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February 2019
Volume XII, Number 8 28 COVER STORY
Cash-flow kings
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
Free cash flows are a better indicator of business strength than
stories that will help you in taking
better-informed investment
profits. Here are some sectors and companies
decisions, encouraging you to that have the highest free cash flows.
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 let’s
grow and evolve as we undertake
this voyage together.
Editor
Dhirendra Kumar
Associate Editor
Vibhu Vats
Research & Analysis
Danish Khanna
Jugal Harpalani
Yash Rohra
Data Support
Sandeep Nambiar
Design
25 INTERVIEW
Satyabrata
Mohanty,
Senior Fund
Kiran Sindhwal
Mukul Ojha
Production
Banking Manager & Head
– Equity Research,
Aditya Birla
Hira Lal
Data source for stocks
AceEquity
on the Sun Life
Mutual
9DOXH5HVHDUFK,QGLD3YW/WG
potential of Fund
Wealth Insight is owned by Value

Research India Pvt. Ltd., 5, Commercial
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Editor: Dhirendra Kumar.
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Total pages 64, including cover Mutual Fund
4 Wealth Insight February 2019

Columns
7 37 40 42 44
EDIT STRAIGHT MAIN STREET OFFBEAT TAKING STOCK
TALK
by DHIRENDRA by ANAND by SAURABH by SANJEEV by MALINI

KUMAR TANDON MUKHERJEA PANDIYA BHUPTA
The flow of How is the Market’s a Sparking The big

logic MPC doing? stage wildfires consumption
While the decision- The RBI’s How competitive How the media shift
making flow of any Monetary Policy advantage drives drives our emotions While a digitally
investment is Committee is churn in the stock savvy consumer
complex, free cash focusing just on market poses a huge
flows can be a inflation, not opportunity for
useful differentiator growth. This can consumer
in stock research have long-term companies, they
consequences. must innovate to
keep the consumer
loyal to them
46 STOCK ADVISOR
8 MONTHLY AGENDA 50 STOCK SCREEN
Nifty 50 vs world indices Quality stocks available

How to avoid 10
cheap
Reasonably priced growth
value traps
MARKET COMPASS
Index Watch stocks

Why a cheap-looking stock can Big moves Discount to book value
cost you dearly In search of value High dividend-yield stocks
Attractive blue chips
18 ANALYST’S DIARY
No small feat 62 WORDS WORTH NOW
Trouble in the making

Holding a fortune
Inside ROE
Pursuit of profits
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
February 2019 Wealth Insight 5

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EDIT
The flow of logic

While the decision-making flow of any investment is complex, free cash
flows can be a useful differentiator in stock research
DHIRENDRA KUMAR
At Value Research, we have long held hope that the finance minister will eliminate, or at least
that we are as much in the education business as we are fix, the long-term capital-gains tax on equity investments
in the business of providing financial analysis and that was reimposed last year.
advice. Unlike anyone else who is doing something The tax worsens the biggest problem that threatens
similar, we are not here to hand you a list of investments the Indian saver, who is wallowing in the financially
and say, “Now go and put your money in this and don’t damaging tradition of sticking overwhelmingly to
ask any questions.” I’m much happier if readers learn deposits. Indian savers need all manner of
what we are doing and why we’re doing it and ask encouragement to switch to equity-based investments.
questions about it. As fixed-income returns have fallen and savers are still
The cover story of this issue of Wealth Insight is a sticking to their habits, more and more retirees are
perfect case in point. Free cash flow is a much more sliding towards old-age poverty. There is no solution to
arcane and geeky measure of the financial situation of this, except to make equity-based investments simple
a company than profits and valuations that most and attractive to understand and implement. Before the
investors are used to. Its applicability too has a lot of ifs current reimposition of the long-term capital-gains tax,
and buts to it. And yet, it’s a very incisive measure. It this was very much the case. However, one year of
asks questions about a company’s business that are not experience has shown that this tax will be a considerable
easy to fudge and whose answers are not easy to fake. impediment in achieving that.
Thus, our cover story is a well-chosen mix of education As an equity investor, this tax places you in the
and guidance. We have explained what the concept of difficult situation of having to make a mental trade-off
free cash flows is and why it’s important. as to whether the financial cost of sticking to a bad
Based on this, we have also run our analysis on a investment will be greater than the tax hit. Of course,
variety of sectors and companies and presented a since most of the time the information to make this
selection of the stocks that have bubbled to the top. As trade-off is not available, it would end up being a
always with such companies, do keep in mind that this random and possibly harmful decision.
is not a ‘buy list’. Many of these companies may not be Last week, John Bogle, one of the great figures of the
good investments because of other issues. Some may be world of investments passed away. He was the father of
great investments but for the valuations. The decision- index investing and the founder of Vanguard, which, at
making flow of any investment is complex and goes $5.1 trillion dollars, is now the world’s largest
through far more than just one or two checkpoints. investment-management company. I well understand
Being aware of all of them and having the knowledge that for most of the readers of this magazine, passive
about what works and what doesn’t is a must. investments sound like a foolish way. However, everyone
Now, let’s talk about the Union Budget. By the time cannot be an active investor and I’m sure that many of
you get this issue in your hands, the Budget would have you are also mutual fund investors. Do read my tribute
just come in. Therefore, in a sense, you have advantage to Bogle at http://vro.in/s46465 – there’s much in his
over me because you know what it holds and I don’t. I do life that every investor should know.

MONTHLY
AGENDA
S&P 500 (USA)

400 Correlation Returns (%, CAGR) Here is how various key world
300
0.97 14.2 11.2 indices have moved vis-a-vis the
Indian market, Nifty 50. While the
200
Nifty 50 may seem to move in sync
100 with other markets, there is a
0
significant difference between their
January 2009 January 2019 respective return profiles. These
variations are the result of different
underlying fundamentals.
DOW JONES INDUSTRIALS (USA)
400
300
Correlation
0.97
Returns (%, CAGR)
14.2 10.8 Nifty 50
200
vs world
indices
100
0
January 2009 January 2019
FTSE 100 (UK)

400 Correlation Returns (%, CAGR)
0.89 14.2 4.5
300
200
100
0
Nifty 50
January 2009 January 2019 Index as stated
DAX 30 (Germany) CAC 40 (France)

400 Correlation Returns (%, CAGR) 400 Correlation Returns (%, CAGR)
0.95 14.2 8.6 0.93 14.2 3.8
300 300
200 200
100 100
0 0
January 2009 January 2019 January 2009 January 2019

MONTHLY
AGENDA
HANG SENG (Hong Kong)

0.84 14.2 6.3
300
200
100
0
KOSPI (South Korea)

0.82 14.2 5.7
300
200
100
0
SHANGHAI SE A SHARE (China)

0.47 14.2 2.9
300
200
100
0
All indices rebased to 100 January 2009 January 2019
NIKKEI 225 (Japan) BOVESPA (Brazil)

400 Correlation Returns (%, CAGR) 400 Correlation Returns (%, CAGR)
0.94 14.2 8.7 0.49 14.2 8.5
300 300
200 200
100 100
0 0
January 2009 January 2019 January 2009 January 2019

MARKET
C MPASS INDEX WATCH
Nifty IT Index
20.2
Price to earnings
5.0
Price to book
1.45
Dividend yield (%)
14.3
Market cap
(` lakh cr)
Nifty IT Nifty Median

Top gainers/losers
Nifty IT is the best-performing index in the last one year.
Company name M-cap (` cr) 1Y change (%)
17500
NIIT Technologies 7,458 70
16000
Mindtree 13,824 36
14500 TCS 7,01,733 31
13000 Infosys 3,21,773 31
11500 Tech Mahindra 68,711 26

Wipro 1,52,721 2
10000
Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 HCL Technologies 1,27,238 -1
Tata Elxsi 6,046 -7
Price/earnings is at 2.7% premium to its five-year median of 19.6.
Oracle Financial Services 31,608 -10
29
Infibeam Avenues 3,002 -69
26
23 Valuations and dividend

Dividend
20
Company name P/E P/B yield (%)
17 HCL Technologies 16.0 4.8 1.3
Infibeam Avenues – 1.2 0.4
14
Jan ’14 Jan ’15 Jan ’16 Jan ’17 Jan ’18 Jan ’19 Infosys 22.9 4.8 3.0
Mindtree 18.2 4.4 1.1
Price/book value is at 6% discount to its five-year median of 5.4. NIIT Technologies 28.3 4.8 1.2
8.0 Oracle Financial Services 28.7 9.7 3.5
Tata Consultancy Services 24.2 9.6 1.3
6.8
Tata Elxsi 20.9 6.9 1.1
5.6 Tech Mahindra 16.8 3.5 2.0
Wipro 21.5 3.4 0.3
4.4
3.2 Weightages
2.0 Company name Weightage (%)
Jan ’14 Jan ’15 Jan ’16 Jan ’17 Jan ’18 Jan ’19
Infosys 43.5
Dividend yield is 53 basis points lower than its five-year median of 1.98. Tata Consultancy Services 31.1
HCL Technologies 8.3
3.0
Tech Mahindra 6.9
2.5 Wipro 5.9
MindTree 1.5
2.0
Oracle Financial Services 1.3
1.5 NIIT Technologies 0.8
Tata Elxsi 0.5
1.0
Infibeam Avenues 0.2
0.5
Jan ’14 Jan ’15 Jan ’16 Jan ’17 Jan ’18 Jan ’19 Data as of January 16, 2019

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

3M returns (%) 3Y avg RoE (%) 3Y earnings growth (%) 3M price (`) movement
1,081
31.7 172 255

Interglobe Aviation
Falling crude-oil prices and expansion plans on
international routes are positive for the company. 74.3 -48.4 821
18.4
186
DLF 7 4,213 157
The company’s net profit increased 26 times,
to `375 crore, in Q2 YoY. 6.5 88.2
15.3 9 8,329
BPCL 296
The recent slump in crude-oil prices is beneficial for
the company. 28.4 7.0 342
4.6 97 901
Avenue Supermarts
1,333
In Q3, the company reported its slowest growth in
the last eight quarters, which led to fall in stock. 20.2 – 1,395
-1.2 – -7,222
Vodafone Idea
37 36
The company has been posting losses due to the
intense competition in the sector. -3.6 -232.2
-4.1 32 1,688
Bandhan Bank 471
While the RBI’s restrictions on opening new branches
has been relaxed, the stock has yet to recover. 20.8 – 452
949
-14.9 8 4274
Indiabulls Housing Finance
The stock has yet to recover from the blow housing-
finance companies received due to liquidity concerns. 27.5 26.8 807
246
-17.5 11 4,481
Yes Bank 203
Rana’s Kapoor’s successor is yet to be decided, which
has kept the stock price in check. 18.8 25.8
-22.4 8 9,039
JSW Steel
12.8 195.0
Metal stocks corrected amidst US–China trade-war concerns. 376
292
600
-24.6 45 2,955
Sun Pharmaceutical Inds.
16.3 -8.9
Fresh corporate-governance issues at the company 452
have resulted in a rapid decline in the stock.
Our large-cap universe has 97 large companies, making the top 70 per cent of the total market capitalisation. The list mentions the stocks that have fluctuated most wildly in the last three months.
Data as on January 15, 2019

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

88.5 241 28
Linde India
1.3 3.1
The company’s parent plans to delist it. 417 786
50.2 – -3,927
Oriental Bank of Commerce
98
The stock gained on the back of lower losses and
provisioning in Q2. -19.4 -314.1 65
48.6 39 219
Kajaria Ceramics
23.1 1.0
Amidst challenging times for the sector, the company 357 530
posted increase in revenues and margins QoQ.
44.7 – -2,367
Adani Power
The company cut its losses. It is also to benefit from
amendment in the power-purchase agreements. -72.4 -284.9 35 50
36.9 20 1,257
219
Adani Transmission
The company was included in the MSCI Global Small Cap
Index. 22.2 – 160
36.4 – -3,565
Union Bank of India
69
-4.7 -222.8
The company reported a profit of `139 crore in Q2FY19 94
vs a loss of `1,530 crore in Q2FY18.
-5.1
184
Edelweiss Financial Services 16 977
The stock staged a recovery after getting bludgeoned
due to liquidity concerns in NBFCs. 13.1 44.0 174
-6.1 78 119
KIOCL 159
The stock recovered after the government announced
plans to cut stake in the company. 0.8 –
150
281
-20.6 5 1,492
Dewan Housing Finance Corporation
Liquidity fears in the bond market and rumours of default
by the company have pummelled the stock. 24.0 30.2
223
54
-33.7 39 160
Dish TV India
The company’s subscription revenue fell from `1,489 crore to
`1,453 crore QoQ. 691.8 -2.7
36
Our mid-cap universe has 219 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.

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

84
189.3 38 41
Dolat Investments
In Q2, the company’s profits increased to `12.6 crore vs
`6.5 crore in Q2 FY18. 14.1 139.9 29
37
76.9 – -111
Indo Rama Synthetics
-9.0 -23.9
The stock price rallied due to a fall in crude-oil prices. The 21
company has also approved issue of new preferential shares.
41.3 – -1,492
Jaypee Infratech
Five companies submitted expression of interest to
take over the company. -23.8 -421.6 3 4
33.8 22 56
Kushal 39
The stock recovered after a steep fall in the last one year.
70.5 – 53
29.6 – -81
DB Realty
-5.1 -274.0
A sector-wide rally in the short term took the 21
company’s stock higher. 27
-0.1 – -108
Hotel Leelaventure 15
Rumours of the company’s acquisition sent the stock
higher, but it soon settled. -3.0 13.0 15
480
-29.7 46 24
SORIL Infra Resources 337
The stock fell amidst a correction in small caps.
11.1 23.2
142
-38.8 16 91
Bhansali Engineering Polymers
The company’s margins fell from 7 per cent to 4.1 per
cent QoQ. 28.6 77.4
87
92
-44.5 9 86
Navkar Corporation
The company reported an 87 per cent drop in net
profit in Q2 YoY. 8.3 7.6
51
1,089
-53.2 18 68
Shankara Building Products
The company posted weak Q2 results, with a decline
of 47 per cent YoY in net profits. 16.6 –
510
Our small-cap universe (minimum market capitalisation `500 crore) has 657 small-cap companies, making the last 10 per cent of the total market capitalisation. The list mentions the stocks that have
fluctuated most wildly in the last three months. Data as on January 15, 2019.

MARKET
C MPASS
In search of value
Value or contra funds specialise in investing in stocks that are beaten down
or offer value relative to their prices. Tracking them is an effective way to
know where value lies in the market. Here is what top-rated value and
contra funds have bought in the last six months (as of December 2018).
ICICI Prudential Value Discovery L&T India Value Tata Equity PE
Top 5 holdings (% of AUM) Top 5 holdings (% of AUM) Top 5 holdings (% of AUM)
Sun Pharma 7.4 Reliance Ind 5.7 HDFC 9.5
SBI 7.2 ICICI Bank 5.2 Reliance Ind 5.8
Infosys 5.7 Infosys 4.8 Tech Mahindra 4.9
NTPC 5.0 L&T 4.0 L&T 4.7
Power Grid 4.6 HDFC 3.7 Bajaj Auto 4.6
Maximum inflows (% of gross flows) Maximum inflows (% of gross flows) Maximum inflows (% of gross flows)
Others IOC Infosys Others ITC
39.7 14.1 Others 19.6 67.9 10.5
Power
42.0 Coal India
ICICI 5.9 M&M
Grid Bank Finance
Indusind
Infosys 13.5 Bank 15.6 Sundaram
5.2
Finance
11.6 SBI 5.5 5.3 M&M
Axis HDFC
Vedanta 13.3 Bank Bank 5.1
7.6 5.4 11.9
Vedanta Coal India HDFC Bank Emami ITC M&M Financial
Top fresh Top fresh Top fresh
1.8 1.5 2.3 0.5 4.0 2.2
Services
entrants entrants entrants
(% of AUM) (% of AUM) (% of AUM)
Bank of Baroda Cummins Coal Sundaram
0.6 0.6 0.1 0.2 0.1

BHEL GAIL Siemens India India Finance Infosys
2.1 2.1 1.8

Aditya Birla SL Pure Value
Top 5 holdings (% of AUM) Maximum inflows (% of gross flows) Top fresh ICICI Bank SBI
ICICI Bank
SBI
5.5
5.2
Others
66.8
Marico
VIP Ind
10.7
entrants
(% of AUM) 5.5 5.2
10.0 Deepak
Gujarat Alkalies2.7
Nitrite
M&M 4.6 SRF Dabur India Yes Bank
2.4 2.4 1.7

4.3
HPCL 2.6 Shriram
Transport
Petronet LNG 2.6 3.6

MARKET
C MPASS
HDFC Capital Builder
Top 5 holdings (% of AUM) Maximum inflows (% of gross flows) Top fresh S H Kelkar and
Coal India Company
8.9
1.4 1.3
HDFC Bank Others BPCL entrants
76.1 5.7 (% of AUM)
ITC 5.2 HDFC Bank
ITC
5.1
Reliance Ind 4.2 Infosys
4.8 Repco Home
Finance Wipro INOX Leisure
3.4 4.2
1.2 1.1 1.0
BPCL Vedanta
4.0
ICICI Bank 3.2
Invesco India Contra IDFC Sterling Value Quantum Long Term Equity Value
Top 5 holdings (% of AUM) Top 5 holdings (% of AUM) Top 5 holdings (% of AUM)
HDFC Bank 8.3 Future Retail 4.5 HDFC 8.0
ICICI Bank 6.7 RBL Bank 3.0 Infosys 7.3
Infosys 6.0 Ramco Cement 2.3 Bajaj Auto 6.0
Reliance Ind 6.0 Indian Hotels 2.1 Hero Moto 5.9
HDFC 5.6 KEC Int 2.0 ICICI Bank 4.9
Maximum inflows (% of gross flows) Maximum inflows (% of gross flows) Maximum inflows (% of gross flows)
Others Infosys Others Minda Ind Others Infosys
64.7 8.9 68.6 8.1 31.4 20.0
Indusind Bank Axis Bank
Vardhman
7.9 Axis 6.8 Textiles
Shriram
Bank Trpt Fin
HDFC Bank 6.6 ICICI Bank 6.0 Yes Bank 14.6
6.3 5.3 Prism 11.3
BPCL Johnson ACC Ambuja
5.6 5.2 10.4 Cements
12.2
Top fresh Indusind Bank Axis Bank
Top fresh Axis Bank Vardhman
Top fresh Shriram Ambuja
4.6 3.7 1.8 1.4

Textiles Transport Cements
3.3 2.7
entrants entrants entrants
(% of AUM) (% of AUM) (% of AUM)
Tech Mahanagar Ipca

BPCL Mahindra Gas ICICI Bank Laboratories Prism Johnson Yes Bank
3.4 3.0 2.1 1.4 1.2 1.2 1.9

Kotak India EQ Contra
Top 5 holdings (% of AUM) Maximum inflows (% of gross flows) Top fresh Asian Paints Dabur India
ICICI Bank
Reliance Ind
7.0
6.2
Others
48.9
Infosys
ICICI
Bank
19.3
entrants
(% of AUM) 2.6 1.2
11.6 Asian
HDFC Bank 5.0 Bajaj Finance
Paints Ircon
7.9 Exide Sun Pharma International
4.3 6.5
0.9 0.9 0.4
HUL Reliance
Bajaj Finance 4.2 Industries

5.8

ANALYST’S
DIARY
No small feat
The following companies have increased their sales and profits every quarter
for the last three years
H
ow does a business make money? The answer mean making more money if the costs also increase
is simple: by selling its goods or services for in tandem. The mark of a good
more than their total cost. But how does a business, thus, is that it should sell
business make more money than before? This more but also increase its profits at the
question adds different dimensions to the same time.
problem now. A business can make more The table below lists some companies
money by selling more or by raising its that have grown their sales as well as
margins on the same sales or by profits in every quarter on a year-on-
cutting costs or by restructuring its year basis for the last three years – no small
operations and so on. Perhaps the feat. Such a performance indicates a solid
simplest is by selling more. But business that is growing, keeping its costs in
selling more doesn’t always check and raising its profits. WI
The only way is up

Market Sales growth (YoY, %) Profit growth (YoY, %) 3Y ret
Company name Sector cap (` cr) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 (%, CAGR)
HDFC Bank Bank 5,71,326 23.0 20.8 17.7 16.9 20.6 18.2 20.3 20.1 26.3
Infosys IT 3,06,199 17.3 12.0 5.6 3.0 10.3 1.6 1.7 38.3 7.1
Kotak Mahindra Bank Bank 2,30,899 20.4 16.3 19.1 12.8 17.2 15.6 21.7 29.5 21.4
Larsen & Toubro Infrastructure 1,87,056 21.3 17.9 10.5 9.4 26.2 13.8 11.6 44.4 21.8
Bajaj Finance Finance - NBFC 1,46,847 39.5 39.0 32.8 31.7 54.5 81.4 60.5 38.0 62.0
IndusInd Bank Bank 89,397 29.2 22.6 21.4 15.9 4.6 23.8 26.8 24.7 17.2
Indiabulls Housing Finance - Housing 33,794 26.1 29.0 25.9 29.5 21.4 30.3 22.3 55.3 6.0
L&T Finance Holdings Finance - NBFC 27,214 25.0 32.2 27.1 25.6 61.9 60.3 30.3 38.7 32.3
Page Industries Textile 26,529 10.4 17.0 22.2 17.5 10.2 45.9 41.1 32.6 23.5
Gruh Finance Finance - Housing 17,124 15.5 11.8 16.4 12.5 20.1 20.0 18.2 28.3 24.6
Sun TV Network Media & Entertainment 22,837 10.9 42.5 23.1 15.9 23.4 62.6 22.8 11.2 15.4
Cholamandalam Inv. Finance - NBFC 18,599 27.7 28.1 25.7 18.6 33.6 37.8 31.1 53.2 24.5
Edelweiss Financial Finance - NBFC 16,555 32.2 18.5 34.8 28.4 53.1 14.7 52.4 53.8 50.9
PNB Housing Finance Finance - Housing 14,838 41.9 42.1 45.9 44.0 33.1 50.4 43.8 57.8 -0.2
City Union Bank Bank 13,910 10.2 7.7 8.8 6.7 16.0 15.2 18.0 22.2 41.1
Minda Industries Automobile & Ancillaries 7,979 38.5 39.8 42.2 15.8 26.1 77.5 157.0 21.9 78.4
Future Consumer Trading 8,322 34.6 26.9 51.3 42.1 – – – – 25.8
JM Financial Finance - Investment 7,463 26.8 23.0 27.2 39.6 14.1 8.9 24.2 45.0 31.4
Tata Elxsi IT 6,040 17.7 18.2 14.8 11.4 43.6 41.7 61.6 42.2 2.8
Can Fin Homes Finance - Housing 3,650 11.3 10.7 10.7 12.1 7.6 11.0 6.5 34.4 12.9
Caplin Point Lab. Healthcare 3,058 18.7 18.6 21.5 37.8 22.4 2.9 5.9 57.7 25.7
KEI Industries Electricals 2,786 32.2 7.3 29.7 16.2 45.2 17.1 40.4 50.7 44.2
Swaraj Engines Automobile & Ancillaries 1,815 18.4 7.5 2.5 5.3 8.0 7.3 17.0 12.6 18.1
Muthoot Cap. Services Finance - NBFC 1,517 39.4 56.4 48.6 50.4 94.1 238.9 93.5 143.8 89.1
6XU\D5RVKQL 'LYHUVLÀHG
IOL Chemicals Healthcare 1,086 94.2 55.3 38.5 32.9 766.8 383.6 474.5 771.3 43.7
Q1 is the most recent quarter, Q2 the next and so on. Minimum market cap `500 crore. Data as on January 14, 2019.

ANALYST’S
DIARY
Trouble in the making

The companies listed below have contingent liabilities higher than equity
I
n air force, stealth aircraft have a special place. Examples of contingent liabilities include tax
They are deadlier than ordinary aircraft because disputes, pending lawsuits, guarantees, etc.
they can’t be detected by most radars. The table below lists companies whose
Indeed, what is insidious and invisible has contingent liabilities are more than equity
the potential to cause greater harm than and have been increasing in the past
what is visible. three years. This means that if these
This reminds us of contingent liabilities are realised, the entire equity
liabilities. These are financial of these companies could be wiped off.
obligations that could materialise in If you are still wondering whether
the future. If you study just the this really happens, Matrimony.com is
balance sheet, you may not realise their a case in point. Its costs from litigation
presence. However, if you study the resulted in the company’s equity base
notes to financial statements, they could turning negative.
be found. The balance sheet doesn’t reflect While valuing a company, hence, do see
them as they haven’t occurred yet. But they the contingent liabilities. If not anything, that
have the potential to make a dent in the balance sheet will help you preclude the need for a contingency
if they occur. plan later. WI
Problems to solve
Contingent liabilities-to-
Market cap shareholders’ funds (%)
Company Name Sector (` cr) 2018 2017 2016 Disputes/issues
Ashoka Buildcon Infrastructure 3,738 543 240 173 Claims, tax disputes, bank guarantees
Reliance Naval Logistics 956 478 160 90 Service tax, excise duty, sales tax
Coal India Mining 1,42,770 396 137 90 General disputes
Hinduja Ventures Media & Entertainment 825 382 42 32 Service tax, licence fee
Reliance Comm Telecom 3,698 341 22 18 Litigation and spectrum charges; custom and excise duties; service tax
Network 18 Media & Entertainment 4,026 327 287 204 Decreasing shareholder funds
GMR Infrastructure Infrastructure 9,808 297 220 147 Decreasing shareholder funds
HCL Infosystems Trading 790 287 72 66 Increase in excise duty and income tax
Jaiprakash Associates Cement 1,742 234 198 61 Income-tax disputes
Hindustan Aeronautics Aviation 26,111 176 147 142 Sales-tax and income-tax disputes
Gateway Distriparks Logistics 1,223 173 147 145 Bank guarantees
Schneider Electric Capital Goods 2,306 169 71 29 Increase in excise and sales duties and income tax
Gujarat State Petronet Gas Transmission 10,244 163 68 67 Bank guarantees and contractual disputes
Future Retail Retailing 22,481 162 149 3 Corporate guarantees
Future Enterprises Retailing 1,624 153 119 4 Guarantees
Usha Martin Iron & Steel 981 150 106 29 Fuel surcharge matters, increase in excise and sales duties, tax disputes
PNC Infratech Infrastructure 3,901 140 114 94 Sales-tax disputes, bank guarantees
Mahindra Holidays Hospitality 2,867 135 134 121 Luxury tax and matters pertaining to revenue recognition
NBCC Realty 10,431 131 127 109 VAT and income-tax disputes
Panacea Biotec Healthcare 1,039 117 102 79 Decreasing shareholder funds
TV18 Broadcast Media & Entertainment 5,837 109 107 88 Lawsuits for copyright and objectionable content, defamation suits
Atul Auto Automobile & Ancillaries 734 107 36 11 Bank guarantees
Zee Media Corporation Media & Entertainment 1,156 102 66 7 Corporate guarantees

ANALYST’S
DIARY
Holding a fortune
The following companies have large investments in other listed companies
V
aluing a company is a crucial offshoot of not with the investment but the ‘investors’, i.e., the
investment research. If you ever get to see an companies that have made these investments.
analyst’s Excel sheet, you will find it filled with It could be that these investor companies’ core
abstruse calculations that he has done to arrive at the operations are suffering or they are highly indebted or
right value of the stock. If you are already shaking they have other loss-making subsidiaries. As one can
your head and wondering what’s the need for all that, observe, in many cases they are the parent companies
given the classic P/E, P/B and PEG measures, the table and may never sell these investments. Hence, they are
below might open up your eyes to a different reality. being valued at a significant discount, what is also
It lists some companies with their investments in called the ‘holding-company discount’ in stock-market
other listed companies. The remarkable thing about lingo. Another reason could be that the investments
these companies is that their investments are at least made by these companies have grown at a faster rate
50 per cent of their own market sizes. At first sight, it than their own market caps.
appears that there is no relation between the market On the bright side, these investments are likely to
value of the company and its investments. Is this an give protection against a downside in the investor
anomaly or is there more to it? The problem may lie company. WI
Where does the value lie?

Investment Investments as
Company name Sector Market cap (` cr) value (` cr) % of market cap Prominent holdings Stake (% of eq)
Rajapalayam Mills Textile 512 2,288 447.2 Ramco Industries 9.7
Alembic Healthcare 1,150 3,458 300.6 Alembic Pharmaceuticals 29.5
Uniphos Enterprises Trading 733 1,958 267.1 UPL 5.1
Kirloskar Industries Capital Goods 845 1,956 231.4 Swaraj Engines 17.4
Sundaram-Clayton Automobile & Ancillaries 6,754 15,085 223.3 TVS Motor co 57.4
E.I.D. Parry Sugar 3,976 8,043 202.3 Coromandel International 60.6
Kama Holdings Plastic Products 3,242 6,149 189.7 SRF 52.3
Ramco Industries Cement 1,909 3,327 174.3 Ramco Cements 21.0
Godrej Industries Chemicals 17,754 27,278 153.6 Godrej Agrovet 58.0
*UDVLP,QGXVWULHV 'LYHUVLÀHG 8OWUD7HFK&HPHQW
NIIT IT 1,469 1,751 119.2 NIIT Technologies 23.5
Vedanta Non - Ferrous Metals 72,950 75,080 102.9 Hindustan Zinc 64.9
Future Enterprises Retailing 1,692 1,351 79.8 Future Supply Chain 51.2
Network 18 Media Media & Entertainment 4,230 3,351 79.2 TV18 Broadcast 51.2
Universal Cables Electricals 940 702 74.6 Vindhya Telelinks 29.2
RSWM Textile 553 362 65.4 HEG 2.5
Triveni Engineering Sugar 1,276 826 64.8 Triveni Turbine 21.8
Sadbhav Engineering Infrastructure 3,703 2,356 63.6 Sadbhav Infrastructure 69.0
HT Media Media & Entertainment 1,099 678 61.8 Hindustan Media Ventures 74.3
India Motor Parts Trading 744 443 59.5 Sundaram Finance 2.6
Thomas Cook Hospitality 8,568 4,872 56.9 Quess corp 48.8
GKW Iron & Steel 537 301 56.1 Graphite India 2.1
Gujarat State Petronet Gas Transmission 10,041 5,560 55.4 Gujrat Gas 54.2
7H[PDFR,QIUDVWUXFWXUH 'LYHUVLÀHG 7H[PDFR5DLO
Bharat Bijlee Capital Goods 641 336 52.4 Siemens 0.01

ANALYST’S
DIARY
Inside ROE
3URÀWPDUJLQVRIFRPSDQLHVZLWKSHUFHQW52(
Profit margin (%, YoY)
Company name (2018) (2017) (2016) (2015)
Indiabulls Real Estate 33.49 15.28 10.90 10.28
The DuPont formula segments ROE Delta Corp 21.61 16.27 10.81 -9.13
Navin Fluorine 19.72 17.49 11.57 9.25
and helps us make more sense of it Can Fin Homes 19.55 17.39 14.51 10.57
Prakash Industries 12.85 3.35 1.02 0.30
R
OE (return on equity) is one of the most IG Petrochemicals 12.47 8.95 5.80 0.69
important and common ratios used to analyse a Solar Industries 11.97 11.38 11.28 10.69
company. And why not? We all want to see how Sterlite Technologies 11.38 8.50 7.02 -0.11
much of the income is attributable to shareholders,
DCM Shriram 9.54 9.03 4.98 3.58
who own the equity. However, just dividing net income
Suprajit Engineering 9.52 8.78 7.76 7.53
by shareholders’ equity can only tell you so much. In
PPAP Automotive 9.15 6.37 3.83 3.32
the 1920s, the DuPont Corporation developed a formula
which broke ROE into three components: profit margin, Satia Industries 9.07 7.17 2.53 1.59
asset turnover and financial leverage. This helps us JK Paper 8.35 5.78 2.10 -0.73
understand the reason behind the increase or decrease Uniply Industries 8.10 5.03 2.64 0.31
in ROE. Here is the DuPont equation: Shriram Pistons 7.83 7.27 5.93 4.21
ROE = (Net income/Sales) × (Sales/Total assets) × Bharat Bijlee 7.72 1.92 1.01 -5.10
(Total assets/Total equity) NR Agarwal Industries 7.36 4.54 1.93 -4.40
The first part of the formula calculates profit Larsen & Toubro 7.04 6.25 5.47 5.35
margin. Profit margins usually increase if there is
Visaka Industries 6.38 4.05 2.22 1.89
any increase in the selling price and/or decrease in
Mahindra CIE 5.38 3.06 1.92 -1.36
expenses. An increase in the profit margin reflects a
&RQÀGHQFH3HWUROHXP 4.32 0.91 0.28 -6.93
strong bargaining power. Asset turnover (the second
part of the formula) tells us how efficiently a company Lumax Industries 3.42 3.07 2.63 1.31
is able to use its assets to generate revenue. A high Filatex India 3.03 2.37 1.85 0.55
asset turnover is usually the result of a company Wheels India 2.81 2.49 1.86 1.39
successfully increasing its sales and managing its IOL Chemicals 2.77 0.60 -6.21 -15.66
assets in an optimal manner. Aditya Birla Fashion 1.64 0.81 -1.82 -12.33
These two components examine the operations of a Coffee Day Enterprises 1.25 0.25 -3.58 -5.69
business. It is usually preferable that ROE increases
due to any one or both of these factors (in case of the $VVHWWXUQRYHUVRIFRPSDQLHVZLWKSHUFHQW52(
highlighted names, it increases because of both). Asset turnover (times)
However, it is worth noting here that net profit margin Company Name (2018) (2017) (2016) (2015)
and asset turnover can be in contrast. For example, a Mishtann Foods 7.36 5.07 3.63 0.20
company in the fast-food business may have a high NR Agarwal Industries 1.80 1.65 1.39 1.24
asset turnover due to relatively lower assets but lower &RQÀGHQFH3HWUROHXP 1.39 1.37 1.04 0.85
profit margins. Similarly, a manufacturer of Future Lifestyle 1.34 1.16 0.88 0.84
customised and expensive equipment may have a low
IOL Chemicals 1.23 0.98 0.87 0.59
asset turnover but high profit margins.
Generic Engineering 1.11 0.85 0.09 0.03
The third part of the equation is financial leverage,
JK Paper 0.87 0.85 0.85 0.74
which is also known as the equity multiplier. It tells us
how much debt a company uses to fund its assets. Let’s Oracle Financial 0.77 0.77 0.50 0.35
say a company has `100 as assets and `20 as owners’ Delta Corp 0.44 0.37 0.30 0.23
equity. The balance-sheet equation (assets less liability Zee Learn 0.32 0.25 0.22 0.20
equals to equity) will signify `80 as company debt.
Hence, if a company borrows more to finance its assets, )LQDQFLDOOHYHUDJHRIFRPSDQLHVZLWKSHUFHQW52(
the ratio has to increase. This increases a company’s Assets to equity (times)
Company Name (2018) (2017) (2016) (2015)
risk of default and makes it riskier.
We applied DuPont equation on the companies &RQÀGHQFH3HWUROHXP
which have an ROE of more than 20 per cent. The Generic Engineering 1.76 1.70 1.24 1.22
tables list the results as per each segment. WI Minimum market cap `500 crore. The third table excludes financial companies.

ANALYST’S
DIARY
Pursuit of profits
Here are some companies that have started showing profits after a streak
of losses and hence are witnessing a turnaround
T
here are many ways of profiting from stocks, have started to show profits after a streak of losses.
depending on how adventurous you want to be. If Before the recent four quarters, these companies had
you are staid, you might want to go for plain made losses in at least six of the
value or growth investing. If you can handle the thrills preceding 10 quarters. However, in
and chills of investing, you might want to the recent four quarters, they have
try your hand at picking turnarounds. shown profits in at least three.
Turnarounds are enigmatic. They Sounds interesting?
can make money quickly if you are But we have also got some
right. If you are wrong, probably you homework for you. The numbers
will be holding a dud stock that given below have not been adjusted
punctually moves down when the rest for exceptional gains. While it’s
of the market is moving up. But how unlikely for a company to keep
do you spot a prospective turnaround? reporting profits just on the back of
Alas, there are no clear answers. exceptional items, you should
Perhaps the following table can research these companies thoroughly
help. It lists those companies that before taking a buying decision. WI
+HUHFRPHVWKHSURÀW
Market PAT (` cr) No. of loss-
Company name Sector cap (` cr) Q1 Q2 Q3 Q4 making quarters* 1Y returns (%)
Steel Authority of India Iron & Steel 20,900 554 540 816 43 10 -49
Aditya Birla Fashion Retailing 16,601 43 6 113 35 6 26
HEG Capital Goods 14,426 889 770 634 342 7 17
Future Consumer Trading 8,322 3 0 7 -3 10 -38
Westlife Development Trading 5,977 8 12 7 8 7 6
3ULVP-RKQVRQ 'LYHUVLÀHG
Indiabulls Integrated Miscellaneous 2,857 2 0 47 -16 6 49
Intellect Design Arena IT 2,843 34 44 23 10 6 17
Bombay Dyeing Textile 2,446 246 -94 11 3 8 -58
HMT Automobile & Ancillaries 2,318 5 12 4 1 7 -55
6HTXHQW6FLHQWLÀF +HDOWKFDUH
GVK Power Power 1,192 12 16 23 11 9 -72
Shriram EPC Infrastructure 1,145 21 6 -35 15 7 -64
Atlas Jewellery India Trading 1,075 7 7 2 -5 7 39
Usha Martin Iron & Steel 1,018 28 12 12 -111 9 14
Elpro International Realty 896 83 5 2 4 8 -13
Godawari Power Iron & Steel 850 68 56 103 74 7 -51
BF Utilities Power 830 2 8 1 16 6 -61
Elecon Engineering Capital Goods 812 49 7 52 -3 6 -28
Oriental Hotels Hospitality 805 79 -4 6 2 6 -10
Timex Group India Consumer Durables 557 3 3 8 -5 6 -2
Andhra Petrochemicals Chemicals 542 15 31 6 16 7 1
Q1 is the most recent quarter, Q2 the next and so on; *Out of 10 quarters preceding the recent four quarters. Minimum market cap `500 crore. Data as on January 14, 2019.

INTERVIEW
Banking on the potential

of banking and finance
T
he banking-and-finance
sector has never been
free from media
coverage. The current times
are no different. Whether it is
the NPA concerns of public-
sector banks or the liquidity
crunch faced by NBFCs, the
sector has been passing
through a tumultuous phase.
Amidst all this, however,
quality stocks in the sector
have continued to bring
returns to the investor. Aditya
Birla SL Banking & Financial
Services Fund, which
manages over `1,600 crore, is
a top-rated fund in its
category. We speak to the
fund managers of this
fund to get an idea about
how they pick stocks and
what has made their fund
virtually immune to the
turmoil in the sector.
How do you pick banking

stocks for your fund?
Running a bank is
always an interplay
between attracting
low-cost deposits, a
diversified loan
book and strong
risk
management.
Each of these
constitutes a
Dhaval Gala Satyabrata Mohanty

Fund Manager Senior Fund Manager &
& Senior Analyst, Head – Equity Research,
Aditya Birla Sun Life Mutual Fund Aditya Birla Sun Life Mutual Fund

INTERVIEW
strong competitive moat and have been in existence for over a How do you value a finance stock?
emanates from organisational few decades now and have Valuation is determined by
culture, which is very difficult to delivered steady ROEs. Housing interplay of three main aspects:
build. Hence, our large allocations demand or opportunity size for size of the opportunity, promoter’s
are to banks which have a strong this segment remains large and ability to scale up and return on
deposit franchise, diversified loan penetration levels will continue to equity. The promoter’s ability to
books, and an ability to cross-sell rise in the years to come. scale up enjoys maximum weight.
and effectively manage the risks. The housing-finance space, over We look at P/BV vs. sustainable
Our smaller allocations are to play the years, has attracted massive RoE. The key is to calculate the
some specific themes – regional competition and has now left very right RoE progression of the stock
banks/small-finance banks or thin margins for the companies in and that will be based on
banks focused on SMEs or purely this business. The customer profile management execution and
corporate banks. varies from formal salaried to business-model core competency.
informal salaried to self-employed. Banks with consistent growth and
What attracts you to an NBFC? The collateral profile varies widely asset quality across cycles tend to
NBFCs are generally strong asset based on city, town, etc. get higher P/BV multiple.
franchise. They may not enjoy the Banks have traditionally focused
borrowing-cost advantage that on the salaried segment in top What makes a bank better than the
banks can boast of but they can be cities. Hence, there is ample other in terms of quality?
nimble-footed and reach sections opportunity for HFCs but in other While the opportunity size is
of population that are traditionally segments and micro markets. HFCs similar for everyone, the ability to
ignored/unbanked. which are directly competing with scale up and maintain profitability
A dominant product category, an banks may find it difficult to differs vastly between banks. For
ability to appraise informal/self- maintain margins. But HFCs example, opportunity for
employed customer segment, focusing on small-ticket housing/ unsecured lending (personal loan
better ability to collect receivables, semi-urban and rural segment of and credit cards) has always been
an ability to reach customers housing loans still have a good huge but only two private-sector
faster and in a better way than headroom for growth and can banks have been able to build a
banks, low-cost product delivery deliver sustainable and superior profitable model of size. To sum
the are key differentiators of return ratios. up, a stable funding franchise,
NBFCs vis-a-vis banks. customer segmentation and under-
Our first and foremost criterion With the advent of discount brokers, writing practices are key to any
in evaluating an NBFC is to full-service brokers are under stress. banking business model.
understand the opportunity size of How do you see the broking industry
the niche segment that the five to 10 years from now? When do you see the NPA problem of
company is operating in and how Over the past seven years, top 10 public-sector banks getting over?
difficult it is for banks to disrupt brokers have consistently gained We think the corporate NPA cycle
the segment. Beyond that, we market share from the small-time is nearing an end. Rural lending is
assign importance to credit brokers. Active clients as well as a space to watch, but even adjusted
underwriting processes, liability trading revenue has witnessed for that, one should expect NPA
management and promoter steady growth over the period. ratios to improve. The only reason
background in that order. There is only one discount broker, why NPAs declined sharply from
Identifying such NBFCs at an early called Zerodha, which has made to 2003 to 2008 was the strong global
stage can be very rewarding. the top of the list. Other discount as well as domestic growth cycle.
brokers are struggling. Since then, the growth cycles in
Some analysts believe that housing- Full-scale brokers have also India as well as globally have been
finance companies (HFCs) don’t have started diversifying their revenue patchy. Hence, it is very difficult to
a long-term case because banks can streams to financial-product have a sustained NPA reduction for
also do what they are doing. How do distribution, wealth management, corporate/PSU banks but that is
you see this? etc. Bank-based brokers have been likely to improve.
Housing finance is the largest able to maintain their cash yields
segment within retail financing in over the past seven years, despite When do you realise that it’s time to
India. Companies like HDFC, LIC the huge consolidation in the quit a bank or an NBFC?
Housing Finance, Gruh Finance industry. We keep evaluating the companies

INTERVIEW
we own based on our framework of loans should start seeing normalcy NBFCs with pricing power will
business, management and in a few quarters. Competitive emerge as the key winners.
valuation (BMV). This means that intensity has already reduced and
if there is deterioration with pricing power could be back after a What allocation should an investor do
respect to the business model/ long time for HFCs. Liquidity is towards banking and finance stocks?
strategy (this includes assessment still tight at the medium end of the Allocation purely depends on
of asset quality and growth curve. Though the situation has individuals risk appetite. Having
prospects) or changes in improved for good players, we said that, within an equity
management (execution team and remain cautious and focus on portfolio, banking and finance
risk-management profile) or there asset-quality trends. If they turn should have decent representation.
is a valuation mis-mismatch with bad, the funding environment can We believe that BFSI is a secular
our expectations, we decide to sell. become tough for weaker players. growth story as penetration levels
in most sub-segments remain lower
The recent crash in housing finance What’s your view on the movement of as compared to those in developed
and NBFCs has spooked investors. interest rates in the coming year? countries. In our view, one should
How is the situation now? This is not the first or the last time be overweight on this sector.
Markets have already started that the interest-rate cycle is on the Further, the financial-savings
differentiating between the good hardening side. Each such cycle theme will be multi-year story.
HFCs and the troubled HFCs. The weeds out weak players and Life-insurance, asset-management
HFCs that don’t have much strengthens the efficient ones. Our and general-insurance segments
exposure to large ticket loans endeavour is to be invested in the will offer structural growth and
against property or developer efficient players to ensure longevity. steady return ratios. WI
The authoritative guide

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COVER STORY
Free cash flows are a better indicator of business strength

than profits. Here are some sectors and companies
that have the highest free cash flows.
Cash-flow
kings

COVER STORY
Yash Rohra that generate them year after year. We
F
looked for companies that consistently
ree cash flows are one of the most generated free cash flows of more than 5 per
important factors that impact your cent of their sales in the last three years.
investments. How? For that, first Our search criteria included other non-
understand what they are. Free negotiables: a return on equity of more
cash flows are what a company is left with than 15 per cent in at least four of the last
after spending for business operations and five years and a Z-Score of more than
capital expenditure. They are an important three. We also excluded companies
determinant of dividends and buybacks. operating in the financial sector since free
They are also instrumental in expanding cash flow is not a right parameter to
the business organically or through evaluate these companies.
acquisitions. That’s what makes them an
important analytical metric. Our observations
Here is what we observed in the companies
Why free cash flows are important that made it to our lists:
There are hundreds of companies that are z Most of the companies with healthy free
profitable, earn good margins, report good cash flows are debt-free.
numbers and yet don’t make a lot of money z A number of them paid large dividends.
for their investors. A big reason for this is z Many incurred significant capital
that many of them have little cash left after expenditures from internal funds.
spending large sums for growth or capex. At z A number of them rewarded shareholders
times, they make pricey acquisitions by way of buybacks.
financed through debt that suck up all the z Free cash flows are also a function of
profits to service interest payments. large-scale operations, which provide
Now take the example of ITC Ltd. The them cost advantage and economies of
company generated free cash flows of over scale.
`10,000 crore in FY18. This has enabled it The following pages list out the top free-
to invest in its FMCG business. Or take cash-flow generators in four top sectors that
the case of Divi’s Laboratories, which throw up a large number of free-cash-flow
generated free cash flows of `500 crore in companies: technology, FMCG, automobiles
FY18. This enabled it to cope with an and healthcare. We also take a look at how
import ban on one of its plants. These two some of the top companies in these sectors
examples illustrate how companies with allocated their free cash to shareholder
free cash flows are better able to tide over benefit. Finally, we list out free-cash-flow
huge investments and temporary setbacks. kings in other sectors.
In the tables that follow, we have used a
Net profit vs. free cash flows metric called the free-cash-flow yield, which
Net profit and free cash flows are two very signifies strength of free cash flows. It is
different beasts. The net profit a company calculated by dividing free cash flows by
reports is based on accrual accounting. It market cap. The higher the FCF yield, the
often does not capture the actual cash better it is for the investor. So, when you
inflows a business earns. Free cash flow, on look at your next investment, keep an eye
the other hand, captures the actual net cash out for free cash flows. To improve your
after incurring expenses required for investment process and returns, take free
normal functioning or expansion. cash flows into account.
As always, the companies mentioned in
The search for free-cash-flow kings the list are not our recommendations. If
With the importance of free cash flows in you intend to invest in any of them, do
mind, we set out to search for companies thorough research.

COVER STORY
AUTOMOBILES
Capex... not a problem

While the auto sector is capital-intensive, quite a few companies in the sector
have generated free cash flows due to their dominant positions
A
utomobiles is a capex-driven sector, since it the same period, with the remaining getting added to
requires heavy investments to build capacity. its investments.
Still, many companies operating in this sector Bajaj Auto: Bajaj Auto has generated free cash flows of
have made to our list. Some of the prominent reasons more than `10,500 crore in the past three years, out of
behind this are: which it has paid dividends of more than `5,500 crore,
Negative working capital cycle: Some of the selected while investing the rest for the long term.
companies have a negative working capital cycle, Eicher Motors: In past three years alone, Eicher has
which is a result of their dominant position. They get generated free cash flows of more than `3,800 crore
money faster from their customers than they pay their after spending `1,800 crore on capital expenditures. Its
suppliers. Less working-capital requirements lead to free cash flows have added to its cash balance and
higher free cash flows. investments.
Cyclical capex requirements: Their capital-expenditure Castrol: Castrol has generated free cash flows of more
requirements move in a cycle, which leads to than `1,900 crore, while incurring capital
cyclically high free cash flows. Once capacity has been expenditures of just `130 crore, in the past three
installed and is running, it keeps on producing with years. During the same period, it distributed around
minimal capex requirements. `1,700 crore as dividends. Its average dividend-payout
Economies of scale: The leading players in the ratio during the last
automobile industry enjoy a significant cost three years was
advantage once they start operating at a large scale. 84.5 per cent.
Select examples
Maruti Suzuki: Maruti generated free cash flows of
more than `20,500 crore after spending around
`10,000 crore on capex in the last three years. It
also paid dividends of close to `4,900 crore during
Automobiles: Cash-Áow kings

Cash and
Market FCF FCF as a % of sales FCF Dividend equivalents Debt to 3Y
Company name cap (` cr) (FY18) FY18 FY17 FY16 yield (%) yield (%) (` cr) equity CAGR (%)
Maruti Suzuki 2,23,115 7,903 9.9 10.1 10.2 3.5 1.1 1,291 0.0 20.6
Bajaj Auto 78,672 4,144 16.5 14.1 15.2 5.3 2.2 6,558 0.0 4.6
Hero MotoCorp 58,371 3,196 9.8 9.7 7.4 5.5 3.3 5,829 0.0 5.5
Eicher Motors 55,986 1,736 19.4 16.5 15.4 3.1 0.5 1,845 0.0 6.0
Castrol India 14,901 574 16.0 19.0 21.3 3.9 4.6 784 0.0 -11.7
Balkrishna Industries 17,170 339 7.6 17.9 25.7 2.0 0.9 517 0.2 39.9
Wabco India 12,302 216 8.4 5.1 8.7 1.8 0.1 802 0.0 3.4
Sharda Motor Industries 875 98 8.4 14.4 9.7 11.2 0.8 178 0.0 14.3
NRB Bearings 1,966 94 11.0 8.0 10.8 4.8 1.3 37 0.6 13.0
Swaraj Engines 1,834 67 8.7 11.4 6.8 3.6 3.3 124 0.0 16.6
Sterling Tools 1,238 26 5.7 8.9 8.3 2.1 0.6 56 0.1 50.5

COVER STORY
FMCG
It’s all about distribution

Once FMCG companies have established a wide distribution network, they
can keep generating free cash flows
F
MCG companies may not have to keep investing `21,500 crore, while investing the remaining amount.
heavily in fixed assets, or plant and machinery, Currently, its distribution network covers more than
but they have to invest heavily in their one lakh markets and 60 lakh outlets.
distribution channels. However, once their HUL: HUL has generated free cash flows of more than
distribution channels are established and the products `12,300 crore in the last three years and paid dividends
start to gain acceptance, FMCG companies start to of `13,000 crore during the same period. Its
generate free cash flows. The companies in the table distribution channel covers over two million retail
have been selected for the following reasons: outlets, while its products are available at more than
z Widely accepted products with established 64 lakh outlets across India.
distribution channels Nestle: Nestle has earned free cash flows of more than
z Outsourcing of manufacturing, which requires `3,900 crore in the last three years, out of which it has
minimal capital expenditures paid dividends of `2,150 crore. The remaining amount
z Low production cost due to economies of has gone into its investments and cash balance. Its
scale distribution network covers more than 35 lakh
z Low working-capital requirements due outlets across India.
to a negative working-capital cycle Gillette: Gillette has earned free
cash flows of around `560
Select examples crore in the last three years
ITC: ITC has generated free and paid dividends of `800
cash flows of more than `25,000 crore during the same
crore after spending `8,200 period. Its distribution
crore on capital expenditures in network includes lakhs of
the last three years. It has also retail outlets across
paid dividends of more than India.
FMCG: Cash-Áow kings

Cash and
ITC 3,54,609 10,371 23.9 17.7 19.0 2.9 1.8 13,469 0.0 11.5
Hindustan Unilever 3,86,585 5,186 14.6 11.2 10.5 1.3 1.1 6,356 0.0 30.1
Nestle India 1,10,076 1,622 16.2 14.8 11.6 1.5 0.8 2,851 0.0 26.6
Godrej Consumer Products 79,647 1,412 14.3 18.1 7.6 1.8 1.3 1,816 0.6 23.2
Dabur India 74,423 889 11.5 9.7 12.8 1.2 1.8 1,019 0.2 16.1
GSK Consumer Healthcare 31,527 674 15.6 13.5 12.6 2.1 1.0 3,585 0.0 4.8
Colgate-Palmolive (India) 36,038 485 11.6 9.2 10.8 1.3 1.8 456 0.0 12.7
P&G Hygiene & Health Care 32,302 377 15.4 17.3 15.5 1.2 0.3 400 0.0 20.6
VST Industries 4,896 377 39.8 11.0 9.1 7.7 2.4 452 0.0 22.7
Bajaj Corp 5,665 162 19.6 22.1 22.0 2.9 3.1 321 0.0 -1.7
Gillette India 21,161 156 9.3 11.0 11.6 0.7 0.4 237 0.0 11.8
Zydus Wellness 5,196 61 12.0 10.7 21.7 1.2 0.6 561 0.0 16.6

COVER STORY
PHARMA
A pill for tough times

In spite of facing regulatory headwinds, some pharma companies have
maintained higher margins and generated free cash flows
E
ven after all the issues surrounding pharma In FY18, Sun generated free cash flows of over `2,000
companies, such as USFDA (the drug regulator crore.
in the US) scrutiny, pricing pressure in the US Divis Laboratories: Divis has earned free cash flows of
and intense competition, they continue to generate more than `1,900 crore in the last three years after
meaningful free cash flows. Although their margins spending `1,000 crore on capex. During the same
have taken a hit recently, they continue to be high in period, it has paid dividends of more than `950 crore
comparison to the margins in other sectors. Some of and used the rest of the cash to increase its
the prominent reasons behind their high free cash investments.
flows are: Abbott India: Abbott has generated free cash flows of
z Once a pharma plant starts working, it keeps on more than `690 crore in the last three years, without
generating revenues with minimal capex incurring any material capital expenditure. During
requirements. the same period, it has paid a dividend of `290 crore
z Pharma companies derive a large portion of and added the rest of the amount to its cash balance.
their revenues in dollars, which leads to higher
margins.
z Economies of scale keep their costs in check.
Select examples
Sun Pharma: In the last one-two years, Sun Pharma
has been surrounded by negative news. Still, it has
been able to generate free cash flows of more than
`8,500 crore in the last three years after
spending `8,800 crore on capital
expenditure. During the
same period, it conducted
a buyback and paid
dividends of more than
`5,500 crore.
Pharma: Cash-Áow kings

Cash and
Sun Pharmaceutical Industries 1,06,494 2,013 7.6 11.2 11.9 1.9 0.5 14,020 0.3 -17.6
Divis Laboratories 40,252 502 12.9 19.0 17.0 1.2 0.7 2,002 0.0 10.3
SanoÀ India 14,329 379 15.4 10.7 8.4 2.6 1.1 730 0.0 13.7
Eris Lifesciences 9,281 210 24.5 20.1 18.1 2.3 0.0 104 0.4 7.8
Abbott India 17,196 180 5.5 9.8 8.6 1.0 0.6 1,031 0.0 12.4
Dr. Lal Pathlabs 8,070 125 11.8 13.2 14.6 1.5 0.5 458 0.0 6.3
Advanced Enzyme Technologies 1,920 105 26.9 29.0 29.9 5.5 0.3 61 0.1 -12.1
Thyrocare Technologies 2,899 63 17.8 17.5 22.2 2.2 1.8 112 0.0 -4.3
Valiant Organics 842 11 9.4 7.5 30.7 1.4 0.3 12 0.0 112.9

COVER STORY
INFORMATION TECHNOLOGY
The dollar effect

Since most IT companies have clients based in developed countries, they get
their payments in a stronger currency, which contributes to their cash flows
I
T is a services-driven sector. Because, generally, IT more than `21,000 crore and conducted a buyback of
companies derive a major portion of their another `13,000 crore during the same period. Its
revenues in US dollars, they have high dividend dividends and buybacks were more than its free cash
payouts and regularly buy back their stock. Other flows during the same period. Recently, in Q3, it has
prominent reasons that make them stand out are: announced a buy back of over `8,000 crore.
z Their major expense is employee cost. Post that, all TCS: TCS has generated a massive `63,500 in free cash
revenues make it to the profits. flows in the last three years alone. Again, its
z
They do not have to incur any major capex shareholders were the biggest beneficiaries.
to run their businesses. TCS paid dividends of more than `31,000
z
They do not have major working- crore and bought back its shares worth
capital requirements `16,000 crore.
z
They enjoy client stickiness as Oracle Financial Services: It has hardly
it’s difficult for their clients to incurred any capex in the last 10
switch to a different company, years but still generates free cash
given the complexities. flows of around 25 per cent of its
sales. In the last three years, it has
Select examples generated more than `2,800 crore in
Infosys: In the last three years, free cash flows and paid a dividend
Infosys has generated `27,000 of more than `4,500 crore during the
crore in free cash flows. The same period thanks to its cash-rich
company has paid dividends of balance sheet. WI
IT: Cash-Áow kings

Cash and
Tata Consultancy Services 7,08,507 23,263 18.9 19.7 15.8 3.3 1.3 42,868 0.0 16.4
Infosys 2,96,959 11,220 15.9 12.8 11.7 3.8 3.2 26,225 0.0 8.6
Wipro 1,47,766 6,353 11.7 13.2 12.8 4.3 0.3 29,402 0.3 5.5
HCL Technologies 1,26,926 3,007 5.9 10.9 9.9 2.4 1.3 6,375 0.0 4.2
Tech Mahindra 68,035 2,763 9.0 11.4 8.6 4.1 2.0 6,489 0.1 9.9
Oracle Fin Services Software 31,249 1,127 24.9 24.0 16.6 3.6 3.6 2,646 0.0 -0.6
Larsen & Toubro Infotech 30,875 746 10.2 16.9 12.7 2.4 1.2 1,628 0.0 46.0
Mindtree 13,322 463 8.5 10.9 6.2 3.5 1.1 1,050 0.1 4.8
Hexaware Technologies 9,556 381 9.7 7.1 8.2 4.0 1.2 549 0.0 10.1
NIIT Technologies 7,121 295 9.8 13.8 7.5 4.1 1.3 784 0.0 29.1
Sonata Software 3,130 291 11.9 7.4 8.8 9.3 3.5 477 0.1 19.2
eClerx Services 4,166 264 19.3 21.3 27.8 6.3 0.1 605 0.0 -8.5
Tata Elxsi 6,036 185 13.4 9.6 7.8 3.1 1.1 394 0.0 -1.9
Accelya Kale Solutions 1,389 91 23.9 22.4 17.2 6.6 4.9 64 0.0 -0.7

COVER STORY
Other cash-Áow kings

Cash and
Company name Sector cap (` cr) (FY18) FY18 FY17 FY16 yield (%) yield (%) (` cr) equity CAGR (%)
Hindustan Zinc Non - Ferrous Metals 1,16,239 7,114 31.6 29.8 31.8 6.1 2.9 22,186 0.0 25.2
Petronet LNG Inds. Gases & Fuels 32,130 2,820 9.2 6.2 8.9 8.8 2.1 4,820 0.1 17.5
Interglobe Aviation Aviation 42,175 2,683 11.7 22.4 17.8 6.4 0.5 12,925 0.3 -4.8
Sun TV Network Media & Entertainment 23,249 856 28.9 28.8 37.4 3.7 1.7 1,888 0.0 11.8
Pidilite Industries Chemicals 56,634 620 10.2 12.0 13.8 1.1 0.5 1,279 0.0 26.0
HDFC Asset Management Finance 32,354 602 34.2 29.8 50.8 1.9 1.1 1,313 0.0 -17.1
Marico Agri 50,027 431 6.8 9.6 12.2 0.9 1.1 686 0.1 19.3
Indraprastha Gas Inds. Gases & Fuels 18,645 409 8.9 17.7 11.4 2.2 0.8 1,448 0.0 33.1
Page Industries Textile 25,833 398 15.6 10.0 10.7 1.5 0.6 285 0.1 20.0
Mahanagar Gas Gas Transmission 8,888 383 17.2 13.7 9.8 4.3 2.1 780 0.0 24.2
Reliance Nippon Life Finance 9,982 374 23.6 22.9 17.4 3.8 3.8 691 0.0 -49.5
Jagran Prakashan Media & Entertainment 3,418 344 14.9 15.9 16.9 10.1 2.6 164 0.1 -11.9
L&T Technology Services Capital Goods 17,040 329 8.8 10.6 13.1 1.9 0.7 375 0.0 32.0
Maithan Alloys Ferro Manganese 1,376 273 14.5 9.1 10.9 19.9 0.6 393 0.1 64.3
CRISIL Ratings 11,814 254 15.3 16.7 17.7 2.2 1.7 271 0.0 -6.1
Essel Propack Plastic Products 3,385 206 8.5 7.0 7.8 6.1 1.1 174 0.6 10.2
Just Dial Miscellaneous 3,305 205 26.2 14.5 8.0 6.2 0.0 80 0.0 -16.2
Finolex Cables Electricals 6,869 199 7.1 7.3 13.8 2.9 0.9 805 0.0 20.2
VRL Logistics Logistics 2,540 160 8.3 7.5 9.0 6.3 1.4 19 0.1 -12.0
Kalyani Steels Iron & Steel 943 159 11.8 11.1 6.4 16.9 2.3 151 0.2 6.5
AIA Engineering Capital Goods 15,947 157 6.4 6.7 19.9 1.0 0.5 1,356 0.0 26.0
Kaveri Seed Company Agri 3,513 136 16.6 16.5 29.6 3.9 0.5 589 0.0 14.1
Care Ratings Ratings 2,977 136 40.9 41.1 37.1 4.6 2.8 292 0.0 -6.1
Hindustan Media Ventures Media & Entertainment 951 103 11.8 13.5 8.6 10.9 0.9 497 0.1 -23.9
Grindwell Norton Abrasives 6,131 95 6.7 9.3 8.6 1.6 0.9 272 0.0 14.5
Mayur Uniquoters Textile 1,786 79 13.9 13.6 10.6 4.4 0.4 183 0.0 -5.5
MPS Media & Entertainment 901 76 28.4 15.4 16.3 8.4 2.5 311 0.0 -14.2
Greenlam Industries Construction Materials 2,076 70 6.2 15.0 6.2 3.4 0.3 10 0.7 13.1
Hawkins Cookers Consumer Durables 1,554 68 12.4 11.1 5.8 4.4 2.4 87 0.2 3.3
GM Breweries Alcohol 1,079 67 7.3 7.1 8.8 6.2 0.4 10 0.0 -5.4
Grauer & Weil (India) Chemicals 1,140 63 12.6 16.6 16.2 5.5 1.2 122 0.0 12.7
ICRA Ratings 3,059 63 20.3 18.1 17.9 2.1 0.9 330 0.0 -9.4
Kewal Kiran Clothing Textile 1,479 47 10.1 14.1 7.6 3.2 2.8 156 0.1 -17.7
La Opala RG Construction Materials 2,402 45 17.4 24.3 6.6 1.9 0.5 205 0.0 -11.4
Orient Refractories Capital Goods 2,752 38 6.0 9.4 15.6 1.4 1.1 120 0.0 38.1
Elantas Beck India Chemicals 1,932 31 8.1 13.8 11.6 1.6 0.2 160 0.0 18.3
‘FCF’ stands for free cash flows. Data in all tables as on January 10, 2019. For newly listed stocks, returns are since listing.

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STRAIGHT TALK
How is the MPC doing?

The RBI’s Monetary Policy Committee is focusing just on inflation, not
growth. This can have long-term consequences.
ANAND TANDON
The Finance Act 2016 amended the Dr Viral Acharya’s says, “On the one hand, headline
RBI Act 1934 to provide an institutional framework for inflation has remained low and there is a good case to
monetary-policy management. Section 45 of the RBI Act be made that there is at least a temporary output gap
and its sub-sections created the legal framework, created due to liquidity shortage induced by the
whereby a Monetary Policy Committee (MPC) was set currency replacement. Since our flexible inflation-
up. The central government, in consultation with the targeting mandate also requires paying attention to
RBI, was required to set up a formal inflation target once growth, it could be natural to lower the policy rate to
every five years and the MPC was mandated to set restore growth levels.”
monetary policy to achieve that target. While the press Having stated that there is no sign of worsening
note (dated September 29, 2016) announcing the inflation and a clear sign of low growth, he then goes
formation of the MPC mentions that the MPC is expected on to say, “On the other hand, a low headline inflation
to maintain “price stability while keeping in mind the has been largely driven by food deflation and the most
objective of growth,” no mention of growth objective recent numbers have been heavily driven by the large
translates into the RBI Act. As per the Act, MPC simply dip in vegetable prices. In the past, food deflation has
has one objective, as stated in Section 45ZB(3), “The had strong seasonal patterns which have tended to
Monetary Policy Committee will determine the policy rebound and with vengeance when rainfall disappoints.”
rate required to achieve the inflation target.” This When translated, this means ‘we will remove all
simple statement has done much damage to economic elements of inflation that are low and then make a case
performance as we shall soon see. for looking at only those that are high. If that doesn’t
suffice to convince, then maybe the monsoon will fail!’
MPC’s policy action Does this demonstrate a model-based or a data-driven’
Since its formation, MPC minutes (published within approach? Or does it smack of dogma – ‘we’ve decided
two weeks of the meeting) are available for the past 14 what to do and we’ll just use whatever data is convenient
meetings (up until January 2019). Let’s look at some of to justify it’? It also raises a fundamental question: if
the actions taken by the MPC. the MPC mandate is to look at inflation as defined by
The graph ‘CPI vs repo rate’ shows the Consumer the CPI, why are we looking at defining new inflation
Price Index (CPI) growth and the corresponding measures like core inflation or even more interesting
changes made by the MPC to keep it to the target figure ‘inflation without vegetables!’ If the understanding is
(4 per cent +/- 2 per cent). Even the uninitiated can see that interest rates affect only core inflation (or some
that the MPC is failing miserably in setting direction. variant), would it not be better to define an inflation
Repo rates were cut just as inflation started to rise and figure that is targetable and then focus on that rather
then raised twice at the peak of the inflation cycle. than allowing MPC members to play ‘bullshit bingo’?
Minutes of MPC 3, when effects of demonetisation
were just beginning to wear off, show that the MPC The first dissent
members are unwilling to cut rates because of the The fifth MPC marked the first dissent by at least one
‘transient’ effects of economic shock. member, Prof Dholakia. Arguing for a cut in repo rate,

STRAIGHT TALK
CPI vs repo rate

7 CPI Repo rate
6.25 6.25 6.25 6.25 6.25 6.25 6.25 6.25 6.25 6.25 6.25 6.25 6.50 6.50 6.50 6.50 6.50
6 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00
5.21 5.07
5 4.88 4.87 4.92
4.44 4.28 4.58
4.20 4.17
4 3.89
3.63 3.65 3.58 3.69 3.70
3.41 3.28 3.28 3.38
3.17 2.99
3
2.18 2.36 2.33 2.19
2
1.46
1
0
O N D J F M A M J J A S O N D J F M A M J J A S O N D
2016 2017 2018
Dr Dholakia stated, “The three-month and 12-month available at this stage. Without more clarity, it is
advance inflationary expectations as per the RBI survey possible to make policy errors that can be large and
of households are unambiguously declining and are costly in the medium term. Accordingly, I vote to wait
among the lowest levels observed in the history of such and watch”
surveys. ...there cannot be disagreement on the Indian Translated, this means ‘I know inflation is falling,
economy significantly underperforming compared to but I don’t like lower rates. So I’ll wait till I get data that
its potential now for quite some time.” He goes onto shows there is no need to cut rates!’
add, “Any theoretical rule-based policy for flexible
inflation targeting would not only justify but also And the change to ‘calibrated tightening’
necessitate at least 50 basis point cut in the policy rate.” Having stuck it out with high rates while inflation
Note at this time, real interest rate (as calculated on remained within target range, the MPC then decided
the repo rate) is a high 2.7 per cent. This implies that majestically to raise rates just as inflation expectations
even the highest-rated borrowers would face a real and realised inflation fell off sharply. Astoundingly
interest rate of a back-breaking 4.5 per cent or more. MPC 13 even changed their stance to ‘calibrated
Forecast inflation was still in the range 3.5–4.5 per cent tightening’ even as growth remained sub-par.
(see the table ‘Inflation forecast vs actual CPI’). Dr Chetan Ghate justifies his position, “While I am
Dr Micheal Patra disagrees, “The revised inflation comforted by the decline in median inflationary
trajectory for the first half of 2017–18, the near-term expectations of households for the one-year ahead
inflation outlook, is admittedly benign. Yet, in a horizon by 30 bps in the last RBI’s survey, the median
situation in which transitory and structural factors are one-year ahead expectations are now higher by 180
meshed and difficult to decouple, apparently divergent basis points over the September 2017 round. Meanwhile,
messages emanate from the few data points that are the three-month median inflationary expectations
MPC’s meetings and policy action

Meeting number Institution 1 2 3 4 5 6 7 8 9 10 11 12 13 14
Action proposed on repo rate Cut 0.25 No change No change No change No change Cut 0.25 No change No change No change No change Inc. 0.25 Inc. 0.25 No change No change
Dr Chetan Ghate ISI 1 1 1 1 1 1 1 1 1 1 1 1 Inc. 0.25 1
Dr Pami Dua DSE 1 1 1 1 1 1 1 1 1 1 1 1 1 1
Dr Ravindra Dholakia IIM A 1 1 1 1 Cut 0.5 Cut 0.5 Cut 0.4 Cut 0.25 1 1 1 1 1 1
Dr Micheal Patra RBI 1 1 1 1 1 no change 1 1 Inc. 0.25 Inc. 0.25 1 No change 1 1
R Gandhi Dep Gov RBI 1 1 Member changed - Dr Viral Acharya takes over
Dr Urjit Patel Gov RBI 1 1 1 1 1 1 1 1 1 1 1 1 1 1
Dr Viral Acharya Dep Gov RBI 1 1 1 1 1 1 1 1 1 1 1 1
Note: 1 = Vote for the resolution, other numbers are in per cent. Inc. = Increase. Source: RBI.

STRAIGHT TALK
increased by over 50 bps compared to the previous neither current nor relevant! Under such circumstances,
round, with a cumulative increase of about 220 basis retaining the stance of calibrated tightening seems
points over the September 2017 round.” totally inconsistent and unjustified.”
This translates into: ‘Though inflation is falling, I’ll
chose figures from periods I like so that I can justify a Change of mandate is required
rate hike!’ He continues, “What worries me on the pick The purpose of the MPC was to make policy making
up in growth is the dismal consumer confidence consistent and transparent and less based on individual
numbers, with consumer confidence in Q2 FY18-19 dogma. As shown above, this has not been achieved.
worsening. Ideally, in a growing economy, the durability Some changes that are needed can be set out as below:
of growth is better sustained if it is supported by z Clear articulation of the need to support growth
growing consumer confidence. Notwithstanding this, I with clearly set targets: An inflation target without a
continue to remain sanguine about current and corresponding constraint to foster growth has
medium-term growth prospects as in the last policy. I already led to and will continue to lead to an
vote for an increase in the policy repo rate by 25 basis extremely high real interest rate to the detriment of
points at today’s meeting of the Monetary Policy the economy.
Committee. I also vote for a change in the stance from z Unambiguous identification of target: If the CPI is
‘neutral’ to ‘calibrated tightening’.” to be targeted, specious arguments about transients,
This translates into: ‘So while there is poor consumer vegetables, international trade wars, etc., should not
confidence, I know that things will improve (someone be allowed to colour views. Obviously the economy is
whispered in his ear, I guess), so let’s tighten the policy.’ dynamic. The reason of frequent meetings is to
I wonder if someone can even find a shred of consistency make rapid adjustments. Ignoring short-term
in the arguments above. changes to respond to a hypothetical long-term
Prof Dholakia, perhaps the only consistent voice on equilibrium negates the purpose of the frequent
the MPC, has this to say in MPC 14: “Drastic and meetings of the MPC.
sudden changes in external economic environment z A maximum target for real interest rates
have taken place ….RBI’s own downward revision of Ideally, there has to be a performance measure of
the forecast of inflation 12 months ahead…is a clear how the MPC has performed in terms of forecasting
indication of their long-term impact on the economy. inflation and also in supporting growth. Otherwise, the
Thus, a policy response is called for. If there is no MPC may prove to be an impediment to growth. That
policy action in response to such a major favourable will cost many of India’s young their jobs. WI
shock, the MPC would run the risk of being considered Anand Tandon is an independent analyst.
,QÁDWLRQIRUHFDVWYVDFWXDO&3,
Date of Inflation forecast Actual CPI (Average over
Meeting no. meeting Stance Q4FY17 H1FY18 H2FY18 H1FY19 H2FY19 reference period) Repo rate Real rate
1 03-Oct-16 Accommodative 5.00 3.57 6.25 2.68
2 06-Dec-16 Accommodative 5.00 3.57 6.25 2.68
3 07-Feb-17 Neutral 4–4.5 4.5–5 3.56 6.25 2.69
4 05-Apr-17 Neutral 4–4.5 4.5–5 3.56 6.25 2.69
5 06-Jun-17 Neutral 2–3.5 3.5–4.5 3.56 6.25 2.69
6 01-Aug-17 Neutral 2–3.5 3.5–4.5 3.56 6 2.44
7 03-Oct-17 Neutral 4.2–4.6 4.57 6 1.43
8 05-Dec-17 Neutral 4.3–4.7 4.57 6 1.43
9 06-Feb-18 Neutral 5.1–5.6 4.5–4.6 4.57 6 1.43
10 04-Apr-18 Neutral 4.7–5.1 4.40 4.32 6 1.68
11 04-Jun-18 Neutral 4.8–4.9 4.70 4.32 6.25 1.93
12 30-Jul-18 Neutral 4.40 4.7–4.8 4.32 6.5 2.18
13 03-Oct-18 Calibrated tightening 3.8–4.5 2.63 6.5 3.87
14 03-Dec-18 Calibrated tightening 3.8–4.2 2.63 6.5 3.87
Note: The colours represent inflation forecasts made and modified over time. For example, the first forecast for H1FY18 at 4–4.5 per cent was made in Feb 2017 and the realised inflation aver-
aged 3.56 per cent over H1FY17. Source: RBI.

MAIN STREET
Market’s a stage
How competitive advantage drives churn in the stock market
SAURABH MUKHERJEA
The uneven manner in which the Indian stock market setting up operations (legal costs, capex for a factory,
churns has puzzled us for several years. To be specific, paying for packaging and branding) are `10 crore and
the churn in the Sensex has been around 25–30 per cent suppose that the variable costs (raw materials and fuel
for the past decade, i.e., over a 10-year period, around primarily) are very low in comparison. Assuming that
seven–nine companies exit the Sensex (and an equally the market size is `100 crore, if the market leader has 50
number enter). In contrast, churn in the BSE 500 has per cent market share (which is not unusual when a
been around 50–60 per cent, implying that over the sector is in its infancy), the fixed costs form only 20 per
course of a decade, between 250–300 companies exit the cent of its revenues. In contrast, if the other players
index (with an equivalent number entering). In fact, have each around 10 per cent market share, their
there is no other broad-based index in revenues are barely enough to cover
any other major stock market which their fixed costs. Thus, the barriers to
churns anything as much as the BSE 500. Churn in the BSE entry appear to be relatively high at this
To date, we have failed to understand 500 has been stage of the sector’s evolution.
why the BSE 500 churns twice as much around 50–60 Stage 2 – Rapid new entry: As the niche
as the Sensex. market grows, the cost advantage of the
per cent, largest player is narrowed down at a per-
Fluctuation in competitive advantage implying that unit level (as fixed costs can be defrayed
Now, however, we believe we have a over the course across a wider revenue base). So, the
cogent theory for why churn is so much competitive disadvantage reduces for
higher in the BSE 500 than in the Sensex. of a decade, the non-leading players. As result,
Basically, we are seeing Indian between 250– operating margins start coming under
companies’ moats go through various 300 companies pressure for the leader. Markets grow
stages of waxing and waning as these rapidly by attracting new customers
companies grow and as the sectors in exit the index who are by definition non-captive. These
which they operate grow as well. customers provide a viable base for new
Stage 1 – Inception: A niche market emerges and a firm entrants. Additionally, what also tends to happen is the
which is dominant in that niche prospers as other success of the market leader draws new entrants into
players in that niche either don’t have a quality the market. La Opala is an example of a firm currently
product and/or have higher total cost/unit produced. in Stage 2.
The market leader establishes its dominance in the So, let’s assume that the `100 crore market we saw in
niche (which can be geographic niche or a niche in the Stage 1 grows 10 times over the course of a decade and
product space) and spreads outwards. Garware becomes a `1,000 crore market. Assume further that our
Technical Fibres is an example of a firm currently in market leader still has 50 per cent market share and
Stage 1. that the laggards still have around 10 per cent market
The fact that the market leader has a cost advantage share each. However, the laggards’ revenues are now
can be easily demonstrated. Suppose the fixed costs of comfortably in excess of their fixed costs (of `10 crore)

MAIN STREET
and this attracts lots of new entrants. In fact, the Investment implications
laggards are now likely to have free cash flows, which 1. As the Indian economy gets networked with better
they will spend on heavy marketing and advertising. roads, low-cost flights (along with several smaller
Such a spend will force the market leader to also spend airports) and widely available broadband, it is
on marketing, which will drag down the market leaders’ increasingly becoming possible to discover ‘niche’
margins. markets which can be catered to on a regional or
Stage 3 – Intense competition: Now there are several national basis (whereas in the past, these markets were
players in the burgeoning market and although the each a little island in a small town or village with poor
market leader still has the best operating margins, connectivity to the next town or village). These niche
there are other profitable and increasingly sizeable opportunities are what’s creating lots of Stage 1 and
players in a large and highly competitive market. Stage 2 firms. For example, over a decade ago, La Opala
Operating efficiency is now a critical driver of success focused on a niche segment in the tableware market –
in this stage of a sector’s evolution. For example, opalware. Around this, the firm first built a franchise in
mobile telephony or vehicle financing today. eastern India and then across India. Its market cap went
The big risk for the market leader at this stage – from up from around `150 crore 10 years ago to around
bigger than the more obvious risk of rising competitive `2,500 crore now. La Opala’s success has now attracted
intensity – is that it tries to deal with slowing earnings Borosil and Cello Wim Plast into the opalware market.
growth by entering new markets or new industries. If 2. Competitive intensity is relatively low in Stages 1 and
he does so, then the leader’s ability to deal with 2, peaks in Stage 3 and moderates somewhat in Stage 4.
intense competition in his core business is diluted and Share-price growth for market-leading firms is therefore
with that dilution in focus goes his likely to follow the same path.
chances of improving operating 3. Stage 3 usually comes when a company
efficiency. Bharti’s entry into Africa in
Once a company has broken into the BSE 500 after a good
2009 is an example of a less-than-ideal has nailed down run lasting at least five years. This is
response to rising competitive intensity its moats in when the average fund manager in India
in its core market. In contrast, HDFC
Bank’s and Gruh Finance’s obsessive
Stage 4, it is very and the typically sell-side analyst in
Mumbai ‘discovers’ a stock. Because
focus on expanding inside their core hard to dislodge. Stage 3 is the toughest of the four stages,
market allowed them to reinforce their This explains why it also helps us to understand why
leadership even as an increasing number companies that have just entered the
of challengers entered their markets.
churn in the BSE 500 find it so hard to sustain earnings
Bharti is an example of a business Sensex is so growth and share-price momentum.
currently in Stage 3. much lower than 4. Companies which seem to be in Stage
Stage 4 – The leader consolidates: In the 4 are ‘consistent compounders’ like
final stage in a sector’s evolution one or
the churn in the Relaxo, Page Industries, Dr Lal Pathlabs,
two players create very powerful moats BSE 500. Asian Paints, HDFC Bank, Gruh Finance,
(not just around efficiency but also Pidilite, Nestle, etc. Once a company has
around customer captivity and nailed down its moats in Stage 4, it is
favourable access to lower-cost inputs). These players very hard to dislodge. This explains why churn in the
then drive everybody else out of the industry by not Sensex is so much lower than the churn in the BSE 500.
hiking prices, which hampers the ability of the less 5. Investors are far more likely to make healthy returns
efficient players to hike prices and stay profitable. For (due to the spread between return on capital and cost of
example, Dr Lal Pathlabs has not hiked prices in the capital being juicy) from Stage 1 and Stage 4 companies.
last two years, whilst Asian Paints’ 10-year price-hike Stage 4 companies are likely to have multi-billion-
CAGR is just 2 per cent. In short, these companies are dollar market caps. Stage 1 are likely to have market
consistent compounders. cap below $0.5 billion.
A market-leading firm only makes it to Stage 4 if it 6. Smart investors focus on Stages 1 and 4. The lazy
works hard on improving efficiency and staying focused money chases stocks in Stage 3. Thanks to the lure of
in Stage 3. If a firm loses focus in Stage 3, then Stage 4 the rear-view mirror, the temptation to invest in Stage
– and consistent compounding – proves elusive for it, as 3 stocks tends to be very high. WI
Bharti Airtel, Tata Steel and numerous other large Saurabh Mukherjea is the co-author of Coffee Can Investing and the
Indian companies have discovered over the past decade. founder of Marcellus Investment Managers.

OFFBEAT
Sparking wildfires
How the media drives our emotions
SANJEEV PANDIYA
The #MeToo campaign has quieted feeling of conflict when we feel our value systems
a little, so what I am saying need not be focused only on have been violated.
how the campaign attracted attention, held it and how/ In itself, righteous indignation is a strong-enough
why it then sobered down. What I am saying is emotion, rooted in our sense of right and wrong. Also
applicable in general to a much larger range of trends known as our morality, it’s mostly supplied by the
that follow similar patterns in evolution. collective unconscious (made famous by Carl Jung),
Across nature, trends are sparked, take root, flare which is filled with our religious principles and our
up and then ‘sober down’. For example, consider culture. But it’s made doubly strong because it is fed by
wildfires. Wildfires happen when the underlying herding, which transmits this emotion from one to
conditions are ‘fertile’, i.e., the soil is full another across the population. Do you
of dried timber or agri-residue. They The media is get the connection with dry timber
have a role in evolution, in that they feeding a forest fire?
‘recycle’ the organic matter in dead
devoted to So now let’s come to the second stage,
leaves and turn them into ashes, so that sparking wildfires after fertile conditions. You need a spark
they may be regenerated in the form of where there are to set the forest floor on fire and that’s
new organic matter.
We see this in human behaviour, too,
fertile conditions. provided by righteous indignation. So,
anything that catches the imagination
but with a pernicious difference. This is not (and anger is the perfect limbic emotion)
Conditions turn ‘fertile’ in the sense that intelligent can contribute to such a spark.
people ‘get bored’, a common human But this is where the analogy veers
condition, often called ‘mind wandering’
evolution with a off. Nature has a specific objective in
in intelligent company. And then they purpose; it’s just creating wildfires: the recycling of
switch on the TV, which turns them into a predator organic matter. But suppose there was
‘dry timber’, waiting to be ‘sparked’. an arsonist who’s going around creating
This is where the crowd becomes fair
waiting to prey wildfires randomly, wherever he sees
game for the media. Once the TV has on the weak. fertile conditions – that’s his business.
been turned on, the battle commences in Exactly that’s what happens in
right earnest to catch the eyeballs. And everything that human behaviour. There’s an entire business, the
catches eyeballs is there on display as entertainment, media, that’s devoted to sparking wildfires where there
infotainment (in the name of news) and what have you. are fertile conditions. This is not intelligent evolution
So what drives eyeballs? with a purpose; it’s just a predator waiting to prey on
We have 46 basic emotions and an important the weak (aka the stupid). One of the critical life skills
motivator is anger. Mostly, anger is defined as ‘feeling in the modern world is to understand how (and why)
thwarted’ (from an explicit or subliminal objective), the media works and the underlying (limbic) emotions
but it has shades of grey. One of the important grey that it harnesses to trap you into an irrationality. And
areas around anger is righteous indignation, the that irrationality is seriously damaging for your

OFFBEAT
(financial) health. To live in this jungle of modern unfortunate rape victim (who was raped in a moving
civilisation, it’s very important to know about this bus). Well, that was certainly news, but without the
predatory animal. macabre violence, it would have remained a minor
We often call the media scurrilous. But the media is statistic in police records. By giving the victim a name,
neither a person nor an institution with any centralised this was turned into a major emotive issue that
(thinking) mind of its own. Whenever you give a harnessed (you guessed it) righteous indignation.
monolithic name to something (a country, a religion, The point I am making is not the merit of the
the judiciary or the media), you credit that monolith sparking event, but the way events unfolded thereafter.
with a thinking mind. But the media is an unthinking Those serve the animal, not the original victim – rather
animal, rather like tigers. They are a danger the like the accident of you getting lost in the forest is a
moment you enter the forest, but it’s nothing personal; minor detail. Thereafter, it’s for the tiger who found
they are neither specifically looking for you, nor do you to decide his pleasure with you.
they have any enmity while they are preying on you. So, if steel prices in China have dropped by 20 per
They don’t even remember the mauling they gave you cent, it is then linearly assumed that the same will
because you were not careful. Anybody who sits in the happen in India. And depending on the nature of the
public eye is exposed to this risk, just as anyone who coverage, stock prices will follow suit. Never mind if
seeks to take a walk in the forest must risk the prospect steel imports don’t tick up, and reality is far removed
of suddenly coming up against a tiger. from the reportage. Surviving this media-led stampede
We see this regularly in markets, should we dare to is a critical life skill in the markets, and it is not for you
buy a publicly listed company, especially one which is to ask why these things happen as much as it is not for
in the glare of the media. The excess volatility and the you to ask what the tiger has against you, personally.
noise surrounding F&O stocks, which make little An understanding of the underlying driving
changes in business prospects (see the recent emotions is, therefore, a critical life skill if you want to
movements in the stock prices of Indigo, Tata Steel or live in the modern world as much as a deep knowledge
Sun Pharma), is entirely the creation of the TV media. of the various predators stalking you in the jungle is a
Anticipating this news and being able to handle the critical survival skill. The point is this is not counted
resultant mayhem is a critical business for the as education in the financial courses and is a critical
derivatives trader. In fact, it’s almost all he does. missing link. The current state of financial education
But back to the #MeToo movement to explain an is like teaching about the jungle (of human civilisation)
important point. The original spark is not important, by putting up a map. How useful is that knowledge
but the underlying emotion is always righteous against the appearance of a tiger? WI
indignation – just like the media latched onto the The author teaches, trades and writes at spandiya.blogspot.com

TAKING STOCK
The big consumption shift

While a digitally savvy consumer poses a huge opportunity for consumer
companies, they must innovate to keep the consumer loyal to them
MALINI BHUPTA
Consumer is king we’ve heard often expenditure by 2030. In contrast, India had 68 cities
enough. But in India, the consumer is the very engine of with one million plus population and accounted for 33
economic growth. Be it the Asian crisis of 1997 or the per cent of the country’s household expenditure in
global financial crisis of 2008, India has managed to 2016.
weather most global storms with relative ease because The opportunity is undoubtedly huge, but the path
of a large domestic economy. Powering the world’s to this proverbial pot of gold is going to be littered with
fastest-growing economy is private consumption, which many disruptions. In an era where technology will
accounts for 60 per cent of India’s GDP. In contrast, pretty much define how we live, work and consume,
consumption accounts for 40 per cent of China’s often referred to as the Fourth Industrial Revolution,
economic growth, while 60 per cent is investments. It is the consumption space too will be shaken up as
the domestic consumer that has come to the rescue of consumer expectations from brands and consumption
companies and investors in the worst of times. Given patterns change. The early signs are already visible.
that the contribution of investments in India’s growth Shared mobility is already impacting automobile sales
trajectory is erratic, consumption is the only reliable in urban markets. From Bengal to Madhya Pradesh,
engine of growth. And herein lies both the opportunity consumers are increasingly looking for exciting food
and threat for investors as the consumer’s preferences items online. Food is the most searched consumer
and behaviour are fast changing, as are cravings. category on Google, followed by hair care and skin care.
First, the good news. India is set to become the And 26 per cent diaper sales and 16 per cent of cereal
world’s third-largest economy in the next sales in Bangalore are happening
five years from the world’s sixth largest through e-commerce.
at present. Domestic consumption is
Domestic Undoubtedly, technology shifts and
expected to be a $3 trillion opportunity consumption is e-commerce will determine how
by 2030, according to the World Economic expected to be a consumers consume, but another theme
Forum’s insight report on the future of seems to be silently emerging in India.
consumption in India (dated January
$3 trillion Newer brands and categories are likely
2019). As urbanisation gains pace, India’s opportunity by to emerge because consumer patterns
households will consume more goods 2030, according are no longer uniform. Over the next few
and services. And the opportunity is not years, Indians born in liberal India
limited to any particular economic
to the World (those born between early 90s and early
segment or age group. The opportunity Economic 2000s) will come of age economically.
is going to be huge and spread across Forum’s report These 700 million plus Indians will not
different income groups. McKinsey only consume more compared to the
believes that India will have 100 cities
on the future of previous generation but will demand
with a population of one million plus consumption in differentiated products. This will be the
and this population will account for 49 India first challenge for existing consumer
per cent of India’s total household companies as these consumers are more

TAKING STOCK
open to experimentation. The World Economic Forum’s expectations from existing brands. Shreyash Sigtia,
report on India says, “One of the most challenging and Industry Head, Consumer Packaged Goods, at Google,
exciting implications for companies in India is the recently said at a consumer conference that the share
opportunity to shape consumption patterns – in terms of searches from metros has declined from 45 per cent
of categories consumed, brands purchased or ways of prior to Jio to 36 per cent now. Almost 28 per cent
accessing products and information.” searches through the Google app are now voice-based.
One of the themes that is playing out even now is So what are Indians searching on Google when it comes
the emergence of new categories and brands that are to consumer products? There were 2.5 billion searches
breaking away from the one-size-fits-all products. annually on food, ranging from desserts, chocolates,
Premium yogurt maker Epigamia and Paper Boat are fruits and vegetables. Hair care has seen 750 million
two such examples. Launched in 2013, Paper Boat is a searches, while skin care has seen 650 million searches
preservative-free alternative to aerated drinks. It has annually. According to a Google–BCG study, 40 per cent
both traditional and unique flavours, like ‘Aam Panna’ FMCG sales by 2020 would be influenced by the digital
and ‘Chilli Guava’. Its revenues grew 71 per cent year medium.
on year in FY18. Danone’s investment arm has invested India’s consumption story is set to be rewritten by
`170 crore in Epigamia, after exiting the dairy new-age and tech-savvy consumers. It’s a big
business last year. The general opportunity for sure, but there are risks to
understanding is that the traditional this story as well. A big bet is on
FMCG players that continue to do India’s per-capita GDP will be
the same old stuff will lose going past $2000 in a year or two,
market share of up to 10 which has been a tipping point
percentage points in coming for consumption in most
years as consumers turn to other economies like
new brands. Currently, Singapore, Russia, China
category leaders have 40 and Brazil. As per-capita
per cent market share but GDP goes past $2000,
this will be challenged by consumption booms.
newer brands in the future. The World Economic
What’s changing Forum’s consumer report
consumer behaviour very estimates that by 2030, India
rapidly is media penetration, will add 130 million middle-
changing aspirations and income households and 21
focus on well-being. And the million high-income
value-conscious Indian consumer households, overall doubling the
may veer towards private labels that share of these households to 51 per
meet the aspirational needs at affordable cent. But all this hinges on job creation.
ticket prices. Not surprisingly that newer Indians need at least 100 days of reskilling to
categories like ‘masstige’ products are making their be prepared for the jobs of 2022. Only 2.3 per cent of
way on shelves and e-commerce marketplaces. Masstige India’s workforce is skilled compared to 40 per cent in
products are those that are between mid-market and China. To keep Indians relevant in an evolving economy,
super luxury but have affordable prices. Nyka, India’s at least 125 million Indians will need to be skilled.
premium beauty-products retailer, is adding new While some companies like Honda, IBM, Lenovo and
products under the private labels after its nail-colour Motorola are skilling Indians, the scale is enormous.
range found acceptance. While 75 per cent customers IBM, under Atal Innovation Mission, is set to train
come to Nyka through its app, its offline stores, too, are high-school graduates for careers in artificial
doing well. Each store currently clocks revenues of `3 intelligence, block chain and cybersecurity. If the
crore a year and Nyka’s October 2018 sales stood at `108 reskilling of Indians does not go as per plan and new
crore, up 40 per cent from September 2018. jobs are not created, then the consumption story could
What will tip the scales will be the connected Indian easily be minus 100 million households from the
consumer. With 750 million Indians expected to be middle-income pyramid. And that would derail India’s
connected to high-speed internet, the demand for gravy train. WI
products and services will go through the roof as will The author is the editor of Value Research Stock Advisor

How to avoid
value traps
Why a cheap-looking stock can cost you dearly

Vikas Vardhan Singh 30 per cent fall in the capacities of Chinese graphite-
S
electrode makers. The fall in supply proved to be a
tock market can be irrational at times. But it boon for Indian graphite-electrode companies. HEG’s
is this irrationality that also generates stock is available at a P/E of just five.
opportunities. While stock prices can What explains the valuation
significantly move in both directions, there HEG has thrived on declining competition and not
is often a reason why a stock is in the because of an improvement in its own fundamentals.
dumps. This means that when the market A sudden rise in the prices of a commoditised
gives an opportunity to buy a stock at an unbelievably product, like graphite electrodes, may not last long as
low price, it’s likely that there is something fishy more players in India and globally join the market to
about the company. If a company has also been fill the gap. Moreover, many Chinese companies whose
growing its earnings at a fast pace but is still trading operations were shut down have started getting
at a mouthwatering multiples, it merits a deeper environmental clearances and are adding new
investigation before you invest in it. capacities. This may reinstate competition.
Retail investors are frequently lured by cheap India is also facing similar issues on the
valuations and don’t delve into the reasons why the environmental front as China does and this may lead
company is trading at such low multiples. A stock to production curbs here, too. A few months back, the
with cheap valuations can be a ‘value trap’, i.e., its government imposed a 20 per cent tariff on the export
cheap valuations don’t signify value but are due to bad of graphite electrodes. These uncertainties have raised
underlying fundamentals. questions about the sustainability of HEG’s growth.
How to avoid value traps? Ask why the stock is
trading at cheap valuations. To illustrate this, we HEG has thrived on declining competition and not
studied certain companies that have grown their because of an improvement in its own
earnings over the short and long terms and yet are fundamentals. A sudden rise in the prices of
available at attractive valuations. We filtered out graphite electrodes may not last long as more
stocks that have grown their profits by more than 20 players in India and globally join the market to fill
per cent annually over the last three years and by the gap.
more than 20 per cent in Q2 YoY. Further, we selected
those which are available at a price-to-earnings
multiple of less than seven and market capitalisations Graphite India
of more than `500 crore (see the table). We then found Graphite India, like HEG,
out the reason for their ultra-low valuations. While manufactures graphite electrodes.
the answers were not readily apparent, one key issue So, it is also a beneficiary of the
common to all these companies is the quality of spurt in graphite-electrode prices.
earnings. Let’s have a look at them. Its earnings have grown at an
annualised rate of 208 per cent in the
HEG past three years. During this period, the stock has
HEG manufactures graphite electrodes that are returned 112 per cent annualised but is still available
mainly used in making steel. Its earnings at a P/E of 5.3 times. At 45 per cent, the RoE is also
have grown at an annualised rate very high.
of 357 per cent in the last What explains the valuation
three years. Its share price Graphite India has even more company-specific issues
has multiplied by 24 times than HEG. Firstly, on the pollution front, it has started
during this period. The
return on equity stands at 75 Value traps
3Y PAT growth Q2 PAT growth
per cent. Company name Sector P/E P/B (%, CAGR) (%, YoY) ROE (%)
What has caused HEG to HEG Capital Goods 5.37 4.39 357.1 682.1 75.6
deliver such spectacular numbers? Graphite India Capital Goods 5.29 3.32 208.0 980.6 45.0
The reason for this was the sudden Dewan Housing Finance Finance 4.70 0.67 30.2 52.5 14.2
rise in the price of the graphite
Indiabulls Real Estate Realty 2.00 0.88 77.7 49.5 39.4
electrode from $3,000 per tonne to
Nava Bharat Ventures Power 5.35 0.54 74.6 427.5 8.5
$15,000 per tonne in the past two years.
Sanwaria Consumer Agri 5.45 1.39 67.9 104.7 20.3
This happened because China clamped
down on polluting industries, leading to Century Enka Textile 6.28 0.62 32.0 28.1 8.0

getting the regulator’s attention. After protests
erupted against the company’s plant in Bangalore, the
Supreme Court directed the company to pay
compensation, which is yet to be decided.
Secondly, the company is embroiled in a case related
to its auditor, PricewaterhouseCoopers. PwC has been
alleged of violations in accounting practices in nine
companies, including Graphite India.
After protests erupted against the company’s plant

in Bangalore, the Supreme Court has directed
Graphite India to pay compensation, which is yet
to be decided
78 per cent annualised in the past three years. This

Dewan Housing Finance Corporation looks commendable, given the state of the real-estate
Dewan Housing Finance (DHFL) is an NBFC which sector. The company’s total debt has come down from
lends to retail customers and developers. Despite `9,510 crore in FY17 to `6,600 crore in FY18. Despite
profit growth of 30 per cent annualised in the last the growth, the stock has fallen by more than 60 per
three years and more than 50 per cent in Q2 year on cent in the last one year. This was primarily due to the
year, the company’s stock has fallen more than 60 per liquidity crunch faced by housing-finance companies,
cent from its peak in September 2018. This was the which meant lower funds for realty developers like
result of the liquidity crunch post the IL&FS default Indiabulls Real Estate. The stock is trading at a P/E of
and the panic selling of company’s bonds by mutual just two.
funds. The stock is trading at a P/E of 4.7 times and a What explains the valuation
P/B of 0.65 times. In FY18, the company’s revenue jumped to `5,927 crore
What explains the valuation from `2,320 crore a year ago. When looked at closely,
Other than the panic in the the annual report reveals that the revenue includes
NBFC sector, there are profit from sale of subsidiaries and rental commercial
company-specific projects. Generally, such profits are shown separately
issues which are in the income statement and not included in the
responsible for revenue. However, being a real-estate company,
DHFL’s cheap Indiabulls has reported them as revenue.
valuations. The In absence of such items in the next financial year,
holding company of it’s likely that the company will report a far less
DHFL, Wadhawan Global revenue and thus lower earnings.
Capital, raised `2,125 crore
through zero-coupon non-convertible When looked at closely, Indiabull Real Estate’s
debentures. These debentures have a annual report reveals that its revenue includes
backing of DHFL through its subsidiaries. A default on profit from the sale of subsidiaries and rental
these bonds would spell trouble for DHFL. commercial projects
The holding company of DHFL, Wadhawan Global
Capital, raised `2,125 crore through zero-coupon Nava Bharat Ventures
non-convertible debentures. These debentures Nava Bharat Ventures is a diversified
have a backing of DHFL through its subsidiaries. A company, with businesses in power,
default on these bonds would spell trouble for mining, ferro alloys, agriculture
DHFL. and healthcare. The company’s
earnings have grown at a healthy
pace of 27 per cent annually over the
Indiabulls Real Estate past three years on the back of good
Indiabulls Real Estate is focused on residential and performance from the ferro-alloy and power divisions.
commercial properties in tier 1 cities. The company Despite a decent show at the consolidated level, the stock
has grown its revenue by 29 per cent and net profit by is trading at a P/E of 5.3 times.

What explains the valuation manipulation. The stock price had gone up from `22.95
Firstly, the stock is trading at a so-called ‘conglomerate in February 2009 to `98 in July 2009.
discount’ as the company has multiple unrelated
businesses. Secondly, while the income statement There have been multiple instances of large variations
shows healthy growth in revenues and earnings, if one in the unaudited and audited results announced by
sees the cash-flow statement and the balance sheet, the Sanwaria Consumer
cheap valuation looks justified. Although the company
has made accounting gains, the actual cash flow from
operating activities remains low. The growth has come Century Enka
due to an increase in debtors. In FY18, the receivables Century Enka is a part of the B K
stood at `726 crore. These are more than 30 per cent of Birla Group. It manufactures
the company’s total revenue of `2,348 crore. The ratio nylon-tyre fabric, which is used as
of receivables to revenue was just 6.4 per cent in FY14 a reinforcement material in ‘bias
but has grown gradually over the years. Moreover, the tyres’ (used in heavy and off-road
company’s debt stands at `4,008 crore as against the net vehicles) and nylon yarn used mainly
worth of `3,385 crore. in the apparels industry. The company’s earnings have
The promoter’s credibility has been suspect, too. In grown by 32 per cent annualised in the last three
2014, the Directorate of Enforcement attached years, mainly on account of the rise in nylon prices.
properties, worth `186 crore, belonging to two Despite this healthy growth, the stock is trading at a
promoters and directors of Nava Bharat Power P/E of 6.2 times.
Projects. Two of the company’s directors were alleged What explains the valuation
to have been involved in the coal-block scam that time. The company derives 60 per cent of its revenue from
nylon-tyre fabric, which is used to manufacture bias
In FY18, Nava Bharat’s receivables stood at `726 tyres. However, the new-age radial tyre, which is
crore. These are more than 30 per cent of the gradually replacing the bias tyre in every segment,
company’s total revenue of `2,348 crore. uses polyester rather than nylon. If radial tyres
dominate the industry, Century Enka’s business is
likely to come under threat.
Sanwaria Consumer On the other hand, the company’s directors and
Sanwaria Consumer is into food grains and edible-oil promoters, who also sit on the board of the group
businesses. Earlier, it was only in the edible-oil company Kesoram Industries, have been alleged of
business but later forayed into other segments like insider trading. Kesoram had sold stake in Century
packaged rice, pulses, sugar, soya chunks, etc. The Textiles, another group company, to a firm called
company’s revenue has grown by 25 per cent and Camden Industries for `141 crore in March 2016.
earnings by 68 per cent annualised in the last three Kesoram then invested the money in another
years. Sanwaria has opened company-exclusive stores subsidiary, Cygnet Industries. Cygnet, in turn, bought
called ‘Sanwaria Kirana’ to sell its products directly. back the stake of Camden for `355 crore the very next
The stock is still available at a P/E of 5.6 times. year. It was alleged that Camden made a profit of `214
What explains the valuation crore but Kesoram shareholders lost `100 crore. It’s
There have been multiple instances of large variations suspected that such transactions have happened in
in the unaudited and audited results announced by the Centurey Enka, too.
company. For example, in Q4 FY18, the company had
declared a profit of `36 crore in its unaudited results.
If radial tyres dominate the industry, Century
When the audited results came a month later, it
Enka’s business is likely to come under threat
changed the profit figure to `20 crore.
In 2013, SEBI fined the company and its promoter, Conclusion
Anil Agarwal, `1 crore each for stock-price Long-term investors look for quality, growth and
valuation as major factors. However, when a growth
stock is available unreasonably cheap, they often forget
the third aspect: quality. Make sure that you consider
all three factors while picking stocks and try to find the
reason for cheap valuations. At Value Research Stock
Advisor, we do this all the time for our subscribers. WI
Vikas Vardhan is Senior Equity Analyst at Value Research Stock Advisor

STOCK
SCREEN
Ideas to delve deeper

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

STOCK
SCREEN
Quality stocks available cheap

The stocks listed below clear essential checks on solvency, accounting,
recent financial performance and valuations
No. of companies that
cleared the filters
REASONS TO INVEST THE FILTERS 1,027

Safety Market cap greater than C-Score less than 4 601
Soundness `500 cr PEG less than 1
114
Good performance Z-Score greater than 2.99 P/E to median P/E less
F-Score greater than or equal than 1.5 106
Reasonable valuations
to 7 Earnings yield greater than 5% 41
Banking and finance companies were removed from this analysis as the metrics don’t apply to them.
Safe bets
Stock Altman Piotroski Modified Earnings Market Share 52-week
Company style Z-Score F-Score C-Score yield (%) P/E PEG cap (` cr) price (`) high/low (`)
Action Construction
Construction 5.2 9 2 9.6 16.9 0.31 1,128 96 204-78
Ahluwalia Contracts
Construction 7.9 8 2 10.0 18.1 0.79 2,163 321 443-257
Andhra Petrochemicals
Organic Chemicals
6.9 8 3 14.2 8.2 0.82 551 65 99-38
Asian Star Company
Gems & Jewellery
3.4 9 0 10.5 9.1 0.58 1,297 810 1614-655
Beekay Steel Industries

Stainless Steel
4.7 8 1 18.4 7.1 0.81 685 359 550-252
Bhansali Engg Polymers

Thermoplastics
10.2 9 2 10.4 15.9 0.63 1,448 87 225-60
Cigniti Technologies
Computer Software
4.6 8 2 11.1 9.0 0.30 1,045 381 492-224
Confidence Petroleum
Storage & Distribution
9.5 8 0 5.6 29.4 0.58 1,275 47 57-28
DCM Shriram
Diversified
3.8 9 2 15.5 8.5 0.85 5,566 357 627-237
DIL 4.6 8 0 13.9 11.4 0.49 959 1,046 1125-585

Drugs & Pharma
Everest Industries 3.7 8 1 10.8 11.7 0.70 789 506 638-376

Cement & Asbestos Products
Excel Industries 7.7 8 1 12.0 12.7 1.11 1,724 1,374 1922-652

Pesticides

STOCK
SCREEN

Garware Polyester
Plastic Films 3.3 8 2 15.3 10.1 0.67 625 269 290-134
Gujarat Narmada Valley
Nitrogenous Fertilizer 3.6 9 2 23.9 5.7 0.67 5,886 379 547-315
HEG
Welding Machinery 10.6 8 3 27.9 5.4 0.42 14,150 3,542 4955-2212
HIL
Cement & Asbestos Products 4.5 9 1 12.5 13.1 1.12 1,486 1,998 2606-1480
Himadri Speciality Chem
Coal & Lignite 5.0 9 3 7.9 19.0 0.60 5,550 133 193-106
Insecticides (India)
Pesticides 4.1 8 1 11.3 13.1 0.71 1,231 593 847-361
International Paper APPM
Paper 3.9 9 1 12.0 13.1 0.40 1,780 448 591-284
KNR Construction
Construction 4.6 8 2 8.1 11.6 0.92 3,063 218 340-165
Maithan Alloys
Ferro Alloys 6.5 8 1 38.6 4.5 0.68 1,351 467 1026-448
Manali Petrochemicals
Organic Chemicals 4.7 9 3 26.3 6.7 0.69 511 30 56-29
Meghmani Organics
Pesticides 3.8 9 2 23.6 7.1 0.60 1,506 59 120-52
National Aluminium Co
Aluminium 4.0 8 2 30.0 5.3 0.43 11,623 62 90-57
NR Agarwal Industries
Paper 3.6 8 1 17.9 6.2 0.77 654 383 616-337
NRB Bearings
Ball Bearings 3.8 8 1 7.3 18.4 0.80 2,063 215 224-131
Phillips Carbon Black
Carbon Black 3.0 8 1 12.1 10.4 0.44 3,498 203 287-157
Quick Heal Technologies
Computer Software 35.2 8 1 15.3 15.7 0.65 1,486 211 383-178
Sadhana Nitro Chem
Organic Chemicals 6.2 8 2 15.2 8.4 0.71 680 731 1350-128
Sandur Manganese
Minerals 7.4 9 1 35.6 6.0 0.54 879 1,005 1470-771
Satia Industries
Paper 3.2 9 2 18.4 6.0 1.02 521 521 719-202

STOCK
SCREEN

Sharda Motor Industries

Auto Ancillaries
4.9 8 3 18.1 10.4 0.66 866 1,442 2700-1426
Shemaroo Entertainment
Media & Entertainment
12.5 8 2 10.9 14.9 0.86 1,179 434 595-376
Sreeleathers
Footwear
12.4 9 1 6.4 19.6 0.62 581 230 303-156
Sterlite Technologies
Communication Equipments
7.5 8 2 6.2 25.8 0.79 11,716 292 415-255
Sunflag Iron & Steel Co
Finished Steel
3.4 8 3 21.8 6.2 0.60 959 53 100-48
Tata Metaliks
Pig Iron
4.0 8 0 13.2 9.1 0.99 1,583 625 950-545
Time Technoplast 3.4 9 0 11.5 12.8 1.16 2,273 101 225-97

Other Forms-Primary Plastic
UPL 3.9 8 2 7.4 18.9 1.06 39,477 776 829-537

Inorganic Chemicals
VenkyS (India)
Food Processing
6.4 9 2 10.4 16.6 1.01 3,270 2,321 4725-1787
Zee Media Corporation

Media & Entertainment 5.8 9 2 7.4 17.6 0.63 1,146 24 46-22
Data as on January 15, 2019. New entrants.
Reasonably priced growth stocks

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

At least 20% in the trailing 12
1,027
Companies with strong `500 cr months YoY
fundamentals Earnings growth of:

At least 20% in latest quarter
204
YoY
Greater stability vis-a-vis
At least 20% in the past five Stocks with a P/E of less
value or growth years
than 15 86
On fast track
Stock 5Y median Quarterly EPS TTM EPS 5Y EPS Market cap Share 52-week
Company style P/E P/E PEG growth (%) growth (%) growth (%) (` cr) price (`) high/low (`)
Ashok Leyland
Commercial Vehicles 14.1 33.3 0.14 37.1 76.5 94.9 27,462 94 168-92

STOCK
SCREEN
Asian Star Company

Gems & Jewellery 9.1 15.5 0.36 105.5 103.3 69.0 1,297 810 1614-655
Balmer Lawrie Investments
Misc. Financial Services 11.7 17.1 0.69 42.3 40.6 149.5 877 396 485-361
Beekay Steel Industries
Stainless Steel 7.1 8.7 0.08 41.7 70.0 30.1 689 359 550-252
Bhageria Industries
Organic Chemicals 8.9 8.3 0.12 92.8 81.2 68.9 637 292 365-208
Birla Cable
Wires & Cables 13.9 14.2 0.34 492.2 961.9 109.1 563 189 229-50
Century Enka
Synthetic Yarn 6.2 8.3 0.52 28.1 24.2 29.4 572 264 385-227
Cigniti Technologies
Computer Software 8.9 29.8 0.16 387.5 127.0 79.4 1,044 381 492-224
DIL
Drugs & Pharma 11.4 23.2 0.10 808.4 1,321.0 155.6 959 1,046 1125-585
DLF
Real Estate 6.8 40.2 0.13 2,545.0 1,213.0 75.4 33,147 186 268-142
Elpro International
Electronic Equipment 9.5 103.9 0.05 5,091.4 1,673.8 185.3 886 52 70-40
Empire Industries
Glass & Glassware 9.9 28.1 0.59 187.2 68.5 30.2 624 1,033 2521-1002
Everest Industries
Cement & Asbestos Products
11.6 16.7 0.44 92.1 212.6 36.7 784 506 638-376
Excel Industries
Pesticides
12.7 11.4 0.19 288.0 528.7 105.1 1,724 1,374 1922-652
Firstsource Solutions
Misc. Other Services
9.8 10.0 0.55 33.4 37.3 53.9 3,658 53 84-37
Gallantt Ispat
Steel Wires
10.0 45.4 0.24 230.7 98.5 28.5 1,045 36 51-22
Gandhi Special Tubes
Steel Tubes & Pipes
13.8 18.0 1.26 22.6 22.3 53.3 514 372 430-337
GNA Axles
Auto Ancillaries
12.3 18.6 0.21 41.5 59.5 23.0 793 369 579-306
Godawari Power & Ispat
Sponge Iron
2.9 5.4 0.16 137.9 647.0 28.5 876 249 624-240
Graphite India 5.3 18.6 0.07 913.3 1,149.0 136.8 13,572 696 1127-596
Welding Machinery
Gujarat Alkalies & Chem 5.5 7.1 0.20 63.9 105.5 35.5 3,823 521 929-432
Caustic Soda

STOCK
SCREEN
Gujarat Ambuja Exports

Other Agri Products 11.0 8.4 0.46 58.3 109.4 37.2 2,522 219 310-173
Gujarat Fluorochemicals
Organic Chemicals 14.3 18.3 0.93 546.3 790.0 20.3 10,211 932 975-721
Gujarat Narmada Valley
Nitrogenous Fertilizer 5.7 8.5 0.18 78.4 93.1 38.9 5,886 379 547-315
Gujarat State Fertilizers
Nitrogenous Fertilizer 6.9 8.5 0.41 183.0 76.9 27.3 4,475 112 166-86
Gujarat State Petronet
Crude Oil & Natural Gas 11.9 16.5 1.30 82.7 40.3 46.6 9,567 170 224-156
HEG
Welding Machinery 5.4 12.8 0.04 682.1 2,580.9 196.4 14,150 3,542 4955-2212
HIL
Cement & Asbestos Products 13.1 11.8 0.33 185.5 86.6 71.9 1,487 1,998 2606-1480
IG Petrochemicals
India Glycols
Indiabulls Housing Fin
Housing Finance 8.0 12.4 0.27 20.6 31.0 29.2 34,505 809 1440-639
Indiabulls Real Estate
Real Estate 2.0 11.0 0.04 29.7 485.2 69.2 3,874 86 259-69
International Paper APPM
Paper
13.1 32.5 0.41 550.3 102.2 32.5 1,780 448 591-284
Ion Exchange (India)
Industrial Machinery
10.0 13.5 0.48 52.1 22.6 24.4 558 385 591-335
Jain Irrigation Systems
Plastic Tubes & Pipes
12.8 33.2 0.40 98.9 72.8 32.6 3,269 66 150-55
Jindal Saw
Steel Tubes & Pipes
5.8 7.4 0.21 61.0 22.6 45.3 2,604 81 182-67
JK Paper
Paper
7.7 10.2 0.06 83.3 53.3 165.2 2,691 151 194-97
JMC Projects (India)
Real Estate
13.8 17.0 0.31 20.2 41.1 38.2 1,585 94 141-67
JSW Steel
Finished Steel
7.6 17.8 0.06 154.5 261.4 107.2 70,522 292 428-266
Jubilant Life Sciences
Drugs & Pharma
14.6 19.9 0.27 63.9 43.1 185.1 11,407 720 1039-586
L&T Finance Holdings 14.9 16.5 0.75 51.5 39.3 30.4 28,162 141 190-111
Misc. Financial Services

STOCK
SCREEN
Maharashtra Seamless
Steel Tubes & Pipes
10.3 17.0 0.37 160.4 105.2 63.6 3,243 486 548-407
Manali Petrochemicals
Organic Chemicals
6.7 9.7 0.22 83.4 143.4 60.1 511 30 56-29
Mangalore Chemicals
Nitrogenous Fertilizer
7.7 16.6 0.28 41.7 129.9 63.8 527 45 81-36
Mastek
Computer Software
11.7 18.0 1.05 41.8 53.6 26.4 1,001 422 645-365
Meghmani Organics
Pesticides
7.1 11.9 0.10 22.4 74.9 80.3 1,509 59 120-52
Natco Pharma
Drugs & Pharma
14.4 40.8 0.23 103.5 51.4 55.4 12,725 693 1043-636
National Aluminium Co
Aluminium
5.3 12.5 0.21 117.4 180.4 57.6 11,623 62 90-57
National Peroxide
Inorganic Chemicals
14.6 18.8 0.47 192.7 212.3 55.9 2,289 3,982 5539-1800
NHPC
Electricity Generation
11.6 11.8 2.85 32.5 55.9 24.8 26,161 26 32-22
NOCIL
Thermoplastics
13.9 12.7 0.32 38.0 67.5 104.0 2,781 168 233-139
NR Agarwal Industries
Paper
6.2 8.1 0.06 41.7 66.9 104.9 651 383 616-337
Orient Paper & Industries
Paper
12.1 32.7 0.26 101.4 76.4 46.1 901 42 53-25
Oriental Hotels
Hotels & Restaurants
9.4 104.8 0.14 2,406.2 881.5 91.3 786 44 68-34
Phillips Carbon Black
Carbon Black
10.4 23.7 0.22 112.6 94.9 43.6 3,498 203 287-157
Piramal Enterprises
Drugs & Pharma
8.9 21.6 0.12 20.2 234.1 75.6 42,994 2,346 3308-1795
PNC Infratech
Road Transport
11.4 12.5 0.26 110.8 118.1 20.4 3,912 153 199-122
Pokarna
Granite
9.9 12.1 0.19 63.3 46.9 52.9 539 175 256-125
Polyplex Corporation 6.3 11.0 0.07 151.3 52.9 81.8 1,638 512 668-406
Plastic Films
Prakash Industries 2.7 8.9 0.08 30.3 109.0 66.6 1,581 97 276-71
Diversified
Precision Wires India 13.0 13.9 0.58 32.9 42.1 22.3 532 230 345-182
Wires & Cables

STOCK
SCREEN
Ramkrishna Forgings
Auto Ancillaries 13.8 25.5 0.16 39.3 166.7 92.8 1,685 517 875-505
Reliance Capital
Equipment Leasing 4.3 10.1 0.23 271.8 1,423.5 65.6 5,604 222 606-195
Renaissance Jewellery
Gems & Jewellery 8.2 5.1 0.29 30.7 32.2 42.4 584 309 412-254
Rico Auto Industries
Auto Ancillaries 14.8 16.9 0.22 50.1 51.3 99.2 961 71 102-61
Sadhana Nitro Chem
Organic Chemicals 8.4 11.9 0.07 3,318.0 3,278.1 96.8 680 731 1350-128
Sandur Manganese
Minerals
6.0 11.0 0.29 22.2 65.5 29.9 883 1,005 1470-771
Sanwaria Consumer
Soyabean Products
5.5 10.6 0.14 104.7 105.0 36.6 745 10 31-9
Sarda Energy & Minerals
Finished Steel
4.8 8.1 0.39 58.6 56.8 25.8 955 264 627-227
Satia Industries
Paper
6.0 5.9 0.04 76.3 69.6 37.7 521 521 719-202
Seshasayee Paper
Paper
8.7 10.7 0.18 91.7 25.4 54.6 1,318 1,049 1348-792
Shriram Transport Fin Co
Equipt.Leasing
14.8 17.3 2.49 22.6 25.5 21.0 26,947 1,188 1669-902
Sonata Software
Computer Software
14.2 11.5 0.40 37.1 36.0 70.8 3,192 305 429-255
SREI Infra Finance
Equipt.Leasing
3.6 18.2 0.19 29.0 68.1 38.3 1,680 33 109-25
Stovec Industries
Industrial Machinery
13.6 19.0 0.47 49.6 53.3 71.1 522 2,489 3350-2211
Sunflag Iron & Steel Co
Finished Steel
6.2 10.4 0.09 43.2 101.7 91.6 956 53 100-48
Take Solutions
Misc.Other Services
11.1 15.3 0.46 44.6 22.3 38.7 2,234 151 308-127
Tata Metaliks
Pig Iron
9.1 9.3 0.19 41.7 39.2 151.2 1,578 625 950-545
Tata Power Company
5.1 26.4 0.04 88.5 345.1 93.0 20,313 75 98-60
Tata Steel
Finished Steel
3.4 13.4 0.08 218.2 1,534.7 37.6 57,214 475 754-467
The Inv Trust of India
Hire Purchase
13.3 90.3 0.38 117.1 77.2 27.7 760 149 285-141

STOCK
SCREEN
Thirumalai Chemicals
Organic Chemicals
5.7 11.8 0.12 32.4 73.9 49.0 1,106 108 242-101
Torrent Power
Electricity Distribution
12.1 15.4 0.18 29.8 38.9 63.8 12,828 268 307-212
Ultramarine & Pigments
Dyes & Pigments
13.3 14.0 0.37 22.1 34.4 55.5 710 244 408-211
West Coast Paper Mills
Paper
6.5 12.7 0.06 85.2 55.2 67.1 1,898 290 415-229
WPIL
Pumps & Compressors
9.7 22.5 0.23 659.7 288.6 58.7 820 837 987-501
Data as on January 15, 2019. EPS growth rates are annualised. Median P/E is for less than five years if five-year data are not available. New entrants.
Discount to book value

Stocks available at a discount to their book value indicate bargain and
inherent value, provided the business fundamentals are sound
REASONS TO INVEST THE FILTERS
1,027
Really cheap Market cap greater than Companies must have a five-year
Relatively undervalued `500 cr earnings growth of more than 820
Companies with assets Debt-equity ratio of less than 1.5 10%
Price at least 10 per cent below 577
times
Return on net worth of more than the book value
445
10% in the most recent year
18
Bargain hunt
Stock Dividend Debt-equity Market cap Share 52-week
Company style P/B P/E PEG yield (%) ratio RoE (%) (` cr) price (`) high/low (`)
Bharat Road Network

Construction
0.71 25.8 0.13 0.5 1.0 11.5 831 97 210-82
BSE
Misc. Fin ancial Services
0.91 14.1 -0.19 6.1 0.0 22.4 3,074 594 958-574
Eros International Media

0.32 3.0 0.31 0.0 0.3 11.0 791 83 248-60
Gujarat Alkalies & Chem

Caustic Soda
0.97 5.5 0.20 1.2 0.1 14.9 3,823 521 929-432
Hinduja Global Solutions

Misc.Other Services
0.89 7.5 1.40 1.5 0.4 13.6 1,384 654 1038-591
Hindustan Media Ventures

Books & Newspapers
0.69 8.8 6.32 0.9 0.1 14.8 931 126 271-119

STOCK
SCREEN
Stock Dividend Debt-equity Market cap Share 52-week

Company style P/B P/E PEG yield (%) ratio RoE (%) (` cr) price (`) high/low (`)
HT Media
Books & Newspapers
0.45 6.8 -3.18 0.8 0.5 15.0 1,110 48 114-36
Indiabulls Real Estate

Real Estate
0.88 2.0 0.04 0.0 0.9 39.4 3,874 86 259-69
Indian Metals
Metal Tanks & Fabrications
0.53 4.9 0.14 6.4 0.7 16.4 633 238 730-217
Kiri Industries
Dyes & Pigments
0.89 4.0 0.19 0.0 0.1 11.2 1,427 458 682-383
NLC India
0.74 8.0 0.95 6.7 1.0 15.4 9,353 68 109-65
Polyplex Corporation
Plastic Films
0.59 6.3 0.07 7.8 0.3 11.7 1,638 512 668-406
Prakash Industries
Diversified
0.49 2.7 0.08 0.0 0.3 14.5 1,581 97 276-71
Redington India
Computer Hardware
0.85 7.0 1.27 2.9 0.4 14.5 3,266 84 196-78
Sandesh
Books & Newspapers
0.90 10.0 1.50 0.6 0.0 12.8 621 829 1358-719
Sarda Energy & Minerals

Finished Steel
0.65 4.8 0.39 1.9 0.9 14.0 955 264 627-227
Srikalahasthi Pipes
Pig Iron
0.73 7.0 0.15 3.2 0.3 14.8 875 188 431-165
Thomas Cook (India)

Tourism
0.98 1.5 0.01 0.2 0.0 120.8 8,715 233 303-193
High dividend-yield stocks

Good dividends are not just a bonus in addition to stock returns, they also
accumulate to become sizeable in the long run
REASONS TO INVEST THE FILTERS
Cushion against volatility Market cap greater than Stocks with a current dividend 1,027
Higher total return `500 cr yield of more than 3%
895
Generate regular tax-free Dividend payout ratio of less Stocks with sustained per
income than 40% share dividend and amount 24
over the past five years
16

STOCK
SCREEN
Dear dividend
Stock Dividend Dividend Dividend Earnings Market cap Share 52-week
Company style P/E PEG per share (`) yield (%) pay-out ratio (%) yield (%) (` cr) price (`) high/low (`)
Andhra Sugars
Diversified
7.7 1.33 10.0 3.0 23.3 17.1 899 332 715-302
BSE
Misc. Financial Services
14.1 -0.19 36.0 6.1 27.0 78.6 3,074 594 958-574
Deepak Fertilisers
Inorganic Chemicals
9.2 1.77 6.0 4.2 32.5 9.4 1,361 143 425-134
Gujarat Ind Power Company
17.4 -0.89 2.7 3.5 24.6 23.2 1,179 78 137-67
Gujarat Mineral Dev Corp
Coal & Lignite
19.4 -0.98 3.5 4.0 31.5 24.0 2,771 87 169-81
IRB Infrastructure
Construction
6.4 0.63 5.0 3.2 19.1 13.3 5,542 158 286-117
KSE
Oil Cakes & Animal Feed
8.4 0.19 60.0 3.5 27.6 21.1 555 1,734 4000-1640
Moil
Minerals
9.5 8.70 5.5 3.3 36.0 32.9 4,285 166 257-155
NLC India
8.0 0.95 4.5 6.7 35.2 9.4 9,353 68 109-65
ONGC
Crude Oil & Natural Gas 7.3 1.25 6.6 3.0 38.3 14.3 1,86,210 145 213-135
PTC India
Electricity Distribution 9.6 0.72 4.0 4.4 33.3 3.7 2,691 91 121-64
Reliance Capital
Equiptment Leasing 4.3 0.23 11.0 5.0 21.2 13.7 5,604 222 606-195
Reliance Infrastructure
Electricity Distribn. 8.1 -0.61 9.5 3.1 18.7 24.6 8,163 310 561-275
Srikalahasthi Pipes
Pig Iron 7.0 0.15 6.0 3.2 19.0 26.2 875 188 431-165
Sutlej Textiles & Industries
Synthetic Yarn 11.5 -0.98 1.3 3.1 18.8 8.4 686 42 112-41
VST Tillers Tractors
Other Machinery 15.4 2.34 50.0 3.2 38.6 10.6 1,365 1,569 3095-1537

STOCK
SCREEN
Attractive blue chips

Investing in blue chips at reasonable valuations is one of the simplest
methods of wealth creation with limited pain
REASONS TO INVEST THE FILTERS cleared the filters
Liquidity Large and mid caps
319
Large companies in respective businesses Debt-equity ratio of less than two
Strong balance sheets Interest coverage ratio should be more than 263
Liked by institutions two 204
Average ROE should not have fallen more than
89
20 per cent in any year
Annualised earnings growth of more than 20% 48
over the past five years 24
PEG of less than 1.5 10
Five-year average return on equity above 20%
Solid foundation
Stock Debt-equity Interest 5Y avg 5Y EPS Market cap Share 52-week
Company style P/E PEG ratio coverage ratio RoE (%) growth (%) (` cr) price (`) high/low (`)
Aarti Industries
Organic Chemicals
32.8 1.3 1.3 4.3 22.8 46.2 12,699 1,566 1582-1000
Aurobindo Pharma
Drugs & Pharma
21.0 0.6 0.4 42.7 31.0 37.8 46,008 787 830-527
Hero Motocorp
Two & Three Wheelers
15.9 1.3 0.0 171.2 36.6 28.1 58,036 2,911 3825-2648
Hexaware Technologies
Computer Software
16.4 1.5 0.0 429.3 28.2 54.4 9,513 320 558-294
Minda Industries
Auto Ancillaries
23.8 0.4 0.4 12.6 20.4 58.7 8,050 309 459-292
Natco Pharma
Drugs & Pharma
14.4 0.2 0.1 58.6 21.9 55.4 12,725 693 1043-636
Rajesh Exports
Gems & Jewellery
12.3 0.5 1.2 3.5 20.9 22.8 17,066 578 874-542
Sun TV Network
17.4 1.3 0.0 1,570.4 25.6 47.3 22,871 580 1098-553
Sundram Fasteners
Fasteners
27.6 0.9 0.5 15.8 20.9 59.6 11,150 529 689-480
Tata Elxsi
Computer Software
21.1 0.6 0.0 456.5 39.1 37.3 6,103 979 1491-922
Data as on January 15, 2019. EPS growth rates are annualised. New entrants.

WORDS WORTH
NOW
The global economy is strong enough... If a slowdown happens, it will be

mild, shallow and short. The fundamentals of oil demand are sufficiently
strong and the oil market won’t be impacted. On the supply side, we are
vigilant to take appropriate response if there’s an impact on demand.
Khalid al-Falih Energy minister, Saudi Arabia, Financial Express, January 15, 2019
[Speaking about the rejection by the parliament Gandhiji had led the movement against
of the Brexit deal] We are living through political colonisation. Today, we have to
a historic moment...following the collectively launch a new
referendum that divided our movement against data
nation... We dearly need to bring colonisation. In this
our country back together, and last new world, data is the
night’s vote showed that we do have new oil. And data is
a long way to go. the new wealth.
Theresa May British PM, Mint, Mukesh Ambani Chairman,
January 17, 2019 Reliance Industries,
BusinessLine,
January 19,
2019
In the 5G space, we can leapfrog inadequacies
which we have in the physical world, all of which
can be overcome with use of information and I am of the belief that it is not the big that
communication technologies... There is a serious will beat the small or the small that will
concern that while people are talking of 5G as a beat the big, but the fast that will beat
slogan, it won’t happen unless we the slow. I also believe that disruptors are
put a lot of investment in fibre. often overplayed and that adaptability is
Without fibre, 5G will underplayed. An incumbent, if agile and
not happen. resilient, can be a formidable force for
R S Sharma Trai chairman, anyone. The other thing to keep in mind is
Financial Express, January 18, 2019 that FMCG is not a zero-sum game. There
is room to grow. As a company, we keep
a hawk’s eye on what is happening in the
market. We do not
I respectfully submit that unless my shareholding have to be the first
goes below 10% and/or my group is to enter a category,
not represented on the board, I we could be
would continue to be held out second or third,
as a promoter, and be faced but be better.
with the attendant exposures/
Sanjiv Mehta Chairman
risks of being a promoter. & MD, HUL, Business
Standard, January
Naresh Goyal Promoter, Jet Airways, Finan-
21, 2019
cial Express, January 18, 2019

Small Is Powerful
A little investment every
month goes a long way.
Systematic Investment Plan (SIP) is a facility offered by Mutual Funds which enables
investors to invest a fixed amount at a specified interval into a particular fund.
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Wealth Insight is owned by Value

4 Wealth Insight February 2019

by DHIRENDRA by ANAND by SAURABH by SANJEEV by MALINI

The flow of How is the Market’s a Sparking The big

Nifty 50 vs world indices Quality stocks available

Index Watch stocks

No small feat 62 WORDS WORTH NOW

Trouble in the making

February 2019 Wealth Insight 5

The flow of logic

February 2019 Wealth Insight 7

S&P 500 (USA)

FTSE 100 (UK)

DAX 30 (Germany) CAC 40 (France)

8 Wealth Insight February 2019

HANG SENG (Hong Kong)

KOSPI (South Korea)

SHANGHAI SE A SHARE (China)

NIKKEI 225 (Japan) BOVESPA (Brazil)

February 2019 Wealth Insight 9

Nifty IT Nifty Median

11500 Tech Mahindra 68,711 26

23 Valuations and dividend

10 Wealth Insight February 2019

Large caps Price to earnings Net profit (` crore)

31.7 172 255

12 Wealth Insight February 2019

Mid caps Price to earnings Net profit (` crore)

February 2019 Wealth Insight 13

Small caps Price to earnings Net profit (` crore)

14 Wealth Insight February 2019

Bank of Baroda Cummins Coal Sundaram

0.6 0.6 0.1 0.2 0.1

2.1 2.1 1.8

2.4 2.4 1.7

16 Wealth Insight February 2019

4.6 3.7 1.8 1.4

Tech Mahanagar Ipca

3.4 3.0 2.1 1.4 1.2 1.2 1.9

Bajaj Finance 4.2 Industries

February 2019 Wealth Insight 17

The only way is up

18 Wealth Insight February 2019

Trouble in the making

20 Wealth Insight February 2019

Where does the value lie?

February 2019 Wealth Insight 21

22 Wealth Insight February 2019

24 Wealth Insight February 2019

Banking on the potential

How do you pick banking

Dhaval Gala Satyabrata Mohanty

February 2019 Wealth Insight 25

26 Wealth Insight February 2019

The authoritative guide

To be published in February 2019

February 2019 Wealth Insight 27

Free cash flows are a better indicator of business strength

28 Wealth Insight February 2019

Yash Rohra that generate them year after year. We

February 2019 Wealth Insight 29

All-weather style Market cap greater than