Beyond Bottom Fishing - PPFAS - Nov08

6th November 2008
Index
Preamble Page 3
Sector Surmises
Buffet Meal : FMCG Sector Page 5
Think about IT : Information Technology Page 13
Ferris Wheels : Offshore, Shipbuilding, et.al. Page 23
Migration from "Splurging to Savings" : Two Wheeler Industry Page 37
Other people's money : Banking Sector Page 43
Blue Ocean Formation : Telecom Industry Page 49
The Convenient Shift : Sectoral Rotation Page 53
Resurrection Weapon : Defense Industry Page 57
For the Inquisitionists
Dividend Yield Plays Page 61
Cigar Butts Page 62
Cash Rich Companies Page 63
High Leverage Companies Page 64
Annexure
Companies in Brief Page 66

Preamble
The synchronous carnage in the financial markets the world over is reflective of not just the extent of
globalization that we have achieved, but also the price we pay for having the US currency as a standard benchmark for
world trade. While the global & local regulators have done well with their rescue efforts in averting a Japan-like
depression, things do not change automatically for the good. We perceive that every bear market, while the extent of
fall gets steeper, the timeline is also reducing. There is so much of Instant Gratification in everything. You have one of the
biggest & the most wide-spread slow-down and it would be surprising if the revival happens anytime soon. Infact, the
money pumped in by the governments may go towards adding to the surpluses. Many bottom fishers have gone active on
even cyclicals, justifying bottomed out valuations and more importantly the case that the markets move ahead of the
business cycles. But how much ahead, when most of these companies (like real estate, cement, steel, etc.) are still to
report a meaningful drop in the earnings as the cycle turns. Clearly the easy come – easy go(instant gratification)
syndrome is visible not just in the sharp price movements, but also in the timeline.
One wonders if research makes any sense, more particularly after such an extent of damage. You have
companies who have seen their market capitalization erode to levels even, below the cash on the books or their annual
earnings. Still investors in these scrips loose money by every passing day. Just as a friend from another broking firm says,
'from these levels, anything & everything will go up in the longer run. Research is futile. Just track the liquidity
movement.’ We beg to dissent. Afterall, choice is empowering.
To give some idea of what we have to say in this report..

Why investment in select FMCG at higher multiples makes sense over many cheap alternatives (cigar butts) and more
so after the markets have already been battered down, & the sector has played its part well, as a defensive bet?
Why a number of sectors with seemingly high growth prospects and cheap valuations are Big AVOIDs ? Plus the
behavioral biases attached to these BlackJacks.
Options to play on the theme of Business Cycles & Sector Rotations including some positive bias businesses with a
policy/political acceleration
Our perspectives on the IT & Banking sectors in the post turmoil scenario
Impressions on the Blue Oceans forming up in Telecom space
Plus we have included some useful screeners, which may help into filter, select and abstain from some more
propositions.
We have tried to bring in some different perspectives to both investing & industries. Something, more than Just
Bottom Fishing ! Trust you find this useful & worth of your time.
Parag Parikh Financial Advisory Services Limited 3

Sector Surmises
Buffett Meal Jigar Valia | jigar@ppfas.com
Deepti Singh | deepti@ppfas.com
FMCG Sector
Munger's Three Great Lessons of Investing.
1.“A great business at a fair price is superior to a fair business at a great price.”
2.“A great business at a fair price is superior to a fair business at a great price.”
3. “A great business at a fair price is superior to a fair business at a great price.”
We know that FMCG & Pharma make the best defensive investments and is aptly
reflected in the share price performance in the current downfall.
Index Jan 08 Oct 08 Change % Chg

Auto 5204.73 3099.38 -2105.35 -40.45
Bankex 11557.13 5578.15 -5978.98 -51.73
BSE Realty Index 12093.27 2545.64 -9547.63 -78.95
Capital Goods 18474.53 7975.5 -10499.03 -56.83
Consumer Durables 5933.77 2266.13 -3667.64 -61.81
FMCG Sector 2294.65 1922.07 -372.58 -16.24
Healthcare Sector 4005.76 3195.16 -810.6 -20.24
Metal 17553.09 6230.34 -11322.75 -64.51
Oil & Gas 12533.06 6877.5 -5655.56 -45.13
Power Index 4344.41 1812.67 -2531.74 -58.28
S&P CNX NIFTY 5756.35 3210.22 -2546.13 -44.23
Sensitive Index 19325.65 10549.65 -8776 -45.41
Tech 3582.73 2209.16 -1373.57 -38.34
Source: PPFAS Research
Wonder why investing in the relatively less impacted FMCG companies versus the
many highly-battered high-growth stocks-trading at cheap valuations makes sense ?
Some businesses are inherently better than the others. An easy way to identify these..:
Low Capital Intensity x High Margin = Fantastic Returns on Capital
A number of industries fit the bill on the above profiling. Engineering, Capital Goods,
FMCG, IT are some of the examples. But many of these like engineering & capital
goods are cyclical in nature. Even IT is slightly cyclical, except for India, thanks to the
outsourcing story. So to find whats better than the above..
Low Capital Intensity x High Margin x Sustainability = Fantastic Businesses.
Many FMCG companies make it to the list. Consumer monopolies with brand assets
and sustained growth, when available at attractive valuations make great investments.

Buffett Meal
Particulars GCPL Marico Pidilite

CMP 101.45 49.70 97.80
Dividend Yield 3.94% 1.32% 1.79%
P/E 14.29 17.89 14.40
Initial Rate of Return (EPS/Price) 7.00% 5.59% 6.94%
“The secret that Warren has figured out is that excellent businesses that
benefit from a consumer monopoly, that can consistently earn high rates of
returns on shareholders' equity, are often bargain buys even at what seem
to be very high price-to-earnings ratios.”
- Buffettology
Summary Financials GCPL 2002 2003 2004 2005 2006 2007 2008 CAGR
Net Sales 458.6 470.1 489.6 562.7 699.7 953.2 1102.6 15.7%
Operating Profit 71.1 81.8 88.4 106.9 150 182.3 218.5 20.6%
OPM 15.5% 17.4% 18.1% 19.0% 21.4% 19.1% 19.8%
PAT 42 53.3 54.9 89.6 121.3 144 159.24 24.9%
NPM 9.2% 11.3% 11.2% 15.9% 17.3% 15.1% 14.4%
EPS 1.9 2.4 2.9 4 5.4 6.4 7.1 24.6%
Networth 53.2 45.5 42.4 49.9 78.7 122 171.6 21.6%
Capital Employed 78.3 68 74.2 63.9 154 303.6 367.6 29.4%
Dividend 1.38 2.00 2.25 3.00 3.50 3.75 4.00 19.5%
Payout 72.4% 83.3% 77.6% 75.0% 64.8% 58.6% 56.3%
ROE 78.9% 117.1% 129.5% 179.6% 154.1% 118.0% 92.8%
ROE (1-Payout) 21.8% 19.5% 29.0% 44.9% 54.2% 48.9% 40.5%
Marico 2002 2003 2004 2005 2006 2007 2008 CAGR

Net Sales 695.7 774.4 888.5 1007.0 1143.9 1556.9 1906.7 18.3%
Operating Profit 74.8 75.8 74.4 85.9 139.7 198.6 246.2 22.0%
OPM 10.8% 9.8% 8.4% 8.5% 12.2% 12.8% 12.9%
PAT 50.1 56.2 59.0 69.3 86.9 112.9 169.2 22.5%
NPM 7.2% 7.3% 6.6% 6.9% 7.6% 7.3% 8.9%
EPS 0.9 1.9 1.0 1.2 1.4 1.9 2.8 21.5%
Networth 197.2 193.0 184.2 216.9 261.5 192.4 314.6 8.1%
Capital Employed 202.2 208.1 197.2 282.6 501.1 443.4 672.7 22.2%
Dividend 0.1 0.6 0.9 0.5 0.6 0.7 0.7 29.3%
Payout 16.2% 28.4% 86.2% 44.8% 43.5% 35.3% 23.6%
ROE 25.4% 29.1% 32.0% 32.0% 33.2% 58.7% 53.8%
ROE (1-Payout) 21.3% 20.9% 4.4% 17.7% 18.8% 37.9% 41.1%
Pidilite 2002 2003 2004 2005 2006 2007 2008 CAGR

Net Sales 491.7 574.3 653.8 772.3 917.0 1248.2 1708.2 23.1%
Operating Profit 94.5 110.0 110.0 124.3 140.4 166.2 241.1 16.9%
OPM 19.2% 19.2% 16.8% 16.1% 15.3% 13.3% 14.1%
PAT 54.0 56.9 61.0 75.4 87.8 111.8 173.0 21.4%
NPM 11.0% 9.9% 9.3% 9.8% 9.6% 9.0% 10.1%
EPS 2.1 2.3 2.4 3.0 3.5 4.4 6.8 21.2%
Networth 233.1 306.0 314.9 361.5 413.3 480.6 619.8 17.7%
Capital Employed 305.3 346.2 401.2 453.5 501.6 660.6 1189.0 25.4%
Dividend 0.7 0.8 0.8 1.0 1.3 1.5 1.8 16.5%
Payout 32.7% 31.9% 32.9% 33.2% 35.8% 33.9% 25.8%
ROE 23.2% 18.6% 19.4% 20.9% 21.2% 23.3% 27.9%
ROE (1-Payout) 15.6% 12.7% 13.0% 13.9% 13.6% 15.4% 20.7%

Buffett Meal
Observe that all the three companies have had an EPS CAGR of over 21-25% over
the past 6 years. Now for whether such a growth rate is sustainable, one may
consider the following facets :
Past performance – The near, medium & longer term past performance of all these
companies all indicate a robust and somewhat consistent growth trend.
Take a guess on normalized inflation rate plus some population growth and maybe
even some per capita increase in consumption.
These reputed branded companies with strong distribution networks tend to grow at
a faster pace as compared to competition.
All these 3 companies are mid-size companies with an awesome market standing.
Marico & Pidilite are pure consumer monopolies with their brands 'Parachute' &
'Fevicol' respectively. GCPL is a fraction of the size of HUL, but a close No 2 player,
with a track record of gradually increasing market share.
GCPL, Marico & Pidilite have generated RoEs of 93%, 54% & 21% respectively.
Dividend payout ratios have been 56%, 23% & 26%. Even the retained portion of the
ROE is as high as 41%, 41% & 21%, which basically goes back into the company to
generate future growth. This is actually what goes into compounding the year-on-
year growth for the companies.
So there are reasonable basis for these companies to maintain their healthy growth
rates in the coming years. We hypothetically estimate that these companies will
moderate their growth rates to 18% for the next 5 years & thereafter further moderate at
15% for the next 5 years. Also along with the growth rates, we expect the P/E ratios to
correct correspondingly.
Godrej Consumer Target Target 10 Yr.

Year EPS FY13 5 Yr. Payoff FY18
P/E Price Payoff
FY08 7.10 14.29 101.45 1-Apr-2008 (101.45) 1-Apr-2008 (101.45)
FY13 16.24 13.50 219.28 1-Apr-2013 219.28 1-Apr-2018 408.38
FY18 32.67 12.50 408.38 Return 16.66% Return 14.93%
Marico Industries Target Target 10 Yr.

P/E Price Payoff
FY08 2.78 17.89 49.70 1-Apr-2008 (49.70) 1-Apr-2008 (49.70)
FY13 6.36 16.50 104.86 1-Apr-2013 104.86 1-Apr-2018 191.73
FY18 12.78 15.00 191.73 Return 16.09% Return 14.45%
Pidilite Industries Target Target 10 Yr.

P/E Price Payoff
FY08 6.79 14.40 97.80 1-Apr-2008 (97.80) 1-Apr-2008 (97.80)
FY13 15.54 13.50 209.77 1-Apr-2013 209.77 1-Apr-2018 390.67
FY18 31.25 12.50 390.67 Return 16.48% Return 14.85%

Buffett Meal
So even if the growth rates moderate to 18% & 15% for next 2 five-year periods and
also assuming some correction in the target multiples, we see that each of these
investments provide over 15%+ five year CAGR TAX FREE returns. Plus some regular
dividends, which we have not factored in the payoffs. All this is despite the initial rate of
return of just 6.7%.
How best to apply this strategy ?
This strategy works best only from a long term perspective and that too when applied to
Excellent Businesses. The magic lies in the compounding.
“Understanding both the power of compounding and the

difficulty of getting it is the heart and soul of
understanding a lot of things.”
- Charles Munger
So how does the above investment strategy compare over another value investing
proposition with say a much higher 40-50% return. One, the effective return for most re-
rating candidates, depends on the period over which the re-rating is effected (if at all for
some). Second important aspect to consider is that of re-investing. In the relatively
longer run, your investment returns are governed not just by the returns on the re-rating
propositions, but also on the successes/failures of the future re-investment
endeavours.
This is where the Excellent businesses win over the mediocre. The power of
compounding works for them as they are saved from the re-investment efforts &
outcomes. Also, these are really not dependent on any re-ratings. So even at 15-20
P/E, select FMCGs are better value & growth play – the value being in the growth.

Buffett Meal
Companies Godrej Consumer Products Limited
Godrej Consumer Products Ltd. (GCPL) is a major player in the Indian FMCG market
with leadership in personal, hair, household and fabric care segments. Their centre of
attention is in providing customers with value goods required for meeting their daily
needs. They are among the largest marketer of toilet soaps in the country with leading
brands such as Cinthol , Evita, Crowning Glory, Vigil, Shikakai, Fairglow , Godrej No.1.
They are the leader in the hair colour category in India and have a vast product range.
At the market price of Rs. 101.45, the stock trades at 14x of FY09E earnings (on
expanded equities post rights). GCPL has higher margins versus many peers in the
FMCG industry and it is trading at a lower PE ratio when compared to other players. We
recommend buy at current levels with a long term visibility, to participate into the
expanding horizons of the Indian conglomerate.
Marico Industries Limited
Marico Industries has established itself as one of the leading consumer products and
services company in India. They focus on branded products and most of Marico's
brands dominate their categories with significant marketshare. Their key brands and
brand extensions include Parachute, Saffola, Kaya, Hair & Care, Mediker, Sundari
,Fiancee etc which have significant market shares in their product categories. The
company has demonstrated steady growth on both the topline and bottomline, over the
last 5 years they grew to a CAGR of 21% and 30% respectively. At the current market
price of Rs. 49.7, the stock trades cheap at 16x of FY09 earnings.
Pidilite Industries Limited
Pidilite Industries is a prime example of a consumer monopoly in the Indian listed

space. It is a leader in the field of consumer adhesives and sealants. Its flagship brand
– Fevicol – is a prime example of branding an adhesive. The aspect that works in
Pidilite's favour is that its portfolio is stacked with a formidable array of brands. Pidilite
has achieved consistent sales and earnings growth for the last 10 years, with ROCE in
excess of 20%. In the last 4 years total income has grown at a CAGR of 30.29%,
operating profit has grown at a CAGR of 25% and bottomline has grown at a CAGR of
32%. At the market price of Rs. 97.80, the stock is a strong value pick at 14x FY9E
earnings.

Buffett Meal
GCPL : BUY
Earnings Statement Balance Sheet

Particulars (Rs. Mn.) FY06 FY07 FY08 FY09E Particulars (Rs. Mn.) FY06 FY07 FY08 FY09E
Total Revenues 6,997.2 9,532.3 11,025.7 13,045.9 Equity Capital 225.8 225.8 225.8 258.1
- Growth (%) 24.4% 36.2% 15.7% 18.3% Reserves 561.0 994.1 1,489.8 5,986.8
Total Expenditure 5,570.0 7,735.4 8,880.7 10516.3 Shareholders Funds 786.8 1,220.0 1,715.6 6,244.9
Operating Profit 1,427.2 1,796.9 2,145.0 2,529.6 Borrowed Funds 687.2 1,736.1 1,871.0 500.0
Other Income 73.1 26.5 40.3 54.4 Deferred Tax Liability 65.7 79.8 89.1 89.1
EBITDA 1,500.3 1,823.4 2,185.3 2,584.0 Total Liabilities 1,539.7 3,035.9 3,675.7 6,834.0
- Growth (%) 40.4% 21.5% 19.8% 18.2% Fixed Assets 849.6 1,992.1 2,399.1 2,536.3
Depreciation 114.7 142.1 181.7 307.0 Goodwill 851.4 885.7 956.0 956.0
EBIT 1,385.6 1,681.3 2,003.6 2,276.9 Investments 10.1 0.1 0.1 669.1
Interest 64.7 96.3 128.7 148.4 Current Assets
PBT 1,320.8 1,585.0 1,874.9 2,128.5 Inventory 1,004.7 1,352.3 1,915.6 2,251.8
Tax 107.8 195.4 282.5 319.3 Sundry Debtors 303.3 483.2 509.6 714.8
PAT Before EI 1,213.0 1,389.7 1,592.4 1,809.3 Loans & Advances 142.8 464.8 667.7 789.3
- Growth (%) 35.4% 14.6% 14.6% 13.6% Cash & Bank Balance 263.4 474.9 425.9 2,427.2
Extra-ordinary Items 0.0 50.6 0.0 0.0 Current Liabilities
Reported PAT 1,213.0 1,440.3 1,592.4 1,809.3 Sundry Creditors 1,787.3 2,520.0 2,904.5 3,216.8
Provisions 98.1 97.3 322.4 322.4
Ratio Analysis Net Current Assets (171.3) 158.1 291.8 2,644.0
Particulars (Rs. Mn.) FY06 FY07 FY08 FY09E Miscellaneous Expenditure 0.0 0.0 28.7 28.7
OPM (%) 20.4% 18.9% 19.5% 19.4% Total Assets 1,539.7 3,035.9 3,675.7 6,834.0
EBITDA (%) 21.4% 19.1% 19.8% 19.8%
PBIT (%) 19.8% 17.6% 18.2% 17.5% Cash Flow
PAT (%) 17.3% 14.6% 14.4% 13.9% Particulars (Rs. Mn.) FY06 FY07 FY08 FY09E
Interest Cover (x) 21.4 17.5 15.6 15.3 Opening Cash & Bank 89.7 263.4 474.9 425.9
EPS (Rs.) 5.4 6.2 7.1 7.0 Profit After Tax 1,213.0 1,440.3 1,592.4 1,809.3
P/E (x) 18.9 16.5 14.4 14.5 Invt Income (73.1) (26.5) (40.3) (54.4)
P/BV (x) 29.1 18.8 13.6 4.2 Interest Paid 64.7 96.3 128.7 148.4
BVPS (Rs.) 3.5 5.4 7.5 24.1 Misc. Exp W/Off 0.0 0.0 (28.7) 0.0
Market Cap (Rs. Mn.) 22,911.9 22,911.9 22,911.9 26,185.0 Depreciation 114.7 142.1 181.7 307.0
M Cap/Sales (x) 3.3 2.4 2.1 2.0 Deferred Taxation (13.8) 13.1 9.2 0.0
EV (Rs. Mn.) 23,325.6 24,173.0 24,356.9 23,588.6 Others 85.9 (27.7) (33.3) 0.1
EV/EBITDA (x) 15.5 13.3 11.1 9.1 Change in Working Cap (29.8) (117.8) (182.8) (350.8)
EV/Sales (x) 3.3 2.5 2.2 1.8 CF - Operating Activities 1,361.8 1,519.7 1,626.9 1,859.6
ROCE (%) 94.0% 56.9% 56.3% 33.9% Change in Fixed Assets (36.0) (1,255.9) (555.4) (444.2)
RONW (%) 154.2% 113.9% 94.4% 29.1% Change in Goodwill (851.4) (34.3) (70.3) 0.0
Debt/Equity Ratio (x) 0.9 1.4 1.1 0.1 Change in Investments (10.1) 10.0 0.0 (669.0)
Inventory T/o Days 52.4 51.8 63.4 63.0 Investment Income 73.1 26.5 40.3 54.4
Debtors T/o Days 15.8 18.5 16.9 20.0 CF - Investing Activities (824.4) (1,253.7) (585.4) (1,058.8)
Advances T/o Days 7.4 17.8 22.1 22.1 Increase in Equity (23.5) (33.0) 2.0 3,968.4
Creditors T/o Days 93.2 96.5 96.2 90.0 Changes in Borrowings 625.9 1,048.9 134.9 (1,371.0)
Working Cap T/o Days (8.9) 6.1 9.7 74.0 Interest Paid (64.7) (96.3) (128.7) (148.4)
Fixed Assets T/o (Gross) 4.0 3.5 3.8 3.5 Dividend Paid (901.3) (974.1) (1,098.8) (1,248.4)
DPS (Rs.) 3.5 3.8 4.2 4.2 CF - Financing Activities (363.6) (54.5) (1,090.5) 1,200.6
Dividend Payout (%) 65.2% 60.9% 60.0% 60.0% Net Change in Cash 173.8 211.5 (49.1) 2,001.3
Dividend Yield (%) 3.4% 3.7% 4.2% 4.1% Closing Cash & Bank 263.4 474.9 425.9 2,427.2

Buffett Meal
Marico : BUY

Particulars (Rs Mn.) FY06 FY07 FY08 FY09E Particulars (Rs Mn.) FY06 FY07 FY08 FY09E
- Growth (%) 13.0% 36.1% 22.5% 15.0% Reserves 2,034.8 1,314.7 2,537.2 3,856.5
Total Expenditure 9,997.6 13,443.3 16,603.4 19,240.9 Shareholders Funds 2,614.8 1,923.7 3,146.2 4,465.5
Operating Profit 1,441.8 2,125.9 2,463.5 2,688.6 Minority Interest - - 1.2 2.5
Other Income 35.4 101.6 66.8 232.0 Borrowed Funds 2,396.5 2,509.7 3,579.4 3,579.4
EBITDA 1,477.2 2,227.5 2,530.3 2,920.5 Deferred Tax Liability 82.8 - 1,151.5 - 981.7 - 981.7
- Growth (%) 64.5% 50.8% 13.6% 15.4% Total Liabilities 5,094.1 3,281.9 5,745.1 7,065.7
Depreciation 446.7 520.6 308.6 288.7 Fixed Assets 3,813.0 1,654.4 2,573.1 2,667.1
EBIT 1,030.5 1,706.9 2,221.7 2,631.9 Goodwill 16.7 449.5 842.4 842.4
Interest 50.5 206.1 276.6 276.6 Investments 184.7 0.1 0.1 0.1
PBT 980.0 1,500.8 1,945.1 2,355.3 Current Assets
Tax 111.2 371.9 359.5 339.8 Inventory 1,322.9 2,214.7 2,604.6 2,944.0
PAT Before MI 868.8 1,128.9 1,585.6 2,015.5 Sundry Debtors 515.3 642.6 862.7 1,021.4
Minority Interest 0.0 0.0 1.0 1.3 Loans & Advances 528.8 716.6 1,060.9 1,060.9
PAT After MI 868.8 1,128.9 1,584.6 2,014.2 Cash & Bank Balance 414.6 427.3 752.8 1,796.2
- Growth (%) 24.7% 29.9% 40.4% 27.1% Current Liabilities
Extra-ordinary Items 0.0 0.0 106.1 0.0 Sundry Creditors 1,498.3 2,677.2 2,559.6 2,944.0
Reported PAT 868.8 1,128.9 1,478.5 2,014.2 Provisions 206.1 147.2 391.9 322.4
Net Current Assets 1,077.2 1,176.8 2,329.5 3,556.1
Ratio Analysis Misc. Expenditure 2.5 1.2 - -
Particulars FY06 FY07 FY08 FY09E Total Assets 5,094.1 3,282.0 5,745.1 7,065.7
OPM (%) 12.6% 13.7% 12.9% 12.3%
EBITDA (%) 12.9% 14.3% 13.3% 13.3% Cash Flow
PBIT (%) 9.0% 11.0% 11.7% 12.0% Particulars (Rs Mn.) FY06 FY07 FY08 FY09E
PAT (%) 7.6% 7.3% 8.3% 9.2% Opening Cash & Bank 338.1 414.6 427.3 752.8
Interest Cover (x) 20.4 8.3 8.0 9.5 Profit After Tax 868.8 1,128.9 1,478.5 2,014.2
EPS (Rs.) 1.5 1.9 2.6 3.3 Invt Income (35.4) (101.6) (66.8) (232.0)
P/E (x) 33.2 26.8 19.1 15.0 Interest Paid 50.5 206.1 276.6 276.6
P/BV (x) 11.0 15.7 9.6 6.8 Misc. Exp W/Off 1.3 1.3 1.2 0.0
BVPS (Rs.) 4.5 3.2 5.2 7.3 Depreciation 446.7 520.6 308.6 288.7
Mcap (Rs. Mn.) 28,826.0 30,267.3 30,267.3 30,267.3 Deferred Taxation 31.9 158.1 202.1 0.0
M Cap/Sales (x) 2.5 1.9 1.6 1.4 Others (44.7) (4,677.7) 110.4 (0.0)
EV (Rs. Mn.) 30,623.2 32,349.6 33,093.8 32,050.4 Change in Working Cap 169.5 (86.9) (827.2) (183.2)
EV/EBITDA (x) 20.7 14.5 13.1 11.0 CF - Operating Activities 1,488.6 (2,851.2) 1,483.4 2,164.3
EV/Sales (x) 2.7 2.1 1.7 1.5 Change in Fixed Assets (2,778.7) 2,053.7 (1,159.4) (382.7)
ROCE (%) 20.6% 38.5% 33.0% 32.7% Change in Goodwill 0.0 (432.8) (392.9) 0.0
RONW (%) 33.3% 58.7% 50.4% 45.1% Change in Investments (60.5) 184.6 0.0 0.0
Debt/Equity Ratio (x) 0.9 1.3 1.1 0.8 Investment Income 35.4 101.6 66.8 232.0
Inventory T/o Days 42.2 51.9 49.9 49.0 CF - Investing Activities (2,803.8) 1,907.1 (1,485.5) (150.7)
Debtors T/o Days 16.4 15.1 16.5 17.0 Increase in Equity 0.0 1,513.9 0.0 0.0
Advances T/o Days 16.9 16.8 20.3 17.7 Changes in Borrowings 1,852.2 113.2 1,069.7 0.0
Creditors T/o Days 47.8 62.8 49.0 49.0 Change In Minority 0.0 0.0 1.2 1.3
Working Cap T/o Days 34.4 27.6 44.6 59.2 Interest Paid (50.5) (206.1) (276.6) (276.6)
Fixed Assets T/o (Gross) 2.4 5.6 5.4 4.8 Dividend Paid (410.0) (464.2) (466.7) (694.9)
DPS (Rs.) 0.6 0.6 0.7 1.0 CF - Financing Activities 1,391.7 956.8 327.6 (970.2)
Dividend Payout (%) 41.4% 34.6% 25.2% 30.0% Net Change in Cash 76.5 12.7 325.5 1,043.4
Dividend Yield (%) 1.2% 1.3% 1.3% 2.0% Closing Cash & Bank Bal 414.6 427.3 752.8 1,796.2

Buffett Meal
Pidilite : BUY

- Growth (%) 18.7% 36.1% 36.9% 26.6% Reserves 3,880.5 4,553.5 5,915.8 7,436.7
Operating Profit 1,403.8 1,661.5 2,411.2 3,070.0 Borrowed Funds 563.2 1,449.1 5,263.6 5,263.6
EBITDA 1,580.1 1,850.2 2,725.8 3,468.2 Minority Interest 14.7 15.2 12.7 15.0
- Growth (%) 17.6% 17.1% 47.3% 27.2% Total Liabilities 5,015.6 6,605.6 11,890.0 13,413.1
Depreciation 277.8 327.7 459.0 674.8 Fixed Assets 3,072.4 3,868.8 6,668.1 5,795.8
PBT 1,286.9 1,456.2 2,076.8 2,603.3 Inventory 1,558.1 2,213.7 2,988.3 3,790.9
Tax 405.9 340.4 358.0 650.8 Sundry Debtors 1,133.4 1,579.9 2,377.4 2,724.7
PAT Before MI 881.0 1,115.8 1,718.8 1,952.5 Loans & Advances 330.0 509.5 928.0 930.0
Share of P/L in Asso. (6.3) 1.0 9.0 10.2 Cash & Bank Balance 161.2 381.4 1,718.4 3,426.6
Minority Interest 2.8 0.7 2.0 2.3 Other Current Assets 23.1 21.7 - -
Profit after MI 877.6 1,117.5 1,729.8 1,965.0 Current Liabilities
- Growth (%) 16.3% 27.3% 54.8% 13.6% Sundry Creditors 1,028.8 1,637.9 2,212.1 2,843.2
Provisions 398.5 493.4 610.7 444.1
Ratio Analysis Net Current Assets 1,778.3 2,574.9 5,189.3 7,584.9
Particulars FY06 FY07 FY08 FY09E Misc. Expenditure 5.2 2.7 0.3 -
OPM (%) 15.3% 13.3% 14.1% 14.2% Total Assets 5,015.6 6,605.6 11,890.0 13,413.1
EBITDA (%) 17.2% 14.8% 16.0% 16.0%
PBIT (%) 14.2% 12.2% 13.3% 12.9% Cash Flow
Interest Cover (x) 84.5 22.9 11.9 14.7 Opening Cash & Bank 141.6 161.2 381.4 1,718.4
EPS (Rs.) 3.5 4.4 6.1 6.9 Profit After Tax 877.6 1,117.5 1,729.8 1,965.0
P/E (x) 28.0 22.1 16.0 14.1 Invt Income (176.2) (188.7) (314.6) (398.1)
BVPS (Rs.) 16.4 19.0 22.0 27.4 Misc. Exp W/Off 2.3 2.5 2.4 0.0
M Cap/Sales (x) 2.7 2.0 1.6 1.3 Deferred Taxation 17.0 30.5 0.0 0.0
EV (Rs. Mn.) 24,927.2 25,593.2 31,074.6 29,365.4 Others (150.7) 141.7 686.2 0.0
EV/EBITDA (x) 15.8 13.8 11.4 8.5 Change in Working Cap 153.3 (745.2) (1,405.5) (687.4)
EV/Sales (x) 2.7 2.1 1.8 1.4 CF - Operating Activities 1,016.4 752.3 1,347.4 1,744.3
ROCE (%) 27.8% 24.4% 19.8% 21.5% Change in Fixed Assets (769.6) (1,098.4) (3,735.6) 197.6
RONW (%) 21.3% 23.2% 27.7% 25.3% Change in Investments 26.5 0.4 126.9 0.0
Inventory T/o Days 62.0 64.7 63.9 64.0 CF - Investing Activities (566.8) (909.3) (3,294.2) 595.8
Debtors T/o Days 45.1 46.2 50.8 46.0 Increase in Equity 0.0 0.0 180.1 0.0
Advances T/o Days 6.4 14.9 19.8 15.7 Changes in Borrowings (64.0) 885.9 3,814.4 0.0
Creditors T/o Days 41.0 47.9 47.3 48.0 Interest Paid (15.4) (66.4) (190.0) (190.0)
Working Cap T/o Days 70.8 75.3 110.9 128.1 Chng In Minority Interest 9.2 0.6 (2.5) 2.3
DPS (Rs.) 1.3 1.5 1.6 1.3 CF - Financing Activities (430.0) 377.2 3,283.9 (631.8)
Dividend Payout (%) 35.8% 33.9% 25.8% 19.4% Net Change in Cash 19.6 220.2 1,337.0 1,708.2
Dividend Yield (%) 1.3% 1.5% 1.6% 1.4% Closing Cash & Bank Bal 161.2 381.4 1,718.4 3,426.6

Jigar Valia | jigar@ppfas.com
Think about IT
Information Technology
Just an eclipse The IT industry as been weathering a severe storm following the Sub-prime crisis and
possibly is the worst hit industry next only to the large global banks & i-banks. Punished
like as if they caused it.
“..there are no provable absolutes, and that, with the absence of provable certainty, all
decisions are about probabilities - that is, all decisions are about the respective
probabilities...” - Robert Rubin | Former Secretary of the Treasury of the United States
‘Price is what you pay; value is what you get.’ So the exercise to weigh the pros & cons.
First the negatives. 2 key negatives are : A – The Industry Scenario & B – The
Business Model itself.
The industry scenario for the IT industry is certainly gloomy with concerns over
receivables, loss of clients and most importantly the declining growth rates; as the
developed world averts a depression to settle for a recession. And this developed
world is 80-100% of what most IT companies cater to.
On the business model, it is primarily outsourcing – getting it done cheaply at low
cost English skilled countries like India. Now, the realizations grow at moderate
growth rates somewhat in line with the overall GDP growth rates for the developed
nations. On the other hand, the cost increase is steeper on account of salary hikes,
withering tax benefits and a generally appreciating currency (a reverse trend
currently on account of severe USD-liquidity crunch). So a part of the growth is
going towards maintaining profits.
The Positives. 2 key positives are : A – the Visibility & B – the Value.
The Visibility is in its Necessity. The world cant do without IT. In crisis, you need
some of IT even more. The labour arbitrage theory still holds. Offshore salaries are
still just ~ 1/3rd of Onsite. The visibility sustains until India maintains its edge on two
fronts – (1) ability (educated & english speaking employees...increasing by the
years & (2) the relative labour-cost arbitrage continues.
Value. It Is the excellent margins & ROEs. Most companies are cash rich & debt free
and many have delivered fantastic growth over the years. Read Below : A Cyclical
morphed into Growth Industry. Most attractively, it is the cheap throw away prices at
which many able IT companies are available for investment. For many companies,
even if the earnings drop by 35%-75%, the consequent P/E would still be higher
than the corresponding ROE.
Think about IT!
FY09E If earnings Then

Particulars CMP
EPS P/E ROE drop by EPS P/E ROE
Infosys 1,378.5 102.5 13.5 32.3% 35.50% 66.1 20.9 20.8%
Mphasis 163.1 15.8 10.3 24.3% 34.50% 10.3 15.8 15.9%
NIIT Technologies 68.0 23.3 2.9 26.0% 69.70% 7.1 9.6 9.6%
Sonata Software 17.0 7.2 2.3 26.1% 70.00% 2.2 7.8 7.8%
HTMT Global ^ 149.9 46.3 3.2 35.6% 74.00% 12.0 12.5 12.6%
^ ROE - Excl Cash for HTMT Global Source: PPFAS Research
“ When the gap between perception and reality is the maximum,

price is the best.”
A Cyclical morphed into The kind of growth that a number of IT companies have delivered in the past has been
Growth Industry excellent. We have been trained to look at & expect for a Q-Q growth for the IT
companies.
6000 Infosys Q-o-Q Performance
5000
4000 PAT
3000
Sales
2000
1000
0
Jun-99
Jun-00
Jun-01
Jun-02
Jun-03
Jun-04
Jun-05
Jun-06
Jun-07
Jun-08
Oct-99
Feb-00
Oct-00
Feb-01
Oct-01
Feb-02
Oct-02
Feb-03
Oct-03
Feb-04
Oct-04
Feb-05
Oct-05
Feb-06
Oct-06
Feb-07
Oct-07
Feb-08
Source: Capitaline, PPFAS Research
While most of the IT companies demonstrate a positive quarter-on-quarter growth for

the past many years, ever thought of any of the Indian IT companies as being Cyclical ?
But in essence they are. The businesses of the clients go through business cycles and
there is a corresponding effect to their IT spending. But India story has been a little
different. Because of the outsourcing – our ability & cost advantage – India has been
gaining a greater share of the pie. We may safely bet that this trend of increasing share
will continue for some reasonable time.
..But not a Commodity Most if not all commodities are cyclical; but not vice versa. You can change your
(yet) vendors for grains & steel anytime. But it is not so easy to change your IT vendor. For a
decent size organization, think of all the data gone into the old system and all the
employees who have been used to the softwares. Atleast it is relatively sticky & it needs
support. What we comprehend is that 'Applications’ is still a very subjective affair. Most
companies use softwares customized to their requirements. But this may change in the
coming times as companies shift to packaged (read branded) softwares. This leaves us
with a cogitative point –

Think about IT!
IT is a lot much about HR In the past few months, issues like realizations, growth prospects & currency
fluctuations have garnered all the focus. But we think there is something else, that is
much more important, i.e. HR. Personally, we believe that in IT, you need you best guy
to manage HR. There is still a lot more linearity in the IT business. It is no easy
challenge to manage thousands of educated people. This is the most important
weapon available to the Indian IT companies in the current crisis-like situation. There
are surely some tailwinds here. With supply side comfortable, you can rationalize your
costs and retain the better talent that enhances productivity.
Real time to get scared We are totally convinced on the long term prospects for the IT industry. There are
concerns for sure, but we think these are overdone. We would be more apprehensive:
when India's edge – in terms of ability & more importantly, the labour arbitrage is
significantly compromised;
if there is a slowdown which is coupled with supply side headwiinds.
But now the outlook is comforting on both the issues.
Viewpoint on Acquisitions The cash rich IT companies have on many occasions resorted to acquisitions for many
reasons–scale, domain expertize, strengthening geographical presence,
diversification, clientele, integration benefits, etc. 3 key points here :
Reasons for acquisition – Strategic and/or Growth;

Valuations are rich relative to the acquiring entity, especially in the recent times
Most acquisitions are done internationally;
Growing organically is the best way. But it is difficult & time consuming. Therefore
acquisitions. What most acquisitions have to offer to the buyer is either strategic
(domain, geography, clientele, diversification, integration savings, etc.) or pure growth
(scale). Its best when it is done both selectively and opportunistically. For companies,
which easily resort to this option, it generally ends up being a portfolio approach. Some
work, many don't.
The second thing is why not Buyback own shares when these acquisitions are
expensive relative to the acquiring company, especially in the recent times ? One
reason could be that the investment horizon of the management & the external
investors are very different. The former have a much longer horizon & are interested in
seeing their creation grow. Even otherwise, in a time when the IT companies are valued
purely on the growth front and are valued nothing for the static & inherent business
value, such acquisition led growth do bring in some respite to the shrinking market cap.
Why are most acquisitions done internationally, even when the small domestic
companies are available at obscene/liquidation valuations ? We have a number of
smaller IT companies with positive growth, generating 25% returns and trading at even
< 3x current year earnings. Also the large & small caps seem to have complementing
Think about IT!
characteristics. One has lower offshoring with difficulty in executing good organic
growth; the large caps have higher growth rates with very high offshoring component.
How much more can one improve & vice-versa ? What we fathom about this is that
there is a case size misfit. We have a few very big companies employing even upwards
of 50,000 people and growing at double digits. And there are dozens of smaller
companies employing a few (lower single digit) thousands. From a growth perspective,
these do not even add a very small fraction to the large cap companies. For example, it
makes no sense for Infosys who adds 25,000 people every quarter, to acquire a small
company employing a 2000-4000 people even after factoring the valuations and/or
other positives. We do not have many mid-size companies, who could very effectively
play the part of both buyer & seller in the Indian arena.
What we like We think that the large caps are the most efficient but in the current times, they have a
higher de-rating risk on account the relatively higher exposure to BFSI segment & USA
(both biggest pieces in the pie in terms of vertical & geography). While there has
already been a severe de-rating in valuations despite the improving profitability, the risk
of further de-rating remains, should the market continue to give large importance to
PEG ratios.
On the other hand, small cap IT companies are available at liquidation valuations. Sure
the market is expecting some de-growth in earnings, but the current valuations suggest
of these companies for going out of business. Say for companies like NIIT Tech, even if
the current year earnings drop by 70%, the consequent P/E would still be higher than
the corresponding ROE. We think these are still Growth (Cyclicals morphed into
Growths) stocks and are definitely here to stay. We look for some critical factors like
Domain Expertize (which is critical to protect in case of vendor consolidation)

Visibility in terms of assured business from long term contracts
Lower BFSI & US focus
Basically, niche & technically sound companies available at 'cigar-butt' valuations.

What more, should they gain size & scale, or India fills the void in the midcap space,
these investments double up as future takeover (read re-rating) targets.
Companies Infosys
Big Fish in the Big Pond. More importantly, this IT bellwether has the most
impeccable track record and has set new standards for management credibility. It has
clinched some transformational deals amidst the global BFSI turmoil. Its decision of not
to go in for the price-war for Axon bid, speaks highly of the management & investment
culture of country's most admired company. There are some risks to its share price on
account of the high exposure to BFSI (clear slow down in growth rates) and the markets
fascination for PEG. But still for Infosys, it is still 'Test of faith' v/s. 'Leap of faith' for many
others. Infosys trades at 12.x FY09E earnings of Rs. 102.50 per share.

Think about IT!
Mphasis
High visibility for offshoring from EDS-HP parent. Mphasis offers the highest visibility in
terms of offshoring from its EDS-HP parentage. It is a decent size company with over
28,000 employees, over Half a Billion dollar revenues, both poised & capable of high
growth in the coming times. Relatively lower forex hedging enables maximizing the
forex gains. The possibility of HP-EDS increasing its stake in this company through
integration with HP India and the consequent buyback & maybe de-listing remain a
distant possibility. Mphasis trades at 10.3x FY09E earnings of Rs. 15.75 per share.
NIIT Technologies
This extremely vertical & cost focused company avoids going for every other
opportunity available. Strong domain competence, especially in Travel & Insurance
would shield it from any vendor consolidation threat and may possible even turn it to its
advantage. NIIT Tech & IBM were the only 2 out of the 23 vendors that were retained by
British Airways as a part of their restructuring in 2001. NIIT Technologies has recently
received a multi-billion long term contract from British Airways, which will have a higher
offshore element. By offering integrated & SOA/ Platform based offerings, it is further
strengthening its vertical command. Also, the company is an early mover towards Non-
Linear offerings including SaaS, Managed Services, which provide for value addition &
cost effectiveness to clients and higher margins for NIIT Technologies. Over Rs. 9,000
Mn. run-rate company is available at a 50% market cap of Rs. 4,500 Mn. Consistent
25%+ ROEs and a P/E of 2.9x its FY09E EPS. Not to forget the dividend yield of ~10%.
Sonata Software
Small but a steady company with high medium-term visibility for all the 3 business
segments. The standalone IT business has delivered a steady Q-Q growth for the past
6 quarters. Business from TUI Infotech JV, which constitutes ~45% of the business has
a contractual guarantee. TUI group has committed a Euro 670 mn of revenue to TUI
Infotec over 5 years during 2006-2011 which includes a 40% cash penalty
compensation clause for non fulfillment. The domestic software licensing business too
has a track record of a steady performance. 25% ROE (on low debt) company available
at 2.3x FY09E earnings & 6.50% dividend yield.
HTMT Global
An ITES company with a low BFSI exposure (<10%) and an impressive track of 47%
CAGR over FY04-08 period. It has successfully turnaround its overseas acquisition. A
diversified client mix and its opportune utilization from low cost centres like Durgapur,
reflect positively on the management. HTMT Global has a market cap of Rs. 3 Bn. and
holds free net cash of ~ Rs.5 Bn. This means it is available at ~65% of the free cash on
books. In terms of P/E it is 3.2x FY09E earnings. While reported ROEs are ~11%,
excluding the free cash the ROEs are in 30-40% range. Dividend yield is 5.7%.
Its not sunset; just an eclipse. Think about IT.

Think about IT!
Infosys Tech : BUY
YE March (Rs. Crs.) FY06 FY07 FY08 FY09E YE March (Rs. Crs.) FY06 FY07 FY08 FY09E
Net Sales 9,521.0 13,893.0 16,692.0 21,835.2 Equity Capital 138.0 286.0 286.0 286.0
Software Dvlp. Expenses 5,066.0 7,458.0 9,207.0 11,938.4 Reserves 6,828.0 10,969.0 13,509.0 17,867.8
Gross Profit 4,455.0 6,435.0 7,485.0 9,896.9 Shareholders Funds 6,966.0 11,255.0 13,795.0 18,153.8
Total Expenditure 6,431.0 9,502.0 11,454.0 14,806.9 Pref Shares by Subsidiary - - - -
Operating Profit 3,090.0 4,391.0 5,238.0 7,028.3 Minority Interest 68.0 4.0 - -
Other Income 139.0 370.0 704.0 632.0 Total Liabilities 7,034.0 11,259.0 13,795.0 18,153.8
EBITDA 3,229.0 4,761.0 5,942.0 7,660.3 Fixed Assets 2,226.0 3,771.0 4,777.0 5,189.7
Depreciation 437.0 514.0 598.0 763.3 Investments 755.0 25.0 72.0 72.0
EBIT 2,792.0 4,247.0 5,344.0 6,897.0 Current Assets
Interest - - - - Sundry Debtors 1,608.0 2,436.0 3,297.0 4,486.7
PBT 2,792.0 4,247.0 5,344.0 6,897.0 Loans & Advances 1,297.0 1,214.0 2,771.0 3,589.4
Tax 313.0 386.0 685.0 1,034.5 Cash & Bank Balance 3,429.0 5,871.0 6,950.0 9,415.4
PAT 2,458.0 3,856.0 4,659.0 5,862.4 Current Liabilities
Sundry Creditors 934.0 1,469.0 1,912.0 2,213.4
Ratio Analysis Provisions 1,412.0 681.0 2,279.0 2,538.1
YE March (Rs. Mn.) FY06 FY07 FY08 FY09E Net Current Assets 3,988.0 7,371.0 8,827.0 12,739.9
OPM (%) 32.5% 31.6% 31.4% 32.2% Deferred Tax Assets 65.0 92.0 119.0 152.2
EBITDA (%) 33.9% 34.3% 35.6% 35.1% Total Assets 7,034.0 11,259.0 13,795.0 18,153.8
PBIT (%) 29.3% 30.6% 32.0% 31.6%
PAT (%) 25.8% 27.7% 27.9% 26.8% Cash Flow
EPS (Rs.) 44.5 67.3 81.5 102.5 Particulars (Rs. Crs.) FY06 FY07 FY08 FY09E
P/E (x) 31.0 20.5 16.9 13.5 Opening Cash & Bank 1789.0 3429.0 5871.0 6950.0
P/BV (x) 5.5 7.0 5.7 4.3 Profit After Tax 2458.0 3856.0 4659.0 5862.4
BVPS (Rs.) 252.4 196.8 241.2 317.4 Less : Invt Income (139.0) (370.0) (704.0) (632.0)
M Cap/Sales (x) 4.0 5.7 4.7 3.6 Deferred Taxation (22.0) (27.0) (22.0) (33.2)
EV (Rs. Mn.) 38,046.6 78,850.2 78,850.2 78,850.2 Others (302.0) (6.0) (453.0) 0.0
EV/EBITDA (x) 11.8 16.6 13.3 10.3 Change in Working Cap 354.0 (941.0) (377.0) (1447.5)
EV/Sales (x) 4.0 5.7 4.7 3.6 CF - Operating Activities 2786.0 3026.0 3701.0 4513.0
ROCE (%) 39.7% 37.7% 38.7% 38.0% Change in Fixed Assets (949.0) (2053.0) (1156.0) (1176.0)
RONW (%) 35.3% 34.2% 33.8% 32.3% Change in Investments 456.0 730.0 (47.0) 0.0
Debtors T/o Days 61.6 64.0 72.1 75.0 Investment Income 139.0 370.0 704.0 632.0
Advances T/o Days 49.7 31.9 60.6 60.0 CF - Investing Activities (354.0) (953.0) (499.0) (544.0)
Creditors T/o Days 35.8 38.6 41.8 37.0 Increase in Equity 646.0 1189.0 106.0 0.0
Working Cap T/o Days 152.9 193.7 193.0 213.0 Changes in Borrowings (94.0) 0.0 0.0 0.0
DPS (Rs.) 44.9 11.4 33.3 22.5 CF - Financing Activities (792.0) 369.0 (2123.0) (1503.6)
Dividend Payout (%) 100.7% 17.0% 40.8% 22.0% Net Change in Cash 1640.0 2442.0 1079.0 2465.4
Dividend Yield (%) 3.3% 0.8% 2.4% 1.6% Closing Cash & Bank Bal 3429.0 5871.0 6950.0 9415.4

Think about IT!
Mphasis : BUY
YE March (Rs. Mn.) FY06 FY07 FY08 FY09E YE March (Rs. Mn.) FY06 FY07 FY08 FY09E
Net Sales 9,401.1 17,606.2 24,230.7 31,984.6 Equity Capital 1,684.0 2,149.1 2,148.0 2,148.0
Cost of Revenues 6,485.6 13,187.7 18,735.7 24,854.8 Reserves 4,921.9 7,935.9 9,420.7 11,801.3
Selling Expenses 584.6 918.4 952.7 1,226.1 Shareholders Funds 6,605.9 10,085.0 11,568.8 13,949.3
Genaral & Admin Expenses 868.1 1,456.7 1,750.5 2,223.1 Borrowed Funds 36.9 28.4 56.8 56.8
Total Expenditure 7,938.3 15,562.8 21,438.9 28,304.0 Total Liabilities 6,642.8 10,113.4 11,625.5 14,006.1
Operating Profit 1,462.8 2,043.4 2,791.8 3,680.5 Fixed Assets 1,455.3 2,518.3 3,632.8 4,579.5
Other Income/Forex Gain 76.5 (135.4) (215.1) - Goodwill 2,676.5 2,710.5 2,710.5 2,710.5
Interest (17.5) (75.1) (84.9) (76.2) Sundry Debtors 2,119.3 4,221.6 5,804.4 7,010.3
PBT 1,556.8 1,983.2 2,661.6 3,756.7 Loans & Advances 711.2 1,508.3 2,955.6 2,891.8
Tax 58.2 182.5 108.7 370.9 Cash & Bank Balance 988.5 1,892.6 952.5 1,081.8
Sundry Creditors 836.2 1,975.3 3,025.9 2,891.8
Ratio Analysis Provisions 638.3 939.9 1,403.0 1,340.8
YE March (Rs. Mn.) FY06 FY07 FY08 FY09E Net Current Assets 2,344.5 4,707.1 5,283.6 6,751.2
OPM (%) 15.6% 11.6% 11.5% 11.5% Deferred Tax Assets 166.5 177.4 260.1 226.4
PBIT (%) 16.4% 10.8% 10.6% 11.5%
PAT (%) 15.9% 10.2% 10.5% 10.6% Cash Flow
EPS (Rs.) 8.9 8.4 11.9 15.8 YE March (Rs. Mn.) FY06 FY07 FY08 FY09E
P/E (x) 18.3 19.5 13.7 10.3 Opening Cash & Bank 954.7 988.5 1892.6 952.5
P/BV (x) 4.2 3.5 3.0 2.5 Profit After Tax 1498.6 1800.7 2552.9 3385.8
BVPS (Rs.) 39.2 46.9 53.9 64.9 Less : Invt Income 8.7 1.8 (4.0) 0.0
M Cap/Sales (x) 2.9 2.0 1.4 1.1 Deferred Taxation (18.2) 9.2 (87.0) 33.7
EV (Rs. Mn.) 27,502.8 35,079.7 35,091.1 35,091.1 Others (22.8) 196.9 4.3 0.0
EV/EBITDA (x) 17.9 18.4 13.6 9.5 Change in Working Cap (301.6) (857.7) (1516.5) (1338.4)
RONW (%) 22.7% 17.9% 22.1% 24.3% Change in Investments (791.7) (5.3) 261.5 0.0
Debtors T/o Days 82.3 87.5 87.4 80.0 Investment Income (8.7) (1.8) 4.0 0.0
Advances T/o Days 27.6 31.3 44.5 33.0 CF - Investing Activities (1585.8) (1714.0) (2178.2) (2545.1)
Creditors T/o Days 32.5 41.0 45.6 33.0 Increase in Equity 219.0 337.1 (239.7) (0.0)
Working Cap T/o Days 91.0 97.6 79.6 77.0 Changes in Borrowings (9.4) (8.5) 28.4 0.0
DPS (Rs.) 2.9 2.3 3.3 4.0 CF - Financing Activities (63.3) (225.3) (1040.7) (1005.2)
Dividend Payout (%) 32.5% 27.5% 27.8% 25.4% Net Change in Cash 33.8 904.1 (940.1) 129.3

Think about IT!
NIIT Tech : BUY

- Growth (%) 11.8% 45.8% 6.3% 5.0% ESOP & Share Application 13.9 3.9 2.4 2.4
Total Expenditure 4,919.5 7,056.0 7,652.4 7,903.9 Reserves 2,309.4 3,307.5 3,823.7 4,721.8
Operating Profit 1,155.8 1,802.6 1,762.7 1,982.0 Shareholders Funds 2,709.9 3,702.5 4,413.1 5,317.1
- Growth (%) 20.8% 56.0% -2.2% 12.4% Minority Interest 63.3 149.3 49.5 68.8
Other Income 36.9 148.6 146.1 147.9 Borrowed Funds 420.2 793.2 646.8 496.8
- Growth (%) 15.9% 63.6% -2.2% 11.6% Fixed Assets 949.1 1,530.2 2,377.5 2,873.3
Depreciation 389.5 434.7 388.8 485.9 Investments 649.4 1,444.3 1,311.4 1,311.4
EBIT 803.2 1,516.6 1,520.0 1,644.0 Current Assets
Interest 13.5 1.0 10.8 44.7 Inventory 6.1 2.9 5.6 5.0
PBT 789.7 1,515.6 1,509.2 1,599.3 Sundry Debtors 1,200.7 1,860.6 2,178.3 2,196.9
Tax 114.8 185.3 137.7 196.4 Loans & Advances 425.9 427.7 710.0 741.4
PAT Before MI 674.9 1,330.2 1,371.5 1,402.9 Cash & Bank Balance 923.8 943.5 660.3 978.6
Minority Interest 12.0 37.8 18.9 19.3 Other Current Assets 171.3 146.5 93.4 98.1
PAT 662.90 1292.44 1352.61 1383.58 Current Liabilities
- Growth (%) 13.2% 95.0% 4.7% 2.3% Liabilities 888.0 1,269.5 1,565.9 1,647.6
Provisions 290.9 521.4 728.7 718.4
Particulars FY06 FY07 FY08 FY09E Net Deferred Tax 45.9 80.1 67.4 44.1
OPM (%) 19.0% 20% 19% 20% Total Assets 3,193.4 4,645.0 5,109.5 5,882.7
EBITDA (%) 19.6% 22% 20% 22%
PAT (%) 10.9% 15% 14% 14% Cash Flow
Interest Cover (x) 59.5 1,512.9 140.8 36.8 Particulars (Rs. Mn.) FY06 FY07 FY08 FY09E
EPS (Rs.) 11.4 22.0 23.0 23.3 Opening Cash & Bank 927.9 923.8 943.5 660.3
P/E (x) 5.9 3.1 2.9 2.9 Profit After Tax 662.9 1,292.4 1,352.6 1,383.6
P/BV (x) 1.5 1.1 0.9 0.8 Invt Income (36.9) (148.6) (146.1) (147.9)
BVPS (Rs.) 46.7 63.1 75.2 89.7 Interest Paid 13.5 1.0 10.8 44.7
M Cap/Sales (x) 0.6 0.4 0.4 0.4 Deferred Taxation (27.2) (6.9) 22.5 23.3
EV (Rs. Mn.) 3,435.7 3,835.0 3,975.1 3,546.7 Others (78.4) (8.8) (241.0) (70.5)
EV/EBITDA (x) 2.9 2.0 2.1 1.7 Change in Working Cap (74.6) (21.6) (46.1) 17.6
EV/Sales (x) 0.6 0.4 0.4 0.4 CF - Operating Activities 850.9 1,542.2 1,341.6 1,736.6
ROCE (%) 24.7% 32.6% 29.5% 27.2% Change in Fixed Assets (338.4) (1,077.6) (1,069.6) (981.7)
Inventory T/o Days 0.4 0.1 0.2 0.2 CF - Investing Activities (512.6) (1,723.8) (790.8) (833.8)
Debtors T/o Days 71.1 75.6 83.3 80.0 Increase in Equity 10.4 (2.5) (195.6) 5.9
Advances T/o Days 25.2 17.4 27.1 27.0 Changes in Minority Interest 12.0 86.0 (99.8) 19.3
Creditors T/o Days 52.6 51.6 59.9 60.0 Changes in Borrowings (119.5) 373.0 (146.4) (150.0)
Dividend Payout (%) 35.0% 19.7% 28.2% 30.0% Net Change in Cash (4.2) 19.8 (283.3) 318.3

Think about IT!
Sonata Software : BUY

YE March (Rs. Mn.) FY06 FY07 FY08 FY09E YE March (Rs. Mn.) FY06 FY07 FY08 FY09E
Sales & Services 5,070.3 8,977.2 14,283.7 16,569.1 Equity Capital 105.2 105.2 105.2 105.2
- Purchase of traded goods 2,960.9 3,764.0 5,422.2 6,289.7 Shareholders Funds 1,521.6 1,867.6 2,288.5 2,915.3
- Operating expenses 1,707.3 4,425.2 7,746.8 8,628.6 Minority Interest - 184.9 269.1 429.1
Operating Profit 402.1 788.0 1,114.7 1,650.7 Borrowed Funds - 581.2 283.4 -
Other Income 38.7 198.6 310.6 57.3 Deferred Tax Liabilities 0.9 0.6 1.1 1.1
EBITDA 440.8 986.6 1,425.3 1,708.0 Total Liabilities 1,522.5 2,634.2 2,842.2 3,345.5
Depreciation 107.7 297.4 433.5 448.2 Fixed Assets
EBIT 333.1 689.2 991.8 1,259.8 Gross Block 736.7 6,922.4 7,173.7 7,416.9
Interest 6.6 27.7 49.6 70.0 Accumulated Depn. 418.6 5,074.8 5,410.5 5,666.6
PBT 326.5 661.5 942.2 1,189.8 Net Block 318.2 1,847.7 1,763.2 1,750.3
Tax 51.1 83.5 125.2 267.7 Capital WIP 15.9 49.5 74.1 80.9
PAT before MI 275.4 578.0 817.0 922.1 Investments 75.7 143.1 238.7 238.4
Minority Interest - 107.3 237.8 160.0 Current Assets
Profit from Affiliates - 9.6 6.0 - Inventory 75.5 56.1 144.7 182.7
PAT before EI 275.4 480.3 585.2 762.1 Sundry Debtors 1,307.4 1,941.9 2,386.9 2,754.1
Extraordinary Items (161.8) - - - Loans & Advances 414.2 432.1 424.5 620.7
Reported PAT 113.6 480.3 585.2 762.1 Cash & Bank Balance 571.1 1,212.5 764.4 857.5
Current Liabilities
Ratio Analysis Sundry Creditors 1,298.8 3,141.7 3,096.2 2,222.5
YE March (Rs. Mn.) FY06 FY07 FY08 FY09E Provisions 71.9 77.9 85.4 1,143.8
OPM (%) 7.9% 8.8% 7.8% 10.0% Net Current Assets 997.5 423.0 539.0 1,048.7
EBITDA (%) 8.7% 11.0% 10.0% 10.3% Deferred Tax Assets 115.3 171.0 227.2 227.2
PBIT (%) 6.6% 7.7% 6.9% 7.6% Total Assets 1,522.5 2,634.2 2,842.2 3,345.5
PAT (%) 5.4% 5.3% 4.1% 4.6%
EPS (Rs.) 2.6 4.6 5.6 7.2 Cash Flow
P/E (x) 6.5 3.7 3.1 2.3 Particulars FY06 FY07 FY08 FY09E
P/BV (x) 1.2 1.0 0.8 0.6 Opening Cash & Bank 166.9 571.1 1212.5 764.4
BVPS (Rs.) 14.5 17.8 21.8 27.7 Profit After Tax 113.6 480.3 585.2 762.1
Market Cap (Rs. Mn.) 1,787.7 1,787.7 1,787.7 1,787.7 Investment Income (38.7) (198.6) (310.6) (57.3)
M Cap/Sales (x) 0.4 0.2 0.1 0.1 Depreciation 107.7 297.4 335.8 256.1
EV (Rs. Mn.) 1,787.7 2,368.9 2,071.1 1,787.7 Others 192.5 175.6 (55.6) 0.0
EV/EBITDA (x) 4.1 2.4 1.5 1.0 Change in Working Cap 239.8 1081.5 (564.1) (416.7)
EV/Sales (x) 0.4 0.3 0.1 0.1 CF - Operating Activities 614.9 1836.1 (9.3) 544.2
RONW (%) 18.1% 25.7% 25.6% 26.1% Change in Investments 61.7 (67.3) (95.6) 0.3
Debtors T/o Days 94.1 79.0 61.0 60.7 CF - Investing Activities (39.7) (1729.3) (60.9) (192.4)
Advances T/o Days 29.8 17.6 10.8 13.7 Increase in Equity 0.0 0.0 (28.9) (0.0)
Creditors T/o Days 93.5 127.7 79.1 49.0 Changes in Borrowings (51.1) 581.2 (297.8) (283.4)
Working Cap T/o Days 71.8 17.2 13.8 23.1 Changes in Minority Hldg 0.0 87.1 84.2 160.0

Think about IT!
HTML Global : BUY

Particulars (Rs Mn.) FY07 FY08 Q1FY09 FY09E Particulars (Rs Mn.) FY07 FY08 Q1FY09 FY09E
- Growth (%) 140.0% N.A. 15.7% Share Application Money 0.0 0.0 0.0 0.0
Operating Profit 266.7 938.5 268.3 1,228.3 Shareholders Funds 6,873.8 7,542.6 7,982.3 8,253.3
Other Income 161.1 363.6 76.0 296.2 Borrowed Funds 4.3 276.1 714.5 714.5
EBITDA 427.9 1,302.1 344.4 1,524.5 Deferred Tax Liability 9.0 72.5 111.2 203.9
Depreciation 143.6 279.5 74.4 286.9 Minority Interest 0.0 0.0 0.0 0.0
EBIT 284.3 1,022.6 270.0 1,237.6 Total Liabilities 6,887.2 7,891.2 8,808.0 9,171.7
Interest 0.5 14.5 17.8 78.6 Goodwill 0.0 0.0 0.0 0.0
PBT 283.7 1,008.1 252.2 1,159.0 Fixed Assets 2,022.2 1,816.1 2,567.4 2,129.2
Tax (9.1) 133.9 51.7 208.6 Investments 421.3 100.0 22.6 0.0
PAT Before MI 292.9 874.1 200.5 950.4 Current Assets
Share in Associates 0.0 0.0 0.2 0.6 Inventory 0.0 0.0 0.0 0.0
Minority Interest 0.0 0.0 0.0 0.0 Sundry Debtors 997.2 1,047.2 837.1 1,312.6
PAT after MI 292.9 874.2 200.7 951.0 Loans & Advances 1,549.8 1,221.7 422.7 1,514.6
- Growth (%) 198.5% N.A. 8.8% Cash & Bank Balance 5,096.4 5,385.6 5,415.3 5,581.2
Extraordinary Items 0.0 0.0 0.0 0.0 Other C.A. (Deposits) 126.8 261.8 449.5 504.9
Reported PAT 292.9 874.2 200.7 951.0 Current Liabilities
Sundry Creditors 2,691.7 1,570.8 608.8 1,514.6
Ratio Analysis Provisions 634.7 370.4 297.8 356.2
Particulars FY07 FY08 Q1FY09 FY09E Net Current Assets 4,443.7 5,975.1 6,218.0 7,042.5
OPM (%) 10.0% 14.7% 15.8% 16.7% Miscellaneous Expenditure 0.0 0.0 0.0 0.0
PBIT (%) 10.7% 15.8% 14.8% 15.7%
PAT (%) 11.0% 13.7% 11.8% 12.9% Cash Flow
Interest Cover (x) 534.3 70.5 60.8 15.7 Particulars (Rs Mn.) FY07 FY08 Q1FY09 FY09E
EPS (Rs.) 14.3 42.6 39.1 46.3 Opening Cash & Bank 6,236.6 5,096.4 5,385.6 5,385.6
P/E (x) 10.5 3.5 3.8 3.2 Profit After Tax 292.9 874.2 200.7 951.0
P/BV (x) 0.4 0.4 0.4 0.4 Invt Income (161.1) (363.6) (76.0) (296.2)
Market Cap (Rs. Mn.) 3,078.6 3,078.6 3,078.6 3,078.6 Miscellaneous Exp W/Off 0.0 0.0 0.0 0.0
EV (Rs. Mn.) (2,434.7) (2,130.8) (1,644.8) (1,788.0) Deferred Taxation (18.2) 63.5 25.2 92.7
EV/EBITDA (x) n.a. n.a. n.a. n.a. Others (110.8) 0.0 (361.5) 38.7
EV/Sales (x) n.a. n.a. n.a. n.a. Change in Working Cap (171.7) (1,242.3) (213.2) (871.8)
ROCE (%) 4.1% 13.0% 12.3% 13.5% CF - Operating Activities (24.9) (374.2) (332.7) 279.9
RONW (%) 4.3% 11.6% 10.1% 11.5% Change in Fixed Assets (1,004.4) (73.4) (450.6) (600.0)
Debt/Equity Ratio (x) 0.0 0.0 0.1 0.1 Change in Investments (134.4) 321.3 77.4 100.0
Debtors T/o Days 137.1 60.0 44.2 65.0 CF - Investing Activities (977.6) 611.5 (297.2) (203.8)
Advances T/o Days 213.1 70.0 22.3 75.0 Increase in Equity 0.0 0.0 239.0 (0.0)
Creditors T/o Days 370.1 90.0 32.2 75.0 Changes in Borrowings (16.9) 271.8 438.4 438.4
W Cap(ExCash)T/o Days (89.7) 33.8 42.4 72.4 Interest Paid (0.5) (14.5) (17.8) (78.6)
Fixed Assets T/o (Gross) 0.9 2.1 2.0 2.1 Dividend Paid (120.1) (205.4) 0.0 (240.3)
DPS (Rs.) 5.0 8.5 0.0 10.0 CF - Financing Activities (137.6) 51.9 659.6 119.5
Dividend Payout (%) 35.1% 20.1% 0.0% 21.6% Net Change in Cash (1,140.1) 289.2 29.7 195.6
Dividend Yield (%) 3.3% 5.7% 0.0% 6.7% Closing Cash & Bank Bal 5,096.4 5,385.6 5,415.3 5,581.2

Ferris Wheels Hiren Samani | hiren@ppfas.com
Offshore, Ship Building, et.al.
"Cyclicals are like blackjack: Stay in the game too long,

and it's bound to take back all your profit.”
- Peter Lynch
Don’t blame the market All the stocks have been battered by the ongoing liquidity-crunch. One should realize
that the commodity down-cycle have coincided with the crisis.
When doing our coverage on Aban, we thought we have been conservative in factoring
replacement costs, higher WACC rate and also a terminal drop in realization. We had
our arguments for preference for DCF based valuation versus the usual P/E
methodology, as the near term earnings would not reflect the normalized sustainable
earnings due to asset movement & dry-dockingand would not be able to capture the
long term performance of the company. Few others have went with the relative
parameters like P/E, P/BV, EV/EBITDA etc. for their recommendations, for it is difficult
to predict the longer term profitability for these cyclical companies and so focus near-
term. How naive- All !
So something went wrong. Like many others, we were not able to foresee the macro
financial turmoil emerging and consequently its implications on the oil prices. Aban has
had some new contracts recently at rates even better than what we had anticipated.
The company appears to be extremely cheap on near term & medium term expected
profitability. But the current drop in the oil prices certainly puts a big question on the
sustainability of the rate in the longer run, which are now more likely to deteriorate.
But our Bigger wrong was to get carried away by the seemingly cheap valuations. We
misjudged these cyclicals as growth stocks. This is a cyclical industry which identifying
the trend would be more important than the valuation. In fact these make good
investments with a 'Buy high P/E, Sell low P/E' strategy.
Back to Basics
A cyclical company would see its sales and profits rise and fall in a regular manner, as
the industry moves from expansionary & recessionary cycles. Examples would be -
metals, automobiles, paper, chemicals, airlines, shipping, offshore, ship-building, etc..
Example: Company ABC is cheap or expensive? How should one value this stock?
Price/Avg
Year Phase EPS (Rs) Price PE
EPS
2004 Bottom 30.0 600.0 20.0 2.7
2008 Peak 500.0 3000.0 6.0 13.7
2012 Bottom 125.0 1250.0 10.0 5.7
2004-2012 Average 218.3

Ferris Wheels
It is generally understood that low PE is cheap stock, and high PE is expensive stock.
But for a cyclical, one may wrongly end up NOT buying in 2004 at Rs. 600, when its PE
is HIGH at 20 and NOT sell in 2008 at Rs. 3000 when its PE is LOW at 6. Clearly a long-
term but a faulty value strategy would prove disastrous. So re-iterating again,
identifying the trend would be more important than the valuation. Here is a graphical
representation of the above philosophy for some of our coverage scrips.
5,100 Aban
FY09 Aban
3,600
As Peter Lynch says, EPS 357.0
"Polygraphs of liars and the BVPS 591.6
2,100
Maps of the Alps.” P/E 2.5
600 P/BV 1.5

Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08
Great
950
750
FY09 Great
EPS 60.0
550 BVPS 265.8
P/E 5.7
350
Dec- Feb- Apr- Jun- Aug- Oct- Dec- Feb- Apr- Jun- Aug-
P/BV 1.3
06 07 07 07 07 07 07 08 08 08 08
Garware
260
220 FY09 Garware
180 EPS 22.9

BVPS 103.4
140
P/E 4.4
100
Oct- Dec- Feb- Apr- Jun- Aug- Oct- Dec- Feb- Apr- Jun- Aug- Oct- P/BV 1.0
06 06 07 07 07 07 07 07 08 08 08 08 08
ABG
1,250
1,000 FY09 ABG
750
EPS 41.9
BVPS 305.1
500
P/E 3.0
250 P/BV 0.4

Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08
Bharati Shipyard
825
FY09 Bharati
600
EPS 46.5
BVPS 291.9
375
P/E 1.5
150 P/BV 0.2

Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08
Source: Bloomberg, PPFAS Research

Ferris Wheels
Offshoring Outlook Charter rates for any type of a vessel have on an average increased to 3 times in the
current cycle. For example, rates for Jack-ups increased from $50,000/ day to
$1,50,000/ day. The deep water rigs saw a sharper rise as the oil prices surged to
unprecedented levels.
Lets look at the earnings. Aban earns a Rs. 20 Bn. net profit on a topline of Rs. 60 Bn. in
FY10E from its long term contracts. Offshore companies have fixed cost – variable
revenue model. Like every rise in the day rates has a direct impact on the bottomline,
the vice-versa is also true. Imagine, if the day rates for new contracts correct by 33% on
account of the lower oil prices (still ~$1,00,000/day for a Jack-up) and there is a near
similar impact on the bottomline as well. There is case of a near complete wipe-off in
profits. The company is highly leveraged and an early change in cycle would bring a lot
of trouble to the company. It would be helpful to remind oneself, that just before the
Sinvest consolidation, Aban achieved a PAT of just Rs. 1.2 Bn. on a turnover of Rs. 20
Bn and a loss in FY07 on a turnover of Rs. 7 Bn.
Deepwater rigs have a higher delta. Drilling deep involves higher cost and makes
economical sense, when the oil prices are above a certain threshold. Generally these
larger & more complex vessels have seen the highest surge in the day rates. These
may now see the highest fall, followed by the Jackups and then the other OSVs. The
actual change may not be in the same order as the demand & supply scenario would
play its own role as well. But for once assuming the DD-SS scenario constant, the
larger companies like Aban may feel the highest pain.
Can the prices go lower from the already battered levels ? Generally one may resort to
other methods like P/BV or NAV, etc. to determine a base case valuation. However, for
offshore industry, one should realize that the book values & NAV are as cyclical as the
the day rates. As the day rates go down the market value of these generally easily
traded assets will move correspondingly. Even the payback period methodology goes
for toss, if the company does not realize the expected realizations from these assets.
Estimated Payback time and DCF based valuations suffer from a very high risk of
assumptions going wrong.
What we think for Aban is also what we perceive for the other plays in the offshore
segment. True that Aban has done well to secure a few long dated contracts for its
working assets. But to hold on with the hope of cycle improving would tantamount to
getting trapped in an 'Aversion to a Sure Loss' framework, which a critical part of the

Ferris Wheels
Ship Building – This time Different - is what we thought, when we first became cognizant of some order
its (NOT) different ! cancellations in China and an initial drop in the shipping rates. Coz unlike earlier &
other companies abroad, the Indian Ship Building companies had been clever to book
orders for extended period and that to on their future expanded capacities. Plus they
have in place back-to-back arrangements for the raw materials & bought out
components. Therefore, we have a case where there is a strong visibility for a sharp
uptrend in both revenues & earnings. And 3.5 years is lot reasonable a time to secure
more orders the period beyond. It has been a mistake to play the extended cycles and
again here we see the share price performance in contrast to the earnings trend.
Shipyard Outlook At Rs. 71, Bharati Shipyard is trading at just 1.5 times its FY09E earnings and a P/BV of
just 0.2 times. As on March 08 it had Rs. 42 per share as cash on hand, which is ~45%
of its current market cap. It has secured long term orders on good margins. The P/BV
parameter for a shipyard is a much more realistic figure as compared for an offshore
company. But the company may be in for some trouble in the near to medium term. The
cash on hand is not free. The represent some of the money raised through $100 Mn.
FCCB in December 2005. The first tranche of $20 Mn worth of bonds have got
converted, but the balance $80 Mn. are due in December 2010. With conversion rate at
Rs. 498 per share, these will be called for redemption. With the company still in a big
capex mode and also the working capital blockage on account of subsidy, the company
does not have any free cash flows. The likely fallout of this could be
postponement/shelving of future plans, raise new debt to repay old one, alternatively
much higher dilution to same/other investors at much lower rates, etc. Whatever, the
fallout, it will be detrimental to the interest of the common stockholder.
At 126, ABG Shipyard is trading at 3x its FY09E earnings and a P/BV of 0.4x. Though
overall cheap, but it seems much expensive as compared to Bharati. We see that ABG
has been lucky versus Bharati in terms of its strategy for a pro equity funding and
relatively lower back-to-back bookings of raw materials for the future contracts. ABGs
QIP plans goes for a toss, but still has room for securing debt on account of its relatively
under-leveraged status. Plus it can nor cover-up some pending inputs at lower costs.
We appreciate that the company has taken orders from genuine users & not ship
traders, who are used to ride the trade cycles. Plus also the loss of stage-wise &
advance payments in case of any cancellations. However, the extent of liquidity crunch
globally, can put on strain on the buyers to service the capex installments. The news of
any cancellations for any shipyard company will not be taken well by the markets. What
we sense that the world's largest consumers, USA & Europe going in for a recession,
will have the biggest hit on the global trade. A weakening currency will make
consumption of imported goods even more expensive. While the shipping indices have
come down substantially, there is little case of any revival in the foreseeable future. We
fear that this coupled with the liquidity crunch could test the patience of the genuine
ship-owners, who have placed orders with the shipyards. Tighter credit & poor cash-
flows would add more strain to the general functioning of the Indian Shipyard
companies. We recommend to consider these risks and avoid falling in for these
seemingly cheap & bottomed-out scrips.
Ferris Wheels
Aluminium, Copper, Crude True, most of these commodities have corrected a lot. But maybe not enough. These
prices are still higher than the long term averages. Plus almost the entire the world &
not a nation is headed for a slowdown/recession. These commodities are global
commodities and should be looked from a global perspective and not on a country-
specific perspective.
We again re-iterrate our opinion : 'The commodity cycles have coincided with the
liquidity-crunch.' Please discern this and avoid catching a falling knife.
3500
3000
Aluminum
2500
2000
1500
1000
Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan-
95 96 97 98 99 00 01 02 03 04 05 06 07 08
10000
8500 Copper
7000
5500
4000
2500
1000
Nov- Nov- Nov- Nov- Nov- Nov- Nov- Nov- Nov- Nov- Nov- Nov- Nov- Nov-
95 96 97 98 99 00 01 02 03 04 05 06 07 08
150
Crude
120
90
60
30
Feb-05 Jul-05 Dec-05 May-06 Oct-06 Mar-07 Aug-07 Jan-08 Jun-08 Nov-08
Source: Bloomberg, PPFAS Research

Ferris Wheels
Long term? After so much mayhem, do these make attractive long term bets ?
Predicting an upturn is an arduous task in itself. It seems that the bad news have now
been factored in. Hopefully. But even this would not be enough. There needs to be
some positive news-flow before we see a reversal of trend. Given the global financial
turmoil and the ensuing slowdown or recession, we may witness a notable drop in
consumption, oil prices & global trade. The wait doesn’t end here. Still would need a
resurrection / re-constructing news-flow.
What Now – when the damage has already been done ?
Don't go for mistake no 2. A natural behavioral tendency or fallacy would be to cling to

these stocks. Should the economic scenario worsen, investors saddled with cyclicals
may have to wait for long periods, before the stocks return to their recent highs.
Cyclicals make terrible buy & hold investments. Also you don't have to make it back the
same way you lost it. Time to shift to better alternatives. Look for blue-chip banks,
FMCG, etc..
Lamentably, we find it difficult to do a detailed forecast in a downturn versus

earlier. So we shamefully & discreetly shift our allegiance to Keynes - “Better
roughly right than precisely wrong.”

Ferris Wheels
Companies Aban Offshore Ltd.
Aban Offshore Ltd. (AOL) is the largest private sector offshore drilling entity in India,
providing world class drilling & oil-field services to the offshore oil & gas industry. With
the acquisition of Sinvest ASA, AOL now has a total fleet of 21 drilling assets, placing it
among the top ten drilling asset owners in the world. Almost all its revenues come from
the charter day rates for its drilling rigs, besides which it also very small revenue share
coming from its wind power generation unit.
A few months back, where crude oil prices had sky-rocketed to US$ 145 levels, the day
rates for all the offshore drilling & support vessels had also zoomed to their all-time high
levels. Companies like AOL had seen a corresponding jump (two-fold & three-fold in
some cases) in the charter day rates for their drilling vessels.
But now the tide seems to have changed. With the financial turmoil across the world &
developed countries like US & Europe on the brink of a recession, the crude oil prices
have retrenched a great deal to sub US$ 65 levels. Can this steep fall in crude oil prices
lead to a dip in investments by the Oil & Gas majors, thereby leading to a drop in charter
day rates for the drilling vessels ? The answer to this is anyone's guess.
For AOL, who has majority of its drilling assets entered into long-term contracts,
ranging from 3 – 5 year periods, this might not be of much impact. But if the recent
contracts are any indication of the times to come, there definitely seems some tough
times ahead. Aban has recently contracted two rigs, 'Deep Driller 5' & 'Deep Venture' at
day rates about 15% higher than their previous contracts. On the other hand, as per the
last announcement, it contracted another rig 'Deep Driller 3' at day rates about 28%
lower than its previous contract. So it remains to be seen whether AOL is able to
contract its other vessels that come up for renewal, at same day rates as their current
contracts, or may be higher or lower. However, we believe that even a 15-20% drop in
future day rates for Aban's vessels will have a significant impact on the company's
earnings going forward.
At CMP of Rs. 882.6, the scrip trades at 2.5x FY09E earnings. We recommend a SELL.
Garware Offshore Services Ltd.
Garware Offshore Services Ltd. (GOSL) is a company engaged in providing offshore

support services to the offshore oil & gas industry. It currently owns & operates a fleet of
seven offshore support vessels (OSV), catering to oil & gas companies, largely in India.
It earns majority of its revenues from the chartering of its OSV's, the charter rates for
which had risen in conjunction with those of the drilling rigs. The company also gets
revenues from its agreement with a Norway shipbuilding company, to sell ships & ship
designs. However, with the steep retracement in crude prices over the past two
months, we believe that it might be difficult for companies to fetch similar chartering
rates as have been in the recent past.
At Rs. 101.35, GOSL trades at 4.4x FY09E earnings. We recommend a SELL on rise.
Ferris Wheels
Great Offshore Ltd.
Great Offshore Ltd. (GOFF) is an integrated offshore oilfield services provider, offering
a wide range of services from drilling to marine & air logistics, from marine construction
to port / terminal services. It currently owns & operates a massive fleet of 41 offshore
assets, comprising of drilling rigs & support vessels. GOFF came into being after the
demerger of the offshore division of The Great Eastern Shipping Co. Ltd. GOFF earns
its revenues from diversified operations of chartering of drilling rigs & offshore support
vessels, marine construction contracts & operating of harbour tugs at major ports in
India.
Although GOFF has diversified business operations, reducing its dependence on any
one business segment, majority of its revenues come from the chartering of offshore
assets. With the slump in crude oil prices & the current financial crisis all over the world,
the outlook does not seem clear for GOFF to be able to garner similar day rates for its
offshore vessels.
Even if the charter rates dip by 20%, there could be a significant impact on the
company's earnings.
At CMP of Rs. 341.6, the scrip trades at 4.7x FY09E earnings. We recommend a SELL
on rise.
ABG Shipyard Ltd.
ABG Shipyard Ltd. (ABG) is presently the largest private sector shipyard in India,
manufacturing a variety of ships like bulk carriers, interceptor boats, diving support
vessels, offshore support vessels, etc. ABG is one of the major shipbuilding companies
worldwide in the niche area of offshore vessels. The company has already built &
delivered over 100 vessels successfully since its inception. ABG had its primary yard
located at Magdalla, Surat & has recently expanded its shipbuilding capacity at Surat &
Dahej, in Gujarat. ABG Shipyard Ltd. currently has an order book of Rs. 114,000 Mn.
including orders two Jack up rigs.
ABG has largely been using the equity route to raise funds for its expansion. The
company has already done a private placement previously & further has plans to raise
funds through QIB placements. It has also issued Convertible Warrants to its promoter
during the last financial year. This policy of raising funds through the equity route leads
to dilution of earnings for the existing shareholders.
We still believe that the shipbuilding era for India remains positive for the shipbuilding
companies. However, in the current financial scenario, it may be difficult for ABG to
raise funds through debt. Also the subscribers to convertibles already issued, would
not want to convert these into equity shares, since the price of the scrip has been
hammered & hence, these convertibles would come up for redemptions. Therefore, we
believe that the company's expansion plans may get derailed or postponed. Also, in

Ferris Wheels
case of any order cancellations from the shipping companies that have placed orders
with ABG, the company would suffer to much extent. The issue on the subsidy front still
remains a gray area.
In the current market scenario of financial turmoil, bankruptcies & falling commodities,
the impact has been clearly visible on the shipping sector, where the Baltic has
corrected more than 75 – 80 percent from its peak. In such a scenario, it might be
difficult for shipbuilding companies to report sustained growth going forward.
At CMP of Rs. 125.7, the scrip trades at 3x FY09E earnings. We recommend a SELL on
rise.
Bharati Shipyard Ltd.
Bharati Shipyard Ltd. (BSL) is India's second largest private sector shipyard engaged
in design & construction of various types of sea-going, coastal harbour, inland crafts &
vessels. BSL has also developed itself as successful builder of the complex offshore
support vessels. The companies main yard is located at Ratnagiri, besides which it has
other scattered shipbuilding facilities at Ghodbunder, Goa & Kolkata. The company is
also expansing its yard capacities at Mangalore & Dabhol. As of the last reported
numbers, BSL has an order book of Rs. 48,750 Mn. (approx).
BSL has mostly taken the debt route for financing its expansion plans, although it has
used the equity route as well – through the issue of FCCB. The company had issued
FCCBs worth US$ 100 Mn. of which US$ 20 Mn. have already been converted into
equity shares. Our view is that, the balance FCCBs would not get converted & would
come up for redemptions, since the conversion price of Rs. 498 is way too high as
compared to scrips CMP. This would lead to the company leveraging further, probably
at higher cost to redeem these bonds, eventually leading to higher interest burden &
decrease in earnings. Also this would have a negative impact on the companies
expansion plans.
At CMP of Rs. 70.85, the scrip trades at 1.5x FY09E earnings. We recommend a SELL
on rise.

Ferris Wheels
Aban Offshore : SELL

Particulars (Rs Mn.) FY06 FY07 FY08 FY09E Particulars (Rs Mn.) FY06 FY07 FY08 FY09E
- Growth (%) 69.3% 46.6% 181.2% 130.4% Preference Capital 1,500.0 3,060.0 3,060.0 3,260.0
Share in Asso./JVs 0.0 203.6 853.1 0.0 Minority Interest 0.0 0.0 0.0 1,129.5
Forex Gain/(Loss) (8.4) 163.1 (1,943.8) 0.0 Borrowed Funds 11,098.1 108,525.3 130,434.0 115,097.9
Other Income 147.8 717.9 1,069.9 322.7 Deferred Tax Liability 655.9 737.5 653.6 1,379.1
Depreciation 1,014.0 1,265.6 3,077.5 5,542.1 Fixed Assets 15,466.3 97,647.5 126,246.9 127,689.9
EBIT 1,937.4 3,293.0 9,318.4 26,769.0 Investments 192.1 4,682.5 6,390.9 6,390.9
Interest 436.3 2,686.4 6,658.5 8,632.3 Trade Investments 52.9 1,464.4 1,464.4 1,464.4
PBT 1,501.1 606.6 2,659.9 18,136.7 Current Assets
Tax 678.4 746.6 1,430.1 3,169.8 Inventory 488.8 1,022.3 1,646.8 5,103.9
PAT Before EI & MI 822.6 (140.0) 1,229.8 14,966.9 Sundry Debtors 699.0 2,033.1 4,712.1 8,931.8
Minority Interest (MI) 0.0 0.0 (0.1) 1,129.5 Loans & Advances 181.4 2,870.8 1,277.7 2,552.0
PAT Before EI 822.6 (140.0) 1,229.9 13,837.3 Cash & Bank Balance 135.4 13,264.0 6,453.1 1,351.0
- Growth (%) 59.3% -117.0% -978.4% 1025.1% Current Liabilities
Extraordinary Items (EI) 0.0 0.0 0.0 0.0 Sundry Creditors 835.3 6,624.5 6,568.0 9,569.8
PAT 822.6 (140.0) 1,229.9 13,837.3 Provisions 269.7 324.7 948.6 1,914.0
Net Current Assets 399.7 12,241.0 6,573.1 6,454.9
Ratio Analysis Total Assets 16,058.1 114,571.0 139,210.9 140,535.7
Particulars FY06 FY07 FY08 FY09E
OPM (%) 57.4% 48.3% 61.4% 68.7% Cash Flow
EBITDA (%) 60.2% 63.4% 61.3% 69.4% Particulars (Rs Mn.) FY06 FY07 FY08 FY09E
PBIT (%) 39.5% 45.8% 46.1% 57.5% Opening Cash & Bank 982.8 135.4 13,264.0 6,453.1
PAT (%) 16.8% -1.9% 6.1% 29.7% Profit After Tax 822.6 (140.0) 1,229.9 13,837.3
Interest Cover (x) 4.4 1.2 1.4 3.1 Investment Income (147.8) (717.9) (1,069.9) (322.7)
EPS (Rs.) 22.3 (3.8) 32.5 357.0 Interest Paid 436.3 2,686.4 6,658.5 8,632.3
P/E (x) 39.5 (232.5) 27.1 2.5 Misc. Exp W/Off 0.0 0.0 0.0 0.0
P/BV (x) 7.6 6.1 4.1 1.5 Depreciation 1,014.0 1,265.6 3,077.5 5,542.1
BVPS (Rs.) 116.8 143.9 215.0 591.6 Deferred Taxation 91.4 81.3 (83.8) 725.5
Market Cap (Rs. Mn.) 32,526.8 32,554.8 33,349.0 34,208.7 Others (64.4) 205.1 (48.6) 0.0
M Cap/Sales (x) 6.6 4.5 1.7 0.7 Change in Working Cap 391.6 1,287.3 (1,143.0) (4,983.9)
EV (Rs. Mn.) 43,489.5 127,816.2 157,329.9 147,955.5 CF - Operating Activities 2,543.9 4,667.8 8,620.5 23,430.7
EV/EBITDA (x) 14.7 28.0 12.7 4.6 Change in Fixed Assets (8,339.9) (83,651.6) (31,628.3) (6,985.0)
EV/Sales (x) 8.9 17.8 7.8 3.2 Change in Investments 39.5 (4,490.4) (1,708.3) 0.0
ROCE (%) 12.6% 2.9% 6.7% 19.4% Investment Income 147.8 717.9 1,069.9 322.7
RONW (%) 19.1% -2.6% 15.1% 65.3% CF - Investing Activities (8,152.6) (87,424.1) (32,266.7) (6,662.3)
Debt/Equity Ratio (x) 2.6 20.4 16.1 5.0 Increase in Equity (4.1) (127.6) 2,049.1 2,716.4
Inventory T/o Days 36.4 51.9 29.7 40.0 Changes in Pref. Capital 1,500.0 1,560.0 0.0 200.0
Debtors T/o Days 52.1 103.3 85.1 70.0 Changes in Borrowings 3,919.0 97,427.3 21,908.6 (15,336.1)
Advances T/o Days 13.5 145.8 23.1 20.0 Chng in Minority Interest 0.0 0.0 0.0 1,129.5
Creditors T/o Days 62.2 336.4 118.6 75.0 Interest Paid (436.3) (2,686.4) (6,658.5) (8,632.3)
Working Cap T/o Days 29.8 621.7 118.7 50.6 Dividend Paid – Equity (109.3) (129.7) (159.2) (1,632.4)
Fixed Assets T/o (Gross) 0.4 0.1 0.2 0.3 Dividend Paid – Preference (108.0) (158.7) (304.7) (315.5)
DPS (Rs.) 2.6 3.0 3.6 36.0 CF - Financing Activities 4,761.4 95,884.9 16,835.4 (21,870.4)
Dividend Payout (%) 11.7% -79.2% 11.1% 10.1% Net Change in Cash (847.4) 13,128.5 (6,810.8) (5,102.1)
Dividend Yield (%) 0.3% 0.3% 0.4% 4.1% Closing Cash & Bank 135.4 13,264.0 6,453.1 1,351.0

Ferris Wheels
Garware Offshore : SELL

Particulars (Rs Mn.) CY05 CY06 FY08 (15mths) FY09E Particulars (Rs Mn.) CY05 CY06 FY08 (15mths) FY09E
Total Revenues 308.6 523.8 1,136.7 1,459.6 Equity Capital 144.2 188.3 238.2 238.2
- Growth (%) -3.2% 69.7% 117.0% 28.4% Share Warrant – App. Money 13.7 32.7 0.0 0.0
Total Expenditure 172.0 229.2 441.6 450.7 Reserves 587.9 918.5 1,733.9 2,224.7
Operating Profit 136.6 294.6 695.1 1,009.0 Shareholders Funds 745.8 1,139.5 1,972.0 2,462.9
Forex Gain/(Loss) 0.0 0.0 160.6 0.0 Minority Interest 0.0 0.0 0.0 0.0
Other Income 3.1 10.7 11.8 4.3 Borrowed Funds 810.8 1,847.2 2,653.0 3,853.0
EBITDA 139.7 305.2 867.5 1,013.2 Deferred Tax Liability 0.0 0.0 0.0 0.0
Depreciation 35.7 76.2 160.3 212.3 Total Liabilities 1,556.7 2,986.7 4,625.0 6,315.9
EBIT 104.0 229.0 707.2 800.9 Fixed Assets 1,283.6 2,666.5 4,285.1 5,664.7
Interest 5.4 67.6 218.9 269.7 Investments 4.6 5.6 5.6 5.6
PBT 98.6 161.4 488.2 531.2 Current Assets
Tax 8.2 8.5 13.2 19.6 Inventory 31.1 60.1 127.9 160.0
PAT Before EI 90.4 152.8 475.0 511.6 Sundry Debtors 146.0 112.1 166.2 259.9
- Growth (%) -26.9% 69.1% 210.8% 7.7% Loans & Advances 130.0 124.8 133.9 350.0
Extra-ordinary Items 15.4 3.0 0.0 35.0 Cash & Bank Balance 29.2 108.6 85.7 140.6
PAT 105.8 155.8 475.0 546.6 Current Liabilities
Sundry Creditors 34.0 52.4 95.5 160.0
Particulars CY05 CY06 FY08 (15mths) FY09E Net Current Assets 268.4 314.5 334.3 645.5
OPM (%) 44.3% 56.2% 61.2% 69.1% Total Assets 1,556.7 2,986.7 4,625.0 6,315.9
EBITDA (%) 45.3% 58.3% 76.3% 69.4%
PBIT (%) 33.7% 43.7% 62.2% 54.9% Cash Flow
PAT (%) 29.3% 29.2% 41.8% 35.1% Particulars (Rs Mn.) CY05 CY06 FY08 (15mths) FY09E
Interest Cover (x) 19.4 3.4 3.2 3.0 Opening Cash & Bank 19.0 29.2 108.6 85.7
EPS (Rs.) 7.3 8.3 19.9 22.9 Profit After Tax 105.8 155.8 475.0 546.6
P/E (x) 13.8 12.2 5.1 4.4 Investment Income (3.1) (10.7) (11.8) (4.3)
BVPS (Rs.) 51.7 60.5 82.8 103.4 Misc. Exp W/Off 0.0 0.0 0.0 0.0
EV (Rs. Mn.) 2,243.2 3,646.9 4,981.3 6,126.5 Others (94.8) (3.9) 0.0 0.0
EV/EBITDA (x) 16.1 11.9 5.7 6.0 Change in Working Cap (10.7) 33.2 (42.6) (256.4)
ROCE (%) 6.7% 7.7% 15.3% 12.7% Change in Fixed Assets (869.3) (1,455.3) (1,780.8) (1,506.9)
Inventory T/o Days 36.8 41.9 41.1 40.0 CF - Investing Activities (866.5) (1,445.7) (1,769.1) (1,502.7)
Debtors T/o Days 172.7 78.1 53.4 65.0 Increase in Equity 72.3 257.8 440.4 0.0
Advances T/o Days 153.7 87.0 43.0 87.5 Changes in Share Warrants 13.7 19.1 (32.7) 0.0
Creditors T/o Days 40.2 36.5 30.7 40.0 Changes in Borrowings 777.5 1,036.4 805.8 1,200.0
DPS (Rs.) 1.2 1.8 1.8 2.0 CF - Financing Activities 838.4 1,206.6 944.4 874.6
Dividend Yield (%) 1.2% 1.8% 1.8% 2.0% Closing Cash & Bank 29.2 108.6 85.7 140.6

Ferris Wheels
Great Offshore : SELL

Particulars (Rs Mn.) FY07 FY08 FY09E FY10E Particulars (Rs Mn.) FY07 FY08 FY09E FY10E
- Growth (%) 28.1% 6.5% 21.4% 10% OCR Pref. Capital 1,500.0 1,500.0 0.0
- Growth (%) 18.9% 30.9% 18.7% Borrowed Funds 7,465.6 9,461.3 9,445.1 4,759.6
Other Income 42.6 113.9 159.7 193.4 Deferred Tax Liability (32.9) (65.7) 0.0 0.0
Forex Gain/(Loss) 36.2 386.0 0.0 0.0 Total Liabilities 13,608.5 18,210.9 19,578.9 18,519.5
EBITDA 2,707.2 3,624.3 4,248.8 5,046.1 Fixed Assets 12,889.5 13,904.7 15,386.4 14,959.4
- Growth (%) 33.9% 17.2% 18.8% Goodwill on Consolidation 0.5 0.5 0.5 0.5
Depreciation 709.0 985.5 1,038.3 1,176.9 Investments 0.0 181.9 181.9 181.9
Interest 360.6 683.9 620.8 380.8 Inventory 63.1 78.3 97.9 118.8
PBT 1,637.6 1,954.9 2,589.7 3,488.4 Sundry Debtors 1,239.6 1,748.2 1,566.7 1,901.6
Tax 185.8 173.4 293.0 467.6 Loans & Advances 406.4 1,562.9 478.7 581.0
PAT Before EI 1,451.8 1,781.5 2,296.7 3,020.8 Other Current Assets 5.5 0.0 0.0 0.0
- Growth (%) 22.7% 28.9% 31.5% Cash & Bank Balance 576.4 3,194.0 3,868.7 3,206.0
Extra-ordinary Items 0.0 234.8 0.0 0.0 Current Liabilities
PAT 1,451.8 2,016.3 2,296.7 3,020.8 Sundry Creditors 1,545.7 1,971.0 1,958.4 2,376.9
Provisions 27.2 488.6 43.5 52.8
Ratio Analysis Net Current Assets 718.1 4,123.8 4,010.1 3,377.7
Particulars FY07 FY08 FY09E FY10E Total Assets 13,608.5 18,210.9 19,578.9 18,519.5
OPM (%) 45.1% 41.9% 51.5% 50.3%
EBITDA (%) 46.5% 48.6% 53.5% 52.3% Cash Flow
PBIT (%) 34.3% 35.4% 40.4% 40.1% Particulars (Rs Mn.) FY07 FY08 FY09E FY10E
PAT (%) 24.9% 27.0% 28.9% 31.3% Opening Cash & Bank 1,024.0 576.4 3,325.3 4,000.0
Interest Cover (x) 5.5 3.9 5.2 10.2 Profit After Tax 1,451.8 2,016.3 2,296.7 3,020.8
EPS (Rs.) 38.1 52.9 60.2 72.3 Investment Income (42.6) (113.9) (159.7) (193.4)
P/BV (x) 2.1 1.5 1.3 1.0 Miscellaneous Exp W/Off 2.1 0.4 0.0 0.0
BVPS (Rs.) 162.0 231.3 265.8 329.5 Depreciation 709.0 985.5 1,038.3 1,176.9
Market Cap (Rs. Mn.) 13,021.8 13,021.8 13,021.8 14,263.3 Deferred Taxation (61.5) (32.8) 65.7 0.0
M Cap/Sales (x) 2.2 1.7 1.6 1.5 Others (3.2) 0.0 0.0 0.0
EV (Rs. Mn.) 19,911.0 19,289.1 18,598.2 15,816.8 Change in Working Cap (146.4) (788.1) 788.4 (30.2)
EV/EBITDA (x) 7.4 5.3 4.4 3.1 CF - Operating Activities 2,269.8 2,751.3 4,650.1 4,354.9
EV/Sales (x) 3.4 2.6 2.3 1.6 Change in Fixed Assets (5,778.2) (1,869.4) (2,520.0) (750.0)
ROCE (%) 14.6% 14.4% 16.4% 20.9% Change in Investments 0.0 (181.9) 0.0 0.0
RONW (%) 23.5% 22.9% 22.7% 22.0% Investment Income 42.6 113.9 159.7 193.4
Debt/Equity Ratio (x) 1.2 1.1 0.9 0.3 CF - Investing Activities (5,735.6) (1,937.4) (2,360.3) (556.6)
Inventory T/o Days 4.0 3.8 4.5 4.5 Increase in Equity 72.5 (63.9) 0.0 3,180.0
Debtors T/o Days 77.7 85.5 72.0 72.0 Changes in Pref.Capital 0.0 1,500.0 0.0 (1,500.0)
Advances T/o Days 25.5 76.5 22.0 22.0 Changes in Borrowings 3,654.0 1,995.7 (16.2) (4,685.5)
Creditors T/o Days 96.9 96.4 90.0 90.0 Interest Paid (360.6) (683.9) (620.8) (380.8)
Working Cap T/o Days 45.0 201.8 184.3 127.9 Dividend Paid – Equity (347.7) (728.1) (802.7) (1,074.7)
Fixed Assets T/o (Gross) 0.4 0.5 0.4 0.5 Dividend Paid – Preference 0.0 (84.8) (175.5) 0.0
DPS (Rs.) 8.0 16.0 18.0 22.0 CF - Financing Activities 3,018.2 1,935.0 (1,615.2) (4,460.9)
Dividend Payout (%) 21.0% 30.2% 29.9% 30.4% Net Change in Cash (447.6) 2,748.9 674.7 (662.6)
Dividend Yield (%) 2.3% 4.7% 5.3% 6.4% Closing Cash & Bank Bal. 576.4 3,325.3 4,000.0 3,337.3

Ferris Wheels
ABG Shipyard : SELL

Revenues (Excl Subsidy) 6,242.2 8,851.4 13,837.4 20,732.7 Equity Capital 509.2 509.2 629.2 679.2
- Growth (%) 33.2% 41.8% 56.3% 49.8% Convertible Warrants 318.7
Other Income 52.7 74.0 62.3 82.3 Minority Interest 0.0 0.0 0.0 0.0
Subsidy 819.4 817.0 1,651.1 2,476.7 Borrowed Funds 4,095.8 5,222.0 5,222.0 8,722.0
EBITDA 2,006.4 2,990.7 4,693.3 6,991.1 Deferred Tax Liability 1,080.3 1,675.3 2,554.9 3,837.9
EBITDA (Excl. Subsidy) 1,187.0 2,173.7 3,042.2 4,514.4
Depreciation 59.6 74.0 225.4 374.2 Total Liabilities 11,054.5 14,560.6 26,972.5 39,536.7
EBIT 1,946.8 2,916.7 4,467.8 6,616.9 Fixed Assets 2,962.8 5,855.8 9,880.4 14,756.2
Interest 266.8 457.1 470.0 785.0 Investments 0.0 58.2 1,558.2 2,058.2
PBT 1,679.9 2,459.6 3,997.8 5,831.9 Current Assets
Tax 518.4 852.8 1,359.3 1,982.8 Inventory 5,320.4 12,428.0 11,373.2 17,040.5
PAT Before EI 1,161.5 1,606.8 2,638.6 3,849.1 Sundry Debtors 81.2 84.0 189.6 284.0
- Growth (%) 38.7% 38.3% 64.2% 45.9% Loans & Advances 6,624.6 11,030.4 12,321.0 18,460.6
Extra-ordinary Items 1.6 -0.3 0.0 0.0 Cash & Bank Balance 1,401.5 867.7 1,431.1 1,592.1
Sundry Creditors 5,185.8 15,555.0 9,477.7 14,200.5
Particulars FY07 FY08 FY09E FY10E Net Current Assets 8,091.7 8,646.6 15,533.9 22,722.3
OPM (%) 18.2% 23.7% 21.5% 21.4% Miscellaneous Expenditure 0.0 0.0 0.0 0.0
EBITDA (%) 32.1% 33.8% 33.9% 33.7%
EBITDA % (Excl. Subsidy) 19.0% 24.6% 22.0% 21.8% Total Assets 11,054.5 14,560.6 26,972.5 39,536.7
PBIT (%) 31.2% 33.0% 32.3% 31.9%
PAT (%) 18.6% 18.1% 19.1% 18.6% Cash Flow
Interest Cover (x) 7.3 6.4 9.5 8.4 Particulars (Rs Mn.) FY07 FY08 FY09E FY10E
EPS (Rs.) 22.8 31.5 41.9 56.7 Opening Cash & Bank 4,052.8 1,401.5 513.2 1,395.3
P/E (x) 5.5 4.0 3.0 2.2 Profit After Tax 1,163.1 1,606.5 2,638.6 3,849.1
P/BV (x) 1.1 0.8 0.4 0.3 Investment Income (52.7) (74.0) (62.3) (82.3)
Market Cap (Rs. Mn.) 6,400.9 6,400.9 7,909.3 8,537.8 Miscellaneous Exp W/Off 0.0 0.0 0.0 0.0
EV (Rs. Mn.) 9,095.1 10,755.2 11,700.2 15,667.7 Deferred Taxation 413.1 595.0 879.5 1,283.0
EV/EBITDA (x) 4.5 3.6 2.5 2.2 Others 19.3 0.0 0.0 0.0
EV/Sales (x) 1.5 1.2 0.8 0.8 Change in Working Cap (5,814.8) (1,088.7) (6,323.9) (7,027.5)
ROCE (%) 19.5% 22.6% 18.3% 18.5% CF - Operating Activities (3,945.5) 1,569.9 (2,172.7) (818.6)
RONW (%) 19.8% 21.0% 13.7% 14.3% Change in Fixed Assets (1,481.2) (3,002.9) (4,250.0) (5,250.0)
Debt/Equity Ratio (x) 0.7 0.7 0.3 0.3 Change in Investments 0.0 (58.2) (1,500.0) (500.0)
Debtors T/o Days 4.7 3.5 5.0 5.0 CF - Investing Activities (1,428.6) (2,987.0) (5,687.7) (5,667.7)
Advances T/o Days 387.4 454.9 325.0 325.0 Increase in Equity (19.7) (21.2) 9,433.3 4,250.0
Creditors T/o Days 303.2 641.4 250.0 250.0 Changes in Borrowings 3,098.8 1,126.3 0.0 3,500.0
DPS (Rs.) 1.5 2.0 3.0 4.0 CF - Financing Activities 2,722.8 528.8 8,742.5 6,647.2
Dividend Payout (%) 6.6% 6.3% 7.2% 7.1% Net Change in Cash (2,651.3) (888.3) 882.1 160.9
Dividend Yield (%) 1.2% 1.6% 2.4% 3.2% Closing Cash & Bank Balance 1,401.5 513.2 1,395.3 1,556.2

Ferris Wheels
Bharati Shipyard : SELL

- Growth (%) 38.4% 78.7% 48.1% 36.6% Reserves 2,222.8 5,512.3 9,060.8 10,667.8
Operating Profit 655.2 1,309.5 1,812.4 2,473.2 Minority Interest 10.9 12.8 12.8 12.8
Forex Gain/(Loss) (1.4) (16.1) 0.0 0.0 Borrowed Funds 5,555.3 4,316.5 5,527.0 11,952.0
Subsidy 617.5 597.1 1,140.0 1,560.0 Total Liabilities 8,301.4 10,421.5 15,496.3 23,840.9
EBITDA 1,303.5 1,924.1 2,972.7 4,053.5
EBITDA (Excl. Subsidy) 686.0 1,327.0 1,832.7 2,493.5 Fixed Assets 2,457.4 4,332.6 7,341.7 12,694.2
Depreciation 51.1 81.5 215.9 372.5 Goodwill on Consolidation 3.0 3.0 3.0 3.0
Interest 143.8 215.8 497.4 1,075.7 Current Assets
PBT 1,108.5 1,626.9 2,259.3 2,605.3 Inventory 2,546.3 6,016.0 7,853.7 10,730.4
Tax 376.2 548.5 768.2 885.8 Sundry Debtors 1,375.2 1,865.1 3,665.1 5,007.5
PAT 732.3 1,078.3 1,491.1 1,719.5 Loans & Advances 1,582.0 2,918.5 4,188.7 5,722.9
Minority Interest (MI) 0.2 0.0 0.0 0.0 Cash & Bank Balance 4,016.3 2,269.8 233.4 348.8
PAT after MI 732.0 1,078.3 1,491.1 1,719.5 Current Liabilities
- Growth (%) 43.5% 47.3% 38.3% 15.3% Sundry Creditors 3,183.2 6,032.9 6,544.8 8,942.0
Provisions 554.9 1,015.1 1,309.0 1,788.4
Particulars FY07 FY08 FY09E FY10E Miscellaneous Expenditure 39.1 30.0 30.0 30.0
OPM (%) 18.1% 20.3% 19.0% 18.9%
EBITDA % (Excl. Subsidy) 19.0% 20.6% 19.2% 19.1%
PBIT (%) 34.7% 28.6% 28.9% 28.2% Cash Flow
PAT (%) 20.3% 16.7% 15.6% 13.2% Particulars (Rs Mn.) FY07 FY08 FY09E FY10E
Interest Cover (x) 8.7 8.5 5.5 3.4 Opening Cash & Bank 4,721.5 4,016.3 2,269.8 233.4
EPS (Rs.) 32.5 39.1 46.5 53.7 Profit After Tax 732.0 1,078.3 1,491.1 1,719.5
P/E (x) 2.2 1.8 1.5 1.3 Investment Income (32.1) (33.6) (20.2) (20.2)
P/BV (x) 0.7 0.3 0.2 0.2 Interest Paid 143.8 215.8 497.4 1,075.7
BVPS (Rs.) 107.1 208.9 291.9 342.0 Miscellaneous Exp W/Off 9.8 9.2 0.0 0.0
EV (Rs. Mn.) 3,133.1 4,000.0 7,563.7 13,873.2 Others 1.0 6.2 0.0 0.0
EV/EBITDA (x) 2.4 2.1 2.5 3.4 Change in Working Cap (194.4) (1,986.2) (4,102.1) (2,876.7)
EV/Sales (x) 0.9 0.6 0.8 1.1 CF - Operating Activities 850.9 (611.9) (1,646.8) 583.4
ROCE (%) 15.7% 18.3% 18.5% 16.1% Change in Fixed Assets (1,419.3) (1,962.9) (3,225.0) (5,725.0)
Inventory T/o Days 257.4 340.4 300.0 300.0 CF - Investing Activities (1,397.1) (1,943.8) (3,204.8) (5,704.8)
Debtors T/o Days 139.0 105.5 140.0 140.0 Increase in Equity (16.6) 2,358.6 2,214.6 0.0
Advances T/o Days 159.9 165.1 160.0 160.0 Changes in Minority 0.2 1.9 0.0 0.0
Creditors T/o Days 321.8 341.3 250.0 250.0 Changes in Borrowings 80.1 (1,238.8) 1,210.4 6,425.0
Working Cap T/o Days 584.6 340.7 308.9 309.8 Interest Paid (143.8) (215.8) (497.4) (1,075.7)
DPS (Rs.) 3.0 3.0 3.0 3.0 CF - Financing Activities (159.0) 809.2 2,815.1 5,236.9
Dividend Payout (%) 9.2% 7.7% 6.4% 5.6% Net Change in Cash (705.2) (1,746.6) (2,036.4) 115.5
Dividend Yield (%) 3.5% 4.2% 4.2% 4.2% Closing Cash & Bank Balance 4,721.5 4,016.3 2,269.8 233.4

Migration from “splurging to savings”
Two-Wheeler Industry Anuj Anandwala | anuj@ppfas.com
India's two-wheeler industry, which was going through a lean phase in line with the
global trend, has bounced back, posting higher sales for Sept'08. Despite the aforesaid
concerns to overcome the impact of high interest rates, rising fuel costs and slackening
in availability of finance, two-wheeler sales numbers have surprisingly witnessed a
recovery. The two-wheeler industry volumes grew by 12.4% YTD in FY09 led by factors
like the excise duty cut, low base of production cutbacks made last year.
Rising interest rates during the year pushed the industry into de-growth, against all
expectations and projections. The overall two-wheeler pie (Domestic + Exports)
reported a decrease of 2% with domestic numbers shrinking by almost 12% for the first
time in the decade. Maintaining liquidity, which went stretched affects the credit
availability, is the key priority for policy makers that is implemented by the frequent CRR
cut (currently @ 6.5%). This in turn is providing respite on working capital financing for
the corporates.
With rising credit spreads, the effect of monetary easing on actual credit offtake is likely
to come only with a lag. Hence, the capex plans of corporates will be taking a sharp hit.
Greenfield expansions are expected to suffer more than brownfield ones, as sanctions
for new projects will dry up significantly.
For most of the two-wheeler industry therefore, managing FY07-08 and H1FY09 was
like trying to grow on a rocky terrain, of which the sub-soil was far from nourishing and
the business climate was harsh. Yet, strong companies, like strong trees, learnt to
adapt and adjust. They grew tough roots along the ROCKS.
Currently Hero Honda and Bajaj Auto have negative working capital. In terms of capex
plans, both these companies are nearing the end of their major capex programmes and
also have sufficient cash on balance sheets to fund future capex. Thus we do not see
any funding issues for future expansions for any of these companies.
Luckily, the market leaders like Hero Honda, Bajaj Auto and TVS Motors have
considerably weathered the storm and surpassed the tally of previous years volume
numbers marginally. The companies have also resisted the temptation to bump up
sales artificially through comprehensive festival-related discounts and investing more
in new models and upgrades. Also the government's initiative of farm-loan waiver and
revision in the Sixth Pay Commission seems to have given a boost to rural demand.

Companies Hero Honda Motors Ltd. (HHML)
Hero Honda Motors Limited (HHML) is the largest two-wheeler company in the world
with an overall market share of 44% in domestic markets. HHML's motorcycle product
mix in FY08 consisted ~28% of entry level motorcycles, ~66% of executive models and
remaining ~6% of premium segment bikes. The company currently has an overall
production capacity of 3.9 million units from its two facilities at Manesar and Dharuhera
in Haryana. The company's Uttaranchal plant has begun its operations in the first week
of April-2008 with the initial capacity to produce 750,000 units per annum.
Hero Honda trades at 15x FY08 earnings of Rs. 48.5 per share.
Bajaj Auto Ltd. (BAL)
Bajaj Auto Limited (BAL) is the second largest player in the domestic two-wheeler
industry. The company's market share in the 125 cc plus segment is close to 50%.
Growth in the 125cc plus segment was attributable to its new launches (XCD 125 DTS-
Fi, Discover 135 DTS-i, Pulsar 200 DTS-i, and Pulsar 220 DTS – Fi). BAL also
continued to be a dominant player in the domestic three-wheeler market. In the
passenger three-wheeler segment BAL enjoyed market share of 71.5% in FY08. Over
47% of its three-wheelers were exported during the year. The company has also
started its new manufacturing facility at Pantnagar (Uttarakhand) which has the
capacity to produce 1 million bikes annually. BAL already has four manufacturing units
in Maharashtra, including a modern plant at Chakan where Pulsar is manufactured and
one at Waluj near Aurangabad where it manufactures three-wheelers, its smaller
motorcycles and the newly launched 125cc XCD. Bajaj Auto has planned to launch four
new 125cc bikes in FY09.
Bajaj Auto trades at 9.5x FY08 earnings of Rs. 52.2 per share.
TVS Motors Ltd. (TML)
TVS motor is the third largest player in the two-wheeler industry. TVS enjoy strong
market share in south India and has a network of around 600 dealers and 2,000
authorized service centers across India. TVS operates through its manufacturing
plants based in Hosur and Mysore with an installed capacity of 2 million vehicles per
annum. The company has recently set up a new plant in Himachal Pradesh for
manufacturing two wheelers with an installed capacity of 4 lakh vehicles. It has also
marked its entery into the three wheeler segment with the launch of first two-stroke
200cc auto rickshaws under the brand name “King”. These auto rickshaws will also be
available in LPG and Petrol versions. The company is likely to benefit from lower
comparable base and strong sales growth will drive the profits.
TVS Motors trades at 22.5x FY08 earnings of Rs. 1.3 per share.

Outlook With the Indian middle class earning higher per capita income, more people are ready
to own private vehicles. But, the spike in the interest rate and rising input costs has
been adversely impacting the domestic demand for both the two and three wheeler
segments. The domestic price of CR coil has increased 18.5% in FY08 over last year;
while the aluminum price has increased 12.4% in FY08 over last year. The persistent
volatility of metal prices would continue to exert cost pressure on the companies.
Further with the rising interest rate and non-availability of finance, the short term
outlook in the two-wheeler industry remains bleak.
But on comparative basis we expect two-wheelers to perform better than four-wheelers

on account of lower sensitivity to commodity prices going with less competition and
good margins. This can be further attributed by the recent developments in the
commodities markets as well as the political scenario of the Indian markets. World over,
the drop in input prices viz., crude, aluminium, rubber, lead have fallen, which have
marginally aided the margins of the Indian two-wheeler companies. This has also seen
a shift from the 4-wheeler market and more focus on two-wheelers as its results in a lot
of savings for the end consumers. Also with the substantial fall in crude prices from a
high of $147/barrel to a recent low of $61/barrel is a positive trigger for the Indian two-
wheeler market. The forthcoming state elections in December 2008 and central
elections between February-May 2009 could result in the petrol prices falling thereby
aiding the customers and ramping up two-wheelers sales .
We recommend a BUY on Bajaj Auto and ACCUMULATE on Hero Honda and TVS
Motors as the valuations could turnaround in terms of cost cutting and improvement in
productivity, which would further cushion margins.

Hero Honda : ACCUMULATE

Particulars (Rs. Mn) FY05 FY06 FY07 FY08 Particulars (Rs. Mn) FY05 FY06 FY07 FY08
Two Wheelers Sold (Nos) 2,621,400 3,000,751 3,336,756 3,337,142 Equity Capital 399.4 399.4 399.4 399.4
- Growth (%) 26.6% 14.5% 11.2% 0.01% Reserves 14,534.4 19,693.9 24,301.2 29,463.0
Total Revenues 74,216.5 87,139.8 98,999.6 103,318.0 Shareholders Funds 14,933.8 20,093.3 24,700.6 29,862.4
- Growth (%) 27.2% 17.4% 13.6% 4.4% Borrowed Funds 2,017.6 1,857.8 1,651.7 1,320.0
Total Expenditure 62,530.1 73,495.3 87,269.2 89,824.3 Deferred Tax Liability 1,015.3 1,201.0 1,295.8 1,305.9
Operating Profit 11,686.4 13,644.5 11,730.4 13,493.7 Total Liabilities 17,966.7 23,152.1 27,648.1 32,488.3
Other Income 1,369.0 1,562.8 1,898.5 1,854.2 Fixed Assets 7,153.3 9,935.6 13,554.5 15,487.0
EBITDA 13,055.4 15,207.3 13,628.9 15,347.9 Investments 20,266.5 20,618.9 19,738.7 25,668.2
- Growth (%) 14.1% 16.5% -10.4% 12.6% Pre-operative Expenses 0.0 0.0 0.0 160.5
Depreciation 893.8 1,146.2 1,397.8 1,603.2 Deferred Tax Asset 6.3 13.2 13.8 52.2
Interest (10.9) (61.3) (229.9) (358.1) Inventory 2,042.6 2,265.5 2,755.8 3,171.0
PBT 12,172.5 14,122.4 12,461.0 14,102.8 Sundry Debtors 895.5 1,586.6 3,352.5 2,974.4
Tax 4,067.8 4,409.0 3,882.1 4,424.0 Loans & Advances 2,396.1 2,737.8 2,630.6 1,854.6
PAT 8,104.7 9,713.4 8,578.9 9,678.8 Cash & Bank Balance 176.0 1,587.2 357.8 1,310.9
- Growth (%) 11.3% 19.8% -11.7% 12.8% Other Current Assets 35.1 35.3 36.0 56.9
Current Liabilities
Particulars FY05 FY06 FY07 FY08 Provisions 4,847.1 4,899.2 4,372.4 4,997.6
OPM (%) 15.7% 15.7% 11.8% 13.1% Net Current Assets (9,459.4) (7,415.6) (5,658.9) (8,879.6)
PBIT (%) 16.4% 16.1% 12.4% 13.3%
PAT (%) 10.9% 11.1% 8.7% 9.4% Cash Flow
Interest Cover (x) (1,115.7) (229.4) (53.2) (38.4) Particulars FY05 FY06 FY07 FY08
EBITDA per share (Rs.) 65.4 76.2 68.2 76.9 Opening Cash & Bank 371.2 4,720.4 1,587.2 357.8
EPS (Rs.) 40.6 48.6 43.0 48.5 Profit after Tax 8,104.7 9,713.4 8,578.9 9,678.8
P/E (x) 17.9 14.9 16.9 15.0 Less: Investment Income (1,369.0) (1,562.8) (1,898.5) (1,854.2)
P/BV (x) 9.7 7.2 5.9 4.9 Interest Paid (10.9) (61.3) (229.9) (358.1)
BVPS (Rs.) 74.8 100.6 123.7 149.5 Depreciation 893.8 1,146.2 1,397.8 1,603.2
Market Cap (Rs. Mn.) 144,862.4 144,862.4 144,862.4 144,862.4 Deferred Taxation 115.6 178.8 94.2 12.0
M Cap/Sales (x) 2.0 1.7 1.5 1.4 Others (55.1) (4,754.8) (272.2) (130.9)
EV (Rs. Mn.) 126,437.5 124,514.1 126,417.6 119,203.3 Change in Working Cap 1,753.6 (632.6) (2,986.1) 4,173.8
EV/EBITDA (x) 9.7 8.2 9.3 7.8 CF - Operating Activities 9,432.7 4,026.9 4,684.2 13,124.6
EV/Sales (x) 1.7 1.4 1.3 1.2 Change in Fixed Assets (2,104.4) (3,711.2) (4,743.9) (3,406.7)
ROCE (%) 71.7% 64.1% 46.4% 44.1% Change in Investments (4,615.5) (352.4) 880.2 (5,929.5)
RONW (%) 54.3% 48.3% 34.7% 32.4% Change in Pre-operative Exp 0.0 0.0 0.0 (160.5)
Debt/Equity Ratio (x) 0.1 0.1 0.1 0.0 Change in Deferred Tax Asset 0.5 (6.9) (0.6) (38.4)
Inventory T/o Days 10.0 9.5 10.2 11.2 Investment Income 1,369.0 1,562.8 1,898.5 1,854.2
Debtors T/o Days 4.4 6.6 12.4 10.5 CF - Investing Activities (5,350.4) (2,507.7) (1,965.8) (7,680.9)
Advances T/o Days 11.8 11.5 9.7 6.6 Increase in Equity (0.0) 0.0 (0.0) (78.1)
Creditors T/o Days 50.0 44.9 38.4 46.8 Changes in Borrowings 270.6 (159.8) (206.1) (331.7)
Working Cap T/o Days (46.5) (31.1) (20.9) (31.4) Interest Paid 10.9 61.3 229.9 358.1
Fixed Assets T/o (Gross) 6.721 5.920 5.498 5.329 Dividend Paid (4,559.0) (4,553.9) (3,971.6) (4,438.9)
DPS (Rs.) 20.0 20.0 17.0 19.0 CF - Financing Activities (4,277.5) (4,652.4) (3,947.8) (4,490.6)
Dividend Payout (%) 49.3% 41.1% 39.6% 39.2% Net Change in Cash (195.2) (3,133.2) (1,229.4) 953.1
Dividend Yield (%) 2.8% 2.8% 2.3% 2.6% Closing Cash & Bank Bal 176.0 1,587.2 357.8 1,310.9

Bajaj Auto : BUY

Sales in Numbers 1,824,699 2,281,230 2,721,824 2,451,407 Equity Capital 1,011.8 1,011.8 1,011.8 1,446.8
- Growth (%) - 25.0% 19.3% -9.9% Reserves 40,331.7 46,695.5 54,331.4 14,429.1
Net Revenues 59,270.5 76,679.0 95,204.1 90,461.5 Share Warrants Issue 0.0 0.0 0.0 0.0
- Growth (%) - 29.4% 24.2% -5.0% Shareholders Funds 41,343.5 47,707.3 55,343.2 15,875.9
Total Expenditure 50,136.9 63,116.3 81,034.4 77,526.3 Minority Interest 0.0 0.0 0.0 0.0
Operating Profit 9,133.6 13,562.7 14,169.7 12,935.2 Borrowed Funds 12,269.9 14,671.5 16,254.3 13,343.4
Other Income 4,081.3 4,384.5 5,556.4 1,226.9 Deferred Tax Liability 1,399.0 875.8 741.7 109.8
Depreciation 1,853.6 1,910.0 1,902.6 1,739.6 Fixed Assets 11,408.3 11,558.4 12,963.9 12,928.2
EBIT 11,361.3 16,037.2 17,823.5 12,422.5 Technical Know-how 40.6 13.4 41.3 105.3
Interest 6.7 3.4 53.4 51.6 Investments 45,605.8 58,569.7 64,475.3 18,571.4
Compensation under VRS 490.2 226.4 385.7 1,023.6 Current Assets
Exceptional Items 0.0 0.0 103.9 0.0 Inventory 2,241.7 2,729.3 3,097.0 3,496.1
PBT 10,864.4 15,807.4 17,280.5 11,347.3 Sundry Debtors 1,763.5 3,015.5 5,298.3 2,753.1
Tax 3,196.3 4,791.1 4,900.9 3,787.8 Loans & Advances 20,120.0 21,273.7 28,594.0 8,887.7
PAT Before EOI 7,668.1 11,016.3 12,379.6 7,559.5 Cash & Bank Balance 1,086.9 820.9 834.8 560.7
EOI / PPA 376.5 216.4 (8.6) 1.7 Other Current Assets 685.3 721.3 362.2 799.5
Reported PAT 7,291.6 11,232.7 12,388.2 7,557.8 Current Liabilities
- Growth (%) - 54.1% 10.3% -39.0% Sundry Creditors 7,850.7 12,288.7 14,989.7 10,432.5
Provisions 20,089.0 23,158.9 28,337.9 8,340.4
Ratio Analysis Net Current Assets (2,042.3) (6,886.9) (5,141.3) (2,275.8)
Particulars FY05 FY06 FY07 FY08 Miscellaneous Expenditure 0.0 0.0 0.0 0.0
OPM (%) 15.4% 17.7% 14.9% 14.3% Total Assets 55,012.4 63,254.6 72,339.2 29,329.1
EBITDA (%) 22.3% 23.4% 20.7% 15.7%
PBIT (%) 19.2% 20.9% 18.7% 13.7% Cash Flow
PAT (%) 12.3% 14.6% 13.0% 8.4% Particulars (Rs. Mn) FY05 FY06 FY07 FY08
Interest Cover (x) 1,695.7 4,716.8 333.8 240.7 Opening Cash & Bank 793.7 1,086.9 820.9 834.8
EPS (Rs.) 72.1 111.0 122.4 52.2 Profit after Tax 7,668.1 11,016.3 12,379.6 7,559.5
P/E (x) 6.9 4.5 4.1 9.5 Less: Investment Income (4,081.3) (4,384.5) (5,556.4) (1,226.9)
BVPS (Rs.) 408.6 471.5 547.0 109.7 Depreciation 1,853.6 1,910.0 1,902.6 1,739.6
Market Cap (Rs. Mn.) 50,418.0 50,418.0 50,418.0 72,094.0 Deferred Taxation (187.3) (394.4) (134.1) (173.2)
M Cap/Sales (x) 0.9 0.7 0.5 0.8 Others (552.5) (321.6) (456.8) (3,988.7)
EV (Rs. Mn.) 15,995.2 5,698.9 1,362.2 66,305.3 Change in Working Cap (394.7) 4,578.6 (1,731.7) (3,139.6)
EV/EBITDA (x) 1.2 0.3 0.1 4.7 CF - Operating Activities 4,312.6 12,407.8 6,456.6 822.3
EV/Sales (x) 0.3 0.1 0.0 0.7 Change in Fixed Assets (407.1) (1,650.9) (2,842.7) 1,824.4
ROCE (%) 21.2% 25.7% 24.9% 42.5% Change in Investments (7,051.4) (12,963.9) (5,905.6) 45,903.9
RONW (%) 17.6% 23.5% 22.4% 47.6% Change in Tech. Know-how 36.1 27.2 (27.9) (64.0)
Debt/Equity Ratio (x) 0.3 0.3 0.3 0.8 Investment Income 4,081.3 4,384.5 5,556.4 1,226.9
Inventory T/o Days 13.8 13.0 11.9 14.1 CF - Investing Activities (3,341.1) (10,203.1) (3,219.8) 48,891.2
Debtors T/o Days 10.9 14.4 20.3 11.1 Increase in Equity 0.1 (253.9) (17.2) (43,639.6)
Advances T/o Days 123.9 101.3 109.6 35.9 Share Warrants Issue 0.0 0.0 0.0 0.0
Creditors T/o Days 48.3 58.5 57.5 42.1 Changes in Borrowings 2,212.7 2,401.6 1,582.8 (2,910.9)
Working Cap T/o Days (12.6) (32.8) (19.7) (9.2) Interest Paid (6.7) (3.4) (53.4) (51.6)
DPS (Rs.) 25.0 40.0 40.0 20.0 CF - Financing Activities (678.3) (2,470.7) (3,222.9) (49,987.6)
Dividend Payout (%) 34.7% 36.0% 32.7% 38.3% Net Change in Cash 293.2 (266.0) 13.9 (274.1)
Dividend Yield (%) 5.0% 8.0% 8.0% 4.0% Closing Cash & Bank Bal 1,086.9 820.9 834.8 560.7

TVS : ACCUMULATE

Total Sales (Nos) 1,167,000 1,340,000 1,526,000 1,277,000 Equity Capital 237.5 237.5 237.5 237.5
- Growth (%) 1.7% 14.8% 13.9% -16.32% Reserves 6,550.8 7,423.7 7,855.2 7,978.3
Total Revenues 28,759.1 32,349.6 38,549.6 32,195.0 Shareholders Funds 6,788.3 7,661.2 8,092.7 8,215.8
- Growth (%) 2.0% 12.5% 19.2% -16.5% Borrowed Funds 1,868.4 3,850.4 6,335.6 6,663.4
Total Expenditure 26,643.4 30,304.8 37,176.6 31,782.0 Deferred Tax Liability 1,485.1 1,490.1 1,590.1 1,549.0
Operating Profit 2,115.7 2,044.8 1,373.0 413.0
Other Income 793.0 710.0 659.3 908.5 Total Liabilities 10,141.8 13,001.7 16,018.4 16,428.2
EBITDA 2,908.7 2,754.8 2,032.3 1,321.5
- Growth (%) -1.6% -5.3% -26.2% -35.0% Fixed Assets 7,704.8 8,214.6 10,029.1 10,430.5
Depreciation 896.3 939.1 876.0 945.9 Investments 1,753.9 3,441.9 3,447.4 3,389.6
EBIT 2,012.4 1,815.7 1,156.3 375.6 Current Assets
Interest 7.9 131.2 247.8 21.9 Inventory 2,332.3 3,579.0 3,965.6 4,053.8
PBT 2,004.5 1,684.5 908.5 353.7 Sundry Debtors 395.6 581.9 1,114.0 878.6
Tax 628.8 514.5 242.5 36.0 Loans & Advances 1,647.0 2,148.8 2,275.8 2,775.2
PAT 1,375.7 1,170.0 666.0 317.7 Cash & Bank Balance 738.7 243.5 865.6 37.3
- Growth (%) -0.7% -15.0% -43.1% -52.3% Other Current Assets 2.9 3.0 3.0 3.0
Current Liabilities
Particulars FY05 FY06 FY07 FY08 Provisions 556.1 624.4 497.3 609.9
OPM (%) 7.4% 6.3% 3.6% 1.3% Net Current Assets 38.5 687.2 1,956.5 2,080.4
EBITDA (%) 10.1% 8.5% 5.3% 4.1%
PAT (%) 4.8% 3.6% 1.7% 1.0%
Interest Cover (x) 254.7 13.8 4.7 17.2 Cash Flow
EBITDA per share (Rs.) 12.2 11.6 8.6 5.6 Particulars (Rs. Mn) FY05 FY06 FY07 FY08
EPS (Rs.) 5.8 4.9 2.8 1.3 Opening Cash & Bank 180.0 4,720.4 243.5 865.6
P/E (x) 5.2 6.1 10.7 22.5 Profit after Tax 1,375.7 1,170.0 666.0 317.7
P/BV (x) 1.1 0.9 0.9 0.9 Less: Investment Income (793.0) (710.0) (659.3) (908.5)
Market Cap (Rs. Mn.) 7,136.9 7,136.9 7,136.9 7,136.9 Miscellaneous Exp W/Off (515.6) (13.4) 72.6 57.7
EV (Rs. Mn.) 6,512.7 7,301.9 9,159.5 10,373.4 Deferred Taxation 254.6 5.0 100.0 (41.1)
EV/EBITDA (x) 2.2 2.7 4.5 7.8 Others (39.0) (4,040.9) (133.0) (60.3)
EV/Sales (x) 0.2 0.2 0.2 0.3 Change in Working Cap 239.3 (1,143.9) (647.2) (952.2)
ROCE (%) 23.2% 15.8% 8.0% 2.5% CF - Operating Activities 1,426.2 (3,662.9) 522.9 (618.9)
RONW (%) 20.3% 15.3% 8.2% 3.9% Change in Fixed Assets (1,520.3) (1,389.7) (2,557.5) (1,287.0)
Debt/Equity Ratio (x) 0.3 0.5 0.8 0.8 Change in Investments (473.7) (1,688.0) (5.5) 57.8
Debtors T/o Days 5.0 6.6 10.5 10.0 CF - Investing Activities (1,201.0) (2,367.7) (1,903.7) (320.7)
Advances T/o Days 20.9 24.2 21.5 31.5 Increase in Equity 14.2 55.0 (26.5) (0.0)
Creditors T/o Days 57.4 59.2 54.6 57.3 Changes in Borrowings 678.3 1,982.0 2,485.2 327.8
DPS (Rs.) 1.3 1.3 0.9 0.7 CF - Financing Activities 333.5 1,553.7 2,002.9 111.3
Dividend Payout (%) 22.5% 26.4% 30.3% 52.3% Net Change in Cash 558.7 (4,476.9) 622.1 (828.3)

Other people’s money Jigar Valia | jigar@ppfas.com
Anuj Anandwala | anuj@ppfas.com
Banking Industry
Mr. Garfield in the movie Other People's Money says - “I love money;
& whats better than money is other people's money.”
This statement cant be more true for a Banker. Even the best capitalized banks are
leveraged for 6-8x. There are other people who also leverage, like the consumers in
US. Then we have these banks buy this leverage and start playing the Greater Fool
game. So what these banks then have is a LOT of other people's money.
When you are on a treadmill and running really fast, you can't stop suddenly. You fall on
your face. That’s what happened to Lehman. Merill & AIG were lucky to get some
support that helped slowdown the speed. The sub-prime crisis fear has not spared the
Indian banks as well, which we can say have just hopped on a manual one. For our dear
PSUs, derivatives is far; they just manage to do the basic lending in the first place.
So, we are bullish on the banking sector as a whole. India is still a Savings economy &
we are far from having got used to credit cards. Our Banking & Capital Market
mechanisms are the most robust in the world and is justly being acknowledged &
appreciated globally. In general, we like the Private sector banks, for they are more
dutiful towards their karma, in the sense they lend what they borrow. Plus their 'no pain
no gain' mantra to focus on cost control & efficiency. The PSU counterparts on the other
hand have specific expertize. Their Deposits & Investments divisions are far more
efficient, relatively. They appear to be more risk averse & conservative, thanks to their
'no pain' mantra.
Some of the recent developments (sub-prime which turned into a credit-crunch) in the
banking industry put the Indian Banks & more particularly the PSUs in a very sweet
spot. The spiraling interest rates and more importantly the liquidity crunch has virtually
closed the international window for corporates, who depended on low cost ECBs,
FCCBs, libor based & other forex loans. The Indian Banks are a straight beneficiary of
those accounts. Equity is just not an option. Even the few rights issues are unlikely to
get the support of their own shareholders. All ways go to the Indian Banks.
What more, is that the Indian Banks have become more discreet. Plus they have the
pricing power to compensate for the tight liquidity scenario. But the best times are for
our PSU banks.
The recent scare-run to the ATMs & branches of ICICI Bank and the FMP-selling
Mutual Funds, have done a more than a serious damage to the repute of the
aggressive private players. Our common man is a very simple guy. It took him four

Other people’s money
years of a big bull run to shift his savings from post office & bank deposits to the stock
markets & equity mutual funds. Then after more than a reasonable thrashing on the
stock exchanges, he gets jolted by the FMPs (sold as an assured returns scheme)
pegged to go sub-prime and most importantly, even his money in India's 2nd largest
bank being unsafe. Certainly the Credibility Crisis is as Big as the liquidity crisis for the
private banks.
So more if not all roads go to the PSU Banks. Both for the depositors and also the
borrowers. Borrowers, because the PSUs have the deposits & so the liquidity. The
CRR cuts further strengthens the banks capacity to lend. We are on the higher side of
the interest rate cycle, and ergo the likelihood of most PSUs making more money on
their investment portfolios. The frontline PSUs all have now moved to Core-Banking,
which makes them more efficient plus also requires the CASA holders to maintain an
increased minimum balance. There have been some VRS initiatives & other staff
rationalizations done. 8-to-8 & Sunday Banking have helped improve its 'Service'
image and close some gap with the private players.
This time they have an opportunity to channelize their current & the new CASA &
deposits money plus their surplus investments to the increased lending opportunities
to India Inc. with an improved cost structure. In other words, they can have the cake & it
it too. We hope the PSU banks get their act together, to their karma.
So we like the more conservative private sector banks like HDFC Bank & Axis Bank.
Amongst the PSUs, we prefer the larger & the more aggressive players like State Bank
of India. We prefer a cautious approach & prefer to keep away from the aggressive
private players & smaller PSU banks available at really cheap valuations. While these
may pay off to an aggressive investor, we prefer to stay-put.
We remain perturbed over the medium term prospects of the many NBFCs who have
borrowed internationally and lent domestically for longer term horizons, as this may
head them for a serious margin & liquidity squeeze which may affect their profitability &
new business respectively. NBFCs without a strong & credible retail franchise may find
it more difficult to source fundings.

Some perspectives on why we generally like Private Banks, from our blog-post dated 16th Sept. '08.
The financial sector has been on top of my mind (and Lack of alternatives
that of many others) for some time now. My thoughts The Reserve Bank has effectively killed of the Non-Bank
have been on a different plane and not related to the Financial Companies (NBFC) sector by repeatedly
woes of Lehman, Merrill etc. More specifically I have choking off access to funds and the way they can run
been pondering over the banking sector in India. their business.
The following are the characteristics of the banking Restrictive licencing

sector in India. The Reserve Bank want to keep the money of the
depositors' safe. It also wants to avoid systemic risks.
Uninterested competition Towards this end the Reserve Bank has selected to
Uninterested competition in the presence of a large restrict the banking business to a chosen few. The
number of Public Sector banks. These banks are run for 'chosen' ones are either government owned banks or
the employees and for the government and its political banks promoted by government owned institutions in
constituency. Sometimes they think about customers partnership with multilateral agencies or some large
and rarely if ever about shareholders.Witness the NBFCs which were allowed to convert to banks when
spectacle where State Bank of India is wanting to merge NBFCs were being phased out. New bank licences are
with a small 100% owned subsidiary State Bank of effectively not on offer. It does not matter to the
Saurashtra. Despite assurances of no employee Reserve Bank that such actions have severely limited
retrenchment and no job losses there have been competition in the banking sector and reduced
numerous strikes and demonstrations opposing this. We customer choice.
have a situation of employees holding the government,
customers and shareholders to ransom without any Effective Oligopoly
rhyme or reason. Just imagine what would happen if Hence we have ICICI Bank (earlier a government
some enterprising bank Chariman or Managing Director promoted institution), HDFC Bank and Axis Bank
was to try and close unviable branches or outsource (erstwhile UTI Bank) as the flag bearers of new age
some work to third parties. (To digress slightly, try private banks being run for customers and shareholders
opening a PPF account with any SBI branch in South apart from employees and the government. A lot of
Mumbai. You will be told that the branch has a lot of others folded up and merged with other banks. HDFC
workload and cannot cope up and hence you should Bank acquired (directly/indirectly) Times Bank,
open the account in some suburban branch. The Centurion Bank, Bank of Punjab and Lord Krishna Bank.
account opening form will not be given to you unless you Global Trust Bank merged with Oriental Bank of
plead, cajole, threaten and / or get some personal Commerce in a shot gun merger. Sangli Bank merged
connections.) Witness the government directives to with ICICI Bank. The others like Indusind Bank or the old
write off farmer loans / lower interest rates / not private banks (the ones which escaped nationalisation
increase interest rates / give loans to specific sectors / on account of small scale of operations) or the very new
geographies etc. without any indication of how the banks like Yes Bank are too small to make a difference.
banks are to be compensated. Kotak Bank is more a stock broker and an investment
bank rather than a commercial bank.
Regulated profits’ Under penetration and cherry picking of assets

Regulated profits' for whose benefit? For most industries I read an article on Bloomberg today which mentioned
where competition is limited, the regulators step in for that banks in the US have become really stringent in
the benefit of the consumers. For example in the case of lending for mortgages. Really? US banks have now
Power utilities, there is a cap on tariffs and on the moved to a situation where borrowers are required to
returns that utilities can make or for example TRAI sets put up 3% to 5% of the house value upfront to avail of
maximum charges for cable television, channels or mortgage loans!!! In India 25% to 30% upfront payment is
mobile phone charges. In banking we have a unique the norm. That too on the 'white' component if you know
situation where the regulator regulates charges to what I mean. This is again because there is no effective
favour the oligopolistic service providers !!! Thus we competition in the market place. Hence banks can
have a surprising situation that current accounts pay cherry pick people to whom they will lend. The others
zero interest and savings accounts pay a low interest simply have to do without credit.
(which is capped as per regulations) and calculated as
per the minimum balance held during a month. On the
other hand when it come to lending rates for the
consumer, banks recently went to the Supreme Court to
waive off a cap on interest rates @ 30% p.a.!!!! If we cannot get a banking licence,
we can surely buy stocks of some of
Guaranteed growth
In no other industry is growth virtually guaranteed. In a these Oligopolistic businesses.
situation where money supply grows 15% to 20% each
year, a growth in deposits and lending is given. Further
you have uninterested competitors (see point 1) who
will cede market share each year and a growth in excess
of 20% is assured.

Banking : Financials
Company Name Axis Bank Canara Bank HDFC Bank ICICI Bank PNB
Year 200803 200803 200803 200803 200803
Int Earned (Rs. Crs.) 7,005.3 14,200.7 10,115.0 30,788.3 14,265.0
Int expended (Rs. Crs.) 4,420.0 10,662.9 4,887.1 23,484.2 8,730.9
NIM (%) 3.5 2.4 4.4 2.2 3.6
Credit-Deposit (%) 65.9 69.4 65.3 88.7 70.6
Investment / Deposit (%) 41.4 32.1 47.3 42.7 32.4
Cash / Deposit (%) 8.2 7.6 10.4 10.1 9.0
Op Exps / Total Inc (%) 24.6 17.5 30.2 20.7 21.8
Int Income / Total Funds (%) 7.7 8.3 9.0 8.3 7.9
Net Int Inc / Total Funds (%) 2.8 2.1 4.7 2.0 3.1
Non Int Inc / Total Funds (%) 2.0 1.4 2.0 2.4 1.1
Op Exps / Total Funds (%) 2.4 1.7 3.3 2.2 2.0
Net Profit / Total funds (%) 1.2 0.9 1.4 1.1 1.1
RONW (%) 17.6 19.1 17.7 11.8 19.6
Net Non Perf. Assets (Rs. Crs.) 248.3 899.0 298.5 3,490.6 753.8
Net Non Perf. Assets (%) 0.42 0.84 0.47 1.55 0.64
Capital Adequacy Ratio (%) 13.7 13.3 13.6 14.0 13.0
Tier I Capital (%) 10.2 7.0 10.3 11.8 8.5
Tier II Capital (%) 3.6 6.2 3.3 2.2 4.4
Return on Assets (%) 1.2 0.9 1.3 1.1 1.2
Business Per Employee (Rs. Crs.) 11.2 6.1 5.1 10.1 5.1
Profit Per Employee (Rs. Crs.) 0.1 0.0 0.1 0.1 0.0
Equity (Rs. Crs.) 358.9 410.0 425.1 1,113.3 315.3
Reserves (Rs. Crs.) 8,410.8 10,090.5 11,142.8 45,357.5 12,003.0
Networth (Rs. Crs.) 8,768.5 8,295.6 11,497.2 46,470.2 10,782.7
Capital Employed (Rs. Crs.) 109,625.7 178,491.2 133,251.0 400,417.1 197,513.1
EPS (Rs.) 28.9 36.8 43.4 36.0 62.8
BV (Rs.) 244.3 202.3 272.1 417.4 342.0
CMP – 03 Nov (Rs.) 602.3 167.5 1,070.8 431.0 452.5
P/BV 2.6 0.9 4.1 1.1 1.4
Mcap (Rs. Crs.) 23,000.9 7,293.9 47,219.1 51,109.8 15,323.6
Dividend -% 60.0 80.0 85.0 110.0 130.0
Payout -% 20.8 21.7 19.6 30.6 20.7
Div Yield -% 0.9 4.5 0.8 2.4 2.7
Deposits (Rs. Crs.) 87,626.2 154,072.4 100,768.6 244,431.0 166,457.2
Borrowings (Rs. Crs.) 5,624.0 2,517.2 4,478.9 65,648.4 5,446.6
Total Liabilities (Rs. Crs.) 109,625.7 180,696.0 133,251.0 400,417.1 199,048.8
Advances (Rs. Crs.) 59,661.1 107,238.0 63,426.9 225,616.1 119,501.6
Total Assets (Rs. Crs.) 109,625.7 180,696.0 133,251.0 400,417.1 199,048.8
Source: Capitaline

Banking : Financials
Company Name Andhra Bank Bank of Baroda Bank of India St Bk of India Union Bank
Year 200803 200803 200803 200803 200803
Int Earned (Rs. Crs.) 4,289.9 11,813.5 12,355.2 48,950.3 9,447.3
Int expended (Rs. Crs.) 2,870.0 7,901.7 8,126.0 31,929.1 6,361.0
NIM (%) 2.9 2.9 3.1 3.1 2.8
Credit-Deposit (%) 68.4 68.7 73.6 77.5 72.3
Investment / Deposit (%) 32.1 28.5 28.6 34.8 32.7
Cash / Deposit (%) 8.6 5.7 7.0 8.3 8.1
Op Exps / Total Inc (%) 20.7 21.3 18.3 22.8 19.8
Int Income / Total Funds (%) 8.2 7.3 7.8 7.6 8.4
Net Int Inc / Total Funds (%) 2.7 2.4 2.7 2.6 2.7
Non Int Inc / Total Funds (%) 1.3 1.3 1.3 1.5 1.6
Op Exps / Total Funds (%) 2.0 1.8 1.7 2.1 2.0
Net Profit / Total funds (%) 1.1 0.9 1.3 1.0 1.2
RONW (%) 18.0 14.6 27.6 16.8 26.8
Net Non Perf. Assets (Rs. Crs.) 53.7 493.6 592.0 7,424.3 127.6
Net Non Perf. Assets (%) 0.15 0.47 0.52 1.78 0.17
Capital Adequacy Ratio (%) 11.6 12.9 13.0 13.5 12.5
Tier I Capital (%) 8.5 7.6 8.2 9.1 7.5
Tier II Capital (%) 3.1 5.3 4.8 4.3 5.1
Return on Assets (%) 1.2 0.9 1.3 1.0 1.3
Business Per Employee (Rs. Crs.) 6.3 7.1 6.5 4.6 7.0
Profit Per Employee (Rs. Crs.) 0.0 0.0 0.1 0.0 0.1
Equity (Rs. Crs.) 485.0 367.0 525.2 634.9 505.1
Reserves (Rs. Crs.) 2,764.3 10,678.4 10,063.5 48,401.2 6,842.6
Networth (Rs. Crs.) 3,249.3 11,043.9 8,826.3 49,032.7 5,623.3
Capital Employed (Rs. Crs.) 56,624.3 179,599.5 177,097.5 722,125.1 122,643.7
EPS (Rs.) 11.2 37.9 37.5 103.9 26.8
BV (Rs.) 67.0 301.0 168.1 772.4 111.3
CMP – 03 Nov (Rs.) 46.2 248.2 247.6 1,240.6 136.3
P/BV 0.7 1.0 1.6 1.7 1.3
Mcap (Rs. Crs.) 2,374.1 10,520.1 14,510.4 83,877.2 7,506.1
Dividend -% 40.0 80.0 40.0 215.0 40.0
Payout -% 35.8 21.0 10.7 20.7 14.9
Div Yield -% 8.2 2.8 1.4 1.6 2.7
Deposits (Rs. Crs.) 49,436.6 152,034.1 150,012.0 537,403.9 103,858.6
Borrowings (Rs. Crs.) 590.5 3,927.1 7,172.5 51,727.4 4,760.5
Total Liabilities (Rs. Crs.) 56,624.3 179,599.5 178,860.6 722,125.1 124,368.1
Advances (Rs. Crs.) 34,238.4 106,701.3 113,476.3 416,768.2 74,348.3
Total Assets (Rs. Crs.) 56,624.3 179,599.5 178,860.6 722,125.1 124,368.1
Source: Capitaline

Dwijen Shah | dwijen@ppfas.com
Blue Ocean Formation

Telecom Industry
The telecommunication The worlds second largest Cell phone market is about to see a major change. The
Industry Telecom Giants are expected to show a down turn with every passing quarter. The new
recommendation by TRAI (Telecom Regulatory Authority of India) severely causes
threats to the Telecom giants. The strong recommendation to provide net telephony
would reduce the ARPU (Average Revenue Per User) significantly. The Telecom
companies have no other option but to continue to reduce their calling rates and fall
back on VAS(Value Added Services).
Constructive Oligopoly & According to Charlie Munger there are two kinds of Oligopoly. The constructive
Destructive Oligopoly Oligopoly which allows all the companies to enjoy their respective share of the market
without hurting each others margins. The destructive Oligopoly is the one which we can
see now prevailing in the Indian Telecommunication market. In such a market the
companies fight against each other for a larger market share but the ultimate winner is
the consumer. Since the Telecom business is more or less commodity kind of business
where in the only differentiating factor is the call rates, its difficult to retain subscribers
and cost becomes the major deciding factor. The early mover advantage plays a
significant advantage but after the start of destructive oligopoly it is difficult to have
sustained high return on Investment.
Charlie Munger “when we were in the textile business, which is a terrible commodity
business, we were making low-end textiles - which are a real commodity product. And
one day, the people came to Warren and said, "They've invented a new loom that we
think will do twice as much work as our old ones.”
And Warren said, "Gee, I hope this doesn't work because if it does, I'm going to close
the mill.”
And he meant it.” Mr. Warren Buffett realized if newer technology prevails then it was
very difficult for the business to take advantage of it as the advantage would have to
passed on the consumers to remain competitive in the business. These are businesses
which are capital intensive in nature which restrict any real income.

Charles Mungers A man standing on a mountain peak can see a fundamental shift happening and
Mountain Theory another mountain developing right in front of him yet cannot go all the way down and
climb up that mountain. Many times it happens that due to fundamental change in the
industry some changes arise which causes another mountain to rise and over shadow
the existing one. It is highly unlikely that a man can go down all the way from one peak
and climb up the new mountain in time to take the advantage of the new better larger
mountain.
In case of Telecommunication industry, wire line was the first mountain. MTNL and
BSNL are the ones sitting at the peak. Then this was followed by the fundamental shift
which completely overshadowed wire line, new mountain was wireless
communication. Companies like Bharti, Reliance Communication, Vodafone etc were
the first to go on top of the second mountain. They were the first ones to ride the
change. The existing leaders like BSNL and MTNL could not compete with them
because of the change in landscape. It was difficult for them to climb down one and
climb up another bigger mountain in time. MTNL has now tried to go to the next big
mountain which we believe is VoIP. This new mountain would overshadow the wireless
mountain and become the next even bigger mountain. VoIP is a step ahead in the
wireless communication, it uses the existing infrastructure to provide a much cheaper
and better service.
Only Low ARPU(Average All the major cities in India have already been covered, these cities would be have the
Revenue Per User) users high ARPU users. The cream subscribers have already been added and from now on
left as the companies continue to progress inward into the rural areas, the ARPU per user
would fall significantly. Since now the cities have been covered the only way to expand
the user base is by entering the rural areas. Every new subscriber from the rural area
would reduce the current ARPU for the telecom service providers. The companies have
no other alternative then to bank on VAS(Value Added Services) to maintain their
ARPU.
High End Users We expect the highest ARPU users to shift to net telephony first. These would be the
users with the required handset and technological know how to shift to net telephony.
This would hit the Telecom Operators severly as these would be subscribers
generating the highest revenue. Net Telephony would be able to provide the same
services as the telecom giants but at a fraction of the cost. Since the Telecom giants
have already spent the Capital to set up the infrastructure, they would not be willing to
provide net telephony over night to avoid a drastic fall in revenue. The Telecom giants
have already started shifting their focus on VAS to sustain their ARPU.
2G – 3G – 4G As we progress from 2G to 3G the ability to transfer and receive data along with voice
improves dramatically. We are getting better connectivity to the Internet with every new
handset and a shift in technology. Since the VoIP companies can provide the same
services as the telecom operator without requiring huge infrastructure, it posses as a
huge potential threat to the existing Giants.

Call Drops The problems of Call drops at the ground level has been increasing significantly. The
voice clarity as well as connectivity has seen a decline in recent times. This problem is
prevailing in almost all the services providers and is increasing day by the day. The
existing infrastructure does not seem to be able to cope with the additional subscribers
or call minutes.
We believe that the companies have on purpose avoided to spend on the

infrastructure. The companies are aware of the change and shift in technology and do
not wish to spend money where they do not see any return on investment. The
companies are well aware of the call drops and reducing voice quality but are still not
interested to spend further on out dated technology. The companies would like to milk
the existing infrastructure as much as possible. This is another positive sign for VoIP
providers who are next in line to take advantage of the situation.
Morph into Internet We believe the next step of all the telecom service providers would be to morph into
Service Providers some sort of ISP(Internet Service Provider). The Voice, Data, SMS, MMS, etc services
provided by the telecom companies can be provided over the internet and at a
fractional cost. The cost advantage would force the telecom companies to move to
become some sort of Internet providers.
Shifting to the new We now expect the technological shift to happen with the easing of rules and
Technology regulations. The already available VoIP technology looks to be the next step in telecom
industry. There could be other technologies waiting to take over VoIP as well but as of
now we believe VoIP looks like the next logical step. The smaller communication
companies like Geodesic, Tulip Telecom maybe in a sweet spot to ride the next
technological wave.
Conclusion We believe that the Telecom Giants are about to peak out on their revenue. The only
way to sustain is to bank significantly on the VAS. The new emerging smaller
companies in the Telecom space could be the next in line to see significant growth.
Company Geodesic Limited
Geodesic is well placed to ride the next wave in shift in Telecommunication industry
with its VoIP venture. We expect a sea change in the telecom industry and VoIP to
become the next technology. It has had a phenomenal growth rate of 94% topline &
102% bottomline CAGR over FY05-08 period. This growth has come from its various
products which continue to do well and contribute to the growth. The future triggers
include plans to acquire 3 companies and capex plans of $10Mn to globally launch its
new VoIP product across the globe. Its performance has remained robust in the current
global slowdown with revenue growth of 125.1% & 126.5% growth in PAT. The stock is
available at cheap valuations of 6.9x FY 08 earnings. We believe VoIP to be the Blue
Ocean forming in the Red sea of telecom industry & Geodesic to be the key beneficiary.

Geodesic : Financials

Particulars (Rs Mn) FY05 FY06 FY07 FY08 Particulars (Rs Mn) FY05 FY06 FY07 FY08
Total Revenues 432.2 967.8 1,680.5 3,164.3 Equity Capital 103.4 117.2 118.3 184.3
- Growth (%) 147.4% 123.9% 73.6% 88.3% 5% Redeemable Pref. Sh. 16.5 16.5 16.5 0.0
Total Expenditure 195.7 429.1 644.3 1,249.2 Share Application Money 19.3 39.9 193.1 18.4
Operational Exp 165.6 283.7 396.3 833.0 Reserves 398.1 1,875.3 2,821.7 4,556.9
Staff Cost 0.0 72.1 106.3 184.2 Shareholders Funds 537.3 2,048.8 3,149.6 4,759.6
Other Admin Exp 30.0 67.7 136.0 220.0 Borrowed Funds 52.8 21.6 15.2 5,067.9
Exp W/O 0.1 5.6 5.7 11.9 Deferred Tax Liability 12.8 25.2 1.5 (17.9)
Operating Profit 236.4 538.7 1,036.3 1,915.2 Minority Interest 0.0 0.1 0.2 2.8
Other Income 7.3 36.3 76.1 138.4 Total Liabilities 602.8 2,095.8 3,166.5 9,812.4
EBITDA 243.7 575.1 1,112.4 2,053.6 Goodwill 0.0 247.8 247.8 134.1
Depreciation 55.1 138.1 207.5 336.2 Fixed Assets 157.0 498.7 944.2 1,546.0
EBIT 188.6 437.0 904.9 1,717.4 Investments 46.7 522.6 138.6 232.8
PBT 188.4 435.5 903.7 1,643.1 Inventory 2.9 1.0 0.1 0.3
Tax 7.8 23.0 (8.0) 157.1 Sundry Debtors 156.5 233.6 616.7 1,042.8
PAT Before MI 180.6 412.6 911.6 1,486.1 Loans & Advances 34.5 203.7 274.2 943.8
Minority Interest 0.0 0.0 0.0 0.0 Cash & Bank Balance 364.9 398.5 1,062.9 6,360.7
PAT after MI 180.6 412.6 911.6 1,486.1 Other C.A. (Deposits) 5.5 0.0 0.0 0.0
- Growth (%) 129.4% 128.5% 121.0% 63.0% Current Liabilities
Extraordinary Items (1.4) (10.1) (13.4) (0.6) Sundry Creditors 166.0 17.5 94.0 349.2
Reported PAT 179.1 402.5 898.2 1,485.5 Provisions 0.0 15.2 41.2 247.2
Net Current Assets 398.2 804.2 1,818.6 7,751.2
Ratio Analysis Miscellaneous Exp 1.0 22.6 17.3 148.2
Particulars FY05 FY06 FY07 FY08 Total Assets 602.8 2,095.8 3,166.5 9,812.4
OPM (%) 54.7% 55.7% 61.7% 60.5%
EBITDA (%) 56.4% 59.4% 66.2% 64.9% Cash Flow
PBIT (%) 43.6% 45.0% 53.8% 51.9% Particulars (Rs Mn) FY05 FY06 FY07 FY08
PAT (%) 41.8% 42.6% 54.2% 47.0% Opening Cash & Bank 81.6 364.9 398.5 1,062.9
Interest Cover (x) 1,047.6 296.7 772.1 23.1 Profit After Tax 179.1 402.5 898.2 1,485.5
EPS (Rs.) 3.5 7.0 15.4 16.1 Invt Income (7.3) (36.3) (76.1) (138.4)
P/BV (x) 9.1 2.7 1.8 1.9 Miscellaneous Exp W/Off 0.0 0.0 0.0 0.0
BVPS (Rs.) 10.4 34.6 52.9 50.0 Depreciation 55.1 138.1 207.5 336.2
Market Cap (Rs. Mn.) 4,858.9 5,507.5 5,561.6 8,662.4 Deferred Taxation 2.2 12.1 (23.7) (19.2)
M Cap/Sales (x) 11.2 5.7 3.3 2.7 Others (4.9) (303.9) (17.9) (18.3)
EV (Rs. Mn.) 4,500.1 4,608.0 4,375.3 7,136.8 Change in Working Cap 79.2 (372.4) (350.1) (634.8)
EV/EBITDA (x) 18.5 8.0 3.9 3.5 CF - Operating Activities 303.7 (158.5) 639.2 1,085.2
EV/Sales (x) 10.4 4.8 2.6 2.3 Change in Fixed Assets (112.5) (444.8) (629.8) (934.6)
ROCE (%) 31.3% 20.9% 28.6% 17.5% Change in Investments 72.9 (475.9) 384.0 (94.2)
RONW (%) 33.7% 20.4% 29.1% 32.2% Investment Income 7.3 36.3 76.1 138.4
Debt/Equity Ratio (x) 0.1 0.0 0.0 1.1 CF - Investing Activities (32.4) (884.4) (169.8) (890.4)
Debtors T/o Days 132.1 88.1 134.0 120.3 Increase in Equity (22.8) 1,135.8 230.0 205.8
Advances T/o Days 29.1 76.8 59.6 108.9 Changes in Pref Cap 0.0 0.0 0.0 (16.5)
Creditors T/o Days 140.2 6.6 20.4 40.3 Changes in Borrowings 52.4 (31.1) (6.4) 5,052.7
WCap(Ex Cash)T/o Days 28.1 153.0 164.1 160.4 Interest Paid (0.2) (1.5) (1.2) (74.3)
DPS (Rs.) 0.3 0.4 0.4 0.6 CF - Financing Activities 11.9 1,076.4 194.9 5,103.0
Dividend Payout (%) 8.5% 5.7% 2.6% 3.7% Net Change in Cash 283.3 33.6 664.4 5,297.8
Dividend Yield (%) 0.3% 0.4% 0.4% 0.6% Closing Cash & Bank Bal 364.9 398.5 1,062.9 6,360.7

The Convenient Shift Anuj Anandwala | anuj@ppfas.com
Sectoral Rotation – Opportunities in distress for related industries
"If you are in the right sector, at the right time, you can make a lot of money very fast.”
- Peter Lynch
There has been a positive fallout of the commodity slump to certain industries. An easy-
way to look out for these are all commodity consumers. Engineering, Appliances, Cars
and so many others are all consumers of base commodity. But not many have been
able to gain much out of the input price declines, which may be on account of either or
both of the undermentioned reasons.
i. Their volumes have been affected correspondingly depriving the input price gains.
These too are cyclicals mostly.
ii. Business with no pricing power end up passing it on to the consumers. Poor
businesses with high competition.
We zoom into 3 companies, the best within their industry, which do not suffer from the
above negatives and are more likely than not to be a positive beneficiary. He key
differentiator for these companies versus the rest is that they have some pricing power
& their businesses are not so cyclical. Plus we have included GIPCL, which is likely to
benefit from the softening gas prices and is trading at 0.6x FY08 book value, certainly
cheap for a utility.
Companies Castrol
Castrol is a key beneficiary of the correction in the oil prices. Their sales depend on the
overall number of vehicles and not the number of vehicles sold in a particular year.
Castrol is more focused on 2 wheelers and is a near monopoly play. While the volume
game may take a backseat, the margin gains are a near- surety. So it is a non-cyclical
play with a good pricing power on account of its monopolistic positioning. In term of
financials, the company is trading at ~12.5x FY09E earnings of Rs. 24 per share. This is
certainly cheap, if one factors in the exceptionally high ROEs 50.8% despite a
moderate leverage and a very high dividend payout ratio of 79.2%. The dividend yield
works out to 4.9%. Castrol is our stock-pick on this theme.
At CMP of Rs. 299.5 the stock is trading at 17x CY07 earnings.

The Convenient Shift
Apollo Tyres
Apollo Tyres is India's largest tyre company, with a strong focus on Heavy vehicles. The
company is a key beneficiary of the sharp correction in rubber prices. The company is
relatively the best in terms of size, growth consistency, lower leverage & tight working
capital management. Infact the company is twice as better than competition in terms of
its fixed asset turnover & working capital management, which further helps in
controlling leverage & generate better returns. Now for a tyre company, the
replacement market is somewhat non-cyclical. But the OEM business is cyclical & is
negatively impacted. Also other key negative is the serious dumping of radial tyres from
China, which is now suffering on its exports to America. Though Apollo has managed
an anti-dumping restriction, the industry remains slightly competitive. We sense that
there is some medium-term gain for this industry. However, in the longer run, we do not
prefer this business from an investment perspective, on account of the high capital
intensity (both fixed & working), competition & the sharp fluctuations in key input.
Amara Raja Batteries
Car Battery is again a segment which caters to OEM & replacement markets, the
former being a cyclical element. These companies are benefiting from the falling lead
prices. During the times of spiraling lead prices, these companies have shown some
ability to pass it on the clients.
Amara Raja Batteries Limited (ARBL), an Amara Raja - Johnson Controls company
with 26% equity from Johnson Controls, is the technology leader and is one of the
largest manufacturers of lead acid batteries for both industrial and automotive
applications in the Indian storage battery industry.
In India, Amara Raja is the preferred supplier to major telecom service providers,
telecom equipment manufacturers, UPS Segments (OEM & Replacement) and also to
Indian railways, Power, Oil & Gas among other industry segments. ARBL
manufactures and sells automotive batteries under the Brand Name AMARON, which
is distributed through a large pan-India sale-service retail network.
Gujarat Industries Power Company
A substantial fall in gas prices in recent times following cheap availability of naphta
(competing fuel) and going ahead a boost from new gas finds is likely to help GIPCL for
its Gas fired Power Plants at Vadodara. These plants operate on a MOU arrangement
with the Government of Gujarat. The other power plant is lignite based wherein the raw
material procurement is not an issue as the company has its own captive mines which
would cater them over a period of 30 years support 1000 MW capacity. The company
has massive expansion plans to increase its current installed capacity of 555 MW
increasing to 805 MW by FY2009 and further to 1305 MW by FY2012 .
On the valuation front, scrip is trading cheap at just 0.6x FY08 book value of Rs. 75/-.

Beneficiaries
150
Crude
120
90
Castrol
60
30
30000 Rubber
24000
Apollo Tyres
18000
12000
Jan- Feb- Mar- Apr- May- Jun- Jul- Aug- Sep- Oct- Nov-
08 08 08 08 08 08 08 08 08 08 08
4000 Lead
3000
Amara Raja
2000
1000
Aug-07 Nov-07 Feb-08 May-08 Aug-08 Nov-08
15
Natural Gas
12
GIPCL
6
0
Source: Bloomberg

Castrol : BUY

Particulars (Rs. Mn) CY04 CY05 CY06 CY07 Particulars (Rs. Mn) CY04 CY05 CY06 CY07
Total Revenues 13,051.2 14,303.8 17,524.1 18,882.6 Equity Capital 1,236.4 1,236.4 1,236.4 1,236.4
- Growth (%) - 9.6% 22.5% 7.8% Reserves 2,364.3 2,664.2 2,940.2 3,065.4
Operating Profit 2,082.2 2,116.8 2,199.8 3,295.7 Borrowed Funds 37.2 27.9 27.9 27.9
- Growth (%) - 0.6% 9.8% 43.3% Fixed Assets 1,497.7 1,383.3 1,296.8 1,332.6
Depreciation 248.8 189.3 180.1 207.8 Investments 1,289.1 1,081.4 425.2 205.8
EBIT 2,054.3 2,128.2 2,363.5 3,436.3 Deferred Tax Asset 0.0 0.0 0.0 182.2
PBT 2,025.6 2,098.1 2,322.4 3,398.4 Inventory 1,662.4 2,139.0 2,555.2 2,249.8
Tax 678.3 638.2 777.5 1,214.1 Sundry Debtors 1,312.6 1,516.4 1,889.9 1,479.5
PAT 1,274.6 1,468.1 1,544.9 2,184.3 Loans & Advances 583.2 766.0 825.1 798.2
- Growth (%) - 15.2% 5.2% 41.4% Cash & Bank Balance 296.9 398.5 892.2 3,179.1
Other Current Assets 0.1 0.1 0.4 18.6
Ratio Analysis Current Liabilities
Particulars CY04 CY05 CY06 CY07 Sundry Creditors 1,970.2 2,398.4 2,703.6 3,418.3
OPM (%) 16.0% 14.8% 12.6% 17.5% Provisions 859.8 839.3 915.4 1,697.8
EBITDA (%) 17.6% 16.2% 14.5% 19.3% Net Current Assets 1,025.2 1,582.3 2,543.8 2,609.1
PAT (%) 9.8% 10.3% 8.8% 11.6%
Interest Cover (x) 71.6 70.7 57.5 90.7 Cash Flow
EBITDA per share (Rs.) 18.6 18.7 20.6 29.5 Particulars (Rs. Mn) CY04 CY05 CY06 CY07
EPS (Rs.) 10.3 11.9 12.5 17.7 Opening Cash & Bank 277.8 296.9 4,720.4 892.2
P/E (x) 29.1 25.2 24.0 17.0 Profit after Tax 1,274.6 1,468.1 1,544.9 2,184.3
P/BV (x) 10.3 9.5 8.9 8.6 Less: Investment Income (220.9) (200.7) (343.8) (348.4)
M Cap/Sales (x) 2.8 2.6 2.1 2.0 Deferred Taxation 0.0 (38.7) (53.9) (5.3)
EV (Rs. Mn.) 35,481.4 35,578.2 35,740.7 33,673.2 Others (9.2) (90.5) (4,448.4) (175.9)
EV/EBITDA (x) 15.4 15.4 14.1 9.2 Change in Working Cap 141.8 (455.5) (467.8) 2,221.6
EV/Sales (x) 2.7 2.5 2.0 1.8 CF - Operating Activities 1,463.8 902.1 (3,547.8) 4,122.0
ROCE (%) 56.5% 54.2% 56.2% 79.4% Change in Fixed Assets (36.2) (1.3) 29.6 (123.7)
RONW (%) 35.4% 37.6% 37.0% 50.8% Change in Investments (441.2) 207.7 656.2 219.4
Debt/Equity Ratio (x) 0.01 0.01 0.01 0.01 Change in Def. Tax Asset 0.0 0.0 0.0 (182.2)
Debtors T/o Days 36.7 38.7 39.4 28.6 CF - Investing Activities (256.5) 407.1 1,029.6 261.9
Advances T/o Days 16.3 19.5 17.2 15.4 Increase in Equity (0.0) (0.0) (0.0) (15.5)
Creditors T/o Days 55.1 61.2 56.3 66.1 Changes in Borrowings (4.8) (9.3) 0.0 0.0
DPS (Rs.) 8.3 8.3 9.0 14.0 CF - Financing Activities (1,188.2) (1,207.6) (1,310.0) (2,097.0)
Dividend Payout (%) 80.0% 69.5% 72.0% 79.2% Net Change in Cash 19.1 101.6 (3,828.2) 2,286.9
Dividend Yield (%) 2.8% 2.8% 3.0% 4.7% Closing Cash & Bank Bal 296.9 398.5 892.2 3,179.1

Resurrection Weapon
Defense Industry
"The more we sweat in peace the less we bleed in war."
The dilution of USA & USD dominion on the world is capable of unsettling a lot of things,
not just economically but also from a political parlance. While the world feels some
respite from the Saddam's & the Kim Jong II's, we still have a hysterical-fears with Iran-
Israel. With our neighbour brother becoming the next Afghanistan or Iraq for the US
warplanes, its internal political confrontations and finally with its nuclear deal with
China, it is imperative for India to take heed.
The security spending is rarely a function of economics. The change in India's global
standing post the signing of the nuclear deal with USA and the New Offset policy are
important events. The Offset Policy is particularly important in sense that it can bring in
a lot of traction to the Indian companies in the defense space.
Bharat Electronics Limited (BEL) is a leading Indian defense electronics company with
around 95 per cent of the market share for strategic electronics in India. BEL
manufactures a wide range of cutting-edge Military Communication Systems, Radars
and Sonars, Naval Systems, Telecom & Broadcast Systems, Electronic Warfare
Systems, Tank Electronics, Opto Electronics, Professional Electronic Components
and Solar Powered Systems. The Company has been using the technologies and skills
acquired over the years to design a number of civilian products such as Electronic
Voting Machines, Set Top Boxes, etc.
Key Investment Excellent relationship based strategic position and a Quasi Monopoly business
arguments A Non cyclical and Low Capital intensiveness business
Excellent return ratios
Good revenue visibility due to high indigenisation level targets for defense
expenditure
Key Beneficiary of Offset Policy
Sharp rise in the Order book to be reflected in the revenues of the coming years
Rise in Order Book

Particulars FY05 FY06 FY07 FY08
Sales (Rs Mn.) 33,401.2 36,549.7 40,485.0 42,067.4
Order Book (Rs Mn.) 61,080.0 66,330.0 91,000.0 95,860.0
Order Book/Sales (x) 1.8 1.8 2.2 2.3

Resurrection Weapon
Opinion We believe that the increasing share of civilian contracts, cost reduction through
indigenisation (BEL saved Rs. 163 Crs through cost savings initiatives in FY08),
improving exports (33% increase in FY08), continuous innovation (20 new products
introduced in FY08), all auger well for BEL. The impact is clearly visible as BEL has
been able to expand margins, despite a sharp 50% increase in DA as per the new wage
revision norms.
The share of BEL is coming down with the sector being opened up for private players.
The opening up of the FDI window upto 49% in select parts is likely to benefit both BEL
& private players equally.
While FY09 may be a muted year for BEL, the company is likely to see a very good
traction in the coming year, as a larger portion of its pending order-book gets executed.
Moreso the Offset policy has been effected only from September 2008. The coming
years will see the positive fallout of this policy. Financially the company's performance
has been commendable. BEL trades at 6.5x its FY09E earnings of Rs. 98.2 per share.
We see BEL as being relatively less cyclical than the other engineering companies,
albeit with a lower growth rate. But the extremely cheap valuations & the positive future
outlook does put BEL as a key defensive bet.

Resurrection Weapon
BEL : BUY

Other Income 1,135.0 1,945.5 2,403.6 2,461.6 Minority Interest 16.5 22.3 23.2 28.2
EBITDA 9,942.0 11,669.1 12,670.8 12,931.1 Government Grants 142.5 206.6 208.5 208.5
Depreciation 895.0 933.3 1,007.2 1,018.9 Borrowed Funds 92.7 23.4 20.8 20.8
EBIT 9,047.0 10,735.9 11,663.6 11,912.1 Total Liabilities 21,394.8 26,950.8 33,464.8 39,489.5
Interest 270.2 8.4 3.0 2.5 Fixed Assets 4,255.4 4,490.6 4,724.3 4,701.4
PBT 8,776.8 10,727.5 11,660.6 11,909.6 Investments 0.0 0.0 0.0 0.0
Tax 2,759.4 3,397.5 3,503.4 4,048.1 Inventory 10,611.1 12,736.8 13,688.2 14,107.0
PAT before MI 6,017.4 7,330.0 8,157.2 7,861.6 Sundry Debtors 10,377.8 17,030.7 20,818.7 21,160.5
Minority Interest 4.3 5.9 0.8 5.0 Loans & Advances 8,064.4 3,111.4 5,635.3 5,877.9
PAT before EI 6,013.1 7,324.1 8,156.4 7,856.6 Cash & Bank Balance 18,577.1 20,930.6 24,615.5 29,560.0
Extraordinary Items (28.2) (8.6) 216.3 0.0 Sundry Creditors 23,033.9 28,589.1 33,138.8 32,916.3
Reported PAT 5,984.9 7,315.5 8,372.7 7,856.6 Provisions 8,725.5 4,271.3 4,303.3 4,274.5
Net Current Assets 15,870.9 20,949.1 27,315.5 33,514.7
Ratio Analysis Deferred Tax Assets 1,246.2 1,501.4 1,424.9 1,424.9
Pariculars FY06 FY07 FY08 FY09E Miscellaneous Expenditure 22.3 9.6 0.0 0.0
OPM (%) 24.1% 24.0% 24.4% 24.4% Total Assets 21,394.8 26,950.8 33,464.8 39,641.0
EBITDA (%) 27.2% 28.8% 30.1% 30.1%
PBIT (%) 24.8% 26.5% 27.7% 27.8% Cash Flow
Interest Cover Ratio 33.5 1,281.0 3,871.1 4,764.2 Opening Cash & Bank 13,487.1 18,577.1 20,930.6 24,615.5
EPS 75.2 91.6 102.0 98.2 Profit After Tax 5,984.9 7,315.5 8,372.7 7,856.6
Book Value per share 264.0 333.6 415.2 490.4 Less : Invest. Income (1,135.0) (1,945.5) (2,403.6) (2,461.6)
Market Cap 50,872.0 50,872.0 50,872.0 50,872.0 Add. Interest Expense 270.2 8.4 3.0 2.5
Enterprise Value 50,964.7 50,895.4 50,892.8 50,892.8 Depreciation 895.0 933.3 1,007.2 1,018.9
P/E 8.5 6.9 6.2 6.5 Deferred Taxation (59.2) (216.5) 37.0 0.0
P/BV 2.4 1.9 1.5 1.3 Others 4,307.0 (263.2) (19.3) 0.0
M Cap/Sales 1.4 1.3 1.2 1.2 Govt.Grant Adjustment 4.5 64.1 1.9 0.0
EV/EBITDA 5.1 4.4 4.0 3.9 Net Change in W Capital 779.1 (2,724.7) (2,681.5) (1,254.6)
EV/Sales 1.4 1.3 1.2 1.2 CF - Operating Activities 11,046.6 3,171.4 4,317.3 5,161.8
ROCE (%) 42.3% 39.8% 34.9% 30.2% Change in Fixed Assets (888.3) (1,012.6) (1,094.0) (996.0)
RONW (%) 28.5% 27.4% 24.6% 20.0% Change in Investments (4,538.4) 0.0 0.0 0.0
Debt/Equity Ratio 0.0 0.0 0.0 0.0 Investment Income 1,135.0 1,945.5 2,403.6 2,461.6
Inventory T/o Days 106.0 114.8 118.8 120.0 CF - Investing Activities (4,291.7) 932.8 1,309.7 1,465.6
Debtors T/o Days 103.6 153.5 180.6 180.0 Increase in Equity 0.0 0.0 0.0 (0.0)
Advances T/o Days 80.5 28.1 48.9 50.0 Changes in Borrowings (65.4) (69.2) (2.6) 0.0
Creditors T/o Days 230.0 257.7 287.5 280.0 Changes in Minority Int. 2.5 5.8 0.9 5.0
Net Wrkg Cap T/o Days 158.5 188.9 237.0 285.1 Interest Paid (270.2) (8.4) (3.0) (2.5)
DPS 14.6 18.0 20.7 19.6 CF - Financing Activities (1,664.9) (1,750.7) (1,942.1) (1,834.3)
Dividend Payout (%) 19.4% 19.7% 20.3% 20.0% Net Change in Cash 5,090.0 2,353.6 3,684.9 4,793.1
Dividend Yield (%) 2.3% 2.8% 3.3% 3.1% Closing Cash & Bank 18,577.1 20,930.6 24,615.5 29,408.6

Dividend Yield Plays
NIIT Tech, HTMT Global. VST Industries, Wyeth are some of our picks. Bongaigaon, Chennai Petro & Tata Chem are the
traditional bets based on the Dividend Yield plays.
Name M Cap Div % EPS ROCE (%) RONW (%) P/E Div Yield -% Payout
Bongaigaon Ref 763.3 50.0 13.9 36.1 27.7 3.5 13.1 36.0%
CPCL 1,952.6 170.0 72.5 36.9 36.8 3.9 13.0 23.5%
NIIT Tech. 399.1 65.0 24.4 41.4 41.8 4.2 9.6 26.7%
HCL Infosystems 1,488.1 400.0 16.5 40.4 33.0 8.4 9.2 48.6%
VST Inds. 346.6 200.0 34.4 39.8 26.9 9.0 8.9 58.2%
Finolex Inds 418.0 30.0 5.2 11.7 13.2 12.6 8.9 57.4%
Andhra Bank 2,240.7 40.0 11.2 0.0 18.0 6.6 8.7 35.8%
West Coast Paper 226.2 150.0 13.8 16.4 25.9 4.7 7.6 21.8%
Bank of Maha 1,138.7 20.0 7.3 0.0 18.9 6.9 7.6 27.4%
Vijaya Bank 1,155.3 20.0 8.0 0.0 18.3 6.2 7.5 25.0%
Solvay Pharma 269.9 400.0 49.4 50.8 33.3 14.3 7.5 81.0%
Graphite India 605.9 150.0 8.3 20.7 20.7 6.2 7.5 36.0%
Vardhman Textile 315.7 40.0 20.5 7.4 10.8 5.1 7.3 19.5%
Ashok Leyland 2,760.4 150.0 3.3 26.1 23.5 10.8 7.2 45.9%
Lak. Mach. Works 781.5 450.0 188.2 56.0 36.2 8.5 7.1 23.9%
Wyeth 962.0 300.0 30.8 45.4 31.6 14.8 7.1 97.5%
Merck 488.2 200.0 37.7 24.5 16.9 11.9 6.9 53.0%
Alok Inds 342.7 12.0 10.4 9.4 16.9 5.5 6.9 11.5%
Tata Elxsi 316.5 70.0 15.7 47.9 49.8 10.0 6.9 44.5%
Deccan Chronicle 1,070.2 150.0 10.6 30.2 28.7 15.5 6.9 28.3%
Allahabad Bank 2,300.5 35.0 21.2 0.0 24.6 3.6 6.8 16.5%
HTMT Global 307.9 100.0 26.9 12.3 11.5 11.9 6.7 37.1%
Tata Tea 3,253.1 350.0 44.6 12.0 11.0 18.5 6.7 78.4%
IL&FS Inv Manage 330.8 55.0 9.6 87.1 57.6 25.7 6.6 57.1%
T N Newsprint 472.4 45.0 15.9 16.0 18.3 6.3 6.6 28.3%
Dredging Corpn 644.6 150.0 52.7 12.6 13.1 12.3 6.5 28.4%
Supreme Inds. 339.3 80.0 17.2 22.9 21.7 10.2 6.5 46.7%
Balmer Lawrie 428.5 170.0 50.5 44.2 29.2 7.4 6.5 33.7%
SRF 525.5 50.0 19.3 19.3 17.8 5.2 6.5 25.9%
Finolex Cables 376.3 75.0 5.6 15.9 14.6 12.8 6.1 27.0%
Apar Inds. 301.3 55.0 25.5 35.9 24.0 8.1 5.9 21.6%
Balkrishna Inds 353.2 105.0 52.8 22.4 27.8 10.3 5.8 19.9%
Pfizer 1,452.8 275.0 108.9 37.2 27.3 5.9 5.7 25.3%
Greaves Cotton 526.3 60.0 21.5 42.7 33.1 8.2 5.6 27.9%
Syndicate Bank 2,698.6 28.0 15.8 0.0 24.1 4.8 5.4 17.8%
Tata Chemicals 3,915.6 90.0 39.0 14.7 18.0 7.2 5.4 23.1%
Guj Inds Power 704.1 25.0 6.3 11.3 9.2 14.2 5.4 39.4%
JK Tyre & Indust 209.2 27.0 21.2 14.7 17.4 6.0 5.3 12.7%
Opto Circuits(I) 1,531.3 50.0 11.7 38.6 45.1 28.2 5.2 42.6%
Navneet Publicat 438.9 120.0 5.2 27.4 24.7 18.5 5.2 45.9%
Alembic 400.1 75.0 7.9 16.6 23.2 7.2 5.2 19.1%
HCL Technologies 11,675.1 450.0 10.2 23.5 20.7 24.6 5.2 88.3%
JBF Inds. 285.2 22.5 14.5 18.1 23.5 6.9 4.9 15.6%
Esab India 488.6 155.0 32.2 90.6 59.2 14.3 4.9 48.1%
Castrol India 3,703.0 140.0 15.1 80.5 51.5 23.8 4.7 92.5%
Rallis India 423.2 160.0 95.3 23.7 27.3 3.5 4.5 16.8%
Source: Prowess

Cigar Butts
These are stocks available at seemingly cheap valuations. However one should not fall for these blindly, for there could be
certain negative facets attached to these which may gradually surface over a period of time, denying a long term investor its
true potential. As Buffett said, “There is rarely just one cockroach in the kitchen”. As a part of our basic filtering, we have
eliminated the more vulnerable small cap companies. Also we recommend to avoid selecting any cyclical company in
industry like Cement, Steel, Shipping, etc. based on this approach. We feel that NIIT Tech, Zensar & Apar are some of the
interesting bets from this query.
Name M Cap DER PBIDTM (%) ROCE (%) RONW (%) P/E P/BV Div Yield -%
Ingersoll-Rand 832.2 0.0 18.9 16.7 13.0 3.1 1.2 2.3
JK Lakshmi 246.9 1.4 28.2 24.8 43.7 3.2 1.1 6.2
Uttam Galva 390.3 1.6 11.9 19.9 19.7 3.3 0.6 0.0
Bongaigaon Ref 763.3 0.2 7.4 36.1 27.7 3.5 0.9 13.1
Rallis India 423.2 0.2 12.3 23.7 27.3 3.5 1.8 4.5
Oswal Chem & Fer 285.1 0.0 44.5 12.7 11.5 3.6 0.5 0.0
Ankur Drugs 257.8 3.1 16.0 15.6 40.2 3.7 1.1 1.6
Nectar Lifescn. 276.9 1.9 17.9 17.1 34.1 3.7 1.1 2.2
CPCL 1,952.6 0.7 6.6 36.9 36.8 3.9 1.2 13.0
Birla Corpn 709.3 0.3 30.8 51.8 47.6 3.9 1.5 4.3
India Glycols 223.9 1.4 23.0 29.9 44.7 3.9 1.4 5.0
Tata Sponge Iron 223.0 0.6 34.1 46.9 47.6 4.1 1.6 4.8
NIIT Tech. 399.1 0.1 39.1 41.4 41.8 4.2 1.6 9.6
Jindal Poly Film 370.1 0.2 19.2 19.7 15.6 4.2 0.6 1.5
Prism Cement 499.6 0.0 34.5 62.2 47.0 4.2 1.6 6.0
GE Shipping Co 3,219.2 0.7 61.1 20.9 29.3 4.3 1.4 7.1
Orient Paper 443.4 0.8 23.7 59.6 65.2 4.4 1.8 5.2
J K Cements 383.9 0.8 30.1 34.0 41.5 4.4 1.5 9.1
Kesoram Inds. 683.1 1.3 20.2 32.7 47.2 4.7 1.8 3.7
West Coast Paper 226.2 0.9 18.4 16.4 25.9 4.7 0.9 7.6
Guj Alkalies 530.2 0.5 26.6 25.6 23.2 5.0 1.0 4.9
Godawari Power&I 223.3 1.0 17.0 24.1 32.2 5.0 1.2 5.0
Hind.Zinc 13,430.1 0.0 71.3 61.7 45.2 5.1 1.9 1.6
SRF 525.5 0.6 20.0 19.3 17.8 5.2 0.8 6.5
Tata Metaliks 233.9 0.6 11.9 47.3 41.6 5.3 1.8 7.6
Alok Inds 342.7 3.9 32.1 9.4 16.9 5.5 0.8 6.9
Nava Bharat Vent 958.2 0.7 44.3 37.3 51.6 5.5 2.1 4.9
Kolte Patil Deve 231.0 0.2 46.8 37.4 34.3 5.7 1.3 5.7
GNFC 951.9 0.2 18.8 28.3 21.8 5.8 1.1 6.9
GSFC 653.2 0.5 14.8 18.7 16.8 5.9 0.9 5.5
Pfizer 1,452.8 0.0 26.2 37.2 27.3 5.9 3.0 5.7
JK Tyre & Indust 209.2 2.4 8.4 14.7 17.4 6.0 1.1 5.3
Zensar Technolgs 252.8 0.0 19.5 25.5 24.2 6.1 1.3 3.6
Graphite India 605.9 0.8 24.6 20.7 20.7 6.2 1.1 7.5
T N Newsprint 472.4 0.9 24.9 16.0 18.3 6.3 1.1 6.6
Unichem Labs. 594.8 0.1 19.0 22.8 19.4 6.3 1.1 3.0
Savita Chemicals 237.1 0.2 10.0 31.8 27.1 6.5 1.5 7.1
IVR-Prime Urban 286.8 0.6 42.1 29.0 33.3 6.6 1.2 9.0
Bhushan Steel 2,916.4 3.2 18.5 11.0 29.8 6.7 1.7 0.4
Dalmia Cement 701.8 1.5 29.5 19.0 27.4 6.7 2.1 4.6
Guj Flourochem 972.1 0.6 57.3 31.1 32.6 6.8 2.2 4.2
Source: Prowess

Cash Rich Companies
These companies are at advantage over others in managing their overall profits through higher cash discounts/higher other
income/lower interest expense. We have looked at Net Cash as a percentage of Market Cap & the Total Balance Sheet size
and have sorted the results based on the combined rankings. Here again we have excluded the banking companies for the
query. HTMT Global, Bharat Electronics, Lakshmi Machine Works, Engineers India, Ingersoll are the key picks.
Name M Cap Net Cash Total Liab Cash/Total Liab Cash/M Cap ROCE (%) RONW (%) P/E
Apar Inds. 301.3 396.4 364.9 108.6% 131.6% 35.9 24.0 8.1
HTMT Global 307.9 510.9 983.2 52.0% 166.0% 13.0 11.6 3.5
Engineers India 2329.2 1,252.6 1,152.1 108.7% 53.8% 29.8 19.6 20.3
Lak. Mach. Works 781.5 568.3 757.5 75.0% 72.7% 56.0 36.2 8.5
Ingersoll-Rand 832.2 516.2 702.4 73.5% 62.0% 16.7 13.0 3.1
Alstom Projects 1650.4 393.0 353.8 111.1% 23.8% 35.0 21.7 60.7
Mysore Cement 213.3 180.7 364.6 49.6% 84.7% 27.2 27.2 10.0
Bharat Electron 5086.8 2,452.1 3,234.5 75.8% 48.2% 40.3 28.4 10.6
Hinduja Ventures 242.3 203.4 665.8 30.6% 84.0% 8.4 6.4 17.7
Wyeth 962 227.1 260.9 87.1% 23.6% 45.4 31.6 14.8
Pfizer 1452.8 479.8 648.6 74.0% 33.0% 37.2 27.3 5.9
MTNL 4340.7 3,369.4 11,921.4 28.3% 77.6% 7.0 5.0 11.2
NMDC Ltd 59867 7,198.8 8,289.7 86.8% 12.0% 70.5 46.1 43.6
BHEL 65652 8,290.8 10,869.4 76.3% 12.6% 45.2 29.2 36.8
Colgate Palmoliv 5264.6 139.6 166.9 83.6% 2.7% 130.0 104.7 28.8
Oswal Chem & Fer 285.1 203.1 1,859.3 10.9% 71.2% 12.7 11.5 3.6
Satyam Computer 20216.2 4,438.0 7,379.5 60.1% 22.0% 29.6 26.1 15.8
Apollo Sindhoori 272 53.3 85.5 62.3% 19.6% 55.0 60.0 7.1
Castrol India 3703 315.1 433.0 72.8% 8.5% 80.5 51.5 23.8
Titagarh Wagons 739.5 164.9 280.9 58.7% 22.3% 48.0 37.5 0.0
Astrazeneca Phar 1170.9 111.0 159.3 69.7% 9.5% 63.3 40.8 29.7
Geojit Fin Serv 503.8 126.0 232.7 54.2% 25.0% 33.2 22.2 20.9
Aventis Pharma 1719.9 390.6 706.9 55.3% 22.7% 34.7 22.5 19.4
Natl. Aluminium 9493.9 3,516.5 8,874.4 39.6% 37.0% 30.5 19.7 18.6
Madras Aluminium 524.3 159.0 395.8 40.2% 30.3% 27.3 24.8 18.8
SAIL 37235.6 10,714.2 26,108.8 41.0% 28.8% 49.4 37.3 10.5
SKF India 903.3 236.2 545.3 43.3% 26.2% 51.2 33.2 15.6
Container Corpn 8282.3 1,521.5 3,183.9 47.8% 18.4% 32.6 25.9 15.5
Dredging Corpn 644.6 256.9 1,255.3 20.5% 39.9% 12.6 13.1 12.3
Sulzer India 214.3 22.5 45.2 49.8% 10.5% 65.1 39.0 18.4
Punjab Tractors 727.9 194.8 668.9 29.1% 26.8% 14.9 9.9 22.9
Infosys Tech. 78919.1 6,429.0 13,490.0 47.7% 8.2% 41.5 36.3 19.7
Anant Raj Inds 1441.6 539.1 2,951.2 18.3% 37.4% 24.5 22.5 15.1
Jyothy Labor. 360.5 95.3 329.4 28.9% 26.4% 22.4 16.8 14.4
P & G Hygiene 2451.1 166.5 346.6 48.0% 6.8% 56.6 41.2 20.4
Balmer Lawrie 428.5 100.5 331.3 30.3% 23.5% 44.2 29.2 7.4
Merck 488.2 116.9 422.9 27.6% 24.0% 24.5 16.9 11.9
Tanla Solutions 995.5 183.8 700.5 26.2% 18.5% 30.1 23.8 3.0
IL & FS Invsmart 603.8 126.8 682.4 18.6% 21.0% 4.0 2.3 69.5
Solvay Pharma 269.9 24.4 86.8 28.1% 9.0% 50.8 33.3 14.3
Neyveli Lignite 9982.4 1,958.9 11,831.0 16.6% 19.6% 13.2 12.7 19.3
Oracle Financial 5036.1 640.1 2,812.6 22.8% 12.7% 16.7 15.9 19.2
GAIL (India) 28230 3,207.1 14,270.8 22.5% 11.4% 29.1 21.3 14.6
IL&FS Inv Manage 330.8 16.7 58.5 28.5% 5.0% 87.1 57.6 25.7
Kirl. Ferrous 203.6 39.5 304.1 13.0% 19.4% 25.6 17.4 11.9
Fag Bearings 523.3 63.9 318.1 20.1% 12.2% 44.5 28.4 14.8
Indraprastha Gas 1476.3 133.1 583.3 22.8% 9.0% 49.6 33.4 11.2
T.V. Today 383.1 48.6 293.1 16.6% 12.7% 24.2 15.9 13.4
Source: Prowess

High Leverage Companies
We recommend caution dealing with any of the below highly leveraged companies. Many of these companies are paying a
price for their under-estimation of the risks in their aggressiveness. Even some of the good companies may be constrained
in executing their plans in the current tough liquidity scenario, which may call for compromise from both the company & the
investors. We have excluded banking companies for this query.
Name Year End M Cap Debt Networth Debt/Eq ROCE (%) RONW (%) P/E
Asahi India Glas 200803 720.3 1,391.4 294.5 4.7 6.8 4.6 80.6
Alok Inds 200803 342.7 5,767.3 1,321.2 4.4 9.4 16.9 5.5
Strides Arcolab 200712 560.9 1,062.8 244.5 4.3 0.0 0.0 0.0
Vipul Ltd 200703 206.7 229.1 56.0 4.1 39.7 114.2 28.0
Jai Balaji Inds 200803 239.7 1,429.8 352.5 4.1 18.3 41.2 11.5
Unitech 200803 7,954.7 8,119.5 2,143.8 3.8 23.4 62.4 43.8
Bombay Dyeing 200803 780.7 1,415.8 395.9 3.6 3.6 -4.5 165.1
Bhushan Steel 200803 2,916.4 5,718.1 1,625.3 3.5 11.0 29.8 6.7
Chemplast Sanmar 200803 215.9 847.5 253.2 3.3 5.1 0.8 58.7
Kohinoor Foods 200703 308.1 460.2 141.6 3.2 9.4 16.8 6.2
Zenith Infotech 200803 339.4 331.8 105.6 3.1 14.5 45.9 9.3
MMTC 200803 70,319.3 3,201.6 1,030.0 3.1 16.1 23.8 565.1
Era Infra Engg 200803 870.9 1,447.1 466.2 3.1 20.4 32.1 11.4
Bombay Burmah 200803 237.4 270.0 88.3 3.1 12.8 24.8 52.9
GTL Infrastruc 200803 2,975.9 2,475.7 838.2 3.0 0.0 0.0 0.0
Ankur Drugs 200803 257.8 618.1 210.7 2.9 15.6 40.2 3.7
Shrenuj & Co. 200803 209.6 638.2 218.4 2.9 12.3 16.0 8.8
Adhunik Metal 200803 423.8 889.7 309.9 2.9 15.9 28.1 15.9
Omaxe Ltd 200703 1,052.7 914.1 321.2 2.8 23.5 47.0 9.2
Orchid Chemicals 200803 760.4 1,953.4 688.1 2.8 13.4 31.0 5.9
REI Agro 200703 2,760.0 1,291.3 462.2 2.8 13.0 25.3 10.0
Essar Oil 200803 11,465.8 10,015.6 3,600.7 2.8 0.0 0.0 0.0
Swan Mills 200803 406.1 151.3 55.2 2.7 18.2 20.4 24.3
Jet Airways 200803 1,654.9 12,015.0 4,551.6 2.6 -2.2 -28.9 0.0
Ispat Inds. 200803 1,507.3 7,225.0 2,901.6 2.5 12.2 3.0 112.0
HEG 200703 639.5 887.8 358.2 2.5 13.0 21.8 8.5
Kingfisher Air 200706 898.8 916.7 373.7 2.5 0.0 0.0 0.0
Satra Properties 200803 387.6 191.0 78.2 2.4 34.4 75.7 36.8
JSL Ltd 200803 636.4 4,306.1 1,788.1 2.4 12.6 16.6 9.3
Varun Ship. Co. 200803 679.5 2,200.8 914.8 2.4 13.1 27.6 5.1
Jaybharat Text 200803 5,735.6 216.1 91.7 2.4 19.2 41.7 181.5
SpiceJet 200703 309.0 432.2 184.6 2.3 0.0 0.0 0.0
GHCL 200803 345.6 1,163.6 502.5 2.3 13.4 22.0 10.5
Adani Enterprise 200803 9,917.0 3,062.5 1,337.7 2.3 16.5 22.0 47.8
Radico Khaitan 200803 621.9 540.0 239.6 2.3 9.4 10.3 40.1
Hotel Leela Ven. 200803 1,057.8 2,035.7 930.2 2.2 11.9 21.4 10.4
Kajaria Ceramics 200803 219.7 337.3 154.9 2.2 12.8 10.1 14.2
Marksans Pharma 200803 218.5 303.1 141.5 2.1 6.9 12.4 44.2
Uflex 200803 435.3 1,359.9 637.4 2.1 8.0 11.0 15.4
STC 200803 711.3 1,098.7 524.9 2.1 16.6 26.0 16.3
Jaiprakash Assoc 200803 9,641.6 8,305.6 4,199.5 2.0 12.1 18.9 45.0
Binani Cement 200803 649.9 792.2 417.6 1.9 26.3 48.9 7.5
Shristi Infra 200803 859.6 50.8 28.6 1.8 19.9 48.2 225.2
JK Tyre & Indust 200709 209.2 915.0 533.9 1.7 14.7 17.4 6.0
Federal-Mogul Go 200712 208.3 292.4 176.3 1.7 0.0 0.0 0.0
Sanwaria Agro 200803 523.7 193.3 125.3 1.5 38.9 77.6 14.8
Spice Comm 200712 2,369.9 1,285.5 857.9 1.5 6.7 -10.2 11.4
Source: Prowess

Annexure
Companies in Brief
Div
M Cap Revenues OPM NPM Debt/Eq ROCE RONW P/E P/BV
Company (FY08) Reco Yield
(Rs. Mn.) (Rs. Mn.) (%) (%) (x) (%) (%) (x) (x)
(%)
Godrej Consumer Buy 22,911.9 11,025.7 19.5% 14.4% 1.1 56.3% 94.4% 14.4 13.6 4.2%
Marico Industries Buy 30,267.3 19,066.9 12.9% 8.3% 1.1 33.0% 50.4% 19.1 9.6 1.3%
Pidilite Industries Buy 27,561.8 17,082.0 14.1% 10.1% 0.8 19.8% 27.7% 16.0 4.4 1.6%
Infosys Technologies Buy 788,502.0 166,920.0 31.4% 27.9% - 38.7% 33.8% 16.9 5.7 2.4%
Mphasis Buy 35,034.3 24,230.7 11.5% 10.5% - 22.2% 22.1% 13.7 3.0 2.0%
NIIT Technologies Buy 3,988.6 9,415.1 18.7% 14.4% 0.1 29.5% 30.6% 2.9 0.9 9.6%
Sonata Software Buy 1,787.7 14,283.7 7.8% 4.1% - 34.9% 25.6% 3.1 0.8 6.5%
HTMT Global Sol. Buy 3,078.6 6,370.5 14.7% 13.7% 0.0 13.0% 11.6% 3.5 0.4 5.7%
Aban Offshore Sell 33,349.0 20,210.6 61.4% 6.1% 16.1 6.7% 15.1% 27.1 4.1 0.4%
Garware Offshore ^ Sell 2,414.1 1,136.7 61.2% 41.8% 1.3 15.3% 24.1% 5.1 1.2 1.8%
Great Offshore Sell 13,021.8 7,459.0 41.9% 27.0% 1.1 14.4% 22.9% 6.5 1.5 4.7%
ABG Shipyard Sell 6,400.9 8,851.4 23.7% 33.0% 0.7 22.6% 21.0% 4.0 0.8 1.6%
Bharati Shipyard Sell 1,953.3 6,451.4 20.3% 28.6% 0.7 18.3% 18.7% 1.8 0.3 4.2%
Hero Honda Accumulate 144,862.4 103,318.0 13.1% 9.4% - 44.1% 32.4% 15.0 4.9 2.6%
Bajaj Auto Buy 72,094.0 90,461.5 14.3% 8.4% 0.8 42.5% 47.6% 9.5 4.5 4.0%
TVS Motors Accumulate 7,136.9 32,195.0 1.3% 1.0% 0.8 2.5% 3.9% 22.5 0.9 2.3%
Geodesic Buy 8,662.4 3,164.3 60.5% 47.0% 1.1 17.5% 32.2% 5.8 1.9 0.6%
Castrol India # Buy 37,030.2 22,374.1 19.4% 12.8% 0.0 93.2% 59.5% 12.9 7.7 5.5%
Apollo Tyres Unrated 12,751.2 36,970.5 12.6% 5.9% 0.5 24.1% 20.0% 7.2 1.0 2.0%
Amara Raja Batteries Unrated 4,607.3 10,833.3 14.6% 8.7% 0.8 31.0% 32.7% 4.7 1.4 1.3%
Guj. Ind. Power Corp. Buy 6,745.8 9,355.5 27.1% 10.9% 0.6 11.3% 9.2% 7.4 0.6 5.6%
Bharat Electronics Buy 50,872.0 42,119.3 24.4% 19.4% 0.0 34.9% 24.6% 6.2 1.5 3.3%
Div
M Cap Revenues NNPA NNPA NIM CAR RONW ROA P/BV
Banking Cos. (FY08) Reco Yield
(Rs. Crs.) (Rs. Crs.) (Rs. Crs.) (%) (%) (%) (%) (%) (x)
(%)
Axis Bank Buy 23,000.9 7,005.3 248.3 0.4 3.5 13.7 17.6 1.2 2.6 0.9
HDFC Bank Buy 47,219.1 10,115.0 298.5 0.5 4.4 13.6 17.7 1.3 4.1 0.8
State Bank of India Buy 83,877.2 48,950.0 7,424.3 1.8 3.1 13.5 16.8 1.0 1.7 1.6
^ 15 Months
# CY07

Notes

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6th November 2008

Buffet Meal : FMCG Sector Page 5

Think about IT : Information Technology Page 13

Ferris Wheels : Offshore, Shipbuilding, et.al. Page 23

Migration from "Splurging to Savings" : Two Wheeler Industry Page 37

Other people's money : Banking Sector Page 43

Blue Ocean Formation : Telecom Industry Page 49

The Convenient Shift : Sectoral Rotation Page 53

Resurrection Weapon : Defense Industry Page 57

For the Inquisitionists

Dividend Yield Plays Page 61

Cigar Butts Page 62

Cash Rich Companies Page 63

High Leverage Companies Page 64

Companies in Brief Page 66

To give some idea of what we have to say in this report..

Parag Parikh Financial Advisory Services Limited 3

Munger's Three Great Lessons of Investing.

3. “A great business at a fair price is superior to a fair business at a great price.”

Index Jan 08 Oct 08 Change % Chg

Low Capital Intensity x High Margin = Fantastic Returns on Capital

Low Capital Intensity x High Margin x Sustainability = Fantastic Businesses.

Parag Parikh Financial Advisory Services Limited 5

Particulars GCPL Marico Pidilite

Marico 2002 2003 2004 2005 2006 2007 2008 CAGR

Pidilite 2002 2003 2004 2005 2006 2007 2008 CAGR

Parag Parikh Financial Advisory Services Limited 6

Godrej Consumer Target Target 10 Yr.

Marico Industries Target Target 10 Yr.

Pidilite Industries Target Target 10 Yr.

Parag Parikh Financial Advisory Services Limited 7

How best to apply this strategy ?

“Understanding both the power of compounding and the

Parag Parikh Financial Advisory Services Limited 8

Companies Godrej Consumer Products Limited

Marico Industries Limited

Pidilite Industries Limited

Pidilite Industries is a prime example of a consumer monopoly in the Indian listed

Parag Parikh Financial Advisory Services Limited 9

Earnings Statement Balance Sheet

Parag Parikh Financial Advisory Services Limited 10

Earnings Statement Balance Sheet

Parag Parikh Financial Advisory Services Limited 11

Earnings Statement Balance Sheet

Parag Parikh Financial Advisory Services Limited 12

FY09E If earnings Then

Infosys 1,378.5 102.5 13.5 32.3% 35.50% 66.1 20.9 20.8%

Mphasis 163.1 15.8 10.3 24.3% 34.50% 10.3 15.8 15.9%

“ When the gap between perception and reality is the maximum,

While most of the IT companies demonstrate a positive quarter-on-quarter growth for

Parag Parikh Financial Advisory Services Limited 14

But now the outlook is comforting on both the issues.

Reasons for acquisition – Strategic and/or Growth;

Domain Expertize (which is critical to protect in case of vendor consolidation)

Basically, niche & technically sound companies available at 'cigar-butt' valuations.

Parag Parikh Financial Advisory Services Limited 16

Its not sunset; just an eclipse. Think about IT.

Parag Parikh Financial Advisory Services Limited 17

Earnings Statement Balance Sheet