ENAM 1July 2004

Investment Outlook:Its all in Your Mind

ENAM 2July 2004

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

ENAM 3July 2004

Investing is easy if you avoid the distractions!

Market/ SensexMarket/ Sensex Your index is important not the market Sensex flat since 1992 Wealth creation has occurred

Your index is important not the market Sensex flat since 1992 Wealth creation has occurred

MacroeconomicsMacroeconomics Interest rates, Currencies, Oil prices,

Politics.. do not alter basic competitiveness

Interest rates, Currencies, Oil prices, Politics.. do not alter basic competitiveness

Media & Intermediaries

Media & Intermediaries

Have their own compulsions Caveat Emptor!

Have their own compulsions Caveat Emptor!

ENAM 4July 2004

Market shows low correlation to current “fears”

Sensex vs Oil price

01,0002,0003,0004,0005,0006,0007,000

90-9

1

91-9

2

92-9

3

93-9

4

94-9

5

95-9

6

96-9

7

97-9

8

98-9

9

99-0

0

00-0

1

01-

02

02-

03

05101520253035

Oil price (RHS) Sensex (LHS)

(Rs./bbl)

Sensex vs Fiscal deficit

01,0002,0003,0004,0005,0006,0007,000

90-9

1

91-9

2

92-9

3

93-9

4

94-9

5

95-9

6

96-9

7

97-9

8

98-9

9

99-0

0

00-0

1

01-

02

02-

03

0

30

60

90

120

150

180

Fiscal deficit (RHS) Sensex (LHS)

(Rs. bn)

Sensex vs Monsoon

01,0002,0003,0004,0005,0006,0007,000

90-9

1

91-9

2

92-9

3

93-9

4

94-9

5

95-9

6

96-9

7

97-9

8

98-9

9

99-0

0

00-0

1

01-

02

02-

03

0

20

40

60

80

100

Monsoon* (RHS) Sensex (LHS)

*% of district having excess/normal rainfall

Sensex vs Govt

01,0002,0003,0004,0005,0006,0007,000

90-9

1

91-9

2

92-9

3

93-9

4

94-9

5

95-9

6

96-9

7

97-9

8

98-9

9

99-0

0

00-0

1

01-

02

02-

03

Congress

UF NDA

Source: BP statistics

Source: Statistical outline of India

Source: RBI

Drought

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

1990

-91

1991

-92

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

0

30

60

90

120

150

180

Fiscal deficit (RHS) Sensex (LHS)

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

1990

-91

1991

-92

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

0

30

60

90

120

150

180

Fiscal deficit (RHS) Sensex (LHS)

01,0002,0003,0004,0005,0006,0007,000

1990

-91

1991

-92

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

0

20

40

60

80

100

Monsoon* (RHS) Sensex (LHS)

01,0002,0003,0004,0005,0006,0007,000

1990

-91

1991

-92

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

0

20

40

60

80

100

Monsoon* (RHS) Sensex (LHS)

01,0002,0003,0004,0005,0006,0007,000

1990

-91

1991

-92

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

05101520253035

Oil price (RHS) Sensex (LHS)

01,0002,0003,0004,0005,0006,0007,000

1990

-91

1991

-92

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

05101520253035

Oil price (RHS) Sensex (LHS)

ENAM 5July 2004

Index P/E (Forward Earnings)

Source Bloomberg

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

23x

17x

13x

10x

ENAM 6July 2004

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!

P/E

(x)

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

ENAM 7July 2004

… but the Index hides more than it shows!

0

5,000

10,000

15,000

20,000

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Infosys Wipro Satyam

0

400

800

1,200

1,600

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Ranbaxy Dr Reddy'sCipla Sun Pharma

0200400600800

1,0001,200

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

HDFC HDFC Bank

0

2,000

4,000

6,000

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Zee Hero Honda

IT Pharmaceuticals Banking Media & Auto

020406080

100120140160180200

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

1,5002,0002,5003,0003,5004,0004,5005,0005,5006,0006,500

Indexed Sensex (LHS) Sensex (RHS)

All Figures indexed 100= price in 1994

ENAM 8July 2004

Multibaggers of the last 10 years

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

Source: Bloomberg; Adjusted for bonuses and stock splits; NIFTY constituents

only

ENAM 9July 2004

Multibaggers since 9/11 : The REAL BSE-30!

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

Source: Bloomberg; Adjusted for bonuses and stock splits; NIFTY constituents only

ENAM 10July 2004

Investing is easy if you disaggregate the market

Note : Companies may change characteristics over time!

Global Outsourcers

IT Pharmaceuticals Engineering

Global Commodities

Oil Metals

Domestic Demographics

FMCG Auto Banking

Emerging Business

Telecom Media Retail

Sustainability of Advantage

Sou

rces o

f A

dvan

tag

e

HighLow

Low

Many

ENAM 11July 2004

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

ENAM 12July 2004

Markets continuously discount all factors

Use Bond Yield Reciprocal (100/8)=12.5x as your benchmark

Valu

e

Time

ROE : 25%

ROE : 15%

8% Bonds

Cash

P/E=20x

P/E=12x

P/E=12x

PE multiple represents – Predictability, Sustainability, Scaleability

ENAM 13July 2004

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 !!

ENAM 14July 2004

Thank You