enam securities 1 13 august 2004 portfolio management 1:01 presentation at iim, calicut

ENAM Securities 113 August 2004

Portfolio Management 1:01

Presentation at IIM, Calicut

ENAM Securities August 2004 2

Some Key Concepts

Approaches to Portfolio Construction Top Down v/s Bottom Up Value v/s Growth Think of Cycles… nothing is linear

Client Requirements Match Needs, Requirements and Abilities

Risk Use Math & Computing as tools Make Bets Explicit Why are you diversifying?

Your OWN Portfolio?


Elements of Portfolio Construction

GrowthValue Momentum

Top Down

Bottom Up


Decomposing Approaches

SectorCountryAsset Class

Top Down

• Equities

• Bonds

• Currencies

• Property

• Commodities– Oil– Precious metals– Natural Resources

• Developed Markets

• Emerging Markets

• Regional markets

• FMCG

• Pharma

• Services

• TMT

• Manufacturing

• Cyclicals


Decomposing Approaches

• Volume

• Price

• Efficiency:

– Costs

– Assets

• Restructuring

• Payback

• EV/EBIDTA

• P/E

• DCF

• Technical Charts

• Reflexivity

• PE/G

• Option Value

MomentumGARPValue

Bottom Up

• Dividend Yield

• Price/BV

• Replacement Cost


Some Lessons from History

Japan V/s UK in 1944

Korea V/s India in 1950

Singapore!

Hero Honda V/s Kinetic Honda

Bharti V/s IDEA

Infosys V/s HCL

HDFC Bank V/s SBI

There is NO trade-off between Top- Down and Bottom up


Think of Cycles!

Nature is cyclical, not linear!

Life Cycles

Business Cycles / Boom-Bust

Seasonality

Innovation / Schumpeter

Market Cycles


Valuation Approaches

• Illiquid

• Misunderstood

• Hated/Uncovered

• Appraised value

• Institutional Favorites

• UVG Stories

• Imagine it!

• DCF or Option value

• Max Volume

• News Flow

• Volatile

• Technicals

Value Growth Momentum

In Reality, there is no distinction. Growth and Momentum are

LongTerm/Short Term Value catalysts


OUR VALUATION “SCREEN”

COMPANY MKTVAL ROCE RONWCALC

RONWSales/ CapEmp

SALE/ BLOCK

WCAP/ PAT+D

SALE/EQ

OPM% 94

OPM% 95

OPM% 96

OPM% 97

OPM% 98

OPM% 99

OPR MOM 95/94

OPR MOM 96/95

OPR MOM 97/96

OPR MOM 98/97

EXP MOM 99/98

Agrevo India 751 38% 35% 36% 2.6 4.0 1.8 24 ##### 15% 13% 15% 16% 0% #DIV/0! 36% 30% 22% 22%Cyanamid Agro 210 44% 32% 28% 2.4 21.2 1.4 20 17% 20% 19% 18% 18% 0% 21% 5% 7% -37% 10%Monsanto 265 52% 35% 34% 3.2 9.0 0.9 40 12% 19% 15% 14% 17% 0% 168% -1% 13% 41% 25%

Novartis 2942 35% 23% 24% 2.6 3.8 0.8 21 16% 12% 13% 14% 16% 0% -17% -26% 20% 28% 40%Asahi India 198 16% 18% 10% 1.3 1.2 1.7 33 23% 20% 22% 25% 25% 0% 26% 69% 85% 2% -15%Denso India 89 14% 11% 9% 2.2 1.8 -2.2 7 12% 12% 13% 14% 9% 0% 57% 59% 21% -28% -25%Engine Valves 94 17% 14% 11% 1.1 1.3 1.8 16 21% 22% 22% 22% 19% 0% 24% 8% 25% -6% -15%I P Rings 46 14% 11% 9% 0.7 0.7 0.9 4 36% 40% 35% 39% 28% 0% 98% 24% 24% -44% -30%India Nippon 132 49% 31% 40% 2.2 4.6 0.0 14 20% 19% 18% 24% 24% 29% 41% 49% 83% 11% 20%Kalyani Brakes 121 12% 14% 6% 1.4 1.5 1.2 10 2% 8% 12% 12% 12% 0% 679% 86% -3% 3% -39%

MICO 1433 29% 20% 26% 3.2 1.2 -0.2 31 22% 23% 24% 21% 22% 19% 30% 33% 14% 20% -13%Munjal Showa 167 41% 30% 29% 2.6 2.8 0.1 16 16% 17% 18% 17% 18% 0% 53% 43% 8% 34% 15%Pricol 110 17% 16% 12% 1.1 1.3 1.4 22 17% 20% 18% 22% 15% 0% 65% 20% 46% 2% -15%Sundram Fasteners 493 20% 20% 15% 1.2 1.4 2.0 28 16% 20% 21% 21% 20% 0% 76% 33% 13% -11% -5%

Bajaj Auto 6467 29% 22% 20% 1.3 1.9 -1.5 25 24% 27% 27% 27% 28% 0% 51% 31% 18% 5% 12%

Hero Honda 3368 41% 34% 33% 4.0 4.0 -0.4 29 9% 9% 9% 11% 12% 0% 36% 29% 49% 59% 35%

Punjab Tractors 2668 52% 39% 34% 3.2 4.1 -0.2 39 13% 13% 15% 16% 18% 0% 36% 38% 44% 45% 35%

TELCO 6891 11% 9% 3% 1.1 1.6 1.7 25 12% 15% 16% 16% 13% 0% 85% 47% 33% -42% -33%

TVS Suzuki 1238 42% 38% 41% 3.6 4.3 -0.5 45 12% 12% 12% 13% 14% 0% 51% 53% 41% 37% 15%Archies 306 55% 38% 44% 2.6 5.0 -0.4 19 5% 9% 13% 12% 16% 29% 166% 101% 22% 81% 85%Baush & Lomb 251 15% 11% 10% 1.1 1.7 0.8 3 -9% 0% 11% 12% 17% 0% -105% 5213% 48% 75% 35%Birla 3M 341 13% 11% 6% 1.4 3.5 4.4 9 8% 9% 11% 9% 10% 0% 74% 110% -5% 42% 20%Cadbury 1401 22% 14% 18% 2.2 2.0 -0.3 18 7% 15% 15% 14% 14% 18% 142% 28% 14% 11% 29%

Castrol 5033 50% 40% 40% 2.1 5.2 0.9 15 20% 25% 24% 21% 25% 26% 62% 27% 3% 29% 5%

Colgate-Palmolive 2385 50% 28% 33% 3.9 4.3 -0.1 7 22% 20% 20% 17% 15% 0% 7% 20% 0% -7% -35%Dabur 1875 17% 20% 11% 1.9 3.7 2.4 29 ##### 14% 14% 12% 11% 0% #DIV/0! 36% 10% 5% 6%

Hind Lever 49260 64% 47% 55% 5.4 9.4 -1.0 44 13% 11% 11% 11% 12% 16% 25% 14% 17% 31% 34%Indian Shaving 1934 23% 29% 22% 1.9 1.9 0.1 17 -5% 18% 21% 20% 18% 23% -615% 43% 33% 29% 31%International Bestfoods 161 -2% -2% -2% 2.0 7.1 2.2 12 2% 6% -1% 5% 0% 0% 323% -117% -868% -101% 200%

ITC 22969 32% 31% 29% 1.1 2.4 0.3 13 20% 21% 24% 27% 32% 0% 8% 11% 38% 26% 20%Kodak 261 12% 4% 9% 3.3 10.2 7.2 69 -1% 0% 5% 5% 5% 5% -103% 27125% 47% 42% -3%Marico 823 45% 33% 36% 4.9 7.3 0.1 34 9% 10% 11% 9% 10% 0% 27% 38% -2% 28% 16%

Nestle 5074 36% 38% 44% 3.0 2.8 0.3 16 13% 12% 12% 12% 15% 16% 12% 47% 14% 56% 4%

Proctor & Gamble 1961 30% 24% 23% 2.0 1.8 -1.4 18 5% 15% 17% 21% 21% 0% 217% 49% 30% 13% 22%

Reckitt & Colman 1234 39% 24% 31% 3.3 3.5 0.7 13 16% 17% 16% 12% 14% 14% 24% 17% -16% 46% -2%

SKB ConsHCare 2791 56% 35% 44% 2.7 5.7 0.1 13 22% 22% 21% 20% 20% 25% 30% 23% 32% 14% 22%Britannia 2698 22% 24% 17% 3.8 4.8 -1.6 45 7% 7% 6% 6% 7% 0% 19% 2% 13% 40% 27%

ABB 1405 13% 8% 11% 2.0 3.1 2.5 22 15% 15% 13% 13% 10% 7% 37% 28% 26% -26% -32%Atlas Copco 101 28% 28% 21% 2.2 4.0 2.5 18 20% 17% 16% 13% 14% 0% 0% 19% 14% -6% -30%Carrier Aircon 491 41% 33% 29% 3.3 5.7 0.8 12 13% 16% 16% 15% 14% 0% 110% 85% 17% 19% 16%Chicago Pneumatic 54 17% 13% 12% 1.5 2.2 3.4 14 11% 13% 17% 17% 15% 0% 69% 59% 14% -22% 5%

Cummins 1381 31% 23% 21% 1.9 2.4 1.9 19 21% 20% 20% 19% 19% 0% 29% 17% 16% -7% -15%Elgi Equipment 135 15% 9% 10% 1.1 1.6 1.8 35 13% 14% 13% 17% 19% 0% 34% 24% 28% -13% -5%Esab 145 25% 20% 19% 2.3 3.3 -0.4 10 14% 13% 15% 15% 13% 0% -8% 34% 7% -6% -20%Grindwell Norton 146 20% 13% 13% 1.3 1.6 1.5 12 16% 17% 16% 18% 18% 0% 31% 21% 36% 2% -10%Hindustan Powerplus 143 16% 10% 10% 1.5 4.6 6.7 5 3% 16% 13% 13% 13% 0% 784% 76% 45% -13% -30%Honda Siel Power 177 34% 29% 24% 1.9 2.3 1.3 14 16% 19% 18% 21% 21% 0% 56% 25% 35% -4% -5%

Ingersoll-Rand 1602 47% 29% 32% 2.3 4.9 1.4 13 22% 20% 18% 20% 22% 0% -4% 13% 32% 42% 20%Kvaerner Construction 182 17% 11% 14% 5.0 7.2 4.2 85 9% 9% 8% 5% 3% 8% 60% 16% -23% -52% 184%OTIS Elevator 423 44% 27% 36% 3.6 3.4 -1.4 23 10% 15% 14% 15% 15% 16% 73% 51% 21% 14% 12%Revathi- C P 131 51% 37% 35% 1.7 6.6 1.3 15 21% 23% 24% 25% 31% 0% 10% 27% 15% 44% 35%Sandvik Asia 219 19% -5% 16% 2.3 1.9 2.0 8 29% 33% 31% 23% 14% 6% 58% 35% -14% -45% -53%Siemens 1029 9% -31% -16% 2.7 2.1 -6.2 37 12% 8% 14% 7% 8% 0% -16% 132% -50% 0% 12%Swaraj Engines 351 35% 42% 33% 1.9 2.2 -0.3 20 15% 16% 19% 19% 20% 0% 55% 47% 42% 22% 50%Wartsila NSD 325 18% 14% 15% 2.1 4.7 3.7 18 11% 12% 14% 13% 11% 13% 116% 91% 41% -48% 18%Widia 317 38% 32% 30% 1.4 1.8 1.8 17 24% 24% 26% 27% 31% 0% 1% 48% 44% 25% 8%Colour Chem 362 16% 7% 11% 1.8 2.3 3.2 30 ##### ##### 15% 18% 12% 0% #DIV/0! #DIV/0! 28% -24% 7%Goodlass Nerolac 295 29% 20% 23% 2.4 7.4 1.4 27 11% 12% 13% 13% 13% 0% 39% 23% 25% 8% -7%ICI India 977 23% 20% 18% 1.7 1.8 0.4 16 ##### ##### 14% 16% 16% 0% #DIV/0! #DIV/0! 23% 16% 7%India Gypsum 55 27% 24% 19% 2.0 2.4 1.2 3 ##### 18% 17% 17% 16% 0% #DIV/0! 36% 9% 5% 25%Madras Cements 931 14% 11% 8% 0.6 0.6 0.1 41 23% 31% 35% 33% 32% 0% 68% 48% 2% 12% 20%

MRF 1388 28% 28% 30% 2.2 2.2 1.5 421 11% 11% 12% 14% 18% 0% 31% 50% 25% 34% 5%Albright Wilson 97 24% 21% 21% 1.6 3.2 1.8 26 13% 16% 16% 16% 17% 18% 56% 18% 9% 8% 7%

Asian Paints 1134 26% 22% 22% 1.9 2.7 0.7 20 15% 17% 14% 17% 16% 0% 52% 14% 20% 4% 5%BASF India 575 12% 10% 6% 0.9 1.1 2.2 11 20% 19% 18% 21% 20% 0% 9% 12% 32% 4% 7%Centak Chemicals 80 33% 33% 26% 0.7 1.2 0.1 4 52% 54% 39% 48% 56% 0% 31% -18% 21% 52% 10%


VALUATION BENCHMARKSP/E 2001 CONSUMER PEG I ACT SERVICES PEG I ACT PHARMA/AGRO PEG I ACT AUTO/ANCC PEG I ACT

Bajaj Auto 1.0 18 8

<8 India Nippon 0.3 21 8

HDFC 0.4 18 8 TVS Suzuki 0.4 16 8

Astra IDL 0.4 17 9 Swaraj Engines 0.5 31 9

<12 Marico 0.4 23 10 Punjab Tractors 0.6 25 10

MICO 0.3 13 11

Monsanto Chemicals 0.3 33 11 Sundram Fastener 0.5 16 12

Knoll Pharma 0.8 22 15

Burroughs Wellcome 0.6 17 15 Hero Honda 0.5 27 15

<18 Glenmark Pharma 0.5 16 16

Agrevo 1.0 28 17

German Remedies 0.8 21 17

Archies 0.6 37 17

Castrol 3.6 55 18 Rhone Poulenc 1.3 23 18

Skb Consumer 3.0 23 19 CRISIL 0.6 21 19 Wyeth-Lederle 0.7 21 19

Kodak 1.0 12 19 Abbott Labs 0.6 17 19

E Merck 1.4 25 19

<24

Proctor & Gamble 2.4 25 22 Parke Davis 2.4 25 23

Novartis 0.7 24 24

Navneet 1.1 24 23

<30 Smithkline Pharma 0.8 14 26 TELCO -0.1 15 27

Cadbury 0.7 23 26 Pfizer 1.0 28 27

Nestle 1.2 31 26

Colgate-Palmolive 0.7 19 29

Reckitt & Colman 1.8 18 29 Hoechst Marion 0.6 25 30

Britannia 0.8 23 30

Dabur 0.5 23 30Nirma 0.4 26 33 Glaxo 2.1 17 33

<40NIIT 0.8 33 35

Hindustan Lever 1.5 45 46 Aptech 0.6 20 41 Cipla 1.5 21 42

Thomas Cook -85.1 16 41 Dr. Reddys 0.9 16 48

<50

Geometrix 0.6 29 50

Subex Systems 0.3 63

Birla 3M 1.3 17 50 Sonata Software 1.0 67

Polaris 2.6 26 84Satyam Comp 0.8 43 88

TV18 4.7 16 111

>50 BFL Software 0.9 29 100

VisualSoft 1.5 36 119

Digital 2.4 19 122

Hughes Software 2.1 34 127

Indian Shaving 4.8 23 121 Infosys Tech 1.7 40 134

HCL Technologies 3.9 17 143


Think Client Management

WHO is the CLIENT?

WHAT does he want from you?

HOW are you shaping his expectations & mindset?

WHY should he stick to you?

“Most clients would rather have their fund manager fail

conventionally than succeed unconventionally.”

— Marc Faber


CHANGING NEEDS OVER A LIFETIME

0

2

4

6

8

10

12

BANK/FD Mutual Fund Pvt. Advisor

Incom

e

Daily Exps

Durables

House

Own Business

Equity/Bonds

Property

Art/Misc


KYC and Thyself!

Asset Allocation

Country Allocation

Sector Allocation

Large Cap

Small

Cap

Pvt. Banks / Pension Funds /

Macro Funds/ Fund of Funds

Regional Funds

Country Funds/ Mutual Funds

HNW / PMS / Absolute Return

Funds/ “Hedge” Funds

Relative

Absolute


Key Success Factors

Pvt. Bankers / Pension Funds / Macro Funds

Regional Funds

Country Funds

Absolute

Return

Funds

• Institutional Marketing• Deployment of Large Pools• Capital Preservation

• Marketing Scale & Scope• Economist

• Fund Manager• Technician

• Stock Picker

BCA GLOBAL

BCA EMG MKTS

BCA CHINA

INDIA FUNDS


Risk Mitigation

Formulas / Computers are tools, not cast in stone

Sterling Crisis

LTCM

Markets discount the rate of change ; most metrics measure history

Understand logic of EMT, CAPM and Beta; do not be bound by it.

“Risk is something I manage between my ears.”

— Warren Buffett


Make Explicit Bets

Asset / Sector / Class Use Computing to make interrelations and risk explicit; scenario modelling

Catalyst Reflation ; Upgrading Debt Rating ; Margins…

Valuation Payback, DCF, etc

→ What will make you change your mind?

→ Your weightage should not be led by overconfidence !


IDEAL PORTFOLIO

PBTx FMCG SERVICES PHARMA AGRO MISC POWER ENGG AUTO ANCC

<5Zeel. edge

EsselGoodlas Traf. Hse

I.NipponMunjal

<9marico

VSNLRhoneAstra S.Honda

RevthiG.Norton TVS

E ValveIP Ring

<11 CRISILGermanKnoll

AgrEvoCynmde

FosecoA Paints Wartsila

A CopcoEsab

BajajP Trac

MICODenso

<15ITCSKB-CH

T. InfoWIPRO

PfizerWyeth

HPPCummins

CarrierOTIS

<18P&GCastrol

Ind HotlWIH

RanbaxySKB-P ABB Ingersoll

>18RCI/CadHLL/ISPLNestle

InfosysT Cook

GlaxoHMR

Novartis NalcoHoganas

HondaTelco

S Fstnr

7575%%


Decompose | Decompose | Decompose

Sectors Large Cap Medium Cap Small Cap Total

FMCG

Pharma

Banks

IT

Telecom

Media

Engg

Autos

Commodities

Total


Decompose | THEN | Consolidate

A good investor is a good businessman and vice versa

OPM % Sales / NBIK Wkg Cap/ Sales ROI ROE

Div y/d P/BV EV/EBIDTA P/E PE/G

Sales OPIDT PAT DIV NW Debt Net Blk Wkg Cap

Aggregate Portfolio Metrics


Typical Career Path to Nirvana

Analyst Head of Research Fund Manager Abs. Manager Own Funds

Large Fund Manager

Even Larger Fund ManagerMarketing Guru


How is your Portfolio Tilted?

BUILD A CONSCIOUS LIFESTYLE !

WORK

COLLEAGUES

PROFESSIONAL

COLLEGUES

OWN

INTERESTS

FAMILY

CLIENT TIME


HEAVEN AND HELL

AMERICAN SALARY

ENGLISH HOME

GERMAN CAR

CHINESE FOOD

INDIAN WIFE

AMERICAN WIFE

ENGLISH CAR

GERMAN FOOD

CHINESE HOME

INDIAN SALARY

YOUR REAL WEALTH = YOUR HAPPINESS = YOUR YOUR REAL WEALTH = YOUR HAPPINESS = YOUR STATE OF MIND = WITHIN YOUSTATE OF MIND = WITHIN YOU


SUMMARY

UNDERSTAND YOURSELF OBJECTIVELY

UNDERSTAND THE INVESTMENT LANDSCAPE

UNDERSTAND THE UNDERLYING INVESTMENT

UNDERSTAND THE MARKET PARTICIPANTS

FOLLOW BASIC PRINCIPLES AND STICK TO THEM!

BE HAPPY!

enam securities 1 13 august 2004 portfolio management 1:01 presentation at iim, calicut

Documents

enam securities

calicut slide

valuation screen slide

marc faber slide

korea vs india

history japan vs uk

portfolio management

think client management