Our themes for 2012 would be currency depreciation (continuation of risk off trade), growth slowdown (political and policy), NPA scare in the banking system, likely falling commodity prices, and a declining inflation and interest rate scenario. In this capital starved economy where availability and cost of capital are issue for sustaining normal operations, investment pickup is unlikely and asset / capital light businesses should do well. That would entail IT, pharmaceutical, consumer business and the services part of the economy to do well. We believe it is too early to play financial leverage or operating leverage as a large part of India Inc will struggle with a weak demand.

My view: I have observed that its not easy to forecast for the whole year. Be it any smart investor! I think its better to divide 2012 into first half and second half. I believe 2Ps (political and policy) would both be favourable for India Inc in the second half while first quarter of first half should be a consolidation period. Remain long on consumption.

We hope the year 2012 is a great one for India and all of us. Wish you all a very happy and prosperous New Year!!

Cholamandalam Investment and Finance Ltd (market value of around Rs 53crs)

Max India (Management mentioned they will recover all losses of previous 3 quarters and end FY11 in the black. Major beneficiary of reforms in Insurance if and when it happens )

Whirlpool of India (MV of Rs 50crs) . I had posted about Whirlpool last year in my blog.

Greaves Cotton (Manufacturers of engines for Piaggio, Tata Motors and Mahindra & Mahindra’s three-wheeler vehicles. Also manufactures Construction equipment. I have a vested interest in this stock)

Rallis India (Stock had a dream run over the past 2 years. Still it should do well in the long term)

Entertainment Network of India Ltd (ENIL) (Owners of Radio Station “Radio Mirchi” )

Gujarat Pipavav Port (Anchor investor in IPO last year)

Blue Star (See recovery in earnings only in H2 of FY12)

Kirloskar Oil Engines Ltd (market value of around Rs 32crs)

Edelweiss Capital (I have not seen any industry as competitive as broking)

Carborundum Universal (The company targets a Return on Capital Employed of 25% from 21.5% currently over the next few years)

OnMobile Global (Beneficiary of 3G)

Tube Investments of India ( It seems like some sort of obsession with Muruguppa Group companies! )

I think (from the few companies I track) the portfolio is very well diversified across sectors with companies known for maintaining high standard of corporate governance. Since Akash Prakash appears on business channels frequently and writes a column for Business Standard with no mention of his fund’s holdings anywhere, I thought why not find out from the BSE!

Taking a leap into the next growth curve

India is at an inflection point of sustained growth and so is Whirlpool. With a strong brand, well differentiated products and a healthy balance sheet, Whirlpool of India has embarked on a journey of accelerated growth. With the intention of doubling its business over the next 3-4 years, it has charted a 3-pronged business strategy.

• Grow the core business
• Extend the core business
• Expand beyond the core

This business strategy will be supported both by heavy investments and channel strategy.

Channel Development:

• Reaching out to tier 2, 3 & 4 towns

The immediate focus of Whirlpool is on 700+ towns in tier 2, 3 and 4 where it plans to expand its presence.

• Expanding Modern Trade Footprint

Volume grew by almost 60% last year, vital for growing the premium range.

• Enhancing Brand Experience

Increasing visibility and reach through exclusive outlets by trebling the number of brand shops from the current count of 35.

Home Appliance Industry comprising Refrigerators, Washing Machines, Microwaves and Air-conditioners grew by 15-20%. Our estimate of category growth is 15-20% for Refrigerators and Microwaves and 20-25% for Washing Machines and Air-conditioners.

Outlook and Opportunities:

Penetration of home appliance is still very low and the long term growth opportunity for this industry is very attractive. Out of every 100 consumers living in urban India, only 33 own a refrigerator and 13 a washing machine and these numbers are miniscule in rural areas. Penetration of air conditioners, microwaves and electrical water purifiers is even lower.

Within the home appliance industry, categories/segments that are expected to grow ahead of the industry average are washing machines, microwaves and air-conditioners.

My take : Whirlpool has a diversified portfolio of products leading with refrigerators. Market size should be huge but the competition is also intense. It is a debt-free company with a very good return ratios (ROE of 44% and ROCE of 49%) and at CMP of 300, it trades at 30x FY10 and 23x FY11 expected earnings which is neither cheap nor expensive. Company plans to invest Rs 4bn over next 3 years which indicates the growth prospects it foresees.

Approach: Our approach involves two stages:

Firstly, we try to predict the long term potential size of each of the key consumer segments in which we invest (e.g. confectionery, soft drinks, detergents, noodles, fast food, beer, etc.). We do so by comparing consumption trends globally in relation to GDP per capita at various stages of economic development. We have been pleasantly surprised by how much data is available in this area. This allows us to create a scatter diagram, and then a “best fit” curve – a guide as to how demand for a product or service can be expected to develop as GDP expands, structural barriers decline and, most importantly, consumers’ propensity to spend higher proportions of their income on discretionary items rises. This “triple whammy” can lead to sector growth rates well above general levels of economic growth. We refer to this as our “scale factor”. It invariably takes the shape of an “S” when graphed.

Having established a number for the sector growth potential by country, the second stage of our model looks at company specifics. We estimate the potential for a company to increase its market share and then try to assess its likely economic value added. We do this by making assessments of long term trends in margins, tax rates and fixed and operating asset intensity. This allows us to establish a long term cash flow profile for each company based on its value adding capabilities. Then we discount the cash flows back to provide a current valuation.

Long term Strategy:  We say this strategy will outperform because over long periods dominant consumer companies always do. This is for obvious reasons: low capital intensity, high cash generation, defensible moats (brands, distribution etc), and resilience against external shocks (we all need to eat, drink, wash and brush our teeth). The equivalent companies in the US have compounded at 15% per annum over the last thirty years. Add in emerging market tail winds in the form of: (a) disposable incomes rising faster than absolute incomes; (b) the evolution of a credit culture (mortgages and credit cards); (c) favorable demographics (except in China); (d) urbanisation; (e) formalisation of consumption (i.e. more supermarkets / fewer Mom & Pops); and (f) improving distribution reach as a result of infrastructure development, then these Asian businesses should do even better over the long haul.

HUL: We met the CEO to review our seventy page research report which concludes that the company will struggle both to retain market share in soaps and detergents and to drive growth from food and cosmetics (it is really only strong in deodorants, where, admittedly, wider usage would bring immediate benefit). Whilst he impressed us with his plans to improve distribution and product time-to-market, we feel our money is better placed with the more focused Nestle and Colgate.

Colgate: We were told that they have no plans to introduce non-oral hygiene products, such as the Palmolive range, until their market share in toothpaste reaches 70% from the 50% currently. The risk is the possible entry of P&G into this sector with Crest, the largest selling toothpaste brand globally, although, for now, P&G seems more concerned with battling Unilever in detergents.

Nestle: Despite dominant market shares in baby food, instant noodles, soups, sauces, coffee, etc., annual sales have only just surpassed USD 1 billion. Of course, this is miles above the USD 8 million revenues recorded when the company first listed in India in 1978 – at Rps 12.5 per share versus today’s Rps 2400 per share. We expect revenues to be in the order of USD 12 billion twenty years hence. This does not take into account the likely launch of the Perrier, Haagen-Dazs and Gerber brands.

Britannia: Indians eat more biscuits than anybody else in the world – about 150 per annum each; yet their market remains tiny, barely USD 1.9 billion in size. The bulk of, course, are the plain glucose variety costing only USD 1.4 per kilo (versus USD 16 in Japan!). Britannia Industries, has been the only disappointment, as last year’s decline in raw material prices allowed a flood of opportunistic, cheap glucose biscuit manufacturers to take market share. The introduction, however, of a unified sales tax across the country from 2010 will see off many of the fly-by-night producers who in this sector, as in many others, depend on tax dodging to stay competitive. The tax will free up fixed and working capital as producers will no longer be obliged to operate multiple factories and warehouses to qualify for tax advantages on a state-by-state basis.

GSK Consumer: Although the Horlicks malt drink accounts for 75% of the India business, plans are well advanced to extend this brand into nutrition bars and the like, as well as to launch the Lucozade energy drink brand.

Potential: Right now market share is, in the case of India, 12% of its packaged food (Nestle), 33% of its biscuit (Britannia), 40% of its toothpaste (Colgate) and 20% of its hair care sectors (Marico). What’s more, it is worth remembering that the market share data only refers to the “organised” sector. As consumers shift from the informal market, often equal in size to the visible sector, the overall scale of the addressable opportunity will increase dramatically. Just by holding their current market shares, these companies could eventually become global leaders.

Risks: The risks to this rosy scenario are mainly geo-political – China and India could go to war over water. Six out of seven of the region’s largest rivers originate from the Tibetan plateau, which could explain why the area is so hotly contested.

Valuation: In the old days we thought it was better to own the third player on 10x versus the market leader on 20x. Well, that was misguided. The third player invariably gets marginalised, resorting to dodgy practices to stay alive, whilst the market leader consistently surprises positively, using the cash flow from its dominant position to reinforce its brands, etc. Our men may be de-rated, but they won’t be de-railed. As brand owners, they have pricing power. Indeed they tend to push up prices faster than their costs. They don’t have debt and, if rates rise, will simply earn more on their cash holdings. Meanwhile, their customers still need to eat, drink and wash. A portfolio of dominant consumer companies is the best inflation hedge of all.

Bought:

Lupin – 79,500 shares

Titan – 1,57,000 shares

Nagarjuna Constructions – 12,50,000 shares

Rallis India – 35,000 shares

McNally Bharat Engineering – 4,80,078 shares

Sold:

Punj Lloyd – 12,50,000 shares

Praj Industries – 12,50,000 shares

Karur Vysya Bank – 5,27,503 shares

HOEC – 5,50,500 shares

No change in holdings in Crisil, Pantaloon-DVR, Bilcare, Geojit BNP Paribas, Geometric and Zen Technologies.

Big Bull is selling stocks whose earnings disappoint or are likely to disappoint in the future. Punj Lloyd since its IPO has gone nowhere.

Manappuram General Finance & Leasing Ltd (CMP- 651) : Provides loans on gold which is at large an unorganised segment currently. Market cap of Rs 1125crs (it will increase after the merger with its subsidiary), ROE of 30-35%, NIM of 13% and the Highest Credit rated  NBFC. Venture Capital investors hold an aggregate 32% stake in the company.

Shriram City Union Finance (CMP – 394) : It is sort of a micro-finance organization. Small ticket retail loans with shorter tenors operating in the semi-urban and rural areas. Market cap of Rs 1816crs, ROE of 20%, NIM of around 11-12% and a Strong management. Shriram Group is very popular among the VC/PE  investors.

e-Clerx (CMP – 426) : Only listed play on the KPO space. The company derives major portion of its revenues from the financial vertical. It has a market cap of 789crs, ROE and ROCE in excess of 35% and growth will be directly related to the US economy.

Himadri Chemicals (CMP -432) : Manufactures Coal Tar and plans to triple capacity and be counted amongst the top three players globally in 3 years. It has a market cap of Rs 1426crs, ROE of around 20% with a high entry barriers which leads to a certain competitive advantage.

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.

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!

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.

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.