Most of us might have faced a dilemma whether to buy the Industry leader or its nearest competitor. So lets take a look at historical returns over three years as these include 14 months of Bear market. Stock returns reflect how management of both the leader and its nearest competitor faced the global recessionary environment. I have excluded Tata Steel v/s SAIL comparison as the former has a global presence while the later is restricted to India, RIL v/s ONGC due to govt. intervention in the operation of ONGC, Sun Pharma v/s Cipla due to FDA issues at the former’s subsidiary.

SBI v/s ICICI Bank

SBI delivered 82% returns compared to just 5% returns from ICICI Bank.

HDFC Bank v/s Axis Bank

The former delivered 72% returns while Axis outperformed with a huge margin with 127% returns.

It is interesting to note that relatively SBI has outperformed even HDFC Bank which is considered to be the darling of Indian markets when it comes to financials.

Infosys v/s TCS

Surprise. Surprise. Returns from TCS (20%) are better than Infosys (12%) .

Bharti Airtel v/s Rel Comm

The gap between both the stocks returns are huge with Bharti Airtel delivering 10% returns while RCOM with a negative returns of 57%. The problem with all the ADAG companies are their focus on market share rather than profitability.

DLF v/s Unitech

Unitech’s returns were 2 times the DLF on the downside with -67% compared to -33% of DLF.

Hero Honda v/s Bajaj Auto

Inspite of losing market share to Hero Honda, Bajaj Auto’s stock has done relatively better with 185% returns compared to 112% from the leader’s stock,  since it was listed after its demerger of various businesses on 26/05/08.

Voltas v/s Blue Star

Blue Star did much better than Voltas with 101% returns compared to 59% from the later. Blue Star’s focus on return ratios did the trick for them.

Exide v/s Amara Raja Batteries

Amara Raja Batteries did relatively better than Exide with 216% returns while the later delivered 197% returns. I guess Exide’s underperformence was due to its loss making life insurance business.

Welspun Gujarat v/s Jindal Saw

The leader delivered a return of 215% compared to its nearest competitor (Jindal Saw) returns of 149% over the last three years.

Conclusion: Its divided here with the leader doing relatively better to its competitor in 4 out of the 9 cases. So buying the second largest player may sometimes be the better option than the industry/segment leader.

Its time to look back and see how have my prediction for 2009 fared even though there is still a month left to end the year and anything can happen in the remaining days to come. As things stand today, here is how it turned out:

ICICI Bank is the 3rd best performer in the constituents of Sensex stocks against my expectations of being the top performer.

RIL did announce its plan for acquiring Lyondell-Basell but the acquisition has not yet been completed and RIL may or may not acquire the company.

ICICI did sell a small portion of 3i Infotech in the secondary market but yes neither 3i Infotech nor First Source has been put on the block.

Right now, Sensex is trading at much higher level than my predicted range of 10k-14k.

Rupee is around 46 to the dollar v/s my prediction of 45.

Like equities, commodities has surprised on the upside as well. Crude is trading around $78 as against my expectation of $40-60.

India’s  Q2 GDP came at 7.9% v/s China’s GDP of 8.9%. So my macro prediction turned out to be correct !

PE players have not been active in any of the markets forget about India.

I got my underweight calls on Metals and Real-estate WRONG.

So, overall, I did reasonably well. Not bad but not good either. There is always scope for improvement!

Lupin is India’s fifth largest drug-maker and has one of the best return ratios in the industry with ROE of 35% and ROCE around 28%. It provides growth visibility for the next 3 years . The company is also making all the right moves whether its acquisition, hedging, product launches and use of capital. Its acquisition strategy is based on geographical presence and margin improvement through back-ending of production. After Ranbaxy, Lupin is the only other Indian company present in Japan (world’s 2nd largest market). Its hedges around 35% of its total exposure through forward contracts rather than through exotic instruments. Product strategy is to launch niche and differentiated products with a focus on Para IVs and FTFs. There is also efficient usage of capital through working capital optimisation.

Growth in the future will come from the following areas:

FY11:  Company acquisitions in Latin America and GCC. Branded generic products acquisitions (Antara and Allernaze)

FY12:  Generic version of GSK’s Combivir and Forest’s Namenda (FTF), Biosimilars, Oral Contraceptives (Only 2 players present currently) and Milestone payment ($40-45mn) from Salix if the extended release product of Rifaximin progresses well during trials. Margins improves due to back-ending of production, capex might decrease by 150crs over FY11 and tax rate goes up by 2-3% due to possibility of sunset clause not being extended.

FY13:  Launch of generic version of Schering Plough’s Clarinex, Fortamet (exclusive FTF),  Novartis’s Lotrel, Royalty and API sales from Salix’s Xifaxan.

Developed countries focus on containing healthcare costs should benefit generic players like Lupin. All these should result in earnings growing by atleast 25% over the next 3 years. Risk remains of very high competition once product is out of the exclusive sales period.

This is just a small brief on what the Big Bull bought/sold the last quarter.

He bought 1,54,500 shares of Lupin, 1,37,105 shares of Titan Industries, 6,00,000 shares of Karur Vysya Bank, 203000 shares of Rallis India and 8,00,000 shares of Geometric in the quarter ending September’09.

He sold 19575 shares of Bilcare. This is his second consecutive quarter of selling in Bilcare.

No change in holdings in Crisil, Punj Lloyd, Pantaloon Retail, Geojit BNP, Praj Industries, Zen Technologies and Nagarjuna Constructions. Not all the companies have disclosed the shareholding pattern.

Wish you a very Happy Diwali. Don’t expect markets to go up by 90% again by the next Diwali though the bull market remains intact ! Avoid Index stocks and buy quality midcap stocks.

Sanjoy Bhattacharya, Partner, Fortuna Capital who advises an hedge fund “Aristos”, write a column for Forbes India. Here are the links of the article he has written till now. It makes for an interesting reading. He is very much focussed on “high ROCE” companies. I have seen him at the Myiris Investor show twice and I quite agreed to the point he made there.

The Myth of Fair Value

The Letdown and After

Stray Where You Are

When Pigs Take Wing

Aristos Fund posted a gain of 7.26% in July compared to 8% gain by Index and the Fund is up by 39.4% year to July.

Positive signals coming in from the Govt. Divestment, National Unique Identity programme, Direct Tax Code 2009, etc. But reforms on Insurance and Pension still pending. 3G auction pending. These remain the key triggers.

Two Index heavy-weights stocks (RIL and Bharti Airtel) are  facing unknown events. Any positive news on these will take markets higher.

FII inflows till date have been around $6-7bn. India can see inflows back to the FY08 levels or even more i.e $15bn-18bn. Big Boy of Dalal Street LIC can’t increase stake in most of the Index companies while most of the FII inflows have been coming through Exchange Traded Funds. Rupee could trade at 42-43 levels by the end of FY10.

Monsoon impact on earnings should be marginally negative.  FMCG companies should pass on the increase in prices to the consumer while Autos should continue to benefit from low interest rate regime.

Low base effect will make sure that every headlines sound like “Ahead of expectations”.

Fiscal deficit not a major concern as long as there is an improvement in the global economy. Finance Ministry has considered crude @ $80 while calculating subsidies. However, its diificult to take a call on the outlook for crude oil.

Demand for Real-estate is highly dependent on the IT sector. There is no major recruitment in the IT sector yet so it is difficult to see the demand coming back to 2007 levels in the near future while low interest rates might offset the same to a greater extent. What happens when the interest rates go up remains to be seen.

Impact of global inflation and rollback of stimulus package remains to be seen. This could turn out to be risks on the downside.

I have tried to find out when did the Ace Investor Rakesh Jhunjhunwala first bought a stock and at what (Average) price, adjusted for bonus issue and stock split through the BSE Shareholding pattern and BSE Historical prices data. BSE doesn’t disclose holdings less than 1% so its very likely that he must have bought some stocks earlier and subsequently raised it to more than 1%. In bracket is the multibaggers he is making at CMP (as of today). Considering his acquisition price, the dividend yields on most of his stocks is as high as 20% !!!

Crisil was bought in the March’02 quarter when the stock was trading at an average price of 250 (16 bagger) .

He bought Titan in the June’02 quarter when the stock was trading at 65. At the Myiris.com Investor meet two years ago, Jhunjhunwala mentioned he bought Titan at 40 which means he bought Titan before the June’02 quarter (30 bagger)

RJ first bought Lupin in the Dec’02 quarter when the stock was trading at 60 (15 bagger)

Pantaloon was bought in the Sept’03 quarter when the stock was trading at 22. Rights issue excluded (15 bagger)

Nagarjuna Construction was bought in the March’04 quarter when the stock was trading at 16 (9 bagger)

Praj Industries was bought in the March’04 quarter when the stock was trading at just Rs 4.5 (21 bagger)

Bilcare was bought in the March’04 quarter at 125 (3 bagger)

Geojit BNP Paribas was bought in the March’05 quarter at 7.5 (almost 6 bagger)

Punj Lloyd was bought in the March’06 quarter at 210 (No bagger here)

Karur Vysya Bank was bought in the June’06 quarter at 275 . Rights issue of 1:2 in 2006 excluded. (No bagger here)

This is just a small brief on the shares Ace Investor Rakesh Jhunjhunwala bought/sold in the June quarter. I may request readers to do their own homework before blindly copying his portfolio.

He bought 1,07,200 shares of Lupin, 7,00,000 shares of Nagarjuna Construction, 2,44,838 shares of Rallis India, 2,00,000 shares of Praj Industries and 2,85,000 shares of Hindustan Oil Exploration.

He sold 50,000 shares of Karur Vysya Bank, 27,000 shares of Titan Industries and 2500 shares of Bilcare.

No change in holdings in Crisil, Punj Lloyd, Pantaloon -DVR, Geojit BNP Paribas, Geometric,  Prime Focus, Zen Technologies and Mid-day Multimedia. Due to equity dilution in Pantaloon Retail, RJ’s holdings in Non-DVR Pantaloon might have come down to below 1% and hence it is not disclosed in the Shareholding pattern.

My observations: He increased his holdings in Lupin for the second consecutive quarter while he sold some Titan Industries in the last two quarters. My estimate is that he bought stocks worth Rs 35crs during the June quarter.

Disclosure: I hold Lupin and Punj Lloyd.

A column written by the Ace Investor in Business Today dated 28th June’09.

Click here to read the article.

I have compiled a list of quality stocks which one can look at based on earnings growth and return ratios (FY09) . I have excluded FMCG and Banking from the list.

Amara Raja Batteries (CMP: 92)

Ahluwalia Contracts (CMP: 87)

Bajaj Electricals (CMP: 400)

Blue Star (CMP: 342)

Crisil (CMP: 3412)

Divis Labs (CMP: 1117)

eClerx Services (CMP: 300)

Exide Industries (CMP:66)

Mphasis (CMP: 370)

Opto Circuits (CMP: 160)

Page Industries (CMP: 545)

Sesa Goa (CMP: 185)

Thermax (CMP: 408)

Titan Industries (CMP: 1180)

TRF (CMP: 825)

Voltas (CMP: 123)

Voltamp Transformers (CMP: 842)

Stocks with a little lower ROCE but over 30% ROE are Crompton Greaves and Tulip Telecom (both have ROCE of around 25%).

If you can pick 5 stocks from the above list whose earnings are expected to grow over 20% over the next few years and available at FY11 PE of less than 12, then I believe you can easily outperform the Index over the longer term.