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MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS,

READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
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 3

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 July 2024 Volume XVIII, Number 1

EDITORIAL POLICY
The goal of Wealth Insight, as with all
publications from Value Research, is
not just limited to generating profitable
ideas for its readers; but to also help
them in generating a few of their own.
We aim to bring independent, unbiased
and meticulously-researched stories
that will help you in taking better-in-
formed investment decisions, encour-
aging you to indulge in a bit of research
on your own as well.
All our stories are backed by
quantitative data. To this, we add
rigorous qualitative research obtained by
speaking to a wide variety of
stakeholders. We firmly stick to our
 Cover Story
belief of fundamental research and val-
ue-oriented approach as the best way to
earn wealth in the stock market. Equally
important to us is our unwaveringly
Spot the winners early
focus on long term planning. Be the first one to grab every opportunity
Simplicity is the hallmark of our
style. Our writing style is simple and
so is the presentation of ideas, but that
should not be construed to mean that
we over-simplify.
Read, learn and earn – and let’s
grow and evolve as we undertake this
voyage together.  Cover Story

EDITOR-IN-CHIEF Dhirendra Kumar

Choosing US
COPYEDITING Harshita Singh, Khyati
stocks: Beyond
Simran Nandrajog, Mithilesh Bhaumik
and Ujjal Das
the obvious
RESEARCH & ANALYSIS Hemkesh Find the wealth of
Khattar, Karthik Anand Vijay, Kunal Bansal,
Satyajit Sen, Shubham Dilawari, Sneha
opportunities that lie
Suri, Udhayaprakash J and Vishal Goyal outside the top few
DESIGN Aman Singhal, Anand Kumar,
Aprajita Anushree, Harish Kumar, Kamal
Kant Koner, Mukul Ojha and Nitin Yadav

DATA SOURCE FOR STOCKS AceEquity

 Cover Story
MARKETING Aastha Tiwari, Ashish Jain,
Badrish Upadhyay, Jash Ashar and
Kasturi Kaushik
Maximise your
PRODUCTION MANAGER & CIRCULATION
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choose the leaders

4 Wealth Insight July 2024

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Contents
Interview
 “For us, timing
is everything”
Sandeep Tandon,
CEO and Director,
Quant Mutual Fund

 First Page
by DHIRENDRA KUMAR

A landmark year
Celebrating milestones,
embracing the future with
insightful research

Index Watch
 Market and
sectoral moves
White Oak Stock Advisor
 by MANUJ JAIN & CHIRAG PATEL  by DHIRENDRA KUMAR

The India premium The path to prosperity

Big Moves
 The most significant How governance and other factors
drive equity market multiples
What is the most dangerous phase
in an equity investor’s life?
price movements

IPO Tracker
 D-Street debutants
Here is how the S&P BSE
IPO Index has performed over
the last one year and how the
biggest IPOs have fared
Everyday Economics Straight Talk
 by PUJA MEHRA  by ANAND TANDON
The fastest and slowest- Factor-based
ABCD ETF growing economy? investing – a primer
 Passive funds for Not all Indians are experiencing Why a single factor is inadequate to
new investors India’s growth story explain a security’s performance

‹9DOXH5HVHDUFK,QGLD3YW/WG
Wealth Insight is owned by Value Research India Pvt. Ltd., 5, Commercial Complex, Chitra Vihar, Delhi 110 092.

Editor-In-Chief: Dhirendra Kumar. Printed and published by Dhirendra Kumar on behalf of Value Research India Pvt. Ltd. Published at 5, Commercial Complex, Chitra Vihar, Delhi 110 092.
Printed at Option Printofast, 46, Patparganj Industrial Area, Delhi-110092
Total pages 104, including cover

',6&/$,0(5
The contents of Wealth Insight published by Value Research India Private Limited (the ‘Magazine’) are not intended to serve as professional advice or guidance and the Magazine takes no responsibility or liability, express or implied, whatsoever for any investment
decisions made or taken by the readers of this Magazine based on its contents thereof. You are strongly advised to verify the contents before taking any investment or other decision based on the contents of this Magazine. The Magazine is meant for general reading
purposes only and is not meant to serve as a professional guide for investors. The readers of this Magazine should exercise due caution and/or seek independent professional advice before entering into any commercial or business relationship or making any
investment decision or entering into any financial obligation based on any information, statement or opinion which is contained, provided or expressed in this Magazine.
The Magazine contains information, statements, opinions, statistics and materials that have been obtained from sources believed to be reliable and the publishers of the Magazine have made best efforts to avoid any errors and omissions, however the
publishers of this Magazine make no guarantees and warranties whatsoever, express or implied, regarding the timeliness, completeness, accuracy, adequacy, fullness, functionality and/or reliability of the information, statistics, statements, opinions and
materials contained and/or expressed in this Magazine or of the results obtained, direct or consequential, from the use of such information, statistics, statements, opinions and materials. The publishers of this Magazine do not certify and/or endorse any
opinions contained, provided, published or expressed in this Magazine.Reproduction of this publication in any form or by any means whatsoever without prior written permission of the publishers of this Magazine is strictly prohibited. All disputes shall be subject
to the jurisdiction of Delhi courts only. ALL RIGHTS RESERVED

July 2024 Wealth Insight 5

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 by Dhirendra Kumar
FIRST PAGE

A landmark year

X Celebrating milestones, embracing universe of potential investments to a manageable

subset for further analysis by applying a uniform,
the future with insightful research no-exceptions set of principles. Committing to a
specific philosophy and process helps investors

F
or me, anniversary issues of our magazines avoid emotional decisions, filters out noise, saves
are always a nostalgia trap. As the founder of time that would otherwise be spent devising new
Value Research and the magazines, I naturally strategies, and, most importantly, directs actions
look at the past with a certain fondness, as a father rather than reactions in times of market volatility.
does to his children. The temptation is always to Investors often get excited about stocks and ignore
talk about the past, the turbulent yet exciting potential downsides. For instance, it’s common
journey of almost two decades. However, I must stop to focus on growth and forget about valuation.
myself from going too far down that path. Apart A rating framework helps prevent such oversights.
from some long-time readers, most of you are not In fact, one of the stories in our cover packages is
here to reminisce about the past but to create a meant to be a walkthrough of how the rating system
better future. As every mutual fund investor knows is especially useful at a time like the current one.
too well, past performance does not indicate future When the markets are raging, it’s easy to ignore
returns. Wealth Insight has served you well for warning signs about individual stocks. That’s
18 years with equity research, but that’s not why exactly the problem that the rating system solves.
you are reading this issue – you are reading this Another story in our anniversary package is
because of what you expect us to do in the coming about international investing. Of all the asset
years. Our commitment is to keep evolving to classes that Indian investors should invest in, we
provide you with the most insightful analysis and invest the least in foreign equity. The easiest way to
research to help you invest better. invest abroad has been through mutual funds, but
This past year has been a landmark for equity in recent months, this route has been closed by the
research at Value Research and Wealth Insight. government. However, you can still invest abroad
Six months ago, we launched our Stock Rating directly by buying stocks yourself. Unfortunately,
system, a project that had been in the polish-to- most investors are aware of only the top few well-
perfection field for a long time. The primary goal of known foreign stocks. This part of our cover story
Value Research Stock Ratings is to uncover valuable package takes you beyond these top few and
investment ideas, not just the popular ones. We discusses how to broaden your foreign investments.
strive to identify opportunities that offer long-term As we mark this anniversary, we continue to
value rather than short-term thrills. So, what do deliver on our unwavering commitment to your
these ratings do for you? Essentially, they provide a financial success. Here’s to a future filled with
ready-made packet of quick research that you can insightful research, successful investment
apply immediately to any stock. It’s an investing strategies, and enduring growth for all our readers.
framework designed to guide the initial stages of Together, we will navigate the ever-changing
your investment decisions. financial landscape, achieving greater heights and
A robust investing framework serves as a unparalleled success.
consistent decision-making tool, narrowing the

July 2024 Wealth Insight 7

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 Index Watch
A five-year perspective

Market and sectoral moves

Tracking an index is the easiest way to get an idea about the broader picture
of how the market and various sectors have performed over time. Here are the
performance data of the major Indian indices over the last five years.

BSE Sensex BSE 100

76,457 24,608

39,950 12,083

TOP PERFORMERS TOP PERFORMERS

13.9 42.1% 34.7% 32.0% 15.3 83.8% 69.1% 64.9%

Tata Motors Mahindra & Bharti Airtel Adani HAL Trent
Mahindra Enterprises

BSE 500 BSE Midcap

34,539 44,684

15,524
15,041

TOP PERFORMERS TOP PERFORMERS

17.3 196.2% 135.9% 112.8% 24.3 196.2% 82.4% 75.4%

Patanjali Foods Lloyds Metals Adani Green Patanjali Foods CG Power Linde India
Energy

BSE Smallcap BSE Auto

49,707 57,105

14,619 18,594

TOP PERFORMERS TOP PERFORMERS

27.7 263.9% 163.1% 142.4% 25.2 59.4% 42.1% 38.6%

Waaree Lloyds KPI Green Tube Tata Motors TVS Motor
Renewable Engineering Energy Investments

5Y returns (% pa) as of June 11, 2024

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CAN’T HANDLE TOO MUCH RISK?
THEN DON’T.
When it comes to the stock market, it’s best to invest in products
according to the level of risk you are comfortable with.
And avoid high-risk investments if you do not have adequate knowledge,
experience or the risk appetite for it.

For more information

please call us on
1800 266 0050
or scan the QR code.

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 Index Watch

21.2% 96.0%
Is what the BSE Consumer Durables Of companies of BSE Capital
index returned per annum in the last Goods index have beaten the
10 years, making it the best Sensex in the last five years,
performer of the bunch each giving double-digit returns

BSE Consumer Durables BSE Capital Goods

57,382 69,811

25,467 19,687

TOP PERFORMERS TOP PERFORMERS

17.6 85.5% 32.8% 21.6% 28.8 82.4% 71.6% 69.1%

Dixon Blue Star Titan CG Power Rail Vikas HAL
Technologies Nigam

BSE Finance BSE FMCG

10,887

20,856
6,691
11,653

TOP PERFORMERS TOP PERFORMERS

10.2 94.4% 79.8% 74.0% 12.3 196.2% 77.9% 73.2%

Choice Share India Monarch Patanjali Foods Tilaknagar Manorama
International Securities Networth Industries Industries

BSE Healthcare BSE Infrastructure

36,498
649

210
13,128

TOP PERFORMERS TOP PERFORMERS

22.7 124.3% 64.7% 64.6% 25.3 112.8% 73.7% 71.6%

Gujarat Themis Syncom Jagsonpal Adani Green Adani Power Rail Vikas
Biosyn Formulations Pharma Nigam

5Y returns (% pa) as of June 11, 2024

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 Index Watch

34.0% pts. 7.6%

Difference between the BSE Power Annualised returns generated
index’s returns in the second half and by BSE Telecom index in the
first half of the last decade, making a last 10 years, making it the worst-
remarkable recovery in the latter performing index of the bunch

BSE IT BSE Metal

33,140

35,372

16,098 10,970

TOP PERFORMERS TOP PERFORMERS

17.1 139.1% 122.8% 80.1% 24.7 85.9% 59.4% 44.2%

Magellanic Cressanda Rail. Aurionpro Jindal APL Apollo Jindal Steel &
Cloud Solutions Solutions Stainless Tubes Power

BSE Oil and Gas BSE Power

29,063 7,728

15,178
2,010

TOP PERFORMERS TOP PERFORMERS

13.9 75.4% 41.8% 17.2% 30.9 112.8% 82.4% 73.7%

Linde India Adani Reliance Adani Green CG Power Adani Power
Total Gas Industries Energy

BSE Realty BSE Telecom

8,564 2,937

2,167 1,045

TOP PERFORMERS TOP PERFORMERS

31.6 52.5% 47.5% 41.8% 23.0 95.4% 75.9% 52.4%

Brigade Prestige Estates Swan Energy Avantel Tata Tejas
Enterprises Teleservices Networks

5Y returns (% pa) as of June 11, 2024

12 Wealth Insight July 2024

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 Big Moves
Large-cap wealth creators

Over the last five years, these companies have emerged as top
large-cap wealth creators. In 2019, our large-cap universe had
84 companies, accounting for top 70 per cent of total market cap.

987 6,894
Tata Motors Siemens
Automobile & Anc. Capital Goods

42.1% 40.3%
Worth of `1 lakh Worth of `1 lakh 1,270
171
`5.78 lakh `5.43 lakh

487 856
Power Finance Corp DLF
Finance Realty

35.4% 34.9%
Worth of `1 lakh 107 Worth of `1 lakh 192
`4.55 lakh `4.47 lakh

Mahindra & Mahindra 2,834 1,428

Bharti Airtel
Automobile & Anc. Telecom

34.7% 32.0%
Worth of `1 lakh 638 Worth of `1 lakh
356
`4.44 lakh `4.01 lakh

1,500 181
Sun Pharma Tata Steel
Healthcare Iron & Steel

30.9% 29.8%
Worth of `1 lakh Worth of `1 lakh 49
390
`3.85 lakh `3.68 lakh

673
Avenue Supermarts 4,696 Hindalco
Retailing Non-Ferrous Metals

29.4% 27.5%
Worth of `1 lakh 200
Worth of `1 lakh
`3.63 lakh 1,293
`3.37 lakh

5Y annualised return Data as of June 11, 2024. Price data adjusted for splits, bonus and rights. The charts depict five-year share price.

14 Wealth Insight July 2024

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 Big Moves
Mid-cap wealth creators

Over the last five years, these companies have emerged as top
mid-cap wealth creators. In 2019, our mid-cap universe had
185 companies, accounting for the next 20 per cent of market cap.

3,222
Adani Enterprises Adani Power 763
Trading Power

83.8% 73.7%
Worth of `1 lakh Worth of `1 lakh 48
154
`20.99 lakh `15.81 lakh

4,855 4,902
HAL  Trent
Capital Goods Retailing

69.1% 64.9%
Worth of `1 lakh Worth of `1 lakh
351 402
`13.84 lakh `12.21 lakh

Polycab 6,996 1,547

Varun Beverages
Electricals FMCG

63.3% 62.0%
Worth of `1 lakh Worth of `1 lakh
602 139
`11.63 lakh `11.15 lakh

4,062 637
Tube Investments JSW Energy
Automobile & Anc. Power

59.4% 55.4%
Worth of `1 lakh Worth of `1 lakh 70
395
`10.28 lakh `9.06 lakh

9,537 286
Solar Industries Bharat Electronics
Chemicals Capital Goods

52.2% 50.7%
Worth of `1 lakh Worth of `1 lakh
1,169 37
`8.16 lakh `7.78 lakh

5Y annualised return Data as of June 11, 2024. Price data adjusted for splits, bonus and rights. The charts depict five-year share price.

16 Wealth Insight July 2024

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 Big Moves
Small-cap wealth creators

In the last five years, these 10 small caps were the top wealth
creators. Small caps mean the companies making up the bottom
10 per cent (minimum market cap of `460 crore) of the market in 2019.

1,178
Adani Green  Elecon Engineering
Power 1,857 Capital Goods

112.8% 88.8%
Worth of `1 lakh Worth of `1 lakh 49
43
`43.64 lakh `23.97 lakh

796 10,142
Jindal Stainless Dixon Technologies
Iron & Steel Consumer Durables

85.9% 85.5%
Worth of `1 lakh Worth of `1 lakh
36 461
`22.23 lakh `21.98 lakh

2,081 1,351
JBM Auto Titagarh Railsystems 
Automobile & Anc. Automobile & Anc.

83.9% 83.3%
Worth of `1 lakh Worth of `1 lakh
99 65
`21.01 lakh `20.69 lakh

662
CG Power  HBL Power Systems 478
Capital Goods Automobile & Anc.

82.4% 81.7%
Worth of `1 lakh 33 Worth of `1 lakh
24
`20.21 lakh `19.79 lakh

The Fert. and Chem. Travancore 775 Godawari Power 1,051

Chemicals Iron & Steel

78.3% 76.5%
Worth of `1 lakh Worth of `1 lakh
43 61
`18.00 lakh `17.11 lakh

5Y annualised return Data as of June 11, 2024. Price data adjusted for splits, bonus and rights. The charts depict five-year share price.

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 Big Moves
Most prominent wealth destroyers

In the last five years, these 10 large caps were the biggest
wealth destroyers. Large caps mean the companies making up the
top 70 per cent of the market in 2019.

Bandhan Bank Piramal Enterprises

Bank 560 Finance
2,116
-18.8% -16.8%
Worth of `1 lakh 198 Worth of `1 lakh

`0.35 lakh `0.40 lakh 841

Zee Entertainment UPL

Media & Ent. Chemicals 690

-13.7% 346 -4.3% 554

166
Worth of `1 lakh Worth of `1 lakh

`0.48 lakh `0.80 lakh

IndusInd Bank 1,480

Kotak Mahindra Bank
Bank Bank
1,720
-1.4% 1,587
2.7%
Worth of `1 lakh Worth of `1 lakh
1,508
`0.93 lakh `1.14 lakh

348
Indus Towers Vodafone Idea
16
Telecom 284 Telecom
13

4.2% 4.3%
Worth of `1 lakh Worth of `1 lakh

`1.23 lakh `1.23 lakh

HDFC Bank HDFC Life

1,565
Bank Insurance

5.0% 1,225 5.1%

572
Worth of `1 lakh Worth of `1 lakh
`1.28 lakh `1.28 lakh
445

5Y annualised return Data as of June 11, 2024. Price data adjusted for splits, bonus and rights. The charts depict five-year share price.

20 Wealth Insight July 2024

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 IPO Tracker

D-Street debutants
Here is how the S&P BSE IPO Index has performed over the last one year
and how the biggest IPOs have fared

Highest %6(,32YV%6(6HQVH[
listing-day gain
Tata Tech 160 z BSE IPO z BSE Sensex

140% 145

Highest
130
listing-day loss
Gopal Snacks

-12.7%
115

100
Highest
post-listing gain 85
IREDA
Rebased to 100
275.7%
June 2023 June 2024

Highest Most Least Biggest Total

post-listing loss subscribed IPO subscribed IPO IPO issue size
Flair Writing Aztec Fluids Popular Vehicles & Serv. Bharti Hexacom

-41.5% 203 times 1.2 times `4,275 cr `60,030 cr

7RS,32VE\LVVXHVL]H
Subscription Issue Issue List Current Listing Change post Sensex Current
Company Listing date ratio (times) size (` cr) price (`) price (`) price (`) gain (%) listing (%) change (%) P/E

Bharti Hexacom Apr 12, 2024 29.9 4,275 570 755 1,111 32.5 47.2 4.0 110.2
JSW Infrastructure Oct 3, 2023 37.4 2,800 119 143 310 20.2 116.8 17.9 56.3
Tata Tech Nov 30, 2023 69.4 2,251 500 1,200 992 140.0 -17.3 15.3 59.2
R R Kabel Sep 20, 2023 18.7 1,965 1,035 1,179 1,752 13.9 48.6 15.6 66.3
Indegene May 13, 2024 69.9 1,843 452 660 562 46.0 -14.9 6.1 39.9
Juniper Hotels Feb 28, 2024 2.1 1,800 360 361 456 0.3 26.3 6.8 426.7
Honasa Consumer Nov 7, 2023 7.6 1,702 324 324 450 0.0 38.8 18.9 130.5
Concord Biotech Aug 18, 2023 24.9 1,551 741 900 1,559 21.5 73.2 18.9 52.9
IREDA Nov 29, 2023 38.8 1,501 32 50 188 56.3 275.7 15.4 5.9*
Inox India Dec 21, 2023 61.3 1,459 660 933 1,312 41.4 40.6 9.0 60.8
Go Digit May 23, 2024 9.6 1,438 272 281 334 3.3 18.7 2.4 6.0*
Cello World Nov 6, 2023 38.9 1,430 648 831 907 28.2 9.1 18.9 58.1
Samhi Hotels Sep 22, 2023 5.3 1,370 126 131 191 3.6 46.2 17.0 -
Sai Silks Sep 27, 2023 4.4 1,201 222 230 170 3.6 -26.3 16.8 25.8
Doms Industries Dec 20, 2023 93.5 1,201 790 1,400 2,017 77.2 44.1 9.5 79.9
*Price-to-book value. Data as of June 21, 2024

22 Wealth Insight July 2024

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 Cover Story

Spot the
winners
early
Be the first one to grab
every opportunity

By Udhayaprakash, Hemkesh Khattar, Kunal Bansal and Harshita Singh

I
magine if former Barcelona coach Carles young musical genius, giving us a pioneer of the
Rexach had never discovered the classical era.
wunderkind Lionel Messi at the age of One could argue these prodigies were simply
13. The world, as we know it, would have destined for greatness. But had it not been for the
missed out on the greatest football people who spotted their gifts early on, their
champion to walk the planet. Musical stories may have turned out differently.
virtuoso Mozart was only five when he ‘Catch them young’, as the saying goes, holds
composed his first piece and six when he true for achieving greatness in the stock market
performed before European royalty. It was his too. A sum of `10,000 in Cera Sanitaryware
father Leopold who recognised and nurtured the 20 years ago, for instance, would have made you

24 Wealth Insight July 2024

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 AI generated image

a crorepati today! But it’s impossible to have Wealth Insight draws upon Columbia Business
known this back then. After all, not every 13-year School adjunct professor Michael Mauboussin’s
old could be one Messi. Early performers may not article – ‘Trading stages in the company life
always succeed unless they are creating a solid cycle’ – to detail a company’s different growth
foundation. Thus, besides growth, a company phases and identify when it builds a moat. The
needs a moat to thrive. It is a unique advantage story also packs case studies of winners and
that sets it apart from the crowd. losers. Lastly, you will find a framework to
So, how to spot the champions of tomorrow spot the big shots of tomorrow and profiles of
that are building moats today? One way is by 20 stocks that might be just that.
evaluating company life cycles. This issue of Dive in!

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 Cover Story

Quest for tomorrow’s titans

Walking you through the process of finding young budding stocks

E
very master was once a beginner. However,
not every juvenile company can be a future In the roundabout
trailblazer. So, how do we identify student A company’s growth and cash flows begin to wane when crossing
companies with the potential to be a master? the maturity stage
Broadly, spotting such companies boils down LAUNCH GROWTH MATURITY SHAKE DECLINE
to two steps: -OUT
` Life cycle
z Identifying companies building a solid extension
foundation. You must look for quality companies
that are building strong moats. More on this later.
Sales
z Getting the timing right. To pocket big gains,
you need to detect the future big shots well ahead
in the present. You cannot do it too early when it’s Cash flow
still finding its footing, nor too late when it is
Profit
already established.
But beware! We are not asking you to time the
Time (years)
market. Rather, we are asking you to identify the
right time to invest in a company. For that, you
must understand the concept of life cycle. Like a eventually applied to businesses. Among many
caterpillar’s metamorphosis that gives it the final who adopted the theory was Victoria Dickinson.
form of a butterfly, a business goes through She named these stages and created a
various stages in its life before reaching the end. quantitative framework by linking them to a
To generate maximum returns, investors must company’s cash flow statement. See the
know which stage is ideal to invest at. How do you framework in the graph ‘In the roundabout.’
know which stage is ideal? For that, we need to Michael Mauboussin’s article that we mentioned
take a quick tour back in time to earlier also discusses the life cycle of
understand how the concept of the a business and categorises its stages
business life cycle came to life. based on its cash flow patterns.
The theory of business life cycle In the next pages, we have used
is loosely based on Raymond Mauboussin’s quantitative
Vernon’s product life cycle theory classification to explain how one
devised in 1961, which divides every can determine a particular life stage
product’s life in five stages – of a business from its cash flows.
‘introduction, growth, maturity, and Later, we have detailed some
finally decline or withdrawal’. Over qualitative checks to identify moat-
the years, the concept was building companies.

The hits and misses

Longevity of growth and maturity stages plays a crucial role in driving shareholder returns
Life cycle stages
Cash flow type Introduction Growth Maturity Shake-out Decline

Operating Outflow (-) Inflow (+) Inflow (+) Inflow/outflow (+/-) Outflow (-)
Investing Outflow (-) Outflow (-) Outflow (-) Inflow/outflow (+/-) Inflow (+)
Financing Inflow (+) Inflow (+) Outflow (-) Inflow/outflow (+/-) Inflow/outflow (+/-)

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 Cover Story

The merry-go-round of life

Like humans, businesses are also transient. They go through their own aggressive teenage years, twenties,
stable forties, and so on. These years are spread across introductory, growth, maturity, shake-out, and decline
stages. The cash flow patterns, as can be seen in the ‘The hits and misses’ table, are uniquely different at each
of these stages and help one gauge how the business behaves at each level. We trace this correlation below.

Introductory Growth
This is the initial phase of the company after its birth. The company is still new, but has a financial track
Its revenue streams are not solid and neither does it record by this stage. It knows what it is doing and
have any track records. It is still trying to figure out a begins to carve a small presence in the industry. It
stable business model. Due to high expenses to is able to generate a positive operating cash flow.
establish itself, it is likely to be loss-making. At this But this is not enough to fuel the capex, so it
stage, companies incur operating cash outflows but have continues to raise capital. As a result, its cash flows
positive cash flows from financing as they raise funds for from financing remain positive. The goal is clear;
capex. Nearly all startups belong to this stage. For strengthen position, expand the scale of operations
example, after raising `9,000 crore and establish dominance. Most
from its IPO, Zomato continues IPO companies fall in this
to burn cash to this day. category as they seek
external capital to
accelerate growth.

Decline 1 2 Maturity
The company bites At this stage, the
the dust in this stage. It company has finally
begins reporting established itself in
operating cash the industry,
outflows and the
5 3 achieving
profits start stability. The
waning. It often 4 growth is not as
begins selling off exponential as
its assets. The before but it’s
poor decisions during steady. The profits are
the shake-out stage generally stable, too. Healthy cash flows
lead to this phase. and return on capital helps
Jet Airways is one example. the company generate
It went bankrupt on free cash flows. It
failing to survive Shake-out starts repaying debt
intense competition This is the company’s mid-life crisis. At this stage, (if any) and giving
and adverse its growth could slow down or even decline. This could out dividends. TCS
industry happen due to company or industry-specific reasons. Some and Asian Paints
headwinds. pick up and go back to the previous stages. Others hit the wall. are good
For instance, Jagran Prakashan, owner of the daily Dainik Jagran, is examples.
still trying to claw its way out from the slump in the print media industry.

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Dialling it down
What is the ideal life-cycle stage for investors to pool their money in?

W
e have understood the different sequences
of a company’s life cycle and the typical
behaviour it exhibits at every stage. Next
we have to narrow down to the life stage, which is
most ideal for investors to pool their money in.
It needs no explanation why we would eliminate
the last two stages: shake-out and decline. Even
though the company in the shake-out stage has
possibilities of a turnaround, it seldom does. Those
in decline are a definite lost cause.
The third stage, i.e., maturity is an old race wonder venture capitalists (VCs) are always on a
horse. Here, the company has already tasted lookout for young startups. But most investors can
success and is a stable profit generator. Investing not be VCs. For good reason, too. Companies in the
in a company at this stage would not yield initial phase have the highest risk of failure and
lucrative returns as the moat is already many times investments do not pay off. This leaves
established. That means that it’s the introductory us with companies in the growth stage that have
and growth phases where the moat is created. lived their teenage years but are yet to pull into the
The introductory stage could generate the most stable late thirties. This is the goldilocks stage to
attractive returns given you would be participating pool money in since the business is off the ground
in the foundational chapter of the company. No but not in orbit yet.

‘Finding Nemo’
Tracing out qualitative traits needed to find the next moat builder

N
ow that we have deduced the right stage to
invest, the next step is to figure out how to
go about it. The growth stage is ideal not
only from a quantitative perspective (as concluded
above) but also from a qualitative point of view.
This is because it is also the moat building
stage–where companies attempt to create a unique
and sustainable long-term advantage. For example,
in their younger years, Astral created a moat
by building rapport with its plumbers, while
Asian Paints did it by closely focusing on its
distribution channels.
But before you hurry and pick companies in the alone. Therefore, it becomes crucial to distinguish a
growth stage, know that the number of fish in the growth stage ‘Nemo’ or the next moat builder from
sea is actually not plenty. Not all growth-oriented among the ordinary fish (growth companies
companies that raise capital and incur high capex without moats). You can identify one if it has any
necessarily build moats. Many focus on growth one or all of the below given traits.

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 Cover Story

Winds of change
Between FY19- FY24, PowerGrid’s free cash flow as a percentage of revenue stood at 58 per cent
45,000 Free cash flow (` cr) Market cap (` cr) 3,00,000

30,000 2,00,000

15,000 1,00,000

0 0

-15,000
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24

Does it have intangible assets? Intangible assets are Does it have a cost advantage? Cost advantages
for branding and strategic purposes, and provide over peers can be another moat. Having lower
an edge to the company. Consumer facing costs than competitors is crucial in industries
companies generally use branding assets to create where products are commoditised. A common
a brand recall among customers. For instance, way to achieve lower costs is through scaling up.
Nestle’s ‘Maggi’ became synonymous with Cement players are good examples of this
instant noodles in India, giving the FMCG giant a strategy. Other ways to reduce costs are
unique advantage. backward integration and constant
Licences and patents are strategic intangible debottlenecking. Coromandel International, for
assets. These give the company exclusivity in instance, maintains attractive returns on capital
producing or marketing its products for a time and margins against its peers, thanks to its
period. For example, Page Industries’ pact consistent backward integration.
with Jockey allowed it to exclusively sell the Even one of the above stated traits can result in
latter’s products in India. Other intangible a significant competitive advantage for a company
assets can be strong distribution channels and depending on the industry it operates in. If the
client relationships. One example is Divi’s company successfully builds a moat, it gradually
Laboratories’ three-decades-old association with transitions to becoming a free cash flow
many of its clients. compounder. Power Grid is one example. As seen
Is there a high switching cost? The more difficult it in the graph ‘Winds of change’, the company’s free
is for customers to switch products, the higher cash generating ability has improved over the
their stickiness. For example, switching from years, thanks to its early investments aimed at
Microsoft Windows to Linux OS would entail high having India’s largest power transmission network.
switching cost for users given the familiarity and To recap, here’s what we have learnt so far.
ease in using the former. Thus, most users stick When looking for next-gen wealth creators, first
with Windows. An irreplaceable product or service ensure that the company is in the growth stage of
creates a loyal customer base, becoming an its life cycle, as moat building happens in this
effective moat. phase. Secondly, assess if the company is
Does it have a strong network effect? Besides ad investing money in itself to simply grow or to
spending, a significant edge for a company could be actually build a moat through any of the strategies
its popularity among customers on account of word explained above. In the next section, we have
of mouth. For instance, a key advantage Meta featured case studies of two companies that
(formerly Facebook) has over other platforms is the successfully navigated through their growth
large number of users it managed to acquire due to stages, created solid moats and became free cash
peer-to-peer acceptance. flow compounders.

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 Cover Story

KAJARIA CERAMICS ASTRAL

The growth tryst The prosperity

with tiles pipeline

K F
ajaria Ceramics is the world’s eighth-largest ounded by Sandeep Engineer, Astral is India’s
and India’s largest tile manufacturer with an second-largest plastic pipe manufacturer by
annual capacity of 86.5 million square metres market cap. It operates 22 manufacturing
(MSM). Ceramic tiles segment is its biggest revenue facilities with a total capacity of 4 lakh metric
generator, which contributed 38 per cent to its FY24 tonnes. Astral’s success is primarily attributed to
revenue, followed by glazed vitrified tiles at several strategic initiatives that solidified its
36 per cent and polished vitrified tiles at 26 per cent. position in the industry.
Kajaria’s market leadership is a result of its Initially, Astral attracted customers by selling
three moats: scale, branding, and most importantly, CPVC pipes at prices on par with the much popular
the right product mix. galvanised iron pipes. To carve a
13.0 Recognising the growing demand 21.3 unique space, it shifted its focus
10Y PAT for vitrified tiles in India during 10Y PAT away from industrial customers
growth (% pa) growth (% pa)
the late 2000s, Kajaria capitalised like factories, where it lacked
14.4 on this opportunity. Since India
was predominantly meeting its
30.0 bargaining power, to other
consumers such as the realty
10Y returns 10Y returns
(% pa) requirements through imports, (% pa) sector. Sandeep Engineer
Kajaria sought to bridge that gap. conducted meetings with real
1,545 Between FY07-13, the company 1,702 estate developers and hotel
10Y cumulative 10Y cumulative
FCF (` cr) invested `572 crore in capex, FCF (` cr) owners to emphasise the
which was 125 per cent of its importance of CPVC pipes. To
cumulative operating cash flow during the period! persuade distributors and dealers, Astral
This increased its capacity from 26.4 MSM to participated in numerous trade shows across the
43.6 MSM, with the majority directed toward the country and held targeted meetings.
vitrified tiles segment. The company even Lastly, its ultimate trump card was its focus on
converted certain ceramic tile lines to produce plumbers, whom Sandeep Engineer considered as
vitrified tiles. With the product strategy in place, the brand’s first ambassadors. The company
Kajaria then invested in marketing and distribution conducted training programs for over
to reach customers. It spent over `100 crore on 10,000 plumbers, embedding its brand in their
marketing. On the distribution side, it not only minds. Beyond generous marketing spending, many
increased the number of dealers but also rewarded of Astral’s moat-building activities are not easily
them to enhance loyalty and assisted them with quantifiable but are evident in their financials.
skill development. With new products and strong Between FY14-24, Astral’s revenue and profit after
distribution in place, it witnessed explosive growth. tax grew annually by 18 per cent and 21 per cent,
The company has been free cash flow positive since respectively. Despite ongoing capex, Astral has
FY16, generating `1,629 crore till date. As a result, remained consistently free cash positive since FY18,
its 10-year annual share price return is 14 per cent. generating `1,624 crore till date.

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Not quite hunky-dory
Despite the big potential, there remain risks associated with moat stocks

W
ho doesn’t like success stories? The
preceding two examples of Kajaria and
Astral may well work to inspire your next
quest of finding up-and-coming hot moat stocks. But
we suggest against making haste as spotting young
prodigy stocks is no walk in the park. In fact, only a
handful of companies succeed in creating
irreplaceable and long-standing moats. Why do the
rest fail then? Because like everything else in life,
there are inherent risks at play.
Strong returns are primarily made during the
company’s transition from growth to maturity. This
is the window where it builds the moat. Once it
reaches maturity, the opportunity is lost.
Meanwhile, the earlier you invest in the growth
stage and the longer the window between the two
stages lasts, the more handsome your returns will BSE Healthcare index’s 13 per cent annual gain.
be. However, there is a big threat to this thesis which Thus, before investing in a young company that is
is that companies can often remain stuck in the first trying to create a moat, keep in mind the potential
gear. Even after years of investment, it is possible to pitfalls that can plague its efforts. Consider the below
fail to create a moat and never complete the given risk factors when assessing a company’s moat:
transition to the next stage. Suven Life Sciences is The sustainability question: While assessing a
one such example. The company actively tried to company’s moat, consider if it’s sustainable or not.
build a moat; it wanted to be one of India’s largest Some competitive advantages may erode faster than
generic pharma player but failed due to a lack of expected due to technological breakthroughs,
operational expertise. As a result, it has given a changing consumer behaviour, regulatory changes,
10-year annual return of just 0.3 per cent against the or entry of new competitors. As a result, the
company may be forced to look for a new moat,
requiring re-investments.
Down and out Possible complacency: Companies with perceived
Suven Life Sciences’ operating cash flows have consistently been strong moats could end up becoming complacent,
negative for the last six years
leading to inefficiencies and reduced innovation.
200 Free cash flow (` cr) Market cap (` cr) 5,000 Their innovation efforts may stagnate if they
overwhelmingly rely on existing competitive
advantages.
100 2,500
The valuation dilemma: Companies attempting to
build moats are difficult to be valued as their
0 0 potential is unknown. In many cases, these
companies are also loss-making and have negative
cash flows. As such, picking a metric to accurately
-100 -2,500
capture their prospects is tough.
Investing in growth-stage companies can be a
-200 -5,000 slippery affair. Potential rewards are big but so are
FY09 FY24 the banana skins (risks). Hence, in our next section,
we decided to detail two stories of defeat.

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 Cover Story

NETWORK18 MEDIA & INVESTMENTS ZYDUS WELLNESS

Error 404, signal Stuck in a

not found sandbox

A A
bout over a decade ago, Network18 Media mong companies that ever failed to create
was arguably India’s leading media moats, Zydus Wellness is an oddball. Unlike
company. It operated TV channels through Network18, Zydus Wellness, which is a
its subsidiary TV18 Broadcast. In particular, it was subsidiary of Zydus Life Sciences, managed to
doing exceptionally well in the news media build a niche leadership. But the said niche turned
segment, thanks to its partnership with CNBC and out too small and weighed on its growth.
CNBC Worldwide. The company’s focus on content Zydus Wellness owns several well-known
as well as TV presentation helped it become a consumer brands in India, such as Sugar-free,
favourite among viewers. Everyuth, Nutralite, Nycil, Glucon D, and
However, Network18 desired more and set its eyes Complan. The company has leadership in six of its
on becoming an undisputed market leader. To reach 10 portfolio products. In the low-calorie sugar
this ambitious goal, it introduced substitute segment, it has held
21.3 11 new TV channels across various over 90 per cent market share for 10.7
10Y increase segments, including entertainment, over a decade. However, it carved 10Y PAT
in loss (% pa) where it was still unfamiliar. its position in a market that was growth (% pa)

Additionally, it launched a film too niche with low growth

3.3 production company, Indian Film potential. Many of its segments 12.5
10Y returns 10Y returns
(% pa) Company, and even partnered with have remained underpenetrated (% pa)
Forbes to launch the Indian edition for over a decade. It also forayed
-11,527 of the magazine. There’s more. It into the face wash and soaps -3,311
10Y cumulative also formed a joint venture with category, where growth potential 10Y cumulative
FCF (` cr) FCF (` cr)
Viacom CBS called Viacom18. All of was better, but it was ultimately
these endeavours were primarily beaten by competition. The
funded through debt and the company ended up biting company’s consistent marketing efforts, which
off more than it could chew. cost around 20 per cent of its revenue every year,
In a sad turn of events, many of the new channels also failed to yield the desired results. Between
became loss-making. The company still did not stop FY14-23, it spent `1,754 crore on marketing, much
and continued to raise money, pouring it in the loss- higher than its cumulative operating cash flow of
making segments. Starting from FY09, with the `1,420 crore.
advent of the financial crisis, Network18 began Its recent attempt to boost growth by acquiring
incurring consistent losses. Its operating cash flow Heinz India’s business has not been successful
became inconsistent, forcing the company to raise either, as revenue growth in this segment remains
capital to stay afloat. Its share price plummeted in single digits due to its mature nature. The
93 per cent between May 2007 and 2014. However, it acquisition primarily resulted in increased
has somewhat recovered since then after its takeover marketing budgets, higher debt, and equity
by Reliance Industries in 2014. dilution for the company.

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 Cover Story

Our methodology
A framework to spot companies building solid moats in their growth stage

T
he twin flames of our story, as you would
have figured out by now, are growth and
moat. We believe it would take a combination
of these two to prepare a cauldron of hot returns.
Hence, our quest is for growth-stage infant
companies that are hungry to grow and are
simultaneously creating an advantage that can
remain unchallenged. This is why we have devised
a methodology to help you find promising players
that offer the best of both worlds. For this, we have
broken down our strategy in two parts. First, we
simply created quantitative filters using Michael
Mauboussin’s cash flow structure. Then, we looked
for some unique traits seen in moat-building

Budding bulwarks
20 stocks that are building solid moats
3Y cumulative (` cr)
Cash flow from Free cash flow 3Y median
Company Market cap (` cr) Stock Rating operations Capex Free cash flow to revenue (%) ROCE (%)

APL Apollo Tubes 39,747  2,453 -2,091 362 0.8 26.9
Craftsman Automation 8,772 Unrated 1,448 -1,178 270 2.7 21.6
eMudhra 6,163 Unrated 128 -182 -55 -6.8 25.0
Ethos 5,622 Unrated 45 -129 -84 -3.5 21.2
Gravita India 6,885  252 -275 -23 -0.3 31.2
Himadri Speciality Chemical 15,963  790 -152 638 5.7 12.5
Hindware Home Innovation* 2,482 Unrated 681 -261 420 5.3 18.4
Jupiter Wagons 21,662  118 -530 -412 -6.0 24.0
Kaynes Technology 18,120 Unrated 50 -509 -459 -12.6 22.2
Mold-Tek Packaging* 2,453  221 -255 -33 -1.6 19.3
Mrs. Bectors Food 7,457 Unrated 402 -382 20 0.5 21.2
Navin Fluorine 15,105  761 -2,010 -1,249 -22.3 19.3
Netweb Technologies 12,873 Unrated 51 -37 13 1.0 52.6
Pitti Engineering 2,689  384 -412 -28 -0.9 20.1
Saregama India* 9,682  378 -198 180 8.5 20.3
Shivalik Bimetal Controls* 2,898  92 -83 9 0.7 36.5
SJS Enterprises 2,101 Unrated 256 -354 -98 -6.8 21.0
UNO Minda 48,474  2,160 -2,556 -395 -1.2 17.3
Varun Beverages 1,83,479  5,412 -5,867 -454 -1.2 27.5
Zen Technologies 7,907  86 -47 38 5.3 24.5
Price data as of June 4, 2024. Financials as of FY24. *Cash flow data as of FY23.

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companies. Let’s begin with the first filters we return on capital employed (ROCE) of more than or
applied. We searched for: equal to 12 per cent.
z Companies with a market capitalisation of more z Lastly, companies whose current three-year
than `500 crore. This helped us avoid companies median ROCE (FY22-24) did not fall more than
that might be in their introductory stage. This five percentage points against the preceding three-
returned us about 1,646 companies. year median as of FY21. We did this to eliminate
z Companies excluding banking, financial services, companies whose return on capital might have
and insurance companies as analysing them purely adversely deteriorated recently. With this, we were
from their cash flow statements will be be left with 157 companies.
inaccurate. On eliminating these, we were left with For the second part, we sought to shortlist
1,468 companies. companies that are either building leadership in
z Companies with positive three-year cumulative their respective segments or are trying to
operating cash flow. We chose this filter as it indicates strengthen their already-built leading positions. We
that such companies have crossed their introductory also ensured to eliminate companies whose
stage, according to Mauboussin’s structure. foremanship existed in a niche industry with little
z Companies with negative three-year cumulative to no growth prospects. This rigorous analysis
capex as this would mean they have been investing returned us only 20 companies from the remaining
more capital in building assets. 157. As we now delve into the specifics of these
z Companies with positive three-year cumulative 20 companies, remember that these insights should
cash flow from financing activities. This suggests not be construed as stock recommendations. These
that such companies still need to raise capital for companies are merely starting points for your quest
expansion purposes. On applying these three filters, to find moat-building stocks. We ask our readers to
we sifted down to 314 companies. do their due diligence before considering these
z Companies with current three-year median companies for investment.

APL APOLLO TUBES

High on innovation
A
PL Apollo Tubes is driven by innovation in heavily in marketing and branding, which makes it a
the structural steel tubes market. Its high- favourite among fabricators and architects.
speed mills, pre-galvanised tubes and Direct Leveraging these advantages, APL Apollo is
Forming Technology (DFT) has always kept the expanding its capacity to benefit from the high-
company ahead of peers. Its R&D focuses on products growth HR Coil-based steel tube market in India
that replace conventional construction and increasing its global footprint with a
materials like wood, aluminium, concrete, and
steel angles and channels. The company holds
45.8 0.3 MTPA capacity in Dubai (to be operational
by FY25) to serve Middle Eastern and
3Y PBT growth
16 patents for its products. (% pa) European markets. For profitability, it is
Over the last decade, it has impressively focusing to increase the pie of value-added
grown its revenue and net profit by 22 per cent 55.6 products like heavy structural steel tubes and
and 29 per cent per annum, respectively. During Current P/E coated products, in its portfolio.
this time, it developed many moats that gave it The stock is not cheap and trades at a P/E of
an edge over competitors. First is scale: APL 46.3 56 times. The company operates in a cyclical
Apollo meets nearly 2 per cent of India’s steel 5Y median P/E sector. Its global aspirations could face stiff
demand, giving it bargaining power with competition given its EBITDA margins are less
suppliers. Second is its solid distribution network of than half those of its global peers, allowing
over 800 distributors across India, with strategically competitors to restrict its expansion through price
located, backward-integrated manufacturing units, cuts. Additionally, mature markets like Dubai will
which saves it freight costs. The company also invests likely limit its growth.

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 Cover Story

CRAFTSMAN AUTOMATION

Aluminium ambitions

I
ncorporated in 1986, Craftsman Automation is a annually during FY21-24.
diversified engineering company. It derives its Recently, it acquired a controlling stake in DR
revenue from three segments: automotive Axion India for `375 crore to enhance its capabilities.
powertrain that makes up 35 per cent share, This acquisition has led to process synergies, as
automotive aluminium products at 48 per cent and Craftsman specialises in high-pressure die castings
industrial & engineering at 17 per cent. The while DR Axion uses low-pressure castings. This
company primarily deals with intermediate, 40.4 has expanded Craftsman’s presence in the PV
medium, and heavy commercial vehicles and 3Y PBT growth segment and helped it add new customers. The
construction equipment firms in India. It has (% pa) company has also initiated greenfield expansions
long-term relationships with marquee clients in Kothavadi and Bhiwadi. The Bhiwadi facility
like Tata Motors and Tata Cummins, providing 28.6 in Rajasthan will bring it closer to many
them solutions for over a decade. Current P/E automakers, enabling faster supply and an
The company is betting on its aluminium expanded portfolio across all its businesses.
segment, which is gaining importance in the 32.5 However, the company faces risks from the
automotive industry due to its higher strength-to- 5Y median P/E cyclical nature of the industry and raw material
weight ratio. The rising adoption of electric volatility, which can impact margins. Slow EV
vehicles is driving the use of aluminium as OEMs look adoption and competition from other ancillary players
to offset battery size and weight to maximise range. in the same segments also pose risks. Additionally, the
This focus is reflected in the company’s financials, increasing debt burden in recent years could be
with revenue from this segment soaring 75 per cent problematic during industry downturns.

eMudhra

Forging trust digitally

I
ndia’s digital prowess is at an unprecedented Over the past five years, eMudhra has seen its
pace, thanks to the government’s digital push. revenue and profit after tax grow nearly fourfold. The
As a result, nearly every service can now be company’s early mover advantage and rapid service
availed online. However, digital adoption has also scale-up across India contributed to its success. It is
led to a rampant rise in cyber fraud, creating a the only Indian company recognised by renowned
crucial need for digital trust services. This is software companies like Microsoft, Mozilla,
where eMudhra steps in.
eMudhra is India’s largest licensed Certifying
57.7 Apple, and Adobe. This is evident from its strong
global revenues that made up 55 per cent of its
3Y PBT growth
Authority (CA), holding nearly 40 per cent (% pa) FY24 revenue and have grown exponentially by
market share as of FY24. Its clients include almost 8 times between FY21 and FY24.
banks, government entities etc. It provides 83.0 That said, one-third of its employees are
digital trust services like issuing digital Current P/E dedicated to R&D given the high competition
signature certificates and public key from domestic and global peers. Some of these
infrastructure (PKI) services. Digital signatures 58.4 risk overtaking the company with more
provided by the company authenticate the 5Y median P/E advanced technologies. Moreover, its revenue
identity of the signatory on electronic concentration from the top 10 clients almost
documents. These eSignatures also facilitate secure doubled during the last four years, making up
digital information transfer within an enterprise’s 32 per cent of its FY24 revenue. Further, it needs to
private network, developed by eMudhra, which diversify into other tech services to justify its high
charges for managing this traffic. P/E ratio of 83 times.

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 Cover Story

ETHOS

Luxury in every tick

I
n 2023, Mumbai and Delhi topped the global list a significant focus on exclusive brands (51 offerings),
for adding the most billionaires, surpassing cities which provide higher returns on capital. Moreover,
like Tokyo, Beijing, London, and New York. the recent EFTA agreement between India and
Ethos, a luxury watch retailer, is capitalising on the Switzerland has eliminated import duties on many
surge in affluence in India. Swiss products. This is expected to support demand
From opening its first store in 2003 to for Swiss watches in India in the coming few
capturing a 20 per cent market share in Indian 614.4 years (currently it stands at around
luxury watch retail, Ethos has made significant 3Y PBT growth 21 per cent). Additionally, the company is
strides. The company benefits from the four- (% pa) venturing beyond watches into other luxury
decade-long relationship of its promoters KDDL segments such as jewellery and luggage,
(watch components supplier for Swiss watch 72.4 targeting its large loyalty program, “Club
manufacturers), with renowned Swiss watch Current P/E Echo,” which boasts over 3 lakh HNI customers.
brands. Its average selling price per watch it However, there are some risks, too.
sold has vaulted from `84,000 in FY20 to around 67.6 Competition from new entrants and
`1,90,000 by FY24, boosting its financials. 5Y median P/E established players like Titan could pose
It recently raised `175 crore to expand its challenges for the company. It also lacks
store base across tier 2 and 3 cities, following exclusivity for high-selling brands like Rolex and
successful responses from places like Siliguri, Rado in India, leaving room for other competitors to
Bhubaneswar, Raipur, and Surat. It is also rapidly join hands with these brands. The stock trades at a
expanding its luxury brands (65 plus offerings), with hefty P/E ratio of 72 times.

GRAVITA INDIA

The recycling champ

S
upportive government policies like the Vehicle The company targets 25 per cent revenue growth,
Scrappage Policy, and Battery Waste 35 per cent profitability growth, and a 25 per cent
Management Rules have helped Gravita India ROCE run rate by 2028. This ambitious goal is
swiftly ride the recycling trend. Incorporated in supported by its foray into lithium-ion battery
1992, the company procures and recycles non- recycling (through a pact to establish a battery
ferrous scraps. Operating both in India and recycling plant through a JV in Oman), as well
globally, Gravita aims to become the most
valuable company in the global recycling
66.4 as steel and paper recycling. Gravita has
earmarked over `600 crore for capex in the next
3Y PBT growth
space. Its four main recyclable verticals are (% pa) three years, with more than one-third allocated
lead, aluminium, plastic, and rubber, with to the new verticals. The focus is on increasing
11 recycling plants, over 1,700 touchpoints, and 29.6 contributions from value-added products like
350 customers across 32 countries. Its client Current P/E lead bricks, customised aluminium alloys, and
list includes prominent names like Glencore, plastic granules to expand margins.
Tata, Exide, and Asian Paints. 18.5 While its outlook is impressive and the stock
Gravita benefits from strategically located 5Y median P/E is reasonable at a P/E ratio of 30 times, the
recycling plants near scrapping and consuming recycling market is not inherently high-growth.
markets, reducing freight costs. The market’s high Gravita benefits mainly from increasing
barriers to entry make it lucrative, as establishing formalisation. There are other risks, too. Many
relationships with OEMs and setting up OEMs are setting up their recycling facilities, and
procurement networks takes years. lithium recycling is still in its nascent stage.

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HIMADRI SPECIALITY CHEMICAL

Taking big strides

I
ncorporated in 1987, Himadri has steadily Additionally, Himadri has strengthened its EV
climbed the value chain in the coal tar industry, position with two strategic acquisitions: a
offering value-added products such as speciality 13 per cent stake in Silicona and a 40 per cent stake
carbon black, refined naphthalene, and himcoat in Invati Creations. Silicona develops silicon-
enamel. These are used in industries like defence, carbon anode materials for next-generation
aluminium, and tyres. Its exports made up lithium-ion batteries, which offer higher
about 19 per cent of its FY24 revenue. 106.9 energy density and reduce charging time
The company is now making strategic 3Y PBT growth significantly, enhancing efficiency. Invati
shifts. First, it has acquired bankrupt Birla (% pa) Creations, an India-based company, is also
Tyres to enhance its forward integration in the innovating in the same field.
tyre industry, leveraging its existing carbon 38.6 However, several risks must be
black production, a key input for tyres. Current P/E considered. Most industries Himadri serves
Second, Himadri announced a `4,800 crore are cyclical, and its ambitious capex plans
investment to capitalise on the growing EV 29.1 may pressure its balance sheet due to
adoption. This sum will go into setting up 5Y median P/E increased leverage forward. Furthermore,
2,00,000 MTPA Cathode Active Material (CAM) its new ventures face intense competition
capacity for lithium-ion batteries over the next five from existing clients like MRF in tyres and from
to six years. This capacity could generate up to China, which produces over 80 per cent of the
`20,000 crore in annual revenue (its FY24 revenue world’s lithium-ion batteries. The stock trades at
was `4,185 crore). a P/E ratio of 39 times.

HINDWARE HOME INNOVATION

The bathroom artist

I
t is not unusual if you have caught the the fastest-growing player in this segment, albeit
Hindware brand somewhere in your bathroom from a low base.
at least once. This is thanks to its leadership in The company’s strategy was straightforward:
India’s sanitaryware and faucets segments. The with a customer base that covers more than
company behind this six-decade-old brand, 30 crore Indians, Hindware aimed to extend its
Hindware Home Innovation (formerly Somany leadership beyond bathrooms to other home
Home Innovation), was formed after the
demerger of Hindustan Sanitaryware &
41.3 areas. It anticipates continued strong growth
in its sanitaryware and faucets segment and
3Y PBT growth
Industries and listed in 2019. (% pa) has ramped up focus on the pipes segment,
Hindware Home Innovation boasts over investing over `180 crore to expand capacities.
1,200 institutional clients, including DLF, 98.7 Additionally, it acquired a ready-made
Godrej Properties, and Taj Hotels. Leveraging Current P/E manufacturing facility from its group
its strong brand presence and extensive company, enhancing integration and
distribution network of over 35,000 retail 33.6 centralising operations.
touchpoints, the company has expanded into 5Y median P/E However, this expansion has increased its
the consumer appliance industry (offering debt obligations, with interest costs rising
fans, coolers, and water heaters) and other building nearly fivefold between FY22-24 (its current debt-to-
materials segments. Notably, its Plastic Pipes & equity ratio stands at around 2 times), while
Fittings business, under the brand Truflo, operating profits showed negligible growth. The
contributes over 25 per cent to its revenue and is stock is pricey, trading at a P/E ratio of 99 times.

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 Cover Story

JUPITER WAGONS

Powered at full throttle

J
upiter Wagons manufactures railway wagons has also formed joint ventures with two European
and various marine containers and carriers for companies to leverage their braking technology and
commercial vehicles. Its client list includes acquired two Indian companies that produce tyres
notable names like Tata Motors and Ashok Leyland. and braking systems for railway wagons. These
However, railways remain its largest revenue strategic moves aim to help it achieve backward
generator, contributing around 75 per cent of integration, enhancing profitability and
its total order book as of FY24. 188.5 opening new revenue streams by
Jupiter Wagons benefits significantly from 3Y PBT growth commercialising the new braking technology.
the government’s increased capital (% pa) Management expects these new segments to
expenditure on railway transportation in significantly contribute to revenue from FY25.
India. Its leadership position in 25-tonne 64.9 Additionally, Jupiter Wagons is diversifying
carriers and heightened demand have driven a Current P/E into passenger coaches and preparing to bid
major shift in the company’s business. The for manufacturing metro coaches soon.
record-high sales of commercial vehicles in 45.1 However, the company’s reliance on railway
FY24 made things even better for the company. 5Y median P/E growth means that budget cuts in the railway
It operates four production plants across India department could significantly impact its
and has invested heavily to enhance its capacity by success. Another area of concern is its entry into
50 per cent over the last three years. It currently the production of electric CVs, where it has no prior
manufactures 9,000 wagons annually, with a target experience. These challenges are further
to reach 10,000 by the end of FY25. Jupiter Wagons compounded by its hefty P/E ratio of 65 times.

KAYNES TECHNOLOGY

Levelling up in PCBs
E
ver looked into an electronic device and found undertook brownfield expansions at two existing
a green chip-like board? These are printed facilities. It also acquired a US-based company with
circuit boards (PCBs), and Kaynes expertise in box-build processes to enhance its
Technology is among its key manufacturers. The technology and production capabilities, aiming to
company operates nine manufacturing facilities secure new commercial orders. Additionally,
across India, with the domestic business Kaynes plans to improve profitability through
generating almost 90 per cent of its revenue.
Kaynes Technology began its journey in the
122.7 backward integration by producing bare PCBs
and other components starting in FY25.
3Y PBT growth
low-margin PCB assembly segment. Over the (% pa) Kaynes recently raised `140 crore through a
years, it gained expertise and moved up the QIP to manufacture highly complex inter-
value chain to enter the more complex PCB 102.1 connected PCBs. It is actively seeking
box build segment, which includes initial Current P/E inorganic opportunities in this segment to
design, multiple tests, and prototype building. commercialise it in the next three years.
While PCB assembly remains its largest 119.2 The prospects for Kaynes Technology are
segment, accounting for 55 per cent of revenue, 5Y median P/E promising. However, the new complex PCB
the box build segment has grown significantly, segments requires high expertise. Investors
contributing 42 per cent to revenue in FY24. should consider long gestation periods and a high
The company aims to expand in both domestic P/E ratio of 102 times. Any delays in
and international markets. Recently, Kaynes commercialisation could significantly impact
acquired a manufacturing plant in Pune and its financials.

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 Cover Story

MOLD-TEK PACKAGING

Packing up the growth promise

I
f you have ever bought paint from Asian Paints, introduction of various new products expanding
you likely received it in containers made by Mold- the company’s portfolio.
tek Packaging. A leader in India’s plastic Mold-tek has also ventured into the pharma
packaging market, Mold-tek produces injection- packaging sector. A new manufacturing facility for
moulded containers used in packaging paints, pharma packaging is undergoing audits and will
lubricants, food items, and more. Paints is its begin commercial operations in H2 FY25. The
largest segment, with Asian Paints alone 28.6 positive response from potential clients has
comprising nearly one-third of its total sales 3Y PBT growth made the management confident in the growth
volume in FY24. After dominating the paint and (% pa) prospects of its pharma business, with plans
lubricant segments, Mold-tek pivoted to already in place to scale up operations.
producing plastic containers for FMCG products. 36.8 However, the packaging industry is highly
It gained traction in the ice cream segment from Current P/E dependent on the performance of its clients’
clients like HUL, Amul and Dabur. products, and Mold-tek is no exception. This
The launch of Grasim’s paint business in 33.9 vulnerability was evident in FY24, as sales
early 2024 presented a new opportunity. The 5Y median P/E volumes for both its major segments were
company seized this chance by setting up disappointing: paint sales remained flat, and
three new manufacturing facilities to serve ice cream consumption decreased due to an erratic
Grasim. Two of these started operations in FY24, monsoon. Consequently, the company experienced
and the third will commence in H2 FY25. Volumes a year-over-year revenue decline of 4 per cent and
from the FMCG segment are also growing, with the an 18 per cent drop in net profit for FY24.

MRS. BECTORS FOOD SPECIALITIES

Baked to perfection
W
hat do McDonald’s and Burger King Mrs. Bectors one of the most recognisable bakery
burgers in India have in common? It’s their brands in the country.
buns that are made by Mrs. Bectors. The Over the years, the company has developed a
company manufactures packaged baked goods such diverse range of products in both the mid and
as biscuits, bread, and buns. Mrs. Bectors operates premium segments for household and commercial
two B2C brands in India: Cremica and English use. Besides product innovation, its scale and
Oven. As of FY24, biscuits were its largest
segment, accounting for 61 per cent of revenue,
45.7 distribution is driving growth. Mrs. Bectors
plans to replicate its North Indian success
3Y PBT growth
with bakery items contributing 35 per cent. (% pa) nationwide. The company has commissioned
From humble beginnings in Ludhiana, new biscuit and bakery plants in West Bengal,
Punjab, Cremica became a household name in 58.2 Madhya Pradesh, and Maharashtra, set to
the mid-90s due to its unique taste. Current P/E be operational in FY25. Mrs. Bectors has
Recognising an opportunity in the bakery thrived in a competitive environment, but
market, the management started producing a 41.4 the landscape has changed. The rise in
wide range of premium products. Expanding 5Y median P/E bakery consumption in India has attracted
operations to Noida, they extended many organised and unorganised players.
distribution channels across North India and Entering these mature markets will be
formed strategic partnerships with major QSR challenging, even with the strong brand
brands, including McDonald’s in 1996, a partnership recognition. Investors should also note the
that continues to this day. This strategy made company’s high P/E ratio of 58 times.

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NAVIN FLUORINE INTERNATIONAL

The chemical conquest

N
avin Fluorine boasts over 50 years of successfully commercialised hydrogen-based eco-
expertise in manufacturing fluorine-based friendly refrigerant gases, commissioning a new
chemicals, with a wide range of applications plant to meet global demand. Additionally, the
across many industries. The company derives most company expanded capacities in its specialty
of its revenue from manufacturing refrigerant business to capture the growing demand for
gases, which account for 46 per cent of its fluorine-based mining and agrochemicals.
sales. Specialty chemicals contribute 23.2 Its pharma operations have begun gaining
41 per cent, while the contract-based pharma 3Y PBT growth attention as the company aims to move up the
business makes up the remaining 13 per cent. (% pa) production chain. New R&D labs and
Fluorine compounds are essential in the production lines have been established to
pharmaceutical and agrochemical industries, 59.6 handle complex operations on a large scale.
serving as key inputs in manufacturing Current P/E However, these ambitious growth plans have
various products. Navin Fluorine has come at a cost. Its cash reserves have depleted,
leveraged its scale and expertise in fluorine 52.5 and its debt-to-equity ratio rose from 0.06 to 0.43
production to strategically enter these 5Y median P/E between FY22-FY24. Operational struggles with
segments through its specialty chemical and the reopening of the Chinese economy led to
contract manufacturing businesses. intense price competition, hurting profitability. The
The management has made bold capex decisions pharma segment was the worst hit, with its revenue
to enhance scale across all segments and capitalise falling over 50 per cent YoY in FY24 as multiple
on the China plus one strategy. In FY23, it orders were awaiting clinical approval.

NETWEB TECHNOLOGIES

Leading the supercomputing race

A
rtificial intelligence (AI), supercomputers, and motherboards tailored to customer needs.
and data centers are the new buzzwords of These advanced processors are also crucial for
today’s rapidly evolving tech landscape. running AI software, allowing Netweb to develop
Companies worldwide are racing to capitalise on AI-integrated workstations. The company plans to
these trends, and Indian tech firms are no exception. use its IPO proceeds to expand its operations
Among them, the recently listed Netweb through inorganic growth.
Technologies stands out as a frontrunner.
Netweb designs, assembles, and instals high-
127.9 But there remain challenges. The company
faces competition from giants like IBM, Dell,
3Y PBT growth
performance computing systems, also known as (% pa) and Lenovo. Although partnerships with
supercomputers, in India. With over two Nvidia and Intel are beneficial, they also
decades of experience, it has installed more than 161.1 suggest the company’s high dependence on
500 supercomputers nationwide. It operates in Current P/E these technologies. These pacts are also not
six segments, with private cloud infrastructure exclusive, which means other tech companies
and supercomputers being its largest, 143.5 can also form similar alliances.
contributing 37 per cent and 36 per cent to its 5Y median P/E Netweb generates 64.5 per cent of its
revenue, respectively, as of FY24. revenue from its top 10 clients, primarily
Netweb’s use of unique, high-capability government-run educational and research entities.
processors sets it apart. Its partnerships with A reduction in their budgets could dent its
industry giants like Nvidia and Intel provide it key revenue. An astronomically high P/E ratio of
processing inputs, enabling it to design servers 161 times also works against it.

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 Cover Story

PITTI ENGINEERING

The high road to capex

initiated a capex plan of around `470 crore in FY21,

W
ith over four decades of experience, Pitti
Engineering is India’s largest producer of spread across three years. This was done to enhance
electrical steel laminations. The company its capacity by 45 per cent. Currently in the final
manufactures key components for motors and phase of this capex cycle, Pitti Engineering plans to
transformers used to enhance efficiency in energy achieve the desired capacity by the end of FY25.
transmission. It supplies these laminations to Additionally, it acquired an Indian firm in a
major electrical companies in India, including 59.1 similar business in FY24, gaining access to new
ABB, Siemens, and BHEL. While Pitti 3Y PBT growth manufacturing facilities and penetrating the
Engineering caters to multiple industries, (% pa) untapped market of South India, thereby
railways stand out as its largest revenue establishing a pan-India presence. The
contributor, accounting for nearly 40 per cent of 30.5 management is clear about continuing to expand
domestic revenue in FY24. It also has a strong Current P/E capacities. That said, given its high dependence
international presence, with exports accounting on railways, any potential slowdown in railway
for 35 per cent of its total revenue in FY24. The 18.4 expenditure can significantly dent its financials.
company operates three manufacturing 5Y median P/E Besides, its capex investments have strained the
facilities. Its in-house metal sheet processing company’s balance sheet. Its debt shot up by
capabilities give it a unique advantage, allowing it to 85 per cent YoY to `537 crore in FY24. The company’s
modify products to meet customer needs and expensive valuation is also noteworthy, as it
command higher profit margins. currently trades at a P/E ratio of 31 times, which is
To solidify its market leadership, the company 1.7 times higher than its five-year median.

SAREGAMA

Retro rhythms to modern beats

I
f you are an old music connoisseur, you’re among pure music licensing business grew by 23 per cent
Saregama’s millions of customers. With a library annually between FY19-24.
of over 1,50,000 songs, 70 movies, and over 45 It aims to continue this growth, projecting a
digital shows, Saregama is India’s largest music 25 per cent annual revenue increase over the next
production company. As of FY24, its music segment, three to four years. To fuel this expansion, it plans
which licences out its IP and generates revenue to invest around `1,000 crore in new content
from various streaming platforms, was its
highest revenue contributor at 81 per cent,
59.9 during this period. Its recent acquisition of
Pocket Aces, which houses popular media
3Y PBT growth
followed by films and TV at 14 per cent each. (% pa) brands like Filtercopy and Dice Media, is
Once the king of the Indian music industry expected to support this growth.
in the 20th century, its glory began to fade in 48.1 That said, the lack of investment in the
the 2000s and early 2010s due to its lack of Current P/E 2000s have allowed several new music labels to
investment in new music. The company relied emerge, posing a threat to the company in new
heavily on its legacy IPs, leading to 36.6 content acquisition. Competition is expected to
inconsistent revenue. However, things 5Y median P/E intensify, especially for bigger movie deals
changed in 2015 when Vikram Mehra became where payoffs are almost guaranteed.
the new CEO. The revised strategy was simple: Additionally, redirecting investments to movies
invest in new music. Utilising data analytics to and TV shows, which are low-margin segments,
assess user listening patterns, Saregama chose its could be risky. Although the growth prospects are
investments wisely. This strategy paid off, as the attractive, a P/E ratio of 48 times warrants caution.

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Moderate te
High ly
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Mo Low t
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Hig
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Very
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LOW VERY HIGH

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 Cover Story

SHIVALIK BIMETAL CONTROLS

Acing agility

F
ew companies can beat obsolescence and Despite being a niche industry, Shivalik’s growth
remain resilient in an ever-changing world. prospects are promising due to applications in smart
Shivalik Bimetals is one such case. In 2011, the meters and battery management systems for EVs.
electro-mechanical component maker earned Shivalik invested `75 crore during FY21-23 and
30 per cent of its revenue from cathode ray tubes that plans to spend an additional `20-30 crore between
were used in video displays of TV and computer FY24 and FY26 to improve its efficiency. After
screens. But its sales plummeted to nearly zero 82.2 this expansion, it aims to reach a revenue
by 2014 due to the advent of LED and LCD 3Y PBT growth potential of `1,600 crore (FY24 revenue was
televisions. But Shivalik quickly adapted by (% pa) `449 crore). Its confidence stems from its high
modifying its facility to produce shunt resistors technical expertise, the longest value chain
that regulate electrical current flow. These now 35.4 among peers (enabling rapid response times for
account for almost half of its FY24 revenue. Current P/E custom projects), and strong client retention.
The company’s components measure and However, challenges remain. Shivalik
manage electricity. Its key products include 29.5 operates in a working capital-intensive
shunt resistors and thermostatic bimetals, used 5Y median P/E business, with over half of its capital tied up.
in overload protection devices. These are Any disruption could lead to significant
essential in switchgear and various electrical impairment, as most products are customised. There
appliances. The company boasts the largest global is also a risk of substitution by alternative products
capacity for shunt production, with exports that are yet to become superior, but pose a threat
contributing nearly 65 per cent of its FY24 revenue. nonetheless as seen in the past.

SJS ENTERPRISES

For the aesthetics

E
ver noticed the chrome-plated logos of cars with the purchase of the Indian arm of Walter Pack,
and bikes that proudly flash their brands? a specialist in designing and manufacturing glass
SJS is one of the companies behind them. The panels for automobiles and consumer electronics.
company runs in-house design and manufacturing This acquisition grants SJS access to Walter
operations for aesthetics such as logos, display Pack parent’s advanced injection molding design
panels, and chrome accessories, widely used in (IMD) technology. This will enable SJS to
automobiles and home appliances.
Aesthetics are highly subjective and
18.8 capture new segments such as digital
speedometers and protective glass for
3Y PBT growth
constantly evolving. SJS’s relentless pursuit of (% pa) infotainment systems in automobiles. The
product innovation, combined with integrated management also aims to leverage its long-
in-house operations, has driven its success. 25.3 standing relationships to expand operations
Effective operations have enabled it to Current P/E into the export market.
maintain an average relationship of 19 years The cyclical auto sector contributed over
with its top 10 clients, including nine of the 27.1 70 per cent to its total revenue in FY24. An
top 10 automobile manufacturers in India. 5Y median P/E economic slowdown, thus, could hurt its
SJS has adopted an inorganic growth financials. Additionally, the company’s
strategy. First, the company acquired an Indian aggressive inorganic approach has led it to raise
chrome-based aesthetics manufacturer in FY23, long-term debt for the first time in its history. While
making it the largest producer of chrome aesthetics its debt-to-equity remains low at 0.1 times as of FY24,
in India. The acquisition spree continued in FY24 it could rise with further high-profile acquisitions.

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UNO MINDA

Revving up the growth gear

T
o be a leader is no small feat. It requires enhance capacity to meet the growing demand for
immense effort to rise to the top and maintain its products. Consequently, it has commissioned
a leading position in a competitive market. capacity expansions in existing plants and acquired
Uno Minda has achieved this distinction in the land in three locations for new production facilities.
heated auto ancillary segment. The company has also developed 12 dedicated
Operating from 67 manufacturing facilities products for the fast-growing electric vehicle
worldwide, Uno Minda caters to all automobile 48.4 (EV) segment and established a new plant
segments. It is India’s largest producer of 3Y PBT growth specifically for its EV business. Inorganic
switches, horns, alloy wheels for passenger (% pa) growth is a key strength of Uno Minda, and the
cars, and seats for commercial vehicles and management continues to pursue this strategy.
two-wheelers. Additionally, it is the country’s 56.0 The company runs 16 joint ventures worldwide
third-largest automobile lighting Current P/E to leverage advanced technologies and expand
manufacturer. As of FY24, automobile switches its commercial operations.
were its largest segment, contributing 53.6 As a prime player, Uno Minda benefits from
26 per cent to its revenue, followed by 24 per 5Y median P/E the current boom in India’s automobile
cent from lighting and 20 per cent from the industry. However, any downturn in the
alloy business. industry could hurt its financials and disrupt its
Despite being an industry leader, Uno Minda’s expansion plans. Investors should also take note of
management remains hungry for growth. The a 25 per cent yearly rise in its total debt in FY24,
company aims to solidify its market position and coupled with a high P/E ratio of 56 times.

VARUN BEVERAGES

Sipping on success
I
magine a company with no brand of its own, operates three exclusive and 13 integrated plants,
no pricing authority, and reliance on a single owns a fleet of over 2,500 distribution vehicles, and
raw material supplier. These traits make for drives cost efficiencies through innovations like
an undesirable stock in the market. But removing corrugated pads in packaging.
surprisingly, Varun Beverages, despite such It is also expanding rapidly with PepsiCo’s
features, still trades at a P/E of 90 times. And brands in Africa, generating 17 per cent of its
this isn’t due to declining profits. In fact, its
profit after tax has grown 47 per cent
88.7 revenue from three countries there, and
operating in over 10. Additionally, it is
3Y PBT growth
annually over the last five years. (% pa) expanding its own brand portfolio, such as
Varun Beverages is the bottler and Cream Bell for dairy-based beverages and
distributor for PepsiCo and distributes nearly 89.9 Reboost for energy drinks, leveraging its
all its beverages, including Pepsi, Sting, Current P/E established scale. Further capacity expansion
Miranda, and Mountain Dew, across India. But and a focus on backward integration bode
it did not always have this dominance. In 2011, 61.3 well for the company.
it contributed just 26 per cent to PepsiCo’s 5Y median P/E However, there are some emerging risks.
beverage sales in India. Today, that figure has Until now, most of its sales growth came from
soared to 90 per cent, thanks to the company’s geographic expansion. But as its base grows larger,
excellent execution skills. This success led PepsiCo the company will need to grow organically in a
to grant Varun Beverages franchise rights across 27 market with stiff competition from Coca-Cola and
states and 7 union territories. The company new entrants like Reliance’s Campa Cola.

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 Cover Story

ZEN TECHNOLOGIES

Defence armour architect

`1,400 crore, reflects this trend with over 40 per cent

I
n just two years, the world has witnessed two
raging wars with no end in sight. Nearer home, consisting of Anti-Drone System orders. The
tensions between China and Taiwan also remain company is also making significant inroads
high. Against this backdrop, global defence internationally, with over 30 per cent of its order
spending is pacing fast and India is rising to the book from exports. It is also exploring inorganic
occasion. A company capitalising on this trend acquisitions to enter adjacent markets, such as
is Zen Technologies. 3.2 healthcare simulators.
The company is a leading manufacturer of 3Y PBT growth However, Zen’s core segment is highly
defence training simulators with robust (% pa) volatile, as defence spending depends on
in-house design and development capabilities. fluctuating government priorities. This is
Over the past five years, the company has 58.8 evident in Zen’s irregular revenue over the
invested around `85 crore in R&D, representing Current P/E past decade. To mitigate this volatility, the
about 9 per cent of its cumulative revenue. This company has started entering annual
investment has allowed the company to make 70.5 maintenance contracts (AMC) for its product
innovative products like its recent Anti-Drone 5Y median P/E sales, offering a high-margin, annuity-based
System. It received its first order for this revenue model.
product within a year of launch. The company has Despite a strong order book, nearly half of Zen’s
filed over 130 patents, with more than 50 granted. capital is tied up in inventory and receivables. Any
With the government increasing its defence payment delays or order cancellations could strain
budget, the demand for related products is likely to the company financially. Additionally, it trades at a
remain high. Zen’s growing order book, currently at high P/E ratio of 59 times.

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Passive funds for new investors
After much But you might be wondering where to invest. The mutual
deliberation, you fund landscape can be quite a maze. Let us guide you
have finally through it.
decided to begin
investing in
mutual funds.
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similar to learning how to funds. These funds, comprising index
swim. You don’t dive funds and exchange-traded funds/fund of
into the deep end of funds, simply track an underlying index and
the pool on the first day. seek to generate returns as per that.
Initially, you learn how to
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principle applies to investing.

For instance, the Nifty Moreover, passive funds typically have lower
50 Index consists of expense ratios than actively managed funds. This
India’s top 50 listed matters because lower expense ratios can lead to better
companies in terms of net returns for investors, subject to market risks.
market capitalisation.
By investing in passive

`
funds tracking such an

`
index, you may seek to
get underlying index
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The views expressed here constitute only the opinions and do not constitute
Investing in passive funds is as easy as... any guidelines or recommendation on any course of action to be followed by the
reader. The data/information/opinions are meant for general reading purposes
only and are not meant to serve as a professional guide/investment advice
for the readers. Readers are advised to seek independent professional advice
and arrive at an informed investment decision before making any investments.
An investor education and awareness initiative by Mirae Asset Mutual
Fund. All Mutual Fund investors have to go through a one-time KYC (Know
Your Customer) process. Investors should deal only with Registered Mutual
Funds (RMF). For further information on KYC, RMFs and procedure to lodge a
complaint in case of any grievance, you may refer the Knowledge Center section
available on the website of Mirae Asset Mutual Fund.

Mutual fund investments are subject to market risks, read all scheme related documents carefully.

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 Cover
Cover Story
Story
y

Maximise your
portfolio with
Value Research

Stock
R tings
Use our ratings and choose the leaders

By Shubham Dilawari, Satyajit Sen and Vishal Goyal

F
irst, the rooks, then the bishop and about which were in the red and which were in the
finally the queen — one by one, Adolf green. However, in doing so, they missed the bigger
Anderssen, the German chess picture: Their portfolio performance.
master, sacrificed the three pieces in Like chess, an investor’s goal is to outsmart the
his famous 1852 match with Lionel opponent—in this case, the market. For that, the
Kieseritzky, another fellow chess price movement of individual stocks should take
master from the Baltic. It seemed the back seat. The focus should be on whether the
like Kieseritzky was a whisker away from victory. portfolio as a whole is sturdy and capable of
Yet, by the end, Anderssen stunned everyone with a generating index-beating returns. In other words,
surprising checkmate. aim to checkmate the market, not just to see your
While this match-up is from nearly two centuries favourite stocks in green.
ago, we were reminded of it in the market crash of To achieve this, you need to adopt a portfolio
June 4, 2024. During the crash, most investors were approach. View all your investments as a
focused on individual pieces or stocks, worrying single entity. Before buying or selling, ask

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 AI generated image

yourself if the stock fits your portfolio well. If that suit your portfolio and investment style.
the answer is no, then regardless of how good Moreover, you might not even have to do
the stock is individually, it is not a worthwhile that. We have developed five screens for the five
investment for you. most popular investing styles. Each screen
However, with over 4,000 listed companies in provides around 25 stocks. Further, we have
India, finding the perfect fit for your portfolio may picked the six most promising stocks from each
seem like finding a needle in a haystack. This is screen and summarised their business model
where our experience comes into play. After and growth drivers.
30 years of research, we developed a novel tool: So, fasten your seatbelts as we navigate through
Value Research Stock Ratings. each of these screens and companies. But before we
Our ratings assess and rate every stock based on set sail, we must warn you: These are not stock
three key drivers of long-term wealth creation: recommendations. While our screens are a great
quality, valuation, and growth. Combined with our time-saver, due diligence is still essential before
screener, these ratings can help you filter stocks making any investment.

July 2024 Wealth Insight 53

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 Cover Story

Growth at a reasonable price

Fast growth balanced with comfortable valuation

P
opularised by the legendary fund manager the overall economy.
Peter Lynch, the growth at a reasonable To find such companies, we applied the
price (GARP) strategy aims to combine following filters:
the best of both worlds — growth and value. We zGrowth Score greater than or equal to seven
are not looking for overpriced darlings with sky- zValuation Score greater than or equal to four
high valuations here. Nor are we scouring the zQuality Score greater than five
bargain bin for undervalued stocks with little These criteria led us to an initial list of more than
growth potential. 200 companies. To refine this list, we sorted the
Instead, we are aiming to strike the perfect companies based on their Quality Score and Growth
balance between growth and value. Using this Score. We picked the top 25 from the list. We would
strategy, you will be able to focus on fast-growing like to remind you that these are not stock
companies available at relatively attractive recommendations. You can go through the entire list
valuations. Usually, these stocks grow faster than here: https://vro.in/b5gt85.

Market cap 3Y share price

Company Industry (` cr) Stock Rating Quality Score Growth Score Valuation Score return (%)

Bajaj Finance Consumer Financing 4,15,535  10 10 5 5.8

Cholamandalam Inv. and Fin. Commercial Financing 1,04,162  8 9 4 31.8
Dr. Reddy’s Labs Branded Medicines 96,547  9 8 6 3.1
PI Industries Pesticides 53,877  10 8 5 10.5
Gujarat Gas Natural Gas Utilities 37,978  10 8 5 0.5
Narayana Hrudayalaya Hospitals & Clinics 24,296  9 8 5 33.1
Great Eastern Shipping Oil & Gas Transportation 15,362  8 8 8 35.4
Manappuram Finance NBFC - Diversified 14,292  10 10 8 2.0
Fine Organic Industries Speciality Chem. - Diversified 13,588  10 8 6 13.6
Aavas Financiers Mortgage/Housing Finance 12,677  9 8 6 -10.7
Can Fin Homes Mortgage/Housing Finance 9,691  10 9 7 10.0
KNR Constructions Constr. & Engg. - Diversified 8,949  9 8 6 14.8
Nava Diversified Others 7,071  7 8 6 77.4
Balaji Amines Speciality Chem. - Diversified 6,775  9 8 5 -7.4
JK Paper Paper & Paper Products 6,527  9 8 8 36.8
Gokaldas Exports Readymade Garment 6,035  7 8 5 84.9
Pilani Inv. and Inds. Inv. Management - Diversified 4,102  8 8 6 31.7
Indraprastha Medical Corp. Hospitals & Clinics 2,255  9 8 5 39.5
Taj GVK Hotels & Resorts Hotels & Resorts 2,046  8 8 5 34.1
Bharat Wire Ropes Steel Wires 1,866  7 8 5 73.1
Agarwal Industrial Corp. Petrochemical 1,309  7 8 6 64.1
Infobeans Technologies Software 975  9 8 5 13.0
Remedium Lifecare Branded Medicines 779  9 8 6 186.3
Shri Jagdamba Polymers Miscellaneous Textiles 537  6 8 6 -5.9
Indo Borax & Chemicals Commodity Chem. - Diversified 502  10 8 7 -
Stock Rating and price data as of June 3, 2024

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 Cover Story

CHOLAMANDALAM INV. & FIN. DR. REDDY'S LABORATORIES NARAYANA HRUDAYALAYA

Harvesting Searching A unique mix

growth in rural for the magic of care and
lands growth pill profitability

D
r. Reddy’s Laboratories
is a global
pharmaceutical
company with two major
segments – generics (87 per cent
of FY24 revenue) and active
pharmaceutical ingredients
(12 per cent). The company has
an extensive global presence,

P N
art of the renowned with North America accounting arayana Hrudayalaya is
Murugappa group, for half of its revenue. Strong a leading hospital
Cholamandalam demand for drugs like Revlimid operator with over 39
Investment and Finance started has led to a 13 per cent annual healthcare facilities nationwide.
in 1978 as a vehicle finance revenue growth in the last five It provides specialised care in
company. Now, it offers a years. In addition, a decline in multiple areas, including
variety of services, including cardiology, oncology and
retail and commercial lending.
Over the years, the lender has
23.4 17.3 neurosciences.
The company’s focus on faster
5Y PAT growth (% pa) P/E ratio
built strong relationships with discharge and affordability has
automobile makers and dealers. helped it secure strong footfalls.
This has provided the company Between FY21 and FY24, footfalls
with an competitive edge. Also, compounded an impressive
with nearly 84 per cent of 27 per cent annually, driving
branches in rural areas, an annual revenue growth of
Cholamandalam has effectively 25 per cent.

23.4 5.5 67.8 30.8

5Y PAT growth (% pa) P/B ratio 5Y PAT growth (% pa) P/E ratio
raw material costs bolstered
tapped into rural credit demand. margins, and its profit after tax It spent nearly `1,000 crore in
This rural focus, along with grew an impressive 25 per cent each of the last two years to
robust underwriting, has driven in the previous five years. Going improve operational efficiency and
a 20 per cent annual growth in forward, opportunities in boost margins. Going forward, its
AUM over the past five years. biosimilars and patent expiries unique mix of affordability and
While SMEs and consumer should drive growth. profitability will drive growth.
loans currently represent a Also, it is expanding into Also, its new hospitals should
small portion of its AUM, CDMO for biotech drugs through help. It plans to spend `1,600 crore
these high-yield segments its subsidiary Aurigene Pharma. in FY25 for greenfield expansion, a
are expected to fuel future This subsidiary has already new hospital in Cayman Island
growth. However, the commenced operations in FY24. and maintenance expenses. Note
highly competitive nature However, its long history of that the new facilities will require
of the industry may volatile margins is a future risk time to break even, which may
present challenges. that should not be neglected. impact profitability.

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MANAPPURAM FINANCE FINE ORGANIC INDS. KNR CONSTRUCTIONS

All that A fine plan On the

glitters is for global highway to
earnings growth wealth

F
ine Organic is India’s
largest manufacturer of
oleochemical-based
additives, used in food, plastic
polymers, cattle feed,
cosmetics, coatings, and more.
With 52 per cent of its FY24
revenue from exports, the
company has a strong global

F A
ounded in 1992, presence. It has benefitted from Hyderabad-based
Manappuram started as a the rising demand for infrastructure company,
gold financier. Over the oleochemical-based additives KNR Constructions is
years, it expanded into housing, globally. Its revenue has grown involved in railways (68 per cent
vehicle finance, and more. The 15 per cent annually over the of FY24 revenue) and irrigation
lender boasts an extensive pan- past five years. Its expertise in projects (32 per cent). Its
India brand presence impressive track record of
encompassing 24 states. It
operates out of nearly 4,000
24.2 33.0 timely execution has helped it
secure numerous government
5Y PAT growth (% pa) P/E ratio
branches, which is higher than projects, driving revenue
several established banks. growth of 14 per cent annually
Its primary growth driver in in the past five years. What
recent years has been its is even more impressive is
microfinance arm, Asirvad. that it has maintained a
Despite the high-risk nature of healthy average operating

18.3 1.4 23.2 11.5

5Y PAT growth (% pa) P/B ratio 5Y PAT growth (% pa) P/E ratio

the segment, the company’s complex oleochemicals profit margin of 18 per cent
conservative approach has provides a strong moat, and working capital days of
helped it find success. It tripled allowing it to command 71 days in the same period
its microfinance AUM between impressive margins. Notably, despite the cyclicality of the
FY19 and FY24 while it maintained an average infrastructure sector.
maintaining a healthy GNPA operating profit margin of Also, with an order book
ratio of 2.8 per cent. However, 20 per cent over five years. of `6,500 crore, which is
the asset quality risks in Looking ahead, the company 1.5 times its FY24 revenue, its
microfinance cannot be ignored. is expanding capacity and near-term outlook remains
The market, too, is cautious of testing new products in promising. A strong order book
this risk. As a result, the stock Thailand, supported by a robust also provides significant
trades at a lower valuation than cash balance of `1,049 crore. revenue visibility. However, its
its key peer in the gold loan However, it faces challenges overt reliance on government
space, the renowned NBFC, from volatile vegetable oil contracts may lead to volatile
Muthoot Finance. prices and supply chain issues. growth rates, which is a risk.

July 2024 Wealth Insight 57

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 Cover Story

Quality at a reasonable price

Companies fit for a resilient portfolio

H
igh-quality companies can do wonders for Failing to do so may potentially turn a solid-
your portfolio. Not only do they have the quality company into a bad investment. Don’t let it
ability to deal with setbacks, they can also become your Achilles heel.
quickly find opportunities to reinvest and grow. We created our second screen with that very
Investing in such companies can provide stability factor in mind. Below are the filters we applied:
and growth, making them invaluable assets. zQuality Score greater than or equal to eight
The challenge is not identifying these high- zValuation Score greater than or equal to five
quality companies – it’s determining the right zGrowth Score greater than six
price to pay for them. Given that the quality of We had 99 companies. To create our portfolio, we
these firms is well-known and appreciated by the further sorted the list using the Quality Score and
market, they often trade at high valuations. So, Valuation Score and chose the top 25 stocks.
patience is a prerequisite for this investment style. You can go through the entire list here:
You must invest only when the valuations are just. https://vro.in/ks892t.

Market cap 3Y share price

Company Industry (` cr) Stock Rating Quality Score Growth Score Valuation Score return (%)

Infosys Software & Serv. - Diversified 5,83,860  10 7 6 0.8

Bajaj Finance Consumer Financing 4,15,535  10 10 5 5.9
Kotak Mahindra Bank Banks - Diversified 3,33,916  10 7 7 -1.4
Coal India Coal & Lignite 3,02,744  10 7 7 50.9
Bajaj Holdings & Investment Investment Holding Companies 88,409  10 7 5 31.8
PI Industries Pesticides 53,877  10 8 5 10.4
Gujarat Gas Natural Gas Utilities 37,978  10 8 5 0.3
Indraprastha Gas Natural Gas Utilities 31,038  10 7 7 -4.2
Bayer CropScience Pesticides 22,501  10 7 5 -1.2
Gujarat State Petronet Natural Gas Utilities 16,348  10 7 8 1.4
Manappuram Finance NBFC - Diversified 14,292  10 10 8 2.0
Fine Organic Industries Speciality Chem. - Diversified 13,588  10 8 6 13.6
Akzo Nobel India Paints & Varnishes 11,689  10 7 5 4.4
Can Fin Homes Mortgage/Housing Finance 9,691  10 9 7 10.0
Avanti Feeds Aquaculture 6,966  10 7 6 -5.2
Nesco Real Estate Lease & Renting 5,991  10 7 6 15.5
West Coast Paper Mills Paper & Paper Products 3,938  10 7 8 36.5
Nirlon Real Estate Development 3,812  10 7 6 13.5
Maithan Alloys Granite Marble & Stones 3,332  10 7 7 10.4
Andhra Paper Paper & Paper Products 1,987  10 7 8 28.9
Cantabil Retail India Readymade Garment 1,779  10 7 7 39.5
Allsec Technologies BPO Services 1,587  10 7 5 40.8
Bajaj Steel Industries Industrial Machinery 743  10 7 5 34.8
3B BlackBio Dx Pesticides 664  10 7 5 32.2
Indo Borax & Chemicals Commodity Chem. - Diversified 502  10 8 7 -
Stock Rating and price data as of June 3, 2024

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 Cover Story

INFOSYS BAJAJ FINANCE KOTAK MAHINDRA BANK

Tech your Bringing Betting big

portfolio to the finance to the on banking
next level forgotten bytes

B
ajaj Finance is India’s
largest NBFC, providing
SME, commercial, rural,
and mortgage loans. It also
has a housing finance
subsidiary, Bajaj Housing
Finance, which will be listed as
a separate entity on RBI orders.
The lender is known for its

I K
nfosys needs no unique approach, wherein it otak Mahindra Bank is
introduction. It is India’s targets customers who are India’s third-largest
second-largest IT company ignored by traditional banks. private sector bank by
in terms of revenue. It offers a Despite the unconventional market capitalisation. It also has
wide range of services, from consumer base, it has a presence in other financial
software development to consistently maintained healthy services, including asset
management. Large scale and management and insurance,
robust quality of services have
helped it build a strong global
18.8 6.0 through its subsidiaries.
The management’s focus on
5Y PAT growth (% pa) P/B ratio
clientele. The US banking and retail banking and smart
financial sector is its largest acquisitions has helped it grow
client, accounting for 27 per cent over the years. Also, its strong
of FY24 revenue, followed by underwriting practices have
retail and manufacturing at 15 kept its asset quality among the
per cent each. Infosys has best in the industry. Its 10-year

29.4 22.3 13.8 2.6

5Y PAT growth (% pa) P/E ratio 5Y PAT growth (% pa) P/B ratio

consistently maintained high asset quality. This is evident in average GNPA ratio is 2 per cent.
profitability in recent years. its 10-year median GNPA ratio The management’s focus on
Notably, its five-year average of just 1.6 per cent. Apart from growing its CASA ratio has kept
operating margin is 20 per cent, this, robust underwriting the cost of funds low and
and its five-year median ROCE practices and diversification bolstered margins, which is
is an impressive 40 per cent. It across geographies have kept evident in its 10-year average
is investing heavily in its AI profitability high. Its 10-year ROA of 2 per cent. However, the
venture, Topaz, which may median ROE is 20.7 per cent. bank was recently banned from
become a major growth driver. Also, its 10-year median ROA is onboarding clients through
However, in recent years, the 3.9 per cent. However, the NBFC digital and online channels as
Indian IT industry has space has witnessed increased the RBI found its digital
struggled with low IT spending competition in recent years, infrastructure unsatisfactory.
in the US. So, the management espically from large banks. This This is concerning as the bank’s
has guided for lower growth in may pose a significant threat in growth strategy was heavily
the current fiscal year. the years ahead. dependent on digital channels.

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INDRAPRASTHA GAS AVANTI FEEDS WEST COAST PAPER MILLS

Profiting from Turning Rock, paper,

a greener delicacies scissors,
future into earnings growth

A
vanti Feeds is India’s
leading producer of
shrimp feeds, boasting
an impressive 50 per cent
domestic market share and a
production capacity of 7,75,000 MT.
Rising demand from the US and
China has helped Avanti
become a dominant force in the

I E
ndraprastha Gas is India’s global market. Consequently, it stablished in 1995, West
second-largest gas grew its revenue by 17 per cent Coast Paper Mills is
distribution company, annually in the last decade. India’s fifth-largest paper
primarily operating out of The company’s large workforce manufacturer, producing
Delhi-NCR and parts of and rights over several around 5,68,000 MT of paper
Rajasthan, Maharashtra, and coastlines also provide it a every year. High capital
Uttar Pradesh. While it competitive edge. requirements and lack of
distributes both CNG and PNG, technical expertise have left the
the former is its bigger segment,
accounting for 75 per cent of
16.6 19.5 Indian paper industry
fragmented, with only a few big
5Y PAT growth (% pa) P/E ratio
FY24 volume. players. Consequently, West
An expansive distribution Coast has enjoyed high
network and favourable realisations and volume growth
government policies have led to over the years.

21.1 15.6 24.2 5.7

5Y PAT growth (% pa) P/E ratio 5Y PAT growth (% pa) P/E ratio

a 20 per cent annual revenue Notably, West Coast’s

growth in the past five years. revenue compounded at a solid
Also, its five-year median ROCE These, coupled with low fixed 18 per cent annually in the past
is a healthy 28 per cent. capital requirements, have led five years. Moreover, the
Moreover, exclusive marketing to an impressive 10-year average management focus on value-
rights over regions provide it ROE of 22 per cent. However, added products has led to a
with a strong moat against new supply chain disruption post the 19 per cent annual growth in
entrants. It plans to spend pandemic has led to an uptick in profit after tax over the
`1,800 crore in FY25 on costs, impacting margins. Also, previous five years. However,
expanding present operations it is presently facing stiff the paper maker is presently
and establishing LNG (liquified competition from Ecuador. The operating at full capacity, and
natural gas) and CBG management is strategically future growth hinges on further
(compressed biogas) plants. focusing on value-added, high- capacity additions. Also, the
However, the Delhi margin products. This should company struggles with volatile
government’s EV policy has help it counter margin woes and costs and competition from
emerged as a threat recently. improve the product mix. China and Indonesia.

July 2024 Wealth Insight 61

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 Cover Story

Fast-growing mid-and small-caps

A portfolio for the high-risk, high-reward investor

T
his screen is similar to the growth at a gradually dwindle. So, a high-risk appetite is a
reasonable price (GARP) strategy but must for adopting this portfolio strategy.
focuses specifically on mid- and small-cap Here are the filters we applied to hunker down
companies. These smaller firms have the on the fast-growing mid and small caps:
potential to grow their shareholders’ wealth z Growth Score greater than or equal to seven
faster than their larger counterparts, thanks to z Valuation Score greater than or equal to four
their long growth runway. This process initially identified 380
But, unlike large caps, most mid- and small-cap companies. After excluding large-cap companies,
firms can’t deal with market downturns easily. It we further refined the list by sorting it based on
is an even bigger problem for small cyclical Growth Score and Valuation Score. We then
companies. As long as the wind is on their back, selected the top 25 stocks for our final list.
everything runs smoothly. However, as soon as You can go through the entire list here:
the tailwind becomes a headwind, such companies https://vro.in/nx6ms2.

Market cap 3Y share price

Company Industry (` cr) Stock Rating Quality Score Growth Score Valuation Score return (%)

PI Industries Pesticides 53,877  10 8 5 10.4

Gujarat Gas Natural Gas Utilities 37,978  10 8 5 0.3
Narayana Hrudayalaya Hospitals & Clinics 24,296  9 8 5 33.7
Jindal Saw Iron & Steel 17,188  4 8 6 70.4
Great Eastern Shipping Oil & Gas Transportation 15,362  8 8 8 35.6
Manappuram Finance NBFC - Diversified 14,292  10 10 8 2.0
Fine Organic Industries Speciality Chem. - Diversified 13,588  10 8 6 13.6
Aavas Financiers Mortgage/Housing Finance 12,677  9 8 6 -10.6
Can Fin Homes Mortgage/Housing Finance 9,691  10 9 7 10.0
KNR Constructions Constr. & Engg. - Diversified 8,949  9 8 6 14.8
Nava Diversified Others 7,071  7 8 6 77.3
Balaji Amines Speciality Chem. - Diversified 6,775  9 8 5 -7.4
JK Paper Paper & Paper Products 6,527  9 8 8 36.8
MAS Financial Services Commercial Financing 4,749  3 8 7 -1.3
Pilani Inv. and Inds. Inv. Management - Diversified 4,102  8 8 6 31.8
Hindustan Oil Exploration Co. Oil & Gas - Diversified 2,532  5 8 6 22.0
Indraprastha Medical Corp. Hospitals & Clinics 2,255  9 8 5 39.6
Taj GVK Hotels & Resorts Hotels & Resorts 2,046  8 8 5 34.1
Agarwal Industrial Corp. Petrochemical 1,309  7 8 6 64.2
Anuh Pharma API / Generic Pharmaceuticals 1,141  8 8 5 19.8
Infobeans Technologies Software 975  9 8 5 13.1
Remedium Lifecare Branded Medicines 779  9 8 6 186.2
Nitta Gelatin India Commodity Chem. - Diversified 747  5 8 7 63.6
Shri Jagdamba Polymers Miscellaneous Textiles 537  6 8 6 -5.9
Indo Borax & Chemicals Commodity Chem. - Diversified 502  10 8 7 -
Stock Rating and price data as of June 3, 2024

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 Cover Story

PI INDUSTRIES JINDAL SAW AAVAS FINANCIERS

Life, growth It came, it Transforming

and earnings Saw and it dreams into
of Pi conquered realties

E
stablished in 1984, Jindal
Saw is a prominent
manufacturer of iron
and steel pipes in India. Its
dominant position in steel pipe
and ductile pipes has helped it
secure an impressive clientele,
which includes industry
leaders such as ONGC and

P A
I Industries is a leading Larsen & Toubro. In recent avas Financiers provides
agrochemical years, the demand for steel housing loans to salaried
manufacturer, providing pipes has sky-rocketed thanks and self-employed
custom synthesis and contract to higher spending on individuals. The lender’s focus
manufacturing services. As a infrastructure in India. on establishing low-cost
result, exports are its key financing sources and strong
revenue generator, accounting
for 82 per cent of FY24 revenue.
15.5 10.2 relationships with renowned
financial institutions have
5Y PAT growth (% pa) P/E ratio
Its expertise in crop protection helped it grow its loan book
and strong R&D have helped it without sacrificing profitability.
retain clients and command In the past five years, AUM has
superior margins. grown 17 per cent annually.
Notably, its operating profit Also, its robust underwriting
margin zoomed 400 basis points practices have kept GNPA ratio
between FY22 and FY24 despite below 1 per cent in this period.

32.6 32.0 22.8 3.4

5Y PAT growth (% pa) P/E ratio 5Y PAT growth (% pa) P/B ratio
The company capitalised on
headwinds in the form of the higher demand by setting up It is also backed by several
inventory destocking from manufacturing facilities across MSME-promoting institutions,
clients. Apart from strong India. In line, its revenue has which helped it maintain a net
demand in its core business, its compounded 12 per cent interest margin of 7.9 per cent in
recent foray into pharma annually in the past five years. FY24 despite competitive
should drive growth. It recently The government’s focus on pressures. Going forward, it
acquired two API makers in the infrastructure is expected to plans to expand into Karnataka
US and Europe for its pharma drive growth. Also, Jindal Saw and Uttar Pradesh. This should
venture. Management expects has a strong order book of boost AUM growth and provide
the pharma segment to $1.5 billion. However, investors geographical diversification.
contribute 15-20 per cent to must take note that However, rising competition
sales in coming years. infrastructure and related from banks and any slowdown
However, competitive pressures industries are highly cyclical. in the affordable housing
from Chinese players will be Hence, make sure you have an segment may lead to lower
a monitorable. appetite for volatility. growth rates.

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JK PAPER INFOBEANS TECHNOLOGIES NITTA GELATIN INDIA

Papering Worth more Making the

over the than a hill competition
supply gaps of beans jelly-ous

I
nfobeans Technologies offers
a wide range of IT services,
including platform services,
UI/UX consulting, testing, and
IT product development. The US
is its major revenue generator,
accounting for 70 per cent of its
FY24 revenue, while the Eurasia
region contributes the

J N
K Paper is a domestic remaining. The rising demand itta Gelatin India is a
Indian paper and for IT services in the US between joint venture (43:32)
paperboard manufacturer FY19 to FY23 helped grow its between Kerala State
with a total capacity of revenue 34 per cent annually. Industrial Development
7,61,000 tonnes per annum. In However, the recent slowdown Corporation and Nitta Gelatin
recent years, the demand for in IT spending in the US led to a Inc. (Japan). It primarily
paper in India went well beyond manufactures Gelatin, di-calcium
the available supply. The
company capitalised on this
3.5 43.4 phosphate, ossein, and collagen
peptides, which are used in food
5Y PAT growth (% pa) P/E ratio
demand and supply mismatch & beverages, pharmaceuticals,
and expanded its capacity. and nutraceuticals. Post Covid,
This led to higher volume and the demand for Gelatin
better realisation, translating increased, especially in the
into an annual sales growth of pharmaceuticals industry.

21.7 5.8 76.4 9.0

5Y PAT growth (% pa) P/E ratio 5Y PAT growth (% pa) P/E ratio

15 per cent in the past five For the uninitiated, Gelatin is

years. In addition, the 4 per cent dip in revenue used to make pharmaceutical
management sources raw in FY24. capsules. Consequently, its
materials locally, which shields Also, the operating profit revenue compounded
it from volatility in pulp prices. margin contracted 400 basis 12 per cent annually between
Looking ahead, the management points in FY24 due to aggressive FY19 and FY24. As per its
plans to expand capacity further hiring in recent years. Moreover, annual report, the global gelatin
to drive growth. The highly the Indian IT industry is market is expected to grow
cyclical nature of the industry, presently battling headwinds in 9 per cent annually to $17 billion
however, can emerge as a the form of lower IT spending in by 2032. The company plans to
threat. Also, it faces competitive the US. This may lead to slower spend `200 crore over the next
challenges from imports, growth rates for a while. But, the two years to capitalise on this
especially from China and other management remains confident opportunity. However, volatile
ASEAN nations. Several paper of better growth in the near raw material prices, regulatory
makers have struggled to grow future. It onboarded three new issues, and competition remain
due to these risks. reputed clients in FY24. the key monitorables.

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 Cover Story

Growing quality small caps

A portfolio for those chasing the big bucks

T
here is nothing like the joy of earning big Now, valuations are an essential factor.
bucks by investing in small-cap companies. However, for the sake of this screen, we choose to
Their explosive growth is a delight to behold. be a bit reckless!
Moreover, if a small-cap stock has a large room to We applied the following filters:
grow, it is like an icing on the cake! zQuality Score greater than or equal to eight
But high growth alone wouldn’t cut it. If the zGrowth Score greater than or equal to seven
growth comes at the expense of profitability, This process initially identified 245 companies.
then it is a value-destroying proposition. So, the After excluding large-cap and mid-cap companies,
key is looking for small caps that are profitable. we further refined the list by sorting it based
That is, identifying companies that make on Quality Score and Growth Score. We then
judicious use of their capital and reinvest it in selected the top 25 stocks for our final list.
thriving ventures. In common parlance, such a You can go through the entire list here:
trait is deemed ‘high-quality’. https://vro.in/693day.

Market cap 3Y share price

Company Industry (` cr) Stock Rating Quality Score Growth Score Valuation Score return (%)

Elecon Engineering Industrial Machinery 12,440  8 8 3 111.8

Can Fin Homes Mortgage/Housing Finance 9,691  10 9 7 10.0
Elantas Beck India Speciality Chem. - Diversified 9,247  10 8 2 47.8
KNR Constructions Constr. & Engg. - Diversified 8,949  9 8 6 14.8
Esab India Welding Machinery 8,193  10 8 3 44.1
Balaji Amines Speciality Chem. - Diversified 6,775  9 8 5 -7.4
JK Paper Paper & Paper Products 6,527  9 8 8 36.8
Pilani Inv. and Inds. Inv. Management - Diversified 4,102  8 8 6 31.8
Fineotex Chemical Diversified Chemicals 3,955  10 8 4 58.2
West Coast Paper Mills Paper & Paper Products 3,938  10 7 8 36.5
RPG Life Sciences API / Generic Pharmaceuticals 2,364  10 8 4 47.7
Indraprastha Medical Corp. Hospitals & Clinics 2,255  9 8 5 39.6
Praveg Communications Event Management 2,102  8 8 3 135.8
Taj GVK Hotels & Resorts Hotels & Resorts 2,046  8 8 5 34.1
Andhra Paper Paper & Paper Products 1,987  10 7 8 28.9
Anuh Pharma API / Generic Pharmaceuticals 1,141  8 8 5 19.8
Benares Hotels Hotels & Resorts 1,123  10 8 4 86.7
ICE Make Refrigeration Industrial Machinery 1,086  8 8 2 108.8
UP Hotels Hotels & Resorts 982  10 8 3 -
Infobeans Technologies Software 975  9 8 5 13.1
Eco Recycling Waste Management 949  8 8 2 110.8
Nintec Systems Software & Serv. - Diversified 933  10 9 3 -
Remedium Lifecare Branded Medicines 779  9 8 6 186.2
Mold-Tek Technologies Constr. & Engg. - Diversified 710  10 8 4 62.6
Indo Borax & Chemicals Commodity Chem.- Diversified 502  10 8 7 -
Stock Rating and price data as of June 3, 2024

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 Cover Story

ELANTAS BECK INDIA FINEOTEX CHEMICAL RPG LIFE SCIENCES

A pick to A quality The perfect

insulate catalyst for cure for
against risks your growth mix low-returns

F
ineotex Chemicals
manufactures over 450
specialty chemicals for
the textile, garment,
construction, leather, water
treatment, agrochemical,
adhesives, and other industries.
Notably, its products are used in
the entire value chain of

E R
lantas Beck India is the textile processing, ensuring PG Life Sciences is an
leading Indian client stickiness. Indian pharmaceutical
manufacturer of liquid The management’s focus on company boasting
insulation for electrical expanding its value-added market leadership in
equipment like motors, portfolio and diversifying into immunosuppressant drugs. It
transformers, and generators. It high-margin, consumer-facing also makes drugs for nine other
is part of Altana, a German therapeutic areas, including
specialty chemicals
conglomerate. The German
37.8 33.0 nephrology, rheumatology, and
oncology. The management’s
5Y PAT growth (% pa) P/E ratio
parent’s technical expertise has focus on less-competitive
helped Elantas maintain high developed markets, such as
profitability levels. Canada and Germany, and
Notably, its five-year average forays into new therapeutic
operating profit margin stands areas drove an annual revenue
at 16.5 per cent, and its average growth of 12 per cent in the
ROCE for the last five years is last five years.

15.9 64.2 52.0 27.0

5Y PAT growth (% pa) P/E ratio 5Y PAT growth (% pa) P/E ratio
industries have spurred growth
21 per cent. Moreover, it has in recent years. In the past five It also launched new products,
managed to reduce its cash years, its revenue grew around which aided growth. Notably,
conversion cycle to 22 days in 18 per cent annually, and profit Naprosyn became a `70 crore
2023 from 48 days in 2019. Going after tax compounded 27 per cent brand in FY24, accounting for
forward, rising power demand annually. Moreover, the company 30 per cent of FY24 revenue as
should drive growth. The boasts an impressive 10-year against 6 per cent in FY19.
company has also purchased average ROCE of 30 per cent. Going forward, it expects
30 acres of land in Gujarat for a Going forward, the mix of Naprosyn to become an `100 crore
new facility. Overall, its long- diversification and value-added brand. Its expansion into the
term prospects appear highly products will continue to drive international market should
promising. Investors, however, growth. However, its reliance on drive growth moving forward.
should not forget that its the textile industry impacts its Investors, however, should take
performance is sensitive to pricing power and has led to note that the branded generics
crude oil prices. volatile margins in the past. market is highly competitive.

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INDRAPRASTHA MEDICAL CORP BENARES HOTELS MOLD-TEK TECHNOLOGIES

A clean bill Checking Riding on

of financial in for high two growth
health returns waves

I
ncorporated in 1971, Benares
Hotels, a subsidiary of The
India Hotels Company,
operates three properties - Taj
Nadesar and Taj Ganges in
Varanasi, and Ginger Gondia in
Maharashtra. In total, these
three properties have 178 rooms.
Rising demand for travel post-

I E
ndraprastha Medical Covid and higher discretionary stablished in 2001, Mold-
Corporation (IMCL) is a spending have led the company Tek Technologies
joint venture between to new fortunes. provides civil engineering
India’s largest hospital chain In the last two years, its (81 per cent of FY24 revenue) and
operator, Apollo Hospitals revenue has grown 86 and mechanical engineering services
(AHEL), and the Delhi 30 per cent YoY, respectively. (19 per cent). The company’s
Government. Its two hospitals efficient designs and robust
in Sarita Vihar and Noida are
the key revenue contributors,
32.8 31.2 service quality have helped it
win several big projects. It has
5Y PAT growth (% pa) P/E ratio
accounting for 40 per cent of also benefitted from increased
inpatient revenue in FY24. spending on infrastructure in
In recent years, rising demand recent years. Over the past
for elective surgeries and a decade, its revenue has grown an
higher number of international impressive 15 per cent annually.

34.3 18.2 18.5 25.5

5Y PAT growth (% pa) P/E ratio 5Y PAT growth (% pa) P/E ratio

patients have bolstered margins; Also, the management’s

its operating margin zoomed to Also, it recorded its highest-ever initiatives to improve
12.3 per cent in FY24 from operating profit margin of operational efficiency saw its
10.1 per cent in FY23. Also, its 30 per cent in FY24. Looking operating profit margin zoom
revenue per bed compounded ahead, its strong brand recall to 22 per cent in FY24 from
8 per cent in the past five years. and rising demand will propel it 17 per cent in FY19. Going
It has also managed to remain forward. It also plans to add 100 forward, higher spending on
debt-free. However, there are new rooms at Taj Ganges. These infrastructure should keep
margin risks. Presently, it is rooms are expected to be demand steady for its civil
battling an ongoing litigation operational by Q2 FY25. engineering segment. Also,
in the Supreme Court for the However, the hotel industry is its mechanical engineering
provision of free medicine. notorious for its high segment should benefit from
In the case the Court decides to cyclicality. Also, demand is the EV boom. However,
rule against the hospital influenced by broad investors must keep in
operator, it may impact margins macroecnomic factors such as mind that this is a highly
in the future. discretionary spending. cyclical industry.

July 2024 Wealth Insight 69

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 Cover Story

Old-school value investor

A portfolio for the seekers of value

H
ow can we forget about our value brethren? may not offer much of a smoke, but the ‘bargain
These are investors who wouldn’t bulge purchase’ will make that puff all profit.” Don’t
beyond their comfortable P/E zone. They forget that what makes them a bargain is not
are seekers of bargain, scouring the market for only the low price but also their potential to grow
companies that they deem are trading below their their earnings.
intrinsic value. But remember, the companies in To find these ‘undervalued’ companies, here are
this screen are undervalued for a reason, whether the filters we applied:
good or bad. It is your job to determine if these zValuation Score greater than six
stocks have it in them to deliver decent profits in zQuality Score greater than or equal to six
the next three to five years. We were left with 63 companies. Then, we selected
Warren Buffett called it ‘cigar-butt investing’. In the top 25 companies based on their Stock Ratings.
the words of the Oracle of Omaha, “A cigar butt You can go through the entire list here:
found on the street that has only one puff left in it https://vro.in/3e9n55.

Market cap 3Y share price

Company Industry (` cr) Stock Rating Quality Score Growth Score Valuation Score return (%)

Kotak Mahindra Bank Banks - Diversified 3,33,916  10 7 7 -1.4

Oil & Natural Gas Corp. Oil & Gas Exploration and Prod. 3,32,811  6 6 8 32.8
Coal India Coal & Lignite 3,02,744  10 7 7 50.9
Indraprastha Gas Natural Gas Utilities 31,038  10 7 7 -4.2
Bandhan Bank Corporate Banks 30,310  7 5 8 -14.9
Gujarat State Petronet Natural Gas Utilities 16,348  10 7 8 1.4
Great Eastern Shipping Oil & Gas Transportation 15,362  8 8 8 35.6
Manappuram Finance NBFC - Diversified 14,292  10 10 8 2.0
City Union Bank Banks - Diversified 10,592  9 5 8 -4.5
Can Fin Homes Mortgage/Housing Finance 9,691  10 9 7 10.0
Kama Holdings Commodity Chem. - Diversified 7,884  7 7 9 21.5
JK Paper Paper & Paper Products 6,527  9 8 8 36.8
GHCL Commodity Chem. - Diversified 4,821  10 6 8 43.2
West Coast Paper Mills Paper & Paper Products 3,938  10 7 8 36.5
Maithan Alloys Granite Marble & Stones 3,332  10 7 7 10.4
Bhansali Engineering Polymers Plastic Materials 2,339  8 6 8 -3.4
Siyaram Silk Mills App. & Footwear - Diversified 2,000  6 7 8 13.7
Andhra Paper Paper & Paper Products 1,987  10 7 8 28.9
Cantabil Retail India Readymade Garment 1,779  10 7 7 39.5
GM Breweries Distilleries 1,410  10 5 7 21.5
Dhunseri Ventures Financial Services - Diversified 1,160  8 6 8 21.6
Satia Industries Paper & Paper Products 1,118  8 6 8 10.4
Sree Rayalaseema Hi-Strength Commodity Chem. - Diversified 846  7 3 8 18.3
Advani Hotels & Resorts Hotels & Resorts 619  10 6 7 27.6
Indo Borax & Chemicals Commodity Chem. - Diversified 502  10 8 7 -
Stock Rating and price data as of June 3, 2024

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 Cover Story
COAL INDIA BANDHAN BANK CAN FIN HOMES

Igniting the Macro Homing in

rusty growth returns from a on high
machine micro bet returns

E
stablished in 2015,
Bandhan Bank has a
presence across 35 states.
Microfinance makes up around
50 per cent of its loan book,
followed by home loans at 24 per
cent and commercial banking at
22 per cent. Increasing demand

C C
oal India is India’s for commercial banking has an Fin Homes is a public
largest coal producer fueled growth in recent years. deposit-taking housing
with 322 mines, meeting Revenue from commercial finance company. Canara
around 80 per cent of India’s banking has compounded an Bank, the promoter, holds a
coal needs. Historically, the impressive 22 per cent annually 30 per cent stake in the
stock has been a dividend in the past five years. company. It lends primarily to
stock, providing little capital low-risk salaried professionals.
appreciation. However, in the
past five years, the management
11.9 1.5 This has helped it maintain
robust asset quality. Its GNPA
5Y PAT growth (% pa) P/B ratio
has turned things around, ratio, as of FY24, was 0.8 per
improving capital efficiency and cent. Its focus on keeping its
increasing production. asset quality healthy has helped
Consequently, its profit after grow its earnings despite
tax has grown 16 per cent maintaining a low spread of
annually in this period. 2.6 per cent. Going forward, it

44.7 8.1 18.5 2.3

5Y PAT growth (% pa) P/E ratio 5Y PAT growth (% pa) P/B ratio

Also, its median dividend The stock trades at a wants to establish its own team
payout has halved in this 42 per cent discount to its five- for sourcing and processing
period, signalling that the year median P/B of 2.8 times. loans and reduce its
management is strategically However, investors must note dependency on third-party
focusing on growth. Going that the bank’s exposure to agents (accounted for
forward, its last-mile microfinance is risky, with high 70 per cent of FY24 AUM).
connectivity project is expected default rates. The bank has had However, this may impact
to improve operational to sell off its bad loans to asset margins as its employee
efficiency and boost margins. restructuring companies in expenses have historically been
It is also investing in railway recent years. Overall, the low. Also, the housing finance
tracks near mines to reduce microfinance industry is known space is highly competitive. In
transportation costs. for its high default rates and recent years, the market has
However, the government’s lacklustre asset quality. Hence, witnessed a flood of new
focus on renewable energy may consider this stock only if you entrants. Also, the industry is
emerge as a considerable threat are comfortable with such risks. highly cyclical, which may lead
in the future. Also the industry is cyclical. to significant volatility.

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 Cover Story

KAMA HOLDINGS GM BREWERIES DHUNSERI VENTURES

Betting on When demand Getting more

second-hand is not a than what you
growth concern pay for

G
M Breweries is the
largest manufacturer
of country liquor in
Maharashtra, accounting for
25-30 per cent of the state’s
excise duty on country
liquor. Strong brand
image and regulatory barriers
for new entrants have

K D
ama Holdings is a helped the brewery maintain hunseri Ventures is a
holding company with a strong margins over the petrochemical company,
50.3 per cent stake in years. Notably, its five-year trading various
SRF, a leading specialty median operating profit petrochemical commodities.
chemical manufacturer. margin is an impressive Accounting for 35 per cent of
Investing in Kama, which trades 18 per cent. FY24 revenue, its key product is
at a reasonable valuation of BoPET resins used in food
1.2 times its five-year median
P/B, is effectively a bet on SRF,
17.0 9.3 packaging. What is surprising is
that the company started
5Y PAT growth (% pa) P/E ratio
which trades at high valuations. manufacturing BoPET in FY23.
SRF has witnessed strong The rising demand for food
growth recently. Notably, its packaging should help it sustain
profit after tax has compounded this growth. Also, it plans to
nearly 18 per cent annually in grow its production capacity
the past five years. 3.5 times by FY27. Moreover, the

36.5 9.3 16.5 7.6

5Y PAT growth (% pa) P/B ratio 5Y PAT growth (% pa) P/E ratio

It also boasts efficient capital The stock also trades at a low stock offers an incredible value
allocation, with a five-year P/B of just 1.7 times, making it a play. The company’s book value
median ROCE of 18 per cent. SRF compelling value investment. of `2,959 crore is more than
is eyeing new growth avenues in Also, its non-current double its market capitalisation.
agrochemicals and investments stood at `526 crore Note that the book value
pharmaceuticals to keep the as of FY24, which makes its includes investments of around
momentum alive. However, valuations even more attractive. `2,772 crore. The discrepancy
investors should note that However, the company is might be due to the market
Kama’s fortunes are tied to its presently operating at just worrying about the true value of
stake in SRF. So, be wary of 45 per cent capacity utilisation. these investments. Also, the
stake dilutions. In the past four This has put pressure on its food packaging industry is
years, Kama’s stake in SRF has margins. Also, the stringent highly cyclical. Moreover, while
fallen to 50.3 per cent from regulatory requirements for the recent growth is impressive,
52.3 per cent. Further declines in breweries are a threat that BoPET is still a new product for
stake dilution can be a concern. should not be ignored. the company.

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 Cover Story

AI generated image

Choosing US stocks:
Beyond the obvious
Find the wealth of opportunities that lie outside the top few
By Karthik Anand Vijay and Mithilesh Bhaumik

T
he year was 2023. The US market cult classic Western that tells the tale of seven
was shrouded in gloom, with fears of skilled gunmen who save a town from bandits.
inflation and high interest rates In the movie, however, the seven gunmen trained
lurking in every corner. But out others to fight back against the bandits. Has Wall
came seven stocks, saving investors Street’s own Magnificent Seven done the same and
from yet another year of disaster. inspired others to deliver high returns?
Sounds like a quintessential We have uncovered a few not-yet-magnificent but
Western script. So, it’s no surprise that those promising stocks that say yes. But before revealing
gunning for high returns named the seven stocks— their names, let’s explore what makes the
Alphabet (Google), Amazon, Apple, Meta, Microsoft, Magnificent Seven radiate and if investors should
Nvidia, and Tesla—the Magnificent Seven, after the look beyond them.

July 2024 Wealth Insight 75

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 Cover Story

Earning their magnificence

What makes the seven companies deserving of their tag
Amazon: Imagine starting as an online bookstore

T
he Magnificent Seven may have earned their
moniker from the cult Western. But, truth be and then becoming the largest retailer online.
told, Alphabet (Google), Amazon, Apple, Amazon, undoubtedly, is a true inspiration for
Meta, Microsoft, Nvidia, and Tesla are magnificent entrepreneurs globally. What sets it apart from
even without invoking parallels. other retailers is its large
In the last five years, each of the seven scale, which creates a
companies has generated enormous returns (see network effect and attracts
‘Five-year skyrockets’). In fact, Nvidia’s growth has more buyers and sellers to its platform. This scale
been so outlandish that it led to rumours about the provides Amazon with extensive customer data,
chip maker delivering the highest profit jump in enhancing its high-margin advertising business.
the history of capitalism. Additionally, Amazon Web Services (AWS) leads
So, what do these companies do to stay the cloud computing industry, which is also a high-
magnificent? Let’s take a closer look at their margin business.
business models and strategies that drive each of Apple: Warren Buffett’s favourite stock, Apple, has
these industry giants. redefined consumer electronics. Its
Alphabet (Google): It’s hard to strong brand loyalty, continuous
imagine a world without innovation and premium product
Google. The search engine is quality allow it to charge premium
inseparable from how people navigate the internet. prices. Furthermore, it has created a
But Alphabet is more than just Google. It is a tightly integrated ecosystem of
conglomerate with a presence in a wide array of products (iPhone, iPad, MacBook, etc.) and services
businesses, including cloud computing, drug (iCloud, App Store, etc.). This integration offers a
discovery, robotics software and autonomous seamless user experience and encourages
driving. However, Alphabet’s leadership in search customers to stay within the Apple ecosystem.
engines is what makes it magnificent. It allows it to Meta: Formerly known as Facebook, its platforms -
create and sell a suite of products and services (such Facebook, Instagram and WhatsApp - are used
as digital advertising) and rake profits by the billion! every day by billions around the world. This creates

Five-year skyrockets
The stellar surge of the Magnificent Seven stocks
$3,500
Nvidia 32.8x
2,800
Tesla 12.5x

2,100 Apple 4.2x

Microsoft 3.4x
1,400
Alphabet (Google) 3.3x
700
Meta 2.8x

0 Amazon 1.9x
June 2019 June 2024
Data as of June 7, 2024. Rebased to 100.

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 Cover Story

strong network effects. The and processing enormous datasets. Beyond

more users on the platforms, hardware, Nvidia has crafted a powerful software
the more data it can harvest ecosystem that enhances the accessibility and
on user behaviour and preferences and drive up its utility of its GPUs.
advertisement business. But advertisement is only Tesla: An eccentric genius hellbent
one weapon in its arsenal. The company is betting on colonising Mars. The story of
big on becoming the “next computing platform and Elon Musk and Tesla is definitely
the future of social interaction” through metaverse, begging for a Netflix original. But
its virtual reality initiative. behind the stories and memes is a
Microsoft: If you’re reading this, chances are you company that has revolutionised
have used a Microsoft product. From the automobile industry with its electric vehicles.
the ubiquitous Windows operating Its early-mover advantage in the electric vehicle
system to the essential Office 365 industry has helped it establish a strong market
suite, Microsoft’s tools are woven into presence. The company’s superior battery designs,
the fabric of our daily lives. Beyond manufacturing processes, and extensive
these staples, Microsoft is a supercharger network keep it ahead of the herd.
formidable force in cloud computing with Azure. Moreover, Tesla’s vertical integration strategy -
But what truly sets the tech giant apart is its from manufacturing its own batteries to developing
groundbreaking partnership with OpenAI, the its own software - has allowed for better control
visionary company behind ChatGPT. This over production quality.
collaboration provides Microsoft with an enviable You might have figured it out by now. The recipe
lead in commercialising cutting-edge artificial for magnificence is market leadership in niche
intelligence models. technologies and a perpetual focus on innovation.
Nvidia: If you’re a science fiction fan worried about The seven also have shown that resilience is a
AI taking over the world trademark of companies that stay at the top. In the
Terminator-style, then Nvidia is last three years, these companies have delivered
surely the Skynet of our era. As the commendable performances against all odds.
market leader in designing graphics But here’s the elephant in the room. If these
processing units (GPUs), Nvidia’s technology is at companies are so great, why are we looking for
the heart of AI and machine learning other investment options? The answer lies in their
advancements. Its cutting-edge data centre immense size – they might be too big for their
products are crucial for training vast AI models own good.

Superb financials!
Business has been booming for these companies
$ billion (Fiscal year) 3-year growth (% pa) 3-year median (%)
Profit Free Gross Operating
Company Revenue Profit after tax Revenue after tax cash flow profit margin profit margin ROCE ROE
Apple 383 97 11.8 19.1 10.7 43.3 29.8 66.5 171.9
Alphabet (Google) 307 74 19.0 22.4 17.5 56.6 27.4 29.7 27.4
Microsoft 212 72 14.0 17.8 9.6 68.9 41.8 37.7 47.1
Meta 135 39 16.2 10.3 23.0 80.8 34.7 30.2 28.0
Amazon 575 30 14.2 12.6 7.5 43.8 5.3 15.6 17.5
Nvidia 61 30 54.0 90.1 79.2 64.9 37.3 32.7 44.8
Tesla 97 15 45.3 175.0 17.1 25.3 12.1 18.4 27.9
Financials are as of the latest fiscal year. For four companies – Alphabet (Google), Amazon, Meta and Tesla – fiscal year ended in December 2023.
For Apple, Microsoft and Nvidia, fiscal year ended in September 2023, June 2023 and January 2024, respectively.

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The Magnificent’s misfortune
How size plays a spoilsport for the Magnificent Seven

9
.58 seconds — that’s how much it took Usain
Bolt to run 100 metres. That’s a speed of nearly A thought experiment
37 km/h! But, with all due respect to the fastest Hypothesising various growth scenarios for a 10-year horizon
man alive, he wouldn’t be able to maintain this $ billion
speed if he had run a marathon. The Magnificent Market cap TTM revenue TTM profit after tax
Seven suffer from a similar limitation. Will they Current 15,044 1,844 409
continue to grow in the foreseeable future? Most POTENTIAL SCENARIOS
likely, yes. But can they keep growing at the
5% growth 24,505 3,004 666
present rate? That seems far less likely.
10% growth 39,020 4,784 1,060
As the more experienced investor would know,
most companies find it increasingly difficult to 15% growth 60,862 7,461 1,653
maintain high growth rates once they reach a 20% growth 93,149 11,420 2,530
colossal size. And the Magnificent Seven are indeed Assuming that the P/E remains constant
colossal. Six of the seven have a market cap higher
than a trillion dollars!
In fact, we did some number-crunching to see profit after tax of $409 billion on sales of
how challenging it would be for the seven to $1.8 trillion. Let’s assume for simplicity that the
maintain the present growth rates. In the past P/E ratio of these companies remains the same for
12 months, they have generated a cumulative the next 10 years. In other words, we are assuming
that their share price growth will mirror their
profit after tax growth.
Too big for their own good?
In such a scenario, their cumulative profit after
Six out of the seven companies are worth more than a trillion dollars
tax has to cross $1 trillion in 10 years to generate
Company Market cap ($ billion) P/E
annual returns of 10 per cent. That’s less than the
annual returns of the S&P 500 index in the last five
Microsoft 3,151 36.6 years. To beat the market and generate 15 per cent
annual returns, their cumulative profit has to cross
$1.7 trillion!
Nvidia 3,012 70.7
These numbers are mind-boggling! We wouldn’t
bet on any company generating such astronomical
Apple 3,003 29.9
earnings in 10 years, even the Magnificent Seven.
So, what is the way forward? Should investors
waive the white flag and accept that they missed
Alphabet (Google) 2,177 26.4 out on a once-in-a-lifetime opportunity?
Not quite. Rather, this is a moment of learning.
Our thought experiment reminded us of the five key
Amazon 1,887 50.1 principles of Benjamin Graham, the father of value
investing. While several versions of these principles
are available, we believe Jason Zweig’s
Meta 1,256 27.4
interpretation, published in the book ‘The
Intelligent Investor’, is the most palatable.
1. A stock is not just a ticker symbol or an
Tesla 558 41.0
electronic blip; it is an ownership interest in an
actual business with an underlying value that does
Data as of June 7, 2024
not depend on its share price.

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 Cover Story

2. The market is a pendulum that forever swings matter how exciting an investment seems to be —
between unsustainable optimism (which makes can you minimise your odds of error.
stocks too expensive) and unjustified pessimism 5. By developing your discipline and courage, you
(which makes them too cheap). The intelligent can refuse to let other people’s mood swings govern
investor is a realist who sells to optimists and buys your financial destiny. In the end, how your
from pessimists. investments behave is much less important than
3. The future value of every investment is a how you behave.
function of its present price. The higher the price Based on the above principles, it is safe to say
you pay, the lower your return will be. that while the Seven are solid companies, they
4. No matter how careful you are, the one risk no might not be the best investments presently, and
investor can ever eliminate is the risk of being you have to wait for the pendulum to swing to the
wrong. Only by insisting on what Graham called other side. But several other companies are riding
the “margin of safety”— never overpaying, no on similar tailwinds that might offer an alternative.

Beyond the Magnificent Seven

Promising companies in the US market beyond the Seven

S
o, off we went in search of the best of the rest companies are from the technology sector, while a
in the US market. Our goal was simple: Find few of them are from the energy sector.
companies that may not be as magnificent as Kindly note that these companies are not our
the seven but are promising in their own right. Our recommendations. Please do your research before
search led us to 13 companies. Most of these investing in any of these companies.

The promising 13
3-year growth (% pa) 3-year median (%)
Market cap Profit Gross profit Operating Free cash flow
Company ($ billion) Revenue after tax margin profit margin to revenue ROCE ROE P/E
Arm Holdings* 142 9.4 -25.3 95.2 23.4 25.2 10.0 10.2 464.3
Lam Research 126 20.2 26.1 45.7 30.6 22.1 42.2 69.8 37.2
Palo Alto Networks 96 26.5 26.0 70.0 -3.4 32.6 -4.9 -57.5 42.6
Arista Networks 93 36.2 48.7 61.9 34.9 32.3 34.5 30.5 41.1
Synopsys 90 16.6 22.8 79.1 21.7 31.5 21.3 18.2 64.2
Cadence Design Systems 81 15.1 20.8 89.6 30.1 31.4 32.6 31.0 77.0
NXP Semiconductors 70 15.5 277.5 56.9 27.6 20.6 19.1 34.8 25.5
Fortinet 46 26.9 32.9 76.6 21.9 32.8 78.2 74.1 38.8
Cummins 38 19.8 -25.7 23.9 10.4 6.3 20.1 25.1 20.5
First Solar 29 7.0 27.8 25.0 20.1 -10.4 9.8 8.2 28.7
Skyworks Solutions 15 12.5 6.4 47.5 27.8 22.2 20.1 23.7 17.4
Lincoln Electric 11 16.4 38.3 34.1 16.3 9.4 30.9 46.5 21.9
DigitalOcean 3 29.6 34.7 60.2 -2.6 15.4 -1.0 -8.9 -

*Revenue and profit after tax growth for two years. Financials as of latest fiscal year. Price data as of June 7, 2024.

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 Cover Story

Arm Holdings. There is a high chance that you are Cadence Design Systems. Similar to Synopsys,
reading this using a device with an Arm Holdings Cadence Design Systems provides hardware and
chip. It is a leading semiconductor software for designing
manufacturer and designer and is integrated circuits and
known for its energy-efficient processor systems-on-chips. The
architectures. The company dominates the mobile company is a leader in various market segments,
processor market, with its designs powering the including digital design, verification, analogue/
majority of smartphones globally. It also has a mixed-signal design, and printed circuit board
significant presence in the embedded systems design. Just like Synopsys, Cadence also benefits
market and is making inroads into the data centre from high switching costs for customers.
and automotive markets. NXP Semiconductors. Based in the Netherlands, NXP
Lam Research. Like Nvidia, this company is a is one of the largest suppliers of automotive
beneficiary of the AI boom. It is a leading supplier semiconductors, commanding a
of wafer fabrication equipment used to manufacture significant share of the market. Its
integrated circuits and other products are also used for industrial
semiconductor devices. The and IoT (Internet of Things) applications. In
growing demand for addition, it is a leader in radio frequency and smart
semiconductors across various industries, antenna solutions, essential for communication
including consumer electronics, automotive and AI, systems, mobile devices, and wireless
along with growth in data storage needs, should infrastructure.
lead the company to new fortunes. Fortinet. Similar to Palo Alto, this company is
Palo Alto Networks. AI potentially leaves the door expected to profit
open for a new wave of cybercrime. This company from the rising
offers a solution. Its suite of products and services demand for cybersecurity. It is one of the top
helps protect enterprises, players in the global cybersecurity market and
governments, and service holds a significant market share in the network
providers from cyber threats. It holds a significant security and firewall segments. The proliferation of
market share in the next-generation firewall IoT and migration to the cloud are expected to help
market and has leadership in various the stock scale new heights.
cybersecurity segments, including cloud security Cummins. As the global economy grows, so will its
and endpoint protection. need for power. Cummins designs and
Arista Networks. The demand for cloud computing manufactures power solutions such as
has been pivotal to the success of the Magnificent diesel engines, natural gas engines,
Seven. The same might and electric and hybrid powertrains. It
play out for this company. holds a considerable market share in
It provides networking solutions for large data the diesel engine market, particularly
centres, cloud computing and high-performance for heavy-duty trucks, buses, and industrial
computing. Its products are known for their equipment. It is also a dominant player in the
performance, reliability and programmability. This commercial vehicle engine segment and the power
technological edge is crucial for data centres and generation market. The surge in demand from data
cloud computing environments that require robust centres is also expected to drive growth.
and scalable networking solutions. First Solar. The battle against global warming is
Synopsys. Its products and services are used by heating up, and First Solar stands to gain from it.
engineers to design, verify, and manufacture The company is the largest manufacturer of solar
complex integrated circuits and systems-on-chips. modules globally. It is known for its cadmium
Synopsys holds a significant telluride thin-film technology,
market share in its industry which differentiates it from other
and has client stickiness. This is because its tools major players that typically use
are highly complex, and switching costs are high crystalline silicon technology.
for customers. Additionally, First Solar also

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provides utility-scale photovoltaic power plants and automated joining, assembly and cutting systems,
is a leader in the US utility-scale solar market. plasma and oxy-fuel cutting equipment. The
Skyworks Solutions. The global economy is becoming company also commands a dominant global
increasingly dependent on robust communication position in brazing and soldering alloys. Recently, it
systems. Skyworks is the leading provider of forayed into the electric vehicle charging market.
analogue semiconductors, primarily focusing on DigitalOcean. Like several on this list, DigitalOcean
radio frequency and stands to gain from the rising demand for cloud
mobile computing and AI. It offers cloud computing
communications. Its services to developers, startups,
products have a wide and small- to medium-sized
range of applications, including smartphones, tablets, businesses. Despite stiff
automotive, broadband networking, GPS, and IoT competition from Amazon Web
devices. It is also the major supplier to smartphone Services and Microsoft Azure,
manufacturers such as Apple and Samsung. DigitalOcean has managed to
Lincoln Electric. Be it electric or internal combustion carve out a niche for itself by focusing on simplicity,
engines, to make cars you need to weld and cut. affordability and performance. The company is
Lincoln is the leading witnessing strong growth for its early-stage AI
manufacturer of arc solutions. As a result, it is targeting customers
welding products, looking for smaller and more affordable AI models.

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 Interview
Interview

“For us, timing

is everything”
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 You have had quite the journey from
mutual funds (GIC and IDBI Mutual
Fund) to starting the equity
derivatives segment at big names like
ICICI and Kotak. What are the biggest
takeaways from those experiences?
At Quant, we have built a
framework known as VLRT
(Valuation, Liquidity, Risk
Appetite and Time), and it has
come from the learnings over the
years at various organisations. We
built this predictive analysis based
on mistakes, and the idea is to not
repeat the mistakes going forward.
I firmly believe you will succeed in
markets if you can control your
mistakes. We have seen many
people analyse their success, but
we have examined and rectified
our errors. That has played an
important role in our success.

Equity markets have undergone

significant transformations over
the last 30 years. How do you
think they’ve changed the most
since you started?
I started at the time of the
Harshad Mehta boom when
markets were not only euphoric
but also in a manic phase. I
distinctly remember research
being in its infancy. FIIs (foreign
SANDEEP institutional investors) were just
TANDON entering India and setting up
CEO and research firms. At that time,
Director, Quant research was very elementary,
Mutual Fund like cash flow-based analysis.
I clearly remember that around

B
oasting over 27 years of In an exclusive conversation, the 1995-96, I bought a book by
experience in the capital CEO and Director of Quant Mutual Ashwath Damodaran on valuation,
markets, Sandeep Fund sheds light on the strategic and I couldn’t understand anything
Tandon is a known name use of predictive analysis in from the book because we had
in the industry. forecasting market trends. Further, never thought in that manner.
Previously, he has held positions at he also addresses the prevailing But look at the world today. There
various reputed financial services market speculation and leverage, is an overload of information, and
firms, including GIC Mutual Fund, noting that both are currently there is no scarcity of data or
IDBI Mutual Fund, ICICI Securities minimal. Here are some interesting analytics. Now, time management
and Kotak Securities. snippets from the interview. has become very important in terms

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 Interview

of understanding exactly what you

have to read and what you have to With predictive analysis,
ignore – a big change from a scarcity
we connect the dots and
of information to an overload of
information. That’s the biggest
see to what extent the
challenge we are facing today. information is valued

When did you first try the strategy

that you follow at Quant? What
convinced you that it would work in
mutual funds?
It’s not fair to say that I started
this strategy when I launched the
mutual fund business. I have been
following this strategy for the past
30 years, and I call it very on the other hand, today, bitcoin fluctuates, you keep changing your
pragmatic research. In traditional represents the risk appetite of the views. Now, we have to remove
investing, you have to calculate the younger generation. So, for me, those human biases.
terminal value of the stock, but this behavioural data point is a How? In our VLRT framework,
when you get into the pragmatic very important risk analysis we allot one-third of the weight to
approach, you understand how the factor. We don’t trade, but we valuation analytics, one-third to
industry operates in real life. So, capture these data points very risk appetite (which is sentiment
over time, we have built our closely because they give a data) and one-third to liquidity
predictive analysis tool, which is a different angle. So, the strategy analytics. Even for us, timing
sort of post-mortem analysis. keeps getting updated every month analytics is a risk mitigation tool.
With predictive analysis, we are or quarter, depending on the data. Let’s take an example from the
not trying to pre-empt the market Covid-19 period. When the
but to connect the dots and see to Can you explain to us your pandemic happened, our analytics
what extent the information is investing framework? showed that liquidity was at an all-
valued. When we build so many Our VLRT framework is a risk time high (thanks to central
theses, we go back and say what mitigation investment framework. bankers), and risk appetite
has worked and what has not and Let’s understand that from a market collapsed to a 30- to 40-year low. So
how to improve further. The point of view when we talk about whenever there is a high liquidity
process is ever-evolving. I don’t certain data points. In September and risk appetite, it’s an indication
think we can ever say we have 2021, the technology stocks peaked, of a lethal bull run. So we were
data like the US market. But if and based on our analytics, we saw 100 per cent deployed in April 2020,
you look at India alone, I think we extraordinary hype and exited the while others were in panic mode.
are way ahead because we have sector. The market realised this six In June-July 2020, the risk appetite
been practising something that is months after we exited, but stocks improved, indicating that mid- and
new terminology for a lot of were down by 30 per cent by then. small-caps will start rallying. So
players. We have been practising One-and-a-half years later, they were we started buying mid- and small-
for 30 years, and that’s the reason down by 50-60 per cent, so if you cap stocks when every other guy
we are ahead of the curve. didn’t sell at the right time, your risk was buying large-cap stocks. One
Let me give you a small assessment and timing were bad. has to understand that you can
example. If we look at bitcoins, I believe that the biggest use liquidity and risk appetite
most people don’t understand how challenge of valuation analysis, analytics tools to arrive at money
this crypto works. If you ask which most people do today, is that flow analysis. The money flow
someone, they will say it’s illegal, most valuation metrics depend on analysis shows us how to
so why should we look into it? one dependent variable called the efficiently do sector, stock
That’s one way of looking at it. But stock price. So, when the price rotation and asset class rotation.

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But, given all the data and in the most hated zone but rather
analytics, how do you select in the neglected one. In a bull
stocks in the portfolio? I believe that everything market, you will not get extremely
Many people think we adopt either trades in admired hated zones so easily. This gives
momentum strategies, but we are you the perspective that, for us,
territory or neglected
predominantly a behavioural fund timing is everything, and
house. With the help of our
territory everything else is conjecture.
analytics, we try to capture all the
sectors and stocks (an investment How do you adapt your strategy for
universe of 800 stocks) trading in zone only twice – once in 2007 and PSUs, value and infrastructure?
admired and neglected territories. again in 2021. History shows it First, let’s understand from the
I believe that everything either traded in the most admired value perspective that PSUs
trades in admired territory or territory in 2000 and 2013. Another (public sector companies) are the
neglected territory. If the stocks indicator at Quant Mutual Fund, best example of a value thesis. In
move into the most admired zone, known as the Quant Fear Index for September 2021, we spotted that
we exit them, and if they are in the ITC, was at an all-time high. So, we something had changed and took
most hated zone, we turn had never seen this kind of fear in the conscious call that this decade
aggressive buyers for them. the stock, but it fit our VLRT belongs to the value theme. At that
I will share the example of ITC. framework, and we went all out same time, we launched our value
When we spotted ITC in September and built exposure. It was a top fund, telling investors not to invest
2021, it was trading around `200. holding across all our schemes, from a short-term perspective but
We bought it because it was and at the price of around `480, to buy it for a decade. Since we
trading in the most hated zone. If we exited completely. have taken a conscious call about
we analyse the history of the last Then, we shifted our focus to value as a decadal theme, most
24 years, it has traded in the hated Reliance Industries, which wasn’t schemes are skewed towards value.

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 Interview

Before September 2021, we were

tilted towards growth (style).
You will be surprised to know
that we are the second-largest
shareholder after the government
of India in several PSU
companies, like LIC, SAIL and
Hindustan Copper. So, now the
question is – what has changed in
the PSU sector? A lot of people are
allergic to PSUs as a thesis, and
one of the major reasons for this
is governance. Today, governance
has improved, and board-level
changes have taken place.
One of the most important
changes in the PSUs has happened
on the capital allocation side. I
was interacting with the
management of a PSU, and they
said that the government nominee
(on the board) was asking why
our financial ratios are not as
good as those of private sector
companies. We could have never
visualised this sort of comparison,
and there has been pressure from
government nominees to make
these companies more efficient,
and that’s an important change.
Apart from that, for 15 years
before 2021, they were in the most
hated zone and were under-
owned. Now, that’s a perfect
situation for us, as something was
changing, and we quickly spotted
that opportunity.
Two more themes we are
extremely bullish about are
manufacturing and
infrastructure. I think
manufacturing, as a thesis, can
last for a few decades. To give an
example, we have never seen
SMEs (small and medium
enterprises) or some other
companies that used to struggle
with a six-month order book, but
now they are booked for five or
six years, and they don’t have the

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capacity to take any fresh orders.
This is a unique situation we have
In today’s environment, the easy phase (to generate high
not seen earlier. Now, look at
infrastructure. The government’s returns) in mid and small caps is over. But if someone
determination is very high in comes with an investment horizon of 10 years or more,
terms of putting capex in place or I would ask them to double or triple their holdings.
building infrastructure in this
country. For instance, India has
witnessed the construction of That said, I can see the froth in I started my career in 1992 during
numerous ports and airports. the SME space. Imagine an SME the Harshad Mehta scam.
company that wanted to raise My father was a banker and
Mid- and small-cap stocks have been `50 crore and got a subscription had shares in SBI (State Bank
performing exceptionally. Do you worth `1,500 crore. So, I think only of India) from the employee
think this momentum is here to stay? this segment of the market is quite quota. He also made some
I will dissect this question into overvalued. There are no signs of investments in Ranbaxy and Tata
two parts. When I say this half- what happened in 2018 (the sharp Motors, among others. It was a
century belongs to India, mid and sell-off in small caps). Even if the euphoric market, and I felt it was
small caps will have to perform. markets correct by 15-20 per cent, the right time to sell and not to
If we say they will underperform, it’s fine, as in any decisive bull buy. It was a task to convince
then my thesis is not correct. market, these corrections are my father and uncle to sell
Some years down the line, we will considered normal. After the those holdings. Somehow, I
become the third-largest election results, I expect we will convinced them to sell at a profit
economy, and things in India are see more inflows from FPIs of `27,000. It was a tiny amount
changing for the better. With this (foreign portfolio investors) and of money then, but significant
background, it should be obvious FDIs (foreign direct investments). for them. So, I started my
that mid and small caps will financial journey with the
outperform large caps from a Every investor has a story to tell amount we had profited. My
long-term perspective. So, in about their first investment. Could journey into the financial market
today’s environment, the easy you share yours? What company was began by selling, not by buying.
phase (to generate high returns) it, how long did you hold onto it, and That’s the reason I always say
in mid and small caps is over. But what was the outcome? selling is more vital.
if someone comes with an
investment horizon of 10 years or
more, I would ask them to double
or triple their holdings.

Which market segment is overvalued

right now, and where do you see
excessive speculation?
I believe there is no excessive
speculation in the market, and
leverage positions are also very
low. So, I call it a disbelief rally, as
the best money managers have not
participated in the market and are
still cautious. Top-most family
offices are negative on markets, and
HNIs (high-net-worth individuals)
have become short-term traders
because they don’t have conviction.

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 By WhiteOak
INVESTMENT ACORNS

The India premium

The role of governance and other factors in driving equity market multiples
shares, an investor effectively buys the proportionate
rights to its equity cash flows into perpetuity.
Where corporate governance is poor, there is a
significant risk that cash flows would be diverted by
controlling shareholders to the detriment of minority
shareholders. As a result, the assumption of minority
shareholders having a proportionate right to such a
company’s cashflows is weakened. It is not surprising,
then, that such companies trade at discounted
multiples compared to their better-governed peers.
By Manuj Jain & Chirag Patel The weaker the governance, the greater the discount.
By logical extension, shareholder rights to the

I
ndia has historically traded at premium multiples perpetual cash flows of equities would be more
compared to other emerging markets (EMs). On valuable in jurisdictions where such contractual
price-to-earnings (P/E) multiple, currently, it is property rights are less prone to being challenged by
trading at about 83 per cent premium based on other parties, including the authorities, and where, if
consensus estimates. India certainly has been, and is challenged, an institutional framework exists that
projected to be, amongst the fastest-growing EMs provides fair protection to the holder of such rights
(20-year real GDP growth of 6.5 per cent). However, (equity shareholders).
GDP growth or even earnings growth, in and of itself,
does not warrant a premium multiple or deliver
higher returns. For instance, China has grown faster
(20-year real GDP growth of 8.2 per cent) for a long
time and yet has consistently traded at a discount.
Further, its equity market has underperformed that of
India over long periods measured in decades.
This is similar to what is observed for relative
multiples of individual company valuations. As we all
know, the company with the fastest-growing sales or
profits in any sector or country does not necessarily
merit the highest multiple. In fact, other factors, such
as corporate governance and the quality of underlying
assets, usually are the dominating factors that impact
multiples. It should not be surprising if the same is
true for the overall market multiple across countries.
In this column, we discuss why India has deservedly
traded at a premium because of superior country-level
governance and underlying asset mix.

Governance factor
To state the obvious, the value of any country’s equity
market is the sum of the value of its constituent
companies, which in turn is the present value of their
future cash flows. By investing in a company’s equity

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 Countries with strong democracies generally have Common Law system, and institutional checks and
well-established independent institutions such as the balances ensure accountability of the government.
judiciary, the central bank and the election Without adequate separation of powers in
commission, among others. Constitutionally, there authoritarian regimes, corporations and investors
exists a separation of powers between these are exposed to a much higher risk of abrupt and
institutions and the executive branch of the arbitrary policy actions. Recently, we saw a
government of democratic countries. In well- regulatory crackdown on certain companies and
functioning democracies, the separation of powers industries and a general heavy-handed approach to
between these independent institutions and the dealing with businesses in one such economy. In
executive branch of the government is enshrined in certain resource-dependent EMs, there have been
the constitution and operational in practice. Such an instances of asset expropriation. In many countries,
institutional framework can be thought of as the soft foreign institutions and investors, particularly
infrastructure of a country, which is essential to minority shareholders, have little recourse to appeal
upholding property rights and maintaining economic to protect their property rights.
and political stability. While such soft infrastructure It is not to say that there have been no
is taken for granted in the developed democracies of disagreements between authorities and investors in
the West, it is in varying degrees of evolution in India. However, what is different from many other
emerging markets. We believe India is a more mature jurisdictions is that corporations and investors,
democracy than most other EMs and scores well domestic or foreign, can expect fair hearing under the
ahead of them on this crucial soft infrastructure. country’s laws. A case in point is the tax dispute
In many respects, India exhibits a more robust between a global telecom company and Indian tax
institutional infrastructure that is befitting of a authorities, in which India’s Supreme Court ruled in
developed democracy, with an independent judiciary, favour of the former. There are very few other
central bank, and election commission. There exists emerging markets where foreign companies or
strong protection for property rights under the investors can file a lawsuit against the government,

1. No instance of currency or political crisis

in India
Politial
Economy Currency crisis Debt crisis* crisis/coups**

Argentina 2002, 2013 2014, 2016

Brazil 1999, 2015 1994 2016
Greece 2012
Indonesia 1998 1999, 2002 2016
Korea 1998
Malaysia 1998
Mexico 1995
Philippines 1998 2006-2007
Poland 1994
Russia 1998, 2014 1998, 2000
South Africa 2015 2018
Thailand 1998 2014
Turkey 1996, 2001, 2021 2016
Vietnam 1997
Source: IMF’s Systemic Banking Crises database, Powell and Thyne (Global Instances
of Coups from 1950 to 2010: A New Dataset) and Center for Systemic Peace
*Includes restructuring. **Includes attempted coups and impeachments.

Illustration: ANAND

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 By WhiteOak
INVESTMENT ACORNS

where they expect not only a fair trial from the

domestic court but also to continue to operate in the 3. Democratic countries are typically accorded
country without any fear of vindictive repercussions. higher P/E multiples
Adequate institutional checks and balances have z Most democratic economies z Least democratic economies
also given India the unique distinction of being 25
Median P/E
among the few EMs with no instance of a currency 20
crisis, sovereign default or political coup in many
decades. Investments in emerging economies are 15
often subject to such risks, as shown in Exhibit 1. 10
But, the absence of such debacles in India
results from its robust soft infrastructure, 5

reducing the country risk and contributing to its 0

premium multiples. 1998 2023

In our view, one key reason India is consistently Sample list of countries that are India, Taiwan, Indonesia, South
rated as one of the most democratic countries is the most democratic (Net Democracy Africa, Poland, Brazil, Chile
institutional separation of powers and the Score >= 8)
robustness of its soft infrastructure. As Sample list of least democratic China, Egypt, Ukraine, Russia,
illustrated in Exhibit 2, India’s Net Democracy economies (Net Democracy Score < 5) Saudi Arabia, Turkey
Score ranks towards the top end of the emerging Source: Polity Project database, Factset
market peer group.
To summarise this aspect, governance must and
does receive paramount consideration in any robust Superior asset mix: Ownership profile and
investing framework. The idea of governance at a earnings stability
country level encompasses numerous strands, each Even in an individual company, the quality of
intricately linked to the other – is it a stable underlying assets has a significant bearing on the
democracy or an authoritarian regime? What is the relative premium that investors are willing to pay.
degree of institutional independence and separation Similarly, markets where a larger proportion of
of powers? Is the rule of law and property rights underlying constituents are deserving of higher
upheld by the judiciary? multiples would also be expected to have higher
The answers to these questions play a dominant multiples at the aggregate market level.
role in determining the premium or discount In the EM context, government versus private
investors ascribe to different emerging markets. As ownership of a company has a significant impact
evidenced by the data of over 20 years in Exhibit 3, on a company’s multiple. Universally, it is observed
the markets in most democratic regimes have that government-owned companies (SOEs or PSUs)
consistently traded at a premium to markets in the trade at lower multiples as compared to their
least democratic regimes. private sector peers.
Consequently, at a country level, a higher degree of
state ownership in equity markets would result in a
2. India’s high Net Democracy Score
lower market multiple and vice versa. Countries like
10 China, which generally trade at lower multiples,
9 9 9
8 8 8 have higher SOE ownership than the EM average of
7
21 per cent. On the other hand, SOE ownership in
4
Thailand

Vietnam

India is one of the lowest at 12 per cent.

Turkey

China

Besides state ownership, sectoral representation

across various EMs is also widely different. As
Taiwan

India

South Africa

Indonesia

South Korea

Brazil

Mexico

Malaysia

Russia

illustrated in Exhibit 4, compared to major EMs,

-3 the Indian market has the most heterogeneous
-4
composition at a sectoral level, and within that, it is
-7 -7
Source: Polity Project database the most diverse at the company level. For instance,
Taiwan’s stock market is dominated by highly cyclical

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tech-hardware stocks, which comprise 72 per cent of
the weight, with TSMC alone accounting for 39 per 5. India’s corporate earnings have been resilient
cent of the total country index. South Korea is not during downcycles
much different, with technology comprising 44 per YoY earnings growth (%)
cent of the index and Samsung group entities across Country 2008 2015 2020 Average
sectors forming 37 per cent of the market.
India -15 3 14 1
In contrast, India has the most diversified sector
Poland -10 18 -17 -3
mix with a fair representation of most sectors.
Unlike most other EMs, no single sector dominates China -13 -3 -1 -6
the Indian index. South Korea -41 5 16 -7
Moreover, India has a well-distributed investible Turkey -34 12 -7 -10
universe of companies by index weights. HHI
Indonesia -4 -9 -24 -12
(Herfindahl–Hirschman Index) is popularly used to
Taiwan -71 -1 30 -14
measure the degree of market concentration. It is
calculated by summing the squared weights of the Malaysia -20 -7 -23 -17
constituents. The higher the number, the greater South Africa -10 -32 -12 -18
the level of concentration. India has the lowest HHI Philippines -24 -1 -40 -22
score amongst all major EMs, evidencing the
Thailand -14 -9 -42 -22
diversity or granularity of the investible universe.
Mexico -23 -7 -42 -24
Besides high concentration, sectors like tech-
hardware, energy and metals & mining (which Brazil -19 -48 -31 -33
dominate many EM indices) are also deeply cyclical. Source: Factset, WhiteOak. Data for respective country MSCI index.
Consequently, the earnings decline for commodity-
intensive markets like Russia and Brazil and
homogenous markets like Taiwan has been quite On the other hand, India’s diversified corporate
acute during past recessions. mix entails lower exposure to cyclical sectors
compared to the EM average. Consequently, as seen
from Exhibit 5, India’s corporate earnings have
4. Diverse asset mix in India compared to other been more resilient during each cyclical downturn
Emerging Markets over the last two decades. In our view, India’s
Weight (%)
relatively stable earnings profile also contributes
towards its higher multiple.
Sector India China S.Africa Mexico Brazil Korea Taiwan
In this column, we have discussed two factors –
Comm. Serv. 3.0 20.1 5.8 9.7 1.6 5.4 1.9
governance and quality of assets – which we believe
Cons. Disc. 13.0 28.7 18.5 1.3 4.9 8.7 2.8 have a significant effect on relative multiples at the
Cons. Staples 6.9 5.3 10.3 32.4 8.8 2.4 1.6 aggregate country level, just as they do for
Energy 9.2 3.7 1.3 19.0 1.0 0.2 individual companies. We acknowledge that many
other factors influence multiples, and some might
Financials 23.4 15.9 34.4 19.8 24.7 9.1 10.7
be less favourable for India.
Health Care 6.4 5.4 2.9 0.3 2.6 7.3 0.9
The key message we have tried to drive home is
Industrials 11.6 5.6 2.7 11.7 10.7 14.4 4.5 that mere comparison of country-level multiples
Technology 10.9 6.3 0.2 0.9 44.2 72.6 without adjusting for these critical factors may
Materials 9.4 3.8 21.0 17.7 15.6 7.0 4.4 result in apples-to-oranges comparisons or even
apples to lemons.
Real Estate 1.8 2.5 3.0 7.0 1.1 0.2 0.5
Utilities 4.2 2.7 10.0 0.4 0.1
Chirag Patel and Manuj Jain, both CFA charterholders, are Associate
HHI* 148 342 429 625 718 1,329 1,547 Directors and Co-Heads of Product and Strategies at WhiteOak Capital
Asset Management Company. They have been with the company for over
Source: Factset, WhiteOak. Note: Data for Country MSCI IMI Index
In HHI (as calculated by Factset), the weights of securities that have the same parent
two years and have over 15 years of experience in asset management.
entity are consolidated for this metric. Part of the WhiteOak Capital Group, WhiteOak Capital Asset Management
Company is the sponsoring entity of WhiteOak Capital Mutual Fund.

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 STOCK ADVISOR

The path to prosperity

What is the most dangerous phase in an equity investor’s life?

is seasoned and follows a thoughtful investing process

is even better. Staying informed and continuously
educating oneself is mandatory.
A straightforward approach to successful investing:
z Avoid derivative trading entirely
z Select stocks with strong fundamentals at fair prices
by z Build positions gradually over time
Dhirendra z Retain investments as long as they meet your criteria
z Regularly review your portfolio
Kumar
While this strategy is uncomplicated, many
investors find it challenging to execute. Conventional

I
n my observation, there are two phases that are most information sources often lead them astray.
dangerous. One is when the investor is new, has just
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temptation to chase after the latest market trends can
help mitigate risks. Seeking advice from someone who

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3. Best Buys: For those seeking potentially higher
returns without excessive risk, we offer a list of 10 Best
Buys. These represent the most attractive opportunities
among our recommendations at any given time.

Now what?
Upon becoming a member, your approach to our stock
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substantial investments, spreading your entry over
12-18 months is advisable. This guidance applies to both
equity mutual funds and direct stock investments, as
averaging is crucial for equity investments. Illustration: ANAND

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 EVERYDAY ECONOMICS

Simultaneously the world’s fastest

and slowest-growing economy
Not all Indians are experiencing India’s growth story
The budget division in the Ministry of Finance could
easily show that the rounding off of decimal points,
following the usual practice followed every year in
every budget, led to the difference in the GDP compu-
tation between the two deficits. The difference looks
huge, but given that the deficits and the GDP are
much bigger, they were actually not that big.
By
Although fairly familiar with budgets, it took me a
Puja few seconds to wrap my head around this. The budget
Mehra division bureaucrat who had prepared the response to
the motion to be presented by the finance minister in

T
he reactions to the results of the Lok Sabha polls Parliament was mighty amused when he recounted
just concluded remind me of an episode during the story. For him, `60,000-70,000 crore isn’t as big a
the first UPA government. After the budget pres- figure as it is for most of us. His daily job involved
entation for that year in Parliament, a privilege dealing with more considerable sums of money. It is
motion was moved against the then Finance Minister, all about the difference in perspectives.
P Chidambaram.
Parliamentary privileges are special rights that What elections can tell us about economic
provide protection to legislators from select laws. The disparities in India
idea behind these privileges is that MPs (Members of Similarly, the Lok Sabha results have come as a sur-
Parliament) should get to perform their duties without prise to most people. But they are especially hard to
fearing repercussions for what they say on the floor of grasp for people far removed from the parts of Uttar
the house during debates. They should get to speak Pradesh that are unlike the swish conclaves in tony
their mind freely and speak truth to power. One of Delhi and posh Mumbai. That, too, is due to the differ-
their privileges is the immunity provided from court ence in perspectives. What is easily overlooked when
proceedings for speeches in Parliament. the narrative is narrowly focused on India becoming
To ensure checks and balances on the freedoms the world’s fastest-growing major economy is that not
enjoyed by MPs, a system of privilege motion exists. If all Indians are experiencing this boom. Yes, the head-
MPs feel someone has breached parliamentary privi- line GDP growth in the 2023-24 financial year, accord-
leges, they can raise a privilege motion. The budget ing to the government’s estimates, was 8.2 per cent.
papers laid by P Chidambaram in Parliament had trig- What percentage of the population is experiencing this
gered such a motion. As is standard practice, the growth? According to the government’s figures,
budget reported figures for the two deficits, the reve- 45 per cent of India’s working population toils on the
nue and the fiscal deficits, expressed as a percentage
of GDP. The motion pointed out that the back calcula-
tion of the GDP from these two figures yielded two When the narrative is narrowly focused
separate figures for GDP. And there was a difference on India being the world’s fastest-growing
of about `60,000-70,000 crore between them. How could
India have two GDPs for the same period?
economy, what’s easily overlooked is not
To most of us, `60,000-70,000 crore is an enormous all Indians are experiencing this boom
sum. But for anyone familiar with the budget, it isn’t.

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 Illustration: ANAND

farms. The government also publishes GDP estimates for `12,100 in 2012 to `11,155 in 2019 and by 0.7 per cent as
different sectors of the economy. It has reported a 1.4 per of 2022, to `10,925. Similarly, the average real earnings
cent growth in agriculture GDP in 2023-24. This suggests of self-employed individuals declined annually by
that the bulk of the population is experiencing not 8.2 per 0.8 per cent, from `7,017 in 2019 to `6,843 in 2022. The
cent but a mere 1.4 per cent growth! This also explains average real monthly earnings of casual workers,
why the increase in consumption in 2023-24, according to however, increased by 2.4 per cent annually, from
the GDP estimates, was only 4 per cent, which is less `3,701 in 2012 to `4,364 in 2019, and by 2.6 per cent
than half of the 8.2 per cent aggregate GDP growth. every year to `4,712 in 2022.
Most stock market analysts and economists speak
only about India’s headline GDP growth rate being the Wealth effect: Limited to urban Indians
world’s fastest but choose to exclude from that narra- The urban experience of what economists call the ‘wealth
tive the all-important detail – the large rural, agricul- effect’, where Indians have seen their assets (equities,
tural population struggling to make ends meet. It’s all gold and real estate) grow in value – is very different
about the difference in perspectives. from the realities of rural life. ‘Welfare’ compensation
through free food and electricity, farm subsidies, rural
Unequal or stagnant wage growth housing and a rural jobs programme hasn’t proved
Several studies and surveys have shown that the enough to compensate for the measly earnings. That’s
wages and earnings in India have been low and stag- probably why the electoral losses for the incumbent gov-
nant or have even declined in the last 10 years. “Over ernment are concentrated in rural constituencies.
the past decade, the average monthly real earnings of The benefits of infrastructure development over the
regular salaried and self-employed persons either last 10 years – doubling the number of airports from a
declined or remained stable. The average real earn- decade ago, adding 10,000 km of roads and 15 GW of
ings of casual workers only slightly increased, point- solar energy capacity a year – haven’t trickled down
ing to poor-quality employment generation,” the to the rural population yet, perhaps because physical
‘India Employment Report 2024’ recently released by infrastructure development isn’t as labour-intensive
the ILO (International Labour Organisation) said. as it used to be.
The report further stated that the average monthly
Puja Mehra is a Delhi-based journalist and the author of
earnings adjusted for inflation for regular salaried ‘The Lost Decade (2008-18): How the India Growth Story Devolved
workers declined annually by 1.2 per cent, from into Growth Without a Story’

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 STRAIGHT TALK

Factor-based investing – a primer

Why a single factor is inadequate to explain a security’s performance
As per research, CAPM was able to roughly account
for about 70 per cent of a diversified portfolio’s
returns. A single factor wasn’t enough to explain the
price performance of securities.

Beta gets ‘smart’

By In the following decades, academics and
Anand practitioners discovered other factors and
Tandon exposures that drive stock returns. Stephen Ross
introduced an extension of the CAPM called the

A
lmost every investor has heard the name of ‘arbitrage pricing theory’ (APT) in 1976, suggesting
Warren Buffett. Buffett, often referred to as a multi-factor approach may be a better model for
the greatest investor of all time, is known for explaining stock returns. Later research by Eugene
his portfolio performance and investing wisdom, Fama and Kenneth French demonstrated that
which he frequently shares publicly. Several books besides the market factor, the size of a company and
have been written about his ‘secret sauce’ for its valuation are also important drivers of stock
investing success and have attempted to explain it price. This became known as the ‘Fama and French
through a mix of fundamental and psychological Three-Factor Model’ (FFTFM).
factors. The academic community, too, has The ‘value factor’ posited that ‘high book-to-market’
researched the secret sauce – characteristics of (i.e., stocks where the market capitalisation wasn’t very
securities that explain outperformance against high compared to the book value) tend to outperform
markets (also called ‘premiums’). These growth stocks (where market cap is at a significant
characteristics or properties can be called ‘factors’. premium to book). Similarly, small-cap stocks tend to
outperform large-cap stocks – known as the size factor.
The birth of ‘beta’ This suggested that factors can be considered
Before multi-factor models, finance theory (in the anomalies – since an efficient market where information
early 1960s) asserted that stock returns are was instantly available to all participants would not
responsive to broader market movements. This allow excess returns over time. By constructing
model suggested that a single factor – market portfolios using these factors, investors could generate
exposure – drives the risk and return of a stock. excess returns over markets without taking higher
Known as the ‘capital asset pricing model’ or risks. These became known as ‘smart-beta’ strategies.
CAPM, it stated that returns from individual Fama and French also suggested that combining
securities depended only on ‘non-diversifiable risk’ value and size with the market factor could explain
– denoted by beta (ſ). Any return that could not be roughly 90 per cent of a properly diversified stock
explained was due to company-specific factors. portfolio’s return versus the market as a whole.
Beta is simply a ratio of the expected return from a Therefore, FFTFM theoretically provides a more
security over the risk-free rate and the expected
return from the market over the same risk-free rate.
When the ‘security’ is the market, i.e., all the stocks in As per FFTFM, combining value and size
the market, the beta will be one. Riskier assets will with market factor can explain 90 per cent
have a beta greater than one, while less risky assets
will have a lower beta. CAPM makes several
of a properly diversified stock portfolio’s
simplifying assumptions, which reduces its usefulness return versus the market as a whole
in practical applications.

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 Illustration: ANAND

accurate approach to estimating the discount rate of a In 2015, Fama and French updated their model by
publicly traded company, given that it has two incorporating operating profitability and investment
additional risk factors over the CAPM, which only by firms. Given that the four- and five-factor models
considers beta as its risk factor. explain up to 95 per cent of portfolio stock market
returns, there’s a limited practical benefit in
The factor zoo continuing to include additional factors. Practitioners
The concept that anomalies could be persistent led have added factors like low volatility and quality, but
academics to explore various statistical parameters. these serve more to create product differentiation for
After all, factors beyond what the FFTFM described marketing than add to performance.
could be relevant in explaining returns. These
included momentum, profitability, investment, etc. Cyclicality of factor performance
Professor John H Cochrane, in 2011, while Factor exposure is an excellent way to analyse and
delivering his Presidential address to the American create portfolios. But no single factor works all the time.
Finance Association, commented that financial Small caps underperformed large caps for long periods.
academics and practitioners had created a factor The performance has been cyclical since the early 2000s.
called ‘Zoo’. He didn’t mean that as a compliment. Momentum stocks have done exceptionally well
Computers could find factors that seemingly compared to value. Quality lags during runaway rallies
‘performed’ in the past but not in the future because but leads market rebounds after a fall. Low volatility
they had no underlying economic rationale. For underperforms in a market rallying after a fall.
factors to be useful in portfolio construction, they had The good news is that factors are not highly
to be more than statistically relevant. They had to be correlated. Value versus momentum strategies are
persistent over time, observed across markets and almost opposed. This allows tactically-minded
asset classes and investable after accounting for investors to get the right exposure based on market
transaction costs and liquidity considerations. positioning. For the long-term investor, a portfolio
diversified across factors can be a good option.
The survivors Factor computations require the analysis of data
Of the many models proposed, a few that have over several years. This has become easier with stock
survived are the Carhart Four-Factor Model (CFFM) exchanges offering indices based on factors and mutual
proposed in 1997 by Mark Carhart, and the Fama funds creating products to mimic these indices.
and French Five-Factor Model (FFFFM). In CFFM, For the do-it-yourself (DIY) investor, IIM
Carhart adds momentum as a factor. It measures the Ahmedabad offers updated factor computations (albeit
outperformance of stocks whose prices are with a lag). The link explains the methodology:
advancing over those falling. The CFFM can explain faculty.iima.ac.in/iffm/Indian-Fama-French-
almost 95 per cent of the performance of a Momentum/, which DIY investors can use for
diversified portfolio over the market. analysing their portfolios. Happy factor investing!

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