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Investment Outlook: Its all in Your Mind

Investment Outlook: Its all in Your Mind. Summary. Investing is easy! Avoid the distractions Disaggregate the market Focus on business drivers Follow the Rules Asset Allocation Time Horizon Reasonable Expectations Learn & get wise. Market/ Sensex.

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Investment Outlook: Its all in Your Mind

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  1. Investment Outlook:Its all in Your Mind

  2. Summary • Investing is easy! • Avoid the distractions • Disaggregate the market • Focus on business drivers • Follow the Rules • Asset Allocation • Time Horizon • Reasonable Expectations • Learn & get wise

  3. Market/ Sensex • Your index is important not the market • Sensex flat since 1992 • Wealth creation has occurred Macroeconomics • Interest rates, Currencies, Oil prices, Politics.. do not alter basic competitiveness Media & Intermediaries • Have their own compulsions • Caveat Emptor! Investing is easy ifyou avoid the distractions!

  4. Market shows low correlation to current “fears” Sensex vs Govt Sensex vs Fiscal deficit Congress UF NDA Source: RBI Sensex vs Oil price Sensex vs Monsoon Drought Source: Statistical outline of India *% of district having excess/normal rainfall Source: BP statistics

  5. Index P/E (Forward Earnings) Source Bloomberg

  6. 2005 EPS growth (%) 15 20 25 10 4,382 4,572 4,763 14 6,134 6,401 6,668 18 7,887 8,230 8,572 P/E (x) BSE Index Scenarios • Current Sensex Earnings aggregate to Rs. 381 (FY04A) • IBES consensus earnings estimates 17% growth • Current Sensex is at 4,951 • Implied PER is 13x (trailing) and 10.5x (forward). • The table below sets out the range of Index expectations over next year Risk-Reward in favour of Upside!

  7. … but the Index hides more than it shows! IT Pharmaceuticals Banking Media & Auto All Figures indexed 100= price in 1994

  8. Price as on 14/7/94 Price on 15/7/04 CAGR (%) Satyam Computers 3 326 62 Infosys Technologies 13 1443 60 Wipro 6 525 56 Sun Pharmaceuticals 21 351 33 Hero Honda 33 460 30 Cipla 41 231 19 Ranbaxy 214 976 16 Zee Telefilms 30 126 15 HDFC 161 550 13 Dr Reddy's 248 749 12 Multibaggers of the last 10 years Source: Bloomberg; Adjusted for bonuses and stock splits; NIFTY constituents only

  9. Company Price as on Price on CAGR 15/7/04 11/9/01 (%) Oriental Bank 240 34 92 Mahindra & Mahindra 476 68 91 SAIL 33 5 87 Tata Motors 407 75 76 ONGC 654 136 69 Shipping Corp Of India Ltd 117 24 68 Tata Iron & Steel Co Ltd 327 84 57 BHEL 527 135 57 IPCL 157 40 57 Grasim 952 274 51 GAIL 182 53 51 Reliance Energy 571 176 48 ABB 730 225 48 Bajaj Auto 841 266 47 Tata Chemicals Limited 121 39 45 Company Price as on Price on CAGR 15/7/04 11/9/01 (%) National Aluminium Co Ltd 139 48 43 HPCL 288 111 38 Tata Tea 386 150 37 Hero Honda 460 183 36 Tata Power 254 101 36 Sun Pharma 351 141 35 Ranbaxy 976 415 33 ICICI Bank 238 103 32 SBI Bank 431 187 32 Glaxo 603 282 29 Indian Hotels 370 175 28 BPCL 314 159 26 Satyam Computers 326 175 23 ACC 232 128 22 Gujarat Ambuja 275 155 21 Multibaggers since 9/11 : The REAL BSE-30! Source: Bloomberg; Adjusted for bonuses and stock splits; NIFTY constituents only

  10. Many • Global Outsourcers • IT • Pharmaceuticals • Engineering • Emerging Business • Telecom • Media • Retail Sources of Advantage • Domestic Demographics • FMCG • Auto • Banking • Global Commodities • Oil • Metals Low Sustainability of Advantage High Low Investing is easy if you disaggregate the market Note : Companies may change characteristics over time!

  11. Focus on Micro, Company specific factors • How is Product or Service Quality? • Germany/Japan/China v/s India, v/s competition • How is Cost & Capital Efficiency? • Frugality as a mindset v/s “professionally managed” • What are their Value Systems? • Sugar in the milk • How is their Service to the Customer? • The “goodwill” earned

  12. ROE : 25% P/E=20x Value ROE : 15% P/E=12x 8% Bonds P/E=12x Cash Time Markets continuously discount all factors Use Bond Yield Reciprocal (100/8)=12.5x as your benchmark PE multiple represents – Predictability, Sustainability, Scaleability

  13. Investing is easy if you follow the RULES • KNOW YOURSELF • Are you Schumacher or Buffet? If not – Why not Hire them! • Have a 3 – 5 year outlook Time is the friend of a good business • Proper asset allocation prevents panic attacks! • Have reasonable return expectation: 15% CAGR compounds to lot of money! • In equities – 6/10 is a good success rate • PAY FOR QUALITY • Good men make good companies : Relative goodness is good enough! • Good companies, like good men – are FEW! • Competitiveness & culture (Micro factors) matter more than Macro trends • IS IT IN THE PRICE? • Don’t double count factors! Remember to BOOK PROFITS !!

  14. Thank You

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