October 12, 2009

TOTIS PORCIS - The Whole Hog (When odds in favour Being Greedy like a Pig)

Contributor: Abhir Pandit | [email protected]

"It is not how likely an event is to happen that since their allocations could be done differently. Great matters, it is how much is made when it happens don't stop with finding mispriced securities; that should be the consideration. How frequently they also know how to take maximum advantage of the the profit is irrelevant, it is the magnitude of the opportunities given the respective risk/reward outcome that matters." situations. This mindset is in built in many successful investors and traders the following example show the Nassim Taleb - Fooled By Randomness point. While thinking about position sizing two very good examples of the same are known. In this week's article we try to address the difference between frequency and magnitude in investing and In 1963 after the Salad Oil scandal caused American importance of position sizing. Express to decline, Buffett allocated 25% of his assets at that time when he realized that the stock was Since investing is supposed to deal with future it is supremely mispriced. inherently a probabilistic exercise dealing with various possible scenarios and diverging views of the future. So In 1988-89 when Warren Buffett was purchasing Coca- thus we must try to increase the exposure to the being Cola shares he allocated 37% of his portfolio at that time right events and minimize exposure to the being wrong to Coca-Cola stock. events. It is now well documented and a well known phenomenon that humans suffer roughly twice as much Though these examples are of an extremely skilled from losses as they receive pleasure from comparable investor while considering the position sizing of an gains. Thus investors due to their recent experience an individual should consider his own turn down positive expectation financial propositions. personality, risk profile and psychology in order to profit What investor confuse is that change in wealth is from the mispriced security. not a function of how often you're right but how much money you make when you are Right to how In a extract from Barton Biggs book "HedgeHogging" much you lose when you are Wrong. In an interview there is passage about a character called Tim with Scott Bessent (former Soros Manager) he said in a (rumoured to be Soros Fund manager Nick Roditi). In recent interview, “George has a terrible batting the extract Biggs says "On his beautiful Chippendale average—it's below 50 percent and possibly even desk sits a small plaque, which says Totis below 30 percent—but when he wins it's a grand Porcis—the whole hog. There is a small porcelain slam. He's like Babe Ruth in that respect.” In a value pig, which reads, “It takes Courage to be a Pig.” I strategy the advantage that an investor has is the gap think Stan Druckenmiller, who coined the phrase, between price and value of the business, thus the more gave him the pig. To get really big long-term Mr. Market acts foolishly the more you can take returns, you have to be a pig and ride your advantage of him So when a value investor makes an winners.” investment and if the market price moves below purchase price the right move is to put more money to work assuming that the fundamentals haven't changed Sources thus increasing one's exposure to the particular Articles by Michael Mauboussin of LMCM HedgeHogging by Barton Biggs mispriced security. Inside the House of Money-Top Traders On Profiting in the Global Markets by Steven Drobny Very often when portfolio managers are asked about the types of securities in their portfolio but very rarely about their position sizing "As to why this security has been given this much allocation?" Position sizing is very important in determining portfolio returns. Two portfolios with same securities will have different results 1 Are Pension Funds the right products for you

Are Pension Funds the right products for you?

Kavitha Menon | [email protected]

When one thinks of retirement savings, pension funds are a natural option to consider. Not only do they ensure disciplined savings during an individuals working life, but also ensure guaranteed income for life or for a defined period as per policy.

What pension funds do is invest money received from investors over a defined period – mostly till retirement - into various assets depending on the product. Several Pension products allow allocation to equity too.

Thus the pension funds accumulate a corpus at the end of the premium term. This phase is called accumulation phase. After accumulation comes the distribution phase where the pension fund pays the investor an annuity that can be fixed or variable depending on the scheme features. Investor can take 1/3rd of the accumulated amount as a lump sum; the rest is paid as annuity. Should the investor wish to take the full amount in one lump sum , he will need to pay tax at the highest marginal rate on 2/3rd of the accumulated amount .Annuities can be fixed (guaranteed) or variable.

An investor in pension funds would generally prefer annuity payments as it involves zero hassles, no administration and fund management hassles. But there are some facts to consider

1. For most non –guaranteed schemes annuity amount will be a function of performance of the scheme. If your fund performs poorly exit options are very limited for an investor, and exit costs are too high.

2. If you are in a guaranteed annuity product it is likely that your pension fund manager has invested most of your money in debt instruments. This means that it is unlikely that your returns will keep pace with inflation.

3. Life is full of uncertainties. Money in a pension scheme is illiquid. A pensioner may have a sudden medical need, or an unanticipated requirement for funds, but he will be unable to use his pension money as it is locked with the Pension Fund. Liquidity and access to funds as and when required, is completely not there .This is true even during the accumulation stage.

4. Pension funds are more expensive than regular mutual funds or direct in equities due to their administration, distribution and fund management charges.

5. When funds are in your control you can take advantage of investment opportunities as and when they come. When they are stuck in a pension scheme, you have no say as to where your funds will be invested.

For the undisciplined investor and for those who believe that they cannot manage their money, pension funds are a better choice. This is because there is real risk of spending always ones entire savings or making wrong investment decisions and losing capital. For those who have the discipline to follow a financial plan, a plain vanilla sip in a good mutual fund or regular investing in quality value can help build a decent retirement corpus plus leave an inheritance for future generations.

2

9th October 2009

CMP Rs. 2178.0 Result Update HOLD Q2FY10

Infosys reported a slightly subdued second quarter well within the guidance provided. They remain to be cautiously optimistic about their performance going ahead.

Result Highlights:

For Q2FY10: ?Revenues for the second quarter of FY10 grew by ~3% YoY to Rs. 55,800 Mn, but showed a sequential growth of 2% ?PAT was Rs. 15,400 Mn for the quarter posting a YoY growth of ~7%

Guidance:

Quarter ending December 2009: ?Revenues in the range of Rs. 54,290 Mn and Rs. 54,760 Mn. ?EPS is expected to be in the range of Rs. 23.35 and Rs. 23.56

For FY10: ?Revenues in the range of Rs. 219,610 Mn and Rs. 220,550 Mn. ?EPS between Rs. 99.00 and 100.00

An admirable thing about Infosys is their ability to sustain margins well within their average range even in times of downturn. Infosys sees a repeat business of almost 99% every year which leaves plenty of room for growth. Also the pricing scenario has shown a slight improvement, probably momentarily, but which can lead to further margin growth. The currency movement earlier also gave some cushion to the margin & at the same time, freeze on employee addition.

From the management concall, it was apparent that pricing pressure has reduced from clients & deals in the pipeline have started to move. The company has shown a volume increase of ~2% & has also seen a lot of deals coming in on account of client/vendor consolidation.

The company had reported an estimated addition of 18,000 employees by the end of the FY10 (in Q1FY10), which they have increased by 2000, to 20,000 employees. Most of their recruits would be on the lateral side which, according to the management, will keep them ready for the growth in the business that they are expecting. Infosys wants to strengthen their middle management layer which apparently will facilitate more efficient project execution improving their cycle time per project.

One significant opportunity still remains for Infosys, as before, with the $2.8 bn in cash, they are looking for acquisition targets on the basis of three criteria:

1) Geographical - Smaller acquisition which would strengthen their footprint in German/French/Japanese (Non- English) markets 2) Service Offering - Some platform based acquisition which will strengthen their business solutions. 3) Vertical - They want to ensure a faster entry into their desired verticals

Although, it would be too harsh to say that Infosys might have missed the bus on some very attractive valuations for their target companies, but nevertheless, if the acquisition is a strategic fit, growth can be extracted out of it.

Due to the consolidation seen in the computer hardware industry & their march into the services territory, has changed the game slightly for now. These acquisitions make it possible to show truly end-to-end performance from hardware to services. In the wake of cash rich global giants infringing into the services domain, where does Infosys stand a couple of years from now, is yet to be seen.

3 Infosys Technologies Limited: Q2FY10

Also the company has some pricing risk owing to uncertainty of the client budget scenario & margin risk due to rupee appreciation in the near term. The management mentioned a positive indicator, post downturn, in their concall; that most of the clients who were taking too much time making up their mind for opting for outsourcing, have started to relax. Although decision cycles haven't seen any change in their duration but decisions are being taken regarding new projects.

Since there had been a quarter to quarter budget update as well as clients engaging into more & more short term contracts, volume growth was difficult to keep track of. But at the brink of the upturn, things might look better, although contracts & budgets have been kept short term for now.

It's always difficult to project currency movement, which alters the outlook widely. Judging by their performance till now, on a constant currency basis it can be expected that INFY might meet their FY10 estimates, with relative ease. Addition of new employees coupled with wage hikes will see a slight increase in offshore cost, yet renewed sales effort can bring in better topline performance.

Infosys trades at a P/E of 21, which brings the argument to margin of safety. Infosys is an exceptionally well run company & fairly priced as an industry leader. But in the wake of this, if one considers pruning their IT portfolio, we recommend a HOLD for Infosys.

Infosys: Quarterly Financials

Earnings Statement YE March (Rs. Mn.) Q2FY10 Q1FY10 Q-Q(%) Q2FY09 Y-Y(%) FY09 FY08 Y-Y(%) Net Revenues 5,585.0 5,472.0 2.07% 5,418.0 3.08% 21,693.0 16,692.0 29.96% Direct Expenses 2,963.0 2,915.0 1.65% 2,891.0 2.49% 11,765.0 9,207.0 27.78% Gross Profit 2,622.0 2,557.0 2.54% 2,527.0 3.76% 9,928.0 7,485.0 32.64% Selling & Marketing expenses 276.0 261.0 5.75% 303.0 -8.91% 1,104.0 916.0 20.52% General & Admin Expenses 413.0 428.0 -3.50% 430.0 -3.95% 1,629.0 1,331.0 22.39% Total Expenditure 3,652.0 3,604.0 1.33% 3,624.0 0.77% 14,498.0 11,454.0 26.58% Operating Profit 1,933.0 1,868.0 3.48% 1,794.0 7.75% 7,195.0 5,238.0 37.36% OPM (%) 34.61% 34.14% 1.39% 33.11% 4.53% 33.17% 31.38% 5.69% Other Income 236.0 269.0 -12.27% 66.0 257.58% 473.0 704.0 -32.81% EBITDA 2,169.0 2,137.0 1.50% 1,860.0 16.61% 7,668.0 5,942.0 29.05% Depreciation 232.0 222.0 4.50% 177.0 31.07% 761.0 598.0 27.26% EBIT 1,937.0 1,915.0 1.15% 1,683.0 15.09% 6,907.0 5,344.0 29.25% Interest 0.0 0.0 0.0 0.0 0.0 PBT 1,937.0 1,915.0 1.15% 1,683.0 15.09% 6,907.0 5,344.0 29.25% Tax 397.0 388.0 2.32% 251.0 58.17% 1,027.0 806.0 27.42% PAT Before MI 1,540.0 1,527.0 0.85% 1,432.0 7.54% 5,880.0 4,538.0 29.57% Minority Interest 0.0 0.0 0.0 0.0 0.0 #DIV/0! PAT 1,540.0 1,527.0 0.85% 1,432.0 7.54% 5,880.0 4,538.0 29.57% EPS 26.8 26.6 0.75% 25.0 7.20% 104.4 79.3 31.63%

Ratio Analysis YE March (Rs. Mn.) Q2FY10 Q1FY10 Q-Q(bps) Q2FY09 Y-Y(bps) FY09 FY08 Q-Q(bps) OPM (%) 34.61% 34.14% 47.3 33.11% 102.6 33.17% 31.38% 178.7 EBITDA (%) 38.84% 39.05% (21.7) 34.33% 472.3 35.35% 35.60% (25.0) PBIT (%) 34.68% 35.00% (31.4) 31.06% 393.3 31.84% 32.02% (17.6) PAT (%) 27.57% 27.91% (33.2) 26.43% 147.5 27.11% 27.19% (8.1) Tax Rate (%) 20.50% 20.26% 23.5 14.91% 534.7 14.87% 15.08% (21.3)

4 Infosys Technologies Limited: Q2FY10

Infosys: Financials

Earnings Statement Balance Sheet

YE March (Rs. Mn.) FY07 FY08E FY09 FY10E YE March (Rs. Mn.) FY07 FY08E FY09 FY10E

Net Sales 13,893.0 16,692.0 21,693.0 22,557.3 Equity Capital 286.0 286.0 286.0 286.0

Software Dvlp. Expenses 7,458.0 9,207.0 1 1,765.0 12,524.7 Reserves 10,969.0 13,509.0 17,968.0 22,029.0

Gross Profit 6,435.0 7,485.0 9,928.0 10,032.6 Shareholders Funds 11,255.0 13,795.0 18,254.0 22,315.0 Total Expenditure 9,502.0 11,454.0 14,498.0 15,481.4 Pref Shares by Subsidiary - - - -

Operating Profit 4,391.0 5,238.0 7,195.0 7,075.9 Minority Interest 4.0 - - -

Other Income 370.0 704.0 473.0 678.7 Total Liabilities 11,259.0 13,795.0 18,254.0 22,315.0

EBITDA 4,761.0 5,942.0 7,668.0 7,754.6 Fixed Assets 3,771.0 4,777.0 5,354.0 5,786.8 Depreciation 514.0 598.0 761.0 890.2 Investments 25.0 72.0 - -

EBIT 4,247.0 5,344.0 6,907.0 6,864.3 Current Assets

Interest - - - - Sundry Debtors 2,436.0 3,297.0 3,672.0 4,635.1

PBT 4,247.0 5,344.0 6,907.0 6,864.3 Loans & Advances 1,214.0 2,771.0 3,279.0 3,708.0 Tax 386.0 806.0 1,027.0 1,132.6 Cash & Bank Balance 5,871.0 6,950.0 9,695.0 13,118.2

PAT 3,856.0 4,659.0 5,988.0 5,731.7 Current Liabilities

Sundry Creditors 1,469.0 1,912.0 2,004.0 2,286.6

Ratio Analysis Provisions 681.0 2,279.0 1,868.0 2,803.3 YE March FY07 FY08E FY09 FY10E Net Current Assets 7,371.0 8,827.0 12,774.0 16,371.4

OPM (%) 31.6% 31.4% 33.2% 31.4% Deferred Tax Assets 92.0 119.0 126.0 156.9

EBITDA (%) 34.3% 35.6% 35.3% 34.4% Total Assets 11,259.0 13,795.0 18,254.0 22,315.0

PBIT (%) 30.6% 32.0% 31.8% 30.4% PAT (%) 27.7% 27.2% 27.1% 25.4% Cash Flow

EPS (Rs.) 67.3 79.3 102.8 100.2 YE March (Rs. Mn.) FY07 FY08 FY09 FY10E P/E (x) 20.4 17.3 13.3 13.7 Opening Cash & Bank 3,429.0 5,871.0 6,950.0 10,005.0 P/BV (x) 7.0 5.7 4.3 3.5 Profit After Tax 3,856.0 4,659.0 5,988.0 5,731.7

BVPS (Rs.) 196.8 241.2 319.1 390.1 Less : Invt Income (370.0) (704.0) (473.0) (678.7)

Market Cap (Rs. Mn.) 78,409.8 78,409.8 78,409.8 78,409.8 Depreciation 514.0 598.0 761.0 890.2

M Cap/Sales (x) 5.6 4.7 3.6 3.5 Deferred Taxation (27.0) (22.0) (28.0) (30.9)

EV (Rs. Mn.) 78,409.8 78,409.8 78,409.8 78,409.8 Others (6.0) (453.0) 0.0 0.0

EV/EBITDA (x) 17.9 15.0 10.9 11.1 Change in Working Cap (941.0) (377.0) (1,202.0) (174.2)

EV/Sales (x) 5.6 4.7 3.6 3.5 CF - Operating Activities 3,026.0 3,701.0 5,046.0 5,738.2 ROCE (%) 37.7% 38.7% 37.8% 30.8% Change in Fixed Assets (2,053.0) (1,156.0) (1,007.0) (1,323.0) RONW (%) 34.2% 32.9% 32.2% 25.7% Change in Investments 730.0 (47.0) 72.0 0.0

Debtors T/o Days 64.0 72.1 61.8 75.0 Investment Income 370.0 704.0 473.0 678.7

Advances T/o Days 31.9 60.6 55.2 60.0 CF - Investing Activities (953.0) (499.0) (462.0) (644.4) Creditors T/o Days 38.6 41.8 33.7 37.0 Increase in Equity 1,189.0 106.0 45.0 0.0 Working Cap T/o Days 193.7 193.0 214.9 264.9 Changes in Borrowings 0.0 0.0 0.0 0.0

Fixed Assets T/o (Gross) 3.0 3.1 3.1 2.8 Dividend Paid (756.0) (2,225.0) (1,574.0) (1,670.7)

DPS (Rs.) 11.4 33.3 27.3 25.0 CF - Financing Activities 369.0 (2,123.0) (1,529.0) (1,670.7) Dividend Payout (%) 17.0% 41.9% 26.5% 24.9% Net Change in Cash 2,442.0 1,079.0 3,055.0 3,423.2 Dividend Yield (%) 0.8% 2.4% 2.0% 1.8% Closing Cash & Bank Bal 5,871.0 6,950.0 10,005.0 13,428.1

5

Weekly Report PPFAS Ltd.

Local Equity Market Top Gainers & Losers of the Week INDICES 12-Oct-09 Week Ago % Chng Month Ago % Chng Top Gainers Oct 12, 09 % Chng Sensex 16,642.7 16,866.4 (1.3) 16,264.3 2.3 Jet Airways (India) Ltd. 434.90 29.88 Nifty 4,945.2 5,003.2 (1 .2 ) 4,829.6 2 .4 Cre s t A nimation Studios L td . 54.50 17.84 CNX Nifty Junior 9,391.7 9,203.1 2.0 8,648.4 8.6 Gammon India Ltd. 228.40 16.62 S&P CNX500 4,029.6 4 ,046.7 (0 .4 ) 3,914.1 3 .0 Tita n In d u stries Ltd. 1,423.15 13.80 CNX Midcap 200 6,749.3 6,597.6 2.3 6,230.1 8.3 BASF India Ltd. 343.30 12.69

CNX IT 4,774.8 5,119.6 (6.7) 4,785.7 (0.2) EIH Ltd. 136.95 12.62 International Equity Market Taj G V K H otels & Resort s L td . 144.50 12.06 INDICES 12-Oct-09 Week Ago % Chng Month Ago % Chng Deccan Chronicle Holdings Ltd. 140.40 11.30

DJIA 9,864.9 9,599.8 2.8 9,605.4 2.7 Nasdaq 2,139.3 2 ,068.2 3 .4 2,080.9 2 .8 Top L o s e rs S&P 500 1,071.5 1,040.5 3.0 1,042.7 2.8 Reliance Communications Ltd. 248.85 (21.87)

FTSE 100 5,161.9 5,024.3 2.7 5,011.5 3.0 Bharti Airtel Ltd. 343.30 (21.10) Nikkei 225 10,016.4 9,674.5 3.5 10,444.3 (4.1) Idea Cellular Ltd. 62.45 (15.38) Hang Seng 21,474.2 20,429.1 5.1 21,161.4 1.5 Chemplast Sanmar Ltd. 12.20 (13.78) HSCEI 12,511.5 1 1 ,645.1 7 .4 12,268.2 2 .0 Lum a x In dustries Ltd. 163.20 (13.05) MSCI Indices Pa tn i C o m puter System s L td . 395.10 (12.75) MSCI Indices 12-Oct-09 Week Ago % Chng Month Ago % Chng Vishal Exports Overseas Ltd. 1.10 (12.00) The World Index 1,139.8 1 ,099.4 3 .7 1,118.3 1 .9 Mid -D a y M ultimedia Ltd 22.60 (11.89) Emerging Market 946.3 907.0 4 .3 884.6 7 .0 EM Asia 383.4 370.4 3.5 365.0 5.0 Sectoral Performance EM India 443.0 435.1 1 .8 406.5 9 .0 Se c to r s Week Month 3 Months Commodities Ho te ls 6.6 16.5 35.4 Commodities 12-Oct-09 Week Ago % Chng Month Ago % Chng Chemicals - Speciality 5.9 12.1 75.5 GOLD ($/oz) 1,049.4 1,017.3 3 .2 1,005.2 4 .4 Air c o n d itioners 5.6 5.7 21.4 SILVER ($/oz) 17.8 16.6 7.0 16.8 6.2 Cigarettes 5.1 7.3 24.9 ALUMINIUM ($/t) 1,909.0 1,790.0 6.6 1,845.0 3.5 Paints 2.9 3.0 28.9 COPPER ($/t) 6,235.0 5,920.0 5.3 6,250.0 (0.2) Diesel Engines 2.5 3.0 55.6 CRUDE – BRENT ($/bbl) 70.4 68.0 3 .5 68.5 2 .8 Fin a n c e - Housing 1.6 11.3 27.8 CRUDE – WTI ($/bbl) 72.2 70.4 2.5 69.7 3.5 Travel And Transport 1.3 7.1 29.3 Tranportation Pla s ti c A n d P lastic Prod u c ts 1.3 4.3 74.3 Tranportation 12-Oct-09 Week Ago % Chng Month Ago % Chng Refractories 1.0 - -

World SCALE 40.0 40.0 - 30.0 33.3 Sugar 0.9 1.5 46.7 BALTIC FREIGHT INDEX2,695.0 2 ,3 6 2.0 14 .1 2,468.0 9 .2 Po w e r 0.9 2.9 26.5 Forex Aluminium 0.6 2.8 51.2

FOREX 12-Oct-09 Week Ago % Chng Month Ago % Chng Shipping 0.3 4.2 21.6 USD 46.6 47.5 (1.9) 48.5 (3.9) Chemicals - Inorganic 0.2 7.6 43.7 GBP 73.8 75.7 (2.5) 80.8 (8.6) Metals 0.2 2.5 40.9 EURO 68.5 69.6 (1 .5 ) 70.6 (3 .0 ) Ele c tr ic a l Equipment 0.2 5.1 22.0 YEN 51.7 5 3 .1 (2.6 ) 53.5 (3 .2 ) Oil E x p lo ra ti o n /Productio n (0.1) (1.4) 103.3 Global Listings Gems Jewellery And Watches (0.1) 7.6 46.7 Month Premium Share per Scrips 12-Oct-09 W e e k Chng Pe tr o c h e m icals (0.3) 15.7 66.0 Chng /Discount ADR/GDR Infosys ADR 47.74 (3.14) 5.37 2.17% 1 I n flation (%) 10 year G-Sec Bond Yield Wipro ADR 17.85 (3.77) 12.49 50.82% 1 ICICI Bank ADR 39.11 (1.54) 14.01 1.06% 2 0.83 7.62% Satyam ADR 6.27 (2.49) (0.77) 35.85% 2 7.54% HDFC Bank ADR 117.19 1 . 6 5 10.8 9 8 .6 5 % 3 0 .70 MTNL ADR 3.53 (1.40) (5.04) -0.41% 2 0.37 Dr. Reddy ADR 20.56 5 . 8 7 17.84 -0 .0 5 % 1 Reliance GDR 91.30 0.11 2.01 1.32% 2 6.05% 2019 0.12 ITC GDR 4.00 - - -25.33% 1 7.26% Ranbaxy GDR 8.50 3 . 0 3 17.8 6 2 .4 0 % 1 7.26% L & T GDR 35.30 0.86 3.61 0.73% 1 19-Sep 26-Sep 3-Oct 10-Oct 1 2 -S e p 1 9 - S e p 26-Sep 3 - Oc t DISCLAIMER This report does not constitute or form part of, and should not be construed as, any offer of sale or a solicitation to buy any security.The information contained herein is from sources believed to be reliable, but no representation or warranty , e xp res s or implied, is m ad e t o i ts accuracy. PPF AS an d/ or its clients may have positions in the securities mentioned in the report and may offer to buy, sell such securities or any related investments. 130/132,Great Western Build ing ,1s t F loor,S.B.Marg,N ea r L ion Ga te,Fort,Mum ba i-4 00 02 3. Tel : 91-22-2284 6555 Fax : 91-22-2284 6553,e-mail : [email protected]