Portfolio Management 1:01

Presentation at IIM, Calicut

ENAM Securities

13 August 2004

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?

ENAM Securities

August 2004

Elements of Portfolio Construction

Top Down

Growth
Value

Momentum

Bottom Up
ENAM Securities

August 2004

Decomposing Approaches

Top Down

Asset Class

Equities
Bonds
Currencies
Property
Commodities
Oil
Precious metals
Natural Resources

Country

Developed Markets
Emerging Markets
Regional markets

ENAM Securities

Sector

FMCG
Pharma
Services
TMT
Manufacturing
Cyclicals

August 2004

Decomposing Approaches
Bottom Up

Value

Dividend Yield
Price/BV
Replacement Cost

Volume
Price
Efficiency:
Costs
Assets
Restructuring

GARP

Payback
EV/EBIDTA
P/E
DCF

ENAM Securities

Momentum

Technical Charts
Reflexivity
PE/G
Option Value

August 2004

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

ENAM Securities

August 2004

Think of Cycles!
Nature is cyclical, not linear!

Life Cycles

Business Cycles / Boom-Bust

Seasonality

Innovation / Schumpeter

Market Cycles

ENAM Securities

August 2004

Valuation Approaches
Value

Growth

Momentum

Illiquid

Institutional Favorites

Max Volume

Misunderstood

UVG Stories

News Flow

Hated/Uncovered

Imagine it!

Volatile

Appraised value

DCF or Option value

Technicals

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

LongTerm/Short Term Value catalysts
ENAM Securities

August 2004

OUR VALUATION SCREEN

COMPANY
Agrevo India
Cyanamid Agro
Mons anto

Novartis
As ahi India
Dens o India
Engine Valves
I P Rings
India Nippon
Kalyani Brakes

M ICO
Munjal Showa
Pricol
S undram Fas teners

Bajaj Auto
Hero Honda
Punjab Tractors
TELCO
TVS Suzuki
Archies
Baus h & Lomb
Birla 3M
Cadbury

Castrol
Colgate-Palmolive
Dabur

Hind Lever
Indian Shaving
International Bes tfoods

ITC
Kodak
Marico

Nestle
Proctor & Gamble
Reckitt & Colman
SKB ConsHCare
Britannia

ABB
Atlas Copco
Carrier Aircon
Chicago Pneumatic

Cummins
Elgi Equipment
Esab
Grindwell Norton
Hindus tan Powerplus
Honda S iel Power

Ingersoll-Rand
Kvaerner Cons truction
OTIS Elevator
Revathi- C P
S andvik As ia
Siemens
Swaraj Engines
Wartsila NSD
Widia
Colour Chem
Goodlas s Nerolac
ICI India
India Gyps um
M adras Cements

MRF
Albright W ils on

Asian Paints
BASF India
Centak Chemicals

MKTVAL
751
210
265

ROCE
38%
44%
52%

RONW
35%
32%
35%

CALC S ales /
RONW CapEmp
36%
2.6
28%
2.4
34%
3.2

S ALE/
BLOCK
4.0
21.2
9.0

WCAP/ S ALE/E
OPM
PAT+D
Q
% 94
1.8
24
#####
1.4
20
17%
0.9
40
12%

OPM OPM% OPM% OPM% OPM%

% 95
96
97
98
99
15%
13%
15%
16%
0%
20%
19%
18%
18%
0%
19%
15%
14%
17%
0%

OPR
MOM
95/94
#DIV/0!
21%
168%

OPR
MOM
96/95
36%
5%
-1%

OPR
MOM
97/96
30%
7%
13%

OPR
MOM
98/97
22%
-37%
41%

EXP
MOM
99/98
22%
10%
25%

2942
198
89
94
46
132
121

35%
16%
14%
17%
14%
49%
12%

23%
18%
11%
14%
11%
31%
14%

24%
10%
9%
11%
9%
40%
6%

2.6
1.3
2.2
1.1
0.7
2.2
1.4

3.8
1.2
1.8
1.3
0.7
4.6
1.5

0.8
1.7
-2.2
1.8
0.9
0.0
1.2

21
33
7
16
4
14
10

16%
23%
12%
21%
36%
20%
2%

12%
20%
12%
22%
40%
19%
8%

13%
22%
13%
22%
35%
18%
12%

14%
25%
14%
22%
39%
24%
12%

16%
25%
9%
19%
28%
24%
12%

0%
0%
0%
0%
0%
29%
0%

-17%
26%
57%
24%
98%
41%
679%

-26%
69%
59%
8%
24%
49%
86%

20%
85%
21%
25%
24%
83%
-3%

28%
2%
-28%
-6%
-44%
11%
3%

40%
-15%
-25%
-15%
-30%
20%
-39%

1433
167
110
493

29%
41%
17%
20%

20%
30%
16%
20%

26%
29%
12%
15%

3.2
2.6
1.1
1.2

1.2
2.8
1.3
1.4

-0.2
0.1
1.4
2.0

31
16
22
28

22%
16%
17%
16%

23%
17%
20%
20%

24%
18%
18%
21%

21%
17%
22%
21%

22%
18%
15%
20%

19%
0%
0%
0%

30%
53%
65%
76%

33%
43%
20%
33%

14%
8%
46%
13%

20%
34%
2%
-11%

-13%
15%
-15%
-5%

6467

29%

22%

20%

1.3

1.9

-1.5

25

24%

27%

27%

27%

28%

0%

51%

31%

18%

5%

12%

3368

41%

34%

33%

4.0

4.0

-0.4

29

9%

9%

9%

11%

12%

0%

36%

29%

49%

59%

2668

52%

39%

34%

3.2

4.1

-0.2

39

13%

13%

15%

16%

18%

0%

36%

38%

44%

45%

35%

6891

11%

9%

3%

1.1

1.6

1.7

25

12%

15%

16%

16%

13%

0%

85%

47%

33%

-42%

-33%

1238
306
251
341
1401

42%
55%
15%
13%
22%

38%
38%
11%
11%
14%

41%
44%
10%
6%
18%

3.6
2.6
1.1
1.4
2.2

4.3
5.0
1.7
3.5
2.0

-0.5
-0.4
0.8
4.4
-0.3

45
19
3
9
18

12%
5%
-9%
8%
7%

12%
9%
0%
9%
15%

12%
13%
11%
11%
15%

13%
12%
12%
9%
14%

14%
16%
17%
10%
14%

0%
29%
0%
0%
18%

51%
166%
-105%
74%
142%

53%
101%
5213%
110%
28%

41%
22%
48%
-5%
14%

37%
81%
75%
42%
11%

15%
85%
35%
20%
29%

5033

50%

40%

40%

2.1

5.2

0.9

15

20%

25%

24%

21%

25%

26%

62%

27%

3%

29%

5%

2385
1875

50%
17%

28%
20%

33%
11%

3.9
1.9

4.3
3.7

-0.1
2.4

7
29

22%
#####

20%
14%

20%
14%

17%
12%

15%
11%

0%
0%

7%
#DIV/0!

20%
36%

0%
10%

-7%
5%

-35%
6%

49260
1934
161

64%
23%
-2%

47%
29%
-2%

55%
22%
-2%

5.4
1.9
2.0

9.4
1.9
7.1

-1.0
0.1
2.2

44
17
12

13%
-5%
2%

11%
18%
6%

11%
21%
-1%

11%
20%
5%

12%
18%
0%

16%
23%
0%

25%
-615%
323%

14%
43%
-117%

17%
33%
-868%

31%
29%
-101%

34%
31%
200%

22969
261
823

32%
12%
45%

31%
4%
33%

29%
9%
36%

1.1
3.3
4.9

2.4
10.2
7.3

0.3
7.2
0.1

13
69
34

20%
-1%
9%

21%
0%
10%

24%
5%
11%

27%
5%
9%

32%
5%
10%

0%
5%
0%

8%
-103%
27%

11%
27125%
38%

38%
47%
-2%

26%
42%
28%

20%
-3%
16%

5074

36%

38%

44%

3.0

2.8

0.3

16

13%

12%

12%

12%

15%

16%

12%

47%

14%

56%

4%

1961

30%

24%

23%

2.0

1.8

-1.4

18

5%

15%

17%

21%

21%

0%

217%

49%

30%

13%

22%

1234

39%

24%

31%

3.3

3.5

0.7

13

16%

17%

16%

12%

14%

14%

24%

17%

-16%

46%

-2%

2791
2698

56%
22%

35%
24%

44%
17%

2.7
3.8

5.7
4.8

0.1
-1.6

13
45

22%
7%

22%
7%

21%
6%

20%
6%

20%
7%

25%
0%

30%
19%

23%
2%

32%
13%

14%
40%

22%
27%

1405
101
491
54

13%
28%
41%
17%

8%
28%
33%
13%

11%
21%
29%
12%

2.0
2.2
3.3
1.5

3.1
4.0
5.7
2.2

2.5
2.5
0.8
3.4

22
18
12
14

15%
20%
13%
11%

15%
17%
16%
13%

13%
16%
16%
17%

13%
13%
15%
17%

10%
14%
14%
15%

7%
0%
0%
0%

37%
0%
110%
69%

28%
19%
85%
59%

26%
14%
17%
14%

-26%
-6%
19%
-22%

-32%
-30%
16%
5%

1381
135
145
146
143
177

31%
15%
25%
20%
16%
34%

23%
9%
20%
13%
10%
29%

21%
10%
19%
13%
10%
24%

1.9
1.1
2.3
1.3
1.5
1.9

2.4
1.6
3.3
1.6
4.6
2.3

1.9
1.8
-0.4
1.5
6.7
1.3

19
35
10
12
5
14

21%
13%
14%
16%
3%
16%

20%
14%
13%
17%
16%
19%

20%
13%
15%
16%
13%
18%

19%
17%
15%
18%
13%
21%

19%
19%
13%
18%
13%
21%

0%
0%
0%
0%
0%
0%

29%
34%
-8%
31%
784%
56%

17%
24%
34%
21%
76%
25%

16%
28%
7%
36%
45%
35%

-7%
-13%
-6%
2%
-13%
-4%

-15%
-5%
-20%
-10%
-30%
-5%

1602
182
423
131
219
1029
351
325
317
362
295
977
55
931

47%
17%
44%
51%
19%
9%
35%
18%
38%
16%
29%
23%
27%
14%

29%
11%
27%
37%
-5%
-31%
42%
14%
32%
7%
20%
20%
24%
11%

32%
14%
36%
35%
16%
-16%
33%
15%
30%
11%
23%
18%
19%
8%

2.3
5.0
3.6
1.7
2.3
2.7
1.9
2.1
1.4
1.8
2.4
1.7
2.0
0.6

4.9
7.2
3.4
6.6
1.9
2.1
2.2
4.7
1.8
2.3
7.4
1.8
2.4
0.6

1.4
4.2
-1.4
1.3
2.0
-6.2
-0.3
3.7
1.8
3.2
1.4
0.4
1.2
0.1

13
85
23
15
8
37
20
18
17
30
27
16
3
41

22%
9%
10%
21%
29%
12%
15%
11%
24%
#####
11%
#####
#####
23%

20%
9%
15%
23%
33%
8%
16%
12%
24%
#####
12%
#####
18%
31%

18%
8%
14%
24%
31%
14%
19%
14%
26%
15%
13%
14%
17%
35%

20%
5%
15%
25%
23%
7%
19%
13%
27%
18%
13%
16%
17%
33%

22%
3%
15%
31%
14%
8%
20%
11%
31%
12%
13%
16%
16%
32%

0%
8%
16%
0%
6%
0%
0%
13%
0%
0%
0%
0%
0%
0%

-4%
60%
73%
10%
58%
-16%
55%
116%
1%
#DIV/0!
39%
#DIV/0!
#DIV/0!
68%

13%
16%
51%
27%
35%
132%
47%
91%
48%
#DIV/0!
23%
#DIV/0!
36%
48%

32%
-23%
21%
15%
-14%
-50%
42%
41%
44%
28%
25%
23%
9%
2%

42%
-52%
14%
44%
-45%
0%
22%
-48%
25%
-24%
8%
16%
5%
12%

20%
184%
12%
35%
-53%
12%
50%
18%
8%
7%
-7%
7%
25%
20%

1388
97

28%
24%

28%
21%

30%
21%

2.2
1.6

2.2
3.2

1.5
1.8

421
26

11%
13%

11%
16%

12%
16%

14%
16%

18%
17%

0%
18%

31%
56%

50%
18%

25%
9%

34%
8%

5%
7%

1134
575
80

26%
12%
33%

22%
10%
33%

22%
6%
26%

1.9
0.9
0.7

2.7
1.1
1.2

0.7
2.2
0.1

20
11
4

15%
20%
52%

17%
19%
54%

14%
18%
39%

17%
21%
48%

16%
20%
56%

0%
0%
0%

52%
9%
31%

14%
12%
-18%

20%
32%
21%

4%
4%
52%

5%
7%
10%

ENAM Securities

August 2004

35%

VALUATION BENCHMARKS
P/E 2001

CONSUMER

PEG

AC T

SERVICES

PEG

AC T

PHARMA/AGRO

PEG

AC T

<8
HDFC

0.4

18

8
Astra IDL

<12

Marico

0.4

23

0.4

17

10

<18

Cas trol
Skb Cons umer
Kodak

3.6
3.0
1.0

55
23
12

18
19
19

Proctor & Gamble

2.4

25

22

Archies

0.6

37

17

CRISIL

0.6

21

19

Navneet

1.1

24

23

Monsanto Chemicals

0.3

33

11

Knoll Pharma

0.8

22

15

Burroughs Wellcome

0.6

17

15

Glenmark Pharma

0.5

16

16

Agrevo
German Remedies

1.0
0.8

28
21

17
17

Rhone Poulenc
Wyeth-Lederle
Abbott Labs
E Merck

1.3
0.7
0.6
1.4

23
21
17
25

18
19
19
19

Parke Davis
Novartis

2.4
0.7

25
24

23
24

Smithkline Pharma

0.8

14

26

Pfizer

1.0

28

27

Hoechs t Marion

0.6

25

30

Glaxo

2.1

17

33

Cipla
Dr. Reddys

1.5
0.9

21
16

42
48

AUTO/ANCC

PEG

AC T

Bajaj Auto
India Nippon

1.0
0.3

18
21

8
8

TVS Suzuki

0.4

16

Swaraj Engines

0.5

31

Punjab Tractors

0.6

25

10

MICO

0.3

13

11

Sundram Fastener

0.5

16

12

Hero Honda

0.5

27

15

-0.1

15

27

<24

<30
Cadbury

0.7

23

26

Nes tle

1.2

31

26

Colgate-Palmolive

0.7

19

29

Reckitt & Colman

1.8

18

Britannia

0.8
0.5

23

30

Dabur

23

30

Nirma

0.4

26

33

29

TELCO

<40
NIIT

Hindus tan Lever

1.5

45

46

0.8

33

35

0.6
-85.1

20
16

41
41

Geometrix

0.6

29

50

Subex Systems
Sonata Software
Polaris
Satyam Comp

0.3
1.0
2.6
0.8

26
43

63
67
84
88

TV18

4.7

16

111

BFL Software
Vis ualSoft
Digital
Hughes Software
Infos ys Tech
HCL Technologies

0.9
1.5
2.4
2.1
1.7
3.9

29
36
19
34
40
17

100
119
122
127
134
143

Aptech
Thomas Cook

<50

Birla 3M

1.3

17

50

>50

Indian Shaving

4.8

23

121

ENAM Securities

August 2004

10

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
ENAM Securities

August 2004

11

CHANGING NEEDS OVER A LIFETIME

12
10

Equity/Bonds
Property

Income

Art/Misc
Own Business

6
House

4
Durables

Daily Exps

0
BANK/FD

Mutual Fund

ENAM Securities

Pvt. Advisor

August 2004

12

KYC and Thyself!

Relative
Asset Allocation

Pvt. Banks / Pension Funds /

Macro Funds/ Fund of Funds

Country Allocation
Regional Funds
Sector Allocation

Country Funds/ Mutual Funds

Large Cap

Small
Cap

Absolute

ENAM Securities

HNW / PMS / Absolute Return

Funds/ Hedge Funds

August 2004

13

Key Success Factors

Pvt. Bankers / Pension Funds / Macro Funds

Institutional Marketing
Deployment of Large Pools
Capital Preservation

Regional Funds

Marketing Scale & Scope

Economist

Country Funds

Fund Manager
Technician

Absolute
Return
Funds

BCA GLOBAL

BCA EMG MKTS

BCA CHINA
INDIA FUNDS

Stock Picker

ENAM Securities

August 2004

14

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
ENAM Securities

August 2004

15

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 !
ENAM Securities

August 2004

16

IDEAL PORTFOLIO
PBTx

FMCG

SERVICES

PHARMA AGRO

Zee
l. edge

<5
marico

MISC

POWER

Essel
Goodlas

75%

ENGG

Traf. Hse
S.Honda

Revthi
G.Norton

TVS

E Valve
IP Ring

Wartsila

A Copco
Esab

Bajaj
P Trac

MICO
Denso

Honda
Telco

S Fstnr

VSNL

CRISIL

German
Knoll

<15

ITC
SKB-CH

T. Info
WIPRO

Pfizer
Wyeth

HPP
Cummins

Carrier
OTIS

<18

P&G
Castrol

Ind Hotl
WIH

Ranbaxy
SKB-P

ABB

Ingersoll

RCI/Cad
HLL/ISPL
Nestle

Infosys
T Cook

Glaxo
HMR

<11

>18

AgrEvo
Cynmde

Novartis

Foseco
A Paints

ANCC
I.Nippon
Munjal

Rhone
Astra

<9

AUTO

Nalco
Hoganas

ENAM Securities

August 2004

17

Decompose | Decompose | Decompose

Sectors

Large Cap

Medium Cap

Small Cap

Total

FMCG
Pharma
Banks
IT
Telecom
Media
Engg
Autos
Commodities
Total

ENAM Securities

August 2004

18

Decompose | THEN | Consolidate

A good investor is a good businessman and vice versa
Aggregate Portfolio Metrics
Sales

OPIDT

PAT

DIV

NW

Debt

Net Blk

Wkg Cap

OPM %

Sales / NBIK

Wkg Cap/ Sales

ROI

ROE

Div y/d

P/BV

EV/EBIDTA

P/E

PE/G

ENAM Securities

August 2004

19

Typical Career Path to Nirvana

Analyst

Head of Research

Fund Manager

Abs. Manager

Own Funds

Large Fund Manager

Marketing Guru

Even Larger Fund Manager

ENAM Securities

August 2004

20

How is your Portfolio Tilted?

OWN
INTERESTS

CLIENT TIME

PROFESSIONAL
COLLEGUES

FAMILY

WORK
COLLEAGUES

BUILD A CONSCIOUS LIFESTYLE !

ENAM Securities

August 2004

21

HEAVEN AND HELL

AMERICAN SALARY

AMERICAN WIFE

ENGLISH HOME

ENGLISH CAR

GERMAN CAR

GERMAN FOOD

CHINESE FOOD

CHINESE HOME

INDIAN WIFE

INDIAN SALARY

YOUR REAL WEALTH = YOUR HAPPINESS = YOUR

STATE OF MIND = WITHIN YOU

ENAM Securities

August 2004

22

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

August 2004

23