Nov WI 2016 11

Subscription copy of [timeismoney33@rediffmail.com]. Redistribution prohibited.
Value Research
November 2016
Volume X, Number 5
EDITORIAL POLICY
The goal of Wealth Insight, as with

all publications from Value
Research, is not just limited to
generating profitable ideas for its
readers; but to also help them in
generating a few of their own. We
aim to bring independent, unbiased
and meticulously- researched
stories that will help you in taking
better-informed investment
decisions, encouraging you to
indulge in a bit of research on your
own as well.
All our stories are backed by
quantitative data. To this, we add
rigorous qualitative research
obtained by speaking to a wide
variety of stakeholders. We firmly
stick to our belief of fundamental
research and value-oriented
approach as the best way to earn
wealth in the stock market. Equally
important to us is our unwaveringly
focus on long term planning.
Simplicity is the hallmark of
our style. Our writing style is
simple and so is the presentation
of ideas, but that should not be
construed to mean that we
over-simplify.
Read, learn and earn and lets
grow and evolve as we undertake
this voyage together.
26
COVER STORY
How to find
companies
with moats
Editor
Dhirendra Kumar
Special Correspondent
Mohammed Ekramul Haque
Research & Editorial
Ashish Jain, Kashyap
Sriram, Mohit Khanna,
Neil Borate, Prasobh,
Vibhu Vats & Vikas Vardhan
36
INTERVIEW
41
BOOK REVIEW
Design
Mukul Ojha, Kiran Sindhwal
Being
Bandhan
Production
Hira Lal
Data source for stocks
AceEquity
2016 Value Research India Pvt. Ltd.

Wealth Insight is owned by Value
Research India Pvt. Ltd., 5, Commercial
Complex, Chitra Vihar,
Delhi 110 092.
Editor: Dhirendra Kumar.
Printed and published by Dhirendra
Kumar on behalf of Value Research India
Pvt. Ltd. Published at 5, Commercial
Complex, Chitra Vihar, Delhi 110 092.
Printed at Option Printofast, 46,
Patparganj Industrial Area, Delhi-110092
Advertising Contact:
Mumbai: 22838665 / 22838198
Delhi: 22457916 / 22457918
Venkat K Naidu +91-9664048666
Biswa Ranjan Palo +91-9664075875
Infosys:
Straight
from the
board
R Seshasayee,
Non-executive
chairman, Infosys
Total pages 64, including cover
4 Wealth Insight November 2016

Bandhan by Tamal
Bandyopadhyay is
an engrossing
story of how the
microfinance
player Bandhan is
making a
difference in the
country
Columns
by
24
33
43
45
47
EDIT
THE
CHARTIST
STRAIGHT
TALK
MAINSTREET
GENERALLY
SPEAKING
OFFBEAT
DHIRENDRA
KUMAR
The end of
trends
Those who think
that riding trends
in the market is a
surefire way to
make money cant
be too lucky for
too long
by
DEVANGSHU
DATTA
Out of cash
The increasing
use of electronic
payments over
cash transactions
will change the
economy in a
fundamental way,
but markets are
yet to factor in
this
MARKET COMPASS
Index watch
Big moves
Safe turns risky
Markets take a timeout
Sensexs 30th anniversary
IPO update
Domestic pure-plays make hay
19
ANALYSTS DIARY
Dubious discounts
Lions lose their share
by
ANAND
TANDON
by
SAURABH
MUKHERJEA
by
by
VIVEK
KAUL
SANJEEV
PANDIYA
Spinning
profits
The MRT
factor
You live
and learn
Imperfectly
rational
A portfolio
comprising
companies
undergoing
demergers and
those that have
been spun off
can decisively
beat the market
The range of policy

decisions triggered
by Modi, Rajan and
technology are
transforming
access to endmarkets, capital
and physical
infrastructure
What keeps
entrepreneurs
and writers
going on is
overconfidence
in their abilities.
And it is indeed
needed.
While following the

principles of
behavioural
economics may not
make our decisions
perfect, it can make
them better over
the long term
Solid gains
Bottoming out?
49
STOCK ANALYSTS CHOICE
Our scorecard
52
High dividend-yield stocks

Discount to book value
Reasonably priced growth
stocks
62
WORDS WORTH NOW
COMPANIES WITH MOAT
The watch list
54
STOCK IDEAS
Quality stocks available

cheap
Attractive blue chips
DISCLAIMER
The contents of Wealth Insight published by Value Research India Private Limited (the Magazine) are not intended to serve as professional advice or guidance and the Magazine takes no responsibility or liability, express or implied, whatsoever for any investment
decisions made or taken by the readers of this Magazine based on its contents thereof. You are strongly advised to verify the contents before taking any investment or other decision based on the contents of this Magazine. The Magazine is meant for general reading
purposes only and is not meant to serve as a professional guide for investors. The readers of this Magazine should exercise due caution and/or seek independent professional advice before entering into any commercial or business relationship or making any
investment decision or entering into any financial obligation based on any information, statement or opinion which is contained, provided or expressed in this Magazine.
The Magazine contains information, statements, opinions, statistics and materials that have been obtained from sources believed to be reliable and the publishers of the Magazine have made best efforts to avoid any errors and omissions, however the
publishers of this Magazine make no guarantees and warranties whatsoever, express or implied, regarding the timeliness, completeness, accuracy, adequacy, fullness, functionality and/or reliability of the information, statistics, statements, opinions and
materials contained and/or expressed in this Magazine or of the results obtained, direct or consequential, from the use of such information, statistics, statements, opinions and materials. The publishers of this Magazine do not certify and/or endorse any
opinions contained, provided, published or expressed in this Magazine.Reproduction of this publication in any form or by any means whatsoever without prior written permission of the publishers of this Magazine is strictly prohibited. All disputes shall be subject
to the jurisdiction of Delhi courts only.
ALL RIGHTS RESERVED
November 2016 Wealth Insight 5

EDIT
The end of trends

Those who think that riding trends in the market is a surefire way to make
money cant be too lucky for too long
DHIRENDRA KUMAR
The never-ending seesaw of the stock

market has put the Indian investor in a particularly
confusing situation right now. Its a time when trends
are shifting and reversing, the fundamentals of some
important sectors appear to have reversed
permanently and some of the biggest names in
business appear to be heading for a future when they
wont be big names at all.
Its characteristic of equity investors that we love
trends. Once we recognise it and start making money
out of it, a trend is a comforting thing, a solved problem.
It assures us that the past can be simply extrapolated
into the future and money can be made in this simple
way. A great example has been the bull run in smalland medium-sized stocks over the last three years. In
early 2014, small-cap and mid-cap stock prices parted
ways with large-cap ones and started zooming upwards.
Pretty soon, this became a reliable trend and equity
investors fell in love with this simple idea.
Since that time, there has been only a brief period in
the first quarter of 2016 when this trend hit a speed
bump. During that quarter, large-cap indices, the Sensex
and the Nifty, did somewhat better than small- and midcap indices. Even at that time, the trend made sense
because the market fell and smaller companies fell
more than the bigger ones. However, pretty soon, the
train was back on track and mid-cap indices started
gaining more than the large-cap ones. At this point,
over the last three years, the Nifty and the Sensex have
delivered returns of around 11 per cent p.a., while midcap and small-cap indices are in the range of 29 to 32 per
cent p.a. Cumulated over the period, thats the difference
between `1 lakh becoming `1.37 lakh vs `2.2 lakh. What
a wonderful trend!
But what now? Equity investors are a naively
optimistic lot. Having made all this money from mid
caps, their fantasy would be that this trend should

never end. However, all trends end and often quite
badly for investors who ride them for too long. In
India, one of the biggest roller coaster rides has been
that of the IT services industry. The story is too wellknown to investors to repeat here, and it seems that
the final chapter is being written now. Its possible,
though still not certain, that the labour-rate-arbitrage
business model of Indian IT companies has run its
full life. They simply havent been smart enough to
adapt to the huge changes that are hitting businesses
technology usage.
Of course, there are trends that got derailed because
they were just froth built on hype. Infrastructure is a
prime case. Sure, India needs and is building a lot of
infra and will continue to do so at least as long as Modi
is PM but none of that may result in too much joy for
investors. The financial shape of the sector is such that
apart from a rare L&T, investors may not make any
money out of it. Infra was a bubble trend which
collapsed soon after it started.
This ending of trends has a proper academicsounding name, which is reversion to mean. This
means that if an assets returns deviate from its longterm average, then it will eventually return to the
average. The deviation can be either positive or negative.
What does this mean for the investor? It simply means
that you cant be too lucky for too long. Funnily enough,
I can think of many people who have managed to be too
unlucky for very long. However, the explanation is
actually quite simple these people chased trends. They
got into positive trends without understanding them
and inevitably caught the downward part of the cycle
when the reversion to mean was imminent.
And how do investors avoid this? Simple, never invest
without understanding. This is where Value Research
and Wealth Insight come into the picture.
MARKET
C MPASS
Index watch: Nifty FMCG

35.62
11.48
Price to earnings
Price to book
8.43
1.72
Market cap
Dividend yield (%)
(` lakh crore)
Dynamics of the Nifty FMCG Index
Top gainers/losers
Nifty FMCG is 5.25% lower than its all-time high.
Company name
Price (`)
Marico
250
1-year change (%)
276
37.97
Godrej Consumer
1573
28.43
200
Godrej Industries
453
24.22
150
Tata Global Beverages
153
13.73
P&G Hygiene & Health
6953
13.65
Emami
1169
8.26
Hindustan Unilever
842
6.41
United Breweries
949
5.29
Britannia Industries
3331
4.79
GSK Consumer
6205
3.37
ITC
240
2.99
Dabur India
280
2.98
Colgate Palmolive (I)
920
1.48
Nifty FMCG
Nifty
100
50
Price/earnings is at 0.14% premium to its five-year median of 35.37.

60
45
30
15
0
United Spirits
2416
-22.84
Jubilant Foodworks
1044
-32.86
Price/book value is at 3.38% discount to the five-year average of 11.88.

16
Valuations
12
Company name
8
4
0
Price to
book
50.38
20.78
0.6
Colgate Palmolive (I)
42.54
21.84
1.09
Dabur India
51.12
16.54
0.8
Emami
91.26
18.9
0.6
GSK Consumer Healthcare
37.68
10.01
1.13
Godrej Consumer Products
Dividend yield is 28 basis points higher than the five-year median of 1.44%.
2.0
1.5
1.0
0.5
October 2016
70.96
13.52
0.37
8.86
0.39
Hindustan Unilever
43.42
37.83
1.9
ITC
29.15
8.14
2.36
Jubilant Foodworks
66.25
8.76
0.24
Marico
47.65
12.62
2.44
P&G Hygiene & Health
53.31
14.93
0.52
16.95
3.27
1.47
United Breweries
78.54
11.11
0.12
United Spirits
35.02
12.35
All data as on October 14, 2016

Dividend
yield (%)
141.96
Godrej Industries
2.5
September 2011
Price to
earnings
MARKET
C MPASS
BIG MOVES: LARGE CAPS
Our large-cap universe has 96 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.
IDFC Bank
The stock gained on the possibility of the banks
merger with its parent, IDFC.
Idea Cellular
The coming of Reliance Jio could dent the bottom
lines of telecom companies.
Petronet LNG
Q1 profit grew over 50% YoY.
Hindustan Zinc
A recovery in metal prices lifted the stock prices of
metal companies.
Bajaj Finserv
Good Q1 numbers, along with approval for stock split
and bonus, boosted the stock price.
Indian Oil Corp.

Depressed crude-oil prices are positive for oilmarketing companies.
Rural Electrification
Being available at throwaway valuations, the stock
witnessed value buying.
Piramal Enterprises
Strong Q4 FY16 and Q1 FY17 numbers led to a rally in
the stock price.
Bajaj Finance
The company split the stock and issued bonus shares,
which further sparked a rally.
Eicher Motors
Strong outlook and demand for Royal Enfield and
Bullet motorcycles resulted in a rally in the stock.
3M returns (%)
Price to earnings
3Y avg RoE (%)
Net profit (` crore)

3Y earnings growth (%)
46.5
55.7
467
-34.8
10.9
13.9
2,266
22.3
38.4
28.8
15.6
1,044
-1.8
22.7
14.1
20.1
7,283
1.4
31.1
27.2
23.7
2,914
7.7
34.5
12.7
11.3
12,232
-20.5
31.9
4.8
23.0
5,570
10.8
19.2
32.8
9.0
804
61.1
24.2
42.0
20.4
1,427
31.4
24.6
55.3
35.6
1,309
42.0
3M price (`) movement
75
52
111
72
402
291
240
196
3,189
2,433
643
478
132
100
1,857
1,557
1,079
869
24,645
19,775
Data as on October 17, 2016

BIG MOVES: MID CAPS
MARKET
C MPASS
Our mid-cap universe has 221 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.
Welspun India
The company is facing ire from its customers due to
low-quality products being pushed as premium ones.
Jubilant Life Sciences

Approvals from the USFDA to its ANDA proposal led
to a spurt in the stock price.
Sundram Fasteners
The companys profit jumped almost 100% in Q1.
Q4FY16 had seen the profit grow fourfold.
Balkrishna Inds.
Q1 profit grew 46% YoY. A drop in rubber prices also
benefitted tyre companies.
Escorts
Q1 profit grew 34% YoY. The company is likely to
benefit from a good monsoon.
Bombay Burmah
The board has approved a fund-raising plan of `250
crore.
Ceat
A drop in rubber prices is likely to be good for tyre
companies.
Indian Bank
Public-sector banks showed a sharp recovery after
getting thrashed to multi-year lows.
Dalmia Bharat
The sharp rally in cement stocks had a sector-wide
impact; strong Q1 numbers helped as well.
Edelweiss Financial Services

Backed by a rally in NBFCs, the companys stock
jumped; latest quarterly results helped, too.
3M returns (%)
Price to earnings
3Y avg RoE (%)

-50.8
7.6
30.9
759
40.6
115.5
23.5
6.6
467
54.7
50.5
24.7
15.1
244
37.9
56.7
18.2
24.6
565
13.6
65.6
47.9
7.6
100
-11.2
55.6
42.3
-36
-223.1
49.6
12.0
25.8
417
38.7
33.3
12.6
8.0
803
-17.6
54.5
69.8
0.9
327
49.5
49.5
21.1
9.2
379
27.8
112
55
650
302
284
189
1,080
689
391
236
628
404
1,287
860
209
157
1,904
1,232
117
78

MARKET
C MPASS
BIG MOVES: SMALL CAPS
Our small-cap universe (minimum market capitalisation `400 crore) has 679 smallcap companies, making the last 10 per cent of the total market capitalisation. The list
mentions the stocks that have fluctuated most wildly in the last three months.
GTL Infrastructure
Lenders to the company agree to converting loans to
equity and selling the stake to a strategic investor.
Bhageria Industries
Q1 profit rises about 50% YoY.
Rane Brake Linings

The companys profit more than doubled in Q1 FY17.
In Q4 FY16, it had risen over 40%.
Energy Development Co.

In spite of showing dismal performance, the stock
has been racing. A bubble could be in making.
Patel Engineering Co.

New government regulations for infrastructure
companies will help Patel Engineering cut debt.
BPL
The company is turning around. Q1 profit grew over
315% YoY.
Aptech
News of a high-profile investor buying into the
company led to a stock rally.
Signet Fincom
The stock has gained without any specific reason in
sight. Investors need to be cautious.
Gitanjali Gems
The company is turning around. Q1 profit grew
185% YoY.
Jindal Stainless
The company got clearance to transfer land to Jindal
United Steel and Jindal Coke.
3M returns (%)
Price to earnings
3Y avg RoE (%)

135.7
-150.5
-486
9.0
179.6
26.3
48.6
18
88.6
180.1
31.1
16.6
31
58.6
141.6
-10.9
1
-50.7
86.8
2.2
-44
-198.5
132.8
13.9
-30.9
32
89.6
139.9
88.5
7.4
8
-37.7
112.0
69.2
22.3
16
7.1
85.2
5.0
2.1
170
-29.3
128.4
-82.1
-656
11.4
3
613
219
1,256
448
213
88
97
52
91
39
175
73
36
17
75
41
37
16

MARKET
C MPASS
Safe turns risky

Consumer staples, long deemed to be safe, are at unreasonable valuations.
Investors need to be cautious.
onsumer-staples companies sell food, beverages,

tobacco, alcohol and household products. Since
these are consumed almost on a daily basis, the
demand for these products is generally stable,
irrespective of the economic environment. Hence, it is
often said that these companies provide downside
protection in a bad economic environment. However,
presently, valuations of most of these companies are
overheated, amidst slowing revenue growth.
The current P/Es of nine major consumer-staples
companies are higher than their five-year median
P/Es. Their price-to-earnings-growth ratios are also
way above the reasonable mark of one. Many of these
companies have taken several years to generate a CAGR
of 12 per cent from their last P/E highs. Finally, in the
last five years, the FMCG sector has shown average
revenue growth of around 10.5 per cent, which is less
than the nominal GDP growth rate of 11.77 per cent. WI
Current P/E vs historical median P/E

80
Current P/E
Median P/E
60
40
20
0
Britannia Colgate
Dabur
India
Emami GSK Con- Godrej

sumer Consumer
HUL
ITC
Marico
Five-year revenue growth rates

Company name
Revenue growth rate 5Y CAGR (%)
Jyothy Lab
CCL Products
LT Foods
KRBL
Heritage Foods
Emami
Dabur
Marico
Britannia
KCP Sugar
ITC
Kokuyo Camlin
Dalmia Bharat Sugar
E.I.D. Parry
Hindustan Unilever
ADF Foods
Mcleod Russel
United Breweries
Godfrey Phillips
Jay Shree Tea
Gujarat Ambuja
Tata Coffee
Zydus Wellness
United Spirits
Eveready
Agro Tech Foods
Balrampur Chini
Tilaknagar Industries
21.57
20.24
19.35
16.92
16.49
16.00
15.65
14.39
13.40
12.59
11.89
11.36
11.11
10.59
10.58
10.07
8.95
8.32
8.05
7.58
7.08
5.94
5.57
4.98
4.61
4.27
1.66
-1.50
-1.81
Data as of March 2016
Price-to-earnings-growth (PEG) ratios
Peak P/Es last reached
11.57
Company
4.94
3.52
1.21
Britannia Colgate
2.30
Dabur
India
3.83
2.30
Emami GSK Con- Godrej

sumer Consumer
2.13
HUL
ITC
2.37
Marico
Time taken (in yrs) to generate

Previous P/E high date CAGR of at least 12% after peak P/E
Britannia
8-Sep-10
3.56
Colgate
8-Jan-08
2.23
Dabur India
16-May-06
4.88
Emami
30-Mar-07
GSK Consumer
4-Jun-13
Not yet
Godrej Consumer
3-Apr-06
4.99
HUL
24-Feb-00
Not yet
ITC
7-Jan-08
3.23
Marico
31-Mar-06

MARKET
C MPASS
Markets take a timeout

Markets the world over are taking a break. Here is how the Nifty and various
sectors have performed in the month of September.
How did the major sectors perform?

Table 1 highlights the performance of various sectors
in September this year.
Only four sectors reported a positive return in
September. Oil led the way with a gain of 3 per cent on
the back of the arrest in crude decline. PSU banks and
media were next, with both seeing a 2 per cent jump.
Auto jumped 1 per cent. The sector is witnessing
strong growth in the festive season, especially in
two-wheelers and passenger vehicles.
A grand total of ten sectors saw negative returns.
Telecom led the pack with a decline of 8 per cent as the
sector reeled primarily from the effects of the Jio
launch on the earnings of the incumbent players.
Utilities came in second with a 5 per cent decline as
the sector continued to suffer from structural issues.
Capital goods declined 4 per cent. The sector is still
not seeing any capital investment from the private
sector and has to rely on government capital expenditure, which is not sufficient to keep its coffers filled.
The consumer sector also declined 4 per cent. The
FMCG space in India has been suffering from weak to
declining volume growth, though the prospects of a
good monsoon this year have perked up expectations
of a better performance this year.
Technology, the other defensive, continued its downward spiral as weakness in demand in the US becomes
a reality going forward. WI
Fig 1: Nifty gave negative returns after six

consecutive months of positive returns
6.4
10.8
7.6
Dec 15
Sep 15
Jun 15
Mar 15
Dec 14
Sep 14
Jun 14
Mar 14
Dec 13
Sep 13
Jun 13
Mar 13
Dec 12
6.6
Sep 16
9.8 6.8 8.0
Jun 16
8.5
Mar 16
6
5
4
3
2
1
0
-1
-2
-3
-4
-5
-6
Sep 12
Nifty MoM change (%)
arkets the world over are cooling down.

Developed and emerging economies alike are
losing their momentum as the year comes to
a close. In September this year, developed economies
rallied 0.1 per cent, while emerging economies were
up 1 per cent. In India, the Nifty 50 Index was down 2
per cent its first monthly fall after six consecutive
months of positive returns. Figure 1 highlights the
movement of the Nifty over the last couple of years.
The month of September saw the breadth of the
Nifty 50 Index turn negative. Of the 50 stocks in the
Nifty, 18 reported flat to positive gains, while 32 gave
negative returns.
The top gainers included auto stocks, Eicher Motors
and Maruti, with 10 per cent and 8 per cent gains, as
the sector reported strong numbers. Among the losers,
Idea Cellular led the pack with a decline of 15 per cent.
Concerns on the Jio launch weighed in on the sector.
Table 1: How various sectors have performed

this year
MoM absolute performance (%)
CY16
Jan
16
Feb
16
Mar
16
Apr
16
May
16
Jun
16
-3
-11
12
19
-19
-11
20
14
Media
-6
-12
11
22
Auto
-8
-7
14
20
Midcap100
-7
-7
10
15
Healthcare
-4
-7
-2
-1
-4
NBFC
-8
-10
10
11
-1
15
Metal
-7
-2
12
10
-2
32
Real Estate
-10
-13
17
10
-4
-2
12
Technology
-8
11
-1
-3
-3
-3
-2
-8
Banks - Pvt
-6
-10
14
-3
12
Consumer
-6
-4
-4
Cement
-3
-3
18
10
-4
38
-12
-9
14
10
-2
-4
Utilities
-6
-14
12
-5
Telecom
-20
-4
-1
-8
-8
-21
Nifty 50
-5
-8
11
-2
Sectors
Oil
Banks - PSU
Cap. Goods
Source: Motilal Oswal Securities

Jul
16
Aug
16
Sep YTD
16 chg (%)
MARKET
C MPASS
Sensexs 30th anniversary

Sensexs 30-year journey has mirrored the Indian economy and the changes
it has undergone
ne of the most keenly watched equity indices of

the world, the S&P BSE Sensex has turned 30 in
October 2016. The journey of the Sensex over the
past 30 years, in many ways, mirrors the evolution of the
Indian economy over the past three decades. When it
was first launched in 1986, India was arguably taking
baby steps towards economic liberalisation, the big push
for which finally came in 1991. The reforms of 1991
exposed the then-established business houses to
competition, while paving the way for the rise of
entrepreneurial companies in newer areas such as
software, pharmaceuticals and infrastructure. Thus, the
Sensex underwent a major overhaul in 1996, with 15 of
the then existing 30 stocks being replaced by a new set of
scrips. As Figure 1 shows, the 1990s saw a big churn in
the composition of the Sensex.
Nevertheless, the composition of the Sensex has
continued to evolve over the past three decades. It has
become far more diverse today than it was in 1986. In
1986, the Sensex was dominated by four sectors
materials (cement, metals, fertilizers, etc.), consumer
discretionary, industrials and consumer staples (see
Figure 2). Over the years, the number of sectors
represented in Sensex has increased.
The Sensex has seen its influence rising over the
years as its constituents have come to play an
increasingly greater role in the Indian economy. As
Figure 3 illustrates, the contribution of Sensex
companies to Indias economic output has risen
significantly since the beginning of the 21st century.
The turnover at the S&P BSE Sensex companies
amounted to 7 per cent of Indias gross domestic product
(GDP) in the five years from 200001 to 200405. This ratio
has increased to 19 per cent over the last five years.
However, with the GDP of the country essentially
measuring the gross value added in the economy, the
gross value added by Sensex firms offers a better picture
of the extent of the contribution of Sensex companies to
Indias GDP. Despite a slight fall in the turnover of
Sensex companies, as a proportion of Indias GDP, the
estimated share of value added by these companies has
remained more or less constant at around 11 per cent of
GDP over the last five years. In other words, over a tenth
of Indias output is attributable to the top thirty
companies today. WI
In arrangement with HT Syndication | Mint
Fig 1: Churn in S&P BSE Sensex components

Number of companies that exited the Sensex in each five-year period
23
13
0
1986-90
11
1991-95
1996-2000 2001-05
2006-10
2011-
The year 1996 witnessed a big churn in the index, when 15 new companies made it to the Sensex;
the above data for churn excludes the cases of ICICI Ltd. being replaced with ICICI Bank in 2002 and
Sterlite being replaced with Vedanta in 2013.
Source: Capitaline
Fig 2: Rising diversity of Sensex companies

Sector-wise break-up of Sensex components (absolute number of companies)
Materials includes cement, metal stocks,

Consumer discretionary includes auto, entertainment stocks
Source: Capitaline
Fig 3: Share of Sensex revenues in Indias

GDP has risen sharply since early 2000s
(Aggregate S&P BSE Sensex 30 companies as % of GDP)
*Gross value added is estimated as interest + employee cost + profit + depreciation + other expenses (not amounting to intermediate consumption)
Source: Capitaline, RBI Handbook of Statistics and Mint calculations

MARKET
C MPASS
IPO update
Year 2016 has proved to be particularly good for IPOs, with new issues
raking over `25,000 crore in the last 12 months
ontinuing with the momentum gained in 2015,

initial public offerings (IPOs) are making big
headlines in 2016 as well. While the equity market
was subdued in 2013 and 2014, which affected the number
of IPOs launched, 2015 and 2016 saw it pick pace. The
calender year 2015 had 20 companies, followed by 23
companies in 2016, going for listing.
The size of the issues in the last 12 months stands at
`25,740 crore and is five times of what was raised in the
previous two years put together. The BSE IPO index has
given a return of 17.58 per cent in the past one year in
contrast to 3.01 per cent given by the Sensex during the
same period.
The following issues have come up since our last
coverage in September 2015:
RBL Bank: RBL is an old Maharashtra-based bank that
transformed itself post 2008 and became Indias fastestgrowing bank. The issue size was `832 crore and the
issue got subscribed almost 70 times.
ICICI Prudential Life: A subsidiary of ICICI Bank, ICICI
Pru Life has become the first listed life-insurance
company in India. The issue size was `6,000 crore and
the issue got subscribed over ten times.
Endurance Technology: The company is in the auto-ancillary
space, with Bajaj Auto being its main customer. Besides
India, the company also has a presence in Italy and
Germany. Its IPO issue size was `1,200 crore and the
issue got subscribed almost 44 times.
IPO performance vis--vis the market
Indices rebased to 100
As we go to press, the following IPOs are going to hit

the market:
PNB Housing Finance: A subsidiary of Punjab National
Bank, it is engaged in the business of providing
housing finance. It is the fifth-largest and fastestgrowing housing finance company in India. The issue
size is `3,100 cr and the issue is to open on October 25.
Varun Beverages: It is one of the largest Pepsi bottlers
outside the USA. Its issue size is `1,112 crore and the
issue is to open on October 26, 2016. WI
Check www.ValueResearchOnline.com for our coverage of IPOs.
Performance of the latest issues

Subscription
ratio
Issue size
(` cr)
Issue
price (`)
Listing date
Listing
gain (%)
Adj listing
price (`)
Current
price (`)
43.84
1,162
472
19-Oct-16
20.8
570
648
13.6
0.3
8.06
417
202
04-Oct-16
-5.9
190
188
-0.9
-0.9
ICICI Prudential Life Insurance
10.48
6,057
334
29-Sep-16
-1.5
329
325
-1.2
0.9
GNA Axles
54.88
130
207
26-Sep-16
20.0
249
255
2.7
-0.8
2.53
894
860
23-Sep-16
4.7
900
855
-5.0
-2.1
69.62
853
225
31-Aug-16
21.6
274
313
14.3
-1.4
2.66
176
268
12-Aug-16
13.8
305
340
11.5
-0.3
20.95
664
219
11-Aug-16
9.6
240
229
-4.4
0.7
Company name
Endurance Technologies
HPL Electric & Power
L&T Technology Services

RBL Bank
SP Apparels
Dilip Buildcon
Return since listing (%)

Stock
Sensex
Advanced Enzyme Tech.
116.02
290
896
01-Aug-16
35.0
1,210
2,171
79.4
0.2
Larsen & Toubro Infotech
11.69
1,243
710
21-Jul-16
-6.1
667
622
-6.7
1.3

MARKET
C MPASS
Company name
Subscription
ratio
Issue size
(` cr)
Issue
price (`)
Listing date
Listing
gain (%)
Adj listing
price (`)
Current
price (`)
Quess Corp
144.50
409
317
12-Jul-16
57.4
499
597
19.6
0.9
Mahanagar Gas
64.54
1,040
421
01-Jul-16
28.3
540
761
40.9
3.4
Parag Milk Foods
1.83
737
215
19-May-16
0.3
216
321
48.9
10.5
Ujjivan Financial Services
40.68
888
210
10-May-16
8.1
227
464
104.6
8.9
Thyrocare Technologies
73.55
479
446
09-May-16
48.4
662
660
-0.3
9.3
Equitas Holdings
17.21
1,531
110
21-Apr-16
30.9
144
178
23.9
8.4
Infibeam Incorporation
1.11
540
432
04-Apr-16
6.0
458
907
98.0
10.5
Bharat Wire Ropes
1.21
79
45
01-Apr-16
5.2
47
47
-1.3
11.1
Healthcare Global Enterprises
1.56
357
218
30-Mar-16
-3.8
210
231
10.3
10.8
Quick Heal Technologies
10.80
325
321
18-Feb-16
-5.0
305
246
-19.3
18.7
TeamLease Services
66.02
436
850
12-Feb-16
1.2
860
1,003
16.6
22.1
Precision Camshafts
1.91
418
186
08-Feb-16
-12.3
163
179
10.0
15.6
Narayana Hrudayalaya
8.70
613
250
06-Jan-16
16.4
291
351
20.6
10.5
Alkem Laboratories
44.29
1,350
1,050
23-Dec-15
31.4
1,380
1,685
22.1
8.6
Dr. Lal Pathlabs
33.41
638
550
23-Dec-15
30.4
717
1,024
42.8
8.6
SH Kelkar & Co
27.08
517
180
16-Nov-15
23.3
222
302
35.9
9.0
Interglobe Aviation
6.15
2,304
765
10-Nov-15
11.9
856
950
11.0
9.0
Coffee Day Enterprises
1.82
1,194
328
02-Nov-15
-4.6
313
229
-26.8
5.7
Prabhat Dairy
0.77
474
115
21-Sep-15
0.0
115
131
12.9
6.6
Sadbhav Infrastructure
2.24
294
103
16-Sep-15
7.5
111
108
-2.6
7.4
Pennar Engineered Building
1.15
159
178
10-Sep-15
-15.7
150
183
19.9
8.6
Shree Pushkar Chemicals
1.34
75
65
10-Sep-15
-7.7
60
154
134.3
8.6
Navkar Corporation
2.85
443
155
09-Sep-15
-1.9
152
199
27.4
8.2
273
640
26-Aug-15
-6.3
600
485
-16.9
7.9
Syngene International
32.05
550
250
11-Aug-15
18.0
295
506
57.3
0.6
Manpasand Beverages
1.40
441
320
09-Jul-15
-9.1
291
723
103.3
1.4
PNC Infratech Ltd
0.01
488
378
26-May-15
0.8
76
124
41.8
1.4
UFO Moviez India
2.04
610
625
14-May-15
-4.0
600
449
-18.3
2.2
Power Mech Projects
MEP Infrastructure Developers
Return since listing (%)

Stock
Sensex
1.11
324
63
06-May-15
0.0
63
43
-22.7
3.4
VRL Logistics
74.26
474
205
30-Apr-15
40.5
288
327
9.0
2.6
Inox Wind
18.60
1,060
325
09-Apr-15
23.1
400
224
-31.4
-1.9
Adlabs Entertainment
0.60
366
180
06-Apr-15
-6.7
168
101
-28.0
-1.0
Ortel Communications
0.75
217
181
19-Mar-15
0.0
181
148
-11.9
-0.9
Monte Carlo Fashions
7.83
350
645
19-Dec-14
-9.3
585
456
-12.7
1.4
Shemaroo Entertainment
7.39
132
170
01-Oct-14
5.9
180
312
30.7
2.7
Sharda Cropchem
59.97
352
156
23-Sep-14
62.9
254
419
27.3
2.3
Snowman Logistics
59.75
197
47
12-Sep-14
59.6
75
69
-3.9
1.7
Wonderla Holidays
38.06
181
125
09-May-14
31.8
165
405
44.4
8.5
Just Dial
1.88
719
530
05-Jun-13
11.3
590
455
-7.4
11.3
Repco Home Finance
1.65
270
172
01-Apr-13
-4.1
165
778
54.7
11.8
Data as on October 19, 2016. Returns for the periods more than one year are annualised.

MARKET
C MPASS
Domestic pure-plays make hay

Sectors that operate in the domestic arena outperform those that derive
revenues from abroad
he first-quarter results of FY17 exhibited a

peculiar pattern. Sectors focused on domestic
business outperformed those that generate their
revenues abroad. This trend was highlighted in a
recent report by ICICI Securities. Heres why it matters.
Domestic pure-plays have for some time been stuck
in a rut. Capital goods has been down for a couple of
years. Infrastructure, engineering, oil and gas, and
metals were reeling from a crash. Power and utilities
were still not seeing any action despite the governments
reform measures. The banking sector was down on
account of massive provisioning for non-performing
assets. And the old trusted FMCG sector was not seeing
any volume growth. Under this situation, the sectors
that bring in majority of their revenues from foreign
shores, traditionally technology and pharma, were still
making decent money.
Two things have happened in the past couple of
months that have changed the fortunes around. First,
the foreign-revenue-earners, technology and pharma,
are both undergoing tough times. Technology has
suffered because of a slowdown, primarily in the US, as
well as some fallout due to the Brexit vote. Pharma has
been reeling from a strict USFDA that has issued
warning letters to a number of Indian pharma
companies exporting to the US in the last one year.
These overbearing concerns have seen the momentum
in these two sectors grind down.

The second thing that has led to a change in fortunes
is that the domestic-centred sectors, with the exception
of financials, have seen their earnings stabilise or
grow. With international crude and metal prices
stabilising their fall, domestic oil and metal companies
are seeing their sales decline arrested, while earnings
growth shines, especially for metals. Other domestic
sectors that have seen a change in fortunes for the
better include automobiles. Both two-wheelers and
passenger vehicles have been selling well for some
months now. Cement sales have not seen the slowdown
expected. On the contrary, earnings from the sector
have been stellar. The FMCG sector continues to chug
along with the lure of a good monsoon promising
improved performance this year. Financials continue
to be a drag on earnings, though private retail banks
and NBFCs have bucked the trend and demonstrated
strong earnings growth. Even the slow-earners, power
and telecom, have seen their earnings grow at a higher
clip compared to the once-blazing pharma.
With technology and pharma continuing their
downward momentum, this trend of domestic pureplays outperforming the traditional defensives could
continue to be seen again in the current quarter. The
table below highlights how domestic pure-plays have
outperformed foreign-earnings companies. WI
Domestic shines: Pure-play domestic themes outperfom foreign-earnings generators

Particulars
Nifty weights
(Aug-16, %)
Q1FY17
Q1FY17
Q1FY17
sales growth (%) EBITDA growth (%) PAT growth (%)
FY17E
PAT growth (%)
FY18E
PAT growth (%)
Cement
3.4
5.0
37.9
57.2
35.7
31.5
24.1
Consumer disc.
14.7
9.7
-13.3
-24.2
23.4
17.6
19.4
Financials
FY17 P/E (x)
31.7
NA
NA
-2.3
19.3
26.7
20.1
FMCG
8.9
7.9
8.4
10.6
12.3
18.4
31.3
Industrials
5.0
3.0
-9.0
6.0
14.3
28.8
26.6
IT
13.8
14.6
14.1
11.4
6.4
10.8
16.2
Metals
1.4
-7.5
23.0
174.6
36.4
14.9
Oil & gas
8.3
-12.2
4.9
9.7
-7.5
8.3
13.1
Pharma
6.5
8.8
4.0
4.4
22.0
22.0
25.9
Power
1.7
4.1
11.2
3.6
37.0
15.4
13.0
Telecom
2.3
7.9
12.8
131.1
-15.7
43.0
28.0
Utilities
2.5
4.0
19.3
-5.6
3.3
19.0
13.3
Growth numbers are year-on-year. Source: ICICI Securities report, October 3, 2016.

ANALYSTS
DIARY
Dubious discounts
A large difference between the market cap and the

enterprise value doesnt always mean a cheap stock
nterprise value (EV) refers to the total market

value of a company for its capital providers
(both equity- and debt-holders). To calculate
EV, the market capitalisation of equity shares,
market value of debt and minority interest are
added, and then cash and cash equivalents are
subtracted from the sum. To put it in simple terms,
EV is what you need to pay to completely own a
company: you pay out the entire market cap and the
debt; you pay the minority shareholders for their
stakes. And you get the cash the company has.
We have shortlisted 11 companies whose EV is at a
significant discount to their market capitalisation.
Such companies are attractive because EV being at a
discount to market cap means presence of significant
cash on the balance sheet. However, before you get
too excited about the cash, beware. Such companies
could also very well be value traps. You must
research such companies thoroughly before you take
the buy call. Try to figure out especially why the
company is sitting on a cash pile. Here is what is
happening in the 11 shortlisted companies:
Kothari Products The company has trade payables of
`3,165 crore and contingent liabilities of `2,860 crore.
These are likely to consume the cash visible on the
balance sheet.
Smartlink Network Systems The company has `471
crore cash from the sale of one of its businesses in
201112. It has had a negative cash flow since then.
Clearly, it could be a value trap.
63 Moon Tech The companys market cap is low
because the stock has corrected significantly owing
to a fraud in the company. The company could
require even more cash than what is seen on its
balance sheet to settle legal liabilities.
RS Software The companys revenues have fallen by 50
per cent and profit by almost 85 per cent in the last
one year. The company seems to be accumulating
cash for an acquisition to revive its fortunes.
Orissa Mineral Development Company OMDC is facing
contingent liabilities of `6,072 crore under various
laws, which justifies the EVmarket cap discount.
MOIL The company has gradually accumulated its
cash over the last ten years through good
performance. Government ownership hurts the
Significant discount to market cap

Company name
Market cap Enterprise value

(` cr)
(` cr)
Discount to m-cap (%)
Kothari Products
508
-901
278
Smartlink Network
194
-176
191
63 Moons Technologies
371
-79
121
RS Software (India)
193
24
88
OMDC
1,286
487
62
MOIL
4,591
1,739
62
Tata Sponge Iron
954
417
56
Swelect Energy
355
167
53
Seamec
250
118
53
Rajesh Exports
14,466
6,997
52
Novartis India
2,212
1,099
50
share-price performance. The company is likely to

give big dividends.
Tata Sponge After accumulating cash for several
years, the company has been hit by weak iron-ore
prices. Its cash could be used for an acquisition.
Swelect Energy Systems The company sold off its UPS
business in 201213, which led to a significant
increase in cash. Now, this cash is essential to repay
the outstanding debt as the companys operations
have struggled post sale. The cash flow from
operations has been negative for three years in a row
and the company has just turned in a profit. The
excess cash is likely to be used to repay debt or pay
dividend if the business improves.
Seamec The company is facing contingent liabilities
in the form of penalties and taxes.
Rajesh Exports It has significant trade payables of
`10,858 cr, supported by only `4,889 crore receivables.
Hence, a very high level of cash, `12062 crore, is
maintained to pay upcoming short-term liabilities.
Novartis India It has been making inter-corporate
deposits with the parent, which have become `826
crore. Now this money has been taken back and
invested in short-term investments. The company
could delist, in which case it is likely to use its cash
for a buyback of shares. WI
Ashish Jain ashish@valueresearch.in
ANALYSTS
DIARY
Lions lose their share
In a welcome trend, the Indian market is becoming

less concentrated and more distributed
oncentration means how much share top
companies have in the economy in terms of
various parameters. The lower the concentration,
the better it is for the economy as it bolsters
competition, which in turn improves efficiency, both in
terms of cost and productivity. However, over the last 20
years, the concentration in developed markets has
increased. Due to slow growth, many companies are
looking for inorganic ways to increase growth, which
has increased concentration globally.
Just the opposite is happening in India. Concentration
has been going down, as new companies emerge and
compete with the established players. Improved
accessibility, lower prices and more consumer-friendly
practices have thus followed. India has also become
more competitive on the global scale. The graphs in this
article show increasing fragmentation in the economy.
While the share of the top ten Indian companies in
the total market cap used to be about 50 per cent during

March 1996March 2002, now the top ten companies
make around 25 per cent of the total market cap. Their
share has steadily decreased over the years.
The market share of top five banks has also been
coming down. While it stands at around 40 per cent in
March 2016, it used to be as high as 80 per cent in March
1997. This has proved to be a welcome occurrence for the
economy because high concentration in the banking
sector can unduly expose the economy to risk.
The revenue contribution of the top ten listed
companies in terms of the total revenue of all the listed
companies has also fallen over time, but it did show a
marked jump between March 2001 and March 2005.
Over time, the control of public-sector enterprises has
also loosened in the total market capitalisation. The
private sector has become all the more significant. WI
Ashish Jain ashish@valueresearch.in
Market-cap share of top 10 companies
Market share of top 5 banks
60%
90%
50
75
60
40
45
30
Revenue contribution of top 10 companies
PSU m-cap to BSE m-cap
50%
50%
Mar15
Mar16
Mar14
Mar11
Mar12
Mar13
Mar10
Mar09
Mar08
Mar07
Mar05
Mar06
Mar04
Mar03
Mar02
Mar01
Mar00
Mar99
Mar98
Mar14
Mar15
Mar16
Mar10
Mar11
Mar12
Mar13
Mar08
Mar09
Mar02
Mar03
Mar04
Mar05
Mar06
Mar07
Mar96
Mar97
Mar98
Mar99
Mar00
Mar01
Mar97
30
20
40
44
30
38
20
32
26
Data as of March 2016

Mar15
Mar16
Oct16
Mar11
Mar12
Mar13
Mar14
Mar09
Mar10
Mar03
Mar04
Mar05
Mar06
Mar07
Mar08
Mar97
Mar98
Mar99
Mar00
Mar01
Mar02
Mar14
Mar15
Mar16
Mar10
Mar11
Mar12
Mar13
Mar08
Mar09
Mar02
Mar03
Mar04
Mar05
Mar06
Mar07
Mar96
Mar97
Mar98
Mar99
Mar00
Mar01
10
ANALYSTS
DIARY
Solid gains
The recent fall in gas prices is likely to benefit Indian

gas-consumer companies
he governments decision to link domestic-gas

prices to the four international gas-trading
hubs has brought a windfall for Indian gasconsumer companies. This decision has led to an 18
per cent cut in gas prices the fourth price cut taken
since October 2014. Natural-gas price now stands at
$2.75 per mmbtu (million British thermal units) as
compared to the earlier rate of $3.37 per mmbtu.
A fall in gas price has, in the past, not translated to
an equivalent fall in the price for consumers. Gassupply companies have historically kept some of the
gains for themselves. We discuss three gas companies
Gujarat Gas, Indraprastha Gas and GAIL, which are
set to gain.
Gujarat Gas
Gujarat Gas gross margins hit an all-time high of `7.2
per standard cubic metres (scm) in the last quarter,
largely on account of the fall in gas prices.
The company, in the past, suffered from its highpriced gas contract with Qatars RasGas. As a result,
the companys net profit fell by 71 per cent in FY16.
This caused the company to lag behind its peers as
well as the stock market. Subsequent re-negotiation
with RasGas from January 2016 onwards as well as
the decline in spot LNG prices have brought the company substantial relief. Gujarat Gas could stand to see
151 per cent (YoY) jump in FY17 earnings per share
(ICICI Securities estimates) and its FY16FY19 earnings per share is likely to compound at 60 per cent
annually, driven by annual volume growth of 11 per
cent and persistent high margins.
Indraprastha Gas
Low gas costs have helped Indraprastha Gas see its
margins move up from `7.69.6
per scm in FY11FY6 to its
GAS
all-time high of `10.7 per scm in Q1FY17. This margin upmove is expected to improve further as gas
prices have fallen further. Indraprasthas gas cost has
fallen from $6.68.8 per mmbtu in FY14FY16 to $5.1
5.4 per mmbtu. Gross margins could trade in the
range of `10.7 11.5 per scm (ICICI Securities estimates), assuming gas prices at $3.1-3.5 per mmbtu in
FY17FY19. This is likely to result in Indraprasthas
earnings per share to compound at 25 per cent
during this period.
GAIL
The countrys largest gas-transmission company has
been down in the last couple of years since it saw
peak-market valuations in October 2014. The companys earnings were hit by its petrochemical losses and
the fall in LPG production. The earnings per share for
FY16 came in at `18 per share a 12-year low. Things
are looking up for the company though.
Besides the lower gas price, GAIL also stands to
gain from the recent Petroleum and Natural Gas
Regulatory Boards (PNGRB) hike in the transmission tariff that the company earns. Gas-transmission
EBITDA is expected to grow by 22 per cent annually
between FY16 and FY19. Its petrochemical business
is expected to return to black, while LPG too is set to
gain from lower gas prices. GAIL is expected to see
its earnings per share compound annually at 46 per
cent between FY16 and FY19 on the back of the low
base of FY16. The company is one of the best bets in
the gas space not only because of the fall in gas price
but also because of the multiple triggers of higher
tariffs and better-performing petrochemical business. WI
Mohammed Ekramul Haque
ekram@valueresearch.in

ANALYSTS
DIARY
Bottoming out?
Data show that after going through a bad phase, the

Chinese economy has started to look up
hough there are a number of voices sounding

concerns about the Chinese economic situation,
data coming out of the dragon country have
stayed resilient. China reported its third consecutive
quarter of 6 per cent plus growth, giving credence to
the idea that the economy may just be bottoming out.
Figure 1 shows how the economy has moved over the
last couple of years. To look at the turnaround
indicator, see the sequential growth numbers in
Figure 2. The sequential growth numbers show three
quarters of consecutive growth in the GDP, taking the
growth to 7.2 per cent. The pattern of GDP growth has
shifted, too. From primarily investment-fuelled growth
the countrys policymakers had embarked on in the
last decade or so, consumption has taken centre stage
accounting for 70 per cent of the GDP growth in the
first nine months of this calendar. Investment
accounted for 37 per cent of the GDP growth.
The PMI Index for both manufacturing and services
has stayed above 50 for the last three months after bottoming out in late 2015 and early 2016. A number of
over 50 indicates growth while that below 50 shows
contraction.
Though the economy seems to have stabilised, a
debt-to-GDP ratio of over 300 per cent is still setting
alarm bells ringing. Chinas debt position puts it just
ahead of Portugal, Belgium and Japan all of which
are reeling from a mountainous debt burden. Figure 3
highlights Chinas debt position compared to other
countries. WI
Mohammed Ekramul Haque ekram@valueresearch.in
Fig 2: China Sequential GDP growth
Source: China: cyclical bottom, DBS Group Research, October 19, 2016.
Fig 3: Total credit to GDP
Fig 1: China Step-down GDP growth
Source: China: cyclical bottom, DBS Group Research, October 19, 2016.
Data as of Q1 2016. Source: BIS, CEIC, NAB Economics

Early-bird discount! Save `100.

Place your pre-print order today!
? Expert analysis and
ch
Value Resear o m
w w w. v a l u
eresear
c
chonline.
MUTUAL
FUND
YEARBOOK
Price
`795
detailed data on
handpicked funds by
Value Research
analysts
? Learn how to build a
winning portfolio and

track its performance
2017
? Performance data on
lio
winning portfo
How to build a
perts
ex
mutual fund
Top picks from
dian funds
ation on all In
Decisive inform
every Indian mutualfund scheme
TO BE PUBLISHED IN JANUARY 2017
Yes! Please reserve my copy at a pre-publication price of `695/Name
Phone
Address
E-mail
Cheque Number
Date
Bank & Branch
ValueResearch
Payable to Value Research New Delhi. Add `30/- for non-Delhi cheques.
Value Research
w w w. v a l u e r e s e a r c h o n l i n e . c o m
Mail it to Value Research, 5, Commercial Complex, Chitra Vihar, Delhi-110092, India.

Buy online at www.valueresearchonline.com/products
THE CHARTIST
Out of cash
The increasing use of electronic payments over cash transactions will change
the economy in a fundamental way, but markets are yet to factor in this
DEVANGSHU DATTA
The Income Declaration Scheme (IDS)
cash component is a very substantial chunk of the

total price.
has led to the addition of about `30,000 crore in taxes
to the exchequer since about `65,000 crore in black
Black money from real estate spills over into
money has been declared. Reports suggest that only
construction and related industries. Local governments
about `15,000 crore was voluntarily declared. The rest
are extremely complicit in this. Every real-estate
of the declarations were forced out by aggressive
project involves getting a sequence of permissions and
scrutiny from the IT department. This extra tax
registrations and that means under-the-table payoffs.
The developer pays in black to get clearances and buy
revenue will certainly help in balancing the budget.
the land; the developer then takes money in black from
If we look at it from a different perspective, its just
a drop in the ocean of black money. The declared
buyers and the chain of illegal transactions continues.
amount, `65,000 crore, is approximately 0.45 per cent
There is a useful side effect of the black component.
of the official GDP. Depending on what estimate you
It leads to fewer mortgage defaults. It is skin in the
use,
black
economy
generates
game for buyers. A housing loan is
somewhere between 25 and 40 per cent
issued on, say, 7080 per cent of the
of official GDP. For example, going by
official white cost. But the buyer has
the famous election jumla, the quantity
paid another 3050 per cent of the
The declared amount
official cost under the table. The buyers
of black money stashed abroad itself
[in the IDS], `65,000
commitment is high. So India doesnt
amounts to about `15 lakh per person.
see the chain of mortgage defaults
So this is a tiny percentage of black crore, is approximately
GDP; it will barely skim the surface of
0.45 per cent of official common to First World housing
bubbles.
black economy. It is also unclear how
The second sector which sees
much money the IT department spent GDP, while black
enormous black-money generation and
setting up systems, making raids, etc., to economy generates
collect this cash.
somewhere between 25 laundry is religion. Religion is a very
large business indeed. It gets huge tax
The Income Declaration Scheme, as
and 40 per cent of
breaks. The balance sheets of religious
always, sends a wrong signal like every
organisations are opaque and hard to
other amnesty scheme. It reinforces the official GDP
question. Its easy to set up a religious
impression that another such scheme
trust or a place of worship and use that
will be offered a few years later.
vehicle to launder anonymous donations (often made
There are three sectors, which run primarily on
black money, and two of those are absolutely
by the trustees themselves). Religion is effectively
untouchable while malpractices in the third sector are
legally untouchable. Forget about financial crimes;
hard to change.
even if a religious leader is accused of rape or murder
One of the three sectors fuelled by black money is
(and many religious leaders have such criminal
real estate. That is, at the least, acknowledged as a
charges against them), the law-enforcement authorities
problem area. Almost every real-estate transaction
treat that person with kid gloves.
involves some cash component; quite often that black
The third sector which absolutely floats on black
NOT MUCH

THE CHARTIST
minor repair is very easy with UPI transfers. The

money is politics. Political funding is a black hole.
urban migrant worker can also easily transfer larger
Cash donations can be accepted anonymously. Most
political parties are very reluctant to release data
sums to his family in the village.
about their finances.
Over time, these electronic systems will also enable
Individual candidates have spending limits in
the gathering of huge data on the way the cash
election campaigns. But parties can spend as much as
economy really works. But they wont eliminate the
they like. This is a great loophole. Heres how it works.
need to make all-cash transactions. There will be
A Lok Sabha candidate X for a political party ABC
resistance to some electronic transactions precisely
can only spend `40 lakh (the official limit for a Lok
because people wish to avoid sales tax and excise.
An entirely cashless system doesnt exist anywhere
Sabha candidate) promoting himself directly. So, a
and that is perhaps a good thing. There are situations
poster saying only Vote for Mr X would be charged to
when you would rather use physical cash stashed in a
the personal account. But a poster saying Vote for
trunk under the bed rather than relaying numbers
ABC Party is charged to the party account and the
stored in an electronic ledger.
allowed expense on the party account is unlimited.
Take for example a situation when banks offer
Over and above legitimate spending via such
negative or zero interest rates. This is the case in
loopholes, which is exploited by every party, huge
Japan, in the Eurozone and in several
amounts are spent under the table.
Liquor distributed to goons, for example,
other European countries. In fact,
is common. So are rent-a-crowd
roughly 30 per cent of world GDP is now
payments, trucking people in for
With many countries in from places with negative policy interest
rates. Banks in such regions offer
rallies. By some estimates, it takes about
minimal 0.1 per cent interest or nothing
`7-8 crore to campaign successfully for a the world taking to
low- or negativeat all on deposits, and treasury bills go
Lok Sabha seat. That means several
for negative yields.
candidates in every LS seat spend that interest-rate policies,
In such places, holding cash under
kind of money.
there is a case for
the bed makes more sense than keeping
The same sort of economics features
holding onto cash.
it in a bank. In effect, the bank is
in panchayat, MLC and Vidhan Sabha
campaigns. There is no way in which
Negative interest rates charging a fee to hold cash. Why pay a
fee? For that matter, low or negative
this system will change. Politicians need
rates, encourage risk-taking; if the
black money for their campaigns. Every mean that banks are
assured return is negative, people will
successful politician has broken the effectively charging fee
speculate. Some of the inflows to Third
rules in this regard and it is absurd to
to hold cash.
World assets are being driven by this
expect legislators to vote for change in a
attitude.
system that favours them.
Even if the UPI and mobile wallets
The best thing one can hope for is that
gain steady traction, the vast majority of Indian
the economy will become less cash-driven as electronictransactions will remain in cash for a long while. But
payment systems catch on. Many people already use
these systems will be a great boon for many consumerPaytm and mobile wallets. There are approximately
facing businesses and these systems might encourage
six mobile wallets in circulation for every credit card.
private consumption, too.
The new Unified Payment Interface (UPI) makes it
Its well known that high credit-card penetration
very simple to transfer small or even large sums
encourages consumption. People make impulse buys
instantly without risking giving away accountthat they would not indulge in otherwise. The
compromising information. All it takes is a
penetration of the UPI and mobile wallets should lead
smartphone, a bank account and a couple of text
to similar behaviour.
messages to transfer money via UPI.
Most stock-market investors are ignoring this trend
As of now, 95 per cent of transactions in India (by
towards electronic payments because there is no direct
number) are cash. Mobile wallets and UPI should
reduce the number of cash transactions as it becomes
impact on investments yet. But it will change the
possible to transfer anything up to a limit of `1 lakh
economy in many ways and we will need to adjust our
attitudes to deal with those changes. WI
instantly, 24 7. Paying a small odd sum for groceries,
or settling cab fares or paying the electrician for a
The writer is an independent financial analyst.
CASE FOR CASH

COVER STORY
How to find
companies
with moats
Mohammed Ekramul Haque and Vikas Vardhan Singh
moat is a competitive advantage that gives a

company an edge over its competitors. Such
advantages can arise in the form of brand,
technological superiority, patents, low cost, wide
network and other factors.
Only companies with competitive advantages can
sustain long-term earnings momentum. A high
earnings growth, in turn, can be sustained only
when for every rupee a company invests, it can generate a value of more than a rupee. This return on
invested capital is a measure of a companys capital
efficiency and can be utilised to understand the
source of a companys moat. In this issue of Wealth
Insight, we dig into return on invested capital to
uncover the source of a companys moat and what
gives it the position it commands. Read on.
COVER STORY
Spotting a moat
Did you know that the source of Hindustan Unilevers
moat in the Indian FMCG space could be something
more than just its brands? That ratings company Credit
Analysis and Research (CARE) derives its moat from
the lucrative large-ticket bank-loan and bond-rating
industry? Or that Castrol India gets its moat from both
high consumer demand as well as the technological
superiority of its products?
We know companies with moats. These are entities
competitors find it tough to compete with. Will you use
an adhesive cheaper than Fevicol? Or a low-cost health
drink as compared to Horlicks? Or how about a local
brand of cigarettes?
We understand companies that have a stranglehold
over their customers but what we, as investors, often
dont ask is what the source of the moat is.
What makes Hindustan Unilever or Britannia tick? Is
it just their brands or something else, too? What about
Oracle and how does its competitive advantage differ
from that of TCS?
Source of a companys moat

A company with an enduring moat will meet two key
requirements. First, it must earn in excess of the cost
of capital and, second, it must earn more than its competitors. The return on invested capital (ROIC) can be
used to determine the source of a companys moat.
ROIC can be defined as follows:
Return on invested =
capital (ROIC)
1HWRSHUDWLQJSURWDIWHUWD[123$7
Invested capital (IC)
In the equation above, NOPAT is net operating profit

after tax, i.e., cash earnings of a company before
financing costs. Invested capital is the amount of net
assets a company requires to run operations. ROIC can
be further broken into two parts:
Return on invested =
capital (ROIC)
123$7
Sales
Sales
Invested capital
The measure of NOPAT/sales measures the profitability per unit, while sales/invested capital measures
capital efficiency. When both the above terms are multiplied, sales cancels out, leaving NOPAT/invested capital or return on invested capital (ROIC).
But these two terms taken individually can be used
to uncover the source of a companys competitive

advantage. When NOPAT/sales margin is the dominant factor contributing to the overall ROIC, a company enjoys consumer advantage. When sales/invested
capital is stronger, the company enjoys production
advantage. Where both NOPAT/sales and sales/invested capital are high, these advantages are reinforced by
the economies of scale.
A detailed description of net operating profit after
tax and invested capital is as follows:
123$7 = (%,73URYLVLRQIRUWD[>QHWRSHUDWLQJSURWDIWHUWD[@
6KDUHKROGHUVIXQGV0LQRULW\LQWHUHVW
Invested capital = 1RQFXUUHQWOLDELOLWLHV6KRUWWHUPERUURZLQJV
&XUUHQWPDWXULWLHVRIORQJWHUPGHEWV
Three sources of value creation

When a company generates earnings higher than its
cost of capital, it creates added value. There are three
sources of added value:
Production advantage A production advantage arises
when a company is able to produce its goods or services cheaper than those of its competitors as a result
of privileged access to inputs or patents or some proprietary technology.
Consumer advantage A consumer advantage arises when
a companys products are habit-forming and repeated
in use, when the switching costs to a competitors products are high and when the cost of searching for an
alternative makes such an exercise unviable.
External advantage An external advantage is when a
company has an advantage given to it by the government or any other authority and it enjoys benefits on
account of that advantage.
Getting back to our examples above, Hindustan
Unilever has a NOPAT/sales margin of 11.26 per cent
for FY16. Its capital-efficiency ratio is astounding 6
times. Therefore, the company gains more from production advantages.
The ratings agency CARE has a sales/invested capital ratio of only 0.36 times but a massive NOPAT/
sales margin of 36 per cent. CARE benefits from consumer advantages.
Castrol has a NOPAT margin of 15.77 per cent and a
capital-efficiency ratio of six times. It enjoys both consumer and production advantages.
Lets see these three advantages in detail now.

COVER STORY
PRODUCTION ADVANTAGES
Cheaper than others
company enjoys production advantages when it

can deliver its products or services cheaper
than its competitors. Such companies can get
this advantage because of either privileged access to
inputs, copyrights or patents that prohibit competitors
from imitating them.
Dominos pizza manufacturer, Jubilant Foodworks,
operates at a slim NOPAT margin of 4 per cent.
However, capital efficiency of three times pushes its
ROIC up to 12 per cent. Similarly, voltage-stabiliser
manufacturer V-Guard runs at a NOPAT margin of 6
per cent. Its capital-efficiency ratio of more than 3.6
times vaults its ROIC to 22 per cent.
Production advantages can be divided into the
following parts: complexity, patents, resource uniqueness and distribution network.
Complexity
Selling foodgrains is a simple business. Companies
buy foodgrains from farmers, package them, put a
brand name on them and sell them. Many other businesses are not so simple. Castrol, for instance, prides
itself on the high-quality engine oil and specialty
lubricants. The complex nature of its specialised products means that a new entrant will find it difficult to
Table 1: Complex businesses
imitate its products. There are other complex businesses. Technology and pharmaceuticals often fall into this
category. Table 1 mentions some complex businesses.
Patents
Patents and copyrights allow a firm to have ownership
of a product or process that no competitor can easily
imitate. 3M India enjoys the benefits of patents that its
parent owns. It enjoys a NOPAT margin of only 8.8 per
cent, but a 1.5 times capital-efficiency ratio improves
3Ms ROIC to 13 per cent. Other businesses that enjoy
patents are Abbott, Bosch, Monsanto and GSK Pharma.
Table 2 lists companies that enjoy patent benefits.
Resource uniqueness
When a company has access to a resource or an input
that its competitors do not have, the company enjoys a
resource advantage. Astral Poly Technik operates at a
NOPAT margin of only 7.6 per cent, but it has rights to
use chlorinated PVC pipes (CPVC) PVC pipes that are
more heat-resistant by way of a licence from the
US-based Lubrizol, which owns the CPVC technology.
This helps Astral report a capital efficiency of 1.7 times,
which pulls its ROIC to 12.83 per cent. Other companies
that enjoy resource uniqueness include PI Industries
and Dhanuka Agritech. Both benefit from the licences
they have from innovator companies, which allow them
access to the inputs competitors do not have. Table 3
points to the companies with resource uniqueness.
NOPAT/
sales (%)
Sales/
IC (times)
ROIC
(%)
Castrol India
15.77
6.10
96.22
Tata Elxsi
13.35
2.02
26.96
An entrenched distribution network is a competitive

advantage very few companies can boast of. This dis-
TCS
19.64
1.63
31.97
Table 2: Patent benefits
CRISIL
17.53
1.62
28.40
Infosys
16.92
1.09
18.39
Divis Laboratories
27.28
0.83
22.61
Sun Pharma
22.21
0.64
14.21
Oracle Finan
22.27
0.61
13.55
Automobile & Ancillaries

IT
IT
Ratings
IT
Healthcare
Healthcare
IT
Latest financial-year data
Distribution network
NOPAT/
sales (%)
Sales/
IC (times)
ROIC
(%)
Abbott India
7.96
1.59
12.65
3M India
8.86
1.51
13.35
GSK Pharma
7.35
1.48
10.88
Bosch
8.17
1.28
10.43
Monsanto India
16.14
1.27
20.42
Healthcare
Diversified
Healthcare
Capital Goods
Agri

COVER STORY
Table 3: Resource uniqueness
Table 4: Envious distribution networks
NOPAT/
sales (%)
Sales/
IC (times)
ROIC
(%)
Astral Poly Technik
7.61
1.69
12.83
PI Industries
12.78
Dhanuka Agritech
11.57
La Opala RG
23.42
Hindustan Zinc
38.55
Plastic Products
NOPAT/
sales (%)
Sales/
IC (times)
ROIC
(%)
11.26
6.15
69.23
Colgate-Palmolive (India) 13.65
3.76
51.33
Hindustan Unilever
FMCG
1.62
20.72
Chemicals
FMCG
1.59
18.42
Hero MotoCorp
9.04
3.33
30.14
Asian Paints
10.81
2.36
25.54
Maruti Suzuki India
7.15
2.02
14.43
PI Industries
12.78
1.62
20.72
Rallis India
9.15
1.55
14.15
ITC
21.57
1.09
23.41
NOPAT/
sales (%)
Sales/
IC (times)
ROIC
(%)
ITC
21.57
1.09
23.41
Habitual use
FMCG
These are products that consumers use repeatedly. The

key thing to remember here is that it is not necessary
that the product a company sells has to be actually superior to the products of its competitors. The perception
that it is matters more. Table 5 highlights some companies that sell products that are habitually used.
Jagran Prakashan
16.25
0.74
12.03
Colgate-Palmolive
13.65
3.76
51.33
Page Industries
13.61
1.78
24.21
Experience goods
Godrej Consumer
13.52
0.98
13.26
Dabur India
12.83
1.57
20.15
P&G
11.84
1.90
22.50
Nestle India
11.71
1.78
20.79
Hindustan Unilever
11.26
6.15
69.23
Chemicals
1.00
23.36
Construction Materials
Chemicals
0.36
13.69
Non - Ferrous Metals
tribution network can often be the primary driver of

sales. Companies like Hindustan Unilever or ITC in
the FMCG space and Maruti in the auto sector are
entrenched well in the hinterlands. Look at the companies mentioned in Table 4. These enjoy the benefits
of a strong distribution network.
Chemicals
Chemicals
FMCG
CONSUMER ADVANTAGES
Perception plays
company enjoys a consumer advantage when it

can create a better perception about its products
as compared to its competitors. Here are some
factors that bring about consumer advantages.
These are goods the value of which consumers do not

know at the time of buying. Only after experiencing or
using the product or service can consumers evaluate
the value thereof. Think food, automobiles, tobacco,
media companies, television and other household appliances. Table 6 lists some experience-goods producers.
Switching costs
When a company creates deterrence in the minds of
its consumers that comes in the way of them easily
Table 5: Habitually used
Media & Entertainment

FMCG
Textile
FMCG
Diversified
FMCG
FMCG
FMCG

COVER STORY
switching from its products or services to some competitors, that company has created a switching cost.
This switching cost can either be monetary or perceived: monetary when it requires a change in accounting software, for example, and perceived when a customer is addicted to his favourite brand of soap or shampoo.
This switching cost acts as a competitive advantage for
the companies that sell such products or services. Table
7 lists out some companies that have created switching
costs in the minds of customers.
Network effects
Network effects come into play when the value of a product that a single consumer uses increases with the number of consumers using the same product.
Think Microsoft Excel. It is widely used around the
world and has become a standard in itself. The number
of people proficient in Excel means that no other number-cruncher can pose a threat to Microsoft.
Think Flipkart or Amazon. The number of users and
products available on these platforms means that any
new startup trying to sell the same products will find it
Table 6: Experience goods

ITC
Table 7: High switching costs

NOPAT/
sales (%)
ROIC
(%)
Oracle Financial Services
22.27
0.61
13.55
ITC
21.57
1.09
23.41
TCS
19.64
1.63
31.97
CRISIL
17.53
1.62
28.40
IT
FMCG
IT
NOPAT/
sales (%)
Sales/
IC (times)
ROIC
(%)
Infosys
16.92
1.09
18.39
21.57
1.09
23.41
Castrol India
15.77
6.10
96.22
Colgate-Palmolive
13.65
3.76
51.33
Pidilite Industries
13.38
1.78
23.80
Nestle India
11.71
1.78
20.79
Hindustan Unilever
11.26
6.15
69.23
IT
16.95
0.87
14.83
FMCG
FMCG
0.74
12.03
Jagran Prakashan
16.25
Zee Entertainment
14.43
Page Industries
13.61
TV Today Network
10.51
1.03
10.81
Hero MotoCorp
9.04
3.33
30.14
Relaxo Footwears
7.98
2.26
18.01
Inox Leisure
7.69
Maruti Suzuki India
7.15
Titan Company
5.70
Jubilant FoodWorks
4.04
Chemicals
0.93
13.46
FMCG
1.78
24.21
Textile
FMCG
Table 8: Enjoying network benefits

NOPAT/
sales (%)

FMCG
Sales/
IC (times)
ROIC
(%)
Idea Cellular
13.16
0.48
6.38
Bharti Airtel
10.01
0.62
6.25
Interglobe Aviation
9.94
1.61
15.97
-5.21
3.08
-16.05
-15.06
8.66
-130.49
Telecom
1.53
11.74
Telecom
2.02
14.43
Aviation
3.06
17.42
Diamond & Jewellery

FMCG
Sales/
IC (times)
Ratings
FMCG
Zydus Wellness
difficult to compete with these retail giants.

The reason why Apples and Googles operating systems are popular is because of the number of users they
have, which in turn attracts the maximum number of
app developers to them.
Others like Samsungs Tizen, Blackberrys BB10 or
Nokias Symbian faded because of a fall in the number
of users and app developers. Table 8 highlights some
companies that have the network advantage.
Jet Airways (India)

Aviation
2.98
12.07
Spicejet
Aviation

COVER STORY
EXTERNAL ADVANTAGES
Outside help
A
company is said to enjoy an external advantage when an external factor allows or bestows
upon it an advantage not available to other
players. In such situations, it is usually the government that confers this advantage by restricting or
completely prohibiting other potential players from
enjoying that advantage.
Coal is one such industry. Another is refineries,
even though there are a handful of private players
operating. Gas pipeline and distribution is another
such group of external-advantage companies.
Companies like NBCC and Bharat Electronics are a
direct beneficiary of government projects.
Table 9 highlights the top returns on invested
capital by government companies.
Parting note
This brings an end to this primer on understanding
the source of competitive advantages. When you are
looking at companies with moats, remember to ask
what the source of the moat is. Understanding the
source will bring more clarity and understanding
about what makes a company tick and how far ahead it
is from the competition. From that, you can even infer
how sustainable a moat is in the next five, ten or even
more years ahead. WI
Buffett and moats

THE MOAT ANALOGY IS DRAWN FROM THE
medieval times when kings lived within
formidable castles surrounded by deep
and wide moats that kept invaders at
bay and enabled them to perpetuate
their rule. The modern corporation
too tries to develop competitive
advantages that will allow it to earn
high profits for a prolonged period.
While it cant be said with certainty
who coined the term, legendary investor
Warren Buffett has done his bit to popularise it. When asked what type of firms he liked
to invest in, he said: Look for durability of the franchise. The most important thing to me is figuring out
how big a moat there is around the business. What I love,
of course, is a big castle and a big moat with piranhas
and crocodiles.
Table 9: Enjoying external advantages

NOPAT/
sales (%)
Sales/
IC (times)
ROIC
(%)
Chennai Petroleum Corp
4.07
3.73
15.16
Indraprastha Gas
10.86
1.39
15.07
NBCC (India)
3.77
3.80
14.33
Bharat Petroleum Corp
4.16
3.02
12.59
PTC India
7.91
1.25
9.90
Coal India
7.01
1.35
9.44
Balmer Lawrie
3.91
2.35
9.19
Petronet LNG
3.71
2.41
8.96
Bharat Electronics
10.74
0.81
8.68
Gujarat State Petronet
46.04
0.17
7.93
Crude Oil
Inds. Gases & Fuels

Realty
Crude Oil
Power
Mining
Diversified
Inds. Gases & Fuels

Capital Goods
Gas Transmission
Warren Buffett likes to make the distinction between wide and deep moats.
Today, wide moats are better than deep
moats, or in other words, its preferable for a company to hold a range of
competitive advantages rather than
one advantage in particular. If a
company has competitive advantages across a number of its product
lines, its more likely to withstand
competitive threats longer.
Should a company with a moat hit a
roadblock in one area of its business,
other areas can easily pick up the slack,
hence explaining the reason why a bank will sensibly branch into credit cards, commercial borrowing,
financial planning services, asset management, insurance
and so on. The wider the moat the more likely excess
returns on capital can be sustained over the long term.

STRAIGHT TALK
Spinning profits
A portfolio comprising companies undergoing demergers and those
that have been spun off can decisively beat the market
ANAND TANDON
Fig 1: Both the spun-off company and the parent company do well in short and long run
Average time until spin completion
18
Value creation potential

16% $312bn
16
Excess returns (%)
Joel Greenblatt is not as well known

to the general investing public as perhaps he deserves
to be. A hedge-fund manager with an outstanding
track record, he shut his fund when hugely successful
and turned to teaching at an Ivy League school. Before
returning to investing as a business, Greenblatt wrote
a couple of books that were highly influential. One
under the rather cheesy title of You Can Be a Stock
Market Genius is targeted at the individual investor
but would be a worthwhile read for any professional.
The key thesis of the book is that individuals need
not be driven by the need to match stock-index
performance quarter on quarter and can therefore
seek investment opportunities in more arcane areas,
which the professional cannot do. Consequently, it is
feasible to beat professional managers consistently
without taking higher risk. Greenblatt mentions
several areas such as merger arbitrage and long-dated
options. However, the one area that is most easy to
14
12
$150
bn
10
Post-spin
excess
return: 8%
8
6
$98
bn
3%
$64
bn
2
0
0
100
200
300
400
Pre-spin
excess
return: 8%
500
Trading days post announcement

Source: J.P. Morgan, FactSet, Company Filings, Bloomberg as on 3/31/2015.
Note: Includes all spin-off and split-off announcements by S&P 500

firms with size greater than $500mn and at least two years since
announcement, excluding canceled deals
Fig 2: A significant source of the long-term value creation comes from multiple expansion
Expected
Multiple
expansion
Multiple
erosion
Pre-spin
Pre-spin
Pre-spin to post-spin:
Firm:
+22%
S&P 500:
+8%
Actual (EV/EBITDA)
RemainCo
SpinCo
Post-spin
Post-spin
weighted
average
6.9x
8.0x
0.6x
0.5x
8.6x
1.3x
0.5x
8.3x
0.9x
0.5x
6.9x
6.9x
6.9x
6.9x
Pre-spin
RemainCo
SpinCo
Post-spin
weighted
average
Pre-spin
Excess
expansion
General
market
expansion
Source: J.P. Morgan,

FactSet, Bloomberg
Note: Includes all
completed spin-off
deals since 2009 by
S&P 500 firms with
size greater than
$500mn and at
least six months
since completion;
JXUHVUHIHUWR
median of deals;
analysis based on
next 12-month multiples based on
IBES consensus
estimates
Post-spin

STRAIGHT TALK
Spin-offs add value to both the companies the new

and the old
follow for an Indian investor would be spin-offs (or

what we like to call demergers).
The report goes on to observe (see Figure 2): One

would expect that the separation of a high-growth subsidiary would lead to a decline in the valuation multiA spin-off occurs when a corporation takes a subsidiple of the RemainCo relative to the parent company.
ary, division or part of its business and separates it
This intuition does not, however, play out in practice.
from the parent company by creating a new, indepenWe find that the valuation multiples of both
dent, free-standing company. In most cases, shares of
RemainCo and SpinCo increase relative to the pre-spin
the new spun-off company are distributed or sold to
company. We estimate the uptick in valuathe parent companys existing shareholdtion multiples post-separation to be over
ers. Spin-offs dont always result in a new
20 per cent. Admittedly, broader-market
share getting listed companies may spinmultiples also increased during that perioff divisions which are then sold off to
A spin-off occurs
other companies. This could be motivated
when a corporation od, but after controlling for this general
uplift in multiples, we still find the differby the need to raise cash or simplify busitakes a subsidiary, ence to be material, remaining in the
ness structures. JP Associates sale of its
10%20% range.
various divisions to raise capital to repay
division or part of
debt can be an example of a spin-off.
its business and
However, the best value for shareholders
What causes the multiple expansions?
separates it to
is often created when the spin-off results
Well, the simple answer is do we care?
in a newly listed share that is given free to
So long as the observed expansion allows
create a new,
existing shareholders.
investors to make money, finding explanaindependent
A study by JP Morgan on the value
tions is not necessary. Perhaps its the
company
unlocking from spin-offs is summarised in
entrepreneurial spirit of the management
Figure 1. The study notes that after the
that is unleashed. Alternately, it could be
news of the spin-off is publicly available,
that investors understand the business
excess returns (stock return less beta-adjusted market
better and are therefore able to assess its value more
return) continue right through till well after the
correctly. Most likely it is a combination of factors.
completion of the transaction. The transaction itself
The real question that is relevant to Indian investors
takes almost a year to complete. Over a two-year time
is if this also happens in the Indian stock market?
frame, the excess returns totalled almost 16 per cent in
A study by a domestic portfolio-management
the US over the period covered. This is true across
company seems to indicate that it is indeed the case.
sectors and company sizes.
Unifi Capital carried out a study of spin-off
What is a spin-off?
SPIN-OFFS
Table 1: Tracking returns
Fig 3: Performance of the spin-off portfolio

against BSE MidCap and BSE SmallCap
18,000
Portfolio
MidCap
Demerged company
Zuari Agro Chemicals
SmallCap
16,000
Demerged
date
Nov 27, 12
Returns
(%)*
Parent
62
Zuari Global
Returns
(%)*
3
NRB Industrial Bearings
Apr 15, 13
713
NRB Bearings
14,000
Orient Cement
Jul 12, 13
224
Orient Paper & Ind. 1116
12,000
Future Lifestyle Fashions
Oct 1, 13
-12
Future Retail#
109
10,000
Star Ferro & Cement
Oct 24, 13
336
Century Plyboards
796
8,000
6,000
291
Jindal Poly Inv. & Fin.
Nov 11,13
-24
Jindal Poly Films
184
Marico Kaya Enterprises#
Jul 2, 14
586
Marico
130
Welspun Enterprises
Jul 11, 14
66
Welspun Corp
369
4,000
Gulf Oil Lubricants India
Jul 31, 14
212
Gulf Oil Corp.
118
2,000
Intellect Design Arena
Dec 18, 1
153
Polaris financial Tech -14
Greenlam Industries
Mar 2, 15
70
0
04
05
06
07
08
09
Source: India Spin-Off Fund, Unifi Capital
10
11
12
13
14
Greenply Ind.
44
*From the date of listing of the demerged company. # Future Retails returns as
on May 10, 2016. Marico Kayas returns as on May 25, 2015.

STRAIGHT TALK
opportunities between 2004 and 2014. Their

criteria found 57 cases. To test the
hypothesis, the company created a model
portfolio of equally weighted investments
across all opportunities. The performance of
the resultant portfolio outperformed the
major indices handsomely (see Figure 3).
An article in a business paper listed out
some of the recent cases of demergers (see
Table 1). With a couple of exceptions, most
have created value for investors.
To see how it works in practice, below are
time lines of two transactions that have
occurred over the past couple of years.
Case 1: Polaris Intellect Design

Table 2 works out the date-wise performance
of Polaris assuming that an investor bought
its shares on the day the plan to demerge
was announced. During this period stock
markets were buoyant in anticipation of
election results. Despite this, share values
increased well beyond the markets rise.
Value continued to get created even beyond
the listing date of the spun-off company. It
wasnt too late to buy even after shareholder
approval was received.
Case 2: Max India

Here, three companies were created out of
the de-merger. Against a flat index, the spinoff resulted in a gain of almost 100 per cent
for shareholders. See Table 3.
There is no formulaic approach to
investing that will make money all the time.
In fact, the success of any formula will
ensure that its common use erodes its
usefulness. However, a portfolio of spin-offs
followed consistently as a strategy is likely
to yield superior results to investors without
the need for excessive research in stock
identification.
Interestingly, there seem to be an
increasing number of companies adopting
this route. Companies that have already
made announcements and are in different
stages of the spin-off process include
Reliance Capital, SMS Pharma, Sintex,
Orient Paper, to name a few. Of course, this
is not meant as a recommendation to invest
in these stocks. As always, caveat emptor! WI
Table 2: Polaris Financial demerger

Date
01-Jan-14
Days Event
Price of share
108
% Chg
Nifty
6301
% Chg
18-Mar-14
76
Board approves demerger

of Intellect 1:1
123
13.9
6516
3.4
23-Jul-14
127
Plan receives shareholder

approval
173
40.7
7795
19.6
10-Oct-14
79
Record date for demerger
185
6.9
7864
0.9
18-Dec-14
69
Listing of demerged shares
192
3.8
8159
3.8
22-Sep-16
644
169
-12.0
8745
7.2
Price
No. of shares Value
Nifty
123
100 12300
6516
Polaris
192
100 19200
8159
Intellect
72.2
100
Intellect shares
18-Dec-14
Intellect shares listed
72.2
22-Sep-16
190
Value of portfolio of 100 shares

18-Mar-14
Polaris
Post listing of demerged share

18-Dec-14
7220
Value of portfolio
26420
Gain
22-Sep-16
115%
25%
192%
34%
35900
Table 3: Max India demerger

Date
01-Jan-15
Days Event
27-Jan-15
26
Price of share % Chg Nifty % Chg

288
8284
Max India announces mega restructuring 364
26.4
8910
7.6
06-Aug-15
191
Plan receives shareholder approval
419
15.1
8588
-3.6
24-Dec-15
140
Company receives court approval
366
-12.6
7831
-8.8
27-Jan-16
34
Company trades ex-demerged shares
348
-4.9
7438
-5.0
08-Aug-16
194
542
55.7
8711
17.1
22-Sep-16
45
569
5.0
8867
1.8
No. of shares
Value
Nifty
Merger with HDFC Life announced
Additional Shares received

22-Jun-16
Max Ventures and Ind (1 for 5 shares)
47.2
14-Jul-16
Max India (1:1)
171
Price
Value of Portfolio of 100 shares

27-Jan-15
Max India (original)
364
100
36400
146
100
14600
54
20
1080
569
100
56900
8910
Demerged Portfolio
22-Sep-16
Max India (demerged)
22-Sep-16
Max Ventures
22-Sep-16
Max Financial Services
Anand Tandon is an independent analyst.
Total value
72580
Growth
99.4% -0.48%
8867

INTERVIEW
R. SESHASAYEE,
Non-executive chairman of Infosys
Infosys: Straight from

the board
It has been a little over 15 months since R. Seshasayee became the non-executive chairman of Infosys Ltd. His
term coincides with a very interesting time for the company, which is trying to regain its tag as the bellwether of
the Indian IT industry under its first non-founder chief executive, Vishal Sikka.
In an interview, Seshasayee explained his equation with Sikka, the changing role of the board, the challenges it
faces, its relationship with the company founders, what he likes about Sikkas leadership style and why it is wrong
to say that Infosys has twin power structures. Edited excerpts:
INTERVIEW
board is fully aligned to this strategy Vishal has sketched.

I and the board feel extremely
good that this strategic change in
direction to meet the new demands
in the business landscape has gone
down very well. To communicate
this kind of a change in an organization that is as large as Infosys is
not easy.
Now, of course, we have the execution challenges. And those are
things which we will learn as we go
along. We have had a few bumps.
We have had some quick learning. I
think, by and large, the strategy is
getting executed with the right
speed and in the right direction.
What is the boards role in designing

this strategy?
Is Infosys in a better shape now than

when you started in this role?
Firstly, the change at the leadership
level, to have someone like Vishal
(Sikka) come (in), has (given) a very
clear strategic direction to the company, given the changing landscape
in the industry. That is a very big
step forward.
From the boards perspective, it
is very important to have the right
leader, and I believe we have the
right leader. From the boards perspective, it is important that the
leader articulates the strategy (and)
the board is aligned to this strategy.
I can categorically say that the
Ideally, the board should pick the

right leader for the company and
the leader should articulate the
strategy. The board has an active
role to play for sure in understanding the strategic proposal,
challenging that, and getting an
alignment between the management and the board.
The board cannot stand aside and
say that all this is strategic direction and not our problem. The
board has to be fully engaged in
(the) formulation of strategy.
We have had in the last couple of
years a pretty deep level of engagement. The board does not meet only
for board meetings for approving
what is put on the table. So the
engagement has been continuous. It
has not been even that it takes place
(just) once a quarter.
The second is that I also think
that it is important to think for the
board to be learning. Learning is an
important DNA of Infosys.
Learning does not just apply to
executives, the rank and file of
management. It equally applies to
members of the board. We have had
systematic immersion sessions.
And our intent is to intensify these
sessions. Intent is to make sure that
we are not merely sitting and listening in these sessions.

This is a journey. It is never-ending. But I do think both these continuous engagement and continuous learning are making it possible
to have a very constructive dialogue
with the leadership.
What are the big challenges faced by

the board?
I cannot think of a company of
this size which has gone through
transformation simultaneously on
three fronts.
The first is the business transformation. All IT firms are going
through this, simply because (their)
clients are going through this transformation. That is one massive
transformation. That is pervasive
and happening all across.
The second is the move from
(being) an iconic promoter-led organization to an organization that is
professionally managed at the management and board level. I was
actually looking at how many top
100 companies in India have entirely professional board and professional management. If you leave
aside the banks and the public sector undertakings, perhaps Infosys
is the only company.
From a governance construct,
this is a very unique and desirable
construct, one which would be the
ideal construct. But this transformation from a promoter-managed
organization to a professional-managed organization both happening at the same time, is a huge
transformation. Actually the average tenure of the board, if I leave
aside Jeff (Professor Jeffrey
Lehman), is two-and-a-half years.
So you have a completely new set of
people. And so, to be able to navigate this huge company in the right
direction, from the point of view of
both strategic (issues) and governance, that requires a great deal of
work, and a great deal of rescripting of the playbook.
INTERVIEW
We have had challenges in the

first quarter. We have had some
challenges (with) a couple of good
leaders, whom we would have
liked to retain, not being there. We
have had some challenges regarding the perception issue into governance. I dont think these are
real issues but perception issues.
But we have very quickly learnt
and we are putting in very quickly
in place the right kind of solutions. That is the second kind of
transformation which we are
scripting very well.
And then there is the third kind
of transformation which is the
cultural transformation. From a
Beyond Vishal and Pravin?
company that had been pretty

much India-centric, we are truly
now global-minded. This is a cultural shift. So, in some sense, we
need to reset the needle.
Each of these transformations
is itself a challenge. It may not be
apparent to someone on the
outside.
(Mazumdar-Shaw) is a very entrepreneurial person. We have a very

good diverse group of people.
Having said that, we are constantly on the lookout for the right
kind of talent. We are pretty much
looking at every possible skill
where we think we have a gap and
which we think we need to bring in.
So we are looking at people. So that
is a continuous process. We have
people on the board who can read
the future, have good understanding of technology trends, are able to
challenge the strategic direction.
We do take external inputs where
we need. So those people dont have
to be on the board.
There is some criticism that Infosyss

board does not have enough people
with a technology background.
Im hearing this for the first time
that we do not have enough people
from tech background on the
board. We have Vishal and (chief
operating officer) Pravin (Rao).
Let me explain the diversity we

have on the board. We have Ravi
(Venkatesan), who has spent years
in technology at Microsoft. Of
course, we have Roopa (Kudva) and
Punita (Kumar-Sinha). Look at
their background. They have not
been only in one industry. Roopa
has spent a lifetime at a variety of
industries, evaluating, assessing,
rating a variety of industries. And
so has Punita. We have people dealing with different firms, including
technology firms. Then we have
people like Jeff and John
(Etchemendy) who bring the academic discipline to it. Kiran

So could you perhaps expand the

board?
We are on the lookout, and we have
some candidates in mind and we
will do it at the right time.
Help us understand the boards

relationship with the company
founders.
So this iconic institution has been
created by an iconic leader (N.R.
Narayana) Murthy and his wonderful team. This is an outstanding or
exceptional kind of history where
Murthy and team decided to step
down or step away.
I must tell you categorically
that while I have personally a lot
of communication happening with
Murthy, not once even by accident
have the promoters asked for
information which is not available
to the public.
That must be said to the credit of
the promoters that they have not
sought any information which
would give them any preferential
access to any information.
We talk about many things. We
talk about perceptions that you
might have from what is available
in the public domain, about the
kind of strategic direction. And I
take his advice very seriously.
But that said, the board has the
responsibility to do what is right
for the institution. The board is
closest to the facts and the situation
on the ground.
And therefore, information and
facts, which are available to the
board must drive the board in the
right direction, and that decision
will be of the board only.
Do you think the founders could have

expressed their unhappiness with
certain board decisions such as
Sikkas compensation or KumarSinhas appointment differently?
This is a question that should not
be asked to me, since this is what
the promoters chose to do; so it will
not be fair for me to respond. From
INTERVIEW
the boards perspective, we have

advice coming from many other
investors and not just the promoters. If you believe we do not have
discussions with any other investors, you are wrong. The conversations we have with the promoters
are no different than those we have
with other investors. So it is not
right for me to be second-guessing
on what they should do.
Were you a little saddened by the way

they expressed their displeasure?
This is a free world and everybody
has their own viewpoint. So, do I
get saddened by the percentage of
negative votes on anything? No. I
have a job to do, and we have some
99 percentage in favour and that is
a resounding endorsement of the
boards recommendation. We
should just move on.
What issues do you seek their

advice on?
There are many issues on which I
seek advice from many people. So
why would you want to only look at
what Im seeking from Mr Murthy.
Murthy has been a friend for 30
years. We have worked together on
boards. We were together on the
board of ICICI, we have worked
together on many other forums. So
he is one person I respect, like other
people. So I dont see anything
unusual in that.
There is this perception that there

are twin power centres at Infosys:
Murthy and Sikka.
First, there is no such twin power
centres. That is completely wrong,
and that will be very unfair to the
promoters. Because, like I mentioned, Murthy has been an exceptional leader who has chosen to
stay away and only give advice
when sought from. So it will be
utterly wrong. Now, the second
thing is that when you say there is
this perception. Now I dont want
to deal with perceptions. We must
deal with reality. Im dealing with

reality. The reality is that what I
have clearly said.
concerted engagement.
What are the issues on which Sikka

seeks your advice?
The toughest discussions we have

had are on philosophy.
Because of the fact that we have a

very unique construct, the engagement of the board (with Sikka)
has been continuous. My engagement with Vishal has been more
intense than the rest of the board.
I think we speak almost every
week, sometimes multiple times a
week. We discuss different issues,
say related to people, organization, performance, relating to
issues on strategy, customers. We
discuss also spirituality and phi-
WE HAVE THE RIGHT

KIND OF LEADER IN
VISHAL. HIS
UNDERSTANDING OF THE
CHANGES, HIS INSIGHT
INTO THE CHANGES IS
OUTSTANDING. HIS
STRATEGIC DIRECTION IS
EXCEPTIONAL.
losophy on weekends. We have an
excellent rapport and relationship.
We have a lot of common interests. Last night, we were talking
on pure sciences. So, the foundation of the relationship is one of
complete mutual trust, and complete transparent sharing of information and views. So there are
many things that we do.
How is the board helping Sikka in

this transformation?
Its a two-way constructive process. Its not on the basis of a
paper that is put on the table. The
way it is being done is through
continuous, comprehensive and
What is the toughest issue you have

advised him on so far?
Is Vishals compensation of $11

million a year linked to Infosys
clocking $20 billion by March 2021?
The compensation is linked to targets which are publicly given.
There is a trajectory for this. The
compensation is linked to that trajectory. This is something which
the board and Vishal have discussed and agreed.
Can you help us understand the

weightage of the three specific
targets (total revenue, revenue per
employee, operating margin) on
Sikkas variable pay?
There is probably no other Indian
company which has so clearly
linked pay to targets which have
been made public. To my mind,
this is the most transparent way
of getting shareholders approval.
In the trajectory, we have to take
into account many things. We
need to take into account the
industry dynamics, the company
dynamics, the people dynamics,
all of that. Thats something
which the board is charged with
the responsibility to do and we
will do so.
Can you give us some details about

the trajectory itself?
Can you tell me another company
that has been giving the targets for
the compensation of the chief executive? There is good reason why no
other company does this. It is not
because this is inconvenient or anything. It is because, as I said, its a
very dynamic situation. Every
month, we see changes in the landscape. Every month, we see new
challenges. The board is a delegated
authority of the shareholders to
run this company. It is therefore in
INTERVIEW
the fitness of things that the board

does the job that has been entrusted
by the shareholders. It doesnt kick
back to the shareholders the job
that has been entrusted. We have
gone one step further to say, yes this
long-term goal is what we believe
must be the reference point for the
compensation.
So is it more aspirational in nature?

No, I have said that there is nothing
aspirational in this. This is a target
which the company is looking at, is
pursuing. Now nothing is cast in
stone. But this is, at the moment,
the target that we have.
responsibility to make sure that we

address this issue. So the issue was
not raised in the AGM, but I made a
suo motu statement saying that we
believe that there is no impropriety.
There is a severance agreement.
There are rights of the parties in
the contract. And the contract will
be administrated in line with the
rights of the parties. Period.
So has there been any change in the

agreement?
That is not something you need to
be looking at all. I am only saying
there is a contract, (there are) the
rights of the parties in the contract
and the contract will be adminis-
Are you saying that the growth of the

industry will also be taken into
account?
The growth of the industry is
pretty much the playfield, right?
So we have got to look at the
growth of the industry in the context of assessment.
(For any company) the target is
fixed for the annual budget in the
context of what you see is the
market situation. Technology
changes, all of it are taken into
account. A five-year goal is fixed
on what you believe is the kind of
the trajectory in this. We have to
keep constantly calibrating both
the environment and the industry.
As of now, we are not changing
those targets (for Infosys).
Can they be changed?

Thats a speculative question.
Why did the board change its original

plan on the promised payment to
former chief financial officer Rajiv
Bansal?
All I can say is I have already made
the statement suo motu in the AGM
(annual general meeting). You
wrote this article (referring to
Mints story in May on Bansals
unusually high severance pay).
Because you wrote this article, I
thought it is important and it is our
priety? I have said no, repeatedly

no, and I stand by that.
Is this contract getting changed
or cancelled for any other extraneous considerations? I am going a
step further to say: The contract
will be administered based on the
rights of the parties in the contract. Period.
How do you like Sikkas leadership

style?
We have the right kind of leader in
Vishal. His understanding of the
changes, his insight into the changes is outstanding. Vishals articulation of a solution, even in the context of the auto industry for example or the banking industry, is absolutely on the dot. We have a very
good leader who understands client
requirements and his client connect
is exceptional. His strategic direction is exceptional. He has been a
phenomenal person to motivate a
very, very large crowd. Its not easy
for a new person to step in and have
this kind of influence. We certainly
have an exceptional leader.
How has the boards role at a company

changed?
tered in line with the contractual
rights of the parties. Period.
So is it fair to assume that you could

rework it if one of the parties did not
abide by its terms?
This is an entirely legal issue. All
I need to say is that there are no
other extraneous considerations
for this, for the administration of
this. It will be driven by the contractual rights.
Has anything happened within the

realms of that contract that could lead
to a change in it?
No matter where you are coming
from, the only two things which
are relevant to the public and relevant to everybody else (are): Is
this an issue where there is impro-

The role of a board has changed

phenomenally, and for the good. It is
no longer this friends club that you
had in the past and people coming
to have a cup of coffee and go back.
This is the trusteeship concept.
That is getting to be far better
understood now by enlightened
boards, and therefore, the responsibility that comes with that.
In the process, the engagement is
getting to be much more.
Increasingly, I find that the board
meeting is just one punctuation
mark in that engagement.
It also brings in the need for a
greater amount of understanding
of the business and the independence to challenge. The chaired
board becomes a very informed
coach for the team. WI
In arrangement with HT Syndication | Mint
BOOK REVIEW
Being Bandhan
Bandhan by Tamal Bandyopadhyay is an engrossing story of how the
microfinance player Bandhan is making a difference in the country
Inspiration behind Bandhan
ohammed Yunus won the

Nobel Peace Prize in 2006
for his Grameen Bank, a
microfinance institution. Tamal
Bandyopadhyay writes the story of
Bandhan, the larger and
understated Indian counterpart.
The microfinance sector has
opened up to equity and debt
investors over the years. In 2010,
SKS Microfinance (now Bharat
Financial Inclusion) went public,
raising `1,653 crore. In 2016,
Equitas Holdings and Ujjivan
Finance raised `2,170 and `885
crore, respectively. The shares of
both the companies listed at a 1030
per cent premium to their issue
prices. Bandhan is not listed but it
is also a universal bank unlike its
peers (which have sought
payments-bank licences). Peer into
your debt-fund portfolio and you
may well find your money making
its way towards Bandhan through
Bandhans bonds and commercial
paper and from there to the women
of rural India.
Troubled history of a state

West Bengals financial history
has been one of many tragedies.
At the time of Independence, in
1947, India had 82 scheduled
banks, of which about 25 per cent
were located in the state of West
Bengal. Partition dealt them a
blow. Of the 38 banks that failed
in 1947, 17 were in the state. West
Bengal also has more companies
raising money illegally from the
public than any other state in
India. 104 of 194 companies
against whom the SEBI took
action between mid-2011 and mid2015 for issuing debentures and
equity illegally were located
You dont really

need detailed credit
appraisal of loans to
individuals. All one
needs to do is keep
the amount small,
get the group right,
keep the supervision
of the group tight,
and the repayment
will come.
- Book excerpt
there. Madhya Pradesh was a
distant second, with only 27 such
companies. The Saradha group
raised anything between `20,000
to 30,000 crore from the public
(primarily in West Bengal) before
it collapsed in 2013. It is this gap
that Bandhan stepped into.
Bandhan was founded by Chandra

Shekhar Ghosh. Ghosh is a man of
modest means. He initially ran a
small knitting workshop and then
joined an NGO, which had just
entered the field of microfinance.
A fascinating anecdote
surrounds Ghoshs inspiration for
his great future endeavour. Ghosh
used to watch a daily occurrence at
Shobha bazaar vegetable market in
Kolkata. Every morning a young
man in a red T-shirt would
dispense `500 each to several
women vegetable sellers in the
market and collect `5 from them.
That evening the women would
return `500. Ghosh calculated that
the women were paying `5 as
interest for half a day, which
translates to 730 per cent per
annum. When he asked them about
this, they replied that they were
just buying a cup of tea for the
moneylender. They also asked him
if a bank would give them the
money. Ghosh decided to tackle the
problem they presented.
In 2001, he set up an NGO called
Bandhan-Konnagar, which later
morphed into Bandhan. The name
was meant to signify a bridge or
bond between the haves and the
have-nots. In 2002, he got funding
for his organisation from SIDBI,
which enabled him to launch
operations in full swing. This later
matured into a long-standing
relationship with SIDBI, which
infused both equity and debt into
Bandhan over the years.
Becoming an NBFC
In its first year of operations
(2002), Bandhan had two branches
and 512 borrowers and lent out
BOOK REVIEW
Bandhan by numbers
2002
2006
2011
2016
155
1,553
2,022
Borrowers (000s)
0.5
150
3,250
6,717
Loan Book (` crores)
0.35
22.38
2,500
15,600
Branches
`21.8 lakh. This grew to 1,143

borrowers in 2003 and then
accelerated dramatically. Over the
next three years, this number rose
by nearly hundred-fold, to 1,49,886.
Its loan book also multiplied at
the same rate, to `22.38 crore.
Bandhan also began getting
additional funding from SIDBI,
HDFC and ICICI Bank, along with
the Ford Foundation and Friends
of Womens World Banking. It
slashed its interest rate from 17.5
per cent to 15 per cent in 2005. In
2006, Forbes placed it on the second
spot in its rankings of
microfinance institutions around
the world, far above Bangladeshs
famed Grameen Bank.
It was at this point that Bandhan
decided to convert itself into an
NBFC to smoothen its journey into
the big league. In 2009, it
transferred its entire portfolio to
the NBFC (Bandhan Financial
Services Pvt Ltd) and made
Bandhan-Konnagar, the original
entity, a corporate-socialresponsibility arm. In 2011, it had
about 32,50,000 borrowers and a
`2,500 crore odd loan book.
Battling the crisis

All this was during the time when
the microfinance crisis triggered
by an Andhra Pradesh law struck.
The borrowers in Andhra Pradesh
stopped repaying microfinance
lenders and bad loans multiplied
several times over. Bandhan had a
limited exposure to the state but
Ghosh refused to take any
chances. He called in Bandhans
pre-sanctioned loan of `400 crore
from IDBI Bank and raised
another `110 crore from other
banks to create an emergency war

chest. A halt was called on new
branches and customers. The
crisis soon passed and Bandhan
came out on the other side with
relatively little damage. That said,
Bandhan is disproportionately
exposed to another state West
Bengal, which may well undergo a
similar episode.
When Bandhan
started growing,
there was pressure
on him (Ghosh) to
JHWKLJKO\TXDOLHG
CAs and MBAs at
a higher cost, but
he kept saying he
did not need tigers
to catch rats; cats
could do the job.
- Y C Nanda, NABARD
Bandhan Bank: Challenges

In 2012, International Finance
Corporation, the private finance
arm of the World Bank, picked up
a 10.93 per cent stake in Bandhan
for `135 crore, paying 2.5 times of
what SIDBI had paid. Majority
ownership of Bandhan continues
to rest with public charitable trusts
that are engaged in microfinance,
with its employees trust also
holding a significant stake.
In 2014, Bandhan got the RBIs

in-principle approval to set up a

bank and commenced operations
in August 2015. It has a capital of
`2,570 crore and 2,022 branches
across 22 Indian states. It has
garnered about `12,090 crore in
deposits (a 2530 per cent monthly
growth rate), which it was able to
attract by offering interest rates
about 0.5 per cent higher than the
average and another 0.5 per cent
higher for senior citizens.
Whilst Bandhans deposit
growth has been spectacular, a
banks true arbitrage comes from
the differential between current
and savings accounts (CASA) and
lending rates. Bandhan Banks
current CASA ratio (the proportion
of its deposits that comes from
current and savings accounts) is
21.55 per cent as compared to
HDFC Banks 40 per cent.
Bandhans staff is proficient at
lending to small borrowers but it
has very little experience with the
collection of deposits. Connectivity
is a tremendous challenge in rural
areas and its staff needs to be
trained to use mobile phones and
computers. Attracting top talent to
its headquarters in Kolkata will
also be a challenge, given the citys
relatively diminished stature.
The largest challenge for
Bandhan is whether it will go down
the beaten track, selling products
such as insurance, mutual funds
and credit cards. These products
are a juicy income stream for highstreet banks, even though their
widespread misselling has cost
these banks dearly reputation-wise.
They are also greatly different
from Bandhans core expertise.
However, a singular focus on
traditional banking may leave
Bandhan over-reliant on a single
income stream. Bandhan may
instead reject both options and find
new and innovative methods of
connecting urban savers and rural
borrowers India and Bharat. WI
Neil Borate neil@valueresearch.in
MAINSTREET
The MRT factor

The range of policy decisions triggered by Modi, Rajan and technology are
transforming access to end-markets, capital and physical infrastructure
SAURABH MUKHERJEA
In my first column in 2016, I had
hold the potential of transforming access to endmarkets for producers of goods as well as services in
highlighted that the election of Modi (M), the
India. One of the main reasons responsible for the
appointment of Rajan (R) and the advent of technology
small scale of operations of Indian firms has been
(T) set off a rapid change for India Inc as (1) an
the high cost of access and creation of pan-India
unconventional PM called time on the traditional
distribution networks. The advent of e-commerce has
model of subsidy-funded consumption growth and
helped producers find an inorganic solution to this
crony-capitalism-driven capex growth in India; (2) a
problem as sellers have the option of simply tying up
gutsy RBI governor brought about multiple policy
with one or more e-commerce majors and thereby
changes to radically increase competition in the
creating access to the whole of India overnight.
financial-services sector; and (3) technology lowered
Concomitantly, manufacturers and retailers across
the barriers to entry into B2C sectors such as lending,
India are increasingly moving towards selling
consumer goods and auto.
products online, as the number of Indians with
Whilst the M+R+T resets have been disruptive in
access to the internet rises systematically. On the
the short run, the range of policy decisions triggered
other hand, the introduction of the GST will ensure
by Modi, Rajan and technology are gradually
that indirect-tax structures are common and uniform
transforming access to end-markets, capital as well
across the country. This will eliminate tax risk or
physical infrastructure from a long-term perspective.
make the entire country tax-neutral irrespective of
India has historically been a supply-constrained
the choice of the geographic location of
economy, mainly owing to the existence
business operation.
of barriers that prevent easy access to
Secondly, three powerful sets of
the three basic inputs of production,
changes
underway in India are
namely, capital, labour and technology.
The introduction of the
dramatically transforming access to
The MRT resets have been disruptive in
GST will ensure that
finance
in
India,
namely,
(1)
the short run as incumbents are forced
indirect-tax structures
improvement in access to capital for
to deal with an inorganic rise in
small and medium enterprises (through
competition and/or a breakdown in the
are common and
schemes like MUDRA and credit being
old ways of doing business (which was
uniform across the
extended by e-commerce majors); (2)
largely centred on leveraging political
country. This will
improvement in access to consumer
connectivity). Despite the short-term
finance (through schemes like Pradhan
pain triggered by the MRT resets, these
eliminate tax risk or
Mantri Jan-Dhan Yojana and lenders
resets have inadvertently triggered a
competing to provide retail credit); and
silent revolution that is likely to make the entire
(3) system-level improvements in the
transform access to end-markets, capital country tax-neutral
lending landscape in India owing to
and physical infrastructure.
irrespective of the
increased competition amongst banks
Firstly, the advent of e-commerce in
and to banks (from NBFCs, corporate
India and the potential implementation choice of the
geographic location.
bonds and other financial-technologyof a single goods-and-services tax (GST)
TIMES OF GST

MAINSTREET
physical infrastructure and tax

driven sources). These changes will
reforms like the rollout of the GST
help democratisation of credit and will
system (expected in H2FY18) is likely
also help in lowering the overall cost of
boost access to end-markets as well
debt in India.
Cross-country experience to
as inputs. Cross-country experience
Thirdly, even as India has been
suggests that improved market access
naturally endowed with an abundance suggests that improved
and easier access to inputs boost
of factors of production physical raw market access and easier
productivity in a gradual manner,
material as well as labour India has in
access to inputs boost
thereby suggesting that the growth
the past failed to exploit the potential
pattern in India is likely to follow a
of this endowment owing to problems productivity in a gradual
U-shaped pattern.
associated with physical connectivity. manner, thereby
Secondly, cross-country experience
The central governments spending on
suggesting that the
suggests that greater competition
roads
and
railways
(including
amongst banks and to banks is
on-balance-sheet as well as off-balance- growth pattern in India is
likely to drive lower lending rates.
sheet funding) has risen significantly likely to follow a
This is likely to result in a reduction
under NDA II as compared to the
U-shaped pattern
in the cost of debt capital in India.
spending under UPA I and UPA II. The
The lowering of the cost of debt and
Modi-led NDA administrations focus
the democratisation of credit access
on improving physical connectivity
appear likely to add to consumption growth in the
(via roads, railways, airports and waterways) holds
short term. However, the lower cost of debt capital is
the potential of dramatically improving mobility of
likely to boost investment growth only once capacity
labour as well as raw materials.
utilisation levels begin rising two-three years out. WI
The three transformations in access are likely to
trigger a U-shaped recovery in India over the next
Saurabh Mukherjea is CEO - Institutional Equities at Ambit Capital
and the author of Gurus of Chaos: Modern Indias Money Masters.
five years. Firstly, the combination of superior
U-SHAPED
GROWTH PATTERN

GENERALLY
SPEAKING
You live and learn

What keeps entrepreneurs and writers going on is overconfidence in
their abilities. And it is indeed needed.
VIVEK KAUL
In October 2011, extremely disillusioned
to write a book, close to four years to publish it and I

would have to face the kind of emotional, mental and
with my job with a big pink newspaper, I started
working on a book. The idea was not to waste time and
physical stress that I did, I wouldnt have got around to
writing the book.
get some meaning into my otherwise dull and boring
life at that point of time.
But given that I was writing a book for the first time,
My contract with the publisher was to write a book
I did not know how difficult and immersive the entire
of around 1,00,000 words. But the first draft, when I
process would eventually turn out to be. And my lack
finished writing it in June 2012, turned out to be close
of knowledge and experience on this front essentially
to 3,20,000 words. Of course, as far as first drafts go,
kept me going. There was a sense of optimism which
there was a lot of repetition. The funny thing I
was a part of the entire process and which kept me
discovered was that as I wrote, I kept forgetting what I
going over a period of four years, as one book became
was writing and in the process ended up repeating a
three books.
The point is that that my lack of experience led to
lot of stuff.
certain optimism, even though I am not a very
Eventually, I managed to cut the book down to
optimistic person in real life, and this
around 2,40,000 words. The book was
eventually led me to completing the
now smaller than before but still much
books. After completing the books,
bigger than the 1,00,000 words that the
there was a certain belief that people
contract called for. And there was no
wanted to read what I had written, even
way something as long as 2,40,000 words
Thanks to the optimism though it was slightly esoteric, and this
could be cut to 1,00,000 words. And
led me to relentlessly promoting the
publishing 2,40,000 words at one go
bias, risk-takers often
in the media. This optimism
would price the book out of the market.
underestimate the odds books
essentially led to more than a few people
In the end, my publisher suggested
they face. If it were not
reading the book.
that we do a trilogy instead of one book.
It seems like having an optimism bias
This sounded like a good idea.
for overconfidence and
Nevertheless, the work involved went
does have its share of uses. As Nobel
optimism, capitalism
up. Each of the three parts now needed
Prize-winning psychologist Daniel
to be books in their own right. I finally would not have
Kahneman (he won the Economics
managed to send across the third part to survived.
prize) writes in Thinking, Fast and Slow:
the publisher in October 2014, three
Optimistic
individuals
play
a
years after I had first started writing
disproportionate role in shaping lives.
what was supposed to be one book.
Their decisions make a difference; they are inventors,
It had been a mentally, emotionally and physically
entrepreneurs, political and military leadersThe
taxing journey, which came with a huge opportunity
evidence suggests that an optimistic bias plays a role
cost, given that I eventually quit my job to complete the
sometimes the dominant rolewhenever individuals
book. If I knew in 2011 that it would take me three years
or institutions voluntarily take on significant risks.
SPIRIT OF
CAPITALISM

GENERALLY
SPEAKING
More often than not, risk-takers underestimate the

odds they face and do not invest sufficient effort to find
out what the odds are.
This is precisely how things played out in my case. I
terribly underestimated the odds on many front. First,
I underestimated the breadth of the topic that I had
chosen to write on, which happened to be the history of
money and the current financial crisis. Then I
underestimated the time it would take for the book to
be written and published. I had estimated a time frame
of 18 months at best. Finally, it took close to 46 months,
from when I started writing to when the final book
came out.
Over and above this, I underestimated how stressful
the entire process of writing and editing a book could be.
Given the lack of good editors in the non-fiction space,
editing (even something as basic as proofreading) can be
a nerve-wracking experience at times. Hence, I had no
idea of these things and I kept going.

In fact, this lack of experience and over-optimism is
what drives people towards entrepreneurship,
something which is at the heart of capitalism as it has
evolved. As Kahneman writes, Because they misread
risks, optimistic entrepreneurs often believe they are
prudent, even when they are not. This, when the
chances of a small business surviving are very low.
The interesting thing is that entrepreneurs at some
level seem to understand that entrepreneurship is
risky business, but they also believe that the risks dont
apply to them. As Jason Zweig writes in Your Money
and Your Brain, A survey of nearly 3,000 entrepreneurs
who recently launched a new business showed how
true that is. When asked to rate the chances of success
for any business like yours, only 39 per cent said that
the odds were at least 7 out of 10. But when asked to
estimate the odds that their own venture would succeed,
81 per cent of the entrepreneurs said they stood at least
7 out of 10 chance, and an amazing 33 per cent of them
said there was zero possibility that they would fail.
This, when on average, half of new businesses fail
within five years. Of course, new businesses pop up to
fill this space. As Zweig puts it, Theres no doubt that
most of these entrepreneurs were kidding themselves.
But how else could any of them muster the courage to
start a new business. Without an extra dose of
confidence, it would be much harder to make decisive
choices in an uncertain world and to overcome setbacks
that barricade the path to success. As Kahneman puts
it, The combination of optimism and overconfidence
is one of the main forces that keep capitalism alive.
A similar overconfidence is what keeps writers
going. What else explains the fact that more than a
million books get published every year all over the
world and a very few of them actually become
bestsellers. It is the optimism of writers that ensures
they keep writing. Publishers also dont know what
works and their business model is to keep throwing
books into the market and hope that something works.
To conclude, when I finished writing the Easy
Money series of books, I thought I wont make the same
mistakes again. But that is not how things have turned
out. Over the last six months, I have been working on a
new book and have made the same mistakes that I made
the first time around.
I underestimated the risks and have been overoptimistic about the entire venture. The question is: do
we actually live and learn? WI
Vivek Kaul is the author of the Easy Money trilogy. He can be reached
at vivek.kaul@gmail.com.

OFFBEAT
Imperfectly rational
While following the principles of behavioural economics may not make our
decisions perfect, it can make them better over the long term
SANJEEV PANDIYA
While listening to my regular dose

of Kahneman, I thought up an interesting metaphor to
describe irrationality (this is original, you hear it here
first). In lay language, we tend to define rationality and
irrationality as opposites, akin to black and white.
Kahnemann describes irrationality differently as
imperfect rationality, not irrationality.
Think of rationality as cheese or sponge which is full
of holes. When you look at it, how much is cheese/
sponge and how much is air? Should you say, this is
sponge, when more than half of it is air?
So pure rationality is this intangible, evanescent
concept, which is in reality riddled with holes like a
sponge or a Swiss cheese. The objective of behavioural
economics is to shore up this rationality, somewhat like
if we were to fill up the (holes in the) Swiss cheese with
more Swiss cheese. But the Swiss cheese going into the
holes itself has some air (smaller holes). So have we
really increased more substance with that exercise?
Maybe yes, but the filled-up Swiss cheese still remains
as full of holes as ever.
Its an interesting concept. There is no such thing as
perfect rationality, which the neophyte believes is the
promise held out to him, as he looks down at the vista
that is now called behavioural economics. But a
consciousness of irrationality is like religion in your
everyday life. It provides principles and rules, which
are useful in conducting your everyday life very much
like the vegetarianism of the Jain, who often defines
his ascetic attitudes by everything that a good Jain
does. The forbearance that religion demands from its
subjects differentiates them from most others,
contributing to their general success.
In the same way, a continuous consciousness of
irrationality helps you evolve principles and rules,
which help you to think better as you go through life.
If behavioural economics claims to teach you how to

think, then its central contribution is to fill up the
holes in your thinking fabric with some substance
(which, by the way, may be as imperfect as the holes you
are trying to fill up).
Here is a good example. For those who seek purpose
in life, it seems a good mission statement should be
made up of the answers to the following five questions:
1. Who am I? (In terms of skills, interests, passions,
learnability)
2. What do I do? (Focus on those things that you do
exceptionally well, the kind of things you can teach
others. If you dont have them, develop them.
3. Whom do I do it for? (The community should be large
and viable)
4. What do those people need or want? (What are they
willing to pay for?)
5. How do they change as a result? (The delivery or
efficacy test)
Notice that only the first two questions are internally
focused (on you, the person whose purpose in life we are
seeking to discover), while the remaining three questions
are externally focused on the people in your life.
So one would imagine that if you are choosing to
answer this to get to the purpose in your life, you will
want to do it very rationally. And to cut a long story
short, I decided on my purpose in life as Sanjeev
Pandiya helps people achieve financial independence
so that they can focus on higher goals in life.
That sounded like a good mission statement for
myself. When one gets into the details, I found myself
describing my vocation as one who goes to SMEs/
HNIs, etc., to help locate their idle assets and harness
them to create extra income, which helps them to make
money from money, thus creating financial
independence. Now having done this reasonably well, I
OFFBEAT
Improvements started slowly as behavioural

should have happy clients and a fat bank balance,
economics started to gain a foothold, with the first of
right? And what do I notice? That while I have been
the Nobel Prizes going to John Nash (1994), who gave a
focusing on harnessing other peoples idle assets, I have
framework for matching objectives and choices and
built a significant amount (of idle assets) of my own.
pointed out that what is visible to the observer is not
Not rational, is it? But you cant do both at the same
what is going on in the mind of the (economic)
time, no. So even if I have a good mission statement, I
participant. This helped people build structured models
find myself with the same problem that I am solving for
to optimise scarce resources in a range of applications,
others. So how rational is that?
helping to increase rationality in otherwise flawed
Kahnemann says that the economist has theories (of
decision-making processes. The optimal point was the
how things work) while the psychologist has lists (of
Nash Equilibrium, a mathematically measurable point
phenomena of how people think and behave). The
that obeys certain rules of human behaviour.
former has postulates, while the latter has observations.
Today, almost all the incremental progress in
A good behavioural economist must have a foot astride
economics is coming from behavioural economics, with
both boats and learn to deftly jump from one (boat) to
mathematical economists relegated to the background.
the other.
But academics continues to be dominated by traditional
But psychology and its impact on economics is just
economics, although research is now veering away. The
one aspect of behavioural economics. There is already
shift from maximising (measurable) utility to
behavioural biology, observations about human
maximising happiness is part of this journey. As the
behaviour that come from evolutionary biology
objective becomes diffused and immeasurable, so also
anthropology and clinical psychology/neuroscience.
must the prescriptions. Today, economics
These contribute a list of predispositions
is now closer to religion than to science.
(in our thinking processes) and the
Kahneman talks of certain weights
reasons for them. And then there is this
that we attach to our buying hierarchy
new subject called behavioural
of decision-making models, wherein we
investigation, which tries to develop
Economics should be
prefer (disproportionately) profits to
toolkits to achieve specific (influence)
losses, relative wealth to absolute
goals, which find applications in more like a religion
wealth, present income to future and
marketing, finance, relationships and that drives some
low probabilityhigh payoff to high
the like. You can use it for option
(although not all) of
probabilitylow payoff. For instance, we
trading or for seducing your own wife
buy lotteries, ignoring the low
(a far higher objective, I would imagine), our behaviour, a filter
probability of the high payoff. We focus
especially if she doesnt know her own
that corrects many of
on the information available rather than
mind. All in all, a lot of happiness is
the biases, some
the information needed (a big source of
spread by the practicing behavioural
inherent and some
losses in the stock market). These biases
economist.
are the source of much irrationality in
A new obsession that mainstream acquired, that pepper
our decision-making. Correcting for
economics has is with happiness as the
our thinking
such biases (after first being conscious
objective of life. Considerable work has
of them) will not, however, make our
gone into defining happiness, and
decisions perfect but will make them
developing attitudes to achieve it, even
better over the longer term.
measure it. The subject is not yet as mathematical as
So economics should be more like a religion that
classical economics, and looks and feels more like
drives some (although not all) of our behaviour, a filter
philosophy than like science. It has kind of settled the
that corrects many of the biases, some inherent and
earlier dilemma that economics has gone through: is it
some acquired, that pepper our thinking. And once you
a science or is it an art/ philosophy. The heyday of
have covered the holes in your own Swiss cheese, you
classical economics (19601990) saw a headlong rush
go after the weaknesses in other peoples (cheese) holes.
towards proving that economics is a science (they
Over time, your behaviour gets differentiated in many
still give B.Sc./MS degrees in economics at some
ways, giving you a superior life, whether measured in
colleges). That ended badly, with its normative
terms of money, happiness or any other objective that
mathematical models failing repeatedly, earning it the
you define for yourself. WI
sobriquet of a pseudo-science, with a hit rate only
slightly better than astrology.
The author teaches, trades and writes at spandiya.blogspot.com
ECONOMICS AS
RELIGION

STOCK ANALYSTS
CHOICE
Our scorecard
ver the years we have analysed and recommended several

stocks. The table below shows our performance since July
2011. Yes, we have a few failures, but we also have many
successful picks. A portfolio comprising the stocks below has
delivered an IRR of 26.36 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 `25,77,623 (including dividends) on Oct 21, 2016, whereas investing the same amount in
the Nifty would have generated `16,02,505 (including dividends),
yielding 12.26 per cent, as per the total returns index. WI
Recommended
price (`)
Recommendation date
Jul-11
Aug-11
Sep-11
Oct-11
Nov-11
Asian Paints
Bosch
Castrol India
Colgate-Palmolive
CRISIL
Cummins India
Exide Industries
ITC
Larsen & Toubro
Nestle India
NMDC
Pidilite Industries
Titan Company
Lupin
Opto Circuits
Bank of Baroda
Castrol India
Power Grid Corporation
Rural Electrification
Tata Coffee
Torrent Power
Zee Entertainment Ent.
CMC#
Graphite India
Zylog Systems
295
6,917
244
458
693
481
149
123
1,095
3,888
258
159
229
461
213
152
254
103
87
70
211
123
858
78
197
397
Performance
Total returns* since July 2011
26.4% 12.3%
Stock Analysts Choice
Nifty 50 Index
*As on October 21, 2016

Current
price (`)
1,175
22,486
473
919
2,282
860
193
246
1,488
6,874
117
721
390
1,481
12
156
473
176
135
144
170
514
2,032
76
4
1,590
Value of `10K
invested (`)
39,792
32,508
19,368
20,060
45,632
17,886
12,937
19,958
13,591
17,680
4,551
45,239
17,040
32,160
570
10,269
18,610
17,185
15,543
20,456
8,050
41,644
23,674
9,865
214
40,111
Total return (% per annum)
30.65
25.62
15.06
15.88
26.76
14.12
6.13
16.20
7.18
12.53
-9.68
33.93
10.83
25.63
-41.53
1.22
14.66
13.18
14.54
15.37
-2.64
32.71
25.67
3.51
-51.71
32.92
Returns for less than one year are absolute. Total returns include dividend income. Returns as on October 21, 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
Recommended
price (`)
Recommendation date
Dec-11
Jan-12
Mar-12
Apr-12
May-12
Jun-12
Aug-12
Sep-12
Oct-12
Nov-12
Dec-12
Feb-13
Mar-13
Tata Consultancy Services

Transformers & Rectifiers
Gujarat State Petronet
Noida Toll Bridge
Tata Motors
GAIL
Mahindra Lifespace
MRF
Bajaj Finance
Gabriel India
Opto Circuits
Shriram Transport Finance
TTK Prestige
Bata India
Swaraj Engines
Ajanta Pharma
Elecon Engineering
Kirloskar Pneumatic
Hero Motocorp
Supreme Industries
VST Industries
Amara Raja Batteries
Redington India
Lupin
MindTree
Solar Industries
Grindwell Norton
KPIT Technologies
Mcleod Russel
City Union Bank
Petronet LNG
Wockhardt
Balkrishna Industries
KEC International
Torrent Pharmaceuticals
Emami
Gruh Finance
1,087
197
92
23
180
388
245
6,859
83
23
221
581
2,647
423
2,770
395
75
53
470
2,082
237
1,695
195
71
567
172
197
130
120
306
53
158
1,647
290
64
365
410
108
Current
price (`)
2,400
343
155
22
554
429
436
51,628
1,117
119
12
1,154
5,606
488
6,226
1,381
1,928
71
870
3,409
920
2,316
1,043
104
1,481
477
679
336
131
172
142
400
873
1,063
126
1,648
1,167
347
Value of `10K
invested (`)
22,089
17,385
16,771
9,442
33,654
11,048
17,792
75,221
149,758
52,198
550
19,842
21,180
11,555
22,476
34,969
255,696
13,239
18,512
16,376
38,863
13,669
53,458
14,486
26,106
27,737
34,535
25,831
10,925
5,607
28,963
25,416
5,300
36,631
19,749
45,105
28,447
32,172
20.38
11.81
12.11
7.55
27.84
4.21
15.24
52.23
77.32
44.14
-46.08
17.29
18.45
4.07
20.93
37.96
109.47
9.00
17.01
15.42
40.42
11.03
50.58
10.80
27.26
31.31
36.54
28.90
3.32
-11.74
30.32
28.09
-14.39
42.20
20.97
53.02
34.37
39.05
Returns for less than one year are absolute. Total returns include dividend income. Returns as on October 21, 2016. Transactional fees not taken into account.

STOCK ANALYSTS
CHOICE
Recommended
price (`)
Recommendation date
Apr-13
May-13
Aug-13
Nov-13
Dec-13
Feb-14
Mar-14
Apr-14
May-14
Jun-14
Aug-14
Sep-14
Oct-14
Nov-14
Jan-15
Mar-15
Apr-15
May-15
Berger Paints India

Innoventive Industries##
Kaveri Seed Company
Navneet Education
V-Guard Industries
Cairn India
Indraprastha Gas
Nesco
Bajaj Corp
HCL Technologies
Voltas
J&K Bank
Cummins India
Swaraj Engines
AIA Engineering
Rallis India
Titan Company
Finolex Cables
NBCC
Gateway Distriparks
GMDC
V-Guard Industries
Finolex Industries
Hindustan Media Ventures
Mahindra Holidays & Resorts
Tata Coffee
Infosys
Tata Motors
Apollo Tyres
Ipca Laboratories
Voltas
Astral Poly Technik
VST Tillers Tractors
Just Dial
Shriram Transport Finance
69
103
252
57
49
296
309
730
237
581
89
135
2,213
433
622
560
764
167
256
164
59
232
154
66
297
155
299
93
966
482
208
681
256
449
1,380
1,253
1,099
PORTFOLIO TOTAL
##
Current
price (`)
268
4
435
101
186
224
834
1,916
402
835
400
68
2,400
860
1,381
1,271
1,590
237
390
434
253
256
105
186
461
298
454
144
1,039
554
220
620
400
420
1,923
446
1,154
Value of `10K
invested (`)
39,008
407
17,290
17,574
38,284
7,577
27,006
26,253
16,928
14,379
44,712
5,011
10,844
19,843
22,216
22,693
20,822
14,159
15,259
26,472
42,534
11,073
6,810
28,269
15,528
19,249
15,215
15,450
10,752
12,010
10,568
9,103
15,590
9,355
13,936
3,558
10,496
47.05
-62.83
17.85
21.24
47.74
-5.50
37.66
35.31
23.10
15.68
68.60
-20.74
5.53
33.01
40.65
38.92
33.49
16.36
19.35
50.96
83.77
7.32
-12.89
59.39
25.43
36.33
23.58
24.34
5.70
7.27
4.09
-5.36
31.42
-4.02
24.71
-49.43
4.22
24,93,578
26.36
Stopped trading since Jun 13. Returns for less than one year are absolute. Total returns include dividend income. Returns as on Oct 21, 2016.
Transactional fees not taken into account.

COMPANIES
WITH MOAT
The watch list

Being near-monopolies, these companies have high chances
of delivering consistent returns
he concept of moats was popularised by Warren

Buffett. In business, a moat means a competitive
advantage or a barrier to entry. Companies that
enjoy moats have a near-monopoly. They ensure
consistency of returns. Hence, moat investing is a
sophisticated form of fundamental investing.
In the last anniversary issue of Wealth Insight, we

had presented the latest list of moat companies in
India. The following watch list gives moat companies
with their updated numbers. Many of these companies
have high valuations, which may not make them an
ideal buy currently. WI
Companies with moats

Company name
Industry
ROE (%)
Price to book
AIA Engineering
Engineering
19.4
5.10
28.3
18.7
1,293
1,355-700
Batteries
25.8
7.79
34.9
18.6
1,018
1,077-773
Asian Paints
Paints
34.4
18.46
62.8
42.5
1,183
1,230-785
Bajaj Auto
Automobiles
29.5
6.01
22.0
19.1
2,754
3,122-2,173
Bajaj Corp
FMCG
40.5
9.89
27.6
23.4
400
457-356
Bajaj Finance
NBFC
21.1
7.45
40.7
12.4
1,079
1,180-498
Bayer CropScience
Agrochemicals
15.9
8.36
48.5
22.8
4,461
4,627-3,115
Bharat Electronics
Engineering
15.9
3.45
22.6
15.8
1,262
1,417-1,009
Blue Dart Express
Courier Services
53.5
26.05
69.3
63.9
5,181
7,900-4,911
Bosch
Engineering
15.0
8.03
54.5
35.0
22,152
25,650-15,753
Food
53.5
19.86
47.4
34.2
3,300
3,575-2,507
Castrol India
Lubricants
114.7
33.34
34.5
33.4
463
495-360
Colgate-Palmolive
FMCG
64.4
21.67
42.2
38.0
913
1,033-788
Container Corp of India
Logistics
10.1
3.12
34.0
18.5
1,324
1,544-1,051
CRISIL
Ratings
33.5
15.60
52.0
35.7
2,300
2,490-1,750
Cummins India
Diesel Engines
22.2
7.04
32.7
25.0
851
1,105-747
Dabur India
FMCG
34.1
10.97
37.3
35.8
272
320-231
Divis Laboratories
Pharma
28.6
6.97
27.8
24.4
1,222
1,380-918
Emami
Pharma
27.2
18.07
80.4
32.8
1,162
1,248-901
Essel Propack
Plastic Products
21.0
3.65
20.2
12.6
233
249-133

Price to earnings 5Y median P/E
Price
52-week high-low
COMPANIES
WITH MOAT
Company name
Industry
ROE (%)
Price to book
Price to earnings 5Y median P/E
Price
52-week high-low
Exide Industries
Batteries
17.7
3.42
23.7
22.9
185
200-116
FAG Bearings India
Bearings
16.5
5.06
35.8
25.6
4,188
4,438-3,707
Foods
30.1
10.00
37.6
37.1
6,196
6,800-5,367
HCL Technologies
Software
22.5
4.00
14.8
16.2
809
890-707
HDFC Bank
Banking
18.6
4.13
24.5
24.1
1,238
1,318-929
Hero MotoCorp
Automobiles
42.1
7.70
20.8
19.6
3,404
3,740-2,375
Hindustan Unilever
FMCG
103.5
38.17
43.8
36.6
849
954-765
HDFC
Housing Finance
16.6
3.89
19.1
19.9
1,302
1,463-1,012
Indraprastha Gas
Gas Distribution
17.9
4.53
25.1
13.3
829
882-454
Infosys
Software
25.2
3.62
16.6
18.7
1,022
1,278-996
ITC
Cigarettes
30.7
8.16
29.2
30.5
240
266-179
Marico
FMCG
37.7
15.12
47.5
36.6
276
307-190
Maruti Suzuki India
Automobiles
17.8
5.94
34.8
25.1
5,600
5,770-3,202
MRF
Tyres
41.5
2.90
12.3
9.1
49,842
54,601-30,464
Navneet Education
Publishing
22.1
3.23
16.8
15.5
101
109-76
NBCC
Construction
21.9
9.66
47.7
40.4
250
299-162
Nestle India
Foods
19.9
20.61
81.9
46.3
6,772
7,390-4,990
Oracle Fin Services Software
Software
32.9
6.81
22.9
23.9
3,190
4,092-3,100
Pidilite Industries
Chemicals
30.0
12.07
46.0
34.4
718
770-521
Power Grid Corporation
Power Distribution
14.8
2.06
14.2
14.2
176
188-126
P&G Hygiene & Health Care
FMCG
31.0
15.00
53.6
46.8
6,983
7,280-5,171
Siemens
Electric Equipment
24.7
7.77
67.3
55.1
1,210
1,395-969
SKF India
Bearings
17.2
4.55
33.7
23.3
1,405
1,490-1,040
Sun Pharmaceutical
Pharma
20.5
5.25
28.2
33.8
734
914-706
Sundaram Finance
NBFC
14.7
4.39
31.8
16.8
1,342
1,599-1,106
Software
42.0
6.10
18.3
22.8
2,363
2,740-2,119
Titan Company
Jewellery
21.0
9.40
50.2
37.6
386
445-303
Zee Entertainment
Media
26.6
10.90
48.3
31.4
503
589-350

STOCK
IDEAS
Ideas to delve deeper
ound investment methods outlast cycles and

fads and generate profits over the long run.
Value Research presents stock ideas based on
time-tested principles that have been validated
for every type of investor.
In each issue, we share a listing of attractive stocks
based on the objective principles of sound investment.
We apply stock filters carefully crafted by Value
Research analysts on the universe of Indian stocks to
identify these attractive stocks. The filters are devised
to identify stocks of the following kind:
Quality stocks available cheap

A
ttractive blue chips

Stocks available at a steep discount to book value


Growth stocks available at reasonable prices
We believe that stocks listed in this section are a good
starting point to start a close scrutiny before adding
them to your portfolio. Each stock idea explains the

reason behind the stock and its suitability to investors,
which over time will help you develop your own
investing rules. As we will be evolving such models and
implementing changes to the methodology to be in line
with economic and market cycles, the list will be
dynamic and updated periodically.
In the following pages of Stock Ideas, we present
five stock ideas that collectively list 50 unique stocks
that have strong reasons to find a way into your
portfolio. With these, you will be well-equipped to
select stocks to build your own portfolio. If you think
that this is a lot of hard work, you can get started with
the stock ideas and with time understand the way the
ideas are shaping to make your own judgement on
stock selection. Great investments are not easy to
find, but practice, patience and sound principles are
all that you need.
Glossary
Current ratio It is the ratio of a companys current assets (the most liquid assets,
such as cash and cash equivalents, account receivables, etc.) to its current liabilities (liabilities that are closest to maturity and hence need to be paid back first).
By comparing the latter with the former, an investor can get an idea of how liquid
a companys assets are.
However, in certain circumstances, a high current ratio could be due to the fact
that the company is facing problems in recovering its receivables. Alternatively, it
could be facing a problem in selling its inventory, which is why the current ratio may
be unusually high.
Universe companies (903) We have revised our universe. We checked if the
companies traded on all the days for the last two quarters. We considered the
companies with a market capitalisation of more than `400 crore.
Price to book value (P/BV) Price to book value is the ratio of the price of a
stock to the book value per share of the company. It shows how much premium
investors are willing to pay for the underlying net assets of the company.
Price to earnings (P/E) The price-to-earnings ratio, or the P/E ratio, is simply
the ratio of the price of a stock to its earnings per share. It shows in multiples how
much investors are willing to pay for the earnings. The thumb rule of valuing a stock
is that a high-growth stock will have a high P/E ratio, while a value stock will have
a relatively lower P/E ratio.
Earnings per share (EPS) Earnings per share, or EPS, is calculated by dividing
the companys net profit with the total number of outstanding shares.
Earnings yield EBIT divided by enterprise value. Enterprise value is market cap
added to total debt and less cash and equivalents.
Net sales This is simply the income that a company derives by
selling the goods and services that it produces.
The downside of taking sales as an indicator of growth is that it may not be
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,
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
company has the ability to service its debt. The interest coverage ratio is calculated as
the ratio of operating profit to interest outgo. A company with ICR of more than two
implies that it can service more than twice its current interest charges.
Debt-equity ratio (DE Ratio) The debt-equity ratio is calculated as the ratio of
total outstanding borrowings of the company to its total equity capital. The DE ratio
essentially tells which companies use excessive leverage to achieve growth.
Conventionally, the DE ratio of less than two is considered safe.
Return on equity (RoE) This is measured by taking profit after tax as a percentage of net worth of the company. It indicates how efficiently the company has been
able to utilise investors money.
Net worth Net worth is the net value of the company that shareholders can claim
in case of a bankruptcy. It is composed of broadly the equity capital and the
reserves held by a company. One risk in using this indicator is that companies
could potentially inflate this figure by issuing more equity at regular intervals.
Stock return (stk return) Stock return is calculated by taking the percentage
change in the price of the stock adjusted for bonus or split.
Dividend yield (yield) This is defined as the percentage of the dividend paid per
share to the current market price of the stock. Since the denominator in this ratio
is the market price, a stocks dividend yield changes every day.
Price-earnings to growth (PEG) This ratio demonstrates how high a price we are
paying for the growth that we are purchasing. It is the ratio of price to eanings to EPS
growth of the stock. In all our analyses, we have taken five-year historic EPS growth.
Dividend payout ratio (DPR) This is the total dividend paid to the shareholders
as a percentage of net profit
Operating profit margin (OPM) OPM is operating profit as a percentage of net
sales.
Net profit margin (NPM) NPM is the net profit as a percentage of total
income (sales plus other income)
Stock style It indicates the style of
Growth Value
the stock. It is derived from a combination of the stocks valuation

growth or value and its market
capitalisation large, mid and small.
For example, on the right we have
shown the stock style of a large-cap
growth stock.

Large
Mid
Small
STOCK
IDEAS
Quality stocks available cheap
n the stock market, while

generating returns is indeed
the ultimate goal, prudent
investors first ensure that their
principal is not at risk. For that,
you can use the essential-checks
feature available on the stock pages
on Value Research Online.
The feature has the following
underlying metrics:
Altman Z-Score:
Predicts
the
likelihood of financial distress
Modified C-Score: Tells the probability
of creative accounting
Piotroski F-Score: Highlights financial
performance as compared to the
previous year
Reasonable valuations: Valuation filters
are listed in the adjacent box.
The list given below has been

obtained by applying the four filters
listed above. Banking and finance
companies were removed from this
analysis as the metrics dont apply
to them.
In order to understand how the
four metrics work, visit Value
Research Online stock pages. WI
REASONS TO INVEST
Safety
Soundness
Good performance
Reasonable valuations
THE FILTERS
Z-Score greater than 2.99

F-Score greater than or equal to 8
C-Score less than 4
PEG less than 1
P/E to median P/E less than 1.5
Earnings yield greater than 5%
Companies that clear all the essential checks

For updated numbers, visit: www.ValueResearchOnline.com
Company
Ceat
Tyres & Allied
Century Enka
Textile
Cosmo Films
Plastic Products
Firstsource Solutions
BPO/ITeS
Kabra Extrusiontechnik
Engineering
KPIT Technologies
IT - Software
Nitin Fire Protection Ind

Engineering
Shaily Engineering Plastics

Plastic Products
Srikalahasthi Pipes
Castings/Forgings
Stock
style
Altman
Z-Score
Piotroski
F-Score
Modified
C-Score
Earnings
yield (%)
P/E
PEG
Market
cap (` cr)
Share
price (`)
5,204 1,287
52-week
high/low (`)
4.24
11.97
12.12
0.17
1422-731
3.73
17.55
9.27
-6.77
634
290
302-145
3.05
12.87
7.88
0.32
762
392
427-213
4.54
10.96
9.47
0.50
2,670
40
54-29
5.81
14.32
8.69
0.51
425
133
143-71
8.51
16.33
8.70
0.36
2,542
129
197-108
3.02
13.03
6.83
0.77
763
26
51-23
8.95
5.25
34.95
0.55
537
645
704-416
3.62
17.57
7.41
0.25
1,244
313
356-184

STOCK
IDEAS
For updated numbers, visit: www.ValueResearchOnline.com
Company
Stock
style
The Byke Hospitality

Hotel, Resort & Restaurants
Pharmaceuticals & Drugs
Altman
Z-Score
Piotroski
F-Score
24.98
5.31
Modified
C-Score
Earnings
yield (%)
P/E
PEG
5.87
26.64
0.44
7.77
16.24
0.39
Market
cap (` cr)
737
Share
price (`)
52-week
high/low (`)
184
200-148
27,612 1,632
1768-1190
Data as on October 16, 2016. Indicates new entrants.
lue-chip stocks are shares

in the largest, consistently
profitable and the mostprestigious
companies.
These stocks command a valuation
premium
because
of
their
consistency in performance and
because of the fact that these stocks
have already been discovered.
There is a belief that such stocks
are less risky as compared to
smaller stocks. This is true to a
certain extent as the intrinsic risk
with blue chips is low; many of
these have large market shares and
strong balance sheets.
Our stock selection is based on
stocks that have over a 20 per cent
CAGR on EPS over the past five
years, debt-equity ratio of less than
two and interest-coverage ratio of
more than two.
However, blindly buying a blue
chip irrespective of the valuations
may cause more harm than good.
The risk of capital loss may actually
be heightened when you purchase
blue chips at any rate and valuation.
It is for this reason that we have

included stocks with five-year
average return on equity of more
than 20 per cent. The return should
not have declined by more than 10
per cent in a year. The price-toearnings growth (PEG) should be
less than 1.5. WI
THE FILTERS
REASONS TO INVEST
Liquidity
Large companies in
respective businesses
Strong balance sheets
Liked by institutions
Companies with a capitalisation of

above `4,150 crore
Annualised earnings growth of
more than 20 per cent over the
past five years
Debt-equity ratio of less than two
Interest coverage ratio should be
more than two
Five-year average return on equity
above 20 per cent
Average ROE should not have fallen
more than 20 per cent in any year
PEG of less than 1.5

Company
Stock
style
Adani Ports & Spl Eco Zone

Port
Ajanta Pharma
P/E
PEG
Debt-equity
ratio
Int coverage
ratio
RoE avg
5Y (%)
EPS growth
5Y (%)
Mkt cap
(` cr)
Share
price (`)
52-week
high/low (`)
16.97 0.79
1.73
3.87
24.65
21.57
51,960
251
325-170
38.11 0.72
0.08 112.94
36.15
52.83
16,659 1,893
2127-1103

STOCK
IDEAS
Company

Batteries
Apollo Tyres
Tyres & Allied
Atul
Chemicals
Divis Laboratories
Eicher Motors
Automobile Two & Three Wheelers
KRBL
Consumer Food
Mindtree
IT - Software
Motherson Sumi Systems

Auto Ancillary
Relaxo Footwears
Household & Personal Products
Sun Pharmaceutical Ind

Syngene International
Miscellaneous

IT - Software
Tube Investments Of India

Cycles
Vakrangee
BPO/ITeS
Stock
style
RoE avg
5Y (%)
EPS growth
5Y (%)
0.04 1490.06
27.92
26.90
17,395 1,018
9.52 0.47
0.24
16.71
20.13
20.08
10,639
24.15 0.91
0.24
15.54
23.18
27.81 1.33
0.01 421.37
54.19 1.42
P/E
PEG
34.93 1.30
Debt-equity
ratio
Int coverage
ratio
Mkt cap
(` cr)
Share
price (`)
52-week
high/low (`)
1077-773
209
235-128
26.65
6,968 2,349
2466-1275
27.05
20.87
32,438 1,222
1380-918
0.02 233.13
33.24
38.26
67,031 24,645 26602-14818
19.29 0.81
0.71
7.78
20.85
23.78
6,508
247
306-170
14.01 0.39
0.02 2592.33
26.18
36.17
8,244
491
804-464
34.51 1.29
1.50
9.65
32.48
26.72
45,229
322
359-206
44.37 1.34
0.49
8.76
26.36
33.16
5,349
446
547-360
28.17 1.15
0.27
15.19
24.02
24.59 176,668
734
914-706
42.92 0.93
0.86
31.74
22.48
46.06
509
524-344
18.33 0.87
0.00 1598.37
41.62
21.05 465,592 2,363
2740-2119
16.24 0.39
0.70
13.72
36.83
41.48
27,612 1,632
1768-1190
15.57 0.47
0.43
2.41
30.26
33.08
11,743
627
660-352
28.90 0.59
0.21
11.84
26.39
49.18
12,465
236
241-105
10,189
Data as on October 16, 2016. EPS growth rates are annualised.

STOCK
IDEAS
alling markets give little

room for capital appreciation.
However, investors can
benefit by investing in
companies that pay dividends. But
picking a stock that boasts of the
highest dividend yield does not
always help. You need to go deeper
and examine the reasons behind the
high dividend payout. Many times a
company that pays healthy dividends
can have weak fundamentals, which
will keep the stock price down. For
instance, the company could have
been distributing the profits because
of an extraordinary income or
because there is dearth of profitable
opportunities to invest in.
Blindly chasing the current yield
could be a recipe for disaster. When
looking for high-dividend-yield
stocks, look for companies with a
sustained dividend payout.
Another potential minefield is that
a very high dividend-payout ratio

(dividend paid as per cent of total
profits) can put the future growth of
the company at risk as it is left with
less funds to reinvest in the future.
This
makes
dividends
also
unsustainable.
We have shortlisted companies
with sustained per share dividend,
keeping in mind the fact that yield
shoots up when the share price drops.
We have also factored in a dividend
yield (dividend per share as per cent
of share price) of 3 per cent and the
companys payout ratio before
making the final list. WI
REASONS TO INVEST
Cushion against volatility
Higher total return
Generate regular
tax-free income
THE FILTERS
Stocks with sustained per share dividend and amount over the past five years
Dividend payout ratio of less than 40 per cent
Stocks with a current dividend yield of more than 3 per cent
High dividend yield

Company
Stock
style
Gujarat Industries Power Co

Power Generation/Distribution
Power Finance Corporation

Finance Term Lending
PTC India
Rural Electrification Corp

Finance Term Lending
SJVN
The GE Shipping Company

Shipping
The Karnataka Bank

Bank - Private
P/E
PEG
Dividend
per share (`)
Mkt cap
(` cr)
Share
price (`)
7.05
2.46
2.70
3.07
21.67
25.40
1,332
88
99-73
5.20
0.28 13.90
5.65
29.67
90.00 32,473
123
129-70
8.97
0.98
2.50
3.41
17.20
19.60
2,171
73
88-56
4.68
0.29 17.10
6.48
29.67 106.10 26,058
132
135-76
8.53
1.11
1.10
3.80
32.31
10.06 11,976
29
34-26
5.85
0.37 13.50
3.67
20.03
95.00
5,551
368
420-275
6.54
0.42
3.37
22.69
43.00
2,798
148
162-85
5.00
Dividend Dividend pay- Avg div

yield (%) out ratio (%) 5Y (%)
Data as on October 16, 2016.

52-week
high/low (`)
STOCK
IDEAS
veryone loves a good

bargain. Value investors
hunting for inexpensive
stocks often face a daunting
challenge in bull markets since the
market has already run up.
The idea of value can differ
from person to person. One
parameter for judging value is the
book value of a stock. Book value is
a measure of shareholder equity
and is derived by subtracting debt
and other liabilities from assets. In
other words, book value is the share
price in the companys books.
A stock trading near or below

book value is of most interest since
such a company can be bought for
close to or, better yet, less than what
it is worth. The list below is the
same as that the last month. WI
REASONS TO INVEST
Really cheap
Relatively undervalued
Companies with assets
THE FILTERS
Price at least 10 per cent below the book value

Return on net worth of more than 10 per cent in the most recent year
Debt-equity ratio of less than 1.5 per cent
Companies must have a five-year earnings growth of more than 10 per cent

Company
Noida Toll Bridge Company

Engineering - Construction
The GE Shipping Company

Shipping
The Karnataka Bank

Bank - Private
Stock
style
P/B
P/E
PEG
Dividend
yield (%)
Debt-equity
ratio (%)
RoE (%)
Mkt cap
(` cr)
Share
price (`)
52-week
high/low (`)
0.77
5.57
0.41
13.67
0.08
16.19
409
22
28-21
0.65
5.85
0.37
3.67
0.70
13.23
5,551
368
420-275
0.73
6.54
0.42
3.37
0.29
11.74
2,798
148
162-85
Data as on October 16, 2016.

STOCK
IDEAS
Reasonably priced growth stocks
rowth at a reasonable
price
(GARP)
is
a
combination
of
both
growth
and
value
investing. This strategy was
popularised by Peter Lynch. While
a growth strategy is more focused
on a companys earnings growth
and
value
investing
seeks
companies having their prices
below their intrinsic value, growth
at a reasonable price, as a strategy,
hunts for stocks that have both
growth potential and are also
trading at a reasonable price. A
typical GARP investor seeks to
invest in companies that have had a
positive performance over the past
few years and which also have
positive projections.
A solid benchmark to spot a
GARP stock is the PEG ratio or the
price/earnings growth ratio. PEG

shows the ratio between a
companys P/E ratio (valuation)
and its expected earnings growth
rate over the next several years. A
GARP investor would seek out
stocks that have a PEG of one or
less, which helps find reasonably
priced stocks. WI
REASONS TO INVEST
All-weather style
Companies with strong
fundamentals
Greater stability vis-a-vis
value or growth
THE FILTERS
Earnings growth of:

At least 20 per cent in the past
five years

At least 20 per cent in the trailing 12
months YoY

At least 20 per cent in latest quarter
YoY
Stocks with a P/E of less than 15
Reasonably priced growth stocks

Company
Stock
style
Balaji Amines
Chemicals
DCM Shriram
Diversified
Deepak Nitrite
Chemicals
Ion Exchange (India)

Engineering
Kalyani Steels
Steel & Iron Products
KEI Industries
Cable
KNR Construction
Engineering - Construction
KPIT Technologies
IT - Software
P/E
Industry
P/E
PEG
Quarterly EPS TTM EPS EPS growth

growth (%) growth (%)
5Y (%)
14.09 28.94
0.64
105.5
10.29 28.45
0.14
11.66 28.94
0.36
356.7
11.89 30.82
0.57
10.70 11.15
Mrkt cap
(` cr)
Share
price (`)
52-week
high/low (`)
87.6
22.1
1,054
325
329-115
34.3 116.4
75.1
3,516
217
245-107
88.3
32.8
1,395
120
134-56
51.2
31.8
20.8
438
298
394-249
0.41
62.0
35.7
26.3
1,407
322
413-117
14.14 21.11
0.38
44.7
59.0
37.5
953
123
129-86
12.47 22.10
0.51
86.7 154.1
24.5
2,198
782
820-408
8.70 17.95
0.39
30.3
22.5
2,542
129
197-108

28.1
STOCK
IDEAS
Company
Stock
style
Meghmani Organics
Pesticides & Agrochemicals
Nocil
Chemicals
Sasken Comm Technologies

IT - Software
Srikalahasthi Pipes
Castings/Forgings
Sunteck Realty
Construction - Real Estate
Tamil Nadu Newsprint

Paper & Paper Products
Technocraft Industries (I)

Steel & Iron Products
Trident
Textile - Spinning
Vikas EcoTech
Chemicals
P/E
Industry
P/E
PEG
Quarterly EPS TTM EPS EPS growth

growth (%) growth (%)
5Y (%)
14.30 31.63
0.70
273.8 110.3
14.28 28.94
0.68
38.6
3.10 17.95
Mrkt cap
(` cr)
Share
price (`)
52-week
high/low (`)
20.5
1,237
49
52-18
32.8
20.9
1,202
74
80-38
0.08
90.9 111.1
38.1
657
371
431-233
7.41 13.42
0.25
24.4
29.3
1,244
313
356-184
7.92 24.78
0.07
764.9 196.8 114.6
1,746
277
281-173
9.37 13.36
0.43
33.0
41.0
21.7
2,548
368
392-186
11.17 11.15
0.25
35.8
42.1
44.0
1,019
388
397-176
12.25 11.03
0.27
26.0
66.3
45.2
3,012
59
62-37
12.41 28.94
0.21
962.3 838.9
60.4
419
17
24-11
61.6
Data as on October 16, 2016. EPS growth rates are annualised. Indicates new entrants.
Come to Your
Trusted
Expert
GREAT FUNDS
Choose great funds with Value
Research Fund Rating and
Analysts Choice.
TRACK
Track your investments intelligently with
the My Portfolio tool at ValueResearch
Online.com. The tool is used by over a
million investors every day.
GREAT STOCKS
Choose great stocks with
fundamentally guided stock
Ideas and recommendations.
ASK
Get your money-related questions
answered. About 7.5 million visitors get
expert views on mutual funds, stocks,
insurance, tax and financial planning.
valueresearchonline.com

WORDS WORTH
NOW
Jio is not a punt, it is

a well-thought-out,
engineered ecosystem.
We will prove all
(financial analysts)
wrong. Just watch our
quarter by quarter
results... I am in a
fortunate position of
pursuing my conviction,
with a board to stand
behind me.
MUKESH AMBANI, MD, Reliance
Industries, economictimes.indiatimes.
com, October 18, 2016
When we say markets have run up, it is true for the

last one year but if you look at the last eight years,
markets have done nothing. Markets have lagged
econom growth for fairly long periods
economic
tim the market cap to GDP of
of time;
India is sitting at nearly ten-year
lows It is true that the profit
lows.
grow has been weak for the last
growth
two years but that is all set to
chan and in the next two-three
change
years we should see fairly robust
years,
earnin growth.
earnings
PRASHANT JAIN, MD, ED, HDFC Mutual Fund,
PRA
Th
The Economic Times, October 20, 2016
There are a lot of corporates who have gone to the

markets directly. And a few better-rated corporates
have taken the commercial paper or bond route. So,
they have not taken loans and you know the base itself
has shrunk So because of all these things, the actual
rebound in commercial loans is not visible.
ARUNDHATI BHATTACHARYA, Chairwoman, SBI,
BusinessLine, October 20, 2016
Ive seen many tech cycles in the past

30 years of my working life and the
current phase is the most exciting If
you look back, you can see technologysupported business, which meant
automating back-end systems to hasten
processes. With digital,
business is getting
embedded in
technology. Its a
profound transition.
N CHANDRASEKARAN,, MD & CEO,
TCS, Business Standard,
October 17, 2016
None of us can stay without our phones

for even an hour and people are more
dependent on their phones than they are
on their purses at this point in time
You are looking at the last three months
pricing power, but it [telecom] is a sector
which has not delivered
vered
returns for nine years
ars and
to me such a sectorr looks
pretty interesting because
ecause
I am much more
dependent on telecom
om
than I was in 2007
S NAREN, ED, ICICI Pru Mutual

Fund, The Economic Times,
October 20, 2016


Nov WI 2016 11

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Nov WI 2016 11

Uploaded by

Copyright:

Available Formats

Subscription copy of [timeismoney33@rediffmail.com]. Redistribution prohibited.

Subscription copy of [timeismoney33@rediffmail.com]. Redistribution prohibited.

Subscription copy of [timeismoney33@rediffmail.com]. Redistribution prohibited.

The goal of Wealth Insight, as with

2016 Value Research India Pvt. Ltd.

Total pages 64, including cover

4 Wealth Insight November 2016

The range of policy

While following the

STOCK ANALYSTS CHOICE

High dividend-yield stocks

WORDS WORTH NOW

COMPANIES WITH MOAT

The watch list

Quality stocks available

November 2016 Wealth Insight 5

Subscription copy of [timeismoney33@rediffmail.com]. Redistribution prohibited.

The end of trends

The never-ending seesaw of the stock

caps, their fantasy would be that this trend should

Subscription copy of [timeismoney33@rediffmail.com]. Redistribution prohibited.

Index watch: Nifty FMCG

Dividend yield (%)

Dynamics of the Nifty FMCG Index

Nifty FMCG is 5.25% lower than its all-time high.

1-year change (%)

Tata Global Beverages

P&G Hygiene & Health

Colgate Palmolive (I)

Price/earnings is at 0.14% premium to its five-year median of 35.37.

Price/book value is at 3.38% discount to the five-year average of 11.88.

Colgate Palmolive (I)

GSK Consumer Healthcare

Godrej Consumer Products

P&G Hygiene & Health

Tata Global Beverages

All data as on October 14, 2016

8 Wealth Insight November 2016

Subscription copy of [timeismoney33@rediffmail.com]. Redistribution prohibited.

BIG MOVES: LARGE CAPS

Indian Oil Corp.

Net profit (` crore)

3M price (`) movement

10 Wealth Insight November 2016

BIG MOVES: MID CAPS

Jubilant Life Sciences

Edelweiss Financial Services

Net profit (` crore)

3M price (`) movement

November 2016 Wealth Insight 11

BIG MOVES: SMALL CAPS

Rane Brake Linings

Energy Development Co.

Patel Engineering Co.

Net profit (` crore)

3M price (`) movement

12 Wealth Insight November 2016

Safe turns risky

onsumer-staples companies sell food, beverages,

Current P/E vs historical median P/E

Emami GSK Con- Godrej

Five-year revenue growth rates

Revenue growth rate 5Y CAGR (%)