Capitalideasonline Com Articles Index Php Id 47

8/10/2019 Capitalideasonline Com Articles Index Php Id 47

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Ramesh Damani: So both of you would thus perhaps suggest that the Berlin Wall was a more significant event to remember for the next 30 years then 9/11.

Would that be fair?

Prof. Lata: I think so. In terms of change in mindsets I agree with you.

Rakesh Jhunjunwala: I want to ask them one question. Looking to the enormous debts of both the American Government and the big corporations, the value of

the dollar defies market logic. Don't you think that it could cause the dollar to crash? I cannot predict the time but what kind of a reaction do you think it will have on

the financial markets? Do you think we will go back to gold? Will that be the only way?

Prof. Lata: I hope not.

Rakesh Jhunjhunwala: Hopes don’t matter much. [laughter]

Prof. Lata: That is true. To some extent it's what you are saying. With the wisdom of hindsight, we are now saying all this has

happened and you cannot predict what's going to happen in the future. I won't believe that the dollar is going to crash until I see

some semblance of it. In fact, since 9/11, I have seen quite the contrary. So you are right. Economically speaking, the models

would say that's what ought to happen. But, for instance, the Japanese investment in the US has declined, maybe, over theyears. But the

Chinese have replaced that. Why do people continue to do that? I don't know. Go ask them.

Ramesh Damani: Let me ask for a show of hands. How many o f you think that the Berlin Wall was the defining event of the last 20 years?

[Show of hands]

And how many o f you are willing to believe that 9/11 what actually a more significant event?

[Show of hands]

50:50. That’s neither here or there. Maybe in the question answer session we can have an opportunity to look at this.

Bharat Shah: I would say that the number of $1 billion a day is wrong and I could have refuted this number and said that it is $5 million.

Ramesh Damani: Current account deficits.

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Rajeev Gupta: (from audience) But I think they surely have a current account deficit, they are also having the largest FDI in the world. So on the balance of

payments front the situation may not be as grim as it is made out to be.

Rakesh Jhunjhunwala: No, that's an argument that everybody said about the NASDAQ that the PEs are too high but everybody said markets are

going down, let's participate in it and it's going to hold.

Rajeev Gupta: But this is FDI. This is not portfolio flows.

Rakesh Jhunjhunwala: No, it’s not the question of the color of the money.

Sanjoy Bhattacharya: I think you are absolutely right. The issue is, for instance, Japanese investment which has been a very large part of FDI because they set

up automobile plants, they set up various engineering plants and so on. Today I think the big issue which I think she referred to is , what if Japan, which is

perilously close to plunging into chaos, decides for whatever reason that they are not going to put that kind of money into FDI into the US? It

would be interesting to see what happens.

Rajeev Gupta: They are European FDIs, most of them.

P. Sukumar: I would like to go a step further. If you look at the scenario, the US has been having massive current account deficits, its helped by a lot of capital

inflows and the capital is flowing because the US has such a tradition of having the highest capital efficiency. The return on capital employed is the best for US

companies. The way I see it, I think there are fewer and fewer opportunities for the U.S. to sustain that type of high return on capital in a number

of sectors which may mean that there are going to be a fewer opportunities. Thus there would be a case for lower capital inflows into the U.S.

and if that is going to be the case obviously there is a big mismatch.

Rakesh Jhunjhunwala: But the question is that the country is living on borrowed capital, right? All that money is not only going to fund investment, it is

also going to fund consumption. Today the U.S. consumer debt is at the highest level ever . And it does not matter who finances the debt, whether it is

local financing of that consumption or foreign financing. Every country in the world until now which has lived with these sort of current account deficits may have hadmany reasons. Even Britain had the same problem in 78-79. They followed it by at least 8-10 years of recession where consumption patterns had to decline.

Bharat Shah: Rakesh, I think what you're saying is right that if inflows are in the form of foreign direct investment, they are probably more sticky

and they are going to remain in physical assets which are going to remain around. But the issue is not only that of the source of funding

patterns, the issue is also what you're spending on. If you are spending on productive assets the gap between your current inflows compared to

what you are spending probably is all right so long as the going is good. But if you are spending that money on consumption, as Rakesh is

mentioning, then there is a problem.








What applies to an individual, applies to an entity or to a country. Any individual who earns Rs. 1 lakh and constantly spends Rs. 2 lakh can’t sustain unless there

are ways and means of bridging the gap. There are no free lunches. So why should it apply to America? I would tend to be on the side of what Rakesh is saying

and exactly opposite of what Prof. Lata was say ing. Why would you bet on the dollar? I think that there is every chance in the world that the dollar should crash in

some situation. Timing that of course is difficult but it should logically happen if the behavorial pattern does not change.

John Band: In the USA, I think that there is one free lunch in the world. And is a scandalous free lunch that the Americans have thrived on for

many many years. But to some extent the dollarization of the global economy does mean that all the new money which is required comes in the form of US

dollars which is a crazy wealth transfer from everybody else to America. I am on the side of the bears on the dollar. At some stage it must crash. The

problem is it would be an awesome event but it does occur.

Ramesh Damani: Perhaps 8 points on the Richter scale? The fact is that we talk about a lot of things. This is good. I enjoy that. But about the fiscal deficit that

we are running at home, the S&P managing director who was here a few weeks back said that it was the most scary thing that he had ever seen .

Would you share that view? Is it that what scares you when invest in the marke t also?

Sanjoy Bhattacharya: It is ironic that I am asked this question (Sanjoy was a rating analyst earlier). I spent several of the

best years of my life in beating the analysts. But the thing with rating agencies is that, they always bolt the stable

door after the horse has fled. I am not surprised that he was paranoid. I mean you know it's typical of an S&P managing

director...

Rakesh Jhunjhunwala: He has been paranoid earlier...

Sanjoy Bhattacharya: And I am coming to that. Actually if you look into the structure of our deficit, you can break it into two parts. There is what is called the

primary deficit and the fiscal deficit. And the fiscal deficit is after you have paid your interest obligations. However what India has is a low primary deficit. If you can

get Indian public finances in order then, you actually have not that much to worry about.

But the more scary thing is that that if you can't get it in order then you could actually perhaps at some point in time 5-10 years down the road head into a situation

where you are borrowing to pay interest. We aren’t quite there yet and I think that there is a high degree of awareness in the central bank. We have very open-

minded and very progressive economic policy makers, both monetary and fiscal, now in place in the government and to me it's not worrisome.

What is worrisome is that a large majority of the people now actually believe that in India inflation is going to remain at 1 1/2 - 2 percent. That

is scary and that is often use to buttress the argument that we will have a bull market in India. That is ridiculous. If people say that India is going to

have permanently low interest rates because inflation has fallen and the fiscal deficit isn’t worrisome, I would suggest that they look at the fiscal deficit of both

Center and the states and then look at the s tructure of inflation in this country.

Because there is energy inflation and core inflation. All you can control is core inflation. No country in the world can control energy inflation. And to the extent that

what we are going through right now crea tes a clear difference in what component o f inflation comes from energy and what comes from core inflation. To say that

inflation for the nex t 3-4 years in India is going to remain at a permanently low plateau is wishful thinking.








Now, what can we do? The sort o f things that we need to focus on is very simple. So clearly some of the expenditure is politically motivated, some of it is essential

and there a re far wiser people to think about it. In defense, you can't cut expenditure down arbitrarily. On the revenue side and this is where I think some amount

of opportunity exists and this is where John’s point about bad politicians is very important, we have got a hope that the new breed which emerges,

the people like Arun Jaitley or Arun Shourie, you know people like that will be at the front. Chandrababu Naidu perhaps is the vanguard of that movement, where

you have a greater focus on raising revenues.

Audience Participant: Agricultural taxes.

Sanjoy Bhattacharya: Well agricultural taxes is being ambitious, you are pushing it. Because of profound political repercussions -- all the politicians are

agriculturists...

Rakesh Jhunjhunwala: The big oddity is that the tax to GDP ratio in India is only 11 percent.

Sanjoy Bhattacharya: Yes, yes. I am not one of the big bang guys. But my belief is that in this country I believe something like 80,000 people who….

Raamdeo Agarwal: 76,000 people

Sanjoy Bhattacharya: ok, 76,000 people with a taxable income of Rs. 10 lakhs and above.

Ramesh Damani: But Sanjoy, unless taxpayers have rights, unless there is less extortion, less corruption, are you ever going to be able to increase the net?

Sanjoy Bhattacharya: No, I think charity begins at home. I am sorry, I don't buy that.

Rakesh Jhunjhunwala: As a taxpayer I can say that there are two things in life which I have cheated on and one is taxes .







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necessarily se t the example of what is in store for any o ther company which uses an instrument legitimately and properly. There are in my opinion plenty of those

legitimate companies. They have a legiminate right of rewarding their employees who are partners in intellectual capital. We have to understand that

businesses of intellectual capital are different from the manufacturing and traditional businesses. That relative dependence on intellectual capital

input is vastly different there.

Stock options are required to reward a proportionate partner in a fair manner, but the costs have to be recognized.

Ramesh Damani: So options is the way to go but you should expense them out. But does that change the balance sheet of all the tech stocks that you follow, for

example, Infosys? Would their profits take a big hit?

Bharat Shah: If it takes some hit, so be it and that’s the prospect you have to recognize and see whether it make profits there after.

Ramesh Damani: Fair enough

Rakesh Jhunjhunwala: Bharatbhai, that is the problem here. They are non cash charges. If you treat profit as cash then all stock options are non cash charges.

Therefore that is no real charge to the company.

Ramesh Damani: Correct. It creates an accounting anomaly.

Rakesh Jhunjhunwala: That means nothing. It is no cost to the company. Its cost to the company's shareholders.

Ramesh Damani: But would you, Bharatbhai, invest in a company that reprices its options because the stock price has fallen? I mean what kind

of intellectual corruption is that?

Sanjoy Bhattacharya: Extreme.

Ramesh Damani: Is it not a strong negative when you select the stock?

Bharat Shah: I think definitely it does affect your mind when you see that something like that is being done because at a given point of time you recognize what it

was worth based on the price that it was issued out and that will be like pampering a particular class of the valued stakeholders at the cost of others. And I think

that's a grossly unfair thing. I would think that's not easily acceptable.

Sanjoy Bhattacharya: I just think it exposes the greed of professional managers. Nothing more to it.







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Rakesh Jhunjhunwala: One thing, Ramesh, is it is very nice to read that in Infosys Mr. Narainmurthy's driver is a crorepati. But it's not practical. Because

somebody has to pay for him to be a crorepati. Everybody’s driver cannot be a crorepati. Therefore it is not sustainable.

P. Sukumar: The stock options are to be used judiciously in situations where they are required and should not be spread very thinly.

Sanjoy Bhattacharya: Can I just say one thing. This may sound theoretical but the idea is very simple. Why do you need options? Pay the people cash.

And if they want to buy shares in the company they work for they can use it for buying the shares.

Rakesh Jhunjhunwala: Because options is his father-in-law's wealth. [laughter]

Sanjoy Bhattacharya: The point is why do people go in circles about it.

P. Sukumar: I think why options are required to bring a confluence in the way the shareholders look at the company’s prospects and the way the employees want

to associate with that. There is nothing wrong with having stock options.

Sanjoy Bhattacharya: No, no. I mean pay them real cash bonuses. Why options? Why are we getting devious about it? If you want to encourage managers who

align their interest with those of shareholders...

Rakesh Jhunjunwalla: Let the company buy the shares on its own from the market and issue it to its employees at a discount.

Sanjoy Bhatacharya: At market price.

Rakesh Jhunjunwalla: Then, there is a cash charge. If Infosys buys stocks at Rs. 3700, it pays Rs. 3700 to the market and gives it to the employee at Rs. 2000.

Let Infosys charge Rs. 1700 to the profit and loss account. That's the way it should be done.

Sanjoy Bhatacharya: That's fair.

D. R. Mehta: (from audience) I think we are considering this issue in a very limited way. We have to look at

shareholders who get the shares at a certain price, employees get them at a discounted price. If you look a t

the entire thing from a much larger angle, then you'll consider why this is essential.

Suppose you were to look at what are some of the problems today today? Productivity? The moment you have the







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stock

options it means that this distinction between employersand employees disappears. The employees become part owners. That their perception about

the company changes. And the productivity will certainly go up . And if they don't get higher wages or salaries, well they could expect more dividends or

market capitalization.

In fact, the idea was initially started in 1985 and I was associated with it. And I say this proudly. But somehow immediately after I left somebody argued that no

more than 400 shares could be given to any employee. And there it got killed. Again it got revived. And when we went to the board, would you believe there was a

strong opposition. No one wants to talk of stock options. My point is that suppose the entire company is owned by the employees, would it not be

working for the society and the system? Would it not increase the productivity? And this idea of the tax is misunderstood. What the industry is saying is

that don't charge that tax on the day when the stocks are purchased, but charge the tax when the shares are being sold. The employee doesn't have that much

money because he just bought the shares.

Ramesh Damani: Correct.

D. R. Mehta: So that is not the only issue. Not that there are no economic issues. So my suggestion would be lets not think of it in a very narrow kind of a way.

Let's not do that. Let's view the country as a whole. Lets think of a system which will improve the efficiency, improve the productivity, which will improve the

industrial relations. Real problem in this country is industrial relations. This is one way of dealing with that. Why, this is almost a revolution, so it is good. Suppose all

the shares are owned by all the employees, would it not be a good thing to do? Not to treat it only as finance issues.

Audience Participant: I tend to differ. There have been several studies both in Europe and in U.S. : the more widely held the shares of the company by

the employees, the more the companies have tended to consistently underperform rest of the market. There are huge huge problems between

employees and the rest of the stockholders. At such a level it seems like the employees want to add value -- I can give you an example -- United Airlines, it's not

doing very well and its one of the most cited employee-owned companies. Having said that, I also believe that if you want to go all the way to free capital markets,

you want the manager’s salary to be also fixed by the marketplace.

And I think Enron is more a case of corporate governance failure than the breakdown of stock options or GAAP or any of the other things. There

are lots of companies in the U.S. that do perform pretty well, so I agree with Bharat that stock options is a very, very useful tool. As long as we have a strict

corporate governance mechanisms in place and the contract between the manager and the corporation is subject to the strict corporate governance rules, it's fine.

And of course it has got to be transparent and so on. Another problem that I have is the general quality of the disclosures in this country is -- you just think about it

-- the day the budget is announced, I don't find the economists talking about this. What I find is that our accountants are talking about the tax implications of theprovisions. In other words we seem to approach everything from a tax perspective and not from scarce resource allocation perspectives.

Ramesh Damani: Correct.

Audience Participant: What do we know about the experience of the Western world? As a soc iety we do not know of a better system of allocating scarce

resources in the most efficient way than the marketplace. Nobody in this room can claim that they know what a manager is worth, let that be determined by the

market forces.







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examples of nonperformance in the old economy companies and that are plenty of examples of performing new economy businesses. I think that is the true divide.

There is nothing provocative about something in the new economy vs. the old economy.

Ramesh Damani: What then do you think that the old economy company has at the end of the day? Physical assets, plants, machineries which has a residual

value. Whereas the new economy works with intangibles, they work with intellectual property which the market can reward. But broadband trading which Enron did

could be valued one day and the other day it could not be valued at all. So, as stakeholders in the old economy companies, there is some physical value

to the assets held and in the new economy companies it goes to zero .

John Band: What would you value of the assets of a U.S. Steel Co?

Ramesh Damani: More than Enron.

P. Sukumar: I think I am a protector of wealth and today that are tools to diversify your wealth. You can have different forms of financial assets, you can have

fixed income, you can have government bonds, you can have equities. I think the modern world is far more stable than what it used to be. But you can have your

wealth in financial assets. Now looking at gold, suppose some government in India convinces all the women not to use the gold, I don't know what will be the price

of gold.

Rakesh Jhunjhunwala: But there is a problem. Where is that government?

Ramesh Damani: Sukumar, you put in a sterling performance last year. Your Prima Funds were up by 25-26 percent on an annualized basis. Tell us how you go

about picking stocks? What's your approach? Top down, bottom-up. What's your approach?

P. Sukumar: I think clearly the focus is on buying businesses in which the fundamentals are going to improve over a period of time. And obviously valuation is

very important but there is no single tool which can say what is the right price to pay for a company, so you have to build a subset of companies if you think the

fundamentals are going to improve substantially and you are very convinced about the businesses per se.

I think what is more important is that you have to invest in businesses where you feel the value is going to increase over a period of time andnot decrease. There are some businesses which are like vegetables, if you can't sell them then they will rot and then the value will diminish. And

there are certain businesses which I like, probably metals, or they are sound businesses which even appreciate over a period of time and you have to operate

within these businesses so that if the market doesn't recognize or doesn't see your way and they take their own sweet time, you are still holding on the businesses

which are only improving.

Ramesh Damani: So, are you having the hope that these business that that the competition will be scarce?

P. Sukumar: Yes, I think there are a host of factors. I think in the entire gamut of lessons from business school as to where competitiveness comes from. And

the philosophy is very simple to find out whether the company is getting competitive and whether the business has potential As a portfolio manager






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the philosophy is very simple - to find out whether the company is getting competitive and whether the business has potential. As a portfolio manager

you spend the time in actually doing the due diligence and going through a number of factors and seeing whether it is going to improve, so you have to make sure

that the businesses are not overvalued and to look at what the market is expecting out of the company at that price. Suppose the market price of Infosys is Rs.

3000, what is the marke t expecting in terms of growth? You can use a tool like MIGR (market implied growth rate) to say that they are looking at a EPS

growth of so much. You can use a reverse DCF to say that the market is expecting an EPS growth of a certain percent and if you think that the company is

definitely going to do better than the market expectations than obviously you go ahead and buy it.

Ramesh Damani: Would it be fair to say that you use quantitative data rather than qualitative data?

P. Sukumar: No. As the stock se lection is going to be based on a lot of qualitative inputs as to whether the business is going to do better than that or worse than

that.

Ramesh Damani: Sukumar, you spend a lot of time going and visiting companies. Do you find that increasingly you are able to share the management’s

insights or is the manager is trying to tell you what you want as opposed to what you need to know?

P. Sukumar: I think that are several issues. One is whether the management is open, I think that is one of the issues and that is a positive attitude but you cannot

get carried away by saying there are some managements which are pretty hostile to you. As long as they are creating wealth for you how does it really matter to

you? And it is one of their negatives but every management has several positives and seve ral negatives and what matters is the positives outweigh the negatives.

Ramesh Damani: Rakesh said one of the sectors was PSUs. Where do you find leadership in the economy?

P. Sukumar: I don't see betting on any theme to be a permanent solution to making sustainable gains in the portfolio. You’ll have to go on a bottom-up basis. And

PSUs are good and bad, there are some good PSUs, there are some bad PSUs -- I don't know whether anyone can unlock value in a company like ONGC in 10

years time. I don't think I have a perspec tive better than that time frame and so again one has to be very clear about that. If you are buying a PSU I think you

have to be sure of the value. BPCL had a dividend yield of six percent

Ramesh Damani: Lots of PSU stocks there. What is the outlook for the balance of the year ? But do you feel the index will still be range-bound or will it be a stock

picker’s market?

P. Sukumar I think the market is very undervalued. We don't know what might happen in December, we don't know what might happen earlier, of course no one

can say but I think the market is clearly undervalued and I think even if you are looking at valuations going to the peak, peak vs average you are looking at

least at 20 percent upside.

Ramesh Damani: Twenty percent.

P Sukumar: Yes







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P. Sukumar: Yes.

Ramesh Damani: You know, these were all opinions. Now we will hold them accountable for what they said last year. You know we had some stock picks. I

am going to share those views with you and then we will ask them the new picks and then we can grill them as to whether their suggestions make sense. Last time

we met was on 15th June and that was before September 11th, so that's clearly the dividing point in the market. The Sensex stood at a level of 3373, so we are

roughly about 8-10 percent up, the market has really been flat, as all of them suggested. But if you had the privilege of attending the last conference and you had

listened to them you would have made a lot of money. I will tell you what stocks they had suggested that at time and how they have done so far.

We will start with the big bull. He said wake me up and slap me at 3:00 and I will buy a PSU. He suggested three PSUs. He said CMC at about Rs. 300 and it is

close to Rs.600 today. So that's a double. He suggested a company called Bharat Electronics at Rs. 60, it is at Rs. 150 today. He suggested Engineers India

which is another technology company. It was about hundred bucks at that time and as Sukumar was saying paid maybe a tax-free dividend of eight percent at that

time. It is close to Rs. 300. So that's tripled up. He said one that didn't work out. It's flat. Tata Infomedia. Rs. 95-100 then, it is Rs. 95-100 today. Probably got a

seven bucks dividend in between. So those were Rakesh's picks.

We will go to Sanjoy who defines himself as a value investor. He only looks at a certain set of companies and the universe of 6000 stocks cannot be looked at by

him. The set he looks at meets his particular philosophy in terms of management, in terms of track record and the finances. The stocks that he mentioned are

typical in the way that they go up when the market goes up but you wouldn't lose money in a bad market. So they would hold their values. That's the kind of a

manager he is. He recommended Asian Paints which has gone from Rs. 250 to about Rs. 320-325 today. He mentioned Smithkline Consumer which is

marginally up Rs. 375 to Rs. 400. And Aventis Pharma, flat. It had good results but was flat. And then he had a PSU too, which has done well for him. He

recommended Container Corporation at Rs. 125, it is close to Rs. 310 today. So the perfect calls for the kind of market, the kind of fund manager Sanjoy is.

Bharat bhai of course missed his flight last year, so we can't question his picks out here, so he will have to give us fresh picks today.

Raamdeo had really good stocks because the stock Raamdeo picked is actually at its lifetime high right now. The stock is Hero Honda, a stock that he would tell

anyone about. It has doubled in the period that we have done the show from about Rs. 140 to close to …

Rakesh Jhunjhunwala: But he did not eat motorcycles for breakfast today.

Ramesh Damani: It went as high as 400. It has corrected since then and we will have to ask whether he still has the conviction to buy it today. One stock that he

had not bought, but was studying was BPCL. Did you buy BPCL finally?

Raamdeo Agarwal: Finally, yes.

Ramesh Damani: OK. It turned out to be fortunate for him because the stock has gone up from Rs. 185 to Rs. 325 during this time frame. One s tock that has been

flat for him has been Tisco. He had put a buy on Tisco. That really has gone nowhere. So two successes out of three picks isn't bad in this investment management

business.

The one thing that we found in last year's panel was that though there were a lot of tech bulls, no one recommended any tech stock other than CMC, which I would

classify as a PSU stock anyway.

Sanjoy Bhattacharya: I did and I have done badly







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Sanjoy Bhattacharya: I did and I have done badly.

Ramesh Damani: Which one was that?

Sanjoy Bhattacharya: I-flex Solutions

Ramesh Damani: I-flex is not listed.

Sanjoy Bhattacharya: But it has done badly.

Ramesh Damani: In the private market?

Sanjoy Bhattacharya: Yes.

Ramesh Damani: OK. I-flex was mentioned. It will be probably be listed by the time we are here again.

So those have been the picks and all of them had PSU stocks. So clearly this panel was ahead of the Government of India. They knew that disinvestment was

inevitable and they all said so. So it's a really an impressive track record. So I am going to take my pen out and this is that time to listen and see what they are

recommending. I think because Bharat skipped the last session, we will grill him first.

Mr Jawahir Mulraj is very cautious and the Chairman (SEBI) is also out here, so any recommendations that the panelists make, they are obliged to tell whether they

own those stocks personally or professionally in terms of full disclosure requirements of the Securities and Exchange Board of India.

Rakesh Jhunjhunwala: All stocks that are discussed are owned by all of us.

Ramesh Damani: So we will ask Bharatbhai for his ideas and we have got about an hour and 15 minutes including your questions, so just keep it nippy. You know

I do want the panelists to challenge the assumptions and if any of you fee l very strongly about an idea or disagree, I would like to get your vote in. So, Bharatbhai

what are your ideas for this year?

Bharat Shah: The first pick I would like to talk about is relevant not only for the next year but I think for several years to come. Dr. Reddy's. I believe it's an

incredibly strong pharmaceutical business which has moved away from manufacturing and selling in the local markets to global markets. It is a business

which has moved from copying others products into originating and discovering new ideas and I think its business model has moved from just one market

situation to a multi-market situation. It has also moved from addressing a very small category of solutions to a much wider range of areas in which the

opportunities are being addressed in terms o f value propositions.

I think this is one of the strongest examples of smart individuals who are focusing on their future. They are willing to take legitimate risks and are reconciling

themselves to the effect that there is a chance that some of the ideas may not work out. They are putting their heart and soul behind it for a number of years

before they see the flowering of it. To my mind this is one of the most robust companies there there is, in terms of the sophistication levels, business

models, and the level of innovation that they have already reached. I would think so far most of the ideas are in the seed level which is below the ground,







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ode s, a d t e e e o o at o t at t ey a e a eady eac ed ou d t so a ost o t e deas a e t e seed e e c s be o t e g ou d,

which is not so easily seen. I think the time has come for the flowering and the reaping of the benefits. So that's a company which I would recommend.

Valuation is not too demanding, even if you do not take into account the so-called less recurrent or one-time innovation based income streams. I think

innovation will become a permanent part of their business and people will stop calling that as a one-time occurrence. And that is just around the corner. So,

even if you ignore those onetime income streams, the valuation is not demanding. It's about 21-22 times next year’s earnings. We quite like that business.

Another company that I like is a small company called Glenmark Pharmaceuticals. It's a very strong company.

Rakesh Jhunjhunwala: It's probably an idea. John? It's only an idea.

Bharat Shah: It's a very strong company. It is pretty clear in its areas of focus. It has a dominant dermatological franchise. It is working on new chemical

entities. It will do upwards o f Rs. 250 crores turnover in March 2002. They should safely do 20% plus next year.

Ramesh Damani: 20 percent plus.

Bharat Shah: Yes. Twenty percent plus. I think they are working on developing some level of innovation which is as yet not visible. So it will be not right

to take any account of that benefit into the valuation at all. Much like I am not taking into account Dr. Reddy's as yet. But even the core businesses itself is

available at a single digit valuation multiple. So it's a good company, smart company, growing well and with the right kind of applications and products in the

area that has been chosen by the management. They have rapidly moved into three-four new ideas.

Ramesh Damani: Management has the ability to scale the business up?

Bharat Shah: That is an important issue. Of what I have seen of them so far, I feel that they are capable of that. Three years back they were a Rs. 80 crore

company and today they are a Rs. 260 crore company and I think that they have managed that transition reasonably well. And when I am buying at such low

valuations, I am not interested in asking too many questions. I think that they are capable of ev olving into a bigger company.

An example o f that is the fairly high degree of maturity that they have reached in the research program. So much so that I have seen Dr. Reddy himself

commenting about it in a positive manner twice on television. I would say that he knows the business far better than most of us. I don't understand much about

their research and how they are doing it but if somebody like Dr. Anji Reddy who knows all the aspects of it is saying that then I do believe that they must be doing

something right. I am not taking that benefit into account for their numbers. It is a good company and a smart company.

Moving on to some of the other opportunities I like Hero Honda.

Ramesh Damani: I am sure Raamdeo will talk about that.

Bharat Shah: Raamdeo will cover this company.

Ramesh Damani: But would you recommend a buy today?

Bharat Shah: Yes. I would.

Ramesh Damani: Next company. One more company.

Bharat Shah: One more company probably would be Container Corporation at today's prices. Good, solid logistics company and monopoly business,





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