This document discusses investment opportunities in Indian companies that have the potential for absolute returns of 20% or more over the year. It outlines screening criteria focused on factors like market capitalization, growth rates, return on equity, leverage, and valuation to identify companies with strong franchises, consistent cash generation, and reasonable valuations considering their growth potential. 15 stocks are identified that meet these criteria. The document also analyzes how foreign institutional investors are positioned in India and key sectors, finding they have underinvested given the potential election impacts but that India will overcome short-term disruptions. India is also assessed as having a relative sweet spot compared to other emerging markets in terms of growth, valuations, and the presence of high-quality

1. Probable absolute return opportunities ( Executable )
Tails we gain, heads we don’t loose too much

2. The focus remains on the ‘ Process ‘ …….NOT RESULTS
Due credit to both past and future
Core principles remain as usual
Leadership character | Franchisee | MOAT | Large market opportunity | Non-regulated | GARP


Size :: Market Cap. > 5000crs
Coverage :: Having FY14-16 estimates
Non-FINANCIALs
FINANCIALs

FY14-16 Growth ::
Ebitda >15% & PAT >12%

FY14-16 Growth ::
Op. Profit >15% & PAT >15%

Cash flow ( Growth with cash generation )
FY12-14 Op. Cash Flow / Ebitda >40%
FY14-16 Op. Cash Flow / Ebitda >40%

RoE % ( RoE well above Cost of Capital )
FY12-14 RoE > 15%
FY14-16 RoE > 1x FY12-14’s RoE

RoE % ( RoE well above Cost of Capital )
FY12-14 RoE > 20%
FY14-16 RoE > 0.7x FY12-14’s RoE

Price vs value ( GARP )
PEG <1.2 ( On Equity value )

Leverage ( No stress, but not necessarily debt free )
FY14 Net Debt / Ebitda < 5x

Price vs value ( GARP )
PEG <1.5 ( On Enterprise value )

3. 15 Stocks that stand out ….probable absolute return potential of 20%+ over the year
Several stocks coming in the list stood to get eliminated based on : Margin of safety in terms of entry price or Already pricing in the positives ( E.g. Select IT, Pharma stocks ) etc
 Stocks with high level of govt influence are eliminated.
 Certain hurdle rates like RoE or possible change in RoE ( E.g. MSIL, RIL etc )

4. The single most important and independent variable “ GROWTH “

5. Implied ‘ Valuation , Return Ratios & Cash –Conversion ‘ from assumed Growth
Interpretation of ‘ PEG a measure of GARP ‘
( Conventionally measured on Equity value, we have used PEG on Enterprise-Value for being conservative )
A PEG of 1x implied, the current valuation ratio prices in the next 2yrs of growth.
However high quality, growth franchisee’s will implicitly have a high PEG due their sustainability and moat.

6. Returns over Time

7. Non-Financials :: (I) Capital History

8. Non-Financials :: (II) Growth ~ through B-Cycles

9. Non-Financials :: (III) Cost Structures through B-Cycles

10. Non-Financials :: (IV) Solid Franchisee

11. Non-Financials :: (V) Capacity Creation
Large Capex without significant leverage, maintaining pay-outs

12. Non-Financials :: (VI) Forex Quotient

13. Non-Financials :: (VII) 9m / Half’yrly Results
Reasonably well positioned post recent results

14. Non-Financials :: (VIII) Do the companies create true ‘ value ‘
consistently +ive EVA spread reflects well on the business character
Interpretation of ‘ Dissecting the CMP ‘
Theoretically a company has a life of 20-25 years , thus 4-5% of its value comes from a single year.
Higher the “ FY14 –to- FY16 “ component, higher the margin of safety , implying that markets have lesser faith on long-term
growth sustainability of the company, thus a higher proportion of the company’s value comes from near-term visible growth.

15. With all humility, the Process yielded 10 stocks on 28th Aug’13 ,
communicated then
These and others emphasized separately with supported workings

16. How are broad expectations aligned as of now…….

17. Broad Growth vs
Valuation
expectation
Sensex trades at a
reasonable 1212.5x FY16 PEx (
2yr fwd ) with
growth
expectations of 1517% for both
Ebitda & PAT
However
estimates do build
in a marginal
recovery, thus that
will be tested in
due course.

18. BSE 100 Growth Decomposition
To Note :: 57% of the incremental Ebitda & Pat is being built to come from IT, Pvt. Banks & Energy having Index Wt. 41%.

19. Ownership
FII’s smartly positioned towards election outcome

20. How are FII’s
Positioned across
Sectors
KEY Point ::
76-77% of FII
Portfolio is linked to
“ Domestic
Consumer + Global
Spends “ ….which
are relatively
insulated from govt
interferences and
local industrial
issues.
FII’s are significantly
UW Domestic
Capex & Domestic
Industrials which
are directly
influenced by
Macros.

21. How are FII’s
Positioned across
stocks
KEY Point ::
68% of Portfolio
invested in 20
stocks
ITC & LT are
significant UW’s

22. Key Long-Only
Active Funds in
India
Value of Holding
$75bn
~4.6lac crs @ 62

23. FII Flows - Monthly
India will find a way out for markets
irrespective of election outcome

24. Net – Net
> FII’s are largely underinvested to the impact of elections on the
domestic economy as of now….
> Even if the election does result in a disappointing outcome ( God
forbid ), India will find its way out in a few months….

25. Emerging Market
An ariel view from an FII’s eye

26. INDIA’s Relative Positioning vs EM Peers :: Size , Float , Liquidity & Sector Composition
“ MSCI Emerging Market Index “ is the most significant EM benchmark for global investors and commands over $400bn AUM.
India still has mere 6.3% wt. in index lower than even SA & Taiwan and just a notch above Russia.
Source : Bloomberg ( 15th Feb.’14 )

27. INDIA’s Relative Sweet-spot vs EM Peers :: Growth, Valuations, RoE, Structure
High RoE / Structural Cos. = Consumer Disc. + Consumer Staples + Healthcare + Technology
( India the only country in EM space to have high quality, structural plays with high RoE in the 4 focus sectors.
South Korea dominated by a single co. i.e Samsung Elec. Being 25% of Index & of low growth due to very high base.
Taiwan having low growth and low RoE’s ; China being dominated by several Internet stocks in the Technology space.
Brazil even though having a high Consumer sector weight, has no estimates available on bloomberg
Source : Bloomberg ( 15th Feb.’14 )

28. Indian Cos vs. EM Peers
in 4 key groups : CD,CS,HC & IT

29. Consumer Discretionary :: EM Investible Peers
Hurdle rates :: Estimates available on bloomberg, Avg. Daily Turnover >=$5mn ( 8 of 33 cos Indian )
Share of India :: MCap. 24%, FF MCap. 22%, Liquidity 20%.
India distinctly dominates with High RoE / High growth Cos.

30. Consumer Staples :: EM Investible Peers
Hurdle rates :: Estimates available on bloomberg, Avg. Daily Turnover >=$1mn ( 8 of 23 cos Indian )
Share of India :: MCap. 54%, FF MCap. 50%, Liquidity 40%.
India distinctly dominates with High RoE / High growth Cos.

31. Technology:: EM Investible Peers
Hurdle rates :: Estimates available on bloomberg, Avg. Daily Turnover >=$5mn ( 4 of 22 cos Indian ) – Samsung 35% MCap. Share of peers.
Share of India ( Excluding Samsung ) :: MCap. 38%, FF MCap. 24%, Liquidity 17%.
India distinctly dominates with High RoE / High growth Cos.

32. Healthcare :: EM Investible Peers
Hurdle rates :: Estimates available on bloomberg, Avg. Daily Turnover >=$5mn ( 4 of 22 cos Indian ) – Samsung 35% Mcap. Share of peers.
Share of India :: MCap. 74%, FF MCap. 73%, Liquidity 70%.
India distinctly dominates with High RoE / High growth Cos.

33. For an FII, India is a ‘ Hobson’s choice ‘ of high quality
growth companies in EM