Mind Of An Analyst
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The Mind of a Business Analyst
Applied Lessons for Investment Bankers and Research Analysts
Manish Chokhani
September 2004
1
Agenda Components of an average recommendation What requires to be validated First Principles of Financial Analysis Valuation Principles Valuation Shortcuts and Market Cycles Business Analysis – Circle of Competence Approach Macro Economic, Political and Social Factors Buyer Characteristics and Compulsions Slotting the Recommendation Recap the Valuation
ENAM Securities
August 2004
2
An Average Recommendation Here are the financials ¾ ¾ ¾
Past two years, next two years Current business trajectory is good This is the P/E , this is the EPS or something similarly cheap sounding
Here are some comparable valuations ¾
Local, regional, global
Occasionally: ¾ ¾ ¾
Chance to buy a good business… Unique Promoter … Great Shareholders/ Funds/Pvt Equity… Backing it
So Buy It
ENAM Securities
August 2004
3
What Needs to be Validated? Validity of business financials ¾
Forecast Validity
Key Business Drivers Any hidden liabilities/ subsidiaries / etc Business Competitiveness Macro factors at play Appropriate Valuation Tool
Relative validity ¾ ¾
What else is attractive Decompose by Country / Sector / Mktcap / Promoter
What is driving the deal? ¾ ¾ ¾ ¾
Why the deal? Why Now? Who is the intermediary? Whats in it for me?
ENAM Securities
August 2004
4
Understand the Business Drivers VOLUME ¾
Most loved Consumer focussed UVG stories: eg CellPhones, Retail, Hosing Loans, Media or large addressable markets globally like ITand pharma (buzz on BPO, Textiles…)
PRICE ¾ ¾
Most loved Pricing Power stories: Brands, Oligopolies Excitable Commodity swings: Cement, Metals…
EFFICIENCY ¾
IMPROVING ASSET UTILISATION
¾
Usually Cyclicals – Autos, Engineering due to operating leverage
IMPROVING COST STRUCTURE/ ECONOMIES OF TECHNOLOGY
Usually Engineering, PSUs, Conglomerates…
RESTRUCTURING ¾
Catalysts such as Privatisation, M&A, Divestitures, Buybacks…
ENAM Securities
August 2004
5
Case Studies Lets Examine Sustainable Valuations for ¾
Cement
¾
Autos
¾
IT
¾
Pharma
¾
FMCG
Use 5 key measures that define peak valuations… ¾
Sales / G Block
¾
W Cap / Sales
¾
Sustainable or desirable OPM%
¾
Capex requirements
¾
Volume Growth Assumptions
¾
Help us to decide what we lay out and what we get back…
ENAM Securities
August 2004
6
Now Lets Attempt a DCF
ENAM Securities
August 2004
7
Markets continuously discount all of the above…
ROE : 25%
Value
P/E=20x
ROE : 15% P/E=12x
8% Bonds
P/E=12x
Use Bond Yield Reciprocal (100/8)=12.5x as benchmark
Value multiple - Predictable - Sustainable - Scaleable
Cash Time
ENAM Securities
August 2004
8
Understand Market Cycles – I Bubble
“Virility” Symbols (Towers, diversification/ M&A) Bad qlty of IPOs Capex > near-future reqments Interest rates spike. Huge Credit expansion Retail euphoria Shock/ Leaders in trouble
Fair to Over valuation Capex/ IPO/ Credit cycle revives Asset & Cost inflation Tourism/ Media attention “Themes” emerge, New Valuation “Paradigms”
Correction Bear Phase
Sharp fall followed by pull back “Left outers” jump in Leadership narrows
Severe Undervaluation Ignored, stagnant Cheap valuations Negative press
Symptoms of each hump deceptively similar -- It is the QUALITY which differs:
Undervaluation Important commodities take off (Steel, Gold, etc.) Catalyst/ Regulatory (eg Privatisation, LT Cap gains exemption) Easy Liquidity
Eg high quality IPOs & Capex at “Reasonable” Valuation stage vs flood of bad IPOs & far-out-Capex at Bubble stage
ENAM Securities
August 2004
Bust
9
Resulting in a Swing in Valuation Approaches
BEAR MARKET
BULL MARKET
Value
• • •
Dividend Yield Price/BV Replacement Cost
BUBBLE MARKET
GARP
• • • •
Payback EV/EBIDTA P/E DCF
ENAM Securities
Momentum
• • • •
Technical Charts Reflexivity PE/G Option Value
August 2004
10
Valuation Measures – CASH FLOW IS THE ONLY REALITY DCF helps to make assumptions explicit;gives a good RANGE ¾ ¾ ¾ ¾
P/e ¾
Use probability – don’t fudge the discount rate! Factor in uncertainties and risks Terminal Value is the key – Is all the value residing there? Wider the Optimistic-Pessimistic range – lower the valuation!
P =d/(k-g)
=
d/e / (k-g)
d = dividend per share k = shareholder return expectation k = i + r + rp (inflation+real int+risk premium) g = growth in dividend per share
¾
Hence Importance of payouts and cash flows for better valuation
¾
Close approximation of P/E to ROE
Other Methods are all variants for validation ¾ ¾ ¾
EVA – Economic Value Added - Excess return over WACC quantified EVA = ROIC – (IC x WACC) CFROI – Another smart way to do a DCF
ENAM Securities
August 2004
11
MARGIN OF SAFETY Cash flow v/s Bond Valuations
Growth prospects
Gap between Perception and Reality
Knowledge v/s Popularity
Limited downside/ lots of upside
ENAM Securities
August 2004
12
UNDERSTAND “GOOD BUSINESSES”
THE CIRCLE OF COMPETENCE APPROACH
Manish Chokhani
September 2004
13
BUSINESSES APPRAISAL Think long and hard about cycles Life cycles Business cycles Think about sustainability and sources of advantage Think about external pressures on profitability Where does this business fit on a profitability distribution? The financial litmus tests Think about management and the majority partner
ENAM Securities
August 2004
14
Think of Cycles! Nature is cyclical, not linear!
Life Cycles
Business Cycles / Boom-Bust
Seasonality
Innovation / Schumpeter
Market Cycles
ENAM Securities
August 2004
15
LIFE CYCLE ANALYSIS
SALES
JUTE
SOFTWARE
TIME
ENAM Securities
August 2004
16
BUSINESS CYCLES
FMCG, SERVICES
INTERMEDIATES
CAPITAL GOODS CONSUMER DURABLES
ENAM Securities
August 2004
17
BOSTON CONSULTING GROUP MATRIX
SOURCES OF ADVANTAGE
MANY
FEW
EMERGING/ SMALL SCALE
COMMODITY
LOW
SPECIALISED/ OLIGOPOLIES
MONOPOLY/ CONSUMER FRANCHISE
SUSTABILITY OF ADVANTAGE
ENAM Securities
HIGH
August 2004
18
PORTER’S 5 FORCE ANALYSIS NEW ENTRANTS/ IMPORTS
SUPPLIERS
INTRA INDUSTRY RIVALRY
BUYERS
SUBSTITUTE PRODUCTS
ENAM Securities
August 2004
19
PROFITABILITY DISTRIBUTION BANK RATE
ROI
ENAM Securities
August 2004
20
THE FINANCIAL LITMUS Superior BUSINESSES ¾ ¾ ¾ ¾ ¾ ¾ ¾
Low asset requirements Low credit / inventory Many clients/ economic goodwill Defensible margins Pricing power ( inflation + ) Sustainable growth Free cash flows
Most other businesses ¾ ¾ ¾ ¾
Capital intensive Working capital intensive Want premium valuation, do not deserve it Likely to be cyclical valuations and themes
ENAM Securities
August 2004
21
Now lets talk Micro Focus Costs
Capital Efficiency
People Issues
“Slack”
ENAM Securities
August 2004
22
Costs Are you aware of implications of: ¾
Inappropriate Amortisation
¾
R&D
¾
Technology
¾
Marketing Requirements
¾
Training ; Leadership!
¾
UNIT COSTS/ measures
ENAM Securities
August 2004
23
Corporates have re-engineered costs Cost cutting in Cement Industry 100
(%)
75
1998
2004
1,200
900
50
Cost of Producing Cement (Rs/tonne)
25
Energy Consumption (Units/tonne)
110
90
Coal Consumption (kg/tonne)
200
130
1997
2004
RMC (tons per ton of Steel produced)
4.3
3.1
Energy Consumption (GCAL/TCS)
8.7
7.2
Labour Productivity (tons/Man years)
119
264
0 Cost of Producing Cement
Energy Consumption (Units/ton) 1998
250 200
Coal Consumption (kg/ton)
Source: ENAM Research
2003 2004
Cost cutting by TISCO (%)
150 100 50 0 RMC (tons per ton of Steel)
Energy Consumption (GCAL/TCS) 1997
Labour Productivity (tons/Man years)
Source: ENAM Research
2003 2004
ENAM Securities
August 2004
24
Corporates have right-sized Restructuring by Top 10 Corporates 400
(Rs.m)
(%)
12
300
9
200
6
Revenue (Rs bn)
100
3
Labour Force (nos)
0
0 1995 Revenue (LHS) Revenue/Person (RHS)
Revenue/Person (Rs m)
1995
2003
900
2,750
420,000
335,000
2.1
8.2
2003 Labour Force (LHS)
Right-sizing across sectors Company
Staff shed
Period (Yrs)
% of Labour Force
BHEL
20,000
7
30
Tata Motors
10,000
5
29
Mahindra & Mahindra
6,500
5
34
Bajaj Auto
7,800
6
37
Tisco
30,000
8
40
ACC
6,000
8
38
Source: ENAM Research
ENAM Securities
August 2004
25
Capital Efficiency Are you well focussed on: ¾
Asset Turns: Gross Block, Working Capital?
¾
Lean Assets: Owned v/s Rented
¾
Flexible Structures: Outsourcing
¾
Impact of M&A, Restructuring?
¾
People…
ENAM Securities
August 2004
26
Efficiency Saved India Inc. Peak Rate of Custom Duty (%) 80
160
60 G rowth (% )
120 80 40
40 20 0 -20 -40
0
1996
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
1997
1998
Sales
1999
2000
PBIT
2001
2002
2003
PBT
Working Capital / Sales (%) 12
25 20 G rowth (% )
10 8 6
15 10 5 0 -5
4 1996
1997
1998
1999
2000
2001
2002
1996
2003
1997
Cap Emp
1998
1999
2000
Borrowing
2001
2002
2003
GFA
Source: CMIE
ENAM Securities
August 2004
27
Industry consolidation helped profitability Market share (%) Sector
1997
2004
Aluminium
Top 3 players
77
100
Tyre
Top 5 players
72
85
Cement
Top 5 groups
32
61
Paper
Top 5 players
32
38
Petrochemicals
Top player
45
70
Media
No. of players
Multiple
3 large
Telecom
No. of players
Multiple
4 large
Source: ENAM Research
ENAM Securities
August 2004
28
People Issues How is the company managed? ¾
Lifetime Employment?
¾
How does it Hire? Train? Retain? Fire?
¾
How does it build skills? LEADERS?
¾
Are they Commandos? Soldiers? Mercenaries?
Succession Plans?
Empowerment?
ENAM Securities
August 2004
29
Focus on Micro, Company specific factors How is Product or Service Quality? ¾ Germany/Japan/China v/s India, v/s competition
How is Cost & Capital Efficiency? ¾ Frugality as a mindset v/s “professionally managed”
What are their Value Systems? ¾ Sugar in the milk How is their Service to the Customer? ¾ The “goodwill” earned ENAM Securities
August 2004
30
Watch Out for Hidden Bombs Conflict of Interest Structures ¾
Pvt Businesses
¾
Inter Party relationships
¾
Split Ownerships
¾
Loans & Advances
Off balance Sheet Libailities ¾
Unfunded Pensions
¾
Litigations
¾
Family Settlements
¾
… and many more creative reasons why CAVEAT EMPTOR
ENAM Securities
August 2004
31
CHOOSING “BUSINESS PARTNERS” Integrity / track record
Ability (not just lucky)
Understanding of key issues
Ambition tempered by reality
Commonality of objectives
Orientation towards minority
ENAM Securities
August 2004
32
MACRO FACTORS TO BEAR IN MIND
Manish Chokhani
September 2004
33
Do you have Macro Pointers in Mind? Do you have a point of view about:
¾
Politics as it affects the business
¾
Economics as it affects the business
¾
Demographic Trends
¾
What are Capital Markets Signalling?
¾
Each powerful trend can have disruptive or tidal wave effects on any business
ENAM Securities
August 2004
34
Politics Geo Politics affects addressable markets, terms of trade, cost of doing
business… ¾
Effect of SAFTA, ASEAN, WTO/GATT
¾
Risk Premium/Opportunity of Pakistan
¾
Emerging US-India axis ; NAM, ML
¾
Opportunities in “emerging” economies
¾
Outcry against/trends favouring outsourcing
ENAM Securities
August 2004
35
Outsourcing to India : Brewing Trouble Company
Outsourcing for
IT Services Infosys Tata Consultancy Wipro
Goldman Sachs, Aetna, Northwestern Mutual, Am Ex, DHL, Verizon GE, Honda, UBS, HSBC Transco, HP- Compacq, Nortel, General Motors, Cisco, Sony
ITES Mphasis BFL Spectramind
Citi Group, Acenture, Auto Zone, Capital One Dell, American Express, Capital One
Pharmaceuticals Cipla Shashun Chemicals Lupin Laboratories
Ivax, Watson Pharma, Eon Labs Eli Lily, GSK Pharma Apotex, APP, Watson Pharma
Engineering Bharat Forge Tata Motors Moser Baer Essel Propack
Meritor, Caterpillar, Toyota, Ford, FAW (China) Rover Imation, BASF P&G, Unilever, Colgate
ENAM Securities
August 2004
36
Increasing FDI reflects “openness”
Cost Savings (Production Hubs)
Research Services
Domestic Market Opportunity
Early entrants
Recent entrants
GE, Citi IT, State Farm Amex, Bank Am IBM, HP
Texas Instruments, GE
Coke, Pepsi Ford, Hyundai LG, Samsung Lafarge Port of Singapore, P&O Morgan Stanley, Templeton
JP Morgan, HSBC, Prudential Accenture, CGE&Y Delphi Teva
Microsoft, Sun, Intel GSK, Pfizer, Eli Lily COVANCE
McDonalds, Pizza Hut Honda, Toyota Nokia Michelin Dubai Port, Maersk HSBC MF, Duestche MF
Likely entrants BPOs in throngs Deloitte Consulting Generic Pharma Cos
A number of CROs
Fidelity MF, ABN MF
Source: ENAM Research
ENAM Securities
August 2004
37
Confident Indians going global Pharma
Large Groups ¾ ¾ ¾ ¾ ¾
Tata -Tetley, Daewoo , Rover tie-up RIL - FLAG undersea cable,Trevira (Polyester firm in Germany) Birlas - AV Cell (Canada), Copper mines (Aus), Carbon Black (China) etc Sterlite - Copper Mines in Australia, Listing on LSE ONGC - Stake in: Sakhalin oil fields (Russia), GNOOC oil fields (Sudan)
¾
¾
Wochardt-Esparma (Germany) Ranbaxy- RPG Aventis (France) Dr. Reddy’s - Meridian Healthcare (UK),Trigenesis Therapeutics (USA) Cadila – French operations of Alpharma (USA)
IT ¾ ¾
Wipro - Nervewire, Utilities consulting division of AMS (USA) HCL Tech - BT’s call centre (Ireland)
Others
Auto Parts ¾
¾ ¾ ¾
Sundaram Fasteners - Gear casting business of Dana Spicer (UK), Plant in China Bharat Forge – Dana Corp Forging business (UK), Forging business of CDP (Germany)
¾ ¾ ¾ ¾
Asian Paints - Berger International (Singapore) Essel Propack - Propack Holdings (Switzerland),Arista Tubes (UK) Moser Baer - Mmore International (Holland) Atlas Cycle, Ajanta Clocks - Plants in China
ENAM Securities
August 2004
38
Macro Economic Indicators Global and local economic cycles
Capital costs ¾
Interest rates, Currency rates, Inflation
¾
Cost pressures: RMC, Tarriffs, etc
Social Costs / development
Competition is a given
ENAM Securities
August 2004
39
Eg: Complete Reversal in India Forex reserves
60
Forex reserves (US$ bn)
80
20
Interest rates
60
0
40
100
17 16 15 14 13 12 11 10
03-04
02-03
01-02
00-01
99-00
Invisibles (LHS)
Capital Receipts (LHS)
Total Reserve (RHS)
(%)
80 60 40 20 0
Jul-04
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
(%)
Trade Balance (LHS)
External debt
Interest rates & Re. depreciation (%)
98-99
0 97-98
-40 96-97
20 95-96
-20 94-95
External debt
Rupee/ US$ (LHS)
100
40
Re. depreciation
15 12 9 6 3 0 -3 -6
120
(US$ bn)
96-97
97-98
98-99
99-00
00-01
2-Jan
3-Feb
`03-04
Foreign Exchange Reserves as % of external debt External Debt (% of GDP)
Prime Lending Rate (RHS)
Source: RBI, CMIE
ENAM Securities
August 2004
40
Soft interest rate bias nearing an end.. Room to grow advances vs investments
Inflation making a comeback? 15
50 Investment Deposit Ratio
(%)
12
45
9 6
40
3
Forex reserves at a peak 120,000
15
(US$m)
100,000
12
80,000
Jan-04 Jul-04
Jan-03 Jul-03
Jan-02 Jul-02
Jan-01 Jul-01
Jan-00 Jul-00
Jan-99 Jul-99
Jan-98 Jul-98
Jan-97 Jul-97
Jan-96 Jul-96
Jul-04
Jan-04
Jul-03
Jan-03
Jul-02
Jan-02
Jul-01
Jan-01
Jul-00
Jan-00
Jul-99
Jan-99
Jan-95 Jul-95
0
35
Rupee volatility on the cards (%)
(%)
17 16
9
15
03-04
01-02
00-01
99-00
98-99
97-98
96-97
95-96
94-95
93-94
02-03
Rupee/ US$ (LHS)
Jul-04
10 2003
-6
0
2002
11 2001
-3 2000
20,000
1999
12
1998
0
1997
40,000
1996
13
1995
3
1994
14
1993
6
60,000
Prime Lending Rate (RHS)
Source: Blloomberg, RBI, CMIE
ENAM Securities
August 2004
41
Understand Market Cycles – II
ENAM Securities
August 2004
42
US Interest Rates through cycles
ENAM Securities
August 2004
43
Rising commodity prices reflect USD weakness 320
CRB All Commodity Index
Steel
Gold
All Commodities
Gold AM Fix Prices
450
550
MB HR Steel Prices
(USD/ troy ounce)
300 400
450
350
350
300
250
250 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04
150 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04
280 260 240 220 200 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04
Alumina
Non-ferrous Metals 2,000
Aluminium
Europe Alumina Spot Price
London Metals Exchange Index 500
Aluminium Primary OP SPT 2,000
(USD)
1,800
400
1,800
1,600
300
1,600
1,400
200
1,400
1,200
100
1,200
1,000 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04
0 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04
(USD)
1,000 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04
Source: Bloomberg
ENAM Securities
August 2004
44
Consumption trends across Asia
ENAM Securities
August 2004
45
Government P&L A/c AS IT REALLY IS Centre’s P&L (2004-05E) Particulars
% of GDP
Total Receipts
11
-- Revenue Receipts
10
-- Capital Receipts
1
Total Expenditure
15
-- Interest
4
-- Defence & Subsidies
4
-- Transfer to States
3
-- Infrastructure & Capital Expenditure
1
-- Administrative, etc.
3
Deficit
4
Total debt (Internal + External)
64
Source: Government of India Interim Budget, ENAM Research
Deficit of 5-6% of GDP misleading! Receipts only 11% ENAM Securities
August 2004
46
States have joined the party! 1,400
Aggregate fiscal deficit of states (Rs.bn)
(%)
5.5
Source: RBI
Fiscal Deficit (LHS)
% of GDP (RHS)
FY04 E
2.0 FY03
0 FY02
2.5 FY01
200 FY00
3.0
FY99
400
FY98
3.5
FY97
600
FY96
4.0
FY95
800
FY94
4.5
FY93
1,000
FY92
5.0
FY91
1,200
Power subsidies (% of state fiscal deficit) State
(%)
Madhya Pradesh
74
Andhra Pradesh
51
Gujarat
65
Karnataka
65
Maharashtra
28
Tamil Nadu
40
Source: World Bank
ENAM Securities
August 2004
47
Profligate Governments…weaken us all Crowds out private sector Upward pressure on interest rates Rupee depreciation Making us “poorer”, costlier, less competitive> poorer! Total Central & State debt as a percentage of GDP 80%
Debt/GDP
70% 60% 50%
ENAM Securities
2000-01
1998-99
2002-03 RE
Source: RBI
1996-97
1994-95
1992-93
1990-91
1988-89
1986-87
1984-85
1982-83
1980-81
40%
August 2004
48
Demographics Income Shifts
Age Group Shifts
Social Shifts
ENAM Securities
August 2004
49
Affordability has risen dramatically Falling prices and low interest rates have made products easily affordable 1994
2003
Increase in affordability (x)
6
3
2.0
1,690
1,250
1.4
21" Color TV
18,000
11,000
1.6
Washing Machine
18,000
13,000
1.4
Refrigerator (165 Ltr)
12,000
8,000
1.5
Cordless Telephone
4,000
2,500
1.6
25,000
4,000
6.3
Housing (Ratio of Hsng Price/Annual Inc.) (x)
Housing EMI (Rs.) 10-year repayment / Rs.100,000 / month Cost of (in Rs.)
Cellular Phone Source: ENAM Research
All this has led to a boom in retail lending and consumption ENAM Securities
August 2004
50
Wealth effect adds to consumer power 15 12
Strong rupee and low interest rates (%)
(%)
17 16
Rupee/ US$ (LHS)
Prime Lending Rate (RHS)
Gold: 20,000 tonnes = $100bn gain 450
Jul-04
10
2003
-6
2002
11
2001
-3
2000
12
1999
0
1998
13
1997
3
1996
14
1995
6
1994
15
1993
9
Market Cap gain = $75bn 7,000
(USD/troy ounce) 6,000
400
5,000 350 4,000 300
3,000
250 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
2,000 2002
2003
2004
Source: Bloomberg
ENAM Securities
August 2004
51
Income demographics = Secular consumption growth TV: 1998 - 70m, 2003 98m, 2007 - 130m
600
2 Wheelers: 1998 - 28m, 2003 - 46m, 2007 - 80m
500
Population (m)
Cable TV Sub.: 1998 - 25m, 2003 - 48mn, 2007 - 80m
Basic Telephone: 1998 – 22m, 2003 – 44m, 2007 - 65m Tax Payers: 1998 - 10mn, 2003 - 40m, 2007 - 80m
400
Cellular Subscriber: 1998 - 1mn, 2003 - 14m, 2007 - 95m
300 Home Mortgage Outstanding: 1998 – Rs145bn, 2003 – Rs478bn, 2007 – Rs1367bn
200 Cars: 1998 - 3m, 2003 - 6m, 2007 - 9m
100 2007
0 100
1000
2003 2000
3000
Annual income (US$) Source: ENAM Research
1998
1998 4000 >5000
2003
Value growth far exceeds volume growth
2007
ENAM Securities
Volumes
Value
Two Wheelers
12%
20%
Cars
13%
20%
CAGR (1994 – 2003)
August 2004
52
Consumers are under-leveraged
800
75%
(USD bn)
700
70% 54%
600
60%
53%
500
50%
34%
400
40%
300
30% 17%
200 100
80%
20% 10%
2%
0
0% India
Thailand
Malaysia
Total consumer loans outstanding
Taiwan
Korea
USA
Consumer loans outstanding / GDP (%)
Source: ICICI Bank
ENAM Securities
August 2004
53
Age profile points to secular growth in demand Increasing consuming/producing age group
World Age Population Projected To Decline
Total 1,211.6m
1,200 Total 1,012.4m Overall growth 19.7%
800 246.8m
Growth 34.4%
331.6m
The rising consumer class
400
0 2001 0 to 19
20 to 34
2013 35 to 60 & above
Source: Census 1991
ENAM Securities
August 2004
54
BRICs : The growth engine of the world
Source: Goldman Sachs BRICs Report
ENAM Securities
August 2004
55
Caveats Leadership!
Macro economic stability
Infrastructure and Institutions
Openness
Education (and Health)
ENAM Securities
August 2004
56
Political Contradictions reflect Social flux
CPM Muslim League
CONGRESS
RJD BSP SP DMK
NCP JD Samta party
BJP Telgu Desam AIADMK BJD
Shiv Sena
National Conference
ENAM Securities
August 2004
57
Capital Markets Be aware of shifts ¾
In sectors
¾
In Leadership
¾
In Valuations?
Where we are in the cycle?
ENAM Securities
August 2004
58
Flat markets cloud sectoral shifts! Sectors (% of Nifty) 1998
1999
2000
2001
2002
2003
(July) 2004
8
6
5
7
8
10
12
Commodities
42
32
22
23
25
34
37
Cyclicals
19
15
8
7
9
9
15
FMCG
19
27
16
19
21
15
9
Pharma
4
5
7
6
8
7
6
TMT
8
15
43
38
29
25
21
100
100
100
100
100
100
100
Banking
Total Source: CMIE
Share of corporate profit / GDP Share of sector profit % v/s Share of market cap Should always be at the back of the mind ! ENAM Securities
August 2004
59
Similarly, be aware of relative country valuations High and Stable RoE (EVA +ve), Size and Scalability, Variety and Growth P/E (x)
Interest
RoE (%)
EPS Growth (%)
2002
2003
2004
rates (%)
2002
2003
2004
2002
2003
2004
China
15
14
13
NA
12
14
15
14
11
6
India
18
15
13
4.5
18
21
24
34
13
16*
8
9
8
9.0
27
25
27
53
(7)
10
Korea
11
12
9
3.9
15
14
18
(5)
(7)
33
Malaysia
20
16
15
3.1
10
12
13
14
20
9
Phillipines
26
17
13
7.8
6
9
11
(23)
50
30
Singapore
25
18
16
0.8
7
9
10
(19)
37
12
Taiwan
43
20
15
1.1
5
11
15
(9)
124
29
Thailand
16
12
11
1.3
16
21
23
86
35
9
Indonesia
Source: The Economist, Citi group. * Currently witnessing upgradation and growth to be sustained in 2005
ENAM Securities
August 2004
60
Churn in Top 20 reflects underlying reality shifts Company Name Oil & Natural Gas Corpn. Ltd. Hindustan Lever Ltd. Indian Oil Corpn. Ltd. Mahanagar Telephone Nigam Ltd Reliance Industries Ltd. I T C Ltd. State Bank Of India Hindustan Petroleum Corpn. Ltd. G A I L (India) Ltd. Bharat Heavy Electricals Ltd. Tata Motors Ltd. Bajaj Auto Ltd Bharat Petroleum Corpn. Ltd. Industrial Development Bank of India Hindalco Industries Larsen & Toubro Tata Iron & Steel Co. Ltd. Castrol India Steel Authority Of India Ltd. National Aluminium Co Total Market Cap
1998 Mkt Cap (Rs. bn) 402 278 272 163 158 153 129 110 106 86 77 73 63 63 56 51 50 46 43 39 2,418
Company Name
As ofJune2004 Mkt Cap (Rs. bn)
Oil & Natural Gas Corpn. Ltd. Reliance Industries Ltd. Indian Oil Corpn. Ltd. Infosys Technologies Ltd. Wipro Ltd Hindustan Lever Ltd. Bharti Tele-Ventures Ltd. State Bank Of India I T C Ltd. I C I C I Bank Ltd Ranbaxy Laboratories Ltd Housing Development Finance Corpn. Ltd G A I L (India) Ltd. Tata Motors Ltd. Bharat Petroleum Corpn. Ltd. Steel Authority Of India Ltd. Hindustan Petroleum Corpn. Ltd. Maruti Udyog Ltd Bharat Heavy Electricals Ltd. Tata Iron & Steel Co. Ltd. Total Market Cap
927 625 464 354 354 286 278 253 222 194 187 151 144 141 131 122 121 119 113 110 5,270
Source CMIE Note: Names in red indicate exits, in blue indicate new entrants
ENAM Securities
August 2004
61
… and the Index hides more than it shows!
1,200
10,000
800
5,000
400
0
0
Wipro
Satyam
Ranbaxy Cipla
Dr Reddy's Sun Pharma
2004
2003
2002
Banking 1,200 1,000 800 600 400 200 0
Media & Auto 6,000 4,000 2,000 0
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
15,000
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
1,600
Infosys
2001
Pharmaceuticals
20,000
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
IT
Sensex (RHS)
HDFC
HDFC Bank
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Indexed Sensex (LHS)
2000
1999
1998
1997
1996
1995
6,500 6,000 5,500 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1994
200 180 160 140 120 100 80 60 40 20 0
Zee
Hero Honda
All Figures indexed 100= price in 1994
ENAM Securities
August 2004
62
Always disaggregate the market
Sources of Advantage
Many
Emerging Business
Global Outsourcers
Telecom Media Retail
IT Pharmaceuticals Engineering
Global Commodities
Domestic Demographics
Oil Metals
FMCG Auto Banking
Low Sustainability of Advantage Low
High
Note : Companies may change characteristics over time! ENAM Securities
August 2004
63
PSS companies outperform markets over time! RIL Vs Sensex
Infosys Vs Sensex
HDFC Vs Sensex
10,000
0
0
Reliance Industries (LHS)
400 300 200
Sensex (RHS)
Infosys
Sensex (RHS)
HLL Vs Sensex
HDFC
2004
2003
2002
2001
2000
1999
1998
1997
1996
1994
1995
0
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
100 1994
2004
100 2003
20,000
2002
200
2001
30,000
2000
300
Sensex (RHS)
MICO Vs Sensex
600
500
500
400
400
300
300
HLL
Sensex (RHS)
ENAM Securities
MICO
2004
2003
2002
2001
2000
1999
1998
1996
1995
2004
2003
2002
2001
2000
1999
1998
1997
0 1996
0 1995
100 1994
100
1994
200
200
1997
1999
500
1998
40,000
1997
400
1996
600
1995
50,000
1994
500
Sensex (RHS)
August 2004
64
Multibaggers of the last 10 years Price as on 14/7/94
Price on 15/7/04
CAGR (%)
3
326
62
13
1443
60
6
525
56
Sun Pharmaceuticals
21
351
33
Hero Honda
33
460
30
Cipla
41
231
19
214
976
16
30
126
15
HDFC
161
550
13
Dr Reddy's
248
749
12
Satyam Computers Infosys Technologies Wipro
Ranbaxy Zee Telefilms
Source: Bloomberg; Adjusted for bonuses and stock splits; NIFTY constituents only
ENAM Securities
August 2004
65
Multibaggers since 9/11 : The REAL BSE-30! Company
Price as on
Price on
CAGR
15/7/04
11/9/01
(%)
Oriental Bank
240
34
92
Mahindra & Mahindra
476
68
Price as on
Price on
CAGR
15/7/04
11/9/01
(%)
National Aluminium Co Ltd
139
48
43
91
HPCL
288
111
38
33
5
87
Tata Tea
386
150
37
Tata Motors
407
75
76
Hero Honda
460
183
36
ONGC
654
136
69
Tata Power
254
101
36
Shipping Corp Of India Ltd
117
24
68
Sun Pharma
351
141
35
Tata Iron & Steel Co Ltd
327
84
57
Ranbaxy
976
415
33
BHEL
527
135
57
ICICI Bank
238
103
32
IPCL
157
40
57
SBI Bank
431
187
32
Grasim
952
274
51
Glaxo
603
282
29
GAIL
182
53
51
Indian Hotels
370
175
28
Reliance Energy
571
176
48
BPCL
314
159
26
ABB
730
225
48
Satyam Computers
326
175
23
Bajaj Auto
841
266
47
ACC
232
128
22
Tata Chemicals Limited
121
39
45
Gujarat Ambuja
275
155
21
SAIL
Company
Source: Bloomberg; Adjusted for bonuses and stock splits; NIFTY constituents only
ENAM Securities
August 2004
66
AOL, Time Warner merger – A lesson to remember
Stock Price of Time Warner: now AOL Time Warner
100
(US$)
80
Announcement of Merger
60 40 20
ENAM Securities
2004
2003
2002
2001
2000
1999
1998
1997
1996
0
August 2004
67
Lets Summarise TILL THIS POINT Value is created through an interplay of: ¾
Macro Trends
¾
Micro Focus
¾
Subtler Nuances
¾
Business Leaders must constantly be on top of these ; good leaders and investors continuously value these.
¾
Real winners understand this and play to create enduring value.
May run out of luck, never out of wisdom ! ENAM Securities
August 2004
68
NOW: BUYER BEHAVIOUR
Manish Chokhani
September 2004
69
Understand Fund Manager Behaviour! Approaches to Portfolio Construction ¾
Top Down v/s Bottom Up
¾
Value v/s Growth
¾
Think of Where we are in the Market Cycle!
Client Requirements ¾
Match Needs, Requirements and Abilities
Your OWN Portfolio?
ENAM Securities
August 2004
70
Elements of Valuation Top Down
Value
Growth
Momentum
Bottom Up
ENAM Securities
August 2004
71
KYC and Thyself!
Asset Allocation
Relative
Pvt. Banks / Pension Funds / Macro Funds/ Fund of Funds
Country Allocation Regional Funds Sector Allocation Country Funds/ Mutual Funds
Large Cap Small Cap
Absolute
ENAM Securities
HNW / PMS / Absolute Return Funds/ “Hedge” Funds
August 2004
72
Key Success Factors : Match Your Pitch! • Institutional Marketing • Deployment of Large Pools • Capital Preservation
CAPITAL UBS, GAM GSIC, ADIA
Regional Funds
• Marketing Scale & Scope • Economist
PICTET JANUS GMO LLYOD GEORGE
Country Funds
• Fund Manager • Technician
HSBC, , CIBC, JF ICICI, HDFC, UTI
• Stock Picker
SLOANE ABERDEEN ARISAIG EMIC OPPENHEIMER
Pvt. Bankers / Pension Funds / Macro Funds
Absolute Return Funds
ENAM Securities
August 2004
73
Decomposing Approaches
Top Down
Asset Class
• • • • •
Equities Bonds Currencies Property Commodities – Oil – Precious metals – Natural Resources
Country
• • •
Developed Markets Emerging Markets Regional markets
ENAM Securities
Sector
• • • • • •
FMCG Pharma Services TMT Manufacturing Cyclicals
August 2004
74
Valuation – MegaCap bias
Category 30 Largest Remaining S&P 500
1980 9 9 9
ENAM Securities
1990 15 14 15
1999 46 23 30
August 2004
75
Some Lessons from History Japan V/s UK in 1944 Korea V/s India in 1950 Singapore!
Hero Honda V/s Kinetic Honda Bharti V/s IDEA Infosys V/s HCL HDFC Bank V/s SBI
There is NO trade-off between Top- Down and Bottom up ENAM Securities
August 2004
76
Valuation Approaches based on Sentiment Swings Value
Growth
Momentum
•
Illiquid
•
Institutional Favorites
•
Max Volume
•
Misunderstood
•
UVG Stories
•
News Flow
•
Hated/Uncovered
•
Imagine it!
•
Volatile
•
Appraised value
•
DCF or Option value
•
Technicals
In Reality, there is no distinction. Growth and Momentum are LongTerm/Short Term Value catalysts ENAM Securities
August 2004
77
Think Client Management WHO is the CLIENT?
WHAT does he want from you?
HOW are you shaping his expectations & mindset?
WHY should he stick to you?
“Most clients would rather have their fund manager fail conventionally than succeed unconventionally.”
— Marc Faber ENAM Securities
August 2004
78
Decompose | Decompose | Decompose Sectors
Large Cap
Medium Cap
Small Cap
Total
FMCG Pharma Banks IT Telecom Media Engg Autos Commodities Total
ENAM Securities
August 2004
79
SUMMARY UNDERSTAND YOURSELF OBJECTIVELY ¾
Everybody is not Schumacher or Tendulkar: TAKE HELP, BE SELF AWARE
UNDERSTAND THE INVESTMENT LANDSCAPE ¾
A grip of Macro, Micro, Accounting and Street Smartness is REQUIRED
UNDERSTAND THE UNDERLYING INVESTMENT ¾
What will make it tick or explode?
UNDERSTAND THE MARKET PARTICIPANTS ¾
Who are you playing against and how does he play?
FOLLOW BASIC PRINCIPLES AND STICK TO THEM!
BE HAPPY!
ENAM Securities
August 2004
80
How is your Portfolio Tilted? OWN INTERESTS
CLIENT TIME
PROFESSIONAL COLLEGUES
FAMILY
WORK COLLEAGUES
BUILD A CONSCIOUS LIFESTYLE !
ENAM Securities
August 2004
81
HEAVEN AND HELL
AMERICAN SALARY
AMERICAN WIFE
ENGLISH HOME
ENGLISH CAR
GERMAN CAR
GERMAN FOOD
CHINESE FOOD
CHINESE HOME
INDIAN WIFE
INDIAN SALARY
YOUR REAL WEALTH = YOUR HAPPINESS = YOUR STATE OF MIND = WITHIN YOU
ENAM Securities
August 2004
82
Applied Lessons for Investment Bankers and Research Analysts
Manish Chokhani
September 2004
1
Agenda Components of an average recommendation What requires to be validated First Principles of Financial Analysis Valuation Principles Valuation Shortcuts and Market Cycles Business Analysis – Circle of Competence Approach Macro Economic, Political and Social Factors Buyer Characteristics and Compulsions Slotting the Recommendation Recap the Valuation
ENAM Securities
August 2004
2
An Average Recommendation Here are the financials ¾ ¾ ¾
Past two years, next two years Current business trajectory is good This is the P/E , this is the EPS or something similarly cheap sounding
Here are some comparable valuations ¾
Local, regional, global
Occasionally: ¾ ¾ ¾
Chance to buy a good business… Unique Promoter … Great Shareholders/ Funds/Pvt Equity… Backing it
So Buy It
ENAM Securities
August 2004
3
What Needs to be Validated? Validity of business financials ¾
Forecast Validity
Key Business Drivers Any hidden liabilities/ subsidiaries / etc Business Competitiveness Macro factors at play Appropriate Valuation Tool
Relative validity ¾ ¾
What else is attractive Decompose by Country / Sector / Mktcap / Promoter
What is driving the deal? ¾ ¾ ¾ ¾
Why the deal? Why Now? Who is the intermediary? Whats in it for me?
ENAM Securities
August 2004
4
Understand the Business Drivers VOLUME ¾
Most loved Consumer focussed UVG stories: eg CellPhones, Retail, Hosing Loans, Media or large addressable markets globally like ITand pharma (buzz on BPO, Textiles…)
PRICE ¾ ¾
Most loved Pricing Power stories: Brands, Oligopolies Excitable Commodity swings: Cement, Metals…
EFFICIENCY ¾
IMPROVING ASSET UTILISATION
¾
Usually Cyclicals – Autos, Engineering due to operating leverage
IMPROVING COST STRUCTURE/ ECONOMIES OF TECHNOLOGY
Usually Engineering, PSUs, Conglomerates…
RESTRUCTURING ¾
Catalysts such as Privatisation, M&A, Divestitures, Buybacks…
ENAM Securities
August 2004
5
Case Studies Lets Examine Sustainable Valuations for ¾
Cement
¾
Autos
¾
IT
¾
Pharma
¾
FMCG
Use 5 key measures that define peak valuations… ¾
Sales / G Block
¾
W Cap / Sales
¾
Sustainable or desirable OPM%
¾
Capex requirements
¾
Volume Growth Assumptions
¾
Help us to decide what we lay out and what we get back…
ENAM Securities
August 2004
6
Now Lets Attempt a DCF
ENAM Securities
August 2004
7
Markets continuously discount all of the above…
ROE : 25%
Value
P/E=20x
ROE : 15% P/E=12x
8% Bonds
P/E=12x
Use Bond Yield Reciprocal (100/8)=12.5x as benchmark
Value multiple - Predictable - Sustainable - Scaleable
Cash Time
ENAM Securities
August 2004
8
Understand Market Cycles – I Bubble
“Virility” Symbols (Towers, diversification/ M&A) Bad qlty of IPOs Capex > near-future reqments Interest rates spike. Huge Credit expansion Retail euphoria Shock/ Leaders in trouble
Fair to Over valuation Capex/ IPO/ Credit cycle revives Asset & Cost inflation Tourism/ Media attention “Themes” emerge, New Valuation “Paradigms”
Correction Bear Phase
Sharp fall followed by pull back “Left outers” jump in Leadership narrows
Severe Undervaluation Ignored, stagnant Cheap valuations Negative press
Symptoms of each hump deceptively similar -- It is the QUALITY which differs:
Undervaluation Important commodities take off (Steel, Gold, etc.) Catalyst/ Regulatory (eg Privatisation, LT Cap gains exemption) Easy Liquidity
Eg high quality IPOs & Capex at “Reasonable” Valuation stage vs flood of bad IPOs & far-out-Capex at Bubble stage
ENAM Securities
August 2004
Bust
9
Resulting in a Swing in Valuation Approaches
BEAR MARKET
BULL MARKET
Value
• • •
Dividend Yield Price/BV Replacement Cost
BUBBLE MARKET
GARP
• • • •
Payback EV/EBIDTA P/E DCF
ENAM Securities
Momentum
• • • •
Technical Charts Reflexivity PE/G Option Value
August 2004
10
Valuation Measures – CASH FLOW IS THE ONLY REALITY DCF helps to make assumptions explicit;gives a good RANGE ¾ ¾ ¾ ¾
P/e ¾
Use probability – don’t fudge the discount rate! Factor in uncertainties and risks Terminal Value is the key – Is all the value residing there? Wider the Optimistic-Pessimistic range – lower the valuation!
P =d/(k-g)
=
d/e / (k-g)
d = dividend per share k = shareholder return expectation k = i + r + rp (inflation+real int+risk premium) g = growth in dividend per share
¾
Hence Importance of payouts and cash flows for better valuation
¾
Close approximation of P/E to ROE
Other Methods are all variants for validation ¾ ¾ ¾
EVA – Economic Value Added - Excess return over WACC quantified EVA = ROIC – (IC x WACC) CFROI – Another smart way to do a DCF
ENAM Securities
August 2004
11
MARGIN OF SAFETY Cash flow v/s Bond Valuations
Growth prospects
Gap between Perception and Reality
Knowledge v/s Popularity
Limited downside/ lots of upside
ENAM Securities
August 2004
12
UNDERSTAND “GOOD BUSINESSES”
THE CIRCLE OF COMPETENCE APPROACH
Manish Chokhani
September 2004
13
BUSINESSES APPRAISAL Think long and hard about cycles Life cycles Business cycles Think about sustainability and sources of advantage Think about external pressures on profitability Where does this business fit on a profitability distribution? The financial litmus tests Think about management and the majority partner
ENAM Securities
August 2004
14
Think of Cycles! Nature is cyclical, not linear!
Life Cycles
Business Cycles / Boom-Bust
Seasonality
Innovation / Schumpeter
Market Cycles
ENAM Securities
August 2004
15
LIFE CYCLE ANALYSIS
SALES
JUTE
SOFTWARE
TIME
ENAM Securities
August 2004
16
BUSINESS CYCLES
FMCG, SERVICES
INTERMEDIATES
CAPITAL GOODS CONSUMER DURABLES
ENAM Securities
August 2004
17
BOSTON CONSULTING GROUP MATRIX
SOURCES OF ADVANTAGE
MANY
FEW
EMERGING/ SMALL SCALE
COMMODITY
LOW
SPECIALISED/ OLIGOPOLIES
MONOPOLY/ CONSUMER FRANCHISE
SUSTABILITY OF ADVANTAGE
ENAM Securities
HIGH
August 2004
18
PORTER’S 5 FORCE ANALYSIS NEW ENTRANTS/ IMPORTS
SUPPLIERS
INTRA INDUSTRY RIVALRY
BUYERS
SUBSTITUTE PRODUCTS
ENAM Securities
August 2004
19
PROFITABILITY DISTRIBUTION BANK RATE
ROI
ENAM Securities
August 2004
20
THE FINANCIAL LITMUS Superior BUSINESSES ¾ ¾ ¾ ¾ ¾ ¾ ¾
Low asset requirements Low credit / inventory Many clients/ economic goodwill Defensible margins Pricing power ( inflation + ) Sustainable growth Free cash flows
Most other businesses ¾ ¾ ¾ ¾
Capital intensive Working capital intensive Want premium valuation, do not deserve it Likely to be cyclical valuations and themes
ENAM Securities
August 2004
21
Now lets talk Micro Focus Costs
Capital Efficiency
People Issues
“Slack”
ENAM Securities
August 2004
22
Costs Are you aware of implications of: ¾
Inappropriate Amortisation
¾
R&D
¾
Technology
¾
Marketing Requirements
¾
Training ; Leadership!
¾
UNIT COSTS/ measures
ENAM Securities
August 2004
23
Corporates have re-engineered costs Cost cutting in Cement Industry 100
(%)
75
1998
2004
1,200
900
50
Cost of Producing Cement (Rs/tonne)
25
Energy Consumption (Units/tonne)
110
90
Coal Consumption (kg/tonne)
200
130
1997
2004
RMC (tons per ton of Steel produced)
4.3
3.1
Energy Consumption (GCAL/TCS)
8.7
7.2
Labour Productivity (tons/Man years)
119
264
0 Cost of Producing Cement
Energy Consumption (Units/ton) 1998
250 200
Coal Consumption (kg/ton)
Source: ENAM Research
2003 2004
Cost cutting by TISCO (%)
150 100 50 0 RMC (tons per ton of Steel)
Energy Consumption (GCAL/TCS) 1997
Labour Productivity (tons/Man years)
Source: ENAM Research
2003 2004
ENAM Securities
August 2004
24
Corporates have right-sized Restructuring by Top 10 Corporates 400
(Rs.m)
(%)
12
300
9
200
6
Revenue (Rs bn)
100
3
Labour Force (nos)
0
0 1995 Revenue (LHS) Revenue/Person (RHS)
Revenue/Person (Rs m)
1995
2003
900
2,750
420,000
335,000
2.1
8.2
2003 Labour Force (LHS)
Right-sizing across sectors Company
Staff shed
Period (Yrs)
% of Labour Force
BHEL
20,000
7
30
Tata Motors
10,000
5
29
Mahindra & Mahindra
6,500
5
34
Bajaj Auto
7,800
6
37
Tisco
30,000
8
40
ACC
6,000
8
38
Source: ENAM Research
ENAM Securities
August 2004
25
Capital Efficiency Are you well focussed on: ¾
Asset Turns: Gross Block, Working Capital?
¾
Lean Assets: Owned v/s Rented
¾
Flexible Structures: Outsourcing
¾
Impact of M&A, Restructuring?
¾
People…
ENAM Securities
August 2004
26
Efficiency Saved India Inc. Peak Rate of Custom Duty (%) 80
160
60 G rowth (% )
120 80 40
40 20 0 -20 -40
0
1996
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
1997
1998
Sales
1999
2000
PBIT
2001
2002
2003
PBT
Working Capital / Sales (%) 12
25 20 G rowth (% )
10 8 6
15 10 5 0 -5
4 1996
1997
1998
1999
2000
2001
2002
1996
2003
1997
Cap Emp
1998
1999
2000
Borrowing
2001
2002
2003
GFA
Source: CMIE
ENAM Securities
August 2004
27
Industry consolidation helped profitability Market share (%) Sector
1997
2004
Aluminium
Top 3 players
77
100
Tyre
Top 5 players
72
85
Cement
Top 5 groups
32
61
Paper
Top 5 players
32
38
Petrochemicals
Top player
45
70
Media
No. of players
Multiple
3 large
Telecom
No. of players
Multiple
4 large
Source: ENAM Research
ENAM Securities
August 2004
28
People Issues How is the company managed? ¾
Lifetime Employment?
¾
How does it Hire? Train? Retain? Fire?
¾
How does it build skills? LEADERS?
¾
Are they Commandos? Soldiers? Mercenaries?
Succession Plans?
Empowerment?
ENAM Securities
August 2004
29
Focus on Micro, Company specific factors How is Product or Service Quality? ¾ Germany/Japan/China v/s India, v/s competition
How is Cost & Capital Efficiency? ¾ Frugality as a mindset v/s “professionally managed”
What are their Value Systems? ¾ Sugar in the milk How is their Service to the Customer? ¾ The “goodwill” earned ENAM Securities
August 2004
30
Watch Out for Hidden Bombs Conflict of Interest Structures ¾
Pvt Businesses
¾
Inter Party relationships
¾
Split Ownerships
¾
Loans & Advances
Off balance Sheet Libailities ¾
Unfunded Pensions
¾
Litigations
¾
Family Settlements
¾
… and many more creative reasons why CAVEAT EMPTOR
ENAM Securities
August 2004
31
CHOOSING “BUSINESS PARTNERS” Integrity / track record
Ability (not just lucky)
Understanding of key issues
Ambition tempered by reality
Commonality of objectives
Orientation towards minority
ENAM Securities
August 2004
32
MACRO FACTORS TO BEAR IN MIND
Manish Chokhani
September 2004
33
Do you have Macro Pointers in Mind? Do you have a point of view about:
¾
Politics as it affects the business
¾
Economics as it affects the business
¾
Demographic Trends
¾
What are Capital Markets Signalling?
¾
Each powerful trend can have disruptive or tidal wave effects on any business
ENAM Securities
August 2004
34
Politics Geo Politics affects addressable markets, terms of trade, cost of doing
business… ¾
Effect of SAFTA, ASEAN, WTO/GATT
¾
Risk Premium/Opportunity of Pakistan
¾
Emerging US-India axis ; NAM, ML
¾
Opportunities in “emerging” economies
¾
Outcry against/trends favouring outsourcing
ENAM Securities
August 2004
35
Outsourcing to India : Brewing Trouble Company
Outsourcing for
IT Services Infosys Tata Consultancy Wipro
Goldman Sachs, Aetna, Northwestern Mutual, Am Ex, DHL, Verizon GE, Honda, UBS, HSBC Transco, HP- Compacq, Nortel, General Motors, Cisco, Sony
ITES Mphasis BFL Spectramind
Citi Group, Acenture, Auto Zone, Capital One Dell, American Express, Capital One
Pharmaceuticals Cipla Shashun Chemicals Lupin Laboratories
Ivax, Watson Pharma, Eon Labs Eli Lily, GSK Pharma Apotex, APP, Watson Pharma
Engineering Bharat Forge Tata Motors Moser Baer Essel Propack
Meritor, Caterpillar, Toyota, Ford, FAW (China) Rover Imation, BASF P&G, Unilever, Colgate
ENAM Securities
August 2004
36
Increasing FDI reflects “openness”
Cost Savings (Production Hubs)
Research Services
Domestic Market Opportunity
Early entrants
Recent entrants
GE, Citi IT, State Farm Amex, Bank Am IBM, HP
Texas Instruments, GE
Coke, Pepsi Ford, Hyundai LG, Samsung Lafarge Port of Singapore, P&O Morgan Stanley, Templeton
JP Morgan, HSBC, Prudential Accenture, CGE&Y Delphi Teva
Microsoft, Sun, Intel GSK, Pfizer, Eli Lily COVANCE
McDonalds, Pizza Hut Honda, Toyota Nokia Michelin Dubai Port, Maersk HSBC MF, Duestche MF
Likely entrants BPOs in throngs Deloitte Consulting Generic Pharma Cos
A number of CROs
Fidelity MF, ABN MF
Source: ENAM Research
ENAM Securities
August 2004
37
Confident Indians going global Pharma
Large Groups ¾ ¾ ¾ ¾ ¾
Tata -Tetley, Daewoo , Rover tie-up RIL - FLAG undersea cable,Trevira (Polyester firm in Germany) Birlas - AV Cell (Canada), Copper mines (Aus), Carbon Black (China) etc Sterlite - Copper Mines in Australia, Listing on LSE ONGC - Stake in: Sakhalin oil fields (Russia), GNOOC oil fields (Sudan)
¾
¾
Wochardt-Esparma (Germany) Ranbaxy- RPG Aventis (France) Dr. Reddy’s - Meridian Healthcare (UK),Trigenesis Therapeutics (USA) Cadila – French operations of Alpharma (USA)
IT ¾ ¾
Wipro - Nervewire, Utilities consulting division of AMS (USA) HCL Tech - BT’s call centre (Ireland)
Others
Auto Parts ¾
¾ ¾ ¾
Sundaram Fasteners - Gear casting business of Dana Spicer (UK), Plant in China Bharat Forge – Dana Corp Forging business (UK), Forging business of CDP (Germany)
¾ ¾ ¾ ¾
Asian Paints - Berger International (Singapore) Essel Propack - Propack Holdings (Switzerland),Arista Tubes (UK) Moser Baer - Mmore International (Holland) Atlas Cycle, Ajanta Clocks - Plants in China
ENAM Securities
August 2004
38
Macro Economic Indicators Global and local economic cycles
Capital costs ¾
Interest rates, Currency rates, Inflation
¾
Cost pressures: RMC, Tarriffs, etc
Social Costs / development
Competition is a given
ENAM Securities
August 2004
39
Eg: Complete Reversal in India Forex reserves
60
Forex reserves (US$ bn)
80
20
Interest rates
60
0
40
100
17 16 15 14 13 12 11 10
03-04
02-03
01-02
00-01
99-00
Invisibles (LHS)
Capital Receipts (LHS)
Total Reserve (RHS)
(%)
80 60 40 20 0
Jul-04
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
(%)
Trade Balance (LHS)
External debt
Interest rates & Re. depreciation (%)
98-99
0 97-98
-40 96-97
20 95-96
-20 94-95
External debt
Rupee/ US$ (LHS)
100
40
Re. depreciation
15 12 9 6 3 0 -3 -6
120
(US$ bn)
96-97
97-98
98-99
99-00
00-01
2-Jan
3-Feb
`03-04
Foreign Exchange Reserves as % of external debt External Debt (% of GDP)
Prime Lending Rate (RHS)
Source: RBI, CMIE
ENAM Securities
August 2004
40
Soft interest rate bias nearing an end.. Room to grow advances vs investments
Inflation making a comeback? 15
50 Investment Deposit Ratio
(%)
12
45
9 6
40
3
Forex reserves at a peak 120,000
15
(US$m)
100,000
12
80,000
Jan-04 Jul-04
Jan-03 Jul-03
Jan-02 Jul-02
Jan-01 Jul-01
Jan-00 Jul-00
Jan-99 Jul-99
Jan-98 Jul-98
Jan-97 Jul-97
Jan-96 Jul-96
Jul-04
Jan-04
Jul-03
Jan-03
Jul-02
Jan-02
Jul-01
Jan-01
Jul-00
Jan-00
Jul-99
Jan-99
Jan-95 Jul-95
0
35
Rupee volatility on the cards (%)
(%)
17 16
9
15
03-04
01-02
00-01
99-00
98-99
97-98
96-97
95-96
94-95
93-94
02-03
Rupee/ US$ (LHS)
Jul-04
10 2003
-6
0
2002
11 2001
-3 2000
20,000
1999
12
1998
0
1997
40,000
1996
13
1995
3
1994
14
1993
6
60,000
Prime Lending Rate (RHS)
Source: Blloomberg, RBI, CMIE
ENAM Securities
August 2004
41
Understand Market Cycles – II
ENAM Securities
August 2004
42
US Interest Rates through cycles
ENAM Securities
August 2004
43
Rising commodity prices reflect USD weakness 320
CRB All Commodity Index
Steel
Gold
All Commodities
Gold AM Fix Prices
450
550
MB HR Steel Prices
(USD/ troy ounce)
300 400
450
350
350
300
250
250 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04
150 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04
280 260 240 220 200 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04
Alumina
Non-ferrous Metals 2,000
Aluminium
Europe Alumina Spot Price
London Metals Exchange Index 500
Aluminium Primary OP SPT 2,000
(USD)
1,800
400
1,800
1,600
300
1,600
1,400
200
1,400
1,200
100
1,200
1,000 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04
0 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04
(USD)
1,000 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04
Source: Bloomberg
ENAM Securities
August 2004
44
Consumption trends across Asia
ENAM Securities
August 2004
45
Government P&L A/c AS IT REALLY IS Centre’s P&L (2004-05E) Particulars
% of GDP
Total Receipts
11
-- Revenue Receipts
10
-- Capital Receipts
1
Total Expenditure
15
-- Interest
4
-- Defence & Subsidies
4
-- Transfer to States
3
-- Infrastructure & Capital Expenditure
1
-- Administrative, etc.
3
Deficit
4
Total debt (Internal + External)
64
Source: Government of India Interim Budget, ENAM Research
Deficit of 5-6% of GDP misleading! Receipts only 11% ENAM Securities
August 2004
46
States have joined the party! 1,400
Aggregate fiscal deficit of states (Rs.bn)
(%)
5.5
Source: RBI
Fiscal Deficit (LHS)
% of GDP (RHS)
FY04 E
2.0 FY03
0 FY02
2.5 FY01
200 FY00
3.0
FY99
400
FY98
3.5
FY97
600
FY96
4.0
FY95
800
FY94
4.5
FY93
1,000
FY92
5.0
FY91
1,200
Power subsidies (% of state fiscal deficit) State
(%)
Madhya Pradesh
74
Andhra Pradesh
51
Gujarat
65
Karnataka
65
Maharashtra
28
Tamil Nadu
40
Source: World Bank
ENAM Securities
August 2004
47
Profligate Governments…weaken us all Crowds out private sector Upward pressure on interest rates Rupee depreciation Making us “poorer”, costlier, less competitive> poorer! Total Central & State debt as a percentage of GDP 80%
Debt/GDP
70% 60% 50%
ENAM Securities
2000-01
1998-99
2002-03 RE
Source: RBI
1996-97
1994-95
1992-93
1990-91
1988-89
1986-87
1984-85
1982-83
1980-81
40%
August 2004
48
Demographics Income Shifts
Age Group Shifts
Social Shifts
ENAM Securities
August 2004
49
Affordability has risen dramatically Falling prices and low interest rates have made products easily affordable 1994
2003
Increase in affordability (x)
6
3
2.0
1,690
1,250
1.4
21" Color TV
18,000
11,000
1.6
Washing Machine
18,000
13,000
1.4
Refrigerator (165 Ltr)
12,000
8,000
1.5
Cordless Telephone
4,000
2,500
1.6
25,000
4,000
6.3
Housing (Ratio of Hsng Price/Annual Inc.) (x)
Housing EMI (Rs.) 10-year repayment / Rs.100,000 / month Cost of (in Rs.)
Cellular Phone Source: ENAM Research
All this has led to a boom in retail lending and consumption ENAM Securities
August 2004
50
Wealth effect adds to consumer power 15 12
Strong rupee and low interest rates (%)
(%)
17 16
Rupee/ US$ (LHS)
Prime Lending Rate (RHS)
Gold: 20,000 tonnes = $100bn gain 450
Jul-04
10
2003
-6
2002
11
2001
-3
2000
12
1999
0
1998
13
1997
3
1996
14
1995
6
1994
15
1993
9
Market Cap gain = $75bn 7,000
(USD/troy ounce) 6,000
400
5,000 350 4,000 300
3,000
250 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
2,000 2002
2003
2004
Source: Bloomberg
ENAM Securities
August 2004
51
Income demographics = Secular consumption growth TV: 1998 - 70m, 2003 98m, 2007 - 130m
600
2 Wheelers: 1998 - 28m, 2003 - 46m, 2007 - 80m
500
Population (m)
Cable TV Sub.: 1998 - 25m, 2003 - 48mn, 2007 - 80m
Basic Telephone: 1998 – 22m, 2003 – 44m, 2007 - 65m Tax Payers: 1998 - 10mn, 2003 - 40m, 2007 - 80m
400
Cellular Subscriber: 1998 - 1mn, 2003 - 14m, 2007 - 95m
300 Home Mortgage Outstanding: 1998 – Rs145bn, 2003 – Rs478bn, 2007 – Rs1367bn
200 Cars: 1998 - 3m, 2003 - 6m, 2007 - 9m
100 2007
0 100
1000
2003 2000
3000
Annual income (US$) Source: ENAM Research
1998
1998 4000 >5000
2003
Value growth far exceeds volume growth
2007
ENAM Securities
Volumes
Value
Two Wheelers
12%
20%
Cars
13%
20%
CAGR (1994 – 2003)
August 2004
52
Consumers are under-leveraged
800
75%
(USD bn)
700
70% 54%
600
60%
53%
500
50%
34%
400
40%
300
30% 17%
200 100
80%
20% 10%
2%
0
0% India
Thailand
Malaysia
Total consumer loans outstanding
Taiwan
Korea
USA
Consumer loans outstanding / GDP (%)
Source: ICICI Bank
ENAM Securities
August 2004
53
Age profile points to secular growth in demand Increasing consuming/producing age group
World Age Population Projected To Decline
Total 1,211.6m
1,200 Total 1,012.4m Overall growth 19.7%
800 246.8m
Growth 34.4%
331.6m
The rising consumer class
400
0 2001 0 to 19
20 to 34
2013 35 to 60 & above
Source: Census 1991
ENAM Securities
August 2004
54
BRICs : The growth engine of the world
Source: Goldman Sachs BRICs Report
ENAM Securities
August 2004
55
Caveats Leadership!
Macro economic stability
Infrastructure and Institutions
Openness
Education (and Health)
ENAM Securities
August 2004
56
Political Contradictions reflect Social flux
CPM Muslim League
CONGRESS
RJD BSP SP DMK
NCP JD Samta party
BJP Telgu Desam AIADMK BJD
Shiv Sena
National Conference
ENAM Securities
August 2004
57
Capital Markets Be aware of shifts ¾
In sectors
¾
In Leadership
¾
In Valuations?
Where we are in the cycle?
ENAM Securities
August 2004
58
Flat markets cloud sectoral shifts! Sectors (% of Nifty) 1998
1999
2000
2001
2002
2003
(July) 2004
8
6
5
7
8
10
12
Commodities
42
32
22
23
25
34
37
Cyclicals
19
15
8
7
9
9
15
FMCG
19
27
16
19
21
15
9
Pharma
4
5
7
6
8
7
6
TMT
8
15
43
38
29
25
21
100
100
100
100
100
100
100
Banking
Total Source: CMIE
Share of corporate profit / GDP Share of sector profit % v/s Share of market cap Should always be at the back of the mind ! ENAM Securities
August 2004
59
Similarly, be aware of relative country valuations High and Stable RoE (EVA +ve), Size and Scalability, Variety and Growth P/E (x)
Interest
RoE (%)
EPS Growth (%)
2002
2003
2004
rates (%)
2002
2003
2004
2002
2003
2004
China
15
14
13
NA
12
14
15
14
11
6
India
18
15
13
4.5
18
21
24
34
13
16*
8
9
8
9.0
27
25
27
53
(7)
10
Korea
11
12
9
3.9
15
14
18
(5)
(7)
33
Malaysia
20
16
15
3.1
10
12
13
14
20
9
Phillipines
26
17
13
7.8
6
9
11
(23)
50
30
Singapore
25
18
16
0.8
7
9
10
(19)
37
12
Taiwan
43
20
15
1.1
5
11
15
(9)
124
29
Thailand
16
12
11
1.3
16
21
23
86
35
9
Indonesia
Source: The Economist, Citi group. * Currently witnessing upgradation and growth to be sustained in 2005
ENAM Securities
August 2004
60
Churn in Top 20 reflects underlying reality shifts Company Name Oil & Natural Gas Corpn. Ltd. Hindustan Lever Ltd. Indian Oil Corpn. Ltd. Mahanagar Telephone Nigam Ltd Reliance Industries Ltd. I T C Ltd. State Bank Of India Hindustan Petroleum Corpn. Ltd. G A I L (India) Ltd. Bharat Heavy Electricals Ltd. Tata Motors Ltd. Bajaj Auto Ltd Bharat Petroleum Corpn. Ltd. Industrial Development Bank of India Hindalco Industries Larsen & Toubro Tata Iron & Steel Co. Ltd. Castrol India Steel Authority Of India Ltd. National Aluminium Co Total Market Cap
1998 Mkt Cap (Rs. bn) 402 278 272 163 158 153 129 110 106 86 77 73 63 63 56 51 50 46 43 39 2,418
Company Name
As ofJune2004 Mkt Cap (Rs. bn)
Oil & Natural Gas Corpn. Ltd. Reliance Industries Ltd. Indian Oil Corpn. Ltd. Infosys Technologies Ltd. Wipro Ltd Hindustan Lever Ltd. Bharti Tele-Ventures Ltd. State Bank Of India I T C Ltd. I C I C I Bank Ltd Ranbaxy Laboratories Ltd Housing Development Finance Corpn. Ltd G A I L (India) Ltd. Tata Motors Ltd. Bharat Petroleum Corpn. Ltd. Steel Authority Of India Ltd. Hindustan Petroleum Corpn. Ltd. Maruti Udyog Ltd Bharat Heavy Electricals Ltd. Tata Iron & Steel Co. Ltd. Total Market Cap
927 625 464 354 354 286 278 253 222 194 187 151 144 141 131 122 121 119 113 110 5,270
Source CMIE Note: Names in red indicate exits, in blue indicate new entrants
ENAM Securities
August 2004
61
… and the Index hides more than it shows!
1,200
10,000
800
5,000
400
0
0
Wipro
Satyam
Ranbaxy Cipla
Dr Reddy's Sun Pharma
2004
2003
2002
Banking 1,200 1,000 800 600 400 200 0
Media & Auto 6,000 4,000 2,000 0
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
15,000
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
1,600
Infosys
2001
Pharmaceuticals
20,000
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
IT
Sensex (RHS)
HDFC
HDFC Bank
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Indexed Sensex (LHS)
2000
1999
1998
1997
1996
1995
6,500 6,000 5,500 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1994
200 180 160 140 120 100 80 60 40 20 0
Zee
Hero Honda
All Figures indexed 100= price in 1994
ENAM Securities
August 2004
62
Always disaggregate the market
Sources of Advantage
Many
Emerging Business
Global Outsourcers
Telecom Media Retail
IT Pharmaceuticals Engineering
Global Commodities
Domestic Demographics
Oil Metals
FMCG Auto Banking
Low Sustainability of Advantage Low
High
Note : Companies may change characteristics over time! ENAM Securities
August 2004
63
PSS companies outperform markets over time! RIL Vs Sensex
Infosys Vs Sensex
HDFC Vs Sensex
10,000
0
0
Reliance Industries (LHS)
400 300 200
Sensex (RHS)
Infosys
Sensex (RHS)
HLL Vs Sensex
HDFC
2004
2003
2002
2001
2000
1999
1998
1997
1996
1994
1995
0
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
100 1994
2004
100 2003
20,000
2002
200
2001
30,000
2000
300
Sensex (RHS)
MICO Vs Sensex
600
500
500
400
400
300
300
HLL
Sensex (RHS)
ENAM Securities
MICO
2004
2003
2002
2001
2000
1999
1998
1996
1995
2004
2003
2002
2001
2000
1999
1998
1997
0 1996
0 1995
100 1994
100
1994
200
200
1997
1999
500
1998
40,000
1997
400
1996
600
1995
50,000
1994
500
Sensex (RHS)
August 2004
64
Multibaggers of the last 10 years Price as on 14/7/94
Price on 15/7/04
CAGR (%)
3
326
62
13
1443
60
6
525
56
Sun Pharmaceuticals
21
351
33
Hero Honda
33
460
30
Cipla
41
231
19
214
976
16
30
126
15
HDFC
161
550
13
Dr Reddy's
248
749
12
Satyam Computers Infosys Technologies Wipro
Ranbaxy Zee Telefilms
Source: Bloomberg; Adjusted for bonuses and stock splits; NIFTY constituents only
ENAM Securities
August 2004
65
Multibaggers since 9/11 : The REAL BSE-30! Company
Price as on
Price on
CAGR
15/7/04
11/9/01
(%)
Oriental Bank
240
34
92
Mahindra & Mahindra
476
68
Price as on
Price on
CAGR
15/7/04
11/9/01
(%)
National Aluminium Co Ltd
139
48
43
91
HPCL
288
111
38
33
5
87
Tata Tea
386
150
37
Tata Motors
407
75
76
Hero Honda
460
183
36
ONGC
654
136
69
Tata Power
254
101
36
Shipping Corp Of India Ltd
117
24
68
Sun Pharma
351
141
35
Tata Iron & Steel Co Ltd
327
84
57
Ranbaxy
976
415
33
BHEL
527
135
57
ICICI Bank
238
103
32
IPCL
157
40
57
SBI Bank
431
187
32
Grasim
952
274
51
Glaxo
603
282
29
GAIL
182
53
51
Indian Hotels
370
175
28
Reliance Energy
571
176
48
BPCL
314
159
26
ABB
730
225
48
Satyam Computers
326
175
23
Bajaj Auto
841
266
47
ACC
232
128
22
Tata Chemicals Limited
121
39
45
Gujarat Ambuja
275
155
21
SAIL
Company
Source: Bloomberg; Adjusted for bonuses and stock splits; NIFTY constituents only
ENAM Securities
August 2004
66
AOL, Time Warner merger – A lesson to remember
Stock Price of Time Warner: now AOL Time Warner
100
(US$)
80
Announcement of Merger
60 40 20
ENAM Securities
2004
2003
2002
2001
2000
1999
1998
1997
1996
0
August 2004
67
Lets Summarise TILL THIS POINT Value is created through an interplay of: ¾
Macro Trends
¾
Micro Focus
¾
Subtler Nuances
¾
Business Leaders must constantly be on top of these ; good leaders and investors continuously value these.
¾
Real winners understand this and play to create enduring value.
May run out of luck, never out of wisdom ! ENAM Securities
August 2004
68
NOW: BUYER BEHAVIOUR
Manish Chokhani
September 2004
69
Understand Fund Manager Behaviour! Approaches to Portfolio Construction ¾
Top Down v/s Bottom Up
¾
Value v/s Growth
¾
Think of Where we are in the Market Cycle!
Client Requirements ¾
Match Needs, Requirements and Abilities
Your OWN Portfolio?
ENAM Securities
August 2004
70
Elements of Valuation Top Down
Value
Growth
Momentum
Bottom Up
ENAM Securities
August 2004
71
KYC and Thyself!
Asset Allocation
Relative
Pvt. Banks / Pension Funds / Macro Funds/ Fund of Funds
Country Allocation Regional Funds Sector Allocation Country Funds/ Mutual Funds
Large Cap Small Cap
Absolute
ENAM Securities
HNW / PMS / Absolute Return Funds/ “Hedge” Funds
August 2004
72
Key Success Factors : Match Your Pitch! • Institutional Marketing • Deployment of Large Pools • Capital Preservation
CAPITAL UBS, GAM GSIC, ADIA
Regional Funds
• Marketing Scale & Scope • Economist
PICTET JANUS GMO LLYOD GEORGE
Country Funds
• Fund Manager • Technician
HSBC, , CIBC, JF ICICI, HDFC, UTI
• Stock Picker
SLOANE ABERDEEN ARISAIG EMIC OPPENHEIMER
Pvt. Bankers / Pension Funds / Macro Funds
Absolute Return Funds
ENAM Securities
August 2004
73
Decomposing Approaches
Top Down
Asset Class
• • • • •
Equities Bonds Currencies Property Commodities – Oil – Precious metals – Natural Resources
Country
• • •
Developed Markets Emerging Markets Regional markets
ENAM Securities
Sector
• • • • • •
FMCG Pharma Services TMT Manufacturing Cyclicals
August 2004
74
Valuation – MegaCap bias
Category 30 Largest Remaining S&P 500
1980 9 9 9
ENAM Securities
1990 15 14 15
1999 46 23 30
August 2004
75
Some Lessons from History Japan V/s UK in 1944 Korea V/s India in 1950 Singapore!
Hero Honda V/s Kinetic Honda Bharti V/s IDEA Infosys V/s HCL HDFC Bank V/s SBI
There is NO trade-off between Top- Down and Bottom up ENAM Securities
August 2004
76
Valuation Approaches based on Sentiment Swings Value
Growth
Momentum
•
Illiquid
•
Institutional Favorites
•
Max Volume
•
Misunderstood
•
UVG Stories
•
News Flow
•
Hated/Uncovered
•
Imagine it!
•
Volatile
•
Appraised value
•
DCF or Option value
•
Technicals
In Reality, there is no distinction. Growth and Momentum are LongTerm/Short Term Value catalysts ENAM Securities
August 2004
77
Think Client Management WHO is the CLIENT?
WHAT does he want from you?
HOW are you shaping his expectations & mindset?
WHY should he stick to you?
“Most clients would rather have their fund manager fail conventionally than succeed unconventionally.”
— Marc Faber ENAM Securities
August 2004
78
Decompose | Decompose | Decompose Sectors
Large Cap
Medium Cap
Small Cap
Total
FMCG Pharma Banks IT Telecom Media Engg Autos Commodities Total
ENAM Securities
August 2004
79
SUMMARY UNDERSTAND YOURSELF OBJECTIVELY ¾
Everybody is not Schumacher or Tendulkar: TAKE HELP, BE SELF AWARE
UNDERSTAND THE INVESTMENT LANDSCAPE ¾
A grip of Macro, Micro, Accounting and Street Smartness is REQUIRED
UNDERSTAND THE UNDERLYING INVESTMENT ¾
What will make it tick or explode?
UNDERSTAND THE MARKET PARTICIPANTS ¾
Who are you playing against and how does he play?
FOLLOW BASIC PRINCIPLES AND STICK TO THEM!
BE HAPPY!
ENAM Securities
August 2004
80
How is your Portfolio Tilted? OWN INTERESTS
CLIENT TIME
PROFESSIONAL COLLEGUES
FAMILY
WORK COLLEAGUES
BUILD A CONSCIOUS LIFESTYLE !
ENAM Securities
August 2004
81
HEAVEN AND HELL
AMERICAN SALARY
AMERICAN WIFE
ENGLISH HOME
ENGLISH CAR
GERMAN CAR
GERMAN FOOD
CHINESE FOOD
CHINESE HOME
INDIAN WIFE
INDIAN SALARY
YOUR REAL WEALTH = YOUR HAPPINESS = YOUR STATE OF MIND = WITHIN YOU
ENAM Securities
August 2004
82
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