All multibaggers started with small market

caps
One of the most loved after words in the stock market is the
“multibagger”. Typically multibaggers are stocks that
go up a number of times. I plan to post a series of write-
ups on the similarities in specific financial attributes for the
multibaggers of the past ten years.I have named the series
as " How to identify the next Infosys?". This is so
because Infosys was a shareholder's delight not only in
terms of price appreciation but with respect to other
financial attributes as we would notice once other write ups
are posted. I have excluded companies like Bharti
Airtel, Unitech and Pantaloon Retail because they
have not completed 10 years of listing.

Markets capitalization also known as Market cap means

the amount of money required to buy all (100%)
shares of a company it is computed as the number of
shares multiplied by the market price of each share.
For instance if BEML Rs 900 and there are 3.67 crore shares
issued the market cap would be 3.67 crores X 900 = Rs 3303
crores

The market cap of a company is inversely

proportional to whether that company could be a
multibagger or not. In other words companies with
small market caps are more prone to going up a
number of times compared to companies with large
market caps.

In the analysis that I did for the multibaggers for the Indian
stocks markets an interesting phenomenon was identified.
All multibagger companies started from a base of
very small market capitalization
*Approximate

the table above I have presented a case for buying

All multibaggers started with small
market caps
Compan Price Marke Price Marke CAG
y as on t Cap as on t R
Dec * as Jan Capita
31 on 02, lizatio
1995 that 2006 n
day today
(Rs (Rs
crores crores
) )
Infosys 26.15 708 2996. 81221 59.6
Technol 75 8
ogies
Satyam 7.12 228 737.8 23641 59.0
Comput 0 5
ers
Wipro 9.13 1290 463.4 65516 48.0
5 9
Sun 19.13 354 682.1 12635 42.9
Pharma 5 6
Hero 24.40 479 859.7 16890 42.7
Honda 0 8
HDFC 29.50 928 707.4 22266 37.4
Bank 5 0
Cipla 21.66 646 443.4 13228 35.2
0 4
Zee 12.87 534 156.9 6513 28.4
Telefilm 0 1
HDFC 135.7 3352 1205. 29766 24.4
5 35 0
companies at low market caps. About 10 years back
these companies were available at market caps that were
less then Rs 1000 crores. The PE for quite a few of them
were over 30 and the stock price kept going up because
the earnings went up in all cases and the PE kept on
expanding in some select cases.

In the initial years of growth these companies were very

different from a greater fool theory. The greater fool
theory states that a fool buys an overvalued stock and sells
it to a bigger fool who looks for a greater fool to dump the
same. The idea is not to become the last fool in the chain.
How ever unfortunate it may sound almost all multibagger
companies enter into the greater fool mode. The better ones
recover while the bad ones falter.

The figure to look for in the above table is column (c)

which reflects the market cap at which these companies
were available about 10 years back. Column (e) tells us
the current market cap. In some cases stocks have
gone up by over 100 times over the said period!.

So looking at the table one can easily observe that except

WIPRO and HDFC all the other companies were in a
range of less then Rs 1000 crores market cap. At that
time the total market cap of the Indian stock market
was less then Rs 400,000 crores. Today the market
cap of all the stocks has gone up by about 7 times.
Therefore the yardstick to look for companies below
Rs 1000 crores market cap can be extended to Rs
6,000 crores.

Any ides anyone on companies with small market caps and

which are ready to become multibaggers!

Enterprise value = Market cap + Debt. Some companies

take a lot of debt so on a market cap basis they appear
cheap. In that case we look at enterprise value. On the other
hand some companies have cash on their books in that
case we deduct the cash from the market cap to arrive
at enterprise value..
Let us say that a large cap has a market cap of US$ 750
million. It is very difficult to get a multibagger in a large cap
unless you are sting at the start of any cyclical rally. For e g.
In 2003 we could have made a multibagger out of cement or
any metal but not out of Infy. So if we say a company that
will grow 10 times in 10 years is it a multibagger in the true
sense of the word we want to see it. 10 years is a long period
of time and this means a CAGR of 26% only. There are many
companies in the Cricket XI section that can do this kind of
growth or even better that.

So pls clarify, are you saying that chances are remote that
since Pantaloon and F.T. are already large caps they will not
be multibaggers going forward from current level (10 to 15
times in the next ten years) ?:

These are unusual situations where the sheer size of

the market is about 30 -40 times the current level of
penetration. In fact we could see a 10 bagger in 5 years in
both these companies if they are able to execute what they
said.

Here we should recall that Bharti Airtel moved from

market cap of Rs 7000 crores to Rs 100,000 crores in
3-4 years because the market itself was growing so fast. So
there could be relaxations to this theory but this relaxation is
more of an exception then the norm.

I normally try and look at the market cap in conjunction with

the size of opportunity. Some time back there was a
discussion on an ice-cream company but the total size of ice
cream as a business is restricted so even a Rs 200 crores
market cap does not look compelling.

Technology companies trade at 10 times market cap to sales

whereas something like a pantaloon trades at 1.5 times
sales that is because the former have higher profit margins
compared to the latter. Also the market cap should
always be looked at according to the size of the
opportunity.

Here is some interesting reading (courtesy: Money Life).

Given below are excerpts, pleae click on the link for full text.

Stocks: Stunning winners of last 10 years!

Company TSR TSR (%) Mkt

Rank Cap
in1996
Unitech 1 34196% 73.74
Matrix 2 29910% 3.16
Laboratories
Phoenix Mills 3 28935% 5.26
Donear 4 28533% 3.96
Industries
Vimta Labs 5 27799% 1.16
Pantaloon 6 20412% 3.55
Retail
Infosys 7 19583% 751.82
Technologies
Mercator Lines 8 19545% 3.84
Wipro 9 17319% 580.89
Patel 10 17075% 7.45
Engineering
Satyam 11 16942% 137.80
Computers
Financial 12 16342% 2.73
Technologies
Havells 13 15928% 7.22
Lakshmi Energy 14 12586% 6.01
& Foods
Arrow Webtex 15 12281% 2.62
Panoramic 16 11587% 0.88
Universal
Prime Prop. 17 11518% 0.94
Devp. Corpn.
Aban Offshore 18 10592% 32.49
Amtek Auto 19 10590% 10.62
Jetking Infotrain 20 9557% 0.50

If you are in the middle of a crazy a bull run, you are

likely to get the most unlikely names as wealth
creators

The sheer force of speculation has pushed low-profile

companies high up in the wealth-creators' list.

Often, companies and sectors, which do very well for a

few years, stagnate in the following years.

Indeed, in every bull market, one or two sectors do

extremely well where even garbage floats to the top.

Since value is a function of performance and

perception, a slight change in either is enough to cause
prices to tumble.

Over 10 years, the Sensex had gained 347%.

Raising shareholder value is like mountaineering. To

remain even a modest value creator you have to keep
climbing.

As you go higher, it gets tougher to climb the same

distance.

To use another common metaphor, value creation is like

being on a treadmill. You have to keep running
(growing) to stay where you are (to maintain value).

Most people find it hard to understand that that for

mature and large companies, even if 'performance is
good', shareholder value may not keep rising
Also, in growing economy like, new sectors emerge,
attracting smart capital and investment interest. Since
the fastest growth is from the smallest base and there is
always a fancy for new companies, investors like to bet
on companies that are at the base of the mountain.

How does one measure wealth creation or shareholder

value? This is a basic question and the answer is simple -- it
is whatever a shareholder gets out of being invested
in a company over a certain period. That means the
difference in market price between two periods (adjusted for
splits and bonuses) plus dividends. This is called total
shareholder returns (TSR).

Elephants Can't Dance

Market cap has nothing to do with value creation

Compan Mkt Cap TSR (%)TSR

y in1996 Rank
ONGC 29,301.43 614% 438
IOC 24,514.98 245% 758
HLL 15,538.42 252% 750 The best in
MTNL 15,343.35 -27% 1367 the lot ONGC
SBI 14,717.86 259% 735 had a CAGR
Reliance 12,077.68 821% 333 of only 20%
ITC 9,458.98 940% 288 while wealth
Tata 9,213.26 148% 948 increased 6.5
Motors times. So the
VSNL 9,064.01 166% 916 concept that
SAIL 8,588.96 302% 694 elephants
cannot dance should be taken with that perspective that the
maximum wealth that can be created is 20% CAGR while in
case of a small cap Unitech (freak buy if only
someone could do it) was only 80% CAGR which made
a 340 bagger on the stock. Though I have not checked it
most of these gains would have been in the last 3 years.
Yes, I have thought about that. That is why I keep saying
that at Rs 1500-Rs 2000 we would reach terminal value for
Bharti Airtel. Anything more then that does not seem
possible as of now.

At Rs 438,000 it would be around Rs 2300+ and that

looks stretched.
It is common knowledge that India Inc. has had its dream run
since the early years of this decade and this has been well
manifested in the valuations accorded to them in the equity
markets. While the corporate growth has been holistic with
contribution from companies across sectors, select majors in
each of the sectors have made their presence felt.

A comparison of the compounded annual growth clocked by

a sample of few sectors selected by us to the compounded
annual growth in the market share of the top few
companies in those sectors, gives us an interesting
perspective on this. While it is a given that the low base
effect has magnified the growth numbers for the
smaller companies, it is also worthwhile noting that a
few of the companies have displaced some of their
larger counterparts in the respective product
segments by clocking relatively superior level and quality of
growth.

The trailblazers
CAG
%Marketshare FY01 FY03 FY06
R
220,06 234,04 330,13
Cement (Rsm) 8.5%
2 2 9
16.6
Grasim+Ultratech* 9.8 11.6 21.1
%
ACC 11.9 10.3 11.3 -1.0%
GujaratAmbuja 5.9 6.7 9.2 9.3%
Detergents (Rsm) 51,788 44,785 53,547 0.7%
HLL 35.9 43.1 40.4 2.4%
Nirma 21.4 21.6 20.3 -1.0%
P&GHealth&Hygein 21.9
2.3 2.7 6.2
e %
 1,483,6 1,559,2 1,689,4
Fabrics (Rsm) 2.6%
79 95 18
ArvindMills 0.7 0.8 0.8 2.7%
10.8
AlokIndustries 0.3 0.5 0.5
%
14.9
Raymond 0.1 0.1 0.2
%
10.0
Hotels (Rsm) 40,775 39,543 65,541
%
IndianHotels 16.9 14.4 16.5 -0.5%
EIH 11.7 9.7 11.5 -0.3%
29.2
ITC 3.3 4.9 11.9
%
Passengercars 169,97 189,80 331,98 14.3
(Rsm) 3 0 9 %
Maruti 48.2 44.5 41.6 -2.9%

HyundaiMotorIndia 17.0 20.0 23.7 6.9%

13.3
TataMotors 7.3 11.4 13.6
%
Pharmaceuticals 320,61 368,65 461,15
7.5%
(Rsm) 8 2 2
Ranbaxy 5.9 8.6 8.7 8.1%
14.5
Cipla 3.3 4.2 6.5
%
Dr.Reddy's 3.0 4.6 4.7 9.4%
492,75 618,45 1,172,1 18.9
Steel (Rsm)
0 3 13 %
SAIL 28.1 27.6 24.3 -2.9%
TataSteel 9.2 11.4 10.4 2.5%
14.0
JSWSteel 2.7 3.8 5.2
%
216,84 278,36 504,85 18.4
Software (Rsm)
9 3 0 %
TCS N.A. N.A. 21.2
 15.2
Infosys 8.8 13.0 17.9
%
14.7
Wipro 8.2 11.0 16.3
%
Source:CMIE Industry market size and shares - March 2007
* The market share of Grasim for FY06 includes that of
Ultratech (9.4%)

In case of manufacturing companies like Grasim, capacity

addition (standalone as well as acquisition of Ultra Tech) and
higher utilisation levels apart from better realisations
and improved efficiency has helped the company
report stronger numbers. While Ultra Tech was one of the
major propellers of the company's growth, savings in
operating costs resulting from ongoing modernisation
efforts, up-gradation of plants and energy optimisation have
aided the gain in market share.

Similar capex led volume game was the case with JSW Steel
in the steel sector. In the detergent market, P&G Health &
Hygiene's 'Tide' garnered better realisations as compared
to peer HLL's 'Surf Excel' and 'Rin', thus scoring higher over
the latter. The strong performance of the company was also
on the back of focused marketing initiatives and deeper
distribution.

Both Raymond and Tata Motors derived the benefits of

'exclusivity' in their respective sectors by regularly
launching new products and catering to a niche
segment. Cipla, on the other hand, focused on stability of
revenues through its contract manufacturing business,
against the volatile generic business (subject to pricing
pressure) of its peers Ranbaxy and Dr. Reddy's.

Players in the service sectors, like Infosys (software) and ITC

(hotels), focused on expanding their capacities in
terms of employees and rooms. Better pricing power in
terms of billing rates and average room rentals (ARR)
respectively, also supported their case.
The point that we wish to drive home is that while
companies with bigger balance sheets, higher
turnover and wider reach may offer a comfortable
hedge in times of short term volatility, the smaller and
equally promising entities may seize a larger chunk of
the growth pie in the longer term.

Thus instead of concentrating only on the blue chips,

investors must also evaluate the prospects of some of
the smaller entities in the sector that have an equally
compelling business model, with the potential to
generate higher growth and returns as compared to their
larger counterparts. The catch also lies in the fact that you
may find the most opportune moment to buy the
Infosys' and HLLs in the making at attractive
valuations!
I think that you have not been able to understand my
strategy so let me repeat my investing strategy for you:

A) I never hold any large caps. In fact I sold out Bharti

once it hit Rs 120 (Market cap Rs 20,000 crores) after
getting in at Rs 25 (Market cap Rs 4000 crores)
because it was approaching a market cap I was not
comfortable with. That eliminates all the established blue
chip from my portfolio. I am constantly in search for
emerging blue chips and not the established ones. That is
why I invest in small/midcap companies. I believe that you
can get the next Infosys in a small cap only.

B) I hold at most between 3 and 5 companies in my portfolio.

Yes only 3 to 5. Once I finish analyzing a company I ask
myself one question “Is the company good enough to
take 20% of my portfolio. When ever I get an answer
as yes the next question is OK what can I replace it
with. If I get another yes I would buy that stock. I
prefer putting all my money into one company but just for
the event risk I have divided it into 3 to 5.

Since I hold concentrated portfolios 3 to 5 companies I

forecast a best case scenario with only the target
price of 2 to 4 companies assuming that one will go
bust and get me a zero value in the defined time
span. If still the overall result looks exciting I would invest
taking the mathematical premise that errors will cancel out
each other (I do not know which one will under deliver and
by how much).Robert Hagstorm the author of a book on
Warren Buffet did a study where he found that concentarted
portfolios give out better returns

I have lost many 30% to 100% returns by missing on

opportunities because those companies did not fit my
style of investing. But I have no regret because the
ones I hold have more or less made up for that.

It takes me hardly one hour to analyze a company but

making up my mind (the second part of B above)
takes a few days or a even a few weeks at times. This
is so because I believe in concentration.

C) This is how I like to zero down on a company.

1) I look at the management first. The

management is the most important and lest talked
about aspect of a company.
2) I like to know what business the company is into
and then look at whether it is scalable. I prefer new
sectors since the growth is highest there. I avoid
cyclical because I cannot predict the peaks and
troughs.
 3) I then look at the market cap. If it is below Rs
1000 crores I think we could pay a higher PE to that
company
4) I would then look at the RoE to see if the
company is using its capital efficiently. RoCE is a
better concept though because you could hike the RoE
by using debt but not the RoCE
5) I would then compare the PE with the growth
and the RoE. If there is a big difference between RoE
and growth then the company does not merit
investments. This is so because for a company to grow
at higher rates of growth compared to its RoE it would
have to dilute capital. That hurts
6) Dividend, book value is something that I look
but do not base any of my decisions upon. I think
that they tell you what the company has done and not
what it will do.

D) Once a stock is bought and the price falls without

any change in fundamentals and if I have the required
cash I will buy at each fall.

Now I do not stop at step 1 of phase C above. I do look at

steps 2,3,4 and 5 of phase C above but there is a difference
in priority. That is all. For instance I like Financial technology.
MCX could be HUGE but I am worried by valuations so each
time I want to buy the stock I think in terms of phase B
above and give it a pass.

So it is just a matter of prioritizing the tools of analysis. No

analysis is complete without putting all tools at work. In
none of my reports will you find the valuation
parameter missing because irrespective of the
strategy you use the final objective is to make the
stock price a slave of its earning. The question is which
one are you more comfortable using when compared to the
others i.e. prioritizing the tools.

And finally, I have made my 30 baggers this way so I

have become used to investing in this fashion.

I have an eye on Tata Coffee. WIth coffee we might see the

same demand supply situation as we have with other
commodities. China's Coffee consumption is rising and no
one is talking of it. Sooner or later coffee prices will move far
far ahead then what it used to be. Coffee is getting into the
modern day culture and hence more demand. Supply
constraints are temporary may be in one or two years things
might change but the point is about demand and there lies
the big opportunity.Tata coffee could be a four digit stock.

I use maths never said I do not. But what I said was

that maths has to be used in conjunction with a lot of other
things. I do not use maths in isolation. Also the priorities of
using the various tools differ!

Coffee is the only commodity that has not moved much. The
next few years could be very interesting for coffee
producers. Jim Rogers owns a lot of coffee futures in his
commodity fund.

Pantaloon retail - How I have managed to hold on

from Rs 8(rights/split adjusted) till date.

Manish:

You know I bought Pantaloon Retail at Rs 50. Today Rights

adjusted I am getting Rs 1850 for that the journey between
Rs 50 and Rs 1850 is listed below:
1) Since I did not have enough money or expertise to
start something on my own I wanted to buy the right
company in the high growth sectors. Retailing as a
sector was poised to grow so the question was
getting into the right company in the sector.
2) At that Pantaloon traded at a market cap of Rs 80
crores against a sale of Rs 450 crores and traded at a
PE of 7 times so it was a case of value with growth.
3) In 2003 Kishore Biyani had declared that he would do
a sale of Rs 1000 crore in 2005 and I believed in what
he said. In fact I always believe in the
management’s projection unless they have failed
in their previous targets.
4) AT that time Trent sold for Rs 150 with Rs 60 on its
balance sheet as cash, paid good dividend 2.5% yield
and was backed by the Tata.
5) Pantaloon had an inventory problem analysts said
that there could be inventory write downs. I figured
that could be about Rs 8 to 10 crores so while the
issue was significant the amount was not. The
problem remains till date
6) I must confess that I was not aware that this
stock could go that long this fast. I did write an
article on value notes stating that this stock could go up
40 to 50 times but the time zone was 2010 and not
2006.
7) The Management was not considered honest and
trust worthy but I had no option. The retailers could
only be played through pantaloon and Trent. Moreover
the blemishes on the management were more
subjective in nature. I saw that Kishor Biyani had
mortgaged his personal property to take a
secured loan for the company. Thought that he
could not do any thing wrong intentionally –
showed seriousness of the promoter.
8) This is the most interesting of it: I used to stand
outside the Pantaloon showroom for 30 minutes
and count the number of people who walked out
 with Shopping bags from both Pantaloon and
Westside .They are located adjacent to each other.
9) Whenever I used to take a Taxi, I used o tell the
driver to take me to Westside. He showed
ignorance then I would tell him to take me to
pantaloon and he would immediately respond. I
knew people were going to pantaloon more often then
Westside.
10) I used to bite the head off the ladies in our
family as to which store they shopped more from
Pantaloon or Westside.
11) I used to get excited when I saw a Pantaloons
bag being carried by any of the commuters and I
often remarked to a friend that one day when we see
this bag all around this stock could be at Rs 2000+
12) Was never worried about what happens Kolkata
might not happen elsewhere. Rather I used to
extract feedback from acquaintances in other cities.

Now these were the triggers for buying. How I managed to

hold on is more interesting:

13) When ever I met an analyst he would tell me 3

different reasons as to why pantaloon should be sold. I
panicked at 3 price levels
14) When it hit Rs 250, Rs 500 and Rs
1200. I panicked because I had never made that
much money from one stock and the chance of
losing what I had earned was one of the reasons
to sell then anything else.
15) At each point I used to evaluate my down side
and upside potential. For instance I thought that
if Trent could double in 3 years and Pantaloon go
down by 50% I would not look that stupid. I
constantly evaluate my portfolio as a basket of stocks
since it is a high risk high reward game.
16) Many times over the past three years the stock has
got expensive but the sheer pace of growth is
such that it kind of gets cheap a few months
later. For this I must thank Fisher for his book
“Common Stocks and Uncommon Profits”
17) For instance last month it traded at a PE of 20
times FY 07. Today after having recovered 50%
from that price it trades at a pE of 30 times Fy
07.
18) I think once you have the downside levels in
mind you can handle the situation much better.
19) I never looked for an ultimate target on
pantaloon. That is because the company was
constantly evolving. I was prepared to sell at any price
if the signals were discomforting.
20) Even today I have no targets on pantaloon, just plan
to take each year as it comes.
21) All through out I used to look at the market
cap. The size of the opportunity is even today 300
times the market cap. In the multiplex business it is
only 3 times the market cap. By the size of opportunity
I mean the total sector sales for a particular year. For
instance the pantaloon, Big Bazaar Food bazaar brand
could be sold at a certain percentage of their market
cap and also the roll out of stores will make it an ideal
acquisition target.
22) There are talks of reliance getting into retail
but then there are two ways to look at it.
a) The market is huge so it could absorb
another 3 to 4 reliance
b) Try and see that if Pantaloon is marginalized
the stock could come down to Rs 800 or Rs
1000 if they carry along at their pace then
the upsides are open. So it is a question of risk
& reward. I do not believe that we will have a
Kmart in <ST1:COUNTRY-REGIoN
w:st="on">India</ST1:COUNTRY-REGIoN> before
2011.
 23) Over the years the set up at Pantaloon has changed
they had taken in a lot of new talent. People were
leaving Rel Info and Bharti to join this company. I
thought that may be these guys could not be foolish.

But there were several factors the biggest being the “Buy
what you see” that made me buy and hold it the others were
only supplementing.

Putting the money in an open-ended fund appears a risky

decision....the basic problem I find with a MF company is that
they invest at their own choice and exit under unitholders'
pressure. So, although their stock picking skulls may be
excellent but unless you make an exit properly I dont think
major gains may be expected. Also, the time one spends
doing research on what finds to buy, you can also utilise that
to cherrypick individual stocks.However, with a close ended
find, they have more epriod at their disposal, and are
available at a discount to their NAVs, with no entry loads or
exit loads payable(although brokerage is, which is generally
less than the loadings) always appeal more to me.....
although for me, a stock like TICL appears the best choice in
the pack which is available at a discount of 45p.c. to its
NAV....

I beleive there's a lot of confusion to the word

safety/risk......the biggest risk is not knowing your personal
orientation....its not absolute returns which should be the
giuding light, it should be risk-adjusted returns.....the biggest
trap in the market is low risk-high return type of stocks.....for
the very term is a mis-nomer. People think that high betas
are only dangerous, in my opinion negative betas are no less
dangerous.....its a perception, that those who had not rose
till a particular point in the bull markets are high returns and
low risk stocks..... however, those stocks are equal risky as
the bull market may continue its march without they getting
out of their range. In that very sense, I am quite a risk taking
investor and hence I tend to use debt instruments as a
safety tool, and hence my regard for fixed income securities.
Most of the value stocks, will fit this bill of riskiness.... rather
someone can also say they are low-return and high risk
stocks, which they may turn out to be....

So, Vipul may say I am contradicting myself.....but the

scenario may change totally, if the bull markets chages its
shape......thats the point valie stocks become extremely
valuable.....thats when their character changes to low risk
high return ........dont know Vipul, but I beleive the markets
are making a march to this safety now.....some companies
price behaviour is baffling me.... Castrol, GE Shipping, ONGC
etc....utilities which are considered to be very slow movers
are doing their bit as well......some high profile performers
like IT, Construction etc. are reeling under pressure....its not
a comment....but an observation and may be wrong in
that....

70 Times Better Than the Next Microsoft

I recently found this chart from the ever-helpful

moneychimp.com:

Valu Grow
e th
Large 12.4 9.6%
Cap %
Small 15.4 9.3%
Cap %

Those are historical returns from 1927 to 2004 (not adjusted

for inflation). The terms "value" and "growth" are taken from
data from Fama and French, whose work is highly respected.

That's a persuasive case for putting small-cap value stocks

to work in your portfolio. (We'll get to just how persuasive
later.) And you've probably seen plenty of other data
showing that small caps outperform large caps and value
outperforms growth. Why, then, doesn't small growth
outperform large growth? And why does small growth, on
average, end up being the worst choice for your money?

Moneychimp.com offers a theory, and I think it's worth

seriously entertaining, at least when it comes to how you
invest in small caps. Just think about how investors might
mentally categorize large- and small-cap value and growth
companies. It might look something like this:

Value Growth
Large Well-known boring Well-known exciting
Cap businesses. businesses.
Small Unknown boring The next Microsoft is in here
Cap businesses. somewhere!

Thanks, moneychimp. You're on to something.

What do value and growth look like?

What's the price difference between what might be "the next
Microsoft" and the unknown and boring? Let's look at the
data.

There's never been an official ruling on what separates

"value" from "growth." There are dozens of ways to make
those distinctions, and the data that Fama and French
produce comes from their own method of sorting out what
makes a value stock and what makes a growth stock. Let's
look at a more accessible listing of stocks, to give you an
idea of what value and growth look like according to recent
data. We'll take the two largest holdings from each of the
Vanguard small-cap and large-cap value and growth index
funds as of the end of November 2005.

Price-to- Price-to-
book earnings
Large-Cap Value
ExxonMobil (NYSE: XOM) 3.5 11.5
Citigroup (NYSE: C) 2.2 11.1
Large-Cap Growth
Microsoft (Nasdaq: MSFT) 6.0 22.8
Procter & Gamble (NYSE: 10.7 21.5
PG)
Small-Cap Value
Colonial BancGroup 2.0 16.0
(NYSE: CNB)
Martin Marietta (NYSE: 3.1 20.9
MLM)
Small-Cap Growth
Joy Global (Nasdaq: JOYG) 8.6 38.9
Intuitive Surgical 11.9 87.5

These companies aren't selected to imply that any one or

two is likely to do better than another over time. Rather,
they're selected to show you what some of the larger players
look like when you compare their price to both their book
value and their earnings. Obviously, to justify their prices,
those companies categorized as "growth" need to grow their
earnings much faster than the companies in the value
quadrants. The numbers attached to these small-cap growth
companies are particularly startling. That's not to say that
Joy Global and Intuitive Surgical are necessarily overpriced,
nor that they won't grow their earnings sufficiently to be
good investments. But to the extent that they represent the
other brethren in the small-cap growth field, we can see why
the returns for the quadrant as a whole end up disappointing
investors.

Taken as a whole -- as measured by thousands of

companies, not just two -- small-cap stocks are going to be
more inaccurately priced than large caps in the market, but
not necessarily better-priced. The inaccuracies work both
ways. Those that are overpriced (growth) will be more
overpriced than their large-cap brethren, and those that are
underpriced (value) will be more so than their large-cap
cousins.
What's the cost?
The rewards of being aligned with the right quadrant instead
of the wrong one over 78 years are absolutely staggering.
Consider: Compounded over those 78 years, $100 would
translate to:

Value Growt
h
Large $898,96 $130,1
Cap 7 65
Small $7,307, $103,6
Cap 903 26

Is 78 years a relevant investment period? Sure. It's just

slightly longer than an average American life span. So the
difference between small-cap value and small-cap growth
over a lifetime has been a multiple of more than 70 times
the end result. That's right: 70 times.

There are literally thousands of companies in that small-cap

value quadrant that you should be concentrating on, none of
which can possibly be described as "the next Microsoft."
They might not carry the wallop of a potential Microsoft over
the short term, but over many decades, and taken as a
group ... wow.

Yes, visibility is quite important. At least a 3 year visibility for

me. Thank you for your valuable inputs as always and
thanks for that reaffirmation for a 20 PE entry for a 40%
grower. In fact, this 20 PE and stuff is the job that I do last.

It's like being a "construction company". Once the whole

design and plan is setup for building a colony, the last part is
employing the construction workers who will actually lay
those bricks down.

Hence, my "water purifier" system for healthy water:

1) Management filter(credibility, vision, shareholder-
friendliness, transparency, aggressive): 50% of the system

2) Past growth rate filter (viewing financial reports, visiting

websites for news): 20% of the system

3) Future growth rate possible: 20% of the system

4) Getting a "value-zone" price entry(Usually, try my best

to keep a PEG of less than 0.5 between Forward PE and
Future Growth Rate.): 10% of the system.

Once something goes through all these filters, then I

drink the water. Others can share their views too, so
we all can learn together.
Here's are excerpts from an article written by Mohnish
Pabrai almost 5 years ago. Well....some arguments are
debatable.

--------------------------------------------------

The Danger in Buying the Biggest

By Mohnish Pabrai

There is a French saying: "Buy on the cannons, and sell

on the trumpets!" Whether they were speaking
metaphorically or not, that's exactly what Sir John
Templeton did.
Templeton is considered by many to be, perhaps, the
greatest global stock-picker of the 20th century, so it seems
worthwhile to subscribe to his proven theory of
buying beaten down-stocks at points of maximum
pessimism.

The reverse of Templeton's approach would be to buy stocks

at points of maximum optimism -- and a good place to find
optimism is among the most valued businesses in the
world.
If you started with $10,000 invested in the most valuable
business when the Fortune 500 list was released in April
1987 (that year it was IBM and every year thereafter
reinvested the funds in the new (or same) most valued
business, by 2002, you would have realized an
annualized gain of just 3.3%. Over the same period, the
S&P 500 delivered about 10% annualized.

The Most Valuable

Fortune 500 Business
(1987-2002)
A strategy based on this
table would have trailed the
S&P
Mark Net
Compa Revenu
Year et Incom
ny e*
Cap* e*
1987 IBM $89 $51 $4.8
1988 IBM 68 59 5.8
1989 IBM 70 63 5.2
1990 IBM 61 69 6.0
1991 IBM 75 65 2.1
1992 Exxon 69 103 4.8
1993 Exxon 78 100 5.3
1994 GE 90 40 5.9
1995 GE 92 43 6.6
1996 GE 126 46 7.3
1997 GE 170 49 8.2
1998 GE 260 56 10.7
Microsof
1999 419 20 7.6
t
Microsof
2000 492 23 9.4
t
2001 GE 407 68 14.1
2002 GE 401 73 16.6
*Figures in billions.
Source: 1987-2002 Fortune
500 lists and Value Line

While the data demonstrate the superiority of the

maximum pessimism investment approach, there is
something interesting at work here. An examination of the
table shows that none of the most valued businesses got
much beyond $100 billion in revenue or $10 billion to $15
billion in net income.
Is there a natural upper limit on revenue or
profitability of a business?
Nature provides some possible answers. Mammals rule the
world, but the largest land-based mammal is the
elephant.
Mammals have to eat a lot to generate energy. As a
result, mammal size is bounded by the energy a given
area of land can consistently supply. It is also bounded
by internal organs like the heart, which have to pump blood
to the body's extremities. Thus, these extremities are
physically constrained from being too far from the
heart, and that imposes another size constraint.

Lumbering

Large businesses have their own extremities. There is a

critical need to rapidly get data back and forth between the
central organizational heart (CEO) and all the extremities
(customers and foot soldiers). Over the last 100 years, the
speed and breadth of these arteries have increased
dramatically, and with them has grown the size of our
largest companies.
There is, however, an upper limit to senior
management's ability to accurately process the
various inputs regardless of the size or speed of the
arteries. This limitation translates into a size
constraint on most businesses.
In addition, the most valued business is under constant
attack from the marauding invaders who want to
unseat it. This leads to what Clay Christensen, author of
The Innovator's Dilemma: When New Technologies Cause
Great Firms to Fail, described as the disruptive innovation
phenomenon -- against which the incumbent is virtually
powerless.

The Law

All of this leads to Pabrai's Law of Large Numbers.

The ultimate principle of this law is that one
would be best off never making an investment in
any business that generates more than $3
billion to $4 billion in annual cash flow and is
considered a blue-chip. These businesses are
very unlikely to be able to endlessly grow cash
flow.

Indeed, cash flows are most likely to tread water or start

dropping almost immediately after your investment. A few
companies will buck the trend, but they're probably not the
ones that end up in your portfolio. Over the years, I've
taken a pass on many supposedly stellar businesses
purely on the basis of the Law of Large Numbers, and
I've never regretted it.
Taking insurance while playing Blackjack seems very logical,
but it's a sucker's bet. Investing in the most valuable
businesses around is no different

Prof Mankekar and his Multibagger Portfolio

Prof. Mankekar and his family have made some of the

biggest multibaggers of the Great Indian bull run. Pantaloon
Retail (100 times) and Financial Technologies (50 times)
are amongst his best known bets.
The Prof. is media shy (so much so that I could not find his
photograph on google) does not want to be in the public
domain and like some of the smartest minds in the Indian
markets loves to think and act in isolation. He does not
come on chat shows, does not provide opinion on Tv
but still teaches at the Jamunalal Bajaj Institute in
Mumbai.

I tried making a list of his portfolio from the stocks that he

owns and are disclosed in the public domain. Please note
that these are the stocks which are in the public
domain and it should be assumed that the actuals
might differ because certain purchases would not have
been disclosed or if disclosed would have inadvertently been
omitted. But this portfolio does give a broad idea of his
investing styles and habits.

CM Share
Company Value % of
P s
Rs
portfo
crore
lio
s
Pantaloon Retail 21544 112.0
520 32.56
(India) Ltd. 80 3
99423
India Infoline Ltd. 820 81.53 23.69
5
56850
TV18 890 50.60 14.70
4
22000
NIIT 985 21.67 6.30
0
66000
Balaji Telefilms 270 17.82 5.18
0
24000
Zee News 71 17.04 4.95
00
110 15000
Asian Electronics 16.50 4.80
0 0
Champagne 22142
628 13.91 4.04
Indage Ltd. 0
54100
Radico Khaitan 177 9.58 2.78
0
Galaxy
29730
Entertainment 115 3.42 0.99
2
Corpn. Ltd.
Total value of
344.0
portfolio (Rs
9
crores)

Piquant observations:

o Just like Rakesh Jhunjhunwala the Prof believes in the

benefits of portfolio concentration. His top 3 holdings
account for close to 70% of his portfolio and he
holds only 10 stocks in his disclosed portfolio.

o It is very hard to find a cyclical or commodity

stock in his portfolio.

o All the stocks that he bought were at the time of buying

a small cap. Just that the sheer pace of growth made it
into a large cap is another thing. Maybe the Prof
believes that money can be made in small and mid
caps only.

o With respect to Pantaloon the Professor expects

it to become a Rs 100,000 crores market cap
company He likes buying stocks with a huge
external scale of opportunity

o We do cover companies with huge scale of

opportunity in The Equity Desk - Report Card
section.

o These shares are held by the Mankekar family and

form a part of their disclosed portfolio. They could
be holding more shares through companies, trusts,
proprietary accounts which are not in the public
domain.
 o To know more about investing legends see the section
World's greatest Investors.

o Over the past few months the Professor is buying

into Tv18, Balaji Telefilms, Zee News and Asian
Electronics. His recent buys into the media
shares reflect his new found conviction for the
broadcasting sector.

o His portfolio does see some churn but not before he has
made a multibagger out of his stocks. Stocks that he
has either reduced exposure or exited include Financial
Technologies, Astra Microwave Rishi laser
(suffered a loss here) Pantaloon Industries etc.

Uday Kotak on Shivanand Mankekar

I must mention that one of the very important

influences in my life was Shivanand Mankekar who
was our professor in the MBA course. I used to go
with him to the stock market almost every day, it was
a great learning experience.

I remember the first lecture of Prof.Mankekar.

He asked,"How do you value a company?" Someone
said by net profit, somebody else said by assets. He
said,"All wrong.You value a company on its cash
flow."
Investor Billionaires
BUSINESSWORLD - SEPTEMBER 2006

RAKESH JHUNJHUNWALA:
Titan Industries 8.08 285.26
Nagarjuna Construction 7.14 266.50
Bharat Earth Movers 3.75 203.92
Lupin 4.30 176.07
Praj Industries 11.1 132.84
Punj Lloyd 1.93 109.11
Pantaloon Retail 1.85 97.31
Bilcare 11.62 86.66
Matrix Laboratories 1.38 59.84
CRISIL 4.55 51.84
Karur Vysya Bank 4.88 43.10
Viceroy Hotels 14.23 36.76
Infomedia <ST1:COUNTRY-REGIoN
w:st="on">India</ST1:COUNTRY-REGIoN> 6.39 31.88
Hindustan Oil Exploration 2.74 24.13
Federal Bank 1.29 22.23
Mid-Day Multimedia 5.03 17.75
Geometric Software 2.96 16.99
Provogue (<ST1:COUNTRY-REGIoN
w:st="on">India</ST1:COUNTRY-REGIoN>) 2.96 16.97
TV Today 2.74 16.75
Agro Tech Foods 4.31 14.94
JB Chemicals & Pharmaceuticals 1.38 12.88
Ramco Systems 2.20 7.96
Zenotech Laboratories 2.55 3.23
Vadilal Industries 2.86 0.96
TOTAL 1,735.87
ANIL DHIRUBHAI AMBANI
ADAG:GROUP3,4
Anant Raj Industries 6.88 104.03
Jyoti Structures 7.42 55.91
Madhucon Project 3.88 54.57
TV Today 7.29 44.56
TV18 <ST1:COUNTRY-REGIoN
w:st="on">India</ST1:COUNTRY-REGIoN> 3.09 42.17
Magma Leasing 14.99 30.85
Saregama <ST1:COUNTRY-REGIoN
w:st="on">India</ST1:COUNTRY-REGIoN> 6.04 26.06
ICSA (<ST1:COUNTRY-REGIoN
w:st="on">India</ST1:COUNTRY-REGIoN>) 6.67 24.15
Subex Systems 2.33 22.09
Ruchi Soya Industries 1.67 17.63
Zodiac Clothing Company 7.17 17.20
Mercator Lines 1.78 14.80
Pitti Lamination 14.67 12.24
OCL <ST1:COUNTRY-REGIoN
w:st="on">India</ST1:COUNTRY-REGIoN> 1.83 10.35
Hindustan Dorr-Oliver 1.72 8.50
Ramco Systems 2.18 7.91
K Sera Sera Productions 2.50 2.77
Sarla Polyester 3.01 2.69
TOTAL 498.46

AZIM H PREMJI:AZIM H. PREMJI3

United Phosphorus 1.20 58.53
Novartis <ST1:COUNTRY-REGIoN
w:st="on">India</ST1:COUNTRY-REGIoN> 3.08 58.00
Himatsingka Seide 3.37 54.58
Pfizer 1.55 54.34
Aventis Pharma 1.03 46.81
Monsanto <ST1:COUNTRY-REGIoN
w:st="on">India</ST1:COUNTRY-REGIoN> 1.83 29.67
Gujarat NRE Coke 1.96 19.24
Merck 1.58 15.53
Rallis <ST1:COUNTRY-REGIoN
w:st="on">India</ST1:COUNTRY-REGIoN> 2.63 10.40
Fulford (<ST1:COUNTRY-REGIoN
w:st="on">India</ST1:COUNTRY-REGIoN>) 1.97 4.22
Todays Writing Products 3.90 3.85
Jindal Drilling 1.17 3.27
TOTAL 358.40

HARISH C. BHASIN & ASSOCIATES:HARISH C. BHASIN

& ASSOCIATES5
Jaiprakash Associates 1.60 142.94
DCM Shriram Industries 5.61 14.80
Hotline Teletube 8.77 0.68
Kerala Chemicals 1.17 0.36
Haryana Leather 1.93 0.07
TOTAL 158.85

NEMISH S SHAHNEMISH S. SHAH

Lakshmi Machine Works 2.44 65.87
Motherson Sumi 1.44 35.89
Rico Auto Industries 2.45 27.02
Elgi Equipment 1.71 10.12
Hi-tech Gears 3.09 4.95
Kar Mobiles 4.33 3.11
Super Spinning 1.38 2.93
TOTAL 149.89
VALLABH BHAN
VALLABH BHANSALI & ASSOCIATES:SALI &
ASSOCIATES6
MRF 4.95 65.19
Munjal Showa 7.09 23.05
FDC 1.52 14.25
Prithvi Information Solutions 1.66 11.09
Rane Engine Valves 3.92 10.10
Polyplex Corporation 2.60 6.50
IP Rings 7.12 5.74
K Sera Sera Productions 1.92 2.14
Sterling Tools 1.75 1.42
Elder Health 2.75 0.30
TOTAL 139.78
LAXMI SHIVANAND MANKEKAR
LAKSHMI SHIVANAND MANEKAR:
Pantaloon Retail 1.6 84.51
Astra Microwave 1.29 13.44
Pantaloon Industries 3.07 7.40
Champagne Indage 1.17 4.94
Galaxy Entertainment Corporation 1.39 4.80
Rishi Laser Cutting 4.65 2.20
Zen Technologies 1.52 1.95
TOTAL 119.24
a lot of people win 1 crore lottery or many have won in KBC
or other such programs or many have insider info to
speculate..how many of them are as rich as RJ....how many
of em are followed by people ??....how many of em are
amongst richest indians??....it takes vision and a purpose to
be where rj is today....how much he wud have made by
shorting the market...he started with 20000 or so bucks way
back then... make that 50 times (suppose he invested it
initially and made a 520 bagger)...10 lacs...he speculated
with 10 lacs ...made 40 times ...4 crores.... he s worth 1000
crores today...still multiplied that money by more than 250
times....its not that easy.....buffet made money in a more
investor friendly mkt...its not easy to invest in indian mkts
and still be among the richest men in india.....even if george
bush sneezes sensex sheds a few points

why cant we appreciate our heroes?

he actually started with 10000 in 1985...before shorting acc

how much he wud have made of those 10000 ... ???

Rakesh Jhunjhunwala started with a meagre Rs

10,000 somewhere in 1985 and with some trading
profit was on a leverage capital of Rs 10 lacs in a few
months now if you compound that Rs 10 lacs at 57%
for 22 years, You do get to the figure of Rs 2250
crores. Rakesh Jhunjhunwala is one example of
compounding.