Saturday, August 30, 2008


Since FMCG companies are expected to be major beneficiaries of the growth in rural incomes it makes sense to focus on those companies which look to conciously increase their rural footprint. ITC is one such company in my opinion. In this post, I shall concentrate on the business prospects only and ignore the financials.

ITC operates in various segments and has a diversified product profile.
1. Hotels
Personal Care
Education and Stationery
Safety Matches
3. Paper Boards and Packaging
4. Information Technology
5. Agri Business
Agri commodities
Leaf Tobacco

Out of the above businesses, FMCG and Agri Business would provide a major thrust in the rural space thus benefiting form the agricultural and rural boom.

The FMCG business has products in various segments and at various price points providing a vast choice to consumers from every strata of society. The distribution reach is already there due to their cigarette network with pan wallas and other small vendors. Therefore ITC can effectively leverage this reach to enhance the availability of its other FMCG products like soaps, personal care products, Bingo and other food products. Again with increase in income, consumers in the rural space could migrate from beedis to cigarettes providing additional revenues.

The Company's 'e-Choupal' initiative is enabling Indian agriculture significantly enhance its competitiveness by empowering Indian farmers through the power of the Internet. This transformational strategy, which has already become the subject matter of a case study at Harvard Business School, is expected to progressively create for ITC a huge rural distribution infrastructure, significantly enhancing the Company's marketing reach. e-Choupal reduces transaction costs through elimination of middle men and ensures that farmers get optimum realisations for their produce. This link with the farmers is beneficial for ITC, since it provides a continuous stable source of inputs for its various businesses like agri exports where it is a major player and its foods business like biscuits, chips and atta. Also ITC's retail stores get a captive buyer base from this segment of farmers who come to e-Choupal to transact their business.

The above factors put ITC in an enviable position to capitalise on the boom in the agricultural sector and since the stock is reasonably priced at current levels, the case for investment into it is all the more stronger. Investors with a 3 year horizon can look to buy the stock.

Thursday, August 28, 2008


Sectors having a dependence on agriculture could be outperformers to watch out for. With the rise in prices of global agro commodities, the Indian farmer tends to benefit to a large extent. This increased income in the rural hands could play a large role in driving consumption patterns across the space. Some of the sectors which stand to gain from this effect are:

  1. FMCG : FMCG companies could benefit from increased spending patterns resulting from higher disposable incomes in the hands of the rural population. Investors would do well to concentrate on those companies which have invested large resources to establish their presence in rural areas.
  2. Agrochemicals : A natural beneficiary of increased crop yields would be companies engaged in crop protection in the form of insecticides and pesticides. Also it would be interesting to watch out for stocks of businesses which produce genetically modified seeds which are resistant to various pests and provide higher farm yields.
  3. Fertilizers : Fertilizers, which have not participated in the bull market could be major beneficiaries because of several factors now turning in their favour. The new fertilizer policy gives an incentive to companies which look to increase capacity. Again the recent news of the Government intending to provide subsidies to companies in the form of cash rather than bonds augurs well for this sector, because the bonds had then to be sold by the fertiliser companies at a discount. Then the expected gas from KG basin expected to commence by December 08 would reduce the dependence of these companies on expensive fuel.
  4. Banks : As consumption increases, so would the demand for loans and other financial products catering to the rural space. Banks having an established presence in these areas would stand to gain from the trend. PSU Banks look particularly attractive, considering their reach in remote places and their established network of branches.
  5. Logistics : As prices of agro commodities rise, so would the demand for storage and transportation of these with a view to minimizing losses resulting from lack of proper facilities for movement of these. With organized retail looking to expand their presence in the food and grocery business, logistic and cold chain providers would gain from an increased demand for their services.

In a future post I would discuss some of the dominant companies in each of the above sectors, which would stand to gain the most from the coming agri boom.

Tuesday, August 26, 2008


Infosys' takeover of Axon for approximately 3300 cr signifies a major change in mindset of India's best software company. This shift augurs well for shareholders of Infosys, since not only is it getting an increased presence in the European markets, it is also cementing its position in the field of business consulting.

The valuation also looks fair at 20 times Axon's last year earnings and less than 2 times revenues, the earnings yield works to 5 %. Considering that Axon has been growing its revenues at 65 % compounded for several years is the proverbial icing on the cake. If such high growth rates can be sustained and enhanced due to the takeover, the acquisition makes even more sense and could prove to be a real winner for Infosys.

Consider also that the acquisition is being funded entirely through reserves and not through additional debt or equity. This improves the quality of Infosys' earnings since it boosts income from operations at the cost of other income.

The greatest positive is that Infosys has clearly taken on a strategy of aggressively boosting its revenues and profits, if need be at the cost of margins. It heralds the beginning of the 2nd innings in the history of Infosys and with several factors like the exchange rate turning in its favour, Infosys looks like a great buy at current levels.

Monday, August 25, 2008


Traditionally, Indian investors seem to prefer real estate over equity for their investments. I think the genesis of this attitude lies in the fact that equity markets are volatile and its fluctuations are available to investors on a real time basis. However real estate prices are also prone to severe cuts, though they are not so apparent in the short term and lack some of the advantages which equity investments have to offer:

Real Estate investments are necessarily made for the long term. Except speculators, no retail investor considers real estate for investment for a time horizon of less than 5 years. Now if the same attitude was displayed towards equities, investors would be a far happier lot. If investors bought fundamentally sound stocks and ignored their gyrations, I am sure that after 5 years, they would have made better returns on their investments than in realty. The problem is that we tend to evaluate stock market returns on a daily basis, while we give our real estate investments a far longer leash.

One can book partial profits in an equity investment if it has performed beyond expectations and still hold some stock for future profits. This flexibility is missing in realty investments. Due to this even if one feels that prices have moved ahead of fundamentals, one either has to sell the entire property or not at all. Also if funds need to be raised in an emergency, one can liquidate equity only to the extent required while retaining the balance.

An investor can invest in equity with relatively smaller amounts whereas in the case of realty it is often one of the largest holdings in one's portfolio. An investor can make use of scientifically proven methods like SIP/STP to build wealth bit by bit over the long term.

Liquidity is not an issue with equity investments (at least among the large cap companies). One can liquidate his investments fast and in a transparent manner, usually receiving the proceeds within 5 to 7 days. Anyone who has the experience of trying to sell a property will know the range of valuations bandied about and the innumerable people surveying the property before the transaction actually materialises.

Once purchased equities require no maintenance, while society outgoings are often extremely high , particularly in newer constructions in metro cities. To counter this real estate can yield returns if the property is let out, but advantage would be set off in future when the stock lending and borrowing mechanism becomes a reality, whereby investors would receive "rent" on their securities which they intend to hold for the long term. The dividend accruing on equities is yet another plus.

Tax breaks are often cited as being the rationale behind investing in residential property. But when the property is sold long term capital gains tax needs to be paid. Though there are no tax breaks at the time of investments in the case of equities, any gains from equities held for more than 1 year are completely tax free.

Of course, the above arguments are not valid for a person buying a property for residential or business use, but are intended to provoke a thought process in someone looking to buy property from a purely investment angle.

Saturday, August 23, 2008


China won its first Olympic Gold in 1984. This also coincided with the point where their economy took off and reached its present heights. It has led me to wonder whether there is a relationship between excellence in sports and economic progress. If so, what message does this hold for India considering that they have just got their first individual gold medal in Beijing?

Does it indicate that this is the beginning of India's emergence as a sporting and economic super power? The ingredients all seem to be in place for this scenario playing out. It remains to be seen whether we manage to make the most of it or let the opportunity slip out of our hands yet again, as has happened so many times in the past.

In the Olympics as in life the difference between the winners and the also ran is often very small. So small that, bouts are decided on the basis of judges' decisions rather than outright victories on points. Races need computers to find which sportsperson got to the finish first. So also, when it comes to the question of economic progress India has demonstrated that it can manage to sustain GDP growth rates of 8 to 9% for a significant period of time. The real test lies in whether this can be upped to double digit levels. Though the gap between 9 and 10 may seem marginal, it could make all the difference when it comes to the effects on the ground level. This could be the difference between winning and losing.

One Gold and Two Bronzes may not seem like much to a country of India' size, but it could well be the catalyst to galvanize sleeping sports authorities into action. It could give a much needed confidence booster to our sports heroes who battle it out in spite of miserable living and training conditions. Similarly Indian corporate have gained the confidence to take on the world in spite of battling with an indifferent bureaucracy and inconsistent Government policies. Just as scientific training methods could propel Indian sports into a different league, access to cheap capital and proper infrastructure could make India Inc. world beaters.

Therefore, all our stake holders need to sit up and take notice, lest another opportunity pass us by. Conditions on the ground have to improve in every sphere, be it better nourishment and facilities for sportspersons, better means of farming for farmers, better infrastructure for businesses and more. The talent is already in place. Some changes are already visible. We need to give it that push so that it attains critical mass which, as China has demonstrated, is a prerequisite for success in any sphere.

Monday, August 18, 2008


Software stocks are suddenly back in the limelight on the back of a stronger Dollar. As the dollar appreciates against major currencies and the Indian Rupee, it could provide a major boost to the bottom lines of IT companies. After lying low for more than 18 months, they could now emerge as the leaders of the next rally.

IT companies have already managed to take the US recession in their stride, as they have demonstrated by their Q1 results. They are expanding their market base by diversifying into Europe and Asia. India is also emerging as an important market with Infosys CEO claiming that margins are better on Government projects. Again their focus on products rather than contracts could become a source of steady revenue for these companies. Already Infosys' Finacle (Product for Banking services) is contributing more than 3% of its revenues.

The challenge for Indian IT companies is in moving away from a linear growth model where revenue growth is linked to growth in headcount. Revenue per employee for TCS is $ 51,320, Infosys is

$ 45,800 and for Wipro it is $ 41310. As against this global majors like Accenture have revenue per employee of $ 130,200. Therefore there is immense potential for the big 3 of Indian Software to substantially improve revenue without significantly raising the number of employees, by focussing on greater value addition.

Newer verticals like remote infrastructure management and bioinformatics hold great potential. These segments presently contribute very little to revenues, but going forward they could emerge as

major growth drivers, besides reducing dependence on traditional sectors like BFSI and telecom. Also the majors are trying to get into business consulting , which is a high margin business, though with limited success till now.

According to a report by research firm Gartner," Tata Consultancy Services (TCS), Infosys Technologies and Wipro Technologies will emerge as the nextgen IT service megavendors and threaten the reign of the current global majors—IBM, EDS and Accenture. These (Indian) vendors are increasingly being considered for strategic service deals, and will augment or, in some cases, replace today's acknowledged megavendors by revenue in this space by 2011.Top Indian IT firms have outperformed the megavendors by almost a 3:1 margin in growth rates, a Gartner report said. "The emerging megavendors have more than doubled their revenue in a four-year period, with the 2007 revenue being 2.6 times the 2004 revenue."

On the financials side Indian IT companies are now valued at PE ratios in the early 20'. These are historically low valuations notwithstanding their ethical managements and their business models. In fact, the PE ratios are similar to those witnessed during 2001 the worst of markets for these stocks, which indicates that markets are viewing the future prospects of these business as worse than those during the major crises like Y2K or 9/11 attacks.

To sum up, all the fundamental factors point to IT stocks being a great place to be in for an investor having a 1 year investment horizon. Of course, the clouds and worries are very much there, but without these, the stocks would not have been available at such low prices.

Friday, August 15, 2008


The Union Cabinet on Thursday approved the recommendations of the Sixth Pay Commission thereby paving the way for higher wages for government employees.

"The cabinet has approved the pay commission report," Law Minister Hansraj Bhardwaj told reporters after a cabinet meeting.

The pay panel made its recommendations earlier in 2008 for salary increases for central government workers costing Rs 12561 crore ($2.9 billion) for the fiscal year 2008/09, plus Rs 18060 crore rupees in backpay to January 2006.

The cabinet set up a team of top civil servants to examine the recommendations.

Some analysts say the wage increases could derail govt's moves to tidy up its public finances and widen the federal fiscal deficit, which the government aims to limit to 2.5 per cent of gross domestic product in 2008/09, down from 3.1 per cent in 2007/08.

Another government panel said on Wednesday the budget deficit target for 2008/09 would be exceeded and serious fiscal risks were arising from growing off-budget liabilities estimated at 5 per cent of GDP.

The pay round comes roughly once a decade and the previous one in 1997 raised salaries for federal employees by nearly 40 percent, prompting many state governments to follow suit and blowing the combined state and federal deficit to nearly 10 per cent of GDP.

India is battling inflation of 12 per cent but economists said the pay round was unlikely to give prices a significant boost.


1. Minimum wages to be Rs 10,000 per month.

2. 45 lakh employees to benefit from this hike which would take effect from January 2006

3 It will be paid in two installments: 40 % in FY 09 and rest 60% in FY 10.


Source : The Economic Times


The Negatives:

An already stretched Fiscal Deficit could worsen further, giving rise to downgrades by international rating agencies. However the Government could try to manage the situation by means like increased revenue from spectrum sale to telecom companies and by divestment of shares in PSU's to the public. Both these measures are on the anvil and could help the Government in bridging the gap between revenue and expenditure.


Inflation fires could be further stoked by more disposable income in the hands of the people. This should be more worrisome to a Government already battling high inflation and could lead to further tightening of liquidity by RBI.


The Positives:

More money in the hands of the people would result in more spending in malls and retail outlets, thereby giving a push to slagging demand in consumer durables and two wheelers.


Quality of employees in the public sector and administration would hopefully improve, because of higher pay packets. Public sector units would be able to better incentivise their employees and could hope to retain outperformers. The armed forces, which are facing a shortage of middle level personnel would be better placed to hire capable junior officers and other staff.


Monday, August 11, 2008


In my last post I had discussed the fundamental factors which an investor looks at in choosing a stock for investment. Apart from these an investor would do well to look at some intangibles which one cannot quantify in numbers, but play an equally important part in an investment decision. This theory was first propounded by Philip Fisher and further by Peter Lynch. Some of the factors to look at are:

  1. How well the company's products are being received in the markets. This can be gauged by visiting some of its retail outlets or talking to retailers and dealers which stock the company's products. This can be useful in determining whether there is a strong brand loyalty which could prove invaluable in case the industry, in which the business operates, faces a downturn.
  2. The R & D being carried out by the company. The annual report of the company gives the amount spent by it on R & D. Investors need to find out what percentage of sales is invested in R & D and also whether it is giving results. In case of Pharmaceutical companies, discovery of new drug molecules or new drug delivery mechanisms could herald huge future profits. In other cases investors could look at changes in products developed by the company and whether it is being innovative in introducing newer products or alternate packaging and if the company is keeping pace with competitors new launches.
  3. Goodwill of the business among stake holders. Investors need to see whether the company is fair in its dealings with suppliers, dealers, employees and consumers and minority shareholders. Some businesses do extremely well on the financials, but are known for shady dealings and have a poor reputation in the markets. Investors would do well to stay away from such companies because the integrity of the management itself is suspect and therefore the excellent figures being reported may be manipulated.
  4. Scalability of the business. Investors should look at the line of business and determine whether it holds the potential to scale up in terms of volumes. If, for instance, a business has excellent financials and scores well on other factors, but the nature of the business is such that it has a limited potential for expansion due to the fact that the market for its products is not very large, then investors would do well to not invest in the stock.
  5. Board of Directors of the company. This could provide an important clue as to the authenticity of the published figures. If the company has eminent public figures on its board of directors, an investor is reassured that the probability of accounting jugglery is minimal.

A company may be assessed on the above factors by studying its annual report, talking to various stakeholders like its suppliers, retailers and employees. An important source of information would be the ex-employees of the organization who would be more willing to give out factual details. If a detailed examination is conducted based on the above factors coupled with the financials, the probability of losses for an investor would be low and could yield multi baggers in the long run.


Monday, August 4, 2008


Value investing is an important tool in the arsenal of a fundamental investor. In simple terms it means buying a stock for much less than what an investor thinks it is worth. But how does a value investor decide the worth of the company under study? Given below is an explanation of some basic parameters to decide whether a business is undervalued or not. They are

  1. PE ratio. This is the ratio of the market price of a stock to its earnings per share. It also the number of years the business will take to realise earnings equivalent to the current market price based on current earnings. For instance a business having a PE ratio of 10 would take 10 years before its earnings behind one share equals the market price of one share. This, of course, assumes that the company will keep on earning the same amount of profits every year. PE ratio, therefore indicates how expensive a company is based on current earnings. This is a useful indicator to compare companies in a similar line of business. Lower the PE ratio, cheaper is the stock. Naturally, PE comparisons cannot be carried out across industries, because some industries are given higher PE ratios due to their business dynamics.
  2. Market Capitalisation. The market cap of a business is the number of shares outstanding multiplied by the price of each share. In short the market cap denotes the notional cost of buying the entire shares of the company. This parameter is useful in judging the relative attractiveness of a business as compared to other businesses in similar lines based on what value the market has assigned that business by way of market cap. For example a business in the consumer durable sector may be valued at significantly lower market cap than another consumer durable company. This would make it a value buy based on market capitalisation. For more on how to value a business based on market cap refer here.
  3. Book Value. Book value is value of assets of the company behind every share. It represents the valuation of the stock based on its underlying assets rather than its earnings. If the market price of a stock is quoting at or below its book value, it means that the market does not think that the prospects of that company are bright and often indicates that the company that has become insolvent. However if the market price is below book value due to factors of a temporary nature, then this fact can be looked at by investors as a value proposition and can be used to buy into the stock with a holding perspective till the negative factors turn around.
  4. Dividends. A value investor uses the dividend payouts as an important factor to determine undervaluation in a stock. If the dividend yield of a stock (i.e. the dividend per share divided by the market price) is high it indicates a higher degree of safety in times of adverse market conditions. Also important is to see what proportion of its earnings a company pays out in the form of dividends. For more on use of dividend yields referhere
  5. Net current assets. Net current assets (NCA) are current assets minus current liabilities. If a business has high net current assets and the markets are assigning it a market cap near or below its NCA, it indicates a high degree of undervaluation. According to Benjamin Graham, the pioneer of value investing, investors cannot often go wrong in buying a business valued at or below NCA.

    The above are basic factors used by value investors in determining the relative underperformance of a stock. Of course, an investor also needs to go into the reasons as to why the market is giving a significantly lower valuation to a stock or an entire industry and whether it is justified in doing so before taking an investment decision.

Saturday, August 2, 2008


Contrarian investing pays if you are a patient investor. We have numerous examples of how stocks which are out of favour with investors, but are fundamentally sound, have given handsome returns once the reasons behind their underperformance ease off.

Consider capital goods stocks in 2003. Stocks like BEML, BHEL, L&T and many others were available at a fraction of today’s prices. Investors’ who had the foresight and vision to invest in such stocks at that point would be having 15, 20 or even 100 baggers on their hands. The logic behind investing in such companies would have been that they were high quality companies backed by good managements and having solid assets on their books. They had pedigree, market standing and years of experience. It was simply a case for investing and simply waiting for the investment cycle to turn around.

And what did investors do? I know people who got tired of holding on to such stocks and sold off only to see markets reviving and stocks reaching the stratosphere. My argument is that for earning the highest returns, an investor needs to identify stocks which have been hammered to their lows, analyzing whether such low valuations are justified given the history, management quality, nature of the business, quality of assets, size of the business and future prospects. Then if the investor is convinced that the business is not going to disappear any time soon and simply awaits a change in the business cycle to see better days, go ahead and invest in it. Market volatility may yet take the stock price lower, but one should have conviction that the buy is backed by solid reasoning and not panic. Rather the fall could be used to buy more.

All evidence points to the fact that the world’s best and richest investors like Warren Buffet, Charlie Munger, Mohnish Pabrai, Rakesh Jhunjhunwala etc. have this philosophy at the core of their investment strategy. Each may his own variations on stock selection and valuation matrices, but the core strategy remains buy low and sell high. Contrarian investing is the only way you can follow this strategy. This strategy need not be applied only to a particular industry or stock, but to asset classes or markets as a whole. As described in a previous post, right now income and Gilt funds seem to be logical examples of contra investment as applied to debt investments.