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2 September 2014
Shrinath MithanthayaShrinathM@MotilalOswal.com | +91 22 3982 5522
Rajat RajgarhiaRajat@MotilalOswal.com | +91 22 3982 5441
the IF series #1
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| 6-Force Framework of Levers
6-Force Framework of Levers
Or how to multiply stock value!Page
Preface ......................................................................................................... i-iii
Summary FAQs ............................................................................................... 1
Backdrop & Definitions .................................................................................. 7
Types of Stock Levers ..................................................................................... 8
Case studies & insights ................................................................................. 10
Applying the 6-Force Framework ................................................................. 16
Limitations of the 6-Force Framework ........................................................ 21
What to buy based on the 6-Force Framework ........................................... 22
#1 Sector Lever Jubilant Foodworks ....................... 23
Symphony ..................................... 24
#2 Strategic Lever Alembic Pharma ............................ 25
Gujarat Pipavav Port ..................... 26
J K Cement .................................... 27
Kaveri Seeds .................................. 28
TVS Motor ...................................... 29
Arvind ........................................... 30
#3 Operating Lever Idea Cellular ................................. 31Bharti Infratel ............................... 32
Maruti Suzuki ................................ 33
Ashok Leyland ............................... 34
#4 Financial Lever Jain Irrigation ................................ 35
BHEL .............................................. 36
#5 Regulatory Lever ONGC ............................................ 37
HPCL .............................................. 38
#6 Corporate Action Lever United Spirits ................................ 39
PVR ................................................ 40
Eicher Motors ............................... 41
Crompton Greaves ........................ 42
Annexure 1: Levers for non-Financial companies ....................................... 43
Annexure 2: Levers for Financial companies ............................................... 47
Annexure 3: Non-quantitative Levers .......................................................... 50
Annexure 4: Case Studies of levers
— Company case studies ....................................................... 51
— Sector aggregates: Key takeaways .................................... 63
Notes: Source of all exhibits in this report is MOSL analysis, unless otherwise mentioned.
Current valuations of stocks are based on price dated 26 September 2014.
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September 2014 i
Preface
IF we deeply study them …
IF we fully understand them …
IF we smartly apply them …
… Investment Frameworks can offer Insights Forever!
Presenting …
The 4th dimension of equity researchStock ideas, Sector analyses, Theme studies, and … Investment Frameworks
We believe there are 4 dimensions to equity research, in descending order of prevalence and
practice –
1.
Stock ideas — recommendations on which stocks to buy / sell / hold
2. Sector analyses – actionables based on various issues pertaining to sectors
3. Theme studies – impact analysis of a particular phenomenon or development
4.
Investment Frameworks – tools & techniques which are applicable across stocks, sectors,
time horizons and (in most cases) even geographies.
Motilal Oswal and the 4th dimension
Evolved several Investment Frameworks in the past 25 years
At Motilal Oswal, we track over 225 stocks across 20 sectors. We have also written several
theme reports pertaining to Economy, Politics and various sectors.
Motilal Oswal’s Recent Theme Reports (to read full report, please click on the cover icons)
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September 2014 ii
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Equally important, over the last 25 years, we have evolved several Investment Frameworks,
hitherto published mostly in the form of our Annual Wealth Creation Study.
Motilal Oswal & the 4th dimension of Investment Frameworks (click the icons to read full report)
Investment Framework: MULTI-BAGGERS
Insights Forever: Multi-baggers are of 2 types: (1) Transitory: created
by the combination of cyclical business and questionable management
quality; and (2) Enduring: Great businesses run by good managements
purchased at huge ‘margin of safety’ will create enduring multibaggers.
Investment Framework: INDIA’S NTD OPPORTUNITYInsights Forever: The era of India’s NTD (Next Trillion Dollar of GDP) will
see distinctly buoyant corporate profits, and boom in savings and
investment. This is because amidst linear GDP growth, discretionary
spend grows exponentially, benefiting several businesses.
Investment Framework: GREAT, GOOD, GRUESOME
Insights Forever: Think of companies as 3 types of “savings accounts”:
1.
The Great one pays an extraordinarily high interest rate (i.e. RoE) that
will rise as the years pass.
2. The Good one pays an attractive rate of interest that will be earned
also on deposits that are added.
3.
The Gruesome account both pays an inadequate interest rate and
requires you to keep adding money at those disappointing returns.
Investment Framework: BLUE CHIP INVESTING
Insights Forever: Blue Chips are fountains of dividend. They offer as
much, if not more, investment growth potential than stocks of lesser
quality. There is a systematic framework to identify and invest in
discovered and potential Blue Chip stocks.
Investment Framework: ECONOMIC MOAT
Insights Forever: An Economic Moat protects a company's profits from
being attacked by competitive business forces. Without an Economic
Moat, competition from rivals will ensure that high returns of a companyare lowered to the level of economic cost of capital … or even below.
Companies with “deep, dangerous moats” outperform those without,
both in terms of financial performance and stock returns.
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6-Force Framework of LeversOr how to multiply stock value!
Summary FAQs
We present the summary of this report in the form of 5 FAQs (read as “Facts”, and short for
Frequently Asked Questions).
FAQ #1: What is the 6-Force Framework of Levers?
A perennial truth of equity investing worldwide is this – for a given common set of macro-
economic parameters, there is wide divergence in stock price performance. We present a
6-Force Framework of Levers (i.e. factors or ratios), which taken together, explain the reasons
behind such divergence.
The 6-Force Framework of Levers
Total Stock Lever
=
Earnings Lever
X
Valuation Lever
1. Country Lever
x
2. Sector Leverx
3. Strategic Lever
x
4. Operating Lever
x
5. Financial Lever
6. Valuation Lever
NOTE: This report also covers 3 non-quantitative levers which in turn may affect one or more of the
above 6 quantitative levers. These are (1) Regulatory Lever, (2) Corporate Action Lever and
(3) Externality Lever.
FAQ #2: How does this 6-Force Framework work?
Total Stock Lever (TSL) is the master lever which connects stock price change to a distant
macroeconomic variable, say, Global GDP. Thus –
Total Stock Lever (TSL) = Stock Price
Global GDP
(Note: ∆ stands for delta i.e. percentage change in a year
If period > 1 year, CAGR is used to compute ∆)
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For non-Financial sector companies –
TSL = Stock Price = EPS x Stock Price
Global GDP Global GDP EPS
= Earnings Lever (EL) x Valuation Lever (VL)
Therefore, Stock Price = Global GDP x EL x VL
EL = EPS
Global GDP
= ∆Country GDP x ∆Sector Sales x ∆Co. Sales x ∆EBIT x ∆EPS
∆Global GDP ∆Country GDP ∆Sector Sales ∆Co. Sales ∆EBIT
= Country x Sector x Strategic x Operating x Financial
Lever(CL) Lever(SL) Lever(StL) Lever(OL) Lever(FL)
Therefore, Stock Price = Global GDP x [CL x SL x StL x OL x FL] x [VL]
For Financial sector companies –
TSL = Stock Price = Book value x Stock Price
Global GDP Global GDP Book value
= Book Value Lever (BL) x Valuation Lever (VL)
Therefore, Stock Price = Global GDP x BL x VL
BL = BV
Global GDP
= ∆Country GDP x ∆Agg. NII x ∆Bank NII x ∆PAT x ∆BV
∆Global GDP ∆Country GDP ∆Agg. NII ∆NII ∆PAT
= Country x Sector x Strategic x Operating x Equity
Lever(CL) Lever(SL) Lever(StL) Lever(OL) Lever(EL)
Therefore, Stock Price = Global GDP x [CL x SL x StL x OL x EL] x [VL]
The 6-Force Framework is unique to each sector and company at different points of time.
Thorough understanding of the same provides valuable insights into past performance and
likely future trends.
Non-quantitative levers: In addition to the 6 quantitative levers discussed above, there are at
least 3 major non-quantitative levers which directly or indirectly impact stock prices –
1.
Regulatory Lever (change in policies affecting economy, sectors or stock market)
2. Corporate Action Lever (change of management, stake hike, delisting offer etc)
3. Externality Lever (uncontrollable external events like drought, earthquake, wars etc).
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FAQ #3: Has the 6-Force worked in the past? What are the key lessons?
For a deeper understanding of various levers, we assessed sector and stock data over the full
economic cycle period of FY03-14, divided into two phases – boom (FY03-08) and lull (FY08-14).
The key takeaways are:
Sector-level takeaways:
• The top performing major sectors over the full economic cycle FY03-14 include: (1) Specific
Consumer segments – Alcoholic beverages, Paints, Tobacco, (2) Gems & Jewelry,
(3) Infrastructure/Construction, (4) Capital Goods, (5) Steel, and (6) Autos – Cars, CVs, and
Auto Ancillaries including Tyres.
• The worst performing major sectors over FY03-14 include: (1) Media, (2) Shipping,
(3) Fertilizers, (4) Power Utilities and (5) Oil & Gas.
• Only few sectors meaningfully outperformed the markets in both the boom phase (FY03-08)
and the lull phase (FY08-14) – (1) Alcoholic beverages, (2) Gems & Jewelry, (3) Autos – Cars,(4) Agro Chemicals and (5) Auto Ancillaries.
• Across business cycles, Revenue and Operating Levers are more important determinants of
outperformance than Financial Lever.
Company-level takeaways:
• Expect levers to work strongly in (1) Emerging, high-growth sectors and (2) Market leaders
within these high-growth sectors.
• Non-quantitative Regulatory Lever and Corporate Action Lever play a critical role in
influencing all the quantitative levers.
•
Expect company-specific levers – Strategic, Operating and Financial – to work strongly incases where the market opportunity is sizable, and the company has just completed major
capacity expansion(s).
• If interest rates are expected to significantly ease, high debt-carrying and high interest-
paying companies are excellent Financial Lever plays.
• Major change in management and/or corporate strategy is a key trigger for stock levers to
play out.
• Quality of management is a key factor for performance breakthrough or breakdown.
FAQ #4: How can the 6-Force Framework be applied?
The 6-Force Framework of Levers is powerful, first, to precisely understand the drivers behind
superior stock performance, and second, to identify potential outperformers going forward.
The simple yet accurate mathematics involved holds potential for wide-ranging applications, an
area of ongoing research.
The 3 applications of the 6-Force Framework discussed in this report are –
(1) Determine sector allocation strategy
(2) Create future market scenarios and(3) Identify potential super-performers.
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APP #1: Determine sector allocation strategy – Key exhibits
[A] Sales Growth Leverage map of sectors
[B] Operating Leverage map of high growth leverage sectors
[C] Sector Allocation Strategy based on [A] and [B] above
Macroeconomic Assessment Overweight Sector
Quadrants
from [A] & [B]
Other Quadrants / Sectors for
selective buysDomestic
(Boom / Lull)
Global
(Tailwind/Headwind)
Boom Tailwind O1, O2 Financials, Technology
Boom No Tailwind O1, O3 Financials, O4
Lull No Headwind G4 (ex Fin. PSUs), O3 G3, O4Lull Headwind G4 (ex Fin. PSUs), G3 O4
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APP #2: Create future market scenarios – Key exhibits
Preliminary calculations
FY03-08
(Boom)
FY08-14
(Lull)
FY03-14
(Full cycle)
Delta (CAGR %) -1 GDP 15 15 15
2 Sales 31 17 23
3 EBIT 38 12 23
4 PAT 39 10 23
5 EPS 25 8 16
6 Opening EPS (INR) 272 833 272
7 Closing EPS (INR) 833 1,339 1,339
8 Sensex 39 6 20
9 Opening Sensex level 3,049 15,644 3,049
10 Closing Sensex level 15,644 22,386 22,386
Sensex P/E (x)
11 Opening 11 19 1112 Closing 19 17 17
Key Levers (Formula in brackets based on row nos.)
13 Revenue Lever (2 ÷ 1) 2.1 1.1 1.6
14 Operating Lever (3 ÷ 2) 1.2 0.7 1.0
15 Financial Lever (5 ÷ 3) 0.7 0.7 0.7
16 Earnings Lever (13 x 14 x 15) 1.7 0.6 1.1
17 Valuation Lever (8 ÷ 5) 1.5 0.7 1.3
18 Total Sensex Lever (16 x 17) 2.7 0.4 1.4
Sensex scenarios using Earnings Lever
FY14-16 [Square brackets give row-based formula] Optimistic Pessimistic Moderate
1 GDP CAGR (%) – estimated 13.2 13.2 13.2
2 Earnings Lever (x) – row 16 of previous table 1.7 0.6 1.1
3 Sensex EPS CAGR (%) [1 x 2] 23 7 14
4 FY14 Sensex EPS 1,339 1,339 1,339
5 FY16 Sensex EPS 2,019 1,544 1,743
6 FY16 Sensex P/E range (x) -
a. Scenario A 17 11 14
b. Scenario B 20 13 16
c. Scenario C 22 15 18
7 FY16 Sensex average [Avg of 7a, 7b, 7c] 39,706 20,078 27,881
a. Scenario A [5 x 6a] 34,322 16,989 24,396
b. Scenario B [5 x 6b] 40,379 20,078 27,881c. Scenario C [5 x 6c] 44,416 23,166 31,366
8 FY14-16 Market average return (%) 33 -5 12
a. Scenario A 24 -13 4
b. Scenario B 34 -5 12
c. Scenario C 41 2 18
APP #3: Identify potential outperformers
We adapted the approach outlined in App #2 to sift the 30 Sensex constituent stocks into 4
categories – Super-performers, Outperformers, Market performers and Underperformers – asdepicted on next page.
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Sensex stocks - Earnings Lever v/s Valuation Matrix
Note: The bracket next to Bloomberg ticker carries Earnings Lever (x) | EPS CAGR (%), (Disc.)/Prem. to long-period median P/E
E.g. for NTPC, expect FY14-16 Earnings Lever of 1.2x i.e. EPS CAGR of 15%, and it is trading at 34% discount to LPA valuations.
FAQ #5: Which stocks offer a play on the 6-Force Framework?
We believe the following 20 investment ideas offer a play on the 6-Force Framework –
• Sector Lever Jubilant Foodworks, Symphony
• Strategic Lever Alembic Pharma, Gujarat Pipapav Port, J K Cement,
Kaveri Seeds, TVS, Arvind
• Operating Lever Idea Cellular, Bharti Infratel, Maruti Suzuki, Ashok Leyland
• Financial Lever Jain Irrigation, BHEL
• Regulatory Lever ONGC, HPCL
• Corporate Action Lever United Spirits, PVR, Eicher Motors, Crompton Greaves
Besides, we have 5 stocks on the watch-list given major corporate/regulatory action – Infosys
(new CEO), Sun Pharma (Ranbaxy takeover), IDFC (bank license), MCX (stake by Kotak
Mahindra) and Tata Power (potential tariff revision for its UMPP project).
Subsequent pages present a detailed report on the 6-Force Framework of Levers.
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1. BackdropFrom subjective diagnosis to objective prognosis
“Opinions can be debated … not facts.”
– Anonymous
A perennial truth of equity investing worldwide is this – for a given common set of macro-
economic parameters, there is wide divergence in stock price performance. In India, for
instance, during the boom phase of FY03-08, average real GDP growth was 8.9% and nominal
GDP growth 14.5%. However, stock returns of 670 companies were distributed from -20% to as
high as 220%. Likewise, in the lull phase of FY08-14, real GDP growth fell to 6.7% while nominal
GDP growth was almost unchanged. And yet, stock returns of the same 670 companies ranged
from -40% to 70%.
Significant divergence in stock prices for the same macroeconomic conditions
The above divergence in stock performance is primarily explained by diagnosing the interplay of
multivariate factors top-down, popular as EIC i.e. Economy-Industry-Company. However, in
most cases, such diagnosis tends to be subjective and qualitative, and hence less amenable to
objective prognosis. In this report, we use key quantitative metrics (called “Levers”) to
objectively link stock price performance to macroeconomic parameters.
Once such past linkages are analyzed, understood and established, the insights can be adapted
and applied to build likely scenarios of future stock performance.
2. Defining Lever, Stock Lever & Stock LeverageIntroducing force-multipliers into stocks
“If you wish to converse with me, first, define your terms.”
– Voltaire, French philosopher and writer
The terms “Lever” and “Leverage” can be defined and described variously, even in the field of
equity investing. For the purposes of this report, the key terms are defined as under –
1. LEVER: Any device or mechanism which multiplies the force applied at one end, leading to a
greater impact at the other i.e. a force-multiplier.
0
30
60
90
120
150
180
< ( 2 0 )
( 2 0 ) - 0
0 - 2 0
2 0 - 4 0
4 0 - 6 0
6 0 - 8 0
8 0 - 1 0 0
1
0 0 - 1 2 0
1
2 0 - 1 4 0
1
4 0 - 1 6 0
1
6 0 - 1 8 0
1
8 0 - 2 0 0
2
0 0 - 2 2 0
> 2 2 0
FY03-08 GDP CAGR:
– Real 8.9%
– Nominal 14.5%
Sensex CAGR 39%
0
30
60
90
120
150
180
< ( 4 0 )
( 3 0 ) - ( 4 0 )
( 3 0 ) - ( 2 0 )
( 2 0 ) - ( 1 0 )
( 1 0 ) - 0
0 - 1 0
1 0 - 2 0
2 0 - 3 0
3 0 - 4 0
4 0 - 5 0
5 0 - 6 0
6 0 - 7 0
> 7 0
FY08-14 GDP CAGR:
– Real 6.7%
– Nominal 14.7%
Sensex CAGR 6%
Main Report
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2. STOCK LEVER: A factor (quantitative or qualitative), a small change in which can potentially
magnify the change in stock price i.e. stock value multipliers.
3. STOCK LEVERAGE: The process of Stock Levers at work, typically at 4 levels – (1) Economy,
(2) Sector, (3) Company, and (4) Stock Market.
3. Types of Stock LeversThe 6-Force Framework
“Give me a place to stand and a lever long enough, and I can move the earth.”
– Archimedes, Greek mathematician and scientist
As stated earlier, Stock Levers provide objective, quantitative and mathematically-operable
linkage between stock prices and distant macro-economic variables. Thus, the “longest” Stock
Lever may well be the one which links stock price performance in any country to global GDPgrowth. We can term this as Total Stock Lever. Thus –
Total Stock Lever (TSL) = Stock Price
Global GDP
(Note: ∆ stands for delta i.e. percentage change in a year
If period > 1 year, CAGR is used to compute ∆)
To make Total Stock Lever more granular, we split it into 6 sub-levers under 2 heads as under –
The 6-Force Framework of LeversTotal Stock Lever
=
Earnings Lever
X
Valuation Lever
1. Country Lever
x
2. Sector Lever
x
3. Strategic Lever
x
4. Operating Lever
x
5. Financial Lever
6. Valuation Lever
NOTE: Besides, there are 3 non-quantitative levers which in turn may affect one or more of these 6
quantitative levers – (1) Regulatory Lever, (2) Corporate Action Lever and (3) Externality Lever.
The above framework is broadly applicable for all sectors. However, the specific levers are
different for the non-Financial and Financial sectors. These levers are fairly self-explanatory,
and have been summarized here.
For detailed explanation, see Annexure 1 (Levers for Non-Financial sectors, page 43), Annexure
2 (Lever for Financial sector, page 47), and Annexure 3 (Non-quantitative levers, page 50).
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3.1 Levers for non-Financial companies
Earnings Lever and Valuation Lever are multiplicative in nature such that –
TSL = Stock Price = EPS x Stock Price
Global GDP Global GDP EPS
= Earnings Lever (EL) x Valuation Lever (VL)
Therefore, Stock Price = Global GDP x EL x VL
Next, Earnings Lever is a product of 5 sub-levers as under –
EL = EPS
Global GDP
= ∆Country GDP x ∆Sector Sales x ∆Co. Sales x ∆EBIT x ∆EPS
∆Global GDP ∆Country GDP ∆Sector Sales ∆Co. Sales ∆EBIT
= Country x Sector x Strategic x Operating x Financial
Lever(CL) Lever(SL) Lever(StL) Lever(OL) Lever(FL)
Therefore, EPS = Global GDP x [CL x SL x StL x OL x FL]
3.2 Levers for Financial companies
For Financial sector companies, Book Value is more relevant and important than EPS. Hence, all
levers are adapted to suit this and other characteristics of the business.
TSL = Stock Price = Book value x Stock Price
Global GDP Global GDP Book value
= Book Value Lever (BL) x Valuation Lever (VL)
Therefore, Stock Price = Global GDP x BL x VL
Here too, Book Value Lever is a product of 5 sub-levers as under –
BL = Book Value
Global GDP
= ∆Country GDP x ∆Agg. NII x ∆Bank NII x ∆PAT x ∆BV
∆Global GDP ∆Country GDP ∆Agg. NII ∆NII ∆PAT
= Country x Sector x Strategic x Operating x Equity
Lever(CL) Lever(SL) Lever(StL) Lever(OL) Lever(EL)
Therefore, Book Value = Global GDP x [CL x SL x StL x OL x EL]
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The 6-Force Framework is unique to each sector and company at different points of time.
Thorough understanding of the same provides valuable insights into past performance and
likely future trends. Given the above mathematically accurate equations, once the various
levers are analyzed, understood and established, it should be possible to estimate change in
local stock price for a given or expected growth in global or local GDP.
Flexibility of Levers
The leverage framework is flexible in terms of the starting point. Thus, Global GDP is the
remotest macroeconomic variable. However, one may start the process with country GDP as
well, in which case –
1.
The Country Lever (CL) becomes redundant, and
2. The change in EPS will be linked to country GDP growth, rather than global GDP growth.
Thus, EPS = GDP x [SL x StL x OL x FL] and Stock Price = EPS x Valuation Lever
Likewise, if we start the process with expected growth in sector (i.e. ∆Sector Sales), the Sector
Lever (SL) becomes redundant.
Thus, EPS = Sector Sales x [StL x OL x FL] and Stock Price = EPS x Valuation Lever
3.3 Non-quantitative levers
In addition to the quantitative levers discussed above, there are at least 3 major non-
quantitative levers which directly or indirectly impact stock prices –
1. Regulatory Lever (change in policies affecting economy, sectors or stock market)
2. Corporate Action Lever (change of management, stake hike, delisting offer, etc)
3. Externality Lever (uncontrollable external events like drought, earthquake, wars, etc).
We now proceed to cover case studies where these levers have played out in the past.
4. Case studies and insightsWhere the 6-Force Framework has worked in the past
“Study the past if you would define the future.”
― Confucius, Chinese thinker and philosopher
For a deeper understanding of various levers, we assessed sector and stock data over the full
economic cycle period of FY03-14, divided into two phases – boom (FY03-08) and lull (FY08-14).
The key takeaways from these case studies are summarized below (for full details, see
Annexure 4, pages 51-63).
4.1 Sector Case Studies – Key takeaways
• The absolute and relative stock market performance of most sectors varies, depending on
the macro-economic conditions.
• The top performing major sectors over the full economic cycle FY03-14 include: (1) Specific
Consumer segments – Alcoholic beverages, Paints, Tobacco, (2) Gems & Jewelry,
(3) Infrastructure/Construction, (4) Capital Goods, (5) Steel, and (6) Autos – Cars, CVs, and
Auto Ancillaries including Tyres.
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FY03-14 – Top outperforming sectors
• The worst performing major sectors over FY03-14 include: (1) Media, (2) Shipping,
(3) Fertilizers, (4) Power Utilities and (5) Oil & Gas.
FY03-14 – Major underperforming sectors
• Only few sectors meaningfully outperformed the markets in both the boom phase (FY03-08)
and the lull phase (FY08-14) – (1) Alcoholic beverages, (2) Gems & Jewelry, (3) Autos – Cars,
(4) Agro Chemicals and (5) Auto Ancillaries.
• Across business cycles, Revenue and Operating Levers are more important determinants of
outperformance than Financial Lever. As tabled below, the differential in levers between
outperforming and underperforming sectors was highest in Operating Lever, followed by
Revenue Lever and Financial Lever.
How levers differ for outperforming sectors vis-à-vis underperforming ones
Lever Formula FY03-14 Median
All
sectors
Out-
performers
Under-
performers
Differential
(x)
Revenue Lever ∆Sales/∆GDP 1.2 1.3 1.0 1.3
Operating Lever ∆EBIT/∆Sales 1.0 1.1 0.7 1.4
Financial Lever ∆EPS/∆EBIT 1.0 1.0 0.8 1.2
Valuation Lever ∆Mkt Cap/∆EPS 1.4 1.4 1.4 1.0
3.93.4 3.2
2.8 2.6 2.5 2.3 2.3 2.2 2.2 2.1
1.4
A l c o h o l i c
B e v e r a g e s
G e m s &
J e w e l l e r y
M i n i n g &
r e l a t e d
A u t o - P V s
R e a l t y
A g r o
C h e m i c a l s
P a i n t s
A u t o - C V s
A u t o A n c .
I n f r a s t r u c t u r e
T o b a c c o
P r o d u c t s
B S E S e n s e x
Total Sector Lever i.e. Mkt Cap/ GDP (FY03-14)
0.2
0.9 1.0 1.0 1.1 1.1 1.2 1.2 1.2 1.2
1.4
I T E d u c a t i o n
M e d i a
S h i p p i n g
F e r t i l i z e r s
U t i l i t i e s
C r u d e O i l , G a s
R e f i n e r i e s
C o n s u m e r -
P e r s o n a l , F o o d
T e c h n o l o g y
P a p e r
B S E S e n s e x
Total Sector Lever i.e. Mkt Cap/ GDP (FY03-14)
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4.2 Company Case Studies – Key takeaways
Case Study #1: Bharti Airtel
[All levers]
[A] Boom phase FY04-08
• Expect levers to work strongly in (1) Emerging, high-growth sectors and (2) Market leaders
within these high-growth sectors.
• Businesses which entail huge start-up investments are potential candidates for stock super-
performance when they achieve critical levels of scale.
• Rich valuations should not be a deterrent to buy hyper-growth stocks, which will likely super-
perform even if there is any subsequent correction in valuation.
Bharti Airtel – The 6-Force Framework (x)
Formula FY04-08
Global Nominal GDP CAGR (%) ∆Global GDP 10.4
Benchmark Lever ∆BSE Sensex / ∆Global GDP 2.8
TOTAL STOCK LEVER Stock Price / Global GDP 5.0
EARNINGS LEVER EPS / Global GDP 8.6
Country Lever ∆India GDP / ∆Global GDP 1.5
Sector Lever ∆Telecom Revenue / ∆India GDP 1.5
Strategic Lever ∆Bharti Sales / ∆Telecom Revenue 2.4
Operating Lever ∆EBIT / ∆Revenue 1.4
Financial Lever ∆EPS / ∆EBIT 1.2
a. Debt Lever ∆PBT / ∆EBIT 1.2
b. Tax Lever ∆PAT / ∆PBT 1.0
c. Equity Lever ∆EPS / ∆PAT 1.0
VALUATION LEVER Stock Price / EPS 0.6
Bharti’s FY03-08 PAT performance Despite P/E de-rating, Bharti stock
reflects multiple levers at work! super-performs led by FY04-08 EPS CAGR
[B] Lull phase FY08-14
• Non-quantitative Regulatory Lever and Corporate Action Lever play a critical role in
influencing all the quantitative levers.
• Change in competitive landscape is a key trigger for stock performance.
• Competitive advantage is always local and does not automatically migrate to other
geographies. Hence, mega global acquisitions must be critically analyzed for potential
negative play of levers, leading to stock under-performance.
-2.0
5.115.0
22.6
42.6
67.0
-8.4%
10.5%
18.7% 19.4%23.0%
24.8%
FY03 FY04 FY05 FY06 FY07 FY08
Adj PAT (INR b)
PAT Margin
0
100
200
300
400
500
600
M a r - 0 4
S e p - 0 4
M a r - 0 5
S e p - 0 5
M a r - 0 6
S e p - 0 6
M a r - 0 7
S e p - 0 7
M a r - 0 8
Bharti
Sensex (Re-based)
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Bharti’s FY08-14 PAT dragged down Bharti stock underperforms in FY08-14
by regulatory & corporate action levers despite valuation re-rating
Case Study #2: Amara Raja Batteries
[Sector, Strategic, Operating & Valuation Levers]
• Expect company-specific levers – Strategic, Operating and Financial – to work strongly in
cases where the market opportunity is sizable, and the company has just completed major
capacity expansion(s).
• Duopoly or monopolistic competitive structure in growth sectors is favorable for levers to
play out.
Amara Raja - The 6-Force Framework (x)
Levers (x) FY03-08 FY08-14 FY03-14
Global Nominal GDP CAGR (%) 10.8 4.6 7.4
∆BSE Sensex / ∆Global GDP 3.6 1.3 2.7
TOTAL STOCK LEVER 7.6 7.6 7.4
EARNINGS LEVER 6.2 3.8 5.1
Country Lever 1.3 3.2 2.0
Sector Lever 1.6 1.3 1.4
Strategic Lever 2.0 1.1 1.5
Operating Lever 1.7 1.0 1.4
Financial Lever 0.9 0.8 0.9
a. Debt Lever 0.9 1.1 1.0
b. Tax Lever 1.0 1.0 1.0
c. Equity Lever 1.0 0.7 0.9
VALUATION LEVER 1.2 2.0 1.5
All levers played out well (FY03-14) The stock super-performs the benchmark
67.084.7 89.8
60.542.6
22.8 27.7
24.8%22.9%
21.5%
10.2%
6.0%
3.0% 3.2%
FY08 FY09 FY10 FY11 FY12 FY13 FY14
Adj PAT (INR b)
PAT Margin
100
200
300
400
500
600
M a r - 0 8
S e p - 0 8
M a r - 0 9
S e p - 0 9
M a r - 1 0
S e p - 1 0
M a r - 1 1
S e p - 1 1
M a r - 1 2
S e p - 1 2
M a r - 1 3
S e p - 1 3
M a r - 1 4
Bharti
Sensex (Re-based)
0
3
6
9
12
0
1,000
2,000
3,000
4,000
F Y 0 3
F Y 0 4
F Y 0 5
F Y 0 6
F Y 0 7
F Y 0 8
F Y 0 9
F Y 1 0
F Y 1 3
F Y 1 4
PAT (INR m, LHS)
PAT Margin (%)
0
100
200
300
400
M a r - 0
3
M a r - 0
4
M a r - 0
5
M a r - 0
6
M a r - 0
7
M a r - 0
8
M a r - 0
9
M a r - 1
0
M a r - 1
1
M a r - 1
2
M a r - 1
3
M a r - 1
4
Amara Raja
Sensex (Re-based)
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Case Study #3: CESC
[Financial Lever]
• If interest rates are expected to significantly ease, high debt-carrying and high interest-
paying companies are excellent Financial Lever plays.
•
The impact of Financial Lever tends to be shorter than that of Strategic and OperatingLevers.
• Gains of Financial Lever may be nullified by faulty capital allocation triggering adverse play
of Strategic and/or Operating Leverage.
Huge benefit of Financial Lever during FY03-08 … … nullified during FY08-14, due to Spencer
CESC - The 6-Force Framework (x)
Levers (x) FY03-08 FY08-14
Global Nominal GDP CAGR (%) 10.8 4.6
∆BSE Sensex / ∆Global GDP 3.6 1.3
TOTAL STOCK LEVER 8.8 0.7
EARNINGS LEVER 8.6 2.3
Country Lever 1.3 3.2
Sector Lever 0.9 1.2
Strategic Lever 0.4 0.7
Operating Lever 0.5 1.6
Financial Lever 38.4 0.5
VALUATION LEVER 1.0 0.3
CESC stock super-performs over FY03-08 … … but underperforms over FY08-14
Case Study #4: TCS
[Corporate Action Lever + Strategic & Operating Levers]
• Major change in management and/or corporate strategy is a key trigger for stock levers to
play out.
• Panic-stricken markets offer great opportunity to buy industry leaders with global
competitive advantage cheap (TCS stock at P/E of 10x in FY09). In such cases, Valuation
Lever will amplify earnings growth, driving stock performance.
0
100
200
300
400
500
600
700
M a r - 0 3
S e p - 0 3
M a r - 0 4
S e p - 0 4
M a r - 0 5
S e p - 0 5
M a r - 0 6
S e p - 0 6
M a r - 0 7
S e p - 0 7
M a r - 0 8
CESC
Sensex (Re-based)
100
200
300
400
500
600
M a r - 0 8
S e p - 0 8
M a r - 0 9
S e p - 0 9
M a r - 1 0
S e p - 1 0
M a r - 1 1
S e p - 1 1
M a r - 1 2
S e p - 1 2
M a r - 1 3
S e p - 1 3
M a r - 1 4
CESC
Sensex (Re-based)
0
3
6
9
12
15
18
0
1,000
2,000
3,000
4,000
F Y 0 3
F Y 0 4
F Y 0 5
F Y 0 6
F Y 0 7
F Y 0 8
F Y 0 9
F Y 1 0
F Y 1 1
F Y 1 2
F Y 1 3
F Y 1 4
Interest (net) (INR m)
% of Sales, RHS
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Following appointment of new CEO in mid-FY10, TCS bridged the gap and eventually overtook then
bellwether Infosys on key metrics such as Growth, EBITDA Margin, P/E
FY05-09, TCS underperformed Infosys; Post FY09, TCS has super-performed to emerge as India’s largest
market cap company currently
Case Study #5: Sesa-Sterlite (then Sesa-Goa)
[Regulatory Lever]
• Regulatory Lever can work as a brake or a breakthrough for the fortunes of a company.
• Favorable regulatory changes or relaxation of past regulatory curbs hold potential for stock
super-performance.
• Stocks vulnerable to regulation merit low valuation to factor in the risk of unexpected
adverse regulatory changes.
Sesa Goa: Curbs on iron-ore mining in Stock slides post mining curbs; fall cushionedKarnataka & Goa caused plunge in profits due to consolidation of Cairn India PAT
20
25
30
35
40
F Y 0 5
F Y 0 6
F Y 0 7
F Y 0 8
F Y 0 9
F Y 1 0
F Y 1 1
F Y 1 2
F Y 1 3
F Y 1 4
EBITDA Margin Trend (%)
TCS
InfosysNew CEO
at TCS0
10
20
30
40
F Y 0 5
F Y 0 6
F Y 0 7
F Y 0 8
F Y 0 9
F Y 1 0
F Y 1 1
F Y 1 2
F Y 1 3
F Y 1 4
Year-end trailing P/E (x)
TCS
Infosys New CEO
at TCS
0
50
100
150
200
M a r - 0 5
M a r - 0 6
M a r - 0 7
M a r - 0 8
M a r - 0 9
TCS (Re-based)
Infosys (Re-based)
0
150
300
450
600
750
900
M a r - 0 9
M a r - 1 0
M a r - 1 1
M a r - 1 2
M a r - 1 3
M a r - 1 4
TCS (Re-based)Infosys (Re-based)
0
10
20
30
40
50
0
10
20
30
40
F Y 0 3
F Y 0 4
F Y 0 5
F Y 0 6
F Y 0 7
F Y 0 8
F Y 0 9
F Y 1 0
F Y 1 1
F Y 1 2
F Y 1 3
Sesa Goa Standalone PAT (INR b)
PAT margin (%) - RHS
0
100
200
300
400
500
M a r - 0 3
M a r - 0 4
M a r - 0 5
M a r - 0 6
M a r - 0 7
M a r - 0 8
M a r - 0 9
M a r - 1 0
M a r - 1 1
M a r - 1 2
M a r - 1 3
Sesa Goa Stock Price
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Case Study #6: Satyam Computer (now merged in Tech Mahindra)
[Corporate Action Lever]
• Quality of management is a key factor for performance breakthrough or breakdown.
• Fraudulent and minority shareholder unfriendly management will eventually and invariably
“break down” stock performance.• All management-change cases must be monitored as they hold potential for breakthroughs,
resulting in stock super-performance.
Satyam Computer: PAT rebounds post Stock plunges on fraud announcement,
fraud, after Tech Mahindra takeover but recovers on profit turnaround
See Annexure 4 (page 51 onwards) for full details on all case studies.
5. Applying the 6-Force FrameworkSector allocation, Scenario-building, Stock selection
“Testing assumptions allows you the power to create possibilities.”
― Lisa A Mininni, business strategist and author
The 6-Force Framework of Levers is powerful, first, to precisely understand the drivers behind
superior stock performance, and second, to identify potential outperformers going forward.
The simple yet accurate mathematics involved implies huge potential for wide-ranging
applications, an area of ongoing research.
The initial 3 applications of leverages discussed here are –
1.
Determine sector allocation strategy
2. Create market scenarios
3. Identify potential outperformers.
5.1 APP #1: Sector Allocation Strategy
From the perspective of geographic influence, sectors can be classified into:
(1) Domestic and (2) Global. Within this classification, the sectors can be further organized into
(1) High Growth Leverage (to GDP) and (2) Medium/Low Growth Leverage, as mapped in [A].Next, the sectors with high growth leverage can be organized on the basis of (1) High Operating
Leverage (i.e. big change in EBIT for a small change in Sales) and (2) Low Operating Leverage,
also mapped in [B].
0.8
3.5 5.0
7.19.6
14.116.9
-2.8
2.5
-1.6
12.8
F Y 0 2
F Y 0 3
F Y 0 4
F Y 0 5
F Y 0 6
F Y 0 7
F Y 0 8
F Y 0 9
F Y 1 0
F Y 1 1
F Y 1 2
Satyam Computer PAT (INR b)
Accounting fraud &
also class action claims
Tech
Mahindra
takes over
0
100
200
300
400
500
600
M a r - 0 3
M a r - 0 4
M a r - 0 5
M a r - 0 6
M a r - 0 7
M a r - 0 8
M a r - 0 9
M a r - 1 0
M a r - 1 1
M a r - 1 2
M a r - 1 3
Satyam Computer
Sensex (Re-based)
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As Financial Lever is a relatively less important determinant of stock market outperformance,
these two maps can be juxtaposed to outline an effective sector allocation strategy for an
equity portfolio, as tabled in [C].
[A] Growth Leverage map of sectors
[B] Operating Leverage map of high growth leverage sectors
[C] Sector Allocation Strategy based on [A] and [B] above
Macroeconomic Assessment Overweight Sector
Quadrants
from [A] & [B]
Other Quadrants / Sectors for
selective buysDomestic
(Boom / Lull)
Global
(Tailwind/Headwind)
Boom Tailwind O1, O2 Financials, Technology
Boom No Tailwind O1, O3 Financials, O4
Lull No Headwind G4 (ex Fin. PSUs), O3 G3, O4
Lull Headwind G4 (ex Fin. PSUs), G3 O4
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5.2 APP #2: Create future market scenarios
The 6-Force Framework can be used to create market scenarios of the future, by calculating
past levers for the benchmark index as a whole, considering it as one stock. For instance, we
calculated the past levers for BSE Sensex for the periods FY03-08 (boom), FY08-14 (lull) and
FY03-14 (full-cycle) as under –
Preliminary calculations
FY03-08 FY08-14 FY03-14
Delta (CAGR %) -
1 GDP 15 15 15
2 Sales 31 17 23
3 EBIT 38 12 23
4 PAT 39 10 23
5 EPS 25 8 16
6 Opening EPS (INR) 272 833 272
7 Closing EPS (INR) 833 1,339 1,3398 Sensex 39 6 20
9 Opening Sensex level 3,049 15,644 3,049
10 Closing Sensex level 15,644 22,386 22,386
Sensex P/E (x)
11 Opening 11 19 11
12 Closing 19 17 17
Key Levers (Formula in brackets based on row nos.)
13 Revenue Lever (2 ÷ 1) 2.1 1.1 1.6
14 Operating Lever (3 ÷ 2) 1.2 0.7 1.0
15 Financial Lever (5 ÷ 3) 0.7 0.7 0.7
16 Earnings Lever (13 x 14 x 15) 1.7 0.6 1.1
17 Valuation Lever (8 ÷ 5) 1.5 0.7 1.3
18 Total Sensex Lever (16 x 17) 2.7 0.4 1.4
Now, the levers arrived at above can be used to create future market scenarios as tabled below.
Sensex scenarios using Earnings Lever
FY14-16 Optimistic Pessimistic Moderate
1 Nominal GDP CAGR (%) – see next table 13.2 13.2 13.2
2 Earnings Lever (x) – based on row 16 above 1.7 0.6 1.1
3 Sensex EPS CAGR (%) [1 x 2] 23 7 14
4 FY14 Sensex EPS 1,339 1,339 1,339
5 FY16 Sensex EPS 2,019 1,544 1,743
6 FY16 Sensex P/E range (x) -
a. Scenario A 17 11 14
b. Scenario B 20 13 16
c. Scenario C 22 15 18
7 FY16 Sensex average [Avg of 7a, 7b, 7c] 39,706 20,078 27,881
a. Scenario A [5 x 6a] 34,322 16,989 24,396
b. Scenario B [5 x 6b] 40,379 20,078 27,881
c. Scenario C [5 x 6c] 44,416 23,166 31,366
8 FY14-16 Market return CAGR (%) - Average 33 -5 12
a. Scenario A 24 -13 4
b. Scenario B 34 -5 12c. Scenario C 41 2 18
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FY14-16E India’s Nominal GDP estimate
FY15E FY16E
1 Real GDP growth (%) 5.5 6.5
2 Multiplicative Factor (x) 1.055 1.065
3 Inflation (%) 7.0 6.5
4 Multiplicative Factor (x) 1.070 1.065
5 Nominal GDP growth (%) [based on row (2 x 4) - 1] 12.9 13.4
6 FY14-16 CAGR [based on row 5 above] 13.2
5.3 APP #3: Identify potential outperformers
The approach outlined in App #2 can also be applied to individual stocks, provided -
1.
The past levers are understood, established and suggest a pattern;
2.
The expected future macroeconomic scenario can be mapped to a similar scenario played
out in the past; and
3.
There is no major discontinuity in the company’s operations e.g. a mega acquisition,
business diversification, hive-off of some business division, etc.
5.3.1 Potential outperformers among Sensex constituentsWe undertook the following steps to sift the 30 Sensex constituent stocks into 4 categories -
(1) Super-performers, (2) Outperformers, (3) Market performers and (4) Underperformers -
• Over the full economic cycle FY03-14, we calculated key levers for all the 30 companies on a
2-year rolling CAGR basis i.e. FY03-05, FY04-06, FY05-07, and so on ending with FY12-14 (10
data periods for each lever).
•
We expect the next 2-3 years’ economic and business scenario to be in-between the lullperiod of FY08-14 and boom period of FY03-08.
• Given this, we believe the median values of the rolling CAGR data points should be a
reasonable representation of the likely earnings scenario.
• We calculated the Earnings Lever (i.e. ∆EPS/∆GDP) based on the product of median
Revenue Lever (i.e. ∆Sales/∆GDP) and Operating Lever (i.e. ∆EBIT/∆Sales), with Financial
Lever (∆EPS/∆EBIT) expected to broadly remain around 1x.
• For 9 of the 30 companies, we went with our bottom-up analyst estimates for FY14-16, due
to the reasons tabled below. As can be seen, most of the cases are to do with major change
(i.e. discontinuity) in the companies’ operations, making past established levers non-
applicable going forward.
• We also calculated the stocks’ discount/premium to long-period median P/E, which serves
as a proxy to the Valuation Lever i.e. re-rating/de-rating potential.
• We plotted the Sensex 30 companies on a 4x3 matrix juxtaposing Earnings Lever
(Low/Medium/High/Very High) with Valuation Attractiveness (Low/Medium/High).
• We believe this matrix captures potential Super-performers, Outperformers, Market
Performers and Underperformers among the Sensex constituents.
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Sensex stocks - Earnings Lever v/s Valuation Matrix
Note: The bracket next to Bloomberg ticker carries Earnings Lever (x) | EPS CAGR (%), (Disc.)/Prem. to long-period median P/E
E.g. for NTPC, expect FY14-16 Earnings Lever of 1.2x i.e. EPS CAGR of 15%, and it is trading at 34% discount to LPA valuations.
9 Sensex companies where past levers do not seem relevant
(in these cases, we have relied on our analyst estimates to calculate the Earnings Lever)
Sector Company Reason for past levers not being relevant
Autos Bajaj Auto Significant value migration to scooters
Hero MotoCorp End of association with Honda w.e.f. FY15
M&M Several inorganic growth initiatives
Tata Motors Significant turnaround in overseas subsidiary, JLR
Financials State Bank of India Discontinuous changes in NPA provisioning
Healthcare Sun Pharma Acquisition of Taro
Metals Sesa-Sterlite Mega merger and Cairn India acquisition
Telecom Bharti Airtel Acquisition of Zain
Utilities Tata Power Uncertainty over Mundhra UMPP tariff ruling
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6. Limitations of the 6-Force FrameworkThe meaning is more important than the math
“Real limitations can be reasonably challenged and expanded, but a hobbled mind is not
going anywhere.”– Bryant McGill , US-based author and human rights activist
Powerful though it may be, the 6-Force Framework of Levers has its limitations, which we need
to bear in mind, when applying the same. The two major situations when the 6-Force
Framework becomes mere math rather than meaning are –
1. Discontinuities in a company’s operation; and
2. Profit turnarounds i.e. loss to profit or profit to loss.
6.1 Limitation #1: Discontinuities in a company’s operationIn essence, the 6-Force Framework mathematically links changes in a remote macro-economic
variable to change in a company’s EPS (or book value in the case of financials). For the past such
linkages to make sense and be meaningfully applied in future, there needs to be a semblance of
continuity in the company’s operation. While this is likely to be so in most cases, there are a
fairly large number of events and actions which may cause a company’s future to be
significantly discontinuous from the past, and the framework may cease to apply.
These events and actions are mainly at the company level, but may also occasionally include
structural changes in the sector –
• Major mergers & acquisitions, divestitures or corporate restructuring (e.g. Tata Motors’
acquisition of JLR; Piramal Healthcare’s sale of domestic formulations business; Sesa-
Sterlite merger)
• Far-reaching change in company’s strategy or business-model (e.g. Hero MotoCorp
choosing to terminate its technical-cum-financial tie-up with Honda, Japan)
• Structural shift in the company’s market-place (e.g. “Scooter-ization” of 2-wheelers)
• Any major change in the regulatory framework (e.g. recent ban on iron-ore mining in Goa
and Karnataka, since partially lifted).
6.2 Limitation #2: Profit turnaroundsIn a sense, Profit turnaround (whether from loss to profit or profit to loss) is a special
discontinuity in a company’s operations. In such a case, the 6-Force Framework will most likely
carry meaning only until the Strategic Lever i.e. linking company sales to the economic variable.
But depending on whether the profit turnaround is at the EBIT or the PAT level, the Operating
Lever and the Financial Lever could end up as mere mathematical calculations without
providing any insight.
In fact, in the case profit turnarounds, very little math works e.g. even a simple calculation like
percentage change in PAT can be misleading, as the number will be negative whether from loss
to profit or from profit to loss.
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7. What to buy based on the 6-Force Framework20 stocks which offer play on various levers
“Have the courage of your knowledge and experience. If you have formed a conclusion from
the facts and if you know your judgment is sound, act on it – even though others may hesitateor differ.”
– Benjamin Graham , investing guru and co-author of “Security Analysis” with David Dodd
Sensex constituents apart, we sifted through the MOSL Universe of stocks to identify 20
investment ideas which offer a play on key levers, viz, Sector, Strategic, Operating, Financial,
Regulatory and Corporate Action Levers. The key investment argument for each investment
idea is tabled below.
20 lever plays to bet on
Lever & Stock ideas Key driver of likely stock super-performanceSector Lever i.e. sector performance itself largely drives company performance
Jubilant Foodworks Offers play on high 25%+ growth opportunity in pizza/QSRs
Symphony Air-coolers market growing @ 20%+; penetration rising rapidly
Strategic Lever i.e. competitive positioning/strategic initiative drives company performance
Alembic Pharma Outgrowing the sector via specialty therapies, aggressive US foray
Gujarat Pipapav Port Strategically located for higher share of India’s container traffic
J K Cement Timely commissioning of expansion before expected cement upcycle
Kaveri Seeds Beating sector growth via strong product line, distribution network
TVS Motor Offers play on scooters, which is growing faster than overall 2-wheelers
Arvind Rising share of branded retail sales to drive growth, boost margins
Operating Lever i.e. pricing, costs, product mix and scale drive company performance
Idea Cellular Bottomed-out RPMs, rising data revenue to boost profits
Bharti Infratel High fixed cost business; delta revenue directly flowing to PBT
Maruti Suzuki Improving product mix coupled with scale steadily expands margins
Ashok Leyland Best play on expected CV upcycle
Financial Lever i.e. favorable interest and net debt position impact company performance
Jain Irrigation Multi-pronged deleveraging strategy to drive down interest burden
BHEL Business revival could take net cash to over INR220b, 50% of MCap
Regulatory Lever i.e. favorable regulatory changes drive company performance
ONGC Lower subsidy share, higher gas price may swell profits
HPCL Full diesel deregulation will boost PAT
Corporate Action Lever i.e. specific corporate developments drive performance
United Spirits Majority stake by Diageo to bring plethora of improvements
PVR Cinemax acquisition lends scale, eases competition on the margin
Eicher Motors JV with Volvo opens up huge potential for CV portfolio
Crompton Greaves Proposed demerger of consumer division has value unlocking potential
Besides, we have 5 stocks on the watch-list given major corporate/regulatory action – Infosys
(new CEO), Sun Pharma (Ranbaxy takeover), IDFC (bank license), MCX (stake by Kotak
Mahindra) and Tata Power (potential tariff revision for its UMPP project).
In subsequent pages, we present a more structured yet concise argument for each of the above
6-Force ideas.
15
16
17
19
11
13
14
18
12
20
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| 6-Force Framework of Levers
6-Force Idea #1: Jubilant Foodworks (Bloomberg: JUBI IN)
SECTOR LEVER | Offers play on high 25%+ growth opportunity in pizza/QSRs
How the lever works Company brief & Investment case
India’s pizza market/QSR (Quick Service
Restaurants) opportunity is growing at
25%+ CAGR.
Thus, Sector Lever (i.e. Industry
Sales/ GDP) will be close to 2x.
Even if no other levers come into play
(usually, at least Operating Lever does),
EPS CAGR should be ~25% (given
nominal GDP growth of ~13%).
So, even if the stock looks a bit
expensive, valuations catch up in 1-2
years, and the stock outperforms.
• As the master franchisee of Dominos
Pizza Inc in India, Jubilant is the market
leader in the organized pizza market
with 55% overall share and 70% share in
home delivery segment.
• As of FY14, Jubilant has 726 outlets in
152 Indian cities. In FY15, it plans to add
another 150 outlets.
• The company’s other major revenue
stream – Dunkin’ Donuts – is yet to
breakeven, but holds good potential.
• Expect 35% EPS CAGR FY14-16E.
Financial & valuation snapshot Stock price performance (1 year)
(INR b) Price (INR): 1,235 / Mkt Cap (INR b): 81
/E March 2014 2015E 2016E 2017E
Net Sales 17.2 22.4 29.6 38.0
EBITDA 2.5 3.3 4.5 5.8
Margin (%) 14.8 14.5 15.1 15.4
dj PAT 1.3 1.6 2.3 3.1
EPS (INR) 19.2 25.3 35.1 46.8
EPS Gr. (%) -4 31 39 34
BV (INR) 87.0 112.2 147.3 194.1
RoE (%) 22.1 22.5 23.8 24.1
RoCE (%) 30.8 29.2 31.4 32.1
Payout (%) 0.0 0.0 0.0 0.0
aluations
P/E (x) 64 49 35 26
P/BV (x) 14.2 11.0 8.4 6.4
EV/EBITDA (x) 31.2 24.4 17.5 12.8.
850
1,050
1,250
1,450
1,650
S e p - 1 3
D e c - 1 3
M a r - 1 4
J u n - 1 4
S e p - 1 4
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| 6-Force Framework of Levers
6-Force Idea #2: Symphony (Bloomberg: SYML IN)
SECTOR LEVER | Air-coolers market growing @ 20%+; penetration rising rapidly
How the lever works Company brief & Investment case
Air-coolers market is about INR20b, but
with penetration of only 8%, and share
of organized market only 20%.
As a result, the organized air-cooler
market is growing @ 20%+ CAGR
(i.e. Sector Lever of 2.3x).
Besides home air-coolers, Symphony
has also diversified into industrial air-
coolers, yet another high-growth
segment.
Thus, high sector revenue growth itself
is a key driver of earnings.
• SYML is the India’s largest air-cooler
company, with 50% share (40% in
volumes) in the organized market,
followed by Kenstar (35%) and Bajaj
Electricals (15%).
• Its 10-12% pricing premium suggests
strong brand equity.
• Its India network consists of 750+
distributors and 16,400+ dealers. Its
global network spans 60 countries.
• Expect 28% EPS CAGR FY14-16E.
Financial & valuation snapshot Stock price performance (1 year)
(INR b) Price (INR): 1,329/ Mkt Cap (INR b): 47
/E June 2014 2015E 2016E 2017E
Net Sales 5.3 6.5 8.2 10.3
EBITDA 1.3 1.6 2.1 2.7
Margin (%) 23.6 25.0 25.5 26.0dj PAT 1.1 1.4 1.7 2.2
EPS (INR) 30.4 38.7 49.5 63.2
EPS Gr. (%) 77 28 28 28
BV (INR) 78.8 101.5 130.8 173.9
RoE (%) 42.7 42.9 42.6 41.5
RoCE (%) 54.6 58.0 57.5 56.1
Payout (%) 43 35 35 27
aluations
P/E (x) 44 34 27 21
P/BV (x) 16.9 13.1 10.2 7.6
EV/EBITDA (x) 36.9 28.1 21.5 16.3
Divd Yield (%) 1.0 1.0 1.3 1.3.
250
550
850
1,150
1,450
S e p - 1 3
D e c - 1 3
M a r - 1 4
J u n - 1 4
S e p - 1 4
Symphony Sensex - Rebased
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| 6-Force Framework of Levers
6-Force Idea #3: Alembic Pharma (Bloomberg: ALPM IN)
STRATEGIC LEVER | Outgrowing sector via specialty therapies, strong US foray
How the lever works Company brief & Investment case
The Indian healthcare sector will
continue its steady growth of ~15%.
But ALPM, under a new management
should grow much faster than industry
(i.e. Strategic Lever > 1):
(1) In India, it is shifting away from the
slowing generics business to fast-
moving specialty therapies; and
(2) US generics is likely to grow 5x over
FY13-16E to USD125m, as 50%+ of its
ANDAs are pending approval.
Expect ALPM’s revenue CAGR at 21%.
• ALPM started in 1907 as a tincture/
alcohol producer, and made its way into
modern medicine in 1940.
• Today, it is India’s 25th largest
formulations player, and also has
presence in over 75 other countries.
• Expect FY15 to be a year of (a) large
capex, (b) building front end in US, (c)
adding field force in India, and
(d) bumping up R&D activities.
• Expect 33% EPS CAGR FY14-16E,
following margin expansion of 280bp.
Financial & valuation snapshot Stock price performance (1 year)
(INR b) Price (INR): 414 / Mkt Cap (INR b): 78
/E March 2014 2015E 2016E 2017E
Net Sales 18.6 21.8 27.0 32.5
EBITDA 3.6 4.4 5.9 7.3
Margin (%) 19.2 20.2 22.0 22.5
dj PAT 2.4 3.1 4.2 5.2
EPS (INR) 12.5 16.2 22.1 27.5
EPS Gr. (%) 43 30 36 25
BV (INR) 35.8 48.0 65.4 87.1
RoE (%) 40.0 38.7 39.0 36.1
RoCE (%) 43.1 42.0 43.4 41.5
Payout (%) 24 22 18 18
aluations
P/E (x) 33 25 19 15
P/BV (x) 11.6 8.6 6.3 4.8
EV/EBITDA (x) 22.1 18.0 13.2 10.5
Divd Yield (%) 0.7 0.8 1.0 1.2.
130
220
310
400
490
S e p - 1 3
D e c - 1 3
M a r - 1 4
J u n - 1 4
S e p - 1 4
Alembic Pharma Sensex - Rebased
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| 6-Force Framework of Levers
6-Force Idea #4: Gujarat Pipavav Port (Bloomberg: GPPV IN)
STRATEGIC LEVER | Strategically located for higher share of container traffic
How the lever works Company brief & Investment case
India’s long-period sea cargo volume
growth is about 6%. However, due to
rising container-ization, container traffic
CAGR is 14%.
GPPV is favorably located in Gujarat on
the West coast. Further, GPPV is
expanding its container handling facility
from 0.8m TEUs to 1.35m TEUs, and
also adding 2m tons of liquid handling
capacity.
Expect revenue CAGR of ~20%
i.e. Strategic Lever > 1.
• Port Pipavav, India’s first private sector
port, is an important gateway port on
the West Coast of India for containers,
bulk and liquid cargo.
• GPPV is now owned by APM Terminals,
one of the world’s largest terminal
operators, part of global maritime giant,
AP Moller Maersk Group.
• Expect CY13-15E EPS CAGR of 54%, as
high revenue growth also kicks in
Operating Leverage (EBITDA margin up
12pp to 62% in CY15E).
Financial & valuation snapshot Stock price performance (1 year)
(INR b) Price (INR): 162 / Mkt Cap (INR b): 78
/E December 2013 2014E 2015E 2016E
Net Sales 5.2 6.9 8.1 9.6
EBITDA 2.6 4.2 5.1 6.1
Margin (%) 49.6 60.3 62.6 63.6dj PAT 1.8 3.3 4.3 4.2
EPS (INR) 3.6 6.9 9.0 8.8
EPS Gr. (%) 137 90 30 -2
BV (INR) 29.0 33.9 39.9 45.6
RoE (%) 13.4 22.0 24.3 20.6
RoCE (%) 13.2 20.4 22.7 24.3
Payout (%) 0 25 27 30
aluations
P/E (x) 45 23 18 18
P/BV (x) 5.6 4.8 4.1 3.6
EV/EBITDA (x) 30.5 18.1 14.6 11.9
Divd Yield (%) 0.0 1.5 1.7 1.9.
20
56
92
128
164
200
S e p - 1 3
D e c - 1 3
M a r - 1 4
J u n - 1 4
S e p - 1 4
Gujarat Pipavav Port Sensex - Rebased
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| 6-Force Framework of Levers
6-Force Idea #5: J K Cement (Bloomberg: JKCE IN)
STRATEGIC LEVER | Timely commissioning of expansion before cement upcycle
How the lever works Company brief & Investment case
Cement sector may well continue to
grow at its LPA of 15%.
However, J K Cement’s FY14-17 revenue
CAGR is expected to be higher at 24%
(Strategic Lever of 1.6x) as –
1.
It recently expanded its white
cement capacity by 50% to 0.6mt;
2. It is also poised to complete its
brownfield capacity, expanding
capacity 40% to 10.5mt.
3. Its 0.6mtpa white cement plant in
UAE is also commissioning shortly.
• JKCE is one of India's leading cement
producers with capacity of 7.5mt in
Rajasthan (4.5mt) & Karnataka (3mt).
• It is also India’s second largest white
cement producer (0.6mt capacity).
• JKCE has a favorable market mix —
North and West India account for ~70%
of dispatches; no exposure to the weak
Andhra Pradesh market.
• White cement is a cash cow with stable
EBITDA of INR2-2.5b p.a.
• Expect FY14-16E EPS CAGR of 111%.
Financial & valuation snapshot Stock price performance (1 year)
(INR b) Price (INR): 511 / Mkt Cap (INR b): 36
/E March 2014 2015E 2016E 2017E
Net Sales 27.8 37.5 45.3 53.0
EBITDA 3.4 5.9 9.1 12.2
Margin (%) 12.2 15.8 20.1 23.0
dj PAT 0.7 1.4 3.3 5.6
EPS (INR) 10.7 20.1 47.0 80.1
EPS Gr. (%) -67 88 133 70
BV (INR) 249.7 262.5 300.8 370.9
RoE (%) 4.5 7.8 16.5 23.7
RoCE (%) 7.2 8.9 13.9 18.4
Payout (%) 28 30 15 10
aluations
P/E (x) 48 25 11 6
P/BV (x) 2.0 1.9 1.7 1.4
EV/EBITDA (x) 17.3 10.7 6.5 4.1Divd Yield (%) 0.6 1.2 1.4 1.6
.
150
270
390
510
630
S e p - 1 3
D e c - 1 3
M a r - 1 4
J u n - 1 4
S e p - 1 4
J K Cements Sensex - Rebased
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| 6-Force Framework of Levers
6-Force Idea #6: Kaveri Seeds (Bloomberg: KSCL IN)
STRATEGIC LEVER | Beating sector growth via strong product line & distribution
How the lever works Company brief & Investment case
Indian hybrid seeds market is growing
at a steady 10%.
However, expect Kaveri Seeds revenue
CAGR at 22% (Strategic Lever 2.2x) as:
(1) It has one of India’s largest
anthology of crop germplasm;
(2) It has a dominant market share in
most crops; and
(3) It has a large sales network of over
15,000 distributors and dealers spread
across the country.
• High revenue growth apart, Kaveri is
also benefiting from –
(1) Season mix: In 2008, 85% of corn
sales were in kharif season while now it
is 65% with rabi contributing 35% of
volumes and 50% of value.
(2) Product mix: Selling price of single
cross hybrid corn is INR200/kg v/s
INR80-110/kg for 2-way and 3-way
cross hybrid corn, enabling 55- 60%
EBITDA margins.
• Expect FY14-16E EPS CAGR of 38%.
Financial & valuation snapshot Stock price performance (1 year)
(INR b) Price (INR): 841 / Mkt Cap (INR b): 58
/E March 2014 2015E 2016E 2017E
Net Sales 10.1 12.2 15.2 18.5
EBITDA 2.2 3.0 4.0 5.0
Margin (%) 21.9 25.0 26.2 27.0
dj PAT 2.1 3.0 4.0 5.0
EPS (INR) 30.7 43.6 58.0 73.2
EPS Gr. (%) 66 42 33 26
BV (INR) 75.0 109.3 155.7 213.9
RoE (%) 49.0 47.3 43.8 39.6
RoCE (%) 49.6 48.5 44.6 40.6
Payout (%) 16 18 17 18
aluations
P/E (x) 27 19 14 11
P/BV (x) 11.2 7.7 5.4 3.9
EV/EBITDA (x) 26.0 18.3 13.3 10.0Divd Yield (%) 0.6 1.0 1.2 1.6.
260
460
660
860
1,060
S e p - 1 3
D e c - 1 3
M a r - 1 4
J u n - 1 4
S e p - 1 4
Kaveri Seed Sensex - Rebased
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September 2014 29
| 6-Force Framework of Levers
6-Force Idea #7: TVS Motor Company (Bloomberg: TVSL IN)
STRATEGIC LEVER | Play on scooters, which is growing faster than 2-wheelers
How the lever works Company brief & Investment case
In FY14, India’s 2-wheeler sector grew
only 5.7%. However, within 2-wheelers,
scooters grew a handsome 28%.
This trend continues in FY15 – 1QFY15 2-
wheeler growth is 14% YoY, whereas
scooters growth is a sharp 38%.
TVS offers good play on this trend of
“Scooterization”. In scooters, it is the
second largest (after Honda). It has
recently launched new models like
“Jupiter” and “Zest”. 1QFY15 scooters
growth for TVS is a robust 53% YoY.
Besides, it is also getting aggressive on
the motorcycles front, both in terms of
product launches and promotion.
• TVS Motor Company is 4th largest two-
wheeler company in India.
• It offers the widest range of product in
the Indian 2/3-wheeler sector –
motorcycles, scooters, scooterettes,
mopeds, and 3-wheelers.
• Besides India, TVS has international
presence in more than 50 countries in
Asia, Africa and Latin America.
• Expect EPS CAGR of 58% with RoE
improving from 20% in FY14E to 33% in
FY16E.
• Further, expect TVS to be net-cash by
FY16E.
Financial & valuation snapshot Stock price performance (1 year)
(INR b) Price (INR): 219 / Mkt Cap (INR b): 104
/E March 2014 2015E 2016E 2017E
Net Sales 79.6 113.6 143.5 164.2
EBITDA 4.8 7.5 11.6 14.0
Margin (%) 6.0 6.6 8.1 8.6
dj PAT 2.6 4.4 7.5 9.3
EPS (INR) 5.5 9.3 15.7 19.5
EPS Gr. (%) 44 70 68 24
BV (INR) 29.8 37.0 50.1 66.7
RoE (%) 19.7 28.0 36.1 33.4
RoCE (%) 20.3 31.4 42.2 41.0
Payout (%) 26 19 14 13
aluationsP/E (x) 40 23 14 11
P/BV (x) 7.4 5.9 4.4 3.3
EV/EBITDA (x) 22.5 14.0 8.7 6.7
Divd Yield (%) 0.7 0.8 1.0 1.1.
20
80
140
200
260
S e p - 1 3
D e c - 1 3
M a r - 1 4
J u n - 1 4
S e p - 1 4
TVS Motor Sensex - Rebased
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| 6-Force Framework of Levers
6-Force Idea #8: Arvind (Bloomberg: ARVND IN)
STRATEGIC LEVER | Rising share of branded retail sales to boost growth, margins
How the lever works Company brief & Investment case
Arvind is in the midst of a transition
from a textiles manufacturing giant to a
brand powerhouse.
It has one of the best brand portfolios in
India – 28 brands of which 13 are
owned (e.g. Flying Machine, Excalibur,
Ruggers), 15 licensed (e.g. Arrow, US
Polo, Hanes), and Tommy Hilfiger (JV).
Arvind operates India’s largest value
retail chain, Megamart, which offers its
own and other licensed international
brands at low prices and provides retail
experience of a high-end store.
In parallel, Arvind’s other initiatives will
also contribute to profit e.g. garments
business turnaround, focus on high-end
denim for better margins, hive-off of
real estate division to deleverage, etc.
• Arvind Ltd, flagship of the Lalbhai
group, is India’s largest textiles player. It
is also India’s largest cotton textile
manufacturer, with an installed fabric
capacity of over 200m meters p.a. It is
also one of the leading denim fabric
manufacturers in the world.
• It has a strong distribution network
across 150 cities – over 680 retail stores
and ~1.4m sq ft (incl Megamart).
• Expect Arvind to clock revenue CAGR of
22% over FY14-17. Coupled with
interest cost beginning to plateau (at
INR4b levels), expect 27% CAGR in PAT
and EPS. Also expect RoE to improve
from 16% in FY14 to over 21% in FY17.
• Valuations, both P/E and EV/EBITDA,
are reasonable.
Financial & valuation snapshot Stock price performance (1 year)
(INR b) Price (INR): 297/ Mkt Cap (INR b): 77
/E March 2014 2015E 2016E 2017E
Net Sales 68.6 83.8 103.6 125.9
EBITDA 9.3 11.3 14.1 17.6
Margin (%) 13.6 13.5 13.6 13.9
dj PAT 3.9 4.3 5.6 7.9
EPS (INR) 15.0 16.7 21.8 30.6
EPS Gr. (%) 56 11 31 41
BV (INR) 100.0 113.2 130.3 156.2
RoE (%) 16.0 15.6 17.9 21.4
RoCE (%) 15.1 16.0 18.2 21.0
Payout (%) 16 18 18 13
aluations
P/E (x) 20 18 14 10
P/BV (x) 3.0 2.6 2.3 1.9
EV/EBITDA (x) 11.2 9.5 7.7 6.2
Divd Yield (%) 0.8 1.0 1.3 1.3.
70
140
210
280
350
S e p - 1 3
D e c - 1 3
M a r - 1 4
J u n - 1 4
S e p - 1 4
Arvind Mills Sensex - Rebased
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| 6-Force Framework of Levers
6-Force Idea #9: Idea Cellular (Bloomberg: IDEA IN)
OPERATING LEVER | Bottomed-out RPMs, rising data revenue to boost profits
How the lever works Company brief & Investment case
For wireless telecom, voice traffic
growth is likely to be a modest 10%.
However, RPMs have bottomed out
given easing competitive landscape.
As a result, revenue CAGR @ 13% is
higher than volume CAGR.
Further, share of data in revenue is
rising, even as most associated costs
remain fixed. Within data, share of
higher margin 3G revenue is rising.
As a result, FY14-16E EBIT CAGR at 27%
is much higher than Sales CAGR of 13%
(i.e. Operating Lever of 2x).
• Idea Cellular is India’s third largest
wireless operator with revenue market
share of ~17%.
• It operates in all 22 telecom circles with
strong incumbency advantage in 8
established circles, and 900MHz
spectrum allocation in 9 circles.
• It has 3G spectrum in 13 circles. Expect
3G revenue to contribute 9% of wireless
revenues by FY16E.
• FY14-16E PAT CAGR works out to 18%
even after factoring in INR165b outlay
for spectrum in FY16.
Financial & valuation snapshot Stock price performance (1 year)
(INR b) Price (INR): 166 / Mkt Cap (INR b): 588
/E March 2014 2015E 2016E 2017E
Net Sales 265.2 305.7 339.6 378.0
EBITDA 83.3 102.2 116.5 130.2
Margin (%) 31.4 33.4 34.3 34.4
dj PAT 19.7 32.0 29.4 29.5
EPS (INR) 5.9 8.9 8.2 8.2
EPS Gr. (%) 94 50 -8 1
BV (INR) 49.8 64.3 71.8 79.4
RoE (%) 12.7 16.1 12.0 10.9
RoCE (%) 7.2 8.7 8.4 8.4
Payout (%) 8 8 8 8
aluations
P/E (x) 28 19 20 20
P/BV (x) 3.3 2.6 2.3 2.1
EV/EBITDA (x) 9.5 7.0 7.2 6.0
Divd Yield (%) 0.2 0.4 0.4 0.4.
100
140
180
220
260
S e p - 1 3
D e c - 1 3
M a r - 1 4
J u n - 1 4
S e p - 1 4
Idea Cellular Sensex - Rebased
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| 6-Force Framework of Levers
6-Force Idea #10: Bharti Infratel (Bloomberg: BHIL IN)
OPERATING LEVER | High fixed cost business; delta revenue flowing to PBT
How the lever works Company brief & Investment case
Bharti Infratel offers an excellent
“passive” play on the dynamics of
wireless telecom i.e. growing traffic and
rising share of data.
As most of its costs are fixed/sunk,
much of revenue flows into PBT.
Thus, for FY14-16E, we expect revenue
CAGR of 10%. EBITDA CAGR is higher at
13%. With no major capex, EBIT CAGR is
even higher at 20% i.e. (Operating Lever
of 2x).
There is also Financial Lever of 1.1x i.e.
PAT CAGR 2.3x Sales CAGR.
• BHIL, a subsidiary of Bharti Airtel, is in
the business of passive telecom
infrastructure (mainly towers).
• Besides 35,000 own towers, it also has
42% stake in Indus Towers (i.e. 47,000
of 112,000 towers), a JV of Bharti,
Vodafone, Idea. In toto, BHIL has 21%
share of India’s towers.
• Apart from catering to top 3 GSM
service providers, BHIL has recently
signed a master service agreement for
providing sites to Reliance JIO.
• Expect FY14-16E EPS CAGR of 23%.
Financial & valuation snapshot Stock price performance (1 year)
(INR b) Price (INR): 291 / Mkt Cap (INR b): 550
/E March 2014 2015E 2016E 2017E
Net Sales 108.3 117.7 131.3 145.8
EBITDA 44.0 49.2 56.4 64.2
Margin (%) 40.6 41.8 43.0 44.1
dj PAT 15.2 19.2 23.0 29.1
EPS (INR) 8.0 10.2 12.2 15.4
EPS Gr. (%) 44 26 20 27
BV (INR) 95.5 98.4 101.8 106.1
RoE (%) 8.6 10.5 12.2 14.8
RoCE (%) 7.4 8.5 9.7 11.7
Payout (%) 64 72 72 72
aluations
P/E (x) 36 29 24 19
P/BV (x) 3.0 3.0 2.9 2.7
EV/EBITDA (x) 13.1 11.6 9.9 8.6
Divd Yield (%) 1.5 2.5 3.0 3.8.
140
190
240
290
340
S e p - 1 3
D e c - 1 3
M a r - 1 4
J u n - 1 4
S e p - 1 4
Bharti Infratel Sensex - Rebased
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| 6-Force Framework of Levers
6-Force Idea #11: Maruti Suzuki (Bloomberg: MSIL IN)
OPERATING LEVER | Improving product mix with scale steadily expands margins
How the lever works Company brief & Investment case
Indian car market is seeing steady
premium-ization e.g. Maruti 800
replaced by Alto, which too has given
way to higher end models like Swift.
Improving product mix apart, Maruti
has scale (1.2m cars for ~45% share).
This is an excellent combination for
Operating Lever to play out. Over FY03-
14, Maruti’s EBIT CAGR at 28% was 1.6x
Sales CAGR of 18%.
FY14-16E should see Operating Lever of
2x (38% EBIT CAGR on 19% Sales CAGR).
• Maruti Suzuki is India’s largest passenger
vehicle manufacturer (1.2m cars in FY14
for ~44% market share).
• Besides, it is also emerging as the global
export hub of small cars for Suzuki Japan
(world model A-Star exclusively
produced in India).
• Volume growth will be led by tier-II cities
and rural market coupled with
aggressive new launches (e.g. Celerio
with automatic manual transmission).
• Expect FY14-16E EPS CAGR of 34%.
Financial & valuation snapshot Stock price performance (1 year)
(INR b) Price (INR): 3,035 / Mkt Cap (INR b): 917
Y/E March 2014 2015E 2016E 2017E
Net Sales 444.5 532.7 649.9 777.0
EBITDA 52.0 69.6 93.4 119.3
Margin (%) 11.7 13.1 14.4 15.4Adj PAT 28.5 39.4 56.5 74.6
EPS (INR) 94.4 130.3 186.9 247.1
EPS Gr. (%) 16 38 43 32
BV (INR) 694.5 804.6 965.7 1181.0
RoE (%) 12.7 15.9 19.1 20.7
RoCE (%) 15.4 18.6 23.0 25.3
Payout (%) 13 12 11 10
Valuations
P/E (x) 32 23 16 12
P/BV (x) 4.4 3.8 3.1 2.6
EV/EBITDA (x) 16.2 11.7 8.3 6.0
Divd Yield (%) 0.4 0.5 0.7 0.8.
1,300
1,800
2,300
2,800
3,300
S e p - 1 3
D e c - 1 3
M a r - 1 4
J u n - 1 4
S e p - 1 4
Maruti Suzuki Sensex - Rebased
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| 6-Force Framework of Levers
6-Force Idea #12: Ashok Leyland (Bloomberg: AL IN)
OPERATING LEVER | Offers best play on expected CV upcycle
How the lever works Company brief & Investment case
Ashok Leyland offers the best play on
the expected upcycle in CVs, a business
with high level of fixed costs, and hence
high operating leverage.
During the last two major cycles, MHCV
demand CAGR was 23%. If FY14-17 CV
volumes clock CAGR of 17%, Ashok
Leyland’s EBIT can potentially move
from negative INR2.1b in FY14 to a high
positive INR18b in FY17.
Ramp-up at Pantnagar plant (which
enjoys tax benefits) and softening of
commodity prices could further
accentuate the operating lever.
• Ashok Leyland, the flagship of Hinduja
Group, is India’s 2nd largest M&HCV
player with ~26% market share.
• To expand its product offerings, AL has
entered into 50:50 JV with Nissan for
LCVs (branded “Dost”) and John Deere
for construction equipment.
• Key levers for stock performance are:
(1) Series of new launches, both under
the company itself and via JVs, (2) Sharp
volume-led EBITDA growth, (2) High FCF
generation via measured capex, (3)
Balance sheet de-leveraging, and (4)
Monetization of non-core assets.
Financial & valuation snapshot Stock price performance (1 year)
(INR b) Price (INR): 40 / Mkt Cap (INR b): 113
/E March 2014 2015E 2016E 2017E
Net Sales 99.4 122.2 161.1 203.4
EBITDA 1.7 9.4 16.3 22.8
Margin (%) 1.7 7.7 10.1 11.2
dj PAT -4.8 1.2 7.6 13.3
EPS (INR) -1.8 0.4 2.7 4.7
EPS Gr. (%) -385 -123 553 75
BV (INR) 16.7 18.1 20.2 24.3
RoE (%) -10.7 2.4 13.9 21.0
RoCE (%) -1.6 6.2 14.9 21.6
Payout (%) 0 49 19 11
aluations
P/E (x) N.A. 97 15 9P/BV (x) 2.4 2.2 2.0 1.6
EV/EBITDA (x) 74.4 12.8 6.8 4.3
Divd Yield (%) 0.0 0.5 1.3 1.3.
10
20
30
40
50
S e p - 1 3
D e c - 1 3
M a r - 1 4
J u n - 1 4
S e p - 1 4
Ashok Leyland Sensex - Rebased
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September 2014 35
| 6-Force Framework of Levers
6-Force Idea #13: Jain Irrigation (Bloomberg: JI IN)
FINANCIAL LEVER | Multi-pronged deleveraging strategy to drive down interest
How the lever works Company brief & Investment case
In India, Micro Irrigation Systems (MIS)
are subsidized by State governments.
Chasing growth, JI’s receivables from
States shot up to over 100 days,
bloating interest (81% of EBIT in FY14)
and debt (FY14 debt-equity of 1.9x).
The company has now embarked on a
multi-pronged deleveraging strategy:
(1) Focus on stronger states;
(2) Adopt the NBFC model; and
(3) Stake sale in food processing.
Expect Financial Leverage to kick in
(Interest/Sales to fall from 8% in FY14
to <5% in FY16, and <4% in FY17).
• Set up in 1986, JI is a transnational
company with its headquarters in
Maharashtra, India.
• Its products include drip and sprinkler
irrigation systems, PVC & PE piping
systems, plastic sheets, green houses,
bio-fertilizers, and solar water-
heaters/pumps. It also processes fruits
and vegetables.
• JI’s financial initiatives should
substantially improve cash flow.
• Expect EPS to jump from INR1.4 in FY14
to INR8.9 in FY16.
Financial & valuation snapshot Stock price performance (1 year)
(INR b) Price (INR): 83 / Mkt Cap (INR b): 39
/E March 2014 2015E 2016E 2017E
Net Sales 58.3 66.8 79.2 93.6
EBITDA 7.7 8.9 11.1 13.1
Margin (%) 13.2 13.4 14.0 14.0
dj PAT 0.7 1.7 4.0 5.8
EPS (INR) 1.4 3.6 8.6 12.6
EPS Gr. (%) 33 151 137 46
BV (INR) 47.0 50.0 57.6 69.0
RoE (%) 3.1 7.5 16.0 19.8
RoCE (%) 10.0 10.8 14.7 17.5
Payout (%) 40 19 11 9
aluations
P/E (x) 58 23 10 7P/BV (x) 1.8 1.7 1.4 1.2
EV/EBITDA (x) 10.0 8.2 6.4 5.1
Divd Yield (%) 0.6 0.8 1.1 1.4.
50
75
100
125
150
S e p - 1 3
D e c - 1 3
M a r - 1 4
J u n - 1 4
S e p - 1 4
Jain Irrigation Sensex - Rebased
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| 6-Force Framework of Levers
6-Force Idea #14: BHEL (Bloomberg: BHEL IN)
FINANCIAL LEVER | Revival may take net cash to over INR220b, 50% of MCap
How the lever works Company brief & Investment case
Financial Lever need not work on the
P&L side alone. For BHEL, it may well
play out on the Balance Sheet.
BHEL is a net-cash company. So, there is
no major delta in PAT/EPS for a given
delta in EBIT.
However, economic recovery changes
the shape of BHEL’s balance sheet by
retention money recovery.
Thus, over FY15-16, even on flat sales, if
debtors improve from current 386 days
to ~300, cash rises to INR220b, 50% of
market cap.
• BHEL is India’s dominant producer of
power and industrial machinery, and a
leading EPC company.
• BHEL offers a strong play on India’s
economic recovery, as few companies
in India can match its fabrication
capacity and capability.
• The company is favorably positioned in
3 GW of orders, which are expected to
be awarded in FY15.
• Expect Operating Cash flow to improve
from average of ~INR20b in FY10-13 to
~INR92b in FY15/16E.
Financial & valuation snapshot Stock price performance (1 year)
(INR b) Price (INR): 205 / Mkt Cap (INR b): 502
Y/E March 2014 2015E 2016E 2017E
Net Sales 391.1 333.7 368.4 412.3
EBITDA 45.2 34.0 46.2 61.3
Margin (%) 11.6 10.2 12.5 14.9
Adj PAT 35.9 24.9 35.7 47.6
EPS (INR) 14.7 10.2 14.6 19.5
EPS Gr. (%) -45 -31 43 34
BV (INR) 135.0 142.8 153.8 168.6
RoE (%) 11.3 7.3 9.8 12.1
RoCE (%) 16.1 10.6 13.9 17.0
Payout (%) 19 20 20 20
Valuations
P/E (x) 14 20 14 11
P/BV (x) 1.5 1.4 1.3 1.2
EV/EBITDA (x) 9.0 10.1 6.3 4.0
Divd Yield (%) 1.4 1.0 1.4 1.9.
120
160
200
240
280
S e p - 1 3
D e c - 1 3
M a r - 1 4
J u n - 1 4
S e p - 1 4
BHEL Sensex - Rebased
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| 6-Force Framework of Levers
6-Force Idea #15: ONGC (Bloomberg: ONGC IN)
REGULATORY LEVER | Lower subsidy share, higher gas price may swell profits
How the lever works Company brief & Investment case
ONGC is a play on 2 near-inevitable
regulations -
(1) Ongoing hike in diesel prices,
lowering upstream subsidy sharing (i.e.
hike in effective oil realization from
USD45/bbl to USD65); and
(2) Potential doubling of gas price to
USD8.4/mmbtu.
If both these go through, ONGC’s PAT
will be almost double the current level of
INR260b.
Precise timing of these regulatory
changes is the only issue.
• ONGC, a Fortune 500 company, is
India’s leading E&P company.
• With over 300 discoveries, it has
established in-place reserves of
6.9btoe (billion tons oil equivalent),
with ultimate reserves of 2.4btoe.
• Its 100% subsidiary ONGC Videsh has
E&P stakes in 16 countries.
Downstream presence is through
MRPL (71.6% subsidiary).
• Reasonable valuations imply stock
should outperform even if regulatory
changes are partly implemented.
Financial & valuation snapshot Stock price performance (1 year)
(INR b) Price (INR): 412 / Mkt Cap (INR b): 3,527
/E March 2014 2015E 2016E 2017E
Net Sales 1,745 1,914 2,046 2,113
EBITDA 590 674 789 822
Margin (%) 33.8 35.2 38.6 38.9
dj PAT 262 304 372 388
EPS (INR) 30.6 35.6 43.4 45.4
EPS Gr. (%) 8 16 22 4
BV (INR) 201.2 223.9 252.2 281.2
RoE (%) 16.3 16.7 18.2 17.0
RoCE (%) 13.9 13.7 15.1 14.3
Payout (%) 31 31 30 31
aluations
P/E (x) 13 12 9 9
P/BV (x) 2.0 1.8 1.6 1.5
EV/EBITDA (x) 6.3 5.3 4.5 4.3
Divd Yield (%) 2.3 2.7 3.2 3.4.
200
270
340
410
480
S e p - 1 3
D e c - 1 3
M a r - 1 4
J u n - 1 4
S e p - 1 4
ONGC Sensex - Rebased
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| 6-Force Framework of Levers
6-Force Idea #16: Hindustan Petroleum (Bloomberg: HPCL IN)
REGULATORY LEVER | Full diesel deregulation will boost PAT
How the lever works Company brief & Investment case
Steady price hikes in diesel point to end
of under-recoveries here.
This means no delay in receiving subsidy
payments, and hence no working
capital borrowings. For HPCL, this
translates into lower debt of ~INR30b,
interest savings of ~INR3b pre-tax, and
INR2b post-tax, which is 22% of FY14
PAT.
Further, in a deregulated scenario,
additional marketing margin of INR0.50
on diesel implies PAT delta of INR5b,
which is 50% of FY14 PAT.
• HPCL is one of India’s leading oil
refining and marketing company, and is
among the Fortune 500 list.
• Its refining capacity is 14.8m tons, and it
markets ~30m tons of petroleum
products.
• It plans to setup a 9m ton refinery-cum-
petchem complex at Barmer, Rajasthan
in JV with state government at a capex
of ~INR370b.
• Post-deregulation, earnings growth
coupled with valuation re-rating will
drive stock super-performance.
Financial & valuation snapshot Stock price performance (1 year)
(INR b) Price (INR): 474 / Mkt Cap (INR b): 161
/E March 2014 2015E 2016E 2017E
Net Sales 2,232 2,093 2,149 2,159
EBITDA 52 43 49 52Margin (%) 2.3 2.0 2.3 2.4
dj PAT 17.3 14.8 15.8 17.7
EPS (INR) 51.1 43.7 46.6 52.3
EPS Gr. (%) 92 -14 6 12
BV (INR) 442.8 471.2 501.4 535.4
RoE (%) 12.1 9.6 9.6 10.1
RoCE (%) 8.2 5.8 6.5 7.5
Payout (%) 30 30 30 30
aluations
P/E (x) 9 11 10 9
P/BV (x) 1.1 1.0 0.9 0.9
EV/EBITDA (x) 9.2 11.7 9.3 6.9Divd Yield (%) 3.3 2.8 3.0 3.3
.
170
270
370
470
570
S e p - 1 3
D e c - 1 3
M a r - 1 4
J u n - 1 4
S e p - 1 4
HPCL Sensex - Rebased
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| 6-Force Framework of Levers
6-Force Idea #17: United Spirits (Bloomberg: UNSP IN)
CORPORATE ACTION LEVER | Majority stake by Diageo to usher in improvements
How the lever works Company brief & Investment case
In November 2012, Diageo Plc
announced its plans to acquire United
Spirits from the Mallya Group.
The acquisition adds several premium
brands to UNSP’s offerings, including
Johnny Walker whisky, Smirnoff vodka
and Dom Perignon champagne.
UNSP’s own premium brands like Black
Dog whisky are expected to get required
marketing push.
UNSP’s valuations have also changed
orbit, given governance issues of UB
Group (e.g. Kingfisher Airlines).
• UNSP is India’s leading player in IMFL
(Indian-made Foreign Liquor), with
volume sales of over 120m cases, (41%
market share) and 22 millionaire
brands.
• It has manufacturing and bottling
presence in all states, with 40 owned
plants and 42 contract tie-ups.
• Post its acquisition by Diageo, expect
improvement in product mix to drive up
realizations and profits.
• Restructuring has commenced with sale
of Whyte & McKay and also a huge
INR53b write-off of intercorporate loans
and debtors.
Financial & valuation snapshot Stock price performance (1 year)
(INR b) Price (INR): 2,384 / Mkt Cap (INR b): 346
/E March 2014 2015
2016E 2017
Net Sales 105.0 98.2 110.8 126.6
EBITDA 8.7 10.0 13.3 16.2
Margin (%) 8.3 10.2 12.0 12.8
dj PAT -1.3 4.5 7.6 10.2
EPS (INR) -9.0 31.1 52.5 70.4
EPS Gr. (%) 21 -447 69 34
BV (INR) 208.7 241.1 293.6 361.6
RoE (%) -4.3 12.9 17.9 19.5
RoCE (%) 12.8 14.9 18.8 21.5
Payout (%) -28 0 0 3
aluations
P/E (x) N.A. 77 45 34
P/BV (x) 11.4 9.9 8.1 6.6
EV/EBITDA (x) 48.7 38.5 28.5 23.1.
2,000
2,400
2,800
3,200
3,600
S e p - 1 3
D e c - 1 3
M a r - 1 4
J u n - 1 4
S e p - 1 4
United Spirits Sensex - Rebased
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| 6-Force Framework of Levers
6-Force Idea #19: Eicher Motors (Bloomberg: EIM IN)
CORPORATE ACTION LEVER | Volvo JV opens up huge potential for CV portfolio
How the lever works Company brief & Investment case
To become a full-fledged CV player, in
July 2008, EIM formed Volvo Eicher
Commercial Vehicles (VECV), a 50-50 JV
with AB Volvo, Sweden.
This JV opens up at least 3
opportunities for EIM -
(1) Stronger medium & heavy CV
portfolio for the Indian market
(2) Eicher to be Volvo’s global brand for
mass market trucks
(3) VECV to be global production hub
for medium-duty engines.
Most quantitative levers will kick in.
• Eicher Motors is a diversified auto
company: (1) High-end motorcycles
(350cc+) under the brand “Royal
Enfield”, and (2) Commercial vehicles,
automotive components and engine
solutions under its subsidiary, VECV.
• Benefits of recent expansion projects
should start to flow in –
(1) More than doubling of motorcycle
capacity to 150,000, (2) Medium-duty
engines plant, (3) Bus body-building
facility, (4) New HCV range, etc.
• Expect 58% EPS CAGR CY13-15E.
Financial & valuation snapshot Stock price performance (1 year)
(INR b) Price (INR): 11,356/ Mkt Cap (INR b): 307
/E December 2013 2014E 2015E 2016E
Net Sales 66.9 85.6 117.3 157.6
EBITDA 7.1 10.7 17.2 25.6
Margin (%) 10.7 12.5 14.6 16.2
dj PAT 3.9 6.2 9.6 14.4
EPS (INR) 145.9 228.2 356.5 532.0
EPS Gr. (%) 21 56 56 49
BV (INR) 760.1 892.9 1192.
1661.
RoE (%) 20.7 27.6 34.2 37.3
RoCE (%) 21.8 27.4 37.0 43.0
Payout (%) 21 15 11 9
aluations
P/E (x) 78 50 32 21
P/BV (x) 14.9 12.7 9.5 6.8
EV/EBITDA (x) 41.4 27.1 16.5 10.5Divd Yield (%) 0.3 0.3 0.4 0.4
.
1,000
4,000
7,000
10,000
13,000
S e p - 1 3
D e c - 1 3
M a r - 1 4
J u n - 1 4
S e p - 1 4
Eicher Motors Sensex - Rebased
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| 6-Force Framework of Levers
6-Force Idea #20: Crompton Greaves (Bloomberg: CRG IN)
CORPORATE ACTION LEVER | Demerger of consumer business to unlock value
How the lever works Company brief & Investment case
Two of Crompton Greaves’ three SBUs
are industry-facing, and cater to the
usual ups and downs of business cycles.
The consumer-facing SBU (mainly fans,
lights and household appliances) is both
less-cyclical and also asset-light.
The division is estimated to be currently
contributing 50% to consolidated EBIT,
up from 20-25% 3-4 years ago.
In July 2014, the management proposed
demerger of the Consumer division into
a separate company. A Committee has
been set up to work out modalities.
Considering valuations of peer
companies like Havells, the demerged
Consumer division can account for over
75% of Crompton’s total Enterprise
Value, leaving residual industry-facing
businesses also reasonably valued.
• Crompton Greaves is the flagship of the
Avantha Group led by Gautam Thapar.
• It has organized its business in 3 SBUs:
(1) Power systems (mainly products and
solutions for power transmission &
distribution), (2) Industrial Systems
(mainly motors & drives) and (3)
Consumer Products (fans, lights and
appliances under “Crompton” brand).
• CRG is currently focused on a 3-D
approach to growth: (1) geographic
expansion, (2) moving up the value
chain, and (3) widening the production
footprint through lean manufacturing in
low cost countries.
• Even as the B2B businesses await full
economic recovery, the demerger of
the Consumer SBU could unlock value.
Financial & valuation snapshot Stock price performance (1 year)
(INR b) Price (INR): 200 / Mkt Cap (INR b): 126
/E March 2014 2015E 2016E 2017E
Net Sales 134.8 145.8 165.4 190.7
EBITDA 6.8 9.0 12.7 16.4
Margin (%) 5.1 6.1 7.7 8.6
dj PAT 2.4 4.0 7.4 10.6
EPS (INR) 3.9 6.3 11.9 16.9
EPS Gr. (%) 27 62 88 42BV (INR) 58.2 63.0 72.7 86.6
RoE (%) 7.2 10.3 17.3 21.0
RoCE (%) 6.0 7.6 12.7 16.2
Payout (%) 21 24 16 15
aluations
P/E (x) 51 32 17 12
P/BV (x) 3.4 3.2 2.8 2.3
EV/EBITDA (x) 2.4 15.7 11.0 8.3
Divd Yield (%) 0.6 0.7 0.9 1.2.
80
110
140
170
200
230
S e p - 1 3
D e c - 1 3
M a r - 1 4
J u n - 1 4
S e p - 1 4
Crompton Greaves Sensex - Rebased
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| 6-Force Framework of Levers
Annexure 1: Levers for non-Financial companies
Total Stock Lever (TSL) for a stock can be first broken down into Earnings Lever and Valuation
Lever, which are multiplicative in nature such that –
TSL = Stock Price = EPS x Stock Price
Global GDP Global GDP EPS
= Earnings Lever (EL) x Valuation Lever (VL)
Therefore, Stock Price = Global GDP x EL x VL
Next, Earnings Lever is a product of 5 sub-levers as under –
EL = EPS
Global GDP
= ∆Country GDP x ∆Sector Sales x ∆Co. Sales x ∆EBIT x ∆EPS
∆Global GDP ∆Country GDP ∆Sector Sales ∆Co. Sales ∆EBIT
= Country x Sector x Strategic x Operating x Financial
Lever(CL) Lever(SL) Lever(StL) Lever(OL) Lever(FL)
Therefore, Stock Price = Global GDP x [CL x SL x StL x OL x FL] x [VL]
We discuss each of the above sub-levers below.
A1.1 Country Lever (CL)
Country Lever (CL) = ∆Country GDP
∆Global GDP
• Country Lever links local GDP growth to global GDP growth. (For the purposes of this
report, we have used GDP growth in nominal terms.)
•
Typically, developing economies like India grow faster than global GDP. Thus, companies in
these economies enjoy Country Lever greater than 1.
A1.2 Sector Lever (SL)
Sector Lever (SL) = ∆Sector Sales
∆Country GDP
• Sector Lever links sector sales performance to GDP growth.
•
The higher the ratio, the faster is the sector growth relative to GDP growth and vice versa.• For many sectors, the Sector Lever tends to get established over time.
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A1.3 Strategic Lever (StL)
Strategic Lever (StL) = ∆Co. Sales
∆Sector Sales
•
Strategic Lever captures whether the company has grown faster, slower or in line with the
industry i.e. whether it has gained, lost or maintained market share in value terms.
• Higher the Strategic Lever, stronger is the company’s unique value proposition to its
customers (or Economic Moat).
• This lever is called Strategic Lever as whether a company gains or loses market share
depends on what strategy it is pursuing to strengthen or at least maintain its competitive
positioning.
• In this sense, Strategic Lever is a key reflector of a company’s management competence.
A1.4 Operating Lever (OL)
Operating Lever (OL) = ∆EBIT
∆Sales
= ∆EBITDA x ∆EBIT
∆Sales ∆EBITDA
= Margin Lever (ML) x Utilization Lever (UL)
• Operating Lever captures the impact of two aspects of a company’s operations –1. Cost structure (i.e. mix proportion of variable and fixed), and
2. Scale of operations i.e. asset utilization.
• Higher the fixed cost component, greater the operating leverage and vice versa.
• Likewise, higher the scale or asset utilization levels, greater the operating leverage and vice
versa.
• Operating Lever can be made more granular by dissecting it as Margin Lever (ML) and
Utilization Lever (UL) as discussed below.
A1.4.1 Margin Lever (ML) [ EBITDA ÷ Sales]
•
Margin Lever captures the full interplay of C-P-V-M in a company’s operations i.e. Cost,Price, Volume, Mix.
• Margin Lever greater than 1 suggests one or more of the following:
1. Cost savings not passed on to customers
2. Product price hike more than offsetting cost increase
3. Major increase in volume, lowering per unit fixed costs
4. Change of sales mix in favor of higher margin products/services.
• Margin Lever lower than 1 suggests the opposite of one or more of the above phenomena.
A1.4.2 Utilization Lever (ML) [ EBIT ÷ EBITDA]
•
Utilization Lever highlights the impact of better asset utilization, especially in capital-
intensive sectors like Utilities and Telecom.
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| 6-Force Framework of Levers
• Depreciation is a fixed charge based on the acquisition cost of fixed assets, and irrespective
of their utilization levels.
• When asset utilization improves meaningfully, EBITDA increases in sync but depreciation
remains broadly unchanged. Thus, incremental EBITDA fully flows down to EBIT, causing
Utilization Lever to be greater than 1 (and vice-versa).
A1.5 Financial Lever (FL)
Financial Lever (FL) = ∆EPS
∆EBIT
= ∆PBT x ∆PAT x ∆EPS
∆EBIT ∆PBT ∆PAT
= Debt Lever (DL) x Tax Lever (TL) x Equity Lever (EqL)
• Financial Lever reflects three aspects of a company -
1. Share of debt in current capital structure
2. Tax-cover status and
3. Equity capital expansion or contraction.
• To explicitly capture each of these 3 aspects, it can be trisected into Debt Lever (DL), Tax
Lever (TL) and Equity Lever (EL) as discussed below.
A1.5.1 Debt Lever (DL) [ PBT ÷ EBIT]
• Debt Lever reflects the share of debt in current capital structure, which in turn determineshow Net Interest (Interest Expense less Financial Income) is behaving in the P&L.
• Above PBT breakeven levels, Debt Lever will be greater than 1 if EBIT is rising whereas debt
levels are stable or declining.
A1.5.2 Tax Lever (TL) [ PAT ÷ PBT]
• Tax Lever captures change in a company’s tax-cover status.
• If the company is already a full-tax paying company and likely to remain so, Tax Lever will
always be 1.
• If the company is moving out from a tax holiday or tax concession situation into a full-tax
situation, Tax Lever will be less than 1.
• Tax Lever will be greater than 1 in specific situations e.g. if the company is commencing
units in a tax concession zone, or acquires some business with accumulated losses which
provide tax cover.
A1.5.3 Equity Lever (EqL) [ EPS ÷ PAT]
• Equity Lever indicates whether a company is expanding or contracting its equity.
• If a company has raised funds by issuing equity shares, Equity Lever will be less than 1.
• On the other hand, if the company has resorted to share buybacks, Equity Lever will be
greater than 1.• If equity capital remains unchanged, Equity Lever will be 1.
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A1.6 Valuation Lever
The Earnings Lever and sub-levers when established and applied will suggest how a company’s
EPS will change for a given change in a macroeconomic variable i.e.
Earnings Lever = EPS
Global GDP
Therefore, EPS = Global GDP x Earnings Lever
The final step in completing the Total Leverage exercise is to cross the change in EPS with the
Valuation Lever to arrive at the expected Stock Price change i.e.
Valuation Lever = Stock Price
EPS
Therefore, Stock Price = EPS x Valuation Lever
Essentially, Valuation Lever is a measure as to how much a stock has been (or will be) re-rated
for a given change in earnings. Thus, directionally, three scenarios are possible –
1.
If no change in rating, Valuation Lever = 1, and Stock Price change = EPS change.
2. If there’s a re-rating, Valuation Lever > 1, and Stock Price change > EPS change.
3. If there’s a de-rating, Valuation Lever < 1, and Stock Price change < EPS change.
Further, Valuation Lever itself is influenced by the Earnings Lever – a higher than expected EPS
change is more likely to trigger higher valuation re-rating and vice versa.
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Annexure 2: Levers for Financial companies
For Financial sector companies, Book Value is more relevant and important than EPS. Hence, all
levers are adapted to suit this and other characteristics of the business.
TSL = Stock Price = Book Value x Stock Price
Global GDP Global GDP BV
= Book Value Lever (BL) x Valuation Lever (VL)
Therefore, Stock Price = Global GDP x BL x VL
Here too, Book Value Lever is a product of 5 sub-levers as under –
BL = BV
Global GDP
= ∆Country GDP x ∆Agg. NII x ∆Bank NII x ∆PAT x ∆BV
∆Global GDP ∆Country GDP ∆Agg. NII ∆NII ∆PAT
= Country x Sector x Strategic x Operating x Equity
Lever(CL) Lever(SL) Lever(StL) Lever(OL) Lever(EqL)
Therefore, Stock Price = Global GDP x [CL x SL x StL x OL x EqL] x [VL]
We discuss each of the above sub-levers below.
A2.1 Country Lever (CL)
Country Lever (CL) = ∆Country GDP
∆Global GDP
This lever remains the same, both for non-financial and financial companies (see page 43).
A2.2 Sector Lever (SL)
Sector Lever (SL) = ∆Agg. NII
∆Country GDP
= ∆Total Funds x ∆Agg. NII
∆Country GDP ∆Total Funds
= Monetary Lever (ML) x Interest Rate Lever (IL)
• Sector Lever links Aggregate NII growth to country GDP growth.
• The lever will be greater than 1 if Aggregate NII grows faster than GDP and vice versa.
• For further granularity, the Sector Lever can be dissected into (1) Monetary Lever and
(2) Interest Rate Lever, which are briefly discussed below.
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A2.2.1 Monetary Lever (ML) [ Total Funds ÷ Country GDP]
• Monetary Lever links growth in banking sector’s total funds to GDP growth.
• This reflects the money supply in the economy.
• In India, money supply has grown broadly in line with GDP.
• FY03-14, ML for Indian financial sector has hovered around 1.2-1.3 across economic cycles.
A2.2.2 Interest Rate Lever (IL) [ Aggregate NII ÷ Total Funds]
• Interest Rate Lever captures how interest rates and rate spreads in the economy have
moved over a given period of time.
• In India, IL was 0.9x during the boom phase of FY03-08 (i.e. spread compression in lieu of
growth) and 1.1x during the lull phase of FY08-14.
A2.3 Strategic Lever (StL)
Strategic Lever (StL) = ∆Bank NII
∆Agg. NII
• Strategic Lever is calculated for individual banks/NBFCs, and suggests whether NII has
grown faster or slower than the sector i.e. whether they have gained or lost NII market
share.
• Over FY03-14, SL for most private sector banks is greater than 1x, whereas in contrast, for
most public sector banks it is less than 1x.
A2.4 Operating Lever (OL)
Operating Lever (OL) = ∆PAT
∆NII
= ∆NI x ∆PPP x ∆PBT x ∆PAT
∆NII ∆NI ∆PPP ∆PBT
= Fee x Efficiency x Asset Quality x Tax
Lever(FL) Lever(EfL) Lever(AQL) Lever(TL)
• Operating Lever reflects the operational effectiveness of a bank/NBFC i.e. whether it has
been able to grow PAT faster than its NII or not.
• For Financial Sector, Operating Lever can be further analyzed into (1) Fee Lever, (2)
Efficiency Lever, (3) Asset Quality Lever and (4) Tax Lever which are briefly discussed below.
A2.4.1 Fee Lever (FL) [ NI ÷ NII]
• For financial companies, NI (Net Income) = NII + Non fund-based (i.e. Fee) income
• Thus, Fee Lever > 1 suggests that the bank’s non fund-based income has grown faster than
its fund-based income and vice-versa.
A2.4.2 Efficiency Lever (EfL) [
PPP ÷ NI]• PPP (Pre-Provisioning Profit) = NI – Operating expenses
• Thus, Efficiency Lever suggests how efficiently the bank/NBFC has managed its operating
expenses. EfL > 1 implies operating expenses have grown slower than NI, and vice versa.
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A2.4.3 Asset Quality Lever (AQL) [ PBT ÷ PPP]
• PBT = PPP – Provisions for non-performing assets (NPAs)
• As the name itself suggests, Asset Quality Lever reflects the Asset Quality of the bank/NBFC.
• AQL > 1 implies NPA provisions have grown slower than operating profit and vice versa.
A2.4.4 Tax Lever (TL) [ PAT ÷ PBT]
• As in the case of non-financial companies, the Tax Lever indicates whether the bank/NBFC
enjoys any tax shield (e.g. tax rebate on income from infrastructure/housing loans).
A2.5 Equity Lever (EqL)
Equity Lever (EqL) = ∆BV
∆PAT
= ∆Net Worth x ∆BV
∆PAT ∆Net Worth
= Capital Lever (CpL) x Pricing Lever (PL)
• Equity Lever suggests whether the bank’s Book Value has grown faster or slower than PAT.
• This is a function of two factors: (1) The amount of fresh equity capital raised, and (2) The
price at which the same was issued.
• These two factors get captured and Capital Lever and Pricing Lever, respectively.
A2.5.1 Capital Lever (CpL) [ Net Worth ÷ PAT]
•
Capital Lever (CpL) indicates the level of equity-funding resorted to by the bank/NBFC to
capitalize itself.
• The Financials sector median CpL was 1.4x during the FY03-08 boom and 0.9x during the
FY08-14 lull. This indicates higher equity-raising during boom times for higher capitalization.
A2.5.2 Pricing Lever (PL) [ Book Value ÷ Net Worth]
• Pricing Lever reflects the pricing at which fresh equity was issued, if any.
• The lower the ratio, the lower the equity pricing, relative to the book value prevailing at the
time of raising the funds.
•
Pricing Lever will be 1 if no equity has been raised during a given period.
A2.6 Valuation Lever (VL)
Valuation Lever (VL) = ∆Stock Price
∆Book Value
• Valuation Lever indicates as to whether – and by how much – a stock was (or will be)
re-rated for a given change in book value.
• VL > 1 suggests re-rating and VL < 1 suggests de-rating.
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Annexure 3: Non-quantitative Levers
Apart from the 4 quantitative and multiplicative levers discussed above, there are 3 non-
quantitative levers as well. These are – (1) Regulatory Lever, (2) Corporate Action Lever and (3)
Externality Lever. True to the definition of levers, a small change in any of these levers couldpotentially cause a significant change in stock prices. Hence they merit a separate albeit brief
discussion here.
A3.1 Regulatory Lever
Regulatory Lever mainly includes policy action across the economy, sectors or stock market as
listed below. Change in one or more of these could have a major impact on stock prices.
Regulatory Lever may be triggered across economy, sectors or stock market itself
Area Typical regulatory actions which affect stock prices
Economy•
Income tax rates, Indirect tax rates (customs, excise), Interest rates, etcSectors • Deregulation of hitherto regulated sectors (or vice versa), Environmental norms, etc
Stock Market • Foreign investment norms (including shareholding ceiling), trading limits, turnover tax, etc
A3.2 Corporate Action Lever
Some specific non-operational, non-financial corporate actions could have a significant bearing
on stock prices. These include –
• Change of ownership and/or management
• Stake hike by existing owners
• Hostile takeover bid
•
Offer to delist the shares by 100% buyback of non-owner holding• Major corporate restructuring or M&A announcements, not yet reflected in financials
• Large-scale corruption, fraud or violation of legal norms.
A3.3 Externality Lever
Uncontrollable external events like drought, earthquake, wars, etc also impact stock prices,
even if there is no immediate change in any operating or financial metrics of a company.
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Annexure 4: Case studies of levers
We calculated the various levers for all companies listed in India through the full economic cycle
of FY03 to FY14. We also classified these companies into sectors, and calculated the various
relevant levers for sector aggregates. We present our findings under two sections –1. Case studies of companies where specific levers have played out; and
2.
Key takeaways from sector-level levers.
A4.1 Company case studies
We present case studies of 6 companies which, taken together, illustrate how most of the
major levers covered in this report play out. The companies and the respective levers which
they illustrate are tabled below.
Company case studiesCompany Major levers tested
#1 Bharti Airtel All levers
#2 Amara Raja Batteries Strategic, Operating & Valuation Levers
#3 CESC Financial Lever
#4 TCS Corporate Action Lever + Strategic & Operating Levers
#5 Sesa Goa (now Sesa-Sterlite) Regulatory Lever
#6 Satyam Computer Corporate Action Lever
All the case studies are structured under 5 common heads –
1.
Company in brief
2.
Backdrop to the levers3. How the levers worked
4.
After the levers
5. Key takeaways.
Case Study #1: Bharti Airtel
Major levers tested: All
Company in brief
• Bharti Airtel is an integrated telecom service provider with presence in wireless, fixed-line
and broadband, long distance, enterprise, and passive infrastructure services across India,Sri Lanka, Bangladesh and Africa.
• It is India’s largest wireless operator (revenue market share of 31%), also the third largest
globally in terms of subscribers.
• Bharti’s case offers two distinct set of lessons in the working of levers –
(1) Positive, in the boom phase (FY04-08); and
(2) Adverse, in the lull phase (FY08-14).
[A] BOOM PHASE FY04-08
Backdrop to the levers
•
Bharti Airtel (then Bharti Tele-Ventures) launched its mobile services in FY96. Over the next6-7 years, it steadily expanded its national footprint, both organically and inorganically.
• In FY03, revenue doubled to INR30.5b and EBITDA quadrupled to INR5.4b.
• However, high depreciation and interest burden kept the company in net loss of INR2b.
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After the levers
• Total Stock Lever (-0.9x): Over FY08-14, Bharti’s stock (-4% CAGR) underperformed the
Sensex (+6% CAGR). However, given the strong performance in FY04-08, over the full cycle
FY04-14, Bharti’s stock performance was 2.2x (15% CAGR) that of global GDP (7% CAGR), in
line with that of Sensex.
Bharti’s FY08-14 PAT dragged down Bharti stock underperforms in FY08-14
by regulatory & corporate action levers despite valuation re-rating
Key takeaways
• The non-quantitative Regulatory Lever and Corporate Action Lever play a critical role in
influencing all the quantitative levers.
• Change in competitive landscape is a key trigger for change in stock levers, and hence in
stock super-performance.
• Competitive advantage is always local and does not automatically migrate to other
geographies. Hence, mega global acquisitions must be critically analyzed for potential
negative play of operating/financial levers, leading to stock under-performance.
Case Study #2: Amara Raja Batteries
Major levers tested: Sector, Strategic, Operating & Valuation Levers
Company in brief
•
Amara Raja Batteries is the largest manufacturer of standby VRLA (Valve-Regulated Lead
Acid) batteries in the Indian Ocean Rim (i.e. from Africa and the Middle East to South EastAsia).
• It started operations in 1992 with industrial batteries. In 1997, it entered into a
collaboration with Johnson Controls, US (26% stake), and launched automotive batteries in
January 2000 (“Amaron” brand). It is now the second largest automotive batteries company
in India after Exide Industries.
Backdrop to the levers
• Amara Raja’s foray into automotive batteries came amidst a sharp slowdown in the autos
sector. As a result, overheads and depreciation were eating into profits – PAT declined
steadily from INR440m to INR74m in FY03.• Meanwhile, Amara Raja’s Gross Block expanded to INR1.5b, almost 2.5x the figure 5 years
ago.
67.084.7 89.8
60.542.6
22.8 27.7
24.8%22.9%
21.5%
10.2%
6.0%
3.0% 3.2%
FY08 FY09 FY10 FY11 FY12 FY13 FY14
Adj PAT (INR b)
PAT Margin
100
200
300
400
500
600
M a r - 0 8
S e p - 0 8
M a r - 0 9
S e p - 0 9
M a r - 1 0
S e p - 1 0
M a r - 1 1
S e p - 1 1
M a r - 1 2
S e p - 1 2
M a r - 1 3
S e p - 1 3
M a r - 1 4
Bharti
Sensex (Re-based)
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How the levers worked
• Demand revival: The situation worsened further in FY04; due to high lead prices, EBITDA
Margin dipped to as low as 5.4% (v/s 36.1% in FY99). The company reported an EBIT loss,
other income helped it report PAT of barely INR14m. The take-off commenced in FY05, with
strong revival in battery demand from both Telecom and Auto sectors.
Amara Raja - The 6-Force Framework (x)
Levers (x) FY03-08 FY08-14 FY03-14
Global Nominal GDP CAGR (%) 10.8 4.6 7.4
∆BSE Sensex / ∆Global GDP 3.6 1.3 2.7
TOTAL STOCK LEVER 7.6 7.6 7.4
EARNINGS LEVER 6.2 3.8 5.1
Country Lever 1.3 3.2 2.0
Sector Lever 1.6 1.3 1.4
Strategic Lever 2.0 1.1 1.5
Operating Lever 1.7 1.0 1.4
Financial Lever 0.9 0.8 0.9a. Debt Lever 0.9 1.1 1.0
b. Tax Lever 1.0 1.0 1.0
c. Equity Lever 1.0 0.7 0.9
VALUATION LEVER 1.2 2.0 1.5
• Country Lever (1.3x), Sector Lever (1.6x): During FY03-08, India’s nominal GDP CAGR of
~15% was 1.3x that of global GDP CAGR of ~11%. At the same time, the Auto Ancillary
sector grew 1.6x India’s GDP (i.e. 23% CAGR).
• Strategic Lever (2.0x): Most significantly, Amara Raja Batteries grew at 2x the industry, as it
was ready with its capacity expansion when demand arose. Also, the company went on an
aggressive branding and franchisee strategy for the automotive after-market.
• Operating Lever (1.7x): EBIT growth was 1.7x Sales growth. Asset utilization lever (1.4x) was
a major contributor as depreciation did not grow with sales.
• Financial Lever (0.9x): Amara Raja was a net cash company, and hence PAT and EPS growth
was marginally lower than EBIT growth.
• Earnings Lever (6.2x): As a product of all of the above, Amara Raja’s EPS grew 6.2x faster
than global GDP (EPS CAGR of 66% vis-à-vis global GDP CAGR of 11%).
• Valuation Lever (1.2x): Amara Raja Stock also enjoyed a re-rating from P/E of 5x in FY03 to
8x in FY08, driving stock price CAGR 16pp over EPS CAGR.
After the levers
•
Total Stock Lever (FY03-08 7.6x): In effect, over FY03-08, Amara Raja stock price CAGR
(82%) was 7.6x of global GDP v/s 3.6x for Sensex (29% CAGR).
• Total Stock Lever (FY03-14 7.4x): Amara Raja continued its robust performance even
through the lull phase of FY08-14 through new product launches (two-wheeler batteries,
home UPS, exports, etc) and steady capacity expansion. In the next phase FY08-14, the
stock saw a huge P/E rating from 8x to 18x, despite modest EPS CAGR of 17% (i.e. Valuation
Lever of 2x).Thus, over the full cycle FY03-14, Amara Raja stock price CAGR was 55% i.e.
7.4x that of global GDP.
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Amara Raja: All levers played out well The stock super-performs the benchmark
through the full cycle FY03-14 throughout FY03-14
Key takeaways
• Expect company-specific levers – Strategic, Operating and Financial – to work strongly in
cases where the market-opportunity is big, and the company has just completed major
capacity expansion(s).
• Duopoly or monopolistic competitive structure in growth sectors is favorable for levers to
play out.
• If a cyclical business manages even modest profit growth during lull phase, expect valuation
re-rating to sustain stock super-performance.
Case Study #3: CESC
Major levers tested: Financial Lever
Company in brief
• Flagship company of RP Sanjiv Goenka Group, CESC is one of the oldest integrated power
utilities in India.
• Its generation capacity stands at 1.2GW, and its distribution network supplies power to
2.3m consumers in Kolkata and Howrah region.
• Another 1.2GW of generation projects are under construction and additional 6GW of
projects are in pipeline.
Backdrop to the levers• Non-remunerative tariffs, high T&D losses and rising burden of high-interest debt led CESC
to barely break-even in FY03 following 3 years of losses.
• FY03 interest cost was INR4.1b whereas the market cap was less than INR1b.
How the levers worked
• Debt restructuring: In FY03, CESC completed a debt-restructuring program with 24 of its
lenders, including a cut in lending rates. In FY04, CESC negotiated a further rate cut, and
also swapped high-cost long-term debt with lower cost short-term debt.
• Lower T&D losses, higher collections: CESC worked aggressively to cut T&D losses and
improve cash collections. As a result, its debtor days went down from 155 days in FY03 to47 days in FY08. Cash flow from operations also increased from INR5.5b in FY03 to INR9.6b
in FY08.
0
3
6
9
12
0
1,000
2,000
3,000
4,000
F Y 0 3
F Y 0 4
F Y 0 5
F Y 0 6
F Y 0 7
F Y 0 8
F Y 0 9
F Y 1 0
F Y 1 3
F Y 1 4
PAT (INR m, LHS)
PAT Margin (%)
0
100
200
300
400
M a r - 0 3
M a r - 0 4
M a r - 0 5
M a r - 0 6
M a r - 0 7
M a r - 0 8
M a r - 0 9
M a r - 1 0
M a r - 1 1
M a r - 1 2
M a r - 1 3
M a r - 1 4
Amara Raja
Sensex (Re-based)
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• Financial Lever (38.4x): During FY03-08, CESC’s EBIT CAGR was only 2%, even lower than its
revenue CAGR of 5%. However, with net interest cost slashed from INR3.5b in FY03 to near-
zero in FY08, PBT and PAT CAGR was 120%. Despite a small equity dilution, EPS CAGR was
still a high 93%, translating into a Financial Lever of 38x.
• Earnings Lever (8.6x): In effect, CESC’s FY03-08 EPS CAGR at 93% was 8.6x that of global
GDP CAGR of 11%).
CESC: Huge benefit of Financial Lever … nullified during FY08-14, mainly due to
during FY03-08 … acquisition of Spencer Retail
CESC – The 6-Force Framework (x)
Levers (x) FY03-08 FY08-14
Global GDP CAGR (%) 10.8 4.6
∆BSE Sensex/∆Global GDP 3.6 1.3
TOTAL STOCK LEVER 8.8 0.7
EARNINGS LEVER 8.6 2.3
Country Lever 1.3 3.2
Sector Lever 0.9 1.2
Strategic Lever 0.4 0.7
Operating Lever 0.5 1.6
Financial Lever 38.4 0.5
a. Debt Lever 50.0 0.7
b. Tax Lever 1.0 0.8
c. Equity Lever 0.8 1.0
VALUATION LEVER 1.0 0.3
After the levers• Total Stock Lever (FY03-08 8.8x): With valuation moving in line with earnings, CESC’s stock
price CAGR over FY03-08 at 95% was 8.8x global GDP CAGR, super-performing even the
high-performing Sensex which was 3.6x (39% CAGR).
• Financing impact wears off, strategy takes over: Post FY08, CESC’s Financial Lever slipped
to 0.5x as the company borrowed for expansions and also diversified into retail (Spencer’s),
which is still loss-making. CESC’s FY08-14 price CAGR is only 3%, under-performing the
Sensex’s 6% CAGR.
CESC stock super-performs over FY03-08 … … but underperforms over FY08-14
0
100
200
300
400
500
600
700
M a r - 0 3
S e p - 0 3
M a r - 0 4
S e p - 0 4
M a r - 0 5
S e p - 0 5
M a r - 0 6
S e p - 0 6
M a r - 0 7
S e p - 0 7
M a r - 0 8
CESC
Sensex (Re-based)
100
200
300
400
500
600
M a r - 0 8
S e p - 0 8
M a r - 0 9
S e p - 0 9
M a r - 1 0
S e p - 1 0
M a r - 1 1
S e p - 1 1
M a r - 1 2
S e p - 1 2
M a r - 1 3
S e p - 1 3
M a r - 1 4
CESCSensex (Re-based)
0
3
6
9
12
15
18
0
1,000
2,000
3,000
4,000
F Y 0 3
F Y 0 4
F Y 0 5
F Y 0 6
F Y 0 7
F Y 0 8
F Y 0 9
F Y 1 0
F Y 1 1
F Y 1 2
F Y 1 3
F Y 1 4
Interest (net) (INR m)
% of Sales, RHS
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Case Study #5: Sesa-Goa (now Sesa-Sterlite)
Major levers tested: Regulatory Lever & Corporate Action Lever
Company in brief
• In 2013, Sesa Goa merged with Sterlite Industries (both Vedanta Group companies) to formthe merged entity, Sesa-Sterlite, which also has stake in Cairn India and Hindustan Zinc.
• Prior to the merger, standalone Sesa Goa was India’s largest exporter of iron ore in the
private sector.
Backdrop to the levers
• For 10 consecutive years ending FY11, Sesa Goa’s PAT rose exponentially – from INR89m in
FY02 to INR41.7b in FY11.
• EBITDA Margin was 56% and both RoE and RoCE were well in excess of 40%.
How the levers worked• Regulatory Lever: Sesa Goa’s performance was hit by a series of adverse regulatory
measures –
1.
In July 2010, Karnataka state government stopped all iron ore exports from the state as
a curb on illegal mining.
2.
In August 2011, the Supreme Court ordered a ban on all iron ore mining activity in
Karnataka on environmental concerns and a PIL (public interest litigation) alleging
widespread illegality of mines.
3.
A commission of the Ministry of Mines submitted its report in September 2012. Based
on the same, Goa state government suspended all mining operations. This was followed
by a Supreme Court order in October 2012 suspending all mining operations in Goapending enquiry by a Centrally Empowered Committee.
• Corporate Action: Meanwhile Sesa Goa entered into an agreement to acquire 20% stake in
Cairn India from Vedanta Group for a consideration of INR130b (against net cash of
~INR87b).
After the levers
• PAT almost halves in 2 years …: Owing to the ban on iron ore mining, in two years (FY13
over FY11), Sesa Goa’s revenue fell 72% and EBIT fell 94%. The Cairn India acquisition
caused Interest (net of financial income) to turn from positive inflow of INR4.5b to negative
outflow of INR4.6b. PAT before share of associates went from positive INR42b in FY11 to aloss of INR1.3b in FY13. Including profit share of Cairn India, PAT was still down 46% (-27%
CAGR).
• … followed by stock price: The stock also clocked a negative return in line with PAT decline,
-27% CAGR, underperforming the benchmark by a high 25%.
• Rebound following regulatory relief: Things have since then recovered for the merged
entity Sesa-Sterlite, with the mining ban both in Karnataka and Goa significantly relaxed.
The stock too has regained most of its lost ground.
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After the levers
• Complete turnaround in FY12 …: The new management led by Mr Vineet Nayyar went
about systematically turning around the beleaguered company, renamed as Mahindra-
Satyam. In FY10 and FY11, all the financial discrepancies and the subsequent class action
claims by customers and partners were accounted. Finally, in FY12, Mahindra Satyam was
back in the profit mode.
• … followed by merger with Tech Mahindra: In March 2012, the boards of Tech Mahindra
and Mahindra Satyam approved a merger with a swap ratio of 2 shares of Tech Mahindra
(then at ~INR650) for every 17 shares of Mahindra Satyam (then at INR75). Shareholders
who opted for the swap have gained handsomely as Tech Mahindra shares have since more
than trebled to INR2,100 levels.
Satyam Computer: PAT rebounds post Stock plunges on fraud announcement,
fraud, after Tech Mahindra takeover but recovers on profit turnaround
Key takeaways
• Quality of management is a key factor causing performance breakthrough or breakdown.
• Fraudulent and minority shareholder unfriendly management will eventually and invariably
“break down” stock performance.
• All management-change cases must be monitored as they hold potential for breakthroughs,
resulting in stock super-performance.
0.83.5
5.0 7.1
9.6
14.116.9
-2.8
2.5
-1.6
12.8
F Y 0 2
F Y 0 3
F Y 0 4
F Y 0 5
F Y 0 6
F Y 0 7
F Y 0 8
F Y 0 9
F Y 1 0
F Y 1 1
F Y 1 2
Satyam Computer PAT (INR b)
Accounting fraud &
also class action claims
Tech
Mahindra
takes over
0
100
200
300
400
500
600
M a r - 0 3
M a r - 0 4
M a r - 0 5
M a r - 0 6
M a r - 0 7
M a r - 0 8
M a r - 0 9
M a r - 1 0
M a r - 1 1
M a r - 1 2
M a r - 1 3
Satyam Computer
Sensex (Re-based)
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September 2014 63
| 6-Force Framework of Levers
A4.2 Sector aggregates – Key takeaways
• The absolute and relative stock market performance of most sectors varies, depending on
the macroeconomic conditions.
• The top performing major sectors over the full economic cycle FY03-14 include: (1) Specific
Consumer segments – Alcoholic beverages, Paints, Tobacco, (2) Gems & Jewelry, (3)
Infrastructure/Construction, (4) Capital Goods, (5) Steel, and (6) Autos – Cars, CVs, and Auto
Ancillaries including Tyres.
FY03-14 – Top outperforming sectors
FY03-08 – Top outperforming sectors
FY08-14 – Top outperforming sectors
3.93.4 3.2
2.8 2.6 2.5 2.3 2.3 2.2 2.2 2.1
1.4
A l c o h o l i c
B e v e r a g e s
G e m s &
J e w e l l e r y
M i n i n g &
r e l a t e d
A u t o - P V s
R e a l t y
A g r o
C h e m i c a l s
P a i n t s
A u t o - C V s
A u t o A n c .
I n f r a s t r u c t u r e
T o b a c c o
P r o d u c t s
B S E S e n s e x
Total Sector Lever i.e. Mkt Cap/ GDP (FY03-14)
12.5
10.28.7
6.7 6.3 6.0 5.8 5.5 5.4 5.2
2.7
R e a l t y
M i n i n g &
r e l a t e d
C o n s t r u c t i o n
A l c o h o l i c
B e v e r a g e s
P l a s t i c
p r o d u c t s
C a p i t a l G o o d s
G e m s &
J e w e l l e r y
R e t a i l
S t e e l
I n f r a s t r u c t u r e
B S E S e n s e x
Total Sector Lever i.e. Mkt Cap/ GDP (FY03-08)
2.1 2.11.8 1.8 1.7 1.6 1.6 1.5
1.41.1
0.4
A l c o h o l i c
B e v e r a g e s
A u t o - C V
s
P a i n
t s
G e m s &
J e w e l l e
r y
T y r e s
T o b a c c
o
P r o d u c t s
A u t o - P V
s
A u t o - 2 W
H e a l t h c a r e
A g r o
C h e m i c a
l s
B S E S e n s e x
Total Sector Lever i.e. Mkt Cap/ GDP (FY08-14)
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| 6-Force Framework of Levers
• The worst performing major sectors over FY03-14 include: (1) Media, (2) Shipping, (3)
Fertilizers, (4) Power Utilities and (5) Oil & Gas.
FY03-14 – Major underperforming sectors
FY03-08 – Major underperforming sectors
FY08-14 – Major underperforming sectors
0.2
0.9 1.0 1.0 1.1 1.1 1.2 1.2 1.2 1.2
1.4
I T E d u c a t i o n
M e d i a
S h i p p i n g
F e r t i l i z e r s
U t i l i t i e s
C r u
d e O i l , G a s
R e f i n e r i e s
C o n s u m e r -
P e r
s o n a l , F o o d
T e c h n o l o g y
P a p e r
B S E S e n s e x
Total Sector Lever i.e. Mkt Cap/ GDP (FY03-14)
0.9
1.5 1.6 1.8 1.8
2.0 2.1 2.12.4 2.4
2.7
C o n s u m e r -
P e r s o n a l , F o o d
M e d i a
T e c h n o l o g y
A u t o - 2 W
P a p e r
E n t e r t a i n m e n t
H e a l t h c a r e
F e r t i l i z e r s
C r u d e O i l , G a s
C h e m i c a l s
B S E S e n s e x
Total Sector Lever i.e. Mkt Cap/ GDP (FY03-08)
-1.6 -1.5 -1.4
-0.7 -0.6 -0.6 -0.5 -0.5 -0.4 -0.4
0.4
R e a l t y
I T
E d u c a t i o n
C o
n s t r u c t i o n
S h i p p i n g
U t i l i t i e s
C a p i t a l
G o o d s
P l a s t i c
p r o d u c t s
S u g a r
S t e e l
M i n i n g
& r e l a t e d
B
S E S e n s e x
Total Sector Lever i.e. Mkt Cap/ GDP (FY08-14)
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| 6-Force Framework of Levers
• Only few sectors meaningfully outperformed the markets in both the boom phase (FY03-08)
and the lull phase (FY08-14) – (1) Alcoholic beverages, (2) Gems & Jewelry, (3) Autos – Cars,
(4) Agro Chemicals and (5) Auto Ancillaries.
• Across business cycles, Revenue and Operating Levers are more important determinants of
outperformance than Financial Lever. As tabled below, the differential in levers between
outperforming and underperforming sectors was highest in Operating Lever, followed by
Revenue Lever and Financial Lever.
How levers differ for outperformers vis-à-vis underperformers
Lever Formula FY03-14 Median
All
sectors
Out-
performers
Under-
performers
Differential
(x)
Revenue Lever ∆Sales/∆GDP 1.2 1.3 1.0 1.3
Operating Lever ∆EBIT/∆Sales 1.0 1.1 0.7 1.4
Financial Lever ∆EPS/∆EBIT 1.0 1.0 0.8 1.2
Valuation Lever ∆Mkt Cap/∆EPS 1.4 1.4 1.4 1.0
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September 2014 66
| 6-Force Framework of Levers
N O T E S
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