6-Force Framework of Levers: How to multiply stock value

September 2014
the IF series #1
Shrinath Mithanthaya
ShrinathM@MotilalOswal.com | +91 22 3982 5522
Rajat Rajgarhia
Rajat@MotilalOswal.com | +91 22 3982 5441
| 6-Force Framework of Levers
6-Force Framework of Levers

Or how to multiply stock value!
Page
Preface ......................................................................................................... i-iii

Summary FAQs ............................................................................................... 1
Backdrop & Definitions .................................................................................. 7
Types of Stock Levers ..................................................................................... 8
Case studies & insights ................................................................................. 10
Applying the 6-Force Framework ................................................................. 16
Limitations of the 6-Force Framework ........................................................ 21
What to buy based on the 6-Force Framework ........................................... 22
#1 Sector Lever
#2 Strategic Lever
#3 Operating Lever
#4 Financial Lever
#5 Regulatory Lever
#6 Corporate Action Lever
Jubilant Foodworks ....................... 23

Symphony ..................................... 24
Alembic Pharma ............................ 25
Gujarat Pipavav Port ..................... 26
J K Cement .................................... 27
Kaveri Seeds .................................. 28
TVS Motor ...................................... 29
Arvind ........................................... 30
Idea Cellular ................................. 31
Bharti Infratel ............................... 32
Maruti Suzuki ................................ 33
Ashok Leyland ............................... 34
Jain Irrigation ................................ 35
BHEL .............................................. 36
ONGC ............................................ 37
HPCL .............................................. 38
United Spirits ................................ 39
PVR ................................................ 40
Eicher Motors ............................... 41
Crompton Greaves ........................ 42
Annexure 1: Levers for non-Financial companies ....................................... 43

Annexure 2: Levers for Financial companies ............................................... 47
Annexure 3: Non-quantitative Levers .......................................................... 50
Annexure 4: Case Studies of levers
Company case studies ....................................................... 51
Sector aggregates: Key takeaways .................................... 63
Notes: Source of all exhibits in this report is MOSL analysis, unless otherwise mentioned.
Current valuations of stocks are based on price dated 26 September 2014.
Preface
IF we deeply study them
IF we fully understand them
IF we smartly apply them
Investment Frameworks can offer Insights Forever!
Presenting
The 4th dimension of equity research

Stock ideas, Sector analyses, Theme studies, and Investment Frameworks
We believe there are 4 dimensions to equity research, in descending order of prevalence and
practice
1. Stock ideas recommendations on which stocks to buy / sell / hold
2. Sector analyses actionables based on various issues pertaining to sectors
3. Theme studies impact analysis of a particular phenomenon or development
4. Investment Frameworks tools & techniques which are applicable across stocks, sectors,
time horizons and (in most cases) even geographies.
Motilal Oswal and the 4th dimension

Evolved several Investment Frameworks in the past 25 years
At Motilal Oswal, we track over 225 stocks across 20 sectors. We have also written several
theme reports pertaining to Economy, Politics and various sectors.
Motilal Oswals Recent Theme Reports
September 2014
(to read full report, please click on the cover icons)
Equally important, over the last 25 years, we have evolved several Investment Frameworks,
hitherto published mostly in the form of our Annual Wealth Creation Study.
Motilal Oswal & the 4th dimension of Investment Frameworks
(click the icons to read full report)
Investment Framework: MULTI-BAGGERS

Insights Forever: Multi-baggers are of 2 types: (1) Transitory: created
by the combination of cyclical business and questionable management
quality; and (2) Enduring: Great businesses run by good managements
purchased at huge margin of safety will create enduring multibaggers.
Investment Framework: INDIAS NTD OPPORTUNITY

Insights Forever: The era of Indias NTD (Next Trillion Dollar of GDP) will
see distinctly buoyant corporate profits, and boom in savings and
investment. This is because amidst linear GDP growth, discretionary
spend grows exponentially, benefiting several businesses.
Investment Framework: GREAT, GOOD, GRUESOME

Insights Forever: Think of companies as 3 types of savings accounts:
1. The Great one pays an extraordinarily high interest rate (i.e. RoE) that
will rise as the years pass.
2. The Good one pays an attractive rate of interest that will be earned
also on deposits that are added.
3. The Gruesome account both pays an inadequate interest rate and
requires you to keep adding money at those disappointing returns.
Investment Framework: BLUE CHIP INVESTING

Insights Forever: Blue Chips are fountains of dividend. They offer as
much, if not more, investment growth potential than stocks of lesser
quality. There is a systematic framework to identify and invest in
discovered and potential Blue Chip stocks.
Investment Framework: ECONOMIC MOAT

Insights Forever: An Economic Moat protects a company's profits from
being attacked by competitive business forces. Without an Economic
Moat, competition from rivals will ensure that high returns of a company
are lowered to the level of economic cost of capital or even below.
Companies with deep, dangerous moats outperform those without,
both in terms of financial performance and stock returns.
September 2014
ii
Investment Framework: UNCOMMON PROFITS: EMERGENCE &

ENDURANCE
Insights Forever: Uncommon Profitability (%) = RoE > Cost of Equity.
In Indian context, Cost of Equity = 15%. Consistent Uncommon Profit
earning companies are Value Creators. Emergence means the first entry
of a company into the Uncommon Profit zone i.e. RoE > 15%. The next
challenge is Endurance i.e. sustaining RoE > 15% for several years ahead.
There is a structured framework to identify Emerging and Enduring Value
Creators.
Launching the IF series

Special emphasis on Investment Frameworks
the IF series is our new product to showcase a series of frameworks, offering investment
insights which hold true across companies, sectors, time zones and even geographies.
Our first in the series is the 6-Force Framework of Levers, which we believe is almost as
relevant to understanding investing dynamics as Porters 5-Force Framework is to
understanding the underlying business dynamics.
We hope the IF series provides you significant ammunition to strengthen your investment
armory.
the IF series #1

September 2014
iii

Summary FAQs
We present the summary of this report in the form of 5 FAQs (read as Facts, and short for
Frequently Asked Questions).
FAQ #1: What is the 6-Force Framework of Levers?

A perennial truth of equity investing worldwide is this for a given common set of macroeconomic parameters, there is wide divergence in stock price performance. We present a
6-Force Framework of Levers (i.e. factors or ratios), which taken together, explain the reasons
behind such divergence.
The 6-Force Framework of Levers
Total Stock Lever
Earnings Lever
1. Country Lever
x
2. Sector Lever
x
3. Strategic Lever
x
4. Operating Lever
x
5. Financial Lever
Valuation Lever
6. Valuation Lever
NOTE: This report also covers 3 non-quantitative levers which in turn may affect one or more of the
above 6 quantitative levers. These are (1) Regulatory Lever, (2) Corporate Action Lever and
(3) Externality Lever.
FAQ #2: How does this 6-Force Framework work?

Total Stock Lever (TSL) is the master lever which connects stock price change to a distant
macroeconomic variable, say, Global GDP. Thus
Total Stock Lever (TSL) =
Stock Price
Global GDP
(Note: stands for delta i.e. percentage change in a year
If period > 1 year, CAGR is used to compute )
September 2014
For non-Financial sector companies

= Stock Price
Global GDP
TSL
EPS
Global GDP
= Earnings Lever (EL)

Therefore, Stock Price = Global GDP
EL
Stock Price
EPS
x
x
Valuation Lever (VL)
EL x
VL
EPS
Global GDP
Country GDP x Sector Sales x Co. Sales x EBIT

x EPS
Global GDP
Country GDP Sector Sales Co. Sales
EBIT
Country x
Lever(CL)
Therefore, Stock Price
Sector
x
Lever(SL)
Strategic x
Lever(StL)
Operating
Lever(OL)
x Financial
Lever(FL)
= Global GDP x [CL x SL x StL x OL x FL] x [VL]
For Financial sector companies

= Stock Price
Global GDP
TSL
= Book value
Global GDP
Stock Price
Book value
= Book Value Lever (BL)

BL
BL x
BV
Global GDP
Country GDP x Agg. NII

x Bank NII
Global GDP
Country GDP
Agg. NII
Country x
Lever(CL)
Sector
x
Lever(SL)
Strategic x
Lever(StL)

VL
x PAT
NII
Operating
Lever(OL)
x BV
PAT
x Equity
Lever(EL)
= Global GDP x [CL x SL x StL x OL x EL] x [VL]
The 6-Force Framework is unique to each sector and company at different points of time.
Thorough understanding of the same provides valuable insights into past performance and
likely future trends.
Non-quantitative levers: In addition to the 6 quantitative levers discussed above, there are at
least 3 major non-quantitative levers which directly or indirectly impact stock prices
1. Regulatory Lever (change in policies affecting economy, sectors or stock market)
2. Corporate Action Lever (change of management, stake hike, delisting offer etc)
3. Externality Lever (uncontrollable external events like drought, earthquake, wars etc).
September 2014
FAQ #3: Has the 6-Force worked in the past? What are the key lessons?
For a deeper understanding of various levers, we assessed sector and stock data over the full
economic cycle period of FY03-14, divided into two phases boom (FY03-08) and lull (FY08-14).
The key takeaways are:
Sector-level takeaways:
The top performing major sectors over the full economic cycle FY03-14 include: (1) Specific
Consumer segments Alcoholic beverages, Paints, Tobacco, (2) Gems & Jewelry,
(3) Infrastructure/Construction, (4) Capital Goods, (5) Steel, and (6) Autos Cars, CVs, and
Auto Ancillaries including Tyres.
The worst performing major sectors over FY03-14 include: (1) Media, (2) Shipping,
(3) Fertilizers, (4) Power Utilities and (5) Oil & Gas.
Only few sectors meaningfully outperformed the markets in both the boom phase (FY03-08)
and the lull phase (FY08-14) (1) Alcoholic beverages, (2) Gems & Jewelry, (3) Autos Cars,
(4) Agro Chemicals and (5) Auto Ancillaries.
Across business cycles, Revenue and Operating Levers are more important determinants of
outperformance than Financial Lever.
Company-level takeaways:
Expect levers to work strongly in (1) Emerging, high-growth sectors and (2) Market leaders
within these high-growth sectors.
Non-quantitative Regulatory Lever and Corporate Action Lever play a critical role in
influencing all the quantitative levers.
Expect company-specific levers Strategic, Operating and Financial to work strongly in
cases where the market opportunity is sizable, and the company has just completed major
capacity expansion(s).
If interest rates are expected to significantly ease, high debt-carrying and high interestpaying companies are excellent Financial Lever plays.
Major change in management and/or corporate strategy is a key trigger for stock levers to
play out.
Quality of management is a key factor for performance breakthrough or breakdown.
FAQ #4: How can the 6-Force Framework be applied?

The 6-Force Framework of Levers is powerful, first, to precisely understand the drivers behind
superior stock performance, and second, to identify potential outperformers going forward.
The simple yet accurate mathematics involved holds potential for wide-ranging applications, an
area of ongoing research.
The 3 applications of the 6-Force Framework discussed in this report are
(1) Determine sector allocation strategy
(2) Create future market scenarios and
(3) Identify potential super-performers.
September 2014
APP #1: Determine sector allocation strategy Key exhibits

[A] Sales Growth Leverage map of sectors
[B] Operating Leverage map of high growth leverage sectors
[C] Sector Allocation Strategy based on [A] and [B] above

Overweight Sector
Macroeconomic Assessment
Quadrants
Domestic
Global
from [A] & [B]
(Boom / Lull)
(Tailwind/Headwind)
September 2014
Other Quadrants / Sectors for

selective buys
Boom
Tailwind
O1, O2
Financials, Technology
Boom
No Tailwind
O1, O3
Financials, O4
Lull
No Headwind
G4 (ex Fin. PSUs), O3
G3, O4
Lull
Headwind
G4 (ex Fin. PSUs), G3
O4
APP #2: Create future market scenarios Key exhibits

Preliminary calculations
Delta (CAGR %) 1
GDP
2
Sales
3
EBIT
4
PAT
5
EPS
6
Opening EPS (INR)
7
Closing EPS (INR)
8
Sensex
9
Opening Sensex level
10
Closing Sensex level
Sensex P/E (x)
11
Opening
12
Closing
Key Levers (Formula in brackets based on row nos.)
13
Revenue Lever (2 1)
14
Operating Lever (3 2)
15
Financial Lever (5 3)
16
Earnings Lever (13 x 14 x 15)
17
Valuation Lever (8 5)
18
Total Sensex Lever (16 x 17)
Sensex scenarios using Earnings Lever
FY14-16 [Square brackets give row-based formula]
1
GDP CAGR (%) estimated
2
Earnings Lever (x) row 16 of previous table
3
Sensex EPS CAGR (%) [1 x 2]
4
FY14 Sensex EPS
5
FY16 Sensex EPS
6
FY16 Sensex P/E range (x) a. Scenario A
b. Scenario B
c. Scenario C
7
FY16 Sensex average [Avg of 7a, 7b, 7c]
a. Scenario A [5 x 6a]
b. Scenario B [5 x 6b]
c. Scenario C [5 x 6c]
8
FY14-16 Market average return (%)
a. Scenario A
b. Scenario B
c. Scenario C
FY03-08
(Boom)
FY08-14
(Lull)
FY03-14
(Full cycle)
15
31
38
39
25
272
833
39
3,049
15,644
15
17
12
10
8
833
1,339
6
15,644
22,386
15
23
23
23
16
272
1,339
20
3,049
22,386
11
19
19
17
11
17
2.1
1.2
0.7
1.7
1.5
2.7
1.1
0.7
0.7
0.6
0.7
0.4
1.6
1.0
0.7
1.1
1.3
1.4
Optimistic
13.2
1.7
23
1,339
2,019
Pessimistic
13.2
0.6
7
1,339
1,544
Moderate
13.2
1.1
14
1,339
1,743
17
20
22
39,706
34,322
40,379
44,416
33
24
34
41
11
13
15
20,078
16,989
20,078
23,166
-5
-13
-5
2
14
16
18
27,881
24,396
27,881
31,366
12
4
12
18
APP #3: Identify potential outperformers

We adapted the approach outlined in App #2 to sift the 30 Sensex constituent stocks into 4
categories Super-performers, Outperformers, Market performers and Underperformers as
depicted on next page.
September 2014

Sensex stocks - Earnings Lever v/s Valuation Matrix
Note: The bracket next to Bloomberg ticker carries Earnings Lever (x) | EPS CAGR (%), (Disc.)/Prem. to long-period median P/E
E.g. for NTPC, expect FY14-16 Earnings Lever of 1.2x i.e. EPS CAGR of 15%, and it is trading at 34% discount to LPA valuations.
FAQ #5: Which stocks offer a play on the 6-Force Framework?

We believe the following 20 investment ideas offer a play on the 6-Force Framework
Sector Lever
Jubilant Foodworks, Symphony
Strategic Lever
Alembic Pharma, Gujarat Pipapav Port, J K Cement,

Kaveri Seeds, TVS, Arvind
Operating Lever
Idea Cellular, Bharti Infratel, Maruti Suzuki, Ashok Leyland
Financial Lever
Jain Irrigation, BHEL
Regulatory Lever
ONGC, HPCL
Corporate Action Lever
United Spirits, PVR, Eicher Motors, Crompton Greaves
Besides, we have 5 stocks on the watch-list given major corporate/regulatory action Infosys
(new CEO), Sun Pharma (Ranbaxy takeover), IDFC (bank license), MCX (stake by Kotak
Mahindra) and Tata Power (potential tariff revision for its UMPP project).
Subsequent pages present a detailed report on the 6-Force Framework of Levers.
September 2014
Main Report 1. Backdrop

From subjective diagnosis to objective prognosis
Opinions can be debated not facts.
Anonymous
A perennial truth of equity investing worldwide is this for a given common set of macroeconomic parameters, there is wide divergence in stock price performance. In India, for
instance, during the boom phase of FY03-08, average real GDP growth was 8.9% and nominal
GDP growth 14.5%. However, stock returns of 670 companies were distributed from -20% to as
high as 220%. Likewise, in the lull phase of FY08-14, real GDP growth fell to 6.7% while nominal
GDP growth was almost unchanged. And yet, stock returns of the same 670 companies ranged
from -40% to 70%.
Significant divergence in stock prices for the same macroeconomic conditions
150
120
90
60
FY03-08 GDP CAGR:

Real
8.9%
Nominal 14.5%
Sensex CAGR
39%
180
120
Sensex CAGR
90
6%
60
30
30
0
<(20)
(20)-0
0-20
20-40
40-60
60-80
80-100
100-120
120-140
140-160
160-180
180-200
200-220
>220
FY08-14 GDP CAGR:

Real
6.7%
Nominal 14.7%
150
<(40)
(30)-(40)
(30)-(20)
(20)-(10)
(10)-0
0-10
10-20
20-30
30-40
40-50
50-60
60-70
>70
180
The above divergence in stock performance is primarily explained by diagnosing the interplay of
multivariate factors top-down, popular as EIC i.e. Economy-Industry-Company. However, in
most cases, such diagnosis tends to be subjective and qualitative, and hence less amenable to
objective prognosis. In this report, we use key quantitative metrics (called Levers) to
objectively link stock price performance to macroeconomic parameters.
Once such past linkages are analyzed, understood and established, the insights can be adapted
and applied to build likely scenarios of future stock performance.
2. Defining Lever, Stock Lever & Stock Leverage

Introducing force-multipliers into stocks
If you wish to converse with me, first, define your terms.
Voltaire, French philosopher and writer
The terms Lever and Leverage can be defined and described variously, even in the field of
equity investing. For the purposes of this report, the key terms are defined as under
1. LEVER: Any device or mechanism which multiplies the force applied at one end, leading to a
greater impact at the other i.e. a force-multiplier.
September 2014
2. STOCK LEVER: A factor (quantitative or qualitative), a small change in which can potentially
magnify the change in stock price i.e. stock value multipliers.
3. STOCK LEVERAGE: The process of Stock Levers at work, typically at 4 levels (1) Economy,
(2) Sector, (3) Company, and (4) Stock Market.
3. Types of Stock Levers

The 6-Force Framework
Give me a place to stand and a lever long enough, and I can move the earth.
Archimedes, Greek mathematician and scientist
As stated earlier, Stock Levers provide objective, quantitative and mathematically-operable
linkage between stock prices and distant macro-economic variables. Thus, the longest Stock
Lever may well be the one which links stock price performance in any country to global GDP
growth. We can term this as Total Stock Lever. Thus
Total Stock Lever (TSL) =
Stock Price
Global GDP
(Note: stands for delta i.e. percentage change in a year
If period > 1 year, CAGR is used to compute )
To make Total Stock Lever more granular, we split it into 6 sub-levers under 2 heads as under
The 6-Force Framework of Levers
Total Stock Lever
Earnings Lever
1. Country Lever
x
2. Sector Lever
x
3. Strategic Lever
x
4. Operating Lever
x
5. Financial Lever
Valuation Lever
6. Valuation Lever
NOTE: Besides, there are 3 non-quantitative levers which in turn may affect one or more of these 6
quantitative levers (1) Regulatory Lever, (2) Corporate Action Lever and (3) Externality Lever.
The above framework is broadly applicable for all sectors. However, the specific levers are
different for the non-Financial and Financial sectors. These levers are fairly self-explanatory,
and have been summarized here.
For detailed explanation, see Annexure 1 (Levers for Non-Financial sectors, page 43), Annexure
2 (Lever for Financial sector, page 47), and Annexure 3 (Non-quantitative levers, page 50).
September 2014
3.1 Levers for non-Financial companies

Earnings Lever and Valuation Lever are multiplicative in nature such that
= Stock Price
Global GDP
TSL
EPS
Global GDP
Stock Price
EPS
= Earnings Lever (EL)

Therefore, Stock Price = Global GDP x
EL x VL
Next, Earnings Lever is a product of 5 sub-levers as under
EL
EPS
Global GDP

x EPS
Global GDP
EBIT
Country x
Lever(CL)
Therefore, EPS
Sector
x
Lever(SL)
Strategic x
Lever(StL)
Operating
Lever(OL)
x Financial
Lever(FL)
Global GDP x [CL x SL x StL x OL x FL]
3.2 Levers for Financial companies

For Financial sector companies, Book Value is more relevant and important than EPS. Hence, all
levers are adapted to suit this and other characteristics of the business.
= Stock Price
Global GDP
TSL
= Book value
Global GDP

Stock Price
Book value
x
x BL x VL
Here too, Book Value Lever is a product of 5 sub-levers as under
BL
Book Value
Global GDP
Country GDP x Agg. NII

x Bank NII
Global GDP
Country GDP
Agg. NII
Country x
Lever(CL)
Therefore, Book Value
September 2014
Sector
x
Lever(SL)
Strategic x
Lever(StL)
x PAT
NII
Operating
Lever(OL)
x BV
PAT
x Equity
Lever(EL)
= Global GDP x [CL x SL x StL x OL x EL]
The 6-Force Framework is unique to each sector and company at different points of time.
Thorough understanding of the same provides valuable insights into past performance and
likely future trends. Given the above mathematically accurate equations, once the various
levers are analyzed, understood and established, it should be possible to estimate change in
local stock price for a given or expected growth in global or local GDP.
Flexibility of Levers
The leverage framework is flexible in terms of the starting point. Thus, Global GDP is the
remotest macroeconomic variable. However, one may start the process with country GDP as
well, in which case
1. The Country Lever (CL) becomes redundant, and
2. The change in EPS will be linked to country GDP growth, rather than global GDP growth.
Thus, EPS = GDP x [SL x StL x OL x FL] and Stock Price = EPS x Valuation Lever
Likewise, if we start the process with expected growth in sector (i.e. Sector Sales), the Sector
Lever (SL) becomes redundant.
Thus, EPS = Sector Sales x [StL x OL x FL] and Stock Price = EPS x Valuation Lever
3.3 Non-quantitative levers

In addition to the quantitative levers discussed above, there are at least 3 major nonquantitative levers which directly or indirectly impact stock prices
1. Regulatory Lever (change in policies affecting economy, sectors or stock market)
2. Corporate Action Lever (change of management, stake hike, delisting offer, etc)
3. Externality Lever (uncontrollable external events like drought, earthquake, wars, etc).
We now proceed to cover case studies where these levers have played out in the past.
4. Case studies and insights

Where the 6-Force Framework has worked in the past
Study the past if you would define the future.
Confucius, Chinese thinker and philosopher
For a deeper understanding of various levers, we assessed sector and stock data over the full
economic cycle period of FY03-14, divided into two phases boom (FY03-08) and lull (FY08-14).
The key takeaways from these case studies are summarized below (for full details, see
Annexure 4, pages 51-63).
4.1 Sector Case Studies Key takeaways
September 2014
The absolute and relative stock market performance of most sectors varies, depending on
the macro-economic conditions.
Consumer segments Alcoholic beverages, Paints, Tobacco, (2) Gems & Jewelry,
(3) Infrastructure/Construction, (4) Capital Goods, (5) Steel, and (6) Autos Cars, CVs, and
Auto Ancillaries including Tyres.
10

FY03-14 Top outperforming sectors
Total Sector Lever i.e. Mkt Cap/GDP (FY03-14)
2.2
2.1
1.4
BSE Sensex
2.2
Tobacco
Products
2.3
Infrastructure
2.3
Auto Anc.
2.5
Auto - CVs
2.6
Paints
Auto - PVs
Mining &
related
2.8
Agro
Chemicals
3.2
Realty
3.4
Gems &
Jewellery
Alcoholic
Beverages
3.9
The worst performing major sectors over FY03-14 include: (1) Media, (2) Shipping,
(3) Fertilizers, (4) Power Utilities and (5) Oil & Gas.
FY03-14 Major underperforming sectors
1.2
1.2
Technology
Paper
Fertilizers
1.2
Consumer Personal, Food
Shipping
1.2
Refineries
1.0
1.1
Crude Oil, Gas
1.0
1.1
Utilities
0.9
Media

1.4
BSE Sensex
IT Education
0.2
outperformance than Financial Lever. As tabled below, the differential in levers between
outperforming and underperforming sectors was highest in Operating Lever, followed by
Revenue Lever and Financial Lever.
How levers differ for outperforming sectors vis--vis underperforming ones
Lever
Formula
All
sectors
September 2014
FY03-14 Median
OutUnderperformers
performers
Differential
(x)
Revenue Lever
Sales/GDP
1.2
1.3
1.0
1.3
Operating Lever
EBIT/Sales
1.0
1.1
0.7
1.4
Financial Lever
EPS/EBIT
1.0
1.0
0.8
1.2
Valuation Lever
Mkt Cap/EPS
1.4
1.4
1.4
1.0
11
4.2 Company Case Studies Key takeaways

Case Study #1:
Bharti Airtel
[All levers]
[A] Boom phase FY04-08
Businesses which entail huge start-up investments are potential candidates for stock superperformance when they achieve critical levels of scale.
Rich valuations should not be a deterrent to buy hyper-growth stocks, which will likely superperform even if there is any subsequent correction in valuation.
Bharti Airtel The 6-Force Framework (x)
Formula
Global GDP
BSE Sensex / Global GDP
Stock Price / Global GDP
EPS / Global GDP
India GDP / Global GDP
Telecom Revenue / India GDP
Bharti Sales / Telecom Revenue
EBIT / Revenue
EPS / EBIT
PBT / EBIT
PAT / PBT
EPS / PAT
Stock Price / EPS
Global Nominal GDP CAGR (%)

Benchmark Lever
TOTAL STOCK LEVER
EARNINGS LEVER
Country Lever
Sector Lever
Strategic Lever
Operating Lever
Financial Lever
a. Debt Lever
b. Tax Lever
c. Equity Lever
VALUATION LEVER
Bhartis FY03-08 PAT performance

reflects multiple levers at work!
Despite P/E de-rating, Bharti stock

super-performs led by FY04-08 EPS CAGR
Adj PAT (INR b)

18.7%
19.4%
10.5%
24.8%
67.0
400
100
Mar-08
Sep-07
FY08
Mar-07
FY07
Sep-06
FY06
Mar-06
FY05
Sep-05
Mar-05
FY04
Sensex (Re-based)
200
22.6
-8.4%
-2.0
FY03
Bharti
500
300
42.6
15.0
600
Sep-04
5.1
23.0%
Mar-04
PAT Margin
FY04-08
10.4
2.8
5.0
8.6
1.5
1.5
2.4
1.4
1.2
1.2
1.0
1.0
0.6
[B] Lull phase FY08-14
September 2014
Non-quantitative Regulatory Lever and Corporate Action Lever play a critical role in
Change in competitive landscape is a key trigger for stock performance.
Competitive advantage is always local and does not automatically migrate to other
geographies. Hence, mega global acquisitions must be critically analyzed for potential
negative play of levers, leading to stock under-performance.
12

Bhartis FY08-14 PAT dragged down
by regulatory & corporate action levers
24.8%
22.9%
Bharti stock underperforms in FY08-14

despite valuation re-rating
Adj PAT (INR b)

PAT Margin
21.5%
Bharti
Sensex (Re-based)
600
500
10.2%
FY08
89.8
60.5
FY09
FY10
Case Study #2:
22.8
27.7
FY13
FY14
300
200
100
Amara Raja Batteries

[Sector, Strategic, Operating & Valuation Levers]

cases where the market opportunity is sizable, and the company has just completed major
Duopoly or monopolistic competitive structure in growth sectors is favorable for levers to
play out.
Amara Raja - The 6-Force Framework (x)
Levers (x)
TOTAL STOCK LEVER
EARNINGS LEVER
Country Lever
Sector Lever
Strategic Lever
Operating Lever
Financial Lever
a. Debt Lever
b. Tax Lever
c. Equity Lever
VALUATION LEVER
FY03-08
10.8
3.6
7.6
6.2
1.3
1.6
2.0
1.7
0.9
0.9
1.0
1.0
1.2
400
300
Amara Raja
Sensex (Re-based)
200
100
Mar-14
Mar-13
Mar-12
Mar-11
Mar-10
Mar-09
Mar-08
Mar-07
FY14
FY13
FY10
FY09
FY08
FY07
FY06
1,000
FY05
FY04
2,000
FY03
September 2014
12
Mar-06
PAT (INR m, LHS)

PAT Margin (%)
3,000
FY03-14
7.4
2.7
7.4
5.1
2.0
1.4
1.5
1.4
0.9
1.0
1.0
0.9
1.5
The stock super-performs the benchmark
Mar-05
All levers played out well (FY03-14)

4,000
FY08-14
4.6
1.3
7.6
3.8
3.2
1.3
1.1
1.0
0.8
1.1
1.0
0.7
2.0
Mar-04
FY12
3.2%
Mar-03
FY11
42.6
3.0%
Mar-08
Sep-08
Mar-09
Sep-09
Mar-10
Sep-10
Mar-11
Sep-11
Mar-12
Sep-12
Mar-13
Sep-13
Mar-14
67.0
84.7
400
6.0%
13
Case Study #3:
Huge benefit of Financial Lever during FY03-08

CESC - The 6-Force Framework (x)
Levers (x)
FY03-08
10.8
3.6
TOTAL STOCK LEVER
8.8
EARNINGS LEVER
8.6
Country Lever
1.3
Sector Lever
0.9
Strategic Lever
0.4
Operating Lever
0.5
Financial Lever
38.4
VALUATION LEVER
1.0
FY08-14
4.6
1.3
0.7
2.3
3.2
1.2
0.7
1.6
0.5
0.3
CESC stock super-performs over FY03-08

700
15
12
2,000
9
6
1,000
CESC
Sensex (Re-based)
300
200
Mar-08
Sep-07
Mar-07
Sep-06
Mar-06
Sep-05
Mar-05
Sep-04
100
Mar-04
Sep-03
200
Mar-03
100
Case Study #4:
September 2014
18
400
300
Interest (net) (INR m)

% of Sales, RHS
500
400
3,000
600
Sensex (Re-based)
500
4,000
but underperforms over FY08-14
CESC
600
nullified during FY08-14, due to Spencer
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
The impact of Financial Lever tends to be shorter than that of Strategic and Operating
Levers.
Gains of Financial Lever may be nullified by faulty capital allocation triggering adverse play
of Strategic and/or Operating Leverage.
Mar-08
Sep-08
Mar-09
Sep-09
Mar-10
Sep-10
Mar-11
Sep-11
Mar-12
Sep-12
Mar-13
Sep-13
Mar-14
CESC
[Financial Lever]
TCS
[Corporate Action Lever + Strategic & Operating Levers]
play out.
Panic-stricken markets offer great opportunity to buy industry leaders with global
competitive advantage cheap (TCS stock at P/E of 10x in FY09). In such cases, Valuation
Lever will amplify earnings growth, driving stock performance.
14

Following appointment of new CEO in mid-FY10, TCS bridged the gap and eventually overtook then
bellwether Infosys on key metrics such as Growth, EBITDA Margin, P/E
40
EBITDA Margin Trend (%)
Year-end trailing P/E (x)
30
20
25
10
New CEO
at TCS
FY12
FY11
FY10
FY09
FY08
FY05
FY07
FY14
FY13
FY12
FY11
FY10
FY09
New CEO
at TCS
FY08
FY06
FY05
20
FY07
TCS
Infosys
TCS
Infosys
FY14
30
FY13
35
FY06
40
FY05-09, TCS underperformed Infosys; Post FY09, TCS has super-performed to emerge as Indias largest
market cap company currently
200
900
150
450
50
TCS (Re-based)
300
Infosys (Re-based)
150
Mar-14
Mar-13
Mar-12
Mar-11
Mar-09
Mar-09
Mar-08
Mar-07
Mar-06
Mar-05
Case Study #5:
Mar-10
Sesa-Sterlite (then Sesa-Goa)

[Regulatory Lever]
Regulatory Lever can work as a brake or a breakthrough for the fortunes of a company.
Favorable regulatory changes or relaxation of past regulatory curbs hold potential for stock
super-performance.
Stocks vulnerable to regulation merit low valuation to factor in the risk of unexpected
adverse regulatory changes.
Sesa Goa: Curbs on iron-ore mining in

Karnataka & Goa caused plunge in profits
40
300
30
200
100
Mar-13
Mar-12
Mar-11
Mar-10
Mar-09
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY04
10
FY03
10
Mar-08
20
Mar-07
20
Sesa Goa Stock Price
400
Mar-06
30
50
Mar-05
40
500
Mar-04
Sesa Goa Standalone PAT (INR b)

PAT margin (%) - RHS
Stock slides post mining curbs; fall cushioned

due to consolidation of Cairn India PAT
Mar-03
September 2014
Infosys (Re-based)
600
100
TCS (Re-based)
750
15
Case Study #6:
Stock plunges on fraud announcement,

but recovers on profit turnaround
Mar-13
Mar-12
Mar-11
FY12
FY10
FY11
-1.6
-2.8
FY08
FY07
FY06
FY05
FY04
FY03
FY02
Accounting fraud &

also class action claims
Mar-06
2.5
Mar-05
9.6
600
500
400
300
200
100
0
Mar-04
7.1
Tech
Mahindra 12.8
takes over
FY09
0.8
3.5 5.0
16.9
Mar-03
14.1
Mar-10
Satyam Computer
Sensex (Re-based)
Satyam Computer PAT (INR b)
Mar-09
Satyam Computer: PAT rebounds post

fraud, after Tech Mahindra takeover
Mar-08
Quality of management is a key factor for performance breakthrough or breakdown.

Fraudulent and minority shareholder unfriendly management will eventually and invariably
break down stock performance.
All management-change cases must be monitored as they hold potential for breakthroughs,
resulting in stock super-performance.
Mar-07
Satyam Computer (now merged in Tech Mahindra)

[Corporate Action Lever]
See Annexure 4 (page 51 onwards) for full details on all case studies.
5. Applying the 6-Force Framework

Sector allocation, Scenario-building, Stock selection
Testing assumptions allows you the power to create possibilities.
Lisa A Mininni, business strategist and author
The 6-Force Framework of Levers is powerful, first, to precisely understand the drivers behind
superior stock performance, and second, to identify potential outperformers going forward.
The simple yet accurate mathematics involved implies huge potential for wide-ranging
applications, an area of ongoing research.
The initial 3 applications of leverages discussed here are
1. Determine sector allocation strategy
2. Create market scenarios
3. Identify potential outperformers.
5.1 APP #1: Sector Allocation Strategy

From the perspective of geographic influence, sectors can be classified into:
(1) Domestic and (2) Global. Within this classification, the sectors can be further organized into
(1) High Growth Leverage (to GDP) and (2) Medium/Low Growth Leverage, as mapped in [A].
Next, the sectors with high growth leverage can be organized on the basis of (1) High Operating
Leverage (i.e. big change in EBIT for a small change in Sales) and (2) Low Operating Leverage,
also mapped in [B].
September 2014
16
As Financial Lever is a relatively less important determinant of stock market outperformance,

these two maps can be juxtaposed to outline an effective sector allocation strategy for an
equity portfolio, as tabled in [C].
[A] Growth Leverage map of sectors
[B] Operating Leverage map of high growth leverage sectors
[C] Sector Allocation Strategy based on [A] and [B] above

Overweight Sector
Macroeconomic Assessment
Quadrants
Domestic
Global
from
[A] & [B]
(Boom / Lull)
(Tailwind/Headwind)
September 2014
Other Quadrants / Sectors for

selective buys
Boom
Tailwind
O1, O2
Financials, Technology
Boom
No Tailwind
O1, O3
Financials, O4
Lull
No Headwind
G4 (ex Fin. PSUs), O3
G3, O4
Lull
Headwind
G4 (ex Fin. PSUs), G3
O4
17
5.2 APP #2: Create future market scenarios

The 6-Force Framework can be used to create market scenarios of the future, by calculating
past levers for the benchmark index as a whole, considering it as one stock. For instance, we
calculated the past levers for BSE Sensex for the periods FY03-08 (boom), FY08-14 (lull) and
FY03-14 (full-cycle) as under
Preliminary calculations
Delta (CAGR %) 1
GDP
2
Sales
3
EBIT
4
PAT
5
EPS
6
Opening EPS (INR)
7
Closing EPS (INR)
8
Sensex
9
Opening Sensex level
10
Closing Sensex level
Sensex P/E (x)
11
Opening
12
Closing
Key Levers (Formula in brackets based on row nos.)
13
Revenue Lever (2 1)
14
Operating Lever (3 2)
15
Financial Lever (5 3)
16
Earnings Lever (13 x 14 x 15)
17
Valuation Lever (8 5)
18
Total Sensex Lever (16 x 17)
FY03-08
FY08-14
FY03-14
15
31
38
39
25
272
833
39
3,049
15,644
15
17
12
10
8
833
1,339
6
15,644
22,386
15
23
23
23
16
272
1,339
20
3,049
22,386
11
19
19
17
11
17
2.1
1.2
0.7
1.7
1.5
2.7
1.1
0.7
0.7
0.6
0.7
0.4
1.6
1.0
0.7
1.1
1.3
1.4
Now, the levers arrived at above can be used to create future market scenarios as tabled below.
Sensex scenarios using Earnings Lever
FY14-16
1
Nominal GDP CAGR (%) see next table
2
Earnings Lever (x) based on row 16 above
3
Sensex EPS CAGR (%) [1 x 2]
4
FY14 Sensex EPS
5
FY16 Sensex EPS
6
FY16 Sensex P/E range (x) a. Scenario A
b. Scenario B
c. Scenario C
7
FY16 Sensex average [Avg of 7a, 7b, 7c]
a. Scenario A [5 x 6a]
b. Scenario B [5 x 6b]
c. Scenario C [5 x 6c]
8
FY14-16 Market return CAGR (%) - Average
a. Scenario A
b. Scenario B
c. Scenario C
September 2014
Optimistic
13.2
1.7
23
1,339
2,019
Pessimistic
13.2
0.6
7
1,339
1,544
Moderate
13.2
1.1
14
1,339
1,743
17
20
22
39,706
34,322
40,379
44,416
33
24
34
41
11
13
15
20,078
16,989
20,078
23,166
-5
-13
-5
2
14
16
18
27,881
24,396
27,881
31,366
12
4
12
18
18

FY14-16E Indias Nominal GDP estimate
1
2
3
4
5
6
Real GDP growth (%)

Multiplicative Factor (x)
Inflation (%)
Multiplicative Factor (x)
Nominal GDP growth (%) [based on row (2 x 4) - 1]
FY14-16 CAGR [based on row 5 above]
FY15E
5.5
1.055
7.0
1.070
12.9
FY16E
6.5
1.065
6.5
1.065
13.4
13.2
5.3 APP #3: Identify potential outperformers

The approach outlined in App #2 can also be applied to individual stocks, provided 1. The past levers are understood, established and suggest a pattern;
2. The expected future macroeconomic scenario can be mapped to a similar scenario played
out in the past; and
3. There is no major discontinuity in the companys operations e.g. a mega acquisition,
business diversification, hive-off of some business division, etc.
5.3.1 Potential outperformers among Sensex constituents

We undertook the following steps to sift the 30 Sensex constituent stocks into 4 categories (1) Super-performers, (2) Outperformers, (3) Market performers and (4) Underperformers Over the full economic cycle FY03-14, we calculated key levers for all the 30 companies on a
2-year rolling CAGR basis i.e. FY03-05, FY04-06, FY05-07, and so on ending with FY12-14 (10
data periods for each lever).
We expect the next 2-3 years economic and business scenario to be in-between the lull
period of FY08-14 and boom period of FY03-08.
Given this, we believe the median values of the rolling CAGR data points should be a
reasonable representation of the likely earnings scenario.
We calculated the Earnings Lever (i.e. EPS/GDP) based on the product of median
Revenue Lever (i.e. Sales/GDP) and Operating Lever (i.e. EBIT/Sales), with Financial
Lever (EPS/EBIT) expected to broadly remain around 1x.
For 9 of the 30 companies, we went with our bottom-up analyst estimates for FY14-16, due
to the reasons tabled below. As can be seen, most of the cases are to do with major change
(i.e. discontinuity) in the companies operations, making past established levers nonapplicable going forward.
We also calculated the stocks discount/premium to long-period median P/E, which serves
as a proxy to the Valuation Lever i.e. re-rating/de-rating potential.
We plotted the Sensex 30 companies on a 4x3 matrix juxtaposing Earnings Lever
(Low/Medium/High/Very High) with Valuation Attractiveness (Low/Medium/High).
We believe this matrix captures potential Super-performers, Outperformers, Market
Performers and Underperformers among the Sensex constituents.
September 2014
19

Sensex stocks - Earnings Lever v/s Valuation Matrix
Note: The bracket next to Bloomberg ticker carries Earnings Lever (x) | EPS CAGR (%), (Disc.)/Prem. to long-period median P/E
E.g. for NTPC, expect FY14-16 Earnings Lever of 1.2x i.e. EPS CAGR of 15%, and it is trading at 34% discount to LPA valuations.
9 Sensex companies where past levers do not seem relevant
(in these cases, we have relied on our analyst estimates to calculate the Earnings Lever)
Sector
Company
Reason for past levers not being relevant
Autos
Bajaj Auto
Significant value migration to scooters
Hero MotoCorp
End of association with Honda w.e.f. FY15
M&M
Several inorganic growth initiatives
Tata Motors
Significant turnaround in overseas subsidiary, JLR
Financials
State Bank of India
Discontinuous changes in NPA provisioning
Healthcare
Sun Pharma
Acquisition of Taro
Metals
Sesa-Sterlite
Mega merger and Cairn India acquisition
Telecom
Bharti Airtel
Acquisition of Zain
Utilities
Tata Power
Uncertainty over Mundhra UMPP tariff ruling
September 2014
20
6. Limitations of the 6-Force Framework

The meaning is more important than the math
Real limitations can be reasonably challenged and expanded, but a hobbled mind is not
going anywhere.
Bryant McGill, US-based author and human rights activist
Powerful though it may be, the 6-Force Framework of Levers has its limitations, which we need
to bear in mind, when applying the same. The two major situations when the 6-Force
Framework becomes mere math rather than meaning are
1. Discontinuities in a companys operation; and
2. Profit turnarounds i.e. loss to profit or profit to loss.
6.1 Limitation #1: Discontinuities in a companys operation

In essence, the 6-Force Framework mathematically links changes in a remote macro-economic
variable to change in a companys EPS (or book value in the case of financials). For the past such
linkages to make sense and be meaningfully applied in future, there needs to be a semblance of
continuity in the companys operation. While this is likely to be so in most cases, there are a
fairly large number of events and actions which may cause a companys future to be
significantly discontinuous from the past, and the framework may cease to apply.
These events and actions are mainly at the company level, but may also occasionally include
structural changes in the sector
Major mergers & acquisitions, divestitures or corporate restructuring (e.g. Tata Motors
acquisition of JLR; Piramal Healthcares sale of domestic formulations business; SesaSterlite merger)
Far-reaching change in companys strategy or business-model (e.g. Hero MotoCorp
choosing to terminate its technical-cum-financial tie-up with Honda, Japan)
Structural shift in the companys market-place (e.g. Scooter-ization of 2-wheelers)
Any major change in the regulatory framework (e.g. recent ban on iron-ore mining in Goa
and Karnataka, since partially lifted).
6.2 Limitation #2: Profit turnarounds

In a sense, Profit turnaround (whether from loss to profit or profit to loss) is a special
discontinuity in a companys operations. In such a case, the 6-Force Framework will most likely
carry meaning only until the Strategic Lever i.e. linking company sales to the economic variable.
But depending on whether the profit turnaround is at the EBIT or the PAT level, the Operating
Lever and the Financial Lever could end up as mere mathematical calculations without
providing any insight.
In fact, in the case profit turnarounds, very little math works e.g. even a simple calculation like
percentage change in PAT can be misleading, as the number will be negative whether from loss
to profit or from profit to loss.
September 2014
21
7. What to buy based on the 6-Force Framework

20 stocks which offer play on various levers
Have the courage of your knowledge and experience. If you have formed a conclusion from
the facts and if you know your judgment is sound, act on it even though others may hesitate
or differ.
Benjamin Graham, investing guru and co-author of Security Analysis with David Dodd
Sensex constituents apart, we sifted through the MOSL Universe of stocks to identify 20
investment ideas which offer a play on key levers, viz, Sector, Strategic, Operating, Financial,
Regulatory and Corporate Action Levers. The key investment argument for each investment
idea is tabled below.
20 lever plays to bet on
Lever & Stock ideas
Key driver of likely stock super-performance
Sector Lever i.e. sector performance itself largely drives company performance
Jubilant Foodworks
Offers play on high 25%+ growth opportunity in pizza/QSRs
Symphony
Air-coolers market growing @ 20%+; penetration rising rapidly
Strategic Lever i.e. competitive positioning/strategic initiative drives company performance
Alembic Pharma
Outgrowing the sector via specialty therapies, aggressive US foray
Gujarat Pipapav Port
Strategically located for higher share of Indias container traffic
J K Cement
Timely commissioning of expansion before expected cement upcycle
Kaveri Seeds
Beating sector growth via strong product line, distribution network
TVS Motor
Offers play on scooters, which is growing faster than overall 2-wheelers
Arvind
Rising share of branded retail sales to drive growth, boost margins
Operating Lever i.e. pricing, costs, product mix and scale drive company performance
Idea Cellular
Bottomed-out RPMs, rising data revenue to boost profits
Bharti Infratel
High fixed cost business; delta revenue directly flowing to PBT
11
Maruti Suzuki
Improving product mix coupled with scale steadily expands margins
12
Ashok Leyland
Best play on expected CV upcycle
Financial Lever i.e. favorable interest and net debt position impact company performance
13
Jain Irrigation
Multi-pronged deleveraging strategy to drive down interest burden
14
BHEL
Business revival could take net cash to over INR220b, 50% of MCap
Regulatory Lever i.e. favorable regulatory changes drive company performance
15
ONGC
Lower subsidy share, higher gas price may swell profits
16
HPCL
Full diesel deregulation will boost PAT
Corporate Action Lever i.e. specific corporate developments drive performance
17
United Spirits
Majority stake by Diageo to bring plethora of improvements
18
PVR
Cinemax acquisition lends scale, eases competition on the margin
19
Eicher Motors
JV with Volvo opens up huge potential for CV portfolio
20
Crompton Greaves
Proposed demerger of consumer division has value unlocking potential
Besides, we have 5 stocks on the watch-list given major corporate/regulatory action Infosys
(new CEO), Sun Pharma (Ranbaxy takeover), IDFC (bank license), MCX (stake by Kotak
Mahindra) and Tata Power (potential tariff revision for its UMPP project).
In subsequent pages, we present a more structured yet concise argument for each of the above
6-Force ideas.
September 2014
22
6-Force Idea #1: Jubilant Foodworks (Bloomberg: JUBI IN)

SECTOR LEVER | Offers play on high 25%+ growth opportunity in pizza/QSRs
How the lever works
Company brief & Investment case
Indias pizza market/QSR (Quick Service

Restaurants) opportunity is growing at
25%+ CAGR.
Thus, Sector Lever (i.e. Industry
Sales/GDP) will be close to 2x.
Even if no other levers come into play
(usually, at least Operating Lever does),
EPS CAGR should be ~25% (given
nominal GDP growth of ~13%).
So, even if the stock looks a bit
expensive, valuations catch up in 1-2
years, and the stock outperforms.
Financial & valuation snapshot
Stock price performance (1 year)
1,650
Jubilant Foodworks
Sensex - Rebased
1,450
1,250
1,050
Sep-14
Jun-14
Mar-14
Dec-13
850
Sep-13
(INR b)
Price (INR): 1,235 / Mkt Cap (INR b): 81
Y/E March
2014 2015E 2016E 2017E
Net Sales
17.2
22.4
29.6
38.0
2.5
3.3
4.5
5.8
EBITDA
Margin (%)
14.8
14.5
15.1
15.4
Adj PAT
1.3
1.6
2.3
3.1
EPS (INR)
19.2
25.3
35.1
46.8
EPS Gr. (%)
-4
31
39
34
BV (INR)
87.0
112.2
147.3
194.1
RoE (%)
22.1
22.5
23.8
24.1
RoCE (%)
30.8
29.2
31.4
32.1
Payout (%)
0.0
0.0
0.0
0.0
Valuations
P/E (x)
64
49
35
26
P/BV (x)
14.2
11.0
8.4
6.4
EV/EBITDA (x)
31.2
24.4
17.5
12.8
As the master franchisee of Dominos

Pizza Inc in India, Jubilant is the market
leader in the organized pizza market
with 55% overall share and 70% share in
home delivery segment.
As of FY14, Jubilant has 726 outlets in
152 Indian cities. In FY15, it plans to add
another 150 outlets.
The companys other major revenue
stream Dunkin Donuts is yet to
breakeven, but holds good potential.
Expect 35% EPS CAGR FY14-16E.
September 2014
23
6-Force Idea #2: Symphony (Bloomberg: SYML IN)

SECTOR LEVER | Air-coolers market growing @ 20%+; penetration rising rapidly
How the lever works
Air-coolers market is about INR20b, but

with penetration of only 8%, and share
of organized market only 20%.
As a result, the organized air-cooler
market is growing @ 20%+ CAGR
(i.e. Sector Lever of 2.3x).
Besides home air-coolers, Symphony
has also diversified into industrial aircoolers, yet another high-growth
segment.
Thus, high sector revenue growth itself
is a key driver of earnings.
Symphony
Sensex - Rebased
1,450
1,150
850
550
Sep-14
Jun-14
Mar-14
Dec-13
250
Sep-13
(INR b)
Price (INR): 1,329/ Mkt Cap (INR b): 47
Y/E June
2014 2015E 2016E 2017E
Net Sales
5.3
6.5
8.2
10.3
1.3
1.6
2.1
2.7
EBITDA
Margin (%)
23.6
25.0
25.5
26.0
Adj PAT
1.1
1.4
1.7
2.2
EPS (INR)
30.4
38.7
49.5
63.2
EPS Gr. (%)
77
28
28
28
BV (INR)
78.8 101.5 130.8 173.9
RoE (%)
42.7
42.9
42.6
41.5
RoCE (%)
54.6
58.0
57.5
56.1
Payout (%)
43
35
35
27
Valuations
P/E (x)
44
34
27
21
P/BV (x)
16.9
13.1
10.2
7.6
EV/EBITDA (x)
36.9
28.1
21.5
16.3
Divd Yield (%)
1.0
1.0
1.3
1.3
SYML is the Indias largest air-cooler

company, with 50% share (40% in
volumes) in the organized market,
followed by Kenstar (35%) and Bajaj
Electricals (15%).
Its 10-12% pricing premium suggests
strong brand equity.
Its India network consists of 750+
distributors and 16,400+ dealers. Its
global network spans 60 countries.
Expect 28% EPS CAGR FY14-16E.
September 2014
24
6-Force Idea #3: Alembic Pharma (Bloomberg: ALPM IN)

STRATEGIC LEVER | Outgrowing sector via specialty therapies, strong US foray
How the lever works
The Indian healthcare sector will

continue its steady growth of ~15%.
But ALPM, under a new management
should grow much faster than industry
(i.e. Strategic Lever > 1):
(1) In India, it is shifting away from the
slowing generics business to fastmoving specialty therapies; and
(2) US generics is likely to grow 5x over
FY13-16E to USD125m, as 50%+ of its
ANDAs are pending approval.
Expect ALPMs revenue CAGR at 21%.

Alembic Pharma
Sensex - Rebased
490
400
310
220
Sep-14
Jun-14
130
Mar-14
Dec-13
Sep-13
(INR b)
Price (INR): 414 / Mkt Cap (INR b): 78
Y/E March
2014 2015E 2016E 2017E
Net Sales
18.6
21.8
27.0
32.5
3.6
4.4
5.9
7.3
EBITDA
Margin (%)
19.2
20.2
22.0
22.5
Adj PAT
2.4
3.1
4.2
5.2
EPS (INR)
12.5
16.2
22.1
27.5
EPS Gr. (%)
43
30
36
25
BV (INR)
35.8
48.0
65.4
87.1
RoE (%)
40.0
38.7
39.0
36.1
RoCE (%)
43.1
42.0
43.4
41.5
Payout (%)
24
22
18
18
Valuations
P/E (x)
33
25
19
15
P/BV (x)
11.6
8.6
6.3
4.8
EV/EBITDA (x)
22.1
18.0
13.2
10.5
Divd Yield (%)
0.7
0.8
1.0
1.2
ALPM started in 1907 as a tincture/

alcohol producer, and made its way into
modern medicine in 1940.
Today, it is Indias 25th largest
formulations player, and also has
presence in over 75 other countries.
Expect FY15 to be a year of (a) large
capex, (b) building front end in US, (c)
adding field force in India, and
(d) bumping up R&D activities.
Expect 33% EPS CAGR FY14-16E,
following margin expansion of 280bp.
September 2014
25
6-Force Idea #4: Gujarat Pipavav Port (Bloomberg: GPPV IN)

STRATEGIC LEVER | Strategically located for higher share of container traffic
How the lever works
Indias long-period sea cargo volume

growth is about 6%. However, due to
rising container-ization, container traffic
CAGR is 14%.
GPPV is favorably located in Gujarat on
the West coast. Further, GPPV is
expanding its container handling facility
from 0.8m TEUs to 1.35m TEUs, and
also adding 2m tons of liquid handling
capacity.
Expect revenue CAGR of ~20%
i.e. Strategic Lever > 1.
200
Gujarat Pipavav Port
Sensex - Rebased
164
128
92
56
Sep-14
Jun-14
Mar-14
20
Dec-13
Sep-13
(INR b)
Y/E December
2013 2014E 2015E 2016E
Net Sales
5.2
6.9
8.1
9.6
2.6
4.2
5.1
6.1
EBITDA
Margin (%)
49.6
60.3
62.6
63.6
Adj PAT
1.8
3.3
4.3
4.2
EPS (INR)
3.6
6.9
9.0
8.8
EPS Gr. (%)
137
90
30
-2
BV (INR)
29.0
33.9
39.9
45.6
RoE (%)
13.4
22.0
24.3
20.6
RoCE (%)
13.2
20.4
22.7
24.3
Payout (%)
0
25
27
30
Valuations
P/E (x)
45
23
18
18
P/BV (x)
5.6
4.8
4.1
3.6
EV/EBITDA (x)
30.5
18.1
14.6
11.9
Divd Yield (%)
0.0
1.5
1.7
1.9
Port Pipavav, Indias first private sector

port, is an important gateway port on
the West Coast of India for containers,
bulk and liquid cargo.
GPPV is now owned by APM Terminals,
one of the worlds largest terminal
operators, part of global maritime giant,
AP Moller Maersk Group.
Expect CY13-15E EPS CAGR of 54%, as
high revenue growth also kicks in
Operating Leverage (EBITDA margin up
12pp to 62% in CY15E).
September 2014
26
6-Force Idea #5: J K Cement (Bloomberg: JKCE IN)

STRATEGIC LEVER | Timely commissioning of expansion before cement upcycle
How the lever works
Cement sector may well continue to

grow at its LPA of 15%.
However, J K Cements FY14-17 revenue
CAGR is expected to be higher at 24%
(Strategic Lever of 1.6x) as
1. It recently expanded its white
cement capacity by 50% to 0.6mt;
2. It is also poised to complete its
brownfield capacity, expanding
capacity 40% to 10.5mt.
3. Its 0.6mtpa white cement plant in
UAE is also commissioning shortly.

2014 2015E 2016E 2017E
J K Cements
27.8
3.4
37.5
5.9
45.3
9.1
53.0
12.2
630
12.2
0.7
10.7
-67
249.7
4.5
7.2
28
15.8
1.4
20.1
88
262.5
7.8
8.9
30
20.1
3.3
47.0
133
300.8
16.5
13.9
15
23.0
5.6
80.1
70
370.9
23.7
18.4
10
510
48
2.0
17.3
0.6
25
1.9
10.7
1.2
11
1.7
6.5
1.4
6
1.4
4.1
1.6
Sensex - Rebased
390
270
150
Sep-14
Net Sales
EBITDA
Margin (%)
Adj PAT
EPS (INR)
EPS Gr. (%)
BV (INR)
RoE (%)
RoCE (%)
Payout (%)
Valuations
P/E (x)
P/BV (x)
EV/EBITDA (x)
Divd Yield (%)
Jun-14
Mar-14
Dec-13
Sep-13
(INR b)
Y/E March
JKCE is one of India's leading cement

producers with capacity of 7.5mt in
Rajasthan (4.5mt) & Karnataka (3mt).
It is also Indias second largest white
cement producer (0.6mt capacity).
JKCE has a favorable market mix
North and West India account for ~70%
of dispatches; no exposure to the weak
Andhra Pradesh market.
White cement is a cash cow with stable
EBITDA of INR2-2.5b p.a.
Expect FY14-16E EPS CAGR of 111%.
September 2014
27
6-Force Idea #6: Kaveri Seeds (Bloomberg: KSCL IN)

STRATEGIC LEVER | Beating sector growth via strong product line & distribution
How the lever works
Indian hybrid seeds market is growing

at a steady 10%.
However, expect Kaveri Seeds revenue
CAGR at 22% (Strategic Lever 2.2x) as:
(1) It has one of Indias largest
anthology of crop germplasm;
(2) It has a dominant market share in
most crops; and
(3) It has a large sales network of over
15,000 distributors and dealers spread
across the country.

2014 2015E 2016E 2017E
15.2
4.0
18.5
5.0
21.9
2.1
30.7
66
75.0
49.0
49.6
16
25.0
3.0
43.6
42
109.3
47.3
48.5
18
26.2
4.0
58.0
33
155.7
43.8
44.6
17
27.0
5.0
73.2
26
213.9
39.6
40.6
18
27
11.2
26.0
0.6
19
7.7
18.3
1.0
14
5.4
13.3
1.2
11
3.9
10.0
1.6
Kaveri Seed
1,060
Sensex - Rebased
860
660
460
260
Sep-14
12.2
3.0
Jun-14
10.1
2.2
Mar-14
Net Sales
EBITDA
Margin (%)
Adj PAT
EPS (INR)
EPS Gr. (%)
BV (INR)
RoE (%)
RoCE (%)
Payout (%)
Valuations
P/E (x)
P/BV (x)
EV/EBITDA (x)
Divd Yield (%)
Sep-13
(INR b)
Y/E March
Dec-13
High revenue growth apart, Kaveri is

also benefiting from
(1) Season mix: In 2008, 85% of corn
sales were in kharif season while now it
is 65% with rabi contributing 35% of
volumes and 50% of value.
(2) Product mix: Selling price of single
cross hybrid corn is INR200/kg v/s
INR80-110/kg for 2-way and 3-way
cross hybrid corn, enabling 55- 60%
EBITDA margins.
September 2014
28
6-Force Idea #7: TVS Motor Company (Bloomberg: TVSL IN)

STRATEGIC LEVER | Play on scooters, which is growing faster than 2-wheelers
How the lever works
In FY14, Indias 2-wheeler sector grew

only 5.7%. However, within 2-wheelers,
scooters grew a handsome 28%.
This trend continues in FY15 1QFY15 2wheeler growth is 14% YoY, whereas
scooters growth is a sharp 38%.
TVS offers good play on this trend of
Scooterization. In scooters, it is the
second largest (after Honda). It has
recently launched new models like
Jupiter and Zest. 1QFY15 scooters
growth for TVS is a robust 53% YoY.
Besides, it is also getting aggressive on
the motorcycles front, both in terms of
product launches and promotion.
TVS Motor
Sensex - Rebased
260
200
140
80
Sep-14
Jun-14
Mar-14
Dec-13
20
Sep-13
(INR b)
Y/E March
2014 2015E 2016E 2017E
Net Sales
79.6
113.6
143.5 164.2
4.8
7.5
11.6
14.0
EBITDA
Margin (%)
6.0
6.6
8.1
8.6
Adj PAT
2.6
4.4
7.5
9.3
EPS (INR)
5.5
9.3
15.7
19.5
EPS Gr. (%)
44
70
68
24
BV (INR)
29.8
37.0
50.1
66.7
RoE (%)
19.7
28.0
36.1
33.4
RoCE (%)
20.3
31.4
42.2
41.0
Payout (%)
26
19
14
13
Valuations
P/E (x)
40
23
14
11
P/BV (x)
7.4
5.9
4.4
3.3
EV/EBITDA (x)
22.5
14.0
8.7
6.7
Divd Yield (%)
0.7
0.8
1.0
1.1
TVS Motor Company is 4th largest twowheeler company in India.

It offers the widest range of product in
the Indian 2/3-wheeler sector
motorcycles, scooters, scooterettes,
mopeds, and 3-wheelers.
Besides India, TVS has international
presence in more than 50 countries in
Asia, Africa and Latin America.
Expect EPS CAGR of 58% with RoE
improving from 20% in FY14E to 33% in
FY16E.
Further, expect TVS to be net-cash by
FY16E.
September 2014
29
6-Force Idea #8: Arvind (Bloomberg: ARVND IN)

STRATEGIC LEVER | Rising share of branded retail sales to boost growth, margins
How the lever works
Arvind is in the midst of a transition

from a textiles manufacturing giant to a
brand powerhouse.
It has one of the best brand portfolios in
India 28 brands of which 13 are
owned (e.g. Flying Machine, Excalibur,
Ruggers), 15 licensed (e.g. Arrow, US
Polo, Hanes), and Tommy Hilfiger (JV).
Arvind operates Indias largest value
retail chain, Megamart, which offers its
own and other licensed international
brands at low prices and provides retail
experience of a high-end store.
In parallel, Arvinds other initiatives will
also contribute to profit e.g. garments
business turnaround, focus on high-end
denim for better margins, hive-off of
real estate division to deleverage, etc.

Arvind Mills
Sensex - Rebased
350
280
210
140
Sep-14
Jun-14
Mar-14
70
Dec-13
(INR b)
Price (INR): 297/ Mkt Cap (INR b): 77
Y/E March
2014 2015E 2016E 2017E
Net Sales
68.6
83.8
103.6
125.9
9.3
11.3
14.1
17.6
EBITDA
Margin (%)
13.6
13.5
13.6
13.9
Adj PAT
3.9
4.3
5.6
7.9
EPS (INR)
15.0
16.7
21.8
30.6
EPS Gr. (%)
56
11
31
41
BV (INR)
100.0
113.2
130.3
156.2
RoE (%)
16.0
15.6
17.9
21.4
RoCE (%)
15.1
16.0
18.2
21.0
Payout (%)
16
18
18
13
Valuations
P/E (x)
20
18
14
10
P/BV (x)
3.0
2.6
2.3
1.9
EV/EBITDA (x)
11.2
9.5
7.7
6.2
Divd Yield (%)
0.8
1.0
1.3
1.3
Sep-13
Arvind Ltd, flagship of the Lalbhai

group, is Indias largest textiles player. It
is also Indias largest cotton textile
manufacturer, with an installed fabric
capacity of over 200m meters p.a. It is
also one of the leading denim fabric
manufacturers in the world.
It has a strong distribution network
across 150 cities over 680 retail stores
and ~1.4m sq ft (incl Megamart).
Expect Arvind to clock revenue CAGR of
22% over FY14-17. Coupled with
interest cost beginning to plateau (at
INR4b levels), expect 27% CAGR in PAT
and EPS. Also expect RoE to improve
from 16% in FY14 to over 21% in FY17.
Valuations, both P/E and EV/EBITDA,
are reasonable.
September 2014
30
6-Force Idea #9: Idea Cellular (Bloomberg: IDEA IN)

OPERATING LEVER | Bottomed-out RPMs, rising data revenue to boost profits
How the lever works
For wireless telecom, voice traffic

growth is likely to be a modest 10%.
However, RPMs have bottomed out
given easing competitive landscape.
As a result, revenue CAGR @ 13% is
higher than volume CAGR.
Further, share of data in revenue is
rising, even as most associated costs
remain fixed. Within data, share of
higher margin 3G revenue is rising.
As a result, FY14-16E EBIT CAGR at 27%
is much higher than Sales CAGR of 13%
(i.e. Operating Lever of 2x).

2017E
378.0
130.2
31.4
19.7
5.9
94
49.8
12.7
7.2
8
33.4
32.0
8.9
50
64.3
16.1
8.7
8
34.3
29.4
8.2
-8
71.8
12.0
8.4
8
34.4
29.5
8.2
1
79.4
10.9
8.4
8
28
3.3
9.5
0.2
19
2.6
7.0
0.4
20
2.3
7.2
0.4
20
2.1
6.0
0.4
Idea Cellular
Sensex - Rebased
260
220
180
140
100
Sep-14
2016E
339.6
116.5
Jun-14
2015E
305.7
102.2
Mar-14
2014
265.2
83.3
Dec-13
Y/E March
Net Sales
EBITDA
Margin (%)
Adj PAT
EPS (INR)
EPS Gr. (%)
BV (INR)
RoE (%)
RoCE (%)
Payout (%)
Valuations
P/E (x)
P/BV (x)
EV/EBITDA (x)
Divd Yield (%)
Sep-13
(INR b)
Idea Cellular is Indias third largest

wireless operator with revenue market
share of ~17%.
It operates in all 22 telecom circles with
strong incumbency advantage in 8
established circles, and 900MHz
spectrum allocation in 9 circles.
It has 3G spectrum in 13 circles. Expect
3G revenue to contribute 9% of wireless
revenues by FY16E.
FY14-16E PAT CAGR works out to 18%
even after factoring in INR165b outlay
for spectrum in FY16.
September 2014
31
6-Force Idea #10: Bharti Infratel (Bloomberg: BHIL IN)

OPERATING LEVER | High fixed cost business; delta revenue flowing to PBT
How the lever works
Bharti Infratel offers an excellent

passive play on the dynamics of
wireless telecom i.e. growing traffic and
rising share of data.
As most of its costs are fixed/sunk,
much of revenue flows into PBT.
Thus, for FY14-16E, we expect revenue
CAGR of 10%. EBITDA CAGR is higher at
13%. With no major capex, EBIT CAGR is
even higher at 20% i.e. (Operating Lever
of 2x).
There is also Financial Lever of 1.1x i.e.
PAT CAGR 2.3x Sales CAGR.
Bharti Infratel
Sensex - Rebased
340
290
240
190
Sep-14
Jun-14
Mar-14
Dec-13
140
Sep-13
(INR b)
Y/E March
2014 2015E 2016E 2017E
Net Sales
108.3 117.7 131.3 145.8
44.0
49.2
56.4
64.2
EBITDA
Margin (%)
40.6
41.8
43.0
44.1
Adj PAT
15.2
19.2
23.0
29.1
EPS (INR)
8.0
10.2
12.2
15.4
EPS Gr. (%)
44
26
20
27
BV (INR)
95.5
98.4 101.8 106.1
RoE (%)
8.6
10.5
12.2
14.8
RoCE (%)
7.4
8.5
9.7
11.7
Payout (%)
64
72
72
72
Valuations
P/E (x)
36
29
24
19
P/BV (x)
3.0
3.0
2.9
2.7
EV/EBITDA (x)
13.1
11.6
9.9
8.6
Divd Yield (%)
1.5
2.5
3.0
3.8
BHIL, a subsidiary of Bharti Airtel, is in

the business of passive telecom
infrastructure (mainly towers).
Besides 35,000 own towers, it also has
42% stake in Indus Towers (i.e. 47,000
of 112,000 towers), a JV of Bharti,
Vodafone, Idea. In toto, BHIL has 21%
share of Indias towers.
Apart from catering to top 3 GSM
service providers, BHIL has recently
signed a master service agreement for
providing sites to Reliance JIO.
September 2014
32
6-Force Idea #11: Maruti Suzuki (Bloomberg: MSIL IN)

OPERATING LEVER | Improving product mix with scale steadily expands margins
How the lever works
Indian car market is seeing steady

premium-ization e.g. Maruti 800
replaced by Alto, which too has given
way to higher end models like Swift.
Improving product mix apart, Maruti
has scale (1.2m cars for ~45% share).
This is an excellent combination for
Operating Lever to play out. Over FY0314, Marutis EBIT CAGR at 28% was 1.6x
Sales CAGR of 18%.
FY14-16E should see Operating Lever of
2x (38% EBIT CAGR on 19% Sales CAGR).
Sensex - Rebased
Maruti Suzuki
3,300
2,800
2,300
1,800
Sep-14
Jun-14
Mar-14
Dec-13
1,300
Sep-13
(INR b)
Y/E March
2014 2015E 2016E 2017E
Net Sales
444.5 532.7 649.9
777.0
EBITDA
52.0
69.6
93.4
119.3
Margin (%)
11.7
13.1
14.4
15.4
Adj PAT
28.5
39.4
56.5
74.6
EPS (INR)
94.4 130.3 186.9
247.1
EPS Gr. (%)
16
38
43
32
BV (INR)
694.5 804.6 965.7 1181.0
RoE (%)
12.7
15.9
19.1
20.7
RoCE (%)
15.4
18.6
23.0
25.3
Payout (%)
13
12
11
10
Valuations
P/E (x)
32
23
16
12
P/BV (x)
4.4
3.8
3.1
2.6
EV/EBITDA (x)
16.2
11.7
8.3
6.0
Divd Yield (%)
0.4
0.5
0.7
0.8
Maruti Suzuki is Indias largest passenger

vehicle manufacturer (1.2m cars in FY14
for ~44% market share).
Besides, it is also emerging as the global
export hub of small cars for Suzuki Japan
(world model A-Star exclusively
produced in India).
Volume growth will be led by tier-II cities
and rural market coupled with
aggressive new launches (e.g. Celerio
with automatic manual transmission).
September 2014
33
6-Force Idea #12: Ashok Leyland (Bloomberg: AL IN)

OPERATING LEVER | Offers best play on expected CV upcycle
How the lever works
Ashok Leyland offers the best play on

the expected upcycle in CVs, a business
with high level of fixed costs, and hence
high operating leverage.
During the last two major cycles, MHCV
demand CAGR was 23%. If FY14-17 CV
volumes clock CAGR of 17%, Ashok
Leylands EBIT can potentially move
from negative INR2.1b in FY14 to a high
positive INR18b in FY17.
Ramp-up at Pantnagar plant (which
enjoys tax benefits) and softening of
commodity prices could further
accentuate the operating lever.
Ashok Leyland
Sensex - Rebased
50
40
30
20
Sep-14
Jun-14
Mar-14
Dec-13
10
Sep-13
(INR b)
Y/E March
2014 2015E 2016E 2017E
Net Sales
99.4 122.2 161.1 203.4
1.7
9.4
16.3
22.8
EBITDA
Margin (%)
1.7
7.7
10.1
11.2
Adj PAT
-4.8
1.2
7.6
13.3
EPS (INR)
-1.8
0.4
2.7
4.7
EPS Gr. (%)
-385
-123
553
75
BV (INR)
16.7
18.1
20.2
24.3
RoE (%)
-10.7
2.4
13.9
21.0
RoCE (%)
-1.6
6.2
14.9
21.6
Payout (%)
0
49
19
11
Valuations
P/E (x)
N.A.
97
15
9
P/BV (x)
2.4
2.2
2.0
1.6
EV/EBITDA (x)
74.4
12.8
6.8
4.3
Divd Yield (%)
0.0
0.5
1.3
1.3
Ashok Leyland, the flagship of Hinduja

Group, is Indias 2nd largest M&HCV
player with ~26% market share.
To expand its product offerings, AL has
entered into 50:50 JV with Nissan for
LCVs (branded Dost) and John Deere
for construction equipment.
Key levers for stock performance are:
(1) Series of new launches, both under
the company itself and via JVs, (2) Sharp
volume-led EBITDA growth, (2) High FCF
generation via measured capex, (3)
Balance sheet de-leveraging, and (4)
Monetization of non-core assets.
September 2014
34
6-Force Idea #13: Jain Irrigation (Bloomberg: JI IN)

FINANCIAL LEVER | Multi-pronged deleveraging strategy to drive down interest
How the lever works
In India, Micro Irrigation Systems (MIS)

are subsidized by State governments.
Chasing growth, JIs receivables from
States shot up to over 100 days,
bloating interest (81% of EBIT in FY14)
and debt (FY14 debt-equity of 1.9x).
The company has now embarked on a
multi-pronged deleveraging strategy:
(1) Focus on stronger states;
(2) Adopt the NBFC model; and
(3) Stake sale in food processing.
Expect Financial Leverage to kick in
(Interest/Sales to fall from 8% in FY14
to <5% in FY16, and <4% in FY17).
Sensex - Rebased
Jain Irrigation
150
125
100
75
Sep-14
Jun-14
Mar-14
Dec-13
50
Sep-13
(INR b)
Y/E March
2014 2015E 2016E 2017E
Net Sales
58.3
66.8
79.2
93.6
7.7
8.9
11.1
13.1
EBITDA
Margin (%)
13.2
13.4
14.0
14.0
Adj PAT
0.7
1.7
4.0
5.8
EPS (INR)
1.4
3.6
8.6
12.6
EPS Gr. (%)
33
151
137
46
BV (INR)
47.0
50.0
57.6
69.0
RoE (%)
3.1
7.5
16.0
19.8
RoCE (%)
10.0
10.8
14.7
17.5
Payout (%)
40
19
11
9
Valuations
P/E (x)
58
23
10
7
P/BV (x)
1.8
1.7
1.4
1.2
EV/EBITDA (x)
10.0
8.2
6.4
5.1
Divd Yield (%)
0.6
0.8
1.1
1.4
Set up in 1986, JI is a transnational

company with its headquarters in
Maharashtra, India.
Its products include drip and sprinkler
irrigation systems, PVC & PE piping
systems, plastic sheets, green houses,
bio-fertilizers, and solar waterheaters/pumps. It also processes fruits
and vegetables.
JIs financial initiatives should
substantially improve cash flow.
Expect EPS to jump from INR1.4 in FY14
to INR8.9 in FY16.
September 2014
35
6-Force Idea #14: BHEL (Bloomberg: BHEL IN)

FINANCIAL LEVER | Revival may take net cash to over INR220b, 50% of MCap
How the lever works
Financial Lever need not work on the

P&L side alone. For BHEL, it may well
play out on the Balance Sheet.
BHEL is a net-cash company. So, there is
no major delta in PAT/EPS for a given
delta in EBIT.
However, economic recovery changes
the shape of BHELs balance sheet by
retention money recovery.
Thus, over FY15-16, even on flat sales, if
debtors improve from current 386 days
to ~300, cash rises to INR220b, 50% of
market cap.
BHEL
Sensex - Rebased
280
240
200
160
Sep-14
Jun-14
120
Mar-14
Dec-13
Sep-13
(INR b)
Y/E March
2014 2015E 2016E 2017E
Net Sales
391.1 333.7 368.4 412.3
45.2
34.0
46.2
61.3
EBITDA
Margin (%)
11.6
10.2
12.5
14.9
Adj PAT
35.9
24.9
35.7
47.6
EPS (INR)
14.7
10.2
14.6
19.5
EPS Gr. (%)
-45
-31
43
34
BV (INR)
135.0 142.8 153.8 168.6
RoE (%)
11.3
7.3
9.8
12.1
RoCE (%)
16.1
10.6
13.9
17.0
Payout (%)
19
20
20
20
Valuations
P/E (x)
14
20
14
11
P/BV (x)
1.5
1.4
1.3
1.2
EV/EBITDA (x)
9.0
10.1
6.3
4.0
Divd Yield (%)
1.4
1.0
1.4
1.9
BHEL is Indias dominant producer of

power and industrial machinery, and a
leading EPC company.
BHEL offers a strong play on Indias
economic recovery, as few companies
in India can match its fabrication
capacity and capability.
The company is favorably positioned in
3 GW of orders, which are expected to
be awarded in FY15.
Expect Operating Cash flow to improve
from average of ~INR20b in FY10-13 to
~INR92b in FY15/16E.
September 2014
36
6-Force Idea #15: ONGC (Bloomberg: ONGC IN)

REGULATORY LEVER | Lower subsidy share, higher gas price may swell profits
How the lever works
ONGC is a play on 2 near-inevitable

regulations (1) Ongoing hike in diesel prices,
lowering upstream subsidy sharing (i.e.
hike in effective oil realization from
USD45/bbl to USD65); and
(2) Potential doubling of gas price to
USD8.4/mmbtu.
If both these go through, ONGCs PAT
will be almost double the current level of
INR260b.
Precise timing of these regulatory
changes is the only issue.

ONGC
Sensex - Rebased
480
410
340
270
Sep-14
Jun-14
200
Mar-14
Dec-13
Sep-13
(INR b)
Price (INR): 412 / Mkt Cap (INR b): 3,527
Y/E March
2014 2015E 2016E 2017E
Net Sales
1,745
1,914
2,046 2,113
590
674
789
822
EBITDA
Margin (%)
33.8
35.2
38.6
38.9
Adj PAT
262
304
372
388
EPS (INR)
30.6
35.6
43.4
45.4
EPS Gr. (%)
8
16
22
4
BV (INR)
201.2
223.9
252.2 281.2
RoE (%)
16.3
16.7
18.2
17.0
RoCE (%)
13.9
13.7
15.1
14.3
Payout (%)
31
31
30
31
Valuations
P/E (x)
13
12
9
9
P/BV (x)
2.0
1.8
1.6
1.5
EV/EBITDA (x)
6.3
5.3
4.5
4.3
Divd Yield (%)
2.3
2.7
3.2
3.4
ONGC, a Fortune 500 company, is

Indias leading E&P company.
With over 300 discoveries, it has
established in-place reserves of
6.9btoe (billion tons oil equivalent),
with ultimate reserves of 2.4btoe.
Its 100% subsidiary ONGC Videsh has
E&P stakes in 16 countries.
Downstream presence is through
MRPL (71.6% subsidiary).
Reasonable valuations imply stock
should outperform even if regulatory
changes are partly implemented.
September 2014
37
6-Force Idea #16: Hindustan Petroleum (Bloomberg: HPCL IN)

REGULATORY LEVER | Full diesel deregulation will boost PAT
How the lever works
Steady price hikes in diesel point to end

of under-recoveries here.
This means no delay in receiving subsidy
payments, and hence no working
capital borrowings. For HPCL, this
translates into lower debt of ~INR30b,
interest savings of ~INR3b pre-tax, and
INR2b post-tax, which is 22% of FY14
PAT.
Further, in a deregulated scenario,
additional marketing margin of INR0.50
on diesel implies PAT delta of INR5b,
which is 50% of FY14 PAT.

HPCL
Sensex - Rebased
570
470
370
270
Sep-14
Jun-14
170
Mar-14
Dec-13
Sep-13
(INR b)
Y/E March
2014 2015E 2016E 2017E
Net Sales
2,232 2,093 2,149 2,159
EBITDA
52
43
49
52
Margin (%)
2.3
2.0
2.3
2.4
Adj PAT
17.3
14.8
15.8
17.7
EPS (INR)
51.1
43.7
46.6
52.3
EPS Gr. (%)
92
-14
6
12
BV (INR)
442.8 471.2 501.4 535.4
RoE (%)
12.1
9.6
9.6
10.1
RoCE (%)
8.2
5.8
6.5
7.5
Payout (%)
30
30
30
30
Valuations
P/E (x)
9
11
10
9
P/BV (x)
1.1
1.0
0.9
0.9
EV/EBITDA (x)
9.2
11.7
9.3
6.9
Divd Yield (%)
3.3
2.8
3.0
3.3
HPCL is one of Indias leading oil

refining and marketing company, and is
among the Fortune 500 list.
Its refining capacity is 14.8m tons, and it
markets ~30m tons of petroleum
products.
It plans to setup a 9m ton refinery-cumpetchem complex at Barmer, Rajasthan
in JV with state government at a capex
of ~INR370b.
Post-deregulation, earnings growth
coupled with valuation re-rating will
drive stock super-performance.
September 2014
38
6-Force Idea #17: United Spirits (Bloomberg: UNSP IN)

CORPORATE ACTION LEVER | Majority stake by Diageo to usher in improvements
How the lever works
In November 2012, Diageo Plc

announced its plans to acquire United
Spirits from the Mallya Group.
The acquisition adds several premium
brands to UNSPs offerings, including
Johnny Walker whisky, Smirnoff vodka
and Dom Perignon champagne.
UNSPs own premium brands like Black
Dog whisky are expected to get required
marketing push.
UNSPs valuations have also changed
orbit, given governance issues of UB
Group (e.g. Kingfisher Airlines).
United Spirits
Sensex - Rebased
3,600
3,200
2,800
2,400
Sep-14
Jun-14
Mar-14
Dec-13
2,000
Sep-13
(INR b)
2015
2017
Y/E March
2014
2016E
Net Sales
105.0
98.2
110.8 126.6
8.7
10.0
13.3
16.2
EBITDA
Margin (%)
8.3
10.2
12.0
12.8
Adj PAT
-1.3
4.5
7.6
10.2
EPS (INR)
-9.0
31.1
52.5
70.4
EPS Gr. (%)
21
-447
69
34
BV (INR)
208.7 241.1
293.6 361.6
RoE (%)
-4.3
12.9
17.9
19.5
RoCE (%)
12.8
14.9
18.8
21.5
Payout (%)
-28
0
0
3
Valuations
P/E (x)
N.A.
77
45
34
P/BV (x)
11.4
9.9
8.1
6.6
EV/EBITDA (x)
48.7
38.5
28.5
23.1
UNSP is Indias leading player in IMFL

(Indian-made Foreign Liquor), with
volume sales of over 120m cases, (41%
market share) and 22 millionaire
brands.
It has manufacturing and bottling
presence in all states, with 40 owned
plants and 42 contract tie-ups.
Post its acquisition by Diageo, expect
improvement in product mix to drive up
realizations and profits.
Restructuring has commenced with sale
of Whyte & McKay and also a huge
INR53b write-off of intercorporate loans
and debtors.
September 2014
39
6-Force Idea #18: PVR (Bloomberg: PVRL IN)

CORPORATE ACTION LEVER | Cinemax acquisition lends scale, eases competition
How the lever works
In November 2012, PVR announced the

buyout of Cinemax Indias promoters
69.27% followed by 26% open offer,
post which PVR owns 93.1% in Cinemax
for INR5.3b.
The combined entity now controls a
sizeable 25% of all-India Bollywood box
office collections and 35% of
all-India Hollywood box office.
Scale apart, the deal also eases
competition. Now, only PVR is adding
meaningful multiplex capacity,
strengthening its place further.

2017E
Net Sales
EBITDA
Margin (%)
Adj PAT
EPS (INR)
EPS Gr. (%)
BV (INR)
RoE (%)
RoCE (%)
Payout (%)
Valuations
P/E (x)
P/BV (x)
EV/EBITDA (x)
Divd Yield (%)
13.5
2.1
15.7
0.4
9.3
-17
97.1
7.4
11.1
27
15.9
2.6
16.1
0.6
14.8
59
109.0
14.4
14.2
27
19.3
3.3
17.2
1.0
23.8
61
128.8
20.0
19.6
23
23.0
4.1
17.9
1.4
34.7
46
159.4
24.1
23.5
16
75
7.2
16.3
0.4
48
6.4
13.3
0.6
30
5.5
10.3
0.8
20
4.4
8.0
0.8
PVR
Sensex - Rebased
760
670
580
490
400
Sep-14
2016E
Jun-14
2015E
Mar-14
2014
Dec-13
Y/E March
Sep-13
(INR b)
Post its acquisition of Cinemax, PVR has

become Indias largest multiplex chain
with almost 100 properties, over 420
screens and 101k+ seats.
It is evolving into a lifestyle
entertainment company with
restaurants, coffee shops, gaming zones
and in-mall entertainment.
Acquisition synergies should play out by
way of higher ad revenues and
improved F&B margins.
Expect FY14-16E EPS CAGR of 76%
coupled with rising RoCE and RoE.
..
September 2014
40
6-Force Idea #19: Eicher Motors (Bloomberg: EIM IN)

CORPORATE ACTION LEVER | Volvo JV opens up huge potential for CV portfolio
How the lever works
To become a full-fledged CV player, in

July 2008, EIM formed Volvo Eicher
Commercial Vehicles (VECV), a 50-50 JV
with AB Volvo, Sweden.
This JV opens up at least 3
opportunities for EIM (1) Stronger medium & heavy CV
portfolio for the Indian market
(2) Eicher to be Volvos global brand for
mass market trucks
(3) VECV to be global production hub
for medium-duty engines.
Most quantitative levers will kick in.
13,000
Eicher Motors
Sensex - Rebased
10,000
7,000
4,000
Sep-14
Jun-14
Mar-14
Dec-13
1,000
Sep-13
(INR b)
Price (INR): 11,356/ Mkt Cap (INR b): 307
Y/E December
2013 2014E 2015E 2016E
Net Sales
66.9
85.6 117.3 157.6
7.1
10.7
17.2
25.6
EBITDA
Margin (%)
10.7
12.5
14.6
16.2
Adj PAT
3.9
6.2
9.6
14.4
EPS (INR)
145.9 228.2 356.5 532.0
EPS Gr. (%)
21
56
56
49
BV (INR)
760.1 892.9 1192. 1661.
RoE (%)
20.7
27.6
34.2
37.3
RoCE (%)
21.8
27.4
37.0
43.0
Payout (%)
21
15
11
9
Valuations
P/E (x)
78
50
32
21
P/BV (x)
14.9
12.7
9.5
6.8
EV/EBITDA (x)
41.4
27.1
16.5
10.5
Divd Yield (%)
0.3
0.3
0.4
0.4
Eicher Motors is a diversified auto

company: (1) High-end motorcycles
(350cc+) under the brand Royal
Enfield, and (2) Commercial vehicles,
automotive components and engine
solutions under its subsidiary, VECV.
Benefits of recent expansion projects
should start to flow in
(1) More than doubling of motorcycle
capacity to 150,000, (2) Medium-duty
engines plant, (3) Bus body-building
facility, (4) New HCV range, etc.
Expect 58% EPS CAGR CY13-15E.
September 2014
41
6-Force Idea #20: Crompton Greaves (Bloomberg: CRG IN)

CORPORATE ACTION LEVER | Demerger of consumer business to unlock value
How the lever works
Two of Crompton Greaves three SBUs

are industry-facing, and cater to the
usual ups and downs of business cycles.
The consumer-facing SBU (mainly fans,
lights and household appliances) is both
less-cyclical and also asset-light.
The division is estimated to be currently
contributing 50% to consolidated EBIT,
up from 20-25% 3-4 years ago.
In July 2014, the management proposed
demerger of the Consumer division into
a separate company. A Committee has
been set up to work out modalities.
Considering valuations of peer
companies like Havells, the demerged
Consumer division can account for over
75% of Cromptons total Enterprise
Value, leaving residual industry-facing
businesses also reasonably valued.

2017E
190.7
16.4
8.6
10.6
16.9
42
86.6
21.0
16.2
15
51
3.4
2.4
0.6
32
3.2
15.7
0.7
17
2.8
11.0
0.9
12
2.3
8.3
1.2
Crompton Greaves
Sensex - Rebased
230
200
170
140
110
80
Sep-14
2016E
165.4
12.7
7.7
7.4
11.9
88
72.7
17.3
12.7
16
Jun-14
2015E
145.8
9.0
6.1
4.0
6.3
62
63.0
10.3
7.6
24
Mar-14
2014
134.8
6.8
5.1
2.4
3.9
27
58.2
7.2
6.0
21
Dec-13
Y/E March
Net Sales
EBITDA
Margin (%)
Adj PAT
EPS (INR)
EPS Gr. (%)
BV (INR)
RoE (%)
RoCE (%)
Payout (%)
Valuations
P/E (x)
P/BV (x)
EV/EBITDA (x)
Divd Yield (%)
Sep-13
(INR b)
Crompton Greaves is the flagship of the

Avantha Group led by Gautam Thapar.
It has organized its business in 3 SBUs:
(1) Power systems (mainly products and
solutions for power transmission &
distribution), (2) Industrial Systems
(mainly motors & drives) and (3)
Consumer Products (fans, lights and
appliances under Crompton brand).
CRG is currently focused on a 3-D
approach to growth: (1) geographic
expansion, (2) moving up the value
chain, and (3) widening the production
footprint through lean manufacturing in
low cost countries.
Even as the B2B businesses await full
economic recovery, the demerger of
the Consumer SBU could unlock value.
September 2014
42
Annexure 1: Levers for non-Financial companies

Total Stock Lever (TSL) for a stock can be first broken down into Earnings Lever and Valuation
Lever, which are multiplicative in nature such that
TSL
Stock Price
Global GDP
EPS
x
Global GDP
Stock Price
EPS
= Earnings Lever (EL) x

x EL x VL
Next, Earnings Lever is a product of 5 sub-levers as under
EL
EPS
Global GDP

x EPS
Global GDP
EBIT
Country x
Lever(CL)
Sector
x
Lever(SL)
Strategic x
Lever(StL)
Operating
Lever(OL)
x Financial
Lever(FL)
= Global GDP x [CL x SL x StL x OL x FL] x [VL]
We discuss each of the above sub-levers below.
A1.1 Country Lever (CL)

Country Lever (CL)
Country GDP
Global GDP
Country Lever links local GDP growth to global GDP growth. (For the purposes of this
report, we have used GDP growth in nominal terms.)
Typically, developing economies like India grow faster than global GDP. Thus, companies in
these economies enjoy Country Lever greater than 1.
A1.2 Sector Lever (SL)

Sector Lever (SL)
September 2014
Sector Sales
Country GDP
Sector Lever links sector sales performance to GDP growth.

The higher the ratio, the faster is the sector growth relative to GDP growth and vice versa.
For many sectors, the Sector Lever tends to get established over time.
43
A1.3 Strategic Lever (StL)

Strategic Lever (StL) =
Co. Sales
Sector Sales
Strategic Lever captures whether the company has grown faster, slower or in line with the
industry i.e. whether it has gained, lost or maintained market share in value terms.
Higher the Strategic Lever, stronger is the companys unique value proposition to its
customers (or Economic Moat).
This lever is called Strategic Lever as whether a company gains or loses market share
depends on what strategy it is pursuing to strengthen or at least maintain its competitive
positioning.
In this sense, Strategic Lever is a key reflector of a companys management competence.
A1.4 Operating Lever (OL)

Operating Lever (OL) =
=
=
EBIT
Sales
EBITDA
Sales
EBIT
EBITDA
Margin Lever (ML) x Utilization Lever (UL)
Operating Lever captures the impact of two aspects of a companys operations

1. Cost structure (i.e. mix proportion of variable and fixed), and
2. Scale of operations i.e. asset utilization.
Higher the fixed cost component, greater the operating leverage and vice versa.
Likewise, higher the scale or asset utilization levels, greater the operating leverage and vice
versa.
Operating Lever can be made more granular by dissecting it as Margin Lever (ML) and
Utilization Lever (UL) as discussed below.
A1.4.1 Margin Lever (ML) [EBITDA Sales]
Margin Lever captures the full interplay of C-P-V-M in a companys operations i.e. Cost,
Price, Volume, Mix.
Margin Lever greater than 1 suggests one or more of the following:
1. Cost savings not passed on to customers
2. Product price hike more than offsetting cost increase
3. Major increase in volume, lowering per unit fixed costs
4. Change of sales mix in favor of higher margin products/services.
Margin Lever lower than 1 suggests the opposite of one or more of the above phenomena.
A1.4.2 Utilization Lever (ML) [EBIT EBITDA]
September 2014
Utilization Lever highlights the impact of better asset utilization, especially in capitalintensive sectors like Utilities and Telecom.
44
Depreciation is a fixed charge based on the acquisition cost of fixed assets, and irrespective
of their utilization levels.
When asset utilization improves meaningfully, EBITDA increases in sync but depreciation
remains broadly unchanged. Thus, incremental EBITDA fully flows down to EBIT, causing
Utilization Lever to be greater than 1 (and vice-versa).
A1.5 Financial Lever (FL)

Financial Lever (FL)
EPS
EBIT
PBT
EBIT
PAT
PBT
EPS
PAT
= Debt Lever (DL) x Tax Lever (TL) x Equity Lever (EqL)
Financial Lever reflects three aspects of a company 1. Share of debt in current capital structure
2. Tax-cover status and
3. Equity capital expansion or contraction.
To explicitly capture each of these 3 aspects, it can be trisected into Debt Lever (DL), Tax
Lever (TL) and Equity Lever (EL) as discussed below.
A1.5.1 Debt Lever (DL) [PBT EBIT]
Debt Lever reflects the share of debt in current capital structure, which in turn determines
how Net Interest (Interest Expense less Financial Income) is behaving in the P&L.
Above PBT breakeven levels, Debt Lever will be greater than 1 if EBIT is rising whereas debt
levels are stable or declining.
A1.5.2 Tax Lever (TL) [PAT PBT]
Tax Lever captures change in a companys tax-cover status.

If the company is already a full-tax paying company and likely to remain so, Tax Lever will
always be 1.
If the company is moving out from a tax holiday or tax concession situation into a full-tax
situation, Tax Lever will be less than 1.
Tax Lever will be greater than 1 in specific situations e.g. if the company is commencing
units in a tax concession zone, or acquires some business with accumulated losses which
provide tax cover.
A1.5.3 Equity Lever (EqL) [EPS PAT]
September 2014
Equity Lever indicates whether a company is expanding or contracting its equity.

If a company has raised funds by issuing equity shares, Equity Lever will be less than 1.
On the other hand, if the company has resorted to share buybacks, Equity Lever will be
greater than 1.
If equity capital remains unchanged, Equity Lever will be 1.
45
A1.6 Valuation Lever

The Earnings Lever and sub-levers when established and applied will suggest how a companys
EPS will change for a given change in a macroeconomic variable i.e.
Therefore,
Earnings Lever
EPS
Global GDP
EPS
Global GDP x Earnings Lever
The final step in completing the Total Leverage exercise is to cross the change in EPS with the
Valuation Lever to arrive at the expected Stock Price change i.e.
Therefore,
Valuation Lever
Stock Price
EPS
Stock Price
EPS x Valuation Lever
Essentially, Valuation Lever is a measure as to how much a stock has been (or will be) re-rated
for a given change in earnings. Thus, directionally, three scenarios are possible
1. If no change in rating, Valuation Lever = 1, and Stock Price change = EPS change.
2. If theres a re-rating, Valuation Lever > 1, and Stock Price change > EPS change.
3. If theres a de-rating, Valuation Lever < 1, and Stock Price change < EPS change.
Further, Valuation Lever itself is influenced by the Earnings Lever a higher than expected EPS
change is more likely to trigger higher valuation re-rating and vice versa.
September 2014
46
Annexure 2: Levers for Financial companies

For Financial sector companies, Book Value is more relevant and important than EPS. Hence, all
levers are adapted to suit this and other characteristics of the business.
TSL
Stock Price
Global GDP
= Book Value
Global GDP
Stock Price
BV

Therefore, Stock Price = Global GDP x
x Valuation Lever (VL)
BL x VL
Here too, Book Value Lever is a product of 5 sub-levers as under
BL
BV
Global GDP
Country GDP x
Agg. NII x Bank NII x PAT
Global GDP
Country GDP
Agg. NII
NII
Country x
Lever(CL)
Sector
x
Lever(SL)
Strategic x
Lever(StL)
Operating
Lever(OL)
x BV
PAT
x Equity
Lever(EqL)
= Global GDP x [CL x SL x StL x OL x EqL] x [VL]
We discuss each of the above sub-levers below.
A2.1 Country Lever (CL)

Country Lever (CL)
Country GDP
Global GDP
This lever remains the same, both for non-financial and financial companies (see page 43).
A2.2 Sector Lever (SL)

Sector Lever (SL)
September 2014
Agg. NII
Country GDP
Total Funds x Agg. NII

Country GDP
Total Funds
Monetary Lever (ML) x Interest Rate Lever (IL)
Sector Lever links Aggregate NII growth to country GDP growth.

The lever will be greater than 1 if Aggregate NII grows faster than GDP and vice versa.
For further granularity, the Sector Lever can be dissected into (1) Monetary Lever and
(2) Interest Rate Lever, which are briefly discussed below.
47
A2.2.1 Monetary Lever (ML) [Total Funds Country GDP]
Monetary Lever links growth in banking sectors total funds to GDP growth.
This reflects the money supply in the economy.
In India, money supply has grown broadly in line with GDP.
FY03-14, ML for Indian financial sector has hovered around 1.2-1.3 across economic cycles.
A2.2.2 Interest Rate Lever (IL) [Aggregate NII Total Funds]
Interest Rate Lever captures how interest rates and rate spreads in the economy have
moved over a given period of time.
In India, IL was 0.9x during the boom phase of FY03-08 (i.e. spread compression in lieu of
growth) and 1.1x during the lull phase of FY08-14.
A2.3 Strategic Lever (StL)

Strategic Lever (StL)
Bank NII
Agg. NII
Strategic Lever is calculated for individual banks/NBFCs, and suggests whether NII has
grown faster or slower than the sector i.e. whether they have gained or lost NII market
share.
Over FY03-14, SL for most private sector banks is greater than 1x, whereas in contrast, for
most public sector banks it is less than 1x.
A2.4 Operating Lever (OL)

Operating Lever (OL) = PAT
NII
= NI
NII
PPP
NI
PBT x
PPP
PAT
PBT
= Fee x Efficiency x Asset Quality x Tax

Lever(FL) Lever(EfL)
Lever(AQL)
Lever(TL)
Operating Lever reflects the operational effectiveness of a bank/NBFC i.e. whether it has
been able to grow PAT faster than its NII or not.
For Financial Sector, Operating Lever can be further analyzed into (1) Fee Lever, (2)
Efficiency Lever, (3) Asset Quality Lever and (4) Tax Lever which are briefly discussed below.
A2.4.1 Fee Lever (FL) [NI NII]
For financial companies, NI (Net Income) = NII + Non fund-based (i.e. Fee) income
Thus, Fee Lever > 1 suggests that the banks non fund-based income has grown faster than
its fund-based income and vice-versa.
A2.4.2 Efficiency Lever (EfL) [PPP NI]
September 2014
PPP (Pre-Provisioning Profit) = NI Operating expenses

Thus, Efficiency Lever suggests how efficiently the bank/NBFC has managed its operating
expenses. EfL > 1 implies operating expenses have grown slower than NI, and vice versa.
48
A2.4.3 Asset Quality Lever (AQL) [PBT PPP]
PBT = PPP Provisions for non-performing assets (NPAs)

As the name itself suggests, Asset Quality Lever reflects the Asset Quality of the bank/NBFC.
AQL > 1 implies NPA provisions have grown slower than operating profit and vice versa.
A2.4.4 Tax Lever (TL) [PAT PBT]
As in the case of non-financial companies, the Tax Lever indicates whether the bank/NBFC
enjoys any tax shield (e.g. tax rebate on income from infrastructure/housing loans).
A2.5 Equity Lever (EqL)

Equity Lever (EqL)
BV
PAT
Net Worth x
PAT
Capital Lever (CpL) x Pricing Lever (PL)
BV
Net Worth
Equity Lever suggests whether the banks Book Value has grown faster or slower than PAT.
This is a function of two factors: (1) The amount of fresh equity capital raised, and (2) The
price at which the same was issued.
These two factors get captured and Capital Lever and Pricing Lever, respectively.
A2.5.1 Capital Lever (CpL) [Net Worth PAT]
Capital Lever (CpL) indicates the level of equity-funding resorted to by the bank/NBFC to
capitalize itself.
The Financials sector median CpL was 1.4x during the FY03-08 boom and 0.9x during the
FY08-14 lull. This indicates higher equity-raising during boom times for higher capitalization.
A2.5.2 Pricing Lever (PL) [Book Value Net Worth]
Pricing Lever reflects the pricing at which fresh equity was issued, if any.
The lower the ratio, the lower the equity pricing, relative to the book value prevailing at the
time of raising the funds.
Pricing Lever will be 1 if no equity has been raised during a given period.
A2.6 Valuation Lever (VL)

September 2014
Stock Price
Book Value
Valuation Lever indicates as to whether and by how much a stock was (or will be)
re-rated for a given change in book value.
VL > 1 suggests re-rating and VL < 1 suggests de-rating.
49
Annexure 3: Non-quantitative Levers

Apart from the 4 quantitative and multiplicative levers discussed above, there are 3 nonquantitative levers as well. These are (1) Regulatory Lever, (2) Corporate Action Lever and (3)
Externality Lever. True to the definition of levers, a small change in any of these levers could
potentially cause a significant change in stock prices. Hence they merit a separate albeit brief
discussion here.
A3.1 Regulatory Lever

Regulatory Lever mainly includes policy action across the economy, sectors or stock market as
listed below. Change in one or more of these could have a major impact on stock prices.
Regulatory Lever may be triggered across economy, sectors or stock market itself
Area
Typical regulatory actions which affect stock prices
Economy
Income tax rates, Indirect tax rates (customs, excise), Interest rates, etc
Sectors
Deregulation of hitherto regulated sectors (or vice versa), Environmental norms, etc
Stock Market
Foreign investment norms (including shareholding ceiling), trading limits, turnover tax, etc
A3.2 Corporate Action Lever

Some specific non-operational, non-financial corporate actions could have a significant bearing
on stock prices. These include
Change of ownership and/or management
Stake hike by existing owners
Hostile takeover bid
Offer to delist the shares by 100% buyback of non-owner holding
Major corporate restructuring or M&A announcements, not yet reflected in financials
Large-scale corruption, fraud or violation of legal norms.
A3.3 Externality Lever

Uncontrollable external events like drought, earthquake, wars, etc also impact stock prices,
even if there is no immediate change in any operating or financial metrics of a company.
September 2014
50
Annexure 4: Case studies of levers

We calculated the various levers for all companies listed in India through the full economic cycle
of FY03 to FY14. We also classified these companies into sectors, and calculated the various
relevant levers for sector aggregates. We present our findings under two sections
1. Case studies of companies where specific levers have played out; and
2. Key takeaways from sector-level levers.
A4.1 Company case studies

We present case studies of 6 companies which, taken together, illustrate how most of the
major levers covered in this report play out. The companies and the respective levers which
they illustrate are tabled below.
Company case studies
Company
#1 Bharti Airtel
#2 Amara Raja Batteries
#3 CESC
#4 TCS
#5 Sesa Goa (now Sesa-Sterlite)
#6 Satyam Computer
Major levers tested

All levers
Strategic, Operating & Valuation Levers
Financial Lever
Corporate Action Lever + Strategic & Operating Levers
Regulatory Lever
Corporate Action Lever
All the case studies are structured under 5 common heads

1. Company in brief
2. Backdrop to the levers
3. How the levers worked
4. After the levers
5. Key takeaways.
Case Study #1: Bharti Airtel

Major levers tested: All
Company in brief
Bharti Airtel is an integrated telecom service provider with presence in wireless, fixed-line
and broadband, long distance, enterprise, and passive infrastructure services across India,
Sri Lanka, Bangladesh and Africa.
It is Indias largest wireless operator (revenue market share of 31%), also the third largest
globally in terms of subscribers.
Bhartis case offers two distinct set of lessons in the working of levers
(1) Positive, in the boom phase (FY04-08); and
(2) Adverse, in the lull phase (FY08-14).
[A] BOOM PHASE FY04-08

Backdrop to the levers
September 2014
Bharti Airtel (then Bharti Tele-Ventures) launched its mobile services in FY96. Over the next
6-7 years, it steadily expanded its national footprint, both organically and inorganically.
In FY03, revenue doubled to INR30.5b and EBITDA quadrupled to INR5.4b.
However, high depreciation and interest burden kept the company in net loss of INR2b.
51
How the levers worked

Bharti Airtel The 6-Force Framework (x)
Formula
Global GDP
Benchmark Lever
TOTAL STOCK LEVER
Stock Price / Global GDP
EARNINGS LEVER
EPS / Global GDP
Country Lever
India GDP / Global GDP
Sector Lever
Telecom Revenue / India GDP
Strategic Lever
Bharti Sales / Telecom Revenue
Operating Lever
EBIT / Revenue
Financial Lever
EPS / EBIT
a. Debt Lever
PBT / EBIT
b. Tax Lever
PAT / PBT
c. Equity Lever
EPS / PAT
VALUATION LEVER
Stock Price / EPS
FY04-08
10.4
2.8
5.0
8.6
1.5
1.5
2.4
1.4
1.2
1.2
1.0
1.0
0.6
Country Lever (1.5x): During FY04-08, Indias nominal GDP CAGR of 15% was 1.5x that of
global GDP CAGR of 10%.
Sector Lever (1.5x): The telecom services sector as a whole grew 1.5x Indias nominal GDP,
given high value delivered by wireless coupled with its low market penetration.
Strategic Lever (2.4x): Most significantly, Bhartis sales growth was 2.5x the sector, led by
its strong Airtel brand and aggressive growth strategy, both organic and inorganic.
Operating Lever (1.4x): EBIT growth was 1.4x Sales growth as economies of scale kicked in
and fixed costs got spread. EBIT Margin expanded from 17% in FY04 to 28.3% in FY08.
Financial Lever (1.2x): Net interest cost of INR2.3b turned into a small positive income by
FY08, leading to PAT and EPS growing 1.2x EBIT growth.
Earnings Lever (8.6x): As a product of all of the above, Bhartis EPS grew 8.6x faster than
global GDP i.e. EPS CAGR of 89% vis--vis global GDP CAGR of 10%.
Valuation Lever (0.6x): Point-to-point, March-2004 to March-2008, Bhartis stock price
CAGR was lower than its EPS CAGR, as P/E corrected from a high 56x in FY04 to 23x in FY08
(due to controversial auctioning of fresh 122 2G licenses).
After the levers

Total Stock Lever (5x): Despite valuation de-rating, Bhartis stock price CAGR at 52% was 5x
that of global GDP, compared to 2.8x for Sensex (29% CAGR).
Bhartis FY03-08 PAT performance

reflects multiple levers at work!
Despite P/E de-rating, Bharti stock

super-performs led by FY04-08 EPS CAGR
Adj PAT (INR b)

18.7%
19.4%
10.5%
67.0
September 2014
100
Mar-08
FY08
Sep-07
FY07
Mar-07
FY06
Sep-06
FY05
Mar-06
Sep-05
FY04
Sensex (Re-based)
400
200
22.6
-8.4%
-2.0
FY03
Bharti
500
300
42.6
15.0
600
Mar-05
5.1
24.8%
Sep-04
PAT Margin
23.0%
Mar-04
52
Key takeaways
Businesses which entail huge start-up investments are potential candidates for stock superperformance when they achieve critical levels of scale.
Rich valuations should not be a deterrent to buy hyper-growth stocks, which will likely
super-perform even if there is any subsequent correction in valuation.
[B] LULL PHASE FY08-14

In FY08, Bharti Airtel enjoyed peak profitability with EBITDA Margin at 42%, RoE at 40% and
RoCE of over 25%.
Prepaid schemes took off and Bharti enjoyed massive working capital float.
The company continued to invest in telecom infrastructure, as business continued to grow
at a rapid pace.
Bharti seemed all poised to emerge as Indias largest market cap company (in October
2007, 3rd largest after Reliance and ONGC with market cap of INR2.1 trillion).
September 2014
Regulatory Lever: The first sign of trouble came in 2008 by way of the Telecom Ministry
under Mr A Raja, announcing a controversial auction of 122 new licenses (now infamous as
the 2G scam). As competition was imminent, companies were forced to rein in their pricing
power affecting margins.
Corporate Action Lever: As a counter-strategy to domestic competition, Bharti decided to
expand overseas. In June 2010, Bharti acquired Kuwait-based Zain Telecom's African
business for a massive USD10.7b (about INR480b, almost equal to its then balance sheet
size).
Country Lever (3.2x): During FY08-14, Indias nominal GDP CAGR remained at ~15%, but
was 3.2x that of global GDP CAGR which plunged to 4.6%.
Sector Lever (0.5x): The telecom services sector grew at half the rate of GDP, as fierce
competition slashed RPM (rate per minute).
Strategic Lever (2.7x): Bhartis Zain acquisition ensured that its sales growth was 2.7x the
sector. But the acquisition had disastrous consequences on all other levers as Gross Block
quadrupled and Debt quintupled over FY08 levels.
Operating Lever (0.4x): FY08-14 EBIT CAGR was 0.4x Sales CAGR as depreciation ballooned
5x and consolidated EBIT Margin halved from 28.3% in FY08 to 14% in FY14.
Financial Lever (1.8x): Interest went from net positive in FY08 to negative INR43b in FY14.
Also, overseas losses did not lend tax cover. As a result, PAT and EPS de-grew despite EBIT
growth.
Earnings Lever (-3.1x): As a product of all of the above, Bhartis EPS de-grew 3x global GDP
i.e. EPS CAGR of -15% vis--vis global GDP CAGR of +5%.
Valuation Lever (0.3x): March-2008 to March-2014, Bhartis stock price de-growth (-4%
CAGR) was lower than its EPS de-growth (-15% CAGR). P/E rebound from 23x in FY08 to 45x
in FY14 suggests that the worst may be over for the sector as (1) all the 2008 licenses now
stand cancelled, (2) pricing power in voice is gradually getting restored, and (3) data
revenue is strongly supplementing voice.
53
After the levers
Total Stock Lever (-0.9x): Over FY08-14, Bhartis stock (-4% CAGR) underperformed the
Sensex (+6% CAGR). However, given the strong performance in FY04-08, over the full cycle
FY04-14, Bhartis stock performance was 2.2x (15% CAGR) that of global GDP (7% CAGR), in
line with that of Sensex.
Bhartis FY08-14 PAT dragged down

by regulatory & corporate action levers
24.8%
22.9%
Bharti stock underperforms in FY08-14

despite valuation re-rating
Adj PAT (INR b)

PAT Margin
21.5%
600
Bharti
Sensex (Re-based)
500
10.2%
FY08
89.8
60.5
FY09
FY10
FY11
42.6
FY12
3.0%
3.2%
22.8
27.7
FY13
FY14
300
200
100
Mar-08
Sep-08
Mar-09
Sep-09
Mar-10
Sep-10
Mar-11
Sep-11
Mar-12
Sep-12
Mar-13
Sep-13
Mar-14
67.0
84.7
400
6.0%
Key takeaways
The non-quantitative Regulatory Lever and Corporate Action Lever play a critical role in
Change in competitive landscape is a key trigger for change in stock levers, and hence in
stock super-performance.
Competitive advantage is always local and does not automatically migrate to other
geographies. Hence, mega global acquisitions must be critically analyzed for potential
negative play of operating/financial levers, leading to stock under-performance.
Case Study #2: Amara Raja Batteries

Major levers tested: Sector, Strategic, Operating & Valuation Levers
Company in brief
Amara Raja Batteries is the largest manufacturer of standby VRLA (Valve-Regulated Lead
Acid) batteries in the Indian Ocean Rim (i.e. from Africa and the Middle East to South East
Asia).
It started operations in 1992 with industrial batteries. In 1997, it entered into a
collaboration with Johnson Controls, US (26% stake), and launched automotive batteries in
January 2000 (Amaron brand). It is now the second largest automotive batteries company
in India after Exide Industries.
September 2014
Amara Rajas foray into automotive batteries came amidst a sharp slowdown in the autos
sector. As a result, overheads and depreciation were eating into profits PAT declined
steadily from INR440m to INR74m in FY03.
Meanwhile, Amara Rajas Gross Block expanded to INR1.5b, almost 2.5x the figure 5 years
ago.
54
Demand revival: The situation worsened further in FY04; due to high lead prices, EBITDA
Margin dipped to as low as 5.4% (v/s 36.1% in FY99). The company reported an EBIT loss,
other income helped it report PAT of barely INR14m. The take-off commenced in FY05, with
strong revival in battery demand from both Telecom and Auto sectors.
Amara Raja - The 6-Force Framework (x)
Levers (x)
TOTAL STOCK LEVER
EARNINGS LEVER
Country Lever
Sector Lever
Strategic Lever
Operating Lever
Financial Lever
a. Debt Lever
b. Tax Lever
c. Equity Lever
VALUATION LEVER
FY03-08
10.8
3.6
7.6
6.2
1.3
1.6
2.0
1.7
0.9
0.9
1.0
1.0
1.2
FY08-14
4.6
1.3
7.6
3.8
3.2
1.3
1.1
1.0
0.8
1.1
1.0
0.7
2.0
FY03-14
7.4
2.7
7.4
5.1
2.0
1.4
1.5
1.4
0.9
1.0
1.0
0.9
1.5
Country Lever (1.3x), Sector Lever (1.6x): During FY03-08, Indias nominal GDP CAGR of
~15% was 1.3x that of global GDP CAGR of ~11%. At the same time, the Auto Ancillary
sector grew 1.6x Indias GDP (i.e. 23% CAGR).
Strategic Lever (2.0x): Most significantly, Amara Raja Batteries grew at 2x the industry, as it
was ready with its capacity expansion when demand arose. Also, the company went on an
aggressive branding and franchisee strategy for the automotive after-market.
Operating Lever (1.7x): EBIT growth was 1.7x Sales growth. Asset utilization lever (1.4x) was
a major contributor as depreciation did not grow with sales.
Financial Lever (0.9x): Amara Raja was a net cash company, and hence PAT and EPS growth
was marginally lower than EBIT growth.
Earnings Lever (6.2x): As a product of all of the above, Amara Rajas EPS grew 6.2x faster
than global GDP (EPS CAGR of 66% vis--vis global GDP CAGR of 11%).
Valuation Lever (1.2x): Amara Raja Stock also enjoyed a re-rating from P/E of 5x in FY03 to
8x in FY08, driving stock price CAGR 16pp over EPS CAGR.
After the levers
September 2014
Total Stock Lever (FY03-08 7.6x): In effect, over FY03-08, Amara Raja stock price CAGR
(82%) was 7.6x of global GDP v/s 3.6x for Sensex (29% CAGR).
Total Stock Lever (FY03-14 7.4x): Amara Raja continued its robust performance even
through the lull phase of FY08-14 through new product launches (two-wheeler batteries,
home UPS, exports, etc) and steady capacity expansion. In the next phase FY08-14, the
stock saw a huge P/E rating from 8x to 18x, despite modest EPS CAGR of 17% (i.e. Valuation
Lever of 2x).Thus, over the full cycle FY03-14, Amara Raja stock price CAGR was 55% i.e.
7.4x that of global GDP.
55
400
300
200
100
Mar-14
Mar-13
Mar-12
Mar-11
Mar-10
Mar-09
Mar-08
Mar-07
FY14
FY13
FY10
FY09
FY08
FY07
FY06
FY05
1,000
FY04
FY03
2,000
Amara Raja
Sensex (Re-based)
Mar-06
3,000
12
Mar-05
PAT (INR m, LHS)

PAT Margin (%)
Mar-04
4,000
The stock super-performs the benchmark

throughout FY03-14
Mar-03
Amara Raja: All levers played out well

through the full cycle FY03-14
Key takeaways

cases where the market-opportunity is big, and the company has just completed major
Duopoly or monopolistic competitive structure in growth sectors is favorable for levers to
play out.
If a cyclical business manages even modest profit growth during lull phase, expect valuation
re-rating to sustain stock super-performance.
Case Study #3: CESC

Major levers tested: Financial Lever
Company in brief
Flagship company of RP Sanjiv Goenka Group, CESC is one of the oldest integrated power
utilities in India.
Its generation capacity stands at 1.2GW, and its distribution network supplies power to
2.3m consumers in Kolkata and Howrah region.
Another 1.2GW of generation projects are under construction and additional 6GW of
projects are in pipeline.
Non-remunerative tariffs, high T&D losses and rising burden of high-interest debt led CESC
to barely break-even in FY03 following 3 years of losses.
FY03 interest cost was INR4.1b whereas the market cap was less than INR1b.
September 2014
Debt restructuring: In FY03, CESC completed a debt-restructuring program with 24 of its

lenders, including a cut in lending rates. In FY04, CESC negotiated a further rate cut, and
also swapped high-cost long-term debt with lower cost short-term debt.
Lower T&D losses, higher collections: CESC worked aggressively to cut T&D losses and
improve cash collections. As a result, its debtor days went down from 155 days in FY03 to
47 days in FY08. Cash flow from operations also increased from INR5.5b in FY03 to INR9.6b
in FY08.
56
Financial Lever (38.4x): During FY03-08, CESCs EBIT CAGR was only 2%, even lower than its
revenue CAGR of 5%. However, with net interest cost slashed from INR3.5b in FY03 to nearzero in FY08, PBT and PAT CAGR was 120%. Despite a small equity dilution, EPS CAGR was
still a high 93%, translating into a Financial Lever of 38x.
Earnings Lever (8.6x): In effect, CESCs FY03-08 EPS CAGR at 93% was 8.6x that of global
GDP CAGR of 11%).
CESC: Huge benefit of Financial Lever

during FY03-08
CESC The 6-Force Framework (x)
FY03-08
Levers (x)
Global GDP CAGR (%)
10.8
BSE Sensex/Global GDP
3.6
TOTAL STOCK LEVER
8.8
EARNINGS LEVER
8.6
Country Lever
1.3
Sector Lever
0.9
Strategic Lever
0.4
Operating Lever
0.5
Financial Lever
38.4
a. Debt Lever
50.0
b. Tax Lever
1.0
c. Equity Lever
0.8
VALUATION LEVER
1.0
nullified during FY08-14, mainly due to

acquisition of Spencer Retail
4,000
FY08-14
4.6
1.3
0.7
2.3
3.2
1.2
0.7
1.6
0.5
0.7
0.8
1.0
0.3
3,000
Interest (net) (INR m)

% of Sales, RHS
18
15
12
2,000
9
6
1,000
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
After the levers
Total Stock Lever (FY03-08 8.8x): With valuation moving in line with earnings, CESCs stock
price CAGR over FY03-08 at 95% was 8.8x global GDP CAGR, super-performing even the
high-performing Sensex which was 3.6x (39% CAGR).
Financing impact wears off, strategy takes over: Post FY08, CESCs Financial Lever slipped
to 0.5x as the company borrowed for expansions and also diversified into retail (Spencers),
which is still loss-making. CESCs FY08-14 price CAGR is only 3%, under-performing the
Sensexs 6% CAGR.
CESC stock super-performs over FY03-08

700
but underperforms over FY08-14
CESC
600
600
Sensex (Re-based)
500
500
400
400
300
300
200
Mar-08
Sep-07
Mar-07
Sep-06
Mar-06
Sep-05
Mar-05
100
Sep-04
Mar-04
200
Sep-03
100
Mar-03
September 2014
CESC
Sensex (Re-based)
Mar-08
Sep-08
Mar-09
Sep-09
Mar-10
Sep-10
Mar-11
Sep-11
Mar-12
Sep-12
Mar-13
Sep-13
Mar-14
57
Key takeaways
The impact of Financial Lever tends to be shorter than that of Strategic and Operating
Levers.
Gains of Financial Lever may be nullified by faulty capital allocation triggering adverse play
of Strategic and/or Operating Leverage.
Case Study #4: TCS

Major levers tested: Corporate Action Lever + Strategic & Operating Levers
Company in brief
TCS is the Indias largest IT services company with revenue of USD13.5b.

With 300,000+ people, TCS provides IT/BPO services to over 1,000 global clients, and is
among the preferred IT vendors for many Fortune 500 companies.
TCS was a division of Tata Sons (Tata groups holding company) till 2004, when it was
demerged and listed as an independent entity.
Following TCS IPO in July 2004 and subsequent listing in August 2004, TCS was Indias 12th
largest company in terms of market cap.
Post-listing, TCS began to be actively benchmarked to the then industry vanguard, Infosys.
For the following 4 years FY05-09, TCS key operating metrics lagged that of Infosys Sales
CAGR of 30% (v/s 32% for Infosys), average EBITDA Margin of 25.4% (v/s 31.6%) and EPS
CAGR of 24% (v/s 32%). As a result, TCS consistently traded at a valuation discount to
Infosys.
Next, following the 2008 global meltdown, IT sector as a whole underperformed the market
(FY05-09 price CAGR of -1% v/s 11% for benchmark indices). Further, TCS underperformed
both, Infosys and the IT sector, with price CAGR of -7% v/s +4% for Infosys.
September 2014
Corporate Action Change of management: In October 2009, TCS appointed Mr N

Chandrasekaran as CEO & MD, taking over from TCS veteran, Mr S Ramadorai. With almost
immediate effect, TCS performance started to turn for the better.
Strategic Lever (1.4x): FY05-09, TCS revenue growth was in line with the sector. However,
following the slowdown, TCS hitherto strategy of aggressively bidding for all IT businesses
(discretionary, run-of-business, BPO, etc) worked to its favor. As a result, over FY09-14, its
revenue CAGR at 24% was 1.4x that of the sector. (Infosys managed to grow only in line
with the sector; its focus on high-margin discretionary IT caused it to lose market share in
the high-volume run-of-business segment.)
Operating Lever (1.4x): Most significantly, EBIT margin expanded significantly from 20.9% in
FY09 to 29.1% in FY14, following stringent cost control strategy of the new CEO. As a result,
EBIT CAGR at 33% was 1.4x Sales CAGR.
Earnings Lever (8.1x): TCSs FY09-14 EPS CAGR at 30% was 8.1x global GDP CAGR of 3.6%.
Valuation Lever (1.7x): All of the above lifted TCS P/E from 10x in FY09 to 22x in FY14 (at a
premium to Infosys 18x). Its stock price CAGR at 51% was 1.7x EPS CAGR of 30%.
58

Following appointment of new CEO in mid-FY10, TCS bridged the gap and eventually overtook then
bellwether Infosys on key metrics such as Growth, EBITDA Margin, P/E
40
EBITDA Margin Trend (%)
Year-end trailing P/E (x)
30
20
25
10
New CEO
at TCS
FY12
FY11
FY10
FY09
FY08
FY05
FY07
FY14
FY13
FY12
FY11
FY10
FY09
New CEO
at TCS
FY08
FY07
FY05
20
FY06
TCS
Infosys
TCS
Infosys
FY14
30
FY13
35
FY06
40
After the levers
Total Stock Lever (FY09-14 14x): In effect, over FY09-14, TCS stock price CAGR (51%) was
14x global GDP, compared to 5x for Sensex (18% CAGR).
Total Stock Lever (FY05-14 3.5x): TCS stocks strong performance during FY09-14 more than
made up for the underperformance of FY05-09. Thus, over the full cycle FY05-14, TCS stock
price CAGR was 22% i.e. 3.5x that of global GDP v/s 2.3x for the Sensex (15% CAGR).
TCS Indias No.1 by market cap: From 12th place in FY05, TCS today is Indias No.1
company in terms of market cap (INR4.7 trillion).
FY05-09, TCS underperformed Infosys; Post FY09, TCS has super-performed to emerge as Indias largest
market cap company currently
200
900
TCS (Re-based)
750
150
Infosys (Re-based)
600
100
450
50
TCS (Re-based)
300
Infosys (Re-based)
150
Mar-14
Mar-13
Mar-12
Mar-11
Mar-10
Mar-09
Mar-08
Mar-07
Mar-06
Mar-05
Mar-09
Key takeaways
September 2014
play out.
Panic-stricken markets offer great opportunity to buy industry leaders with global
competitive advantage cheap (TCS stock at P/E of 10x in FY09). In such cases, Valuation
Lever will amplify earnings growth leading to stock super-performance.
59
Case Study #5: Sesa-Goa (now Sesa-Sterlite)

Major levers tested: Regulatory Lever & Corporate Action Lever
Company in brief
In 2013, Sesa Goa merged with Sterlite Industries (both Vedanta Group companies) to form
the merged entity, Sesa-Sterlite, which also has stake in Cairn India and Hindustan Zinc.
Prior to the merger, standalone Sesa Goa was Indias largest exporter of iron ore in the
private sector.
For 10 consecutive years ending FY11, Sesa Goas PAT rose exponentially from INR89m in
FY02 to INR41.7b in FY11.
EBITDA Margin was 56% and both RoE and RoCE were well in excess of 40%.
Regulatory Lever: Sesa Goas performance was hit by a series of adverse regulatory
measures
1. In July 2010, Karnataka state government stopped all iron ore exports from the state as
a curb on illegal mining.
2. In August 2011, the Supreme Court ordered a ban on all iron ore mining activity in
Karnataka on environmental concerns and a PIL (public interest litigation) alleging
widespread illegality of mines.
3. A commission of the Ministry of Mines submitted its report in September 2012. Based
on the same, Goa state government suspended all mining operations. This was followed
by a Supreme Court order in October 2012 suspending all mining operations in Goa
pending enquiry by a Centrally Empowered Committee.
Corporate Action: Meanwhile Sesa Goa entered into an agreement to acquire 20% stake in
Cairn India from Vedanta Group for a consideration of INR130b (against net cash of
~INR87b).
After the levers
September 2014
PAT almost halves in 2 years : Owing to the ban on iron ore mining, in two years (FY13
over FY11), Sesa Goas revenue fell 72% and EBIT fell 94%. The Cairn India acquisition
caused Interest (net of financial income) to turn from positive inflow of INR4.5b to negative
outflow of INR4.6b. PAT before share of associates went from positive INR42b in FY11 to a
loss of INR1.3b in FY13. Including profit share of Cairn India, PAT was still down 46% (-27%
CAGR).
followed by stock price: The stock also clocked a negative return in line with PAT decline,
-27% CAGR, underperforming the benchmark by a high 25%.
Rebound following regulatory relief: Things have since then recovered for the merged
entity Sesa-Sterlite, with the mining ban both in Karnataka and Goa significantly relaxed.
The stock too has regained most of its lost ground.
60

Sesa Goa: Curbs on iron-ore mining in
Karnataka & Goa caused plunge in profits
40
300
30
200
100
Mar-13
Mar-12
Mar-11
Mar-10
Mar-09
Mar-08
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY04
FY03
10
Mar-07
20
10
Mar-06
20
Sesa Goa Stock Price
400
Mar-05
30
50
Mar-04
40
500
Mar-03
Sesa Goa Standalone PAT (INR b)

PAT margin (%) - RHS
Stock slides post mining curbs; fall cushioned

due to consolidation of Cairn India PAT
Key takeaways
Regulatory Lever can work as a brake or a breakthrough for the fortunes of a company.
Favorable regulatory changes or relaxation of past regulatory curbs present potential stock
super-performance opportunity.
Stocks vulnerable to regulation merit low valuation to factor in the risk of unexpected
adverse changes.
Case Study #6: Satyam Computer (now merged into Tech Mahindra)
Major levers tested: Corporate Action Lever
Company in brief
Till FY08, Satyam Computer was reckoned to be among Indias top 5 IT companies.
In January 2009, then owner-chairman Mr Ramalingam Raju confessed to falsification of
accounts, including inflated cash and bank balance to the tune of INR50b. He was arrested
on charges of fraud.
In the open takeover auction that ensued, Tech Mahindra acquired the same, renamed it as
Mahindra Satyam, and subsequently merged it w.e.f. 25 June 2013.
FY03 through FY08, Satyam reported PAT CAGR of 37%. Stock price CAGR was in line with
PAT CAGR at 35%, almost matching Sensex CAGR of 39%.
In May 2008, the stock clocked its all-time high close of INR526. Following the global
meltdown, the stock corrected to INR180 levels on 6 January 2009.
September 2014
Corporate Action Lever (Fraud): On 7 January 2009, the then owner-chairman Ramalingam
Raju confessed to falsification of accounts. Within 2 days, the stock plunged nearly 95% to a
low of INR11.50.
Corporate Action Lever (Change of management): In April 2009, Tech Mahindra acquired
31% stake in Satyam @ INR58 per share, outbidding L&T and Wilbur Ross (private equity
player specializing in distressed assets).
61
After the levers
Stock plunges on fraud announcement,

but recovers on profit turnaround
Mar-13
Mar-12
Mar-11
Mar-10
Mar-05
FY12
FY11
-1.6
-2.8
FY08
FY07
FY06
FY05
FY04
FY03
FY02
Accounting fraud &

also class action claims
600
500
400
300
200
100
0
Mar-04
2.5
FY10
3.5 5.0
9.6
Tech
Mahindra 12.8
takes over
FY09
0.8
7.1
16.9
Mar-03
14.1
Mar-09
Satyam Computer
Sensex (Re-based)
Satyam Computer PAT (INR b)
Mar-08
Satyam Computer: PAT rebounds post

fraud, after Tech Mahindra takeover
Mar-07
Complete turnaround in FY12 : The new management led by Mr Vineet Nayyar went
about systematically turning around the beleaguered company, renamed as MahindraSatyam. In FY10 and FY11, all the financial discrepancies and the subsequent class action
claims by customers and partners were accounted. Finally, in FY12, Mahindra Satyam was
back in the profit mode.
followed by merger with Tech Mahindra: In March 2012, the boards of Tech Mahindra
and Mahindra Satyam approved a merger with a swap ratio of 2 shares of Tech Mahindra
(then at ~INR650) for every 17 shares of Mahindra Satyam (then at INR75). Shareholders
who opted for the swap have gained handsomely as Tech Mahindra shares have since more
than trebled to INR2,100 levels.
Mar-06
Key takeaways
September 2014
Quality of management is a key factor causing performance breakthrough or breakdown.

Fraudulent and minority shareholder unfriendly management will eventually and invariably
break down stock performance.
All management-change cases must be monitored as they hold potential for breakthroughs,
resulting in stock super-performance.
62
A4.2 Sector aggregates Key takeaways
The absolute and relative stock market performance of most sectors varies, depending on
the macroeconomic conditions.
Consumer segments Alcoholic beverages, Paints, Tobacco, (2) Gems & Jewelry, (3)
Infrastructure/Construction, (4) Capital Goods, (5) Steel, and (6) Autos Cars, CVs, and Auto
Ancillaries including Tyres.

2.1
1.4
BSE Sensex
2.2
Tobacco
Products
2.2
Infrastructure
2.3
Paints
Agro
Chemicals
2.3
Auto Anc.
2.5
Auto - CVs
2.6
Realty
2.8
Auto - PVs
3.2
Mining &
related
3.4
Gems &
Jewellery
Alcoholic
Beverages
3.9

12.5
10.2
8.7
6.7
6.3
6.0
5.8
5.5
5.4
5.2
BSE Sensex
Infrastructure
Steel
Retail
Gems &
Jewellery
Capital Goods
Plastic
products
Alcoholic
Beverages
Construction
Mining &
related
Realty
2.7

2.1
2.1

1.8
1.8
1.7
1.6
1.6
1.5
1.4
1.1
September 2014
BSE Sensex
Agro
Chemicals
Healthcare
Auto - 2W
Auto - PVs
Tobacco
Products
Tyres
Gems &
Jewellery
Paints
Auto - CVs
Alcoholic
Beverages
0.4
63
The worst performing major sectors over FY03-14 include: (1) Media, (2) Shipping, (3)
Fertilizers, (4) Power Utilities and (5) Oil & Gas.
Fertilizers
1.2
1.2
Shipping
1.1
1.2
Refineries
1.0
1.2
Crude Oil, Gas
1.0
1.1
Utilities
0.9
Media

1.4
Paper
2.4
Chemicals
BSE Sensex
Technology
2.4
Crude Oil, Gas
IT Education
0.2
2.0
2.1
2.1
Entertainment
Healthcare
Fertilizers
Technology
1.8
Paper
1.6
1.8
Auto - 2W
1.5
Media
2.7
BSE Sensex
0.9
September 2014
-0.4
Mining
& related
BSE Sensex
-0.4
Steel
Construction
-0.5
Sugar
IT Education
-0.5
Plastic
products
-1.4
-0.6
Capital
Goods
-1.5
Shipping
-1.6
Realty
-0.7
-0.6
Utilities
0.4
64
outperformance than Financial Lever. As tabled below, the differential in levers between
outperforming and underperforming sectors was highest in Operating Lever, followed by
Revenue Lever and Financial Lever.
How levers differ for outperformers vis--vis underperformers
Lever
Formula
All
sectors
September 2014
FY03-14 Median
OutUnderperformers
performers
Differential
(x)
Revenue Lever
Sales/GDP
1.2
1.3
1.0
1.3
Operating Lever
EBIT/Sales
1.0
1.1
0.7
1.4
Financial Lever
EPS/EBIT
1.0
1.0
0.8
1.2
Valuation Lever
Mkt Cap/EPS
1.4
1.4
1.4
1.0
65
NOTES
September 2014
66
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September 2014

| 6-Force Framework of Levers

6-Force Framework of Levers

Preface ......................................................................................................... i-iii

Jubilant Foodworks ....................... 23

Annexure 1: Levers for non-Financial companies ....................................... 43

| 6-Force Framework of Levers

The 4th dimension of equity research

Motilal Oswal and the 4th dimension

(to read full report, please click on the cover icons)

| 6-Force Framework of Levers

(click the icons to read full report)

Investment Framework: MULTI-BAGGERS

Investment Framework: INDIAS NTD OPPORTUNITY

Investment Framework: GREAT, GOOD, GRUESOME

Investment Framework: BLUE CHIP INVESTING

Investment Framework: ECONOMIC MOAT

| 6-Force Framework of Levers

Investment Framework: UNCOMMON PROFITS: EMERGENCE &

Launching the IF series

6-Force Framework of Levers

| 6-Force Framework of Levers

6-Force Framework of Levers

FAQ #1: What is the 6-Force Framework of Levers?

Total Stock Lever

FAQ #2: How does this 6-Force Framework work?

Total Stock Lever (TSL) =

| 6-Force Framework of Levers

For non-Financial sector companies

= Earnings Lever (EL)

Valuation Lever (VL)

Country GDP x Sector Sales x Co. Sales x EBIT

Therefore, Stock Price

= Global GDP x [CL x SL x StL x OL x FL] x [VL]

For Financial sector companies

= Book Value Lever (BL)

Country GDP x Agg. NII

Therefore, Stock Price

Valuation Lever (VL)

= Global GDP x [CL x SL x StL x OL x EL] x [VL]

| 6-Force Framework of Levers

FAQ #4: How can the 6-Force Framework be applied?

| 6-Force Framework of Levers

APP #1: Determine sector allocation strategy Key exhibits

[B] Operating Leverage map of high growth leverage sectors

[C] Sector Allocation Strategy based on [A] and [B] above

Other Quadrants / Sectors for

G4 (ex Fin. PSUs), O3

G4 (ex Fin. PSUs), G3

| 6-Force Framework of Levers

APP #2: Create future market scenarios Key exhibits

APP #3: Identify potential outperformers

| 6-Force Framework of Levers

FAQ #5: Which stocks offer a play on the 6-Force Framework?

Jubilant Foodworks, Symphony

Alembic Pharma, Gujarat Pipapav Port, J K Cement,

Idea Cellular, Bharti Infratel, Maruti Suzuki, Ashok Leyland

Jain Irrigation, BHEL

Corporate Action Lever

United Spirits, PVR, Eicher Motors, Crompton Greaves

| 6-Force Framework of Levers

Main Report 1. Backdrop