ambit strategy thematic 14jan2013

8/13/2019 Ambit Strategy Thematic 14Jan2013

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January 14, 2013

Strategy

INDIA STRATEGY THEMATIC

Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit

Capital may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

Please refer to disclaimer section on the last page for further important disclaimer.

Tomorrows ten baggers, revisitedOn 19 January 2012, we had highlighted 25 stocks as potential tenbaggers over the next ten years. These ten baggers were identifiedbased on their relentless and consistent improvement in financialperformance over long periods of time (usually, six years).

The return target from such a portfolio is 26% per annum as this is thereturn that a stock needs to deliver to be 10x in ten years. The

January 2012 ten baggers have comfortably beaten this target byclocking in nearly 30% return over the past year. Now, we publish this

years iteration of ten baggers.

Beyond cyclical BUYs & SELLs, we are thinking long term

Over the past few months, our portfolio strategy research has focused onhelping clients play the ongoing cyclical recovery in India. Whilst we remainfocused on tactical plays, we cannot lose sight of the big picture in a countrylike India where the robustness of the economy ensures that well managedcompanies focused on cash generation have a high chance of doing wellespecially if they are starting from a small base. Structural plays, like the oneswe attempt to identify here, are financially strong firms (with crediblemanagements) that remain consistent outperformers on a cross-cyclical basis.

The Greatness framework

Consistent improvements in corporate performance are more important thangreat leapsthis has been the guiding philosophy of our greatness

framework which lies at the core of our process of identifying structurallysound businesses. Not only do the great firms perform significantly betterthan an average firm on a variety of measures, more importantly, they show amore consistent and calibrated approach to growth over long periods (seeExhibit 5 on page 6). In this note, we update our greatness framework toinclude FY12 numbers. This framework uses the following key attributes tomeasure consistent financial improvements across the universe of BSE500firms (excluding Financial Services): judicious capex, conversion of capex tosales, pricing discipline, balance sheet discipline, cash generation and EPSimprovement, and return ratio improvement. For each of these attributes, welook for two kinds of improvements:

Improvements in performanceover FY10-12 versus FY07-09; and Consistency in performanceover FY07-12The winning stocks

We find that 77 firms from the BSE500 universe pass more than two-thirds ofthe tests in our greatness framework. Of these 77, only 30 firms pass ouraccounting quality and corporate governance filters and haveADV>US$0.2mn (refer to Exhibit A).

Of these 30 firms, the following 8 firms trade below their five-year valuationaverages currently and look particularly attractive: Carborundum, TorrentPower, Sadbhav Engineering, Mahindra Life, Exide, Redington, Titan andJagaran Prakashan. However, for the long term all 30 stocks remaincandidates to be ten baggers from our perspective (as we show in the note,todays valuations do not have a significant effect on long term returns!).

Of these 30 firms, we have bottom-up coverage with BUYs on Redington,Sadbhav, Torrent Power, Oberoi Realty, Asian Paints, Balkrishna Industries,Cadila Healthcare, Eicher Motors, Cummins India and TTK Prestige.

Analyst contacts

Gaurav MehtaTel: +91 22 3043 3255

[email protected]

Saurabh Mukherjea, CFATel: +91 22 3043 3174

[email protected]

Exhibit A: The ten baggers

Ticker CompanyMCap(US$mn)

Attractive Valuations*

CU IN Equity

Carborundum

Uni. 504

EXID IN Equity Exide Inds. 2,236

JAGP IN Equity Jagran Prakashan 659

MLIFE IN Equity Mahindra Life. 303

REDI IN Equity Redington India 635

SADE IN Equity Sadbhav Engg. 373

TPW IN Equity Torrent Power 1,553

TTAN IN Equity Titan Inds. 4,338

Moderate Valuations**

BATA IN Equity Bata India 1,029

NEST IN Equity Nestle India 8,573

OBER IN Equity Oberoi Realty 1,704

PSYS IN Equity Persistent Sys 385

SHOP IN Equity Shoppers Stop 670

WHIRL IN Equity Whirlpool India 643

Rich Valuations***

APNT IN Equity Asian Paints 7,659

BIL IN Equity Balkrishna Inds 533

BYRCS IN Equity Bayer Crop Sci. 891

CDH IN Equity Cadila Health. 3,248

CRISIL IN Equity CRISIL 1,325

EIM IN Equity Eicher Motors 1,387

ELEQ IN Equity Elgi Equipment 281

IPCA IN Equity Ipca Labs. 1,156

ITC IN Equity ITC 40,518

KJC IN Equity Kajaria Ceramics 315

KKC IN Equity Cummins India 2,640

LPC IN Equity Lupin 4,791

SI IN Equity Supreme Inds. 717

SKB IN Equity GlaxoSmith C H L 2,978

TRP IN Equity Torrent Pharma. 1,160

TTKPT IN Equity TTK Prestige 749

Source: Ambit Capital research;

* Trading below five-year P/E, P/B, EV/EBITDA(on at least 2 of these 3 measures)

** Trading below either five-year P/E, five-yearP/B or five-year EV/EBITDA (on one of thesethree measures)

*** Trading above five-year P/E, P/B,EV/EBITDA


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Ambit CapitalPvt Ltd 2

CONTENTS

Philosophy and framework............................................... 3

Performance check on the January 2012s tenbaggers... 5

Quantifying Greatness..... 6

2013s ten bagger list.... 7

Valuations - A long-term perspective!.......13

Appendix: Greatness framework on smaller caps....14


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Philosophy and frameworkGreatness is not in where we stand, but in what direction we aremoving.

- Oliver Wendell Holmes

This quote appropriately captures the driving philosophy behind our greatnessframework that lies at the core of our process of identifying potential tenbaggers.We had unveiled this framework on 19thJanuary 2012 with the first iteration of theTomorrows tenbaggers note. This framework studies a firms structural strengthsby focusing not on absolutes but rather on improvements over a period of timeand the consistency of those improvements. A basic sketch of the underlyingprocess behind the making of a great firm has been recaptured in Exhibit 1 below.

Exhibit 1: The greatness framework

Source: Ambit Capital research

We rank the BSE500 universe of firms (excluding Financial Services firms andexcluding firms with insufficient data) on our greatness score, which consists of sixequally weighted headingsinvestments, conversion to sales, pricing discipline,balance sheet discipline, cash generation and EPS improvement, and return ratioimprovement.

Under each of these six headings, we further look at two kinds of improvements:

Percentage improvements in performanceover FY10-12 versus FY07-09;and

Consistency in performance over FY07-12 i.e. improvements adjusted forstandard deviations.

A complete list of factors that are considered whilst quantifying greatness havebeen mentioned in Exhibit 2 on the next page.

b. Conversion ofinvestment to sales(asset turnover, sales)

c. Pricing discipline(PBIT margin)

d. Balance sheetdiscipline (D/E, cashratio)

a. Investment (grossblock)

e. Cash generation(CFO)

The greatness framework

The framework essentiallyhinges on using publiclyavailable historical data toassess which firms have overa sustained period of time(FY07-12) been able torelentlessly and consistently:(a) Invest capital;(b) Turn investment into

sales;(c) Turn sales into profit;(d) Turn profit into

Balance Sheet

strength;(e) Turn all of that intofree cash flow; and

(f) Invest free cash flowsagain.

Clearly, this approach willhave limited value if there is astructural break in the sectoror in the company, whichmakes past performance ameaningless guide to futureperformance. (For identifyingstructural breaks of this sort

(eg. in the Indian boiler-turbine-generator sector or inthe Indian utilities sector), welook to our sector leads forhelp.)

However, to the extent thatsuch structural breaks tend tobe the exception than therule, the greatness modelhelps in creating a shortlist ofstocks that investors can thenanalyse in greater detail.

Put simply, the greatnessmodel separates the wheatfrom the chaff. Yet, it does notcook the whole meal for you!


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Exhibit 2: Factors used for quantifying greatness

Head CriteriaThreshold or Medians

for BSE500 firms(over FY07-FY12)

1 Investments a. Above median gross block increase (FY10-12 over FY07-09)* 66%

b. Above median gross block increase to standard deviation 3.73

2 Conversion to sales a. Improvement in asset turnover (FY10-12 over FY07-09)* 0.00

b. Positive improvement in asset turnover adjusted for standard deviation 0.00

c. Above median sales increase (FY10-12 over FY07-09)* 67%

d. Above median sales increase to standard deviation 3.11

3 Pricing discipline a. Above median PBIT margin increase (FY10-12 over FY07-09)* 0.06%

b. Above median PBIT margin increase to standard deviation 0.00

4 Balance sheet discipline a. Below median debt-equity decline (FY10-12 over FY07-09)* (0.01)

b. Below median debt-equity decline to standard deviation (0.02)

c. Above median cash ratio increase (FY10-12 over FY07-09)* (0.01)

d. Above median cash ratio increase to standard deviation (0.01)

5Cash generation and EPSimprovement

a. Above median CFO increase (FY10-12 over FY07-09)* 68%

b. Above median CFO increase to standard deviation 0.35

c. Above median EPS increase (FY10-12 over FY07-09)* 45%

d. Above median EPS increase to standard deviation 0.83

6 Return ratio improvement a. Improvement in RoE (FY10-12 over FY07-09)* 0%

b. Positive improvement in RoE adjusted for standard deviation 0.00

c. Improvement in RoCE (FY10-12 over FY07-09)* 0%

d. Positive improvement in RoCE adjusted for standard deviation 0.00

Source: Ambit Capital research. * Rather than comparing one annual endpoint to another annual endpoint (say, FY07 to FY12), we prefer to averagethe data out over FY07- 09 and compare that to the averaged data from FY10-12. This gives a more consistent picture of performance (as opposed to

simply comparing FY07 to FY12).

We rank the BSE500 universe of firms (excluding Financial Services firms) on thisscore to arrive at this years rankings on this measure of structural strength. Afterremoving Financial Services firms and firms with insufficient data, 381 firms fromthe BSE500 were ranked based on this measure. The highlights from thedistribution of these firms on our greatness score are displayed on page 6 butbefore we go on to that, lets check whether this framework actually delivers in thereal world.


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Performance check on 2012s listExhibit 3: The 25 ten baggers published on 19 January 2012Company Bloomberg Code Price (INR)

18-Jan-12 11-Jan-13

Performance(%)

Attractive Valuations List

ICRA ICRA IN Equity 857 1,396 63

Mahindra Life. MLIFE IN Equity 255 394 54

Castrol India CSTRL IN Equity 212 314 48

Torrent Pharma. TRP IN Equity 559 749 34

Cadila Health. CDH IN Equity 650 860 32

Cummins India KKC IN Equity 392 516 32

Voltas VOLT IN Equity 82 104 27

Bajaj Electrical BJE IN Equity 167 208 25

Sadbhav Engg. SADE IN Equity 113 133 17

Exide Inds. EXID IN Equity 121 141 17Tata Power Co. TPWR IN Equity 98 107 9

G S F C GSFC IN Equity 79 70 -12

B H E L BHEL IN Equity 273 227 -17

Average (for this bucket) 25.3

Moderate Valuations List

Asian Paints APNT IN Equity 2,724 4,299 58

CMC CMC IN Equity 901 1,331 48

Titan Inds. TTAN IN Equity 184 270 47

Elgi Equipment ELEQ IN Equity 67 94 40

Lupin LPC IN Equity 433 588 36

Nestle India NEST IN Equity 4,038 4,840 20


Rich Valuations List

Supreme Inds. SI IN Equity 183 303 66

GlaxoSmith C H L SKB IN Equity 2,475 3,863 56

ITC ITC IN Equity 210 273 30

CRISIL CRISIL IN Equity 923 1,015 10

EID Parry EID IN Equity 195 195 -0

Coromandel Inter CRIN IN Equity 273 262 -4


Average (overall) 29.4

Sensex 16,451 19,664 19.5

Source: Bloomberg, Ambit Capital research

On average, the ten baggers highlighted by us on 19thJanuary 2012 have clockednearly 30% returns over the year and hence cleared the 26% threshold (which isthe CAGR that a stock needs to compound at per year to be 10x in 10 years).Moreover, the beginning of period valuations has not made much difference toreturns as seen from the performance of the three valuation buckets. Even moreinterestingly, even in a year of upswing for Indian equities (Sensex up 19.5% over

the past 12 months), this basket with an average beta of only 0.72 has beaten theIndex by 10% points, reinforcing our faith in the framework.


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Quantifying greatnessFrom the universe of BSE500 firms, after removing Financial Services firms andfirms with insufficient data, 381 firms were scored on the six headings highlightedon the previous page. The cut-off for greatness was placed at 67%* and only 77firms (20% of the total population of 381 firms) could manage a score above this

cut-off.

Exhibit 4: Distribution of firms on the greatness score (total population: 381 firms)

0

10

20

30

40

50

60

0%-10% 10%-20% 20%-30% 30%-40% 40%-50% 50%-60% 60%-70% 70%-80% 80%-90% 90%-100%

No.offirms

Greatness Score

Zone of mediocrityGood,

not Great Zone of greatness

211 firms

score < 50%

93 firms

(between 50%

and 67%)

Only 77 firms

score > 67%


In the next exhibit, we present key financial data on the three zones defined above Mediocrity (211 firms), Good but not great (93 firms), and Great (77 firms) -based on their degrees of greatness.

Exhibit 5: Zones of greatness - Financial summary

Mediocre Good but not great Great

Number of firms 211 93 77

Mcap (US$ mn) 509 590 795

Share price (3-year CAGR) -9% 7% 23%

Gross block (3-year CAGR) 15% 18% 16%

Sales (3-year CAGR) 13% 20% 22%

EPS (3-year CAGR) 1% 20% 32%

CFO (3-year CAGR) 3% 11% 24%

PBIT Margin (3-year average) 14% 17% 17%

RoE (3-year average) 13% 19% 26%

RoCE (3-year average) 14% 19% 27%

Net debt equity 0.7 0.2 0.2

Trailing 12 month P/E 18.5 18.7 17.2

Trailing 12 month P/B 1.6 2.7 4.4

Trailing 12 month EV/EBITDA 9.4 9.7 9.4

Source: Ambit Capital research, Capitaline; Note: All figures are based on median values of the firms analysed.

With regard to fundamentals, the superiority of the great firms compared with theother two groups is evident in Exhibit 5. Inspite of that, on P/E and EV/EBITDA, thegreat firms trade in line with the rest of the market. However, on P/B, the greatfirms command a hefty premium to the rest of the market.

Of these 77 great firms, we identify the ones that perform the best on our

accounting and corporate governance filters, and this gives us our final list of 30great companies. We present these 30 potential ten baggers in the next section.

*The greatness score iscalculated by assigning equalweightages to the six factorsoutlined in Exhibit 2 on page4.

Thus, each of these six factorscarries a weightage of 16.7%.The scoring on sub-criteriawithin each of these factors isbinary, with a firm gettingeither 1 or 0 based on

whether it has done betterthan the respective thresholdor not.

These scores are thencumulated to arrive at a finalgreatness score on 100 forthe firm.


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2013s ten-bagger listFrom the 77 firms that cleared more than two-thirds of our cut-offs, we reached ashortlist of 30 firms, after following a process of elimination as outlined below:

28 firms were removed by our accounting filter (for a full exposition of ouraccounting filter, please refer to our 4thJan 2013 note which explains how our

forensic accounting model works);

2 firms were removed for not meeting ADV requirement of US$0.2mn; and 17 firms were removed on suspect corporate governance or structural issues

with the underlying business.

After identifying the 30 great firms that exhibit the ingredients required to betomorrows winners, we run a valuation check to ascertain if they are currentlytrading at reasonable prices for outright investments. In our view, whilst valuationsdo matter on a tactical basis, how the underlying fundamentals evolve for the firmover long periods plays a more important role in determining returns than thebeginning of the period valuation itself. We discuss this point in detail in the finalsection of this note.

Here, we categorise these stocks into three buckets based on their relativeattractiveness on valuations with respect to their own history. We compare thesefirms with respect to their five-year average valuations on three metricsP/B, P/Eand EV/EBITDA. We find 8 firms to be inexpensive (on at least two of the threemetrics): Carborundum, Torrent Power, Sadbhav Engineering, Mahindra Life,Exide, Redington, Titan and Jagaran Prakashan. However, for the long term allthirty stocks remain candidates to be ten baggers from our perspective (as weshow in the note, todays valuations do not have a significant effect on long termreturns!).

We have bottom-up coverage with BUYs on Redington, Sadbhav, Torrent Power,Oberoi Realty, Asian Paints, Balkrishna Industries, Cadila Healthcare, Eicher

Motors, Cummins India and TTK Prestige.We should also point out that 3 months ago, in our bottom-up coverage, weturned SELLers on Exide Industries. Whilst we continue to be admirers of the firmsfranchise, our SELL was driven by managements reluctance in CY12 to host post-results conference calls and its inability to offer convincing explanations for itsrecent weak results when our Auto analyst, Ashvin Shetty, did speak to thembilaterally.


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Exhibit 6: Ten baggers - Valuation perspective

Trailing valuationsCheap w.r.t history?

1 for "yes")

Overall, cheapon how many

counts?Sr.No.

Ticker CompanyMCap

(US$ mn)P/E P/B EV/EBITDA P/E P/B EV/EBITDA


1 CU IN Equity Carborundum Uni. 504 14.4 2.7 9.6 1 1 0 2

2 EXID IN Equity Exide Inds. 2,236 24.1 4.3 13.6 1 1 0 2

3 JAGP IN Equity Jagran Prakashan 659 18.3 4.4 12.4 1 1 0 2

4 MLIFE IN Equity Mahindra Life. 303 13.4 1.4 10.5 1 1 1 3

5 REDI IN Equity Redington India 635 11.1 2.4 8.2 1 1 1 3

6 SADE IN Equity Sadbhav Engg. 373 23.2 1.7 11.7 1 1 1 3

7 TPW IN Equity Torrent Power 1,553 9.7 1.4 8.0 1 1 1 3

8 TTAN IN Equity Titan Inds. 4,338 35.9 14.2 24.8 1 1 0 2


9 BATA IN Equity Bata India 1,029 27.3 9.2 19.6 1 0 0 1

10 NEST IN Equity Nestle India 8,573 49.5 32.6 26.8 0 1 0 1

11 OBER IN Equity Oberoi Realty 1,704 18.0 2.3 13.2 0 1 0 112 PSYS IN Equity Persistent Sys 385 12.8 2.3 6.3 0 0 1 1

13 SHOP IN Equity Shoppers Stop 670 78.4 5.5 31.5 1 0 0 1

14 WHIRL IN Equity Whirlpool India 643 25.2 6.3 12.6 0 1 0 1

Rich Valuations***

15 APNT IN Equity Asian Paints 7,659 39.3 13.8 24.9 0 0 0 0

16 BIL IN Equity Balkrishna Inds 533 9.8 2.3 7.4 0 0 0 0

17 BYRCS IN Equity Bayer Crop Sci. 891 21.9 5.6 14.6 0 0 0 0

18 CDH IN Equity Cadila Health. 3,248 25.8 6.3 16.4 0 0 0 0

19 CRISIL IN Equity CRISIL 1,325 33.6 18.8 21.7 0 0 0 0

20 EIM IN Equity Eicher Motors 1,387 23.6 4.7 12.1 0 0 0 0

21 ELEQ IN Equity Elgi Equipment 281 23.8 3.7 13.0 0 0 0 0

22 IPCA IN Equity Ipca Labs. 1,156 20.0 4.6 12.1 0 0 0 0

23 ITC IN Equity ITC 40,518 32.1 10.7 21.2 0 0 0 0

24 KJC IN Equity Kajaria Ceramics 315 18.7 5.5 8.4 0 0 0 0

25 KKC IN Equity Cummins India 2,640 22.9 6.2 21.2 0 0 0 0

26 LPC IN Equity Lupin 4,791 26.3 5.9 15.1 0 0 0 0

27 SI IN Equity Supreme Inds. 717 15.2 5.0 8.2 0 0 0 0

28 SKB IN Equity GlaxoSmith C H L 2,978 41.4 13.0 26.6 0 0 0 0

29 TRP IN Equity Torrent Pharma 1,160 19.1 4.7 11.3 0 0 0 0

30 TTKPT IN Equity TTK Prestige 749 32.8 11.1 20.7 0 0 0 0

Source: Bloomberg, Capitaline, Ambit Capital research.

* Trading below five-year average P/E, P/B, EV/EBITDA (on at least 2 of these 3 measures)

** Trading below either five-year average P/E, five-year P/B or five-year EV/EBITDA (on one of these three measures)

*** Trading above five-year average P/E, P/B and EV/EBITDA


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Exhibit 7: Ten baggers - Financial snapshot

Sr.No.

Bloomticker

Company SectorMcap(US$mn)

3M ADV(US$ mn)

3-yrprice

CAGR

GrossBlock

(3-yearCAGR)

NetSales

(3-yearCAGR)

EPS (3-year

CAGR)

CFO (3-year

CAGR)

RoE(3-yearavg)

RoCE (3-yearavg)

PBITmargin(3-year

avg)

NetDebt

Equity(FY12)

FY14P/E

FY14P/B


1 CU INCarborundumUni.

Industrials 504 0.4 21% 8% 22% 28% 62% 22% 24% 16.3 0.3 12.4 2.2

2 EXID IN Exide Inds. Auto Anc 2,236 5.1 8% 12% 12% 30% 6% 26% 40% 16.4 -0.3 17.2 3.5

3 JAGP INJagranPrakashan

Media 659 0.3 -6% 36% 18% 23% 24% 28% 32% 24.7 0.5 15.4 3.7

4 MLIFE IN Mahindra Life. Realty 303 0.5 5% 10% 27% 22% 19% 9% 11% 30.2 0.3 10.9 1.2

5 REDI IN Redington India IT 635 0.5 12% 72% 19% 22% 120% 20% 18% 2.7 1.2 8.6 1.7

6 SADE IN Sadbhav Engg. Infrastructure 373 0.3 3% 29% 38% 35% 95% 12% 12% 13.5 2.8 22.3 1.5

7 TPW IN Torrent Power Utilities 1,553 0.9 -15% 29% 23% 46% 34% 24% 21% 25.7 0.8 9.9 1.2

8 TTAN IN Titan Inds. Retail 4,338 9.2 53% 10% 31% 54% -1% 46% 61% 8.9 -0.7 26.1 9.3


9 BATA IN Bata India Retail 1,029 4.2 65% 12% 16% 65% -17% 25% 38% 11.5 -0.2 25.6 6.9

10 NEST IN Nestle India FMCG 8,573 2.4 25% 22% 20% 24% 18% 110% 141% 17.9 0.5 36.8 22.3

11 OBER IN Oberoi Realty Realty 1,704 0.5 9% 54% 25% 22% 39% 20% 23% 65.4 -0.3 10.0 1.8

12 PSYS IN Persistent Sys IT 385 1.3 10% 21% 19% 24% 27% 20% 23% 19.9 -0.4 10.0 1.7

13 SHOP IN Shoppers St. Retail 670 1.5 33% 30% 29% 42% -140% 10% 11% 3.3 0.9 76.7 6.9

14 WHIRL IN Whirlpool IndiaConsumerDurable

643 0.7 27% 7% 16% 20% 5% 38% 53% 7.1 -0.2 17.1 4.1

Rich Valuations***

15 APNT IN Asian Paints FMCG 7,659 5.3 35% 12% 21% 36% 27% 45% 61% 15.4 -0.2 30.0 10.1

16 BIL IN Balkrishna Inds Auto Anc 533 0.6 41% 18% 30% 54% -36% 30% 25% 16.9 1.2 7.4 1.6

17 BYRCS IN Bayer Crop Sci. Fertilisers 891 0.5 33% 2% 18% 14% 46% 24% 32% 11.0 -0.5 20.4 4.2

18 CDH IN Cadila Health. Pharma 3,248 2.1 25% 21% 23% 28% 32% 34% 27% 18.9 0.7 18.9 4.7

19 CRISIL IN CRISIL Miscellaneous 1,325 0.7 31% 21% 16% 15% 16% 43% 57% 35.2 -0.6 25.6 15.9

20 EIM IN Eicher Motors Auto 1,387 1.4 64% 13% 49% 58% 184% 15% 31% 8.8 -1.1 17.9 3.5

21 ELEQ IN Elgi Equipment Capital Goods 281 0.2 27% 15% 22% 14% 14% 26% 39% 12.6 -0.4 16.3 3.0

22 IPCA IN Ipca Labs. Pharma 1,156 2.4 35% 20% 22% 41% 22% 26% 25% 18.4 0.5 13.9 3.3

23 ITC IN ITC FMCG 40,518 30.6 31% 10% 17% 21% 20% 32% 47% 23.8 -0.4 24.6 9.0

24 KJC INKajariaCeramics

Miscellaneous 315 0.4 63% 16% 25% 108% 53% 28% 26% 12.0 1.0 12.1 3.7

25 KKC IN Cummins India Capital Goods 2,640 1.8 20% 12% 5% 8% 24% 31% 43% 19.3 -0.4 19.8 5.4

26 LPC IN Lupin Pharma 4,791 8.6 28% 25% 23% 17% 6% 29% 26% 17.7 0.3 18.5 4.3

27 SI IN Supreme Inds. Industrials 717 0.2 58% 11% 21% 39% 16% 40% 36% 12.8 0.5 11.3 3.4

28 SKB IN GlaxoSmith CHL FMCG 2,978 2.3 41% 6% 20% 23% 42% 31% 48% 18.5 -0.9 31.7 9.7

29 TRP IN Torrent Pharma. Pharma 1,160 1.0 23% 18% 19% 15% 25% 30% 27% 17.9 -0.1 13.6 3.4

30 TTKPT IN TTK Prestige ConsumerDurable

749 5.5 102% 39% 40% 73% 13% 49% 69% 15.6 0.1 24.2 7.6

Source: Bloomberg, Capitaline, Ambit Capital research.


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Exhibit 8: Ten baggers - Forward-looking data using consensus estimates

Sr. No. Ticker CompanyMcap

(US$ mn)3-month ADV

(US$ mn)Next 3 years estimated

EPS CAGR (%)Next 3 years estimated

BVPS CAGR (%)

1 CU IN Equity Carborundum Uni. 504 0.4 9% 17%

2 EXID IN Equity Exide Inds. 2,236 5.1 28% 16%

3 JAGP IN Equity Jagran Prakashan 659 0.3 14% 12%

4 MLIFE IN Equity Mahindra Life. 303 0.5 17% 11%

5 REDI IN Equity Redington India 635 0.5 20% 23%6 SADE IN Equity Sadbhav Engg. 373 0.3 9% 8%

7 TPW IN Equity Torrent Power 1,553 0.9 5% 12%

8 TTAN IN Equity Titan Inds. 4,338 9.2 24% 31%

9 BATA IN Equity Bata India 1,029 4.2 29% 25%

10 NEST IN Equity Nestle India 8,573 2.4 21% 25%

11 OBER IN Equity Oberoi Realty 1,704 0.5 39% 18%

12 PSYS IN Equity Persistent Sys 385 1.3 17% 20%

13 SHOP IN Equity Shoppers Stop 670 1.5 80% 9%

14 WHIRL IN Equity Whirlpool India 643 0.7 21% 29%

15 APNT IN Equity Asian Paints 7,659 5.3 20% 23%

16 BIL IN Equity Balkrishna Inds. 533 0.6 21% 27%

17 BYRCS IN Equity Bayer Crop Sci. 891 0.5 31% 20%

18 CDH IN Equity Cadila Health. 3,248 2.1 21% 22%

19 CRISIL IN Equity CRISIL 1,325 0.7 11% 25%

20 EIM IN Equity Eicher Motors 1,387 1.4 19% 16%

21 ELEQ IN Equity Elgi Equipment 281 0.2 21% 15%

22 IPCA IN Equity Ipca Labs. 1,156 2.4 26% 24%

23 ITC IN Equity ITC 40,518 30.6 19% 14%

24 KJC IN Equity Kajaria Ceramics 315 0.4 32% 28%

25 KKC IN Equity Cummins India 2,640 1.8 12% 7%

26 LPC IN Equity Lupin 4,791 8.6 23% 23%

27 SI IN Equity Supreme Inds. 717 0.2 21% 26%

28 SKB IN Equity GlaxoSmith C H L 2,978 2.3 20% 19%29 TRP IN Equity Torrent Pharma 1,160 1.0 25% 24%

30 TTKPT IN Equity TTK Prestige 749 5.5 25% 36%

Source: Ambit Capital research, Bloomberg


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Exhibit 9: Tenbaggers - Business activity description

Sr.no.

Ticker Company Business Description

1 CU IN EquityCarborundumUni.

Carborundum Universal manufactures refractories and electromineral grains. The company producescoated and bonded abrasives, super refractories, aluminum oxide grains, calcined bauxite,electrocast refractories, silicon carbide grains, and industrial ceramic products.

2 EXID IN Equity Exide Inds.

Exide Industries manufactures a wide range of lead and electric storage batteries. The company's

makes batteries for automobiles, railways, aircrafts, power stations, telephone exchanges, and otheruses.

3 JAGP IN Equity Jagran PrakashanJagran Prakashan publishes a daily newspaper. The company publishes and distributes DainikJagran.

4 MLIFE IN Equity Mahindra Life.Mahindra Lifespace Developers specialises in the construction and operation of commercial andresidential property complexes, projects management services and business centres.

5 REDI IN Equity Redington IndiaRedington (India) is a supply chain solution provider. The company distributes information technology(IT) products and mobile handsets and accessories and provides logistics, supply chain managementand other support services.

6 SADE IN Equity Sadbhav Engg.Sadbhav Engineering provides construction services, with a focus on irrigation, roads and highways,and mining operations. The company constructs earthen dams and canals, rehabilitates andupgrades roads, and excavates overburden of mineral properties.

7 TPW IN Equity Torrent PowerTorrent Power generates, transmits and distributes power. The company also implements large powerprojects in India.

8 TTAN IN Equity Titan Inds.Titan Industries manufactures and retails jewellery and watches. The company produces quartzanalogue electronic watches, watch movements, step motors, and watch cases. Titan Industriesserves customers across the United States.

9 BATA IN Equity Bata India

Bata India manufactures a wide range of leather, rubber/canvas and plastic footwear products. Thecompany also manufactures sports apparel and leather accessories. Bata India sells its productsthrough its chain of company owned retail stores in India, as well as to businesses in the US, UnitedKingdom, Europe, the Middle East and the Far East.

10 NEST IN Equity Nestle India

Nestle India manufactures branded milk products and other food products. The company's productsinclude Everyday dairy whitener, milk powder and ghee, Milkmaid sweetened condensed milk andCerelac weaning foods. Nestle's beverages include Nescafe and Sunrise coffee and Nesfit enrichedglucose powder. Nestle also manufactures Maggi noodles, soups and sauces.

11 OBER IN Equity Oberoi Realty

Oberoi Realty is a real estate development company operating in Mumbai and focused on premiumdevelopments. The company's main focus is residential projects but they also have a diversifiedportfolio of projects covering segments of the real estate market, which target the upper end of therespective income or market segment.

12 PSYS IN Equity Persistent SysPersistent Systems offers outsourced software product development. The company offer services thatinclude testing, support, and professional services.

13 SHOP IN Equity Shoppers St.Shoppers Stop operates a chain of retail shops. The company retails men's, women's, and children'sclothing, cosmetics and skin and hair-care products, home appliances, housewares, linens, luggage,jewellery, and accessories.

14 WHIRL IN Equity Whirlpool IndiaWhirlpool of India manufactures appliances. The company produces refrigerators, washing machines,air conditioners, microwave ovens, water purifiers, built-in appliances and other products.

15 APNT IN Equity Asian Paints

Asian Paints manufactures a wide range of decorative paints, varnishes, enamels, and black &

synthetic resins. The company, through its subsidiaries, also manufactures specialty industrialchemicals and vinyl pyridine latex products, which are used in the manufacture of rubber tyres.

16 BIL IN Equity Balkrishna IndsBalkrishna Industries manufactures automobile tyres and tubes. The company also manufacturesdifferent varieties of paper & paper boards and processes synthetic textiles.

17 BYRCS IN Equity Bayer Crop Sci.Bayer Cropscience is involved in the area of crop protection, non-agricultural pest-control, seed andplant biotechnology.

18 CDH IN Equity Cadila Health.

Cadila Healthcare manufactures and markets healthcare solutions ranging from formulations, activepharmaceutical ingredients, vaccines, diagnostics, health and dietetic foods, animal healthcare tocosmeceuticals. The company's products are available in the form of tablets, capsules, injections,liquids, dry syrups, powders, granules, and ointments.

19 CRISIL IN Equity CRISILCrisil operates a credit rating agency in India. The company specialises in the areas of riskidentification, classification and assessment, across a broad spectrum of industries.

20 EIM IN Equity Eicher MotorsEicher Motors manufactures light commercial vehicles, which are sold domestically and are alsoexported to other countries. Eicher Motors also manufactures tractors, two-wheelers and automotivegears.


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Sr.no.

Ticker Company Business Description

21 ELEQ IN Equity Elgi Equipment

Elgi Equipments manufactures reciprocating and screw-type air compressors, diesel engines,generators and pumps, garage equipment, auto products, and heat pressure cleaners. Elgi markets arange of wheel balancers, oil suction units, AC recovery plants, mobile service units, and pasteuriserand bottle washers. The company operates in India and markets its products globally.

22 IPCA IN Equity Ipca Labs.Ipca Laboratories operates a pharmaceutical company, which distributes products to more than 75countries worldwide. The Group's products include finished dosage forms, drug delivery systems, bulkdrugs and intermediates.

23 ITC IN Equity ITCITC has a diversified presence in cigarettes, hotels, paperboards & specialty papers, packaging, agribusiness, packaged foods & confectionery, branded apparel, greeting cards, and other FMCGproducts.

24 KJC IN Equity Kajaria CeramicsKajaria Ceramics manufactures glazed and unglazed ceramic tiles. The company sells its products inIndia and also exports them to other countries.

25 KKC IN Equity Cummins India

Cummins India manufactures internal combustion engines, including diesel, reciprocating piston, gasturbine and gasoline engines. The company also manufactures power generation sets and publictransport-type passenger motor vehicles, including luxury coaches and airfield buses. In addition,Cummins India operates a computerised and fully-equipped research and development facility.

26 LPC IN Equity Lupin

Lupin manufactures bulk actives and formulations. Its principal bulk actives manufactured includeRifampicin, Pyrazinamide, Ethambutol (anti-TB), Cephalosporins (anti-infectives) and cardiovasculars.The company also possesses competencies in phytomedicines, in which medicines are made out ofplant and herbal resources supported by the discipline of modern medicine.

27 SI IN Equity Supreme Inds.

Supreme Industries manufactures industrial and engineered moulded products and storage andmaterial handling crates. The company also manufactures chemicals, multi-layer sheets, multi-layerfilms, packaging films and expanded polyethylene foam, PVC pipes and fittings, moulded furniture,and disposable EPS containers.

28 SKB IN Equity GlaxoSmith C H LGlaxo SmithKline Consumer Healthcare manufactures and sells malted milk food products. TheGroup's products, which include energy & protein products, cereals, baby foods, and ghee & butter,are sold under the brand names Horlicks, Boost, Viva, Brylcream, Eno, Maltova and Gopika.

29 TRP IN Equity Torrent Pharma

Torrent Pharmaceuticals manufactures bulk drugs and pharmaceutical formulations. The company'sformulations include cardiovascular, psychotropic and antibiotic drugs whilst its bulk drugs include

atenolol, ciprofloxacin and norfloxacin. Torrent Pharmaceuticals has wholly owned subsidiaries inseveral regulated and less-regulated international markets.

30 TTKPT IN Equity TTK PrestigeTTK Prestige manufactures a range of domestic appliances. The Group's products include pressurecookers and non-stick cookware, stainless steel and glass vacuum flasks, and gas stoves.

Source: Bloomberg


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Valuations - A long-term perspective!We have published research over the past few months, indicating how value andgrowth as investment styles take turns in dominating investors preference at anypoint in time (see our note dated 11 th October 2012 The return of valueinvesting). Clearly, from a tactical standpoint valuations do play an important rolein shaping short-term returns. However, how underlying fundamentals evolve for

the firm over long periods plays a more important role in determining returns thanthe beginning of the period valuation itself. This point can be understood better

with the following exhibits that plot ten-year returns over FY02-12 versus FY02valuations as measured by P/B and P/E at the beginning of the period (in 2002).

Exhibit 10: Valuation impact on long-term returns - P/B

R2= 0.000

-80%

-60%

-40%

-20%

0%

20%

40%

60%

- 5.0 10.0 15.0 20.0 25.0

FY02 Price to Book

FY02-

FY

12r

eturns

Source: Ambit Capital research, FY02 FY12 returns here are stock returns relative to Sensex

The value of R-square makes the story self-explanatory. A zero for this valueindicates that the beginning of period valuations do not play any meaningful rolein explaining stock returns over the next ten years. This holds true for both P/B and

P/E as the measures of valuation.

Exhibit 11: Valuation impact on long-term returns - P/E

R2= 0.001

-80%

-60%

-40%

-20%

0%

20%

40%

60%

- 10.0 20.0 30.0 40.0 50.0 60.0 70.0

FY02 Price to Earnings

FY02-

FY12r

eturns

Source: Ambit Capital research, FY02 FY12 returns here are stock returns relative to Sensex

In our note The return of value investing (dated 11 th October 2012), we hadexplained why we expect value stocks to do well over the next few quarters.Hence, from this list of Great 30 stocks, we would expect the most attractivelypriced bucket to do better over the immediate term. However, the two exhibitsabove clearly suggest that from a long-term perspective each of these stocks standa fair chance of being a ten bagger. Indeed, as mentioned on page 5, our 2012

ten baggers did not have any correlation between the returns generated over thepast 12 months and the beginning of period valuations.


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Appendix - Greatness framework on smaller caps

Last year some of our clients suggested running the greatness framework onsmaller firms outside of the BSE500 as well. We present below a list of select smallcaps from outside the BSE500 but above INR 5,000 mn market cap (including thetwo firms that fail our liquidity constraints in the main list) that fare well on ourgreatness framework. However, since our forensic accounting model has been

built only for the BSE500 universe, the list below has not been filtered for suspectaccounting or suspect corporate governance.

Exhibit 12: Greatness framework on smaller caps outside BSE500 (without filteringfor suspect accounting or corporate governance)

Sr. No. Ticker CompanyMcap

(US$ mn)3-month ADV

(US$ mn)FY13 P/E

(est)FY13 P/B

(est)

1 VO IN Vinati Organics 139 0.1 10.4 3.0

2 HMVL IN Hindustan Media 202 0.0 13.7 2.1

3 MUNI IN Mayur Uniquote 97 0.1 12.8 4.3

4 ICSL IN Infinite Comp 104 0.3 4.1 0.9

5 CLRC IN Clariant Chemical 302 0.1 NA NA6 PI IN P I Inds. 295 0.2 15.0 4.0

7 HAWK IN Hawkins Cookers 232 0.1 55.2 22.2

8 ZENT IN Zensar Tech. 220 0.2 6.4 1.5

9 AJP IN Ajanta Pharma 173 0.2 9.4 2.4

10 GDYR IN Goodyear India 142 0.1 14.0 2.2

11 SWE IN Swaraj Engines 116 0.2 11.0 2.8

12 CRS IN Cera Sanitary. 102 0.2 13.6 3.1

13 SEQ IN Sequent Scien. 95 0.1 NA NA

14 KEKC IN Kewal Kir.Cloth. 164 0.0 16.7 3.5

15 SRL IN Speciality Rest. 156 0.6 NA NA

16 STAL IN Styrolution ABS 236 0.1 20.4 3.0

17 FMGI IN Federal-Mogul 203 0.0 28.2* 2.6*



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Institutional Equities Team

Saurabh Mukherjea, CFA Head of Equities (022) 30433174 [email protected]

Research

Analysts Industry Sectors Desk-Phone E-mail

Aadesh Mehta Banking / NBFCs (022) 30433239 [email protected]

Achint Bhagat Cement (022) 30433178 [email protected]

Ankur Rudra, CFA Technology / Telecom / Media (022) 30433211 [email protected]

Ashvin Shetty Automobile (022) 30433285 [email protected]

Bhargav Buddhadev Power / Capital Goods (022) 30433252 [email protected]

Chhavi Agarwal Construction / Infrastructure (022) 30433203 [email protected]

Dayanand Mittal Oil & Gas (022) 30433202 [email protected]

Gaurav Mehta Strategy / Derivatives Research (022) 30433255 [email protected]

Harshit Vaid Power / Capital Goods (022) 30433259 [email protected]

Jatin Kotian Metals & Mining / Healthcare (022) 30433261 [email protected]

Karan Khanna Strategy / Derivatives Research (022) 30433251 [email protected] ASV Banking (022) 30433205 [email protected]

Nitin Bhasin Construction / Infrastructure / Cement (022) 30433241 [email protected]

Nitin Jain Technology (022) 30433291 [email protected]

Pankaj Agarwal, CFA NBFCs (022) 30433206 [email protected]

Pratik Singhania Real Estate / Retail (022) 30433264 [email protected]

Parita Ashar Metals & Mining / Telecom (022) 30433223 [email protected]

Rakshit Ranjan, CFA Consumer / Real Estate (022) 30433201 [email protected]

Ritika Mankar Mukherjee Economy / Strategy (022) 30433175 [email protected]

Ritu Modi Cement / Infrastructure / Healthcare (022) 30433292 [email protected]

Shariq Merchant Consumer (022) 30433246 [email protected]

Utsav Mehta Telecom / Media (022) 30433209 [email protected]

Sales

Name Regions Desk-Phone E-mail

Deepak Sawhney India / Asia (022) 30433295 [email protected]

Dharmen Shah India / Asia (022) 30433289 [email protected]

Dipti Mehta India / Europe / USA (022) 30433053 [email protected]

Parees Purohit, CFA USA (022) 30433169 [email protected]

Pramod Gubbi, CFA India / Asia (022) 30433228 [email protected]

Sarojini Ramachandran UK / USA +44 (0) 20 7614 8374 [email protected]

Production

Sajid Merchant Production (022) 30433247 [email protected]

Joel Pereira Editor (022) 30433284 [email protected]


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Explanation of Investment Rating

Investment Rating Expected return(over 12-month period from date of initial rating)

Buy >5%

Sell

ambit strategy thematic 14jan2013

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