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Wealth Creation --- Indian Equity Markets

February 28. 2011

Nooresh Merani www.analyseindia.com www.nooreshtech.co.in

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Power of Equity

Using the example used by all Mutual Funds to sell you equities !!

• How much can you make in 26 years by just investing Rs.10,000 initially in any of financial instruments ?

Take a wild guess ???

Let us look at the real example…

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If you have subscribed in 100 shares of ________ company with a face value of Rs. 100 in 1980…

• In 1981 company declared 1:1 bonus = you have 200 shares• In 1985 company declared 1:1 bonus = you have 400 shares• In 1986 company split the share to Rs. 10 = you have 4,000 shares• In 1987 company declared 1:1 bonus = you have 8,000 shares• In 1989 company declared 1:1 bonus = you have 16,000 shares• In 1992 company declared 1:1 bonus = you have 32,000 shares• In 1995 company declared 1:1 bonus = you have 64,000 shares• In 1997 company declared 1:2 bonus = you have 1,92,000 shares• In 1999 company split the share to Rs. 2 = you have 9,60,000 shares• In 2004 company declared 1:2 bonus = you have 28,80,000 shares• In 2005 company declared 1:1 bonus = you have 57,60,000 shares• In 2010 company declared 2:3 bonus = you have 86,40,000 shares

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Power of Compounding

Your present valuation is about

Rs. 354 Cr.+&

The company is ‘WIPRO’

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Other Examples !!

CIPLAInvestment of Rs. 10,000 in 1979 will fetch Rs. 95 cr.+

INFOSYSInvestment of Rs. 10,000 in 1992 will fetch Rs. 1.5 cr.+

RANBAXYInvestment of Rs. 1000 in 1980 will fetch Rs. 1.9 cr.+

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What Happened in the last 5 years

To find CAGR:Initial amount: 12455Ending amount: 17404Years of investment: 5CAGR (%): 6.92%

1st April 2007 – 12455 30 March 2012 – 17404

If you take your investment point to be 01st January 2007 the returns become sub 4 %.

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SIP is not the best WAY ! The rise is generally slow and steady. ( 2003 to 2008 )

The fall is swift and markets stay low for lesser time. ( 2008 and 2009 )

It’s the best way for AMCs as you commit funds for 5-10-15 years whether you get returns or you dont.

Example a 7 year SIP in one of the Sensex Funds by X company is giving a negative CAGR.

There may be various methods devised by Asset Management companies right from SIP, Value Averaging, Dividend Yield Fund, P-E fund etc but nothing can beat long term returns by investing directly into equities.

The best time to invest is --- WHEN YOU HAVE MONEY !!

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Investing into Equities !! The simple Way.

FUNDAMENTAL ANALYSIS

Or

TECHNICAL ANALYSIS

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Fundamental Analysis

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Fundamental Analysis

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Things to Note

A stock would move only 10 times a year on events. But we have a ask/bid every second ---- Reason --- Demand – Supply.

The annual report of Larsen & Toubro for instance is 269 pages, Reliance Inds is 200 + and majority of the large cap companies have 100 or more subsidiaries.

Can you rely on a Brokerage Report !!

Can you assume everything written in the Balance Sheets is true !!! ( CA s and Auditors are very smart ). Satyam and many more examples.

What is the max no of companies you can follow Fundamentally ? How many good analysts you can trust ?

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Why to use Technical Analysis

One of the oldest device which is now more then 120 yrs old !

The oldest example is of Homma Munehisa in 18th century in rice trading in Japan.This evolved into the japanese candlesticks.

Dow theory was derived from articles of Charles Dow in 1900-1902 in the Wall Street Journal. He was also the creator of Dow Jones Industrial Average.

After the huge turnarounds in 2008 crash, recovery of 2009, Correction in 2011 and a subsequent recovery in start of 2012 one needs to realize the importance of timing the markets.

Technical Analysis is a study of Demand and Supply which moves the markets.

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Investing into Equities !! The simple Way.

Always stick to stocks with decent margin of safety, Potential Growth and good managements.

Increase Equity Exposure as and when Technicals point to a change to Positive Trend. Like the one we are in right now.

Focus on Cash preservation and book profits when there is a Technical Trend change or Euphoria.

Sensex the next Multibagger ………….. a technical view.

Analyse India

This is the follow up to our 13 year cycle model and long term

view presented first in Sept 2005 and next in August 2009.

Charts !

PRICE

DATE /Timeline

Plotting through Line/Candles/Bars

Daily/Weekly/Mthly

Japanese Candlesticks

Positive

Negative

Flag Pattern

50 Rs

100 Rs

150

13 year cycle / Flag and Pole Pattern.

Super Bull Run :

Dow Jones : 34 yrs

Sensex :13 yrs

ConsolidationDow Jones : 17yrs

Sensex : 13 yrs

Sensex set for bull run till 2018 !!

Aug 2009

April 2012

Dow Jones Pole and Flag- 17 years cycle

The red circles showHow the channel

lines were maintained on such

long term charts

NOW LET US SEE THIS IN COMPARISON WITH

SENSEX

AFTER 8k Sensex we saw a breakout similar to Dow Jones

at 1100-1300 !! Dow doubled in 3 yrs.

CHANNEL TARGET

CHANNEL TARGET 3 times DONE !!

7k to 21k roughly

SENSEX position in Phase 2 !!

SENSEX is here in the BULL

RUN! LOT LOT MORE

TO GO

COMPARISONS

DOW JONES !!

Pole-: 1932 1966 ( 34 yrs)Channel : 1942-1966 ( 24 yrs 10.8 times)Flag: 1966-1983 ( 17 yrs of no growth)First Phase: 1984-1987 ( 2 times in 3 yrs) New High: in 22 mthsTop : in 17 years

SENSEX• Pole-: 1979-1992 ( 13

yrs)• Channel : 1988-1992 ( 4

yrs 10 times)• Flag: 1992-2005( 13 yrs

of no growth)• First Phase: 2005-

2008( 3 times in 3 yrs) • NEW HIGH : Same high

in 24 months• TOP : ( Ideally by 2018 Minimum 27k-32k or 77k.)

Some Observations Sensex completed 1st leg of the 13 year cycle in

3 years from 2005 -2008 by gaining almost 300% or 3 times the channel target.

The bull run started from the lows in 2003 to 2008 and lasted almost 5 years or 58-60 months.

The first phase in Dow Jones lasted for 5 years or 60 odd months from 1982-1987.

Some More…

Dow Jones hit a new high after 1987 in the next 22 months but the correction was only 61% of the move.

Sensex has seen a correction to almost 75% of the upmove and has tested the breakout channel.

This indicates Sensex may take a longer time hit a new high.

So we have a long way to go !! Next chart will SHOW !!!!!! – ( As on August 2009 )

A terminal breakdown below the trendline before the big rally

A terminal breakdown below the trendline before the big rally

A long parallel channel

A long parallel channel

Almost Double Bottom close to

trendline

Sensex now seems is into a correction similar to 1990 of Dow Jones which retraced almost 50% of the rally.

For Sensex the rally of 2009-2011 could not surpass previous highs so it may not necessarily make a 50% retracement but a little lesser then that.

So ideally any retracements to 14500-16000 will remain buy points for long term targets at 27k + in next 3 years and 77k also by 2018.

The 13 year cycle remains in place till 13000/14500 retracement levels are not broken on monthly closing basis.

Although the 13 year cycle theory seems unbelievable or hum bug.

Would like to post the chart of Sept 2005 when this theory was first put up by us at 8000 Sensex with a presentation named- “Post 8000 Boom or Dooom “!

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

10000

20000

30000

40000

50000

60000

70000

k ii

ii

10% p.a compounded for next 13 years we should see SENSEX at 25k

If INDIA grows @ 20% p.a compounded for next 13 years we should see SENSEX at 77k

ik

k

i BSE Sensex 30 Co (7,818.90, 8,521.75, 7,818.90, 8,222.59, +417.160)

1940 1950 1960 1970 1980 1990 2000

5000

10000

15000DOW JONES

march 1983

dec 1999

RR

1158

11658M 10 times

in 16 years flat !!!

k

V V

kDOW JONES (10,273.59, 10,754.60, 10,142.24, 10,422.05, +147.080)

Familiar????? Above is Dow Jones and below is SENSEX

Sensex at 77000 --- That’s INSANE !!

• From 20k average in 2008 say 77k in 2018 is a CAGR of just 14.4%

• 21k in 2010 to 77k in 2018 is a CAGR of 17.6%.

• A index move to 77k by 2018 would imply a CAGR of 25%.

• Even If I were to consider a return of 12% CAGR for Sensex it should touch 36-37k by 2018 .

• THIS IS THE sense of Fear in investors which has come because of the tepid returns over the last 5-6 years.

• The best time to believe the India story is when no one believes it !!!

( H ) OLD IS GOLD !!!

Why BUY ? Land at negligible cost and Depreciation in Assets Holdings in various group companies. Change in Generation/Management. Huge Margin of Safety and Value unlocking on Monetization of Assets over

the next few years.

How to FILTER ? Value of Holdings and Discount. Land and Other Assets. Profit and Cash flow. Debt and Dividend Yield. Possible Triggers – Value Unlocking, Sale of Assets, Restructuring.

The Companies

• Bengal and Assam Company • Bombay Burmah Trading Coporation Limited. • Forbes & Company • Aditya Birla Nuvo• Godrej Inds • Nesco • Bharat Bijlee

Bengal and Assam Company

• Current Market Cap --- 180 cr CMP – 209 . JK Group Holding Company.

• 400-450 crores of quoted investments in JK group companies and other equities.

• Other investments at 300-400 crores at cost.

• Net off Debt – 800 + crores of holding.

• Major Subsidiary – Fenner India ( 87.5 % ) – Does a PAT of 40-50 crores on 300-350 crores of Sales. Consolidated Profit after Tax for Bengal and Assam Company is 60+ crores. Fenner India holds around 150-200 crores of JK group companies.

• The stock is available at 80-90% discount to Holdings and at a consolidated P-e of less then 3.

• The next trigger would be an increase in dividend this year. As of now yield is only 2%

Bombay Burmah Trading Corporation

• Current Market Cap --- 780 cr CMP – 562. WADIA Group Company.

• 51 % stake in Britannia worth 3600 crores. 170 crores worth of Bombay Dyeing.

• Net of debt -- around 2600 crores.

• The company just showed around 130 crores of profit from selling of its two divisions.

• The company also has a TEA business with 2300 hectares, some pockets of land in Pune, Kanjur Marg etc. It may also have other holdings in group companies.

• Available at a 70% + discount to its holding value. But the main trigger would be if further land parcels, tea business or holdings are sold over a period of time.

FORBES & COMPANY

• Current Market Cap – 570 crores – CMP – 443 – Shapoorji Pallonji Group Company

• Eureka Forbes – 50-60% Market Share in Water Purifier Market . Aquaguard is a brand synonymous of the sector.

• 5-7 acres of land at Chandivali – Dispute settled.

• Volkart House in South Mumbai – 14 flats and possibly go into redevelopment.

• 20-24% stake in Bombay Swadeshi Mills. Under Dispute. Land in Chennai.

• The company may have huge land parcels in it books as it is the oldest registered company in the world.

• With the management credibility ( Shapoorji Pallonji networth is 50k crore) we can expect the rewards to come to shareholders. 90% of holding is with safe hands.

Aditya Birla Nuvo

• Current Market Cap – 11400 cr CMP – 1014. Flagship company of Birla Group.

• Holdings in Idea and Hindalco worth 8500 crores.

• Other group business – Birla AMC and Life Insurance, Madura Garments, IT, Manufacturing businesss.

• The net Enterprise Value is around 25k crores. ( If recent valuations of AMC given it will increase quite a bit)

• IT and Telecom business can be on the block over the next few years. Equity Infusion in other business

• A combination of growth, compounding and value unlocking in this defensive.

Godrej Inds

• Current Market Cap – 8600 crores – CMP – 270 ---- Flagship company of Godrej group.

• 3600 crores of Godrej Consumer, 3400 crores worth of Godrej Properties. Net 7000 crores.

• Chemical Business doing 1000 cr sales, Godrej Agrovet 2000 cr sales and other side businesses in Animal feed, godrej tyson etc.

• Company will have a share of 40% in the profits in development of Vikhroli property.

• There could be good value unlocking in the long run and stock remains a buy in sharp corrections.

NESCO

• Current Market Cap – 930 cr CMP – 663 ---

• Zero Debt company and sitting on huge amounts of land and a monopoly in Exhibition business.

• Land worth 2500 + crores. 10 lakh square feet of IT building worth 1000 cr. Plus IT park 4 and 5 to come over the next 3 years with internal accruals.

• Possible expansion of Bombay Exhibition Centre. Rentals to accrue from fy 13. This could lead to a PAT of 80-100 cr in fy13.

• Possible Triggers – FSI application pending for BEC, IT Park 4 planning and more.

• Available at a forward p-e of 10-11 and will keep compounding the earnings over the next 5 years. Possible re-rating of the stock on valuation of real estate.

Other Companies

• Cash for DISCOUNT

• Piramal Healthcare, Smartlink Networks, Numeric Power.

• Technical bets --- Ceat Limited, Skumars Nationwide, Dr Reddys.

THANK YOU Nooresh Merani CEO – Analyse India Market Solutions Pvt Ltd.

www.nooreshtech.co.in www.analyseindia.com

E-mail --- nooresh@analyseindia.com

Phone --- 09819225396