ABSTRACT

Will Rogers once gave a very famous quotation that "I am more concerned about the return of my
money than the return on my money.” This seems to be the biggest concern for all the investors in the
current scenario. Therefore today in this kind of market, instead of focusing on how much money we can
make in the stock market, investors should focus rather on how not to lose money in the stock market. And
if we start doing that, if we start becoming obsessive about not losing money in the stock market we will
automatically start making decisions which will help us to make money in the stock market. This approach
is well explained by the investment paradigm known as ‘Value Investing’.
Value investing is the most conservative way to invest your money as value investing is all about
curtailment of risk, how not to lose money in the market. Therefore this report tries to throw some light
over the concept of value investing.
investors starting with ‘Benjamin Graham’ who
1. INTRODUCTION gave us the concept of value investing in the year
What Does Value Investing Mean? 1928 and was known to be the Father of value
The strategy of selecting stocks investing. Later the section speaks about
that trade for less than their intrinsic values. ‘Warren Buffet’ who is the best investor in the
Value investors actively seek stocks of world and also known to be the best student of
companies that they believe the market has Benjamin Graham.
undervalued. They believe the market overreacts Second part presents an Investment argument on
to good and bad news, resulting in stock price 5 stocks from different sectors which have
movements that do not correspond with the selected after eliminating 45 stocks using value
company's long-term fundamentals. The result is investing principles and strategies. It also gives a
an opportunity for value investors to profit by detailed summary on the basis of selection of
buying when the price is deflated. Typically, these stocks.
value investors select stocks with lower-than-
average price-to-book or price-to-earnings ratios 2. PROBLEM STATEMENT
and/or high dividend yields. The big problem for To select a stock for investing which is
value investing is estimating intrinsic value. really value buy in this current market scenario
Remember, there is no "correct" intrinsic value. and which will be least affected from the
Two investors can be given the exact same recession and give a good return in the long
information and place a different value on a term.
company. For this reason, another central
concept to value investing is that of "margin of 3. OBJECTIVE
safety". This just means that you buy at a big The aim of this project will be to carry out
enough discounts to allow some room for error an analysis of 5 selected sectors and suggest one
in your estimation of value. Also keep in mind stock from each sector which will provide high
that the very definition of value investing is return to the investors on their investments.
subjective. Some value investors only look at Value investing model will be used to identify
present assets/earnings and don't place any value such stocks.
on future growth. Other value investors base
strategies completely around the estimation of
future growth and cash flows. Despite the
4. SCOPE
different methodologies, it all comes back to • Value investment analyzes a position of
trying to buy something for less than it is worth. a company in a particular sector so that the
investment made there in will lead to a
Who is a value investor? balanced portfolio.
The Conventional Definition: A value investor is
• It finds out opportunities in falling
one who invests in low price-book value or low
markets.
price-earnings ratios stocks.
The Generic Definition: A value investor is one • Out performance of bank interest and
who pays a price which is less than the value of bond returns in long run.
the assets in place of a firm. • It makes clear the concept of value
The report is divided into two parts- investing in depth.
First it starts with some insight on value
investing, its principles and strategies. Then it 5. METHODLOGY
speaks about the two most notable value

1
1. Explaining the concept of value investing.
2. A note about Benjamin Graham & his
investment principles.
3. A note about Warren Buffett & his investment
philosophy.
4. Selecting 5 different sectors which contain 10
stocks each.
5. Applying value method filter on this stocks
and finally selecting 1 stock from each sector.
6. Preparing equity research report of one of
those 5 stocks.
It is done with sample size of 6.
5.1.1 The Different Faces of Value
Investing Today
Passive Screeners: Following in the Ben
Graham tradition, you screen for stocks that have
characteristics that you believe identify
undervalued stocks. Examples would include
low PE ratios and low price to book ratios.
Contrarian Investors: These are
investors who invest in companies that others
have given up on, either because they have done
badly in the past or because their future
prospects look bleak.
Activist Value Investors: These are
investors who invest in poorly managed and
poorly run firms but then try to change the way
the companies are run.
5.1.2 Stock Picking Strategies
Value investing is one of the best known
stock-picking methods. In the 1930s, Benjamin
Graham and David Dodd, finance professors at
Columbia University, laid out what many
consider to be the framework for value investing.
The concept is actually very simple: find
companies trading below their inherent worth.
The value investor looks for stocks with strong
fundamentals - including earnings, dividends,
book value, and cash flow - that are selling at a
bargain price, given their quality. The value
investor seeks companies that seem to be
incorrectly valued (undervalued) by the market
and therefore has the potential to increase in
share price when the market corrects its error in
valuation.
5.1.3 Value, Not Junk!
Before we get too far into the discussion of
value investing, let's get one thing straight. Value
2
investing doesn't mean just buying any stock that
declines and therefore seems "cheap" in price.
Value investors have to do their homework and
be confident that they are picking a company that
is cheap given its high quality. It's important to
distinguish the difference between a value
company and a company that simply has a
declining price. Say for the past year Company
A has been trading at about $25 per share but
suddenly drops to $10 per share. This does not
automatically mean that the company is selling at
a bargain. All we know is that the company is
less expensive now than it was last year. The
drop in price could be a result of the market
responding to a fundamental problem in the
company. To be a real bargain, this company
must have fundamentals healthy enough to imply
it is worth more than $10 - value investing
always compares current share price to intrinsic
value not to historic share prices.
5.1.4 Value Investing at Work
One of the greatest investors of all time,
Warren Buffett, has proven that value investing
can work: his value strategy took the stock of
Berkshire Hathaway, his holding company, from
$12 a share in 1967 to $70,900 in 2002. The
company beat the S&P 500's performance by
about 13.02% on average annually! Although
Buffett does not strictly categorize himself as a
value investor, many of his most successful
investments were made on the basis of value
investing principles.
5.1.5 Buying a Business, not a Stock
We should emphasize that the value
investing mentality sees a stock as the vehicle by
which a person becomes an owner of a company
- to a value investor profits are made by
investing in quality companies, not by trading.
Because their method is about determining the
worth of the underlying asset, value investors
pay no mind to the external factors affecting a
company, such as market volatility or day-to-day
price fluctuations. These factors are not inherent
to the company, and therefore are not seen to
have any effect on the value of the business in
the long run.
5.1.6 Contradictions
While the efficient market hypothesis
(EMH) claims that prices are always reflecting
all relevant information, and therefore are
already showing the intrinsic worth of
companies, value investing relies on a premise
that opposes that theory. Value investors bank on
the EMH being true only in some academic
wonderland. They look for times of inefficiency,
when the market assigns an incorrect price to a
stock. Value investors also disagree with the
principle that high beta (also known as volatility,
or standard deviation) necessarily translates into
a risky investment. A company with an intrinsic
value of $20 per share but is trading at $15
would be, as we know, an attractive investment
to value investors. If the share price dropped to
$10 per share, the company would experience an
increase in beta, which conventionally represents
an increase in risk. If, however, the value
investor still maintained that the intrinsic value
was $20 per share, s/he would see this declining
price as an even better bargain. and the better the
bargain, the lesser the risk. A high beta does not
scare off value investors. As long as they are
confident in their intrinsic valuation, an increase
in downside volatility may be a good thing.
5.2.1 A note about Benjamin Graham
Warren Buffett is widely considered to be
one of the greatest investors of all time, but if
you were to ask him who he thinks is the greatest
investor he would probably mention one man:
his teacher, Benjamin Graham. Graham was an
investor and investing mentor who is generally
considered to be the father of security analysis
and value investing.
Benjamin Graham was born in London in
1894, the son of an importer. His family
migrated to America when Ben was very young
and opened an importing business. They did not
do well, Graham’s father dying not long after
moving to America and his mother losing the
family savings in 1907 during an economic
crisis.
Graham, a star student, managed to get to
Columbia University and, although offered a
teaching post there after graduation, took a job as
a chalker on Wall Street with New burger,
Henderson and Loeb. Before long, his natural
intelligence won out when he began doing
financial research for the firm and he became a
partner in the firm. He was soon earning over
$500,000 a year, a huge sum; not bad for a 25
year old.
In 1926, Graham formed an investment
partnership with another broker called Jerome
Newman. He also started lecturing at night on
finance at Columbia, a relationship that was to
continue until his retirement in 1956.
3
The Crash of 1929 almost wiped Graham
out but the partnership survived with the
assistance of friends and the sale of most of the
partners’ personal assets. At one stage, Graham’s
wife was forced to return to work as a dance
teacher. Graham was soon back on his feet but
he had learned valuable lessons that would soon
be brought home to investors in his books.
In 1934, Benjamin Graham together with
David Dodd, another Columbia academic,
published the classic Security Analysis which has
never been out of print. Despite the crash, the
book proposed that it was possible to
successfully invest in common stocks as long as
sound investment principles were applied.
Graham and Dodd introduced the concept of
‘intrinsic value’ and the wisdom of buying
stocks at a discount to that value.
Warren Buffett studied under Graham at
Columbia and approached him for a job in his
investment firm. Graham declined but Buffett
was persistent, and Graham finally yielded,
giving Buffett a job in the firm. This was the
start Buffett needed and he has never failed to
acknowledge what he learned from Ben Graham.
It is interesting that one of the Graham Newman
investments was GEICO, which, as you probably
know, was an early acquisition of Berkshire
Hathaway and which remains today a major
investment vehicle in the Buffett Group. In 1949,
Graham wrote “The Intelligent Investor”,
considered the Bible of value investing. That
book too has never been out of print. Benjamin
Graham died in 1976, with the reputation of
being the ‘Father of Security Analysis.’
5.2.2 The 3 Most Timeless Investment
Principles
Benjamin Graham’s main investment principles
were-
Principle No.1: Always Invest with a
Margin of Safety
Margin of safety is the principle of buying
a security at a significant discount to its intrinsic
value, which is thought to not only provide high-
return opportunities, but also to minimize the
downside risk of an investment. In simple terms,
Graham's goal was to buy assets worth $1 for
$0.50. He did this very, very well. To Graham,
these business assets may have been valuable
because of their stable earning power or simply
because of their liquid cash value. It wasn't
uncommon, for example, for Graham to invest in
stocks where the liquid assets on the balance
sheet (net of all debt) were worth more than the
total market cap of the company (also known as
"net nets" to Graham followers). This means that
Graham was effectively buying businesses for
nothing. While he had a number of other
strategies, this was the typical investment
strategy for Graham. This concept is very
important for investors to note, as value
investing can provide substantial profits once the
market inevitably re-evaluates the stock and ups
its price to fair value. It also provides protection
on the downside if things don't work out as
planned and the business falters. The safety net
of buying an underlying business for much less
than it is worth was the central theme of
Graham's success. When chosen carefully,
Graham found that a further decline in these
undervalued stocks occurred infrequently. While
many of Graham's students succeeded using their
own strategies, they all shared the main idea of
the "margin of safety".
Principle No.2: Expect Volatility and
Profit from it
Investing in stocks means dealing with
volatility. Instead of running for the exits during
times of market stress, the smart investor greets
downturns as chances to find great investments.
Graham illustrated this with the analogy of "Mr.
Market", the imaginary business partner of each
and every investor. Mr. Market offers investors a
daily price quote at which he would either buy
an investor out or sell his share of the business.
Sometimes, he will be excited about the
prospects for the business and quote a high price.
At other times, he is depressed about the
business's prospects and will quote a low price.
Because the stock market has these same
emotions, the lesson here is that you shouldn't let
Mr. Market's views dictate your own emotions,
or worse, lead you in your investment decisions.
Instead, you should form your own estimates of
the business's value based on a sound and
rational examination of the facts. Furthermore,
you should only buy when the price offered
makes sense and sell when the price becomes too
high. Put another way, the market will fluctuate -
sometimes wildly - but rather than fearing
volatility, use it to your advantage to get
bargains in the market or to sell out when your
holdings become way overvalued.
Here are two strategies that Graham
suggested to help mitigate the negative effects of
market volatility:
1. Dollar-Cost Averaging: Dollar-cost averaging
is achieved by buying equal dollar amounts of
4
investments at regular intervals. It takes
advantage of dips in the price and means that an
investor doesn't have to be concerned about
buying his or her entire position at the top of the
market. Dollar-cost averaging is ideal for passive
investors and alleviates them of the
responsibility of choosing when and at what
price to buy their positions.
2. Investing in Stocks and Bonds: Graham
recommended distributing one's portfolio evenly
between stocks and bonds as a way to preserve
capital in market downturns while still achieving
growth of capital through bond income.
Remember, Graham's philosophy was, first and
foremost, to preserve capital, and then to try to
make it grow. He suggested having 25-75% of
your investments in bonds, and varying this
based on market conditions. This strategy had
the added advantage of keeping investors from
boredom, which leads to the temptation to
participate in unprofitable trading (i.e.
speculating).
Principle No.3: Know What Kind of
Investor You Are
Graham advised that investors know
their investment selves. To illustrate this, he
made clear distinctions among various groups
operating in the stock market.
Active vs. Passive
Graham referred to active and passive
investors as "enterprising investors" and
"defensive investors". You only have two real
choices: The first is to make a serious
commitment in time and energy to become a
good investor who equates the quality and
amount of hands-on research with the expected
return. If this isn't your cup of tea, then be
content to get a passive, and possibly lower,
return but with much less time and work.
Graham turned the academic notion of "risk =
return" on its head. For him, "Work = Return".
The more work you put into your investments,
the higher your return should be. If you have
neither the time nor the inclination to do quality
research on your investments, then investing in
an index is a good alternative. Graham said that
the defensive investor could get an average
return by simply buying the 30 stocks of the
Dow Jones Industrial Average in equal amounts.
Both Graham and Buffett said that getting even
an average return - for example, equaling the
return of the S&P 500 - is more of an
accomplishment than it might seem. The fallacy
that many people buy into, according to Graham,
is that if it's so easy to get an average return with
little or no work (through indexing), then just a
little more work should yield a slightly higher
return. The reality is that most people who try
this end up doing much worse than average. In
modern terms, the defensive investor would be
an investor in index funds of both stocks and
bonds. In essence, they own the entire market,
benefiting from the areas that perform the best
without trying to predict those areas ahead of
time. In doing so, an investor is virtually
guaranteed the market's return and avoids doing
worse than average by just letting the stock
market's overall results dictate long-term returns.
According to Graham, beating the market is
much easier said than done, and many investors
still find they don't beat the market.
Speculator Vs. Investor
Not all people in the stock market are
investors. Graham believed that it was critical for
people to determine whether they were investors
or speculators. The difference is simple: an
investor looks at a stock as part of a business and
the stockholder as the owner of the business,
while the speculator views himself as playing
with expensive pieces of paper, with no intrinsic
value. For the speculator, value is only
determined by what someone will pay for the
asset. To paraphrase Graham, there is intelligent
speculating as well as intelligent investing - just
be sure you understand which you are good at.
2.3 Example of value investments by
Benjamin Graham
Du Pont-General Motors:
The Du Pont-General Motors arbitrage
provides a good example of a typical Graham
play. The Du Pont Corporation, which controlled
huge assets and dominated more than a handful
of industries, had used its surplus cash to acquire
a large block of GM stock. But despite these
holdings, Du Pont sold on the stock exchange for
no more than the value of its GM shares alone.
Graham noticed this oddity and reasoned that
either the market was overvaluing the GM shares
or it was ignoring the worth of Du Pont’s own
operations.
Graham decided to bet on the probability
that the market would over time correct for this
imbalance. So he bought Du Pont common stock
and simultaneously sold short seven times as
many shares of General Motors. The market
soon vindicated Graham’s expectations as
5
`DuPont’s share price soared. Graham sold his
Du Pont shares and closed out the short position
in GM. Of course, this arrangement carried no
risk: if the imbalance had been corrected by a
decline in the price of GM, Graham would have
profited by exercising the short position.22
Activities like this one have subsequently
become standard tools in the “value investor’s”
repertoire.
2.4 Graham’s message
Graham’s basic message was that the stock
market can be a highly illogical place, where
greed and fear — rather than rationality — often
prevail and where buyers and sellers from time
to time behave in a herd-like manner. A famous
passage made the point: “In other words,” wrote
Graham and Dodd, “the market is not a
weighing machine, on which the value of each
issue is recorded by an exact and impersonal
mechanism, in accordance with its specific
qualities. Rather should we say that the market is
a voting machine, whereon countless individuals
register choices which are the product partly of
reason and partly of emotion?” The disciplined
investor, according to Graham and Dodd, does
not blindly follow the crowd but instead searches
for stocks selling for less than their intrinsic
value and then waits for the market to recognize
and correct the disparity.
5.3.1 A note about Warren E. Buffett
Warren Edward Buffett, who made most
of his money from investments, is the world’s
second-richest man. He was born on August 30,
1930 to his father Howard, a stockbroker turned-
Congressman. Warren Buffett, for the first time,
purchased stocks at the age of eleven. From this
trading experience, he learned one of the basic
lessons of investing: patience is a virtue. Warren
Buffett earned his bachelor’s degree from the
University of Nebraska-Lincoln and his master’s
degree from Columbia University. During his
graduate study, Warren learned profound
investment principles, especially the principle of
intrinsic business value, from Ben Graham, who
wrote Security Analysis and The Intelligent
Investor books. Warren also worked for Ben
Graham. It was during this time that the
difference between the Graham and Buffett
philosophies began to emerge. Ben simply
wanted numbers by looking only at the balance
sheet and income statement, whereas Warren
was predominately interested in a company’s
management as a major factor when deciding to
invest. After building his personal capital up to
$140,000, Warren returned Omaha and began his
next move. Warren Buffett applied value-
investing principles to build Berkshire
Hathaway.
Currently, the portfolio of Berkshire
Hathaway comprises of utilities (MidAmerican
Energy Holdings), insurance (Geico, General
Re), apparel (Fruit of the Loom), flight services
(Flight Safety, Net Jets) as well as a fairly large
amount of American Express, Coca-Cola,
Gillette, and Wells Fargo).
In June 2006, Warren Buffett announced
to give around 80 percent of his $44 billion
fortune in annual installments to the Bill and
Melinda Gates Foundation for as long as the
couple lives. The Gates Foundations activities
are concentrated on world health (fighting such
diseases as malaria, HIV/AIDS, and
tuberculosis) and on improving U.S. libraries and
high schools.
5.3.2 Warren Buffett’s Investment
Philosophy
1. Economic reality, not accounting reality
Warren Buffett stated that financial statements
prepared by accountants conformed to rules that
might not adequately represent the economic
reality of a business. Accounting reality was
conservative, backward-looking, and governed
by generally accepted accounting principles
(GAAP). However, investment decisions should
be based on the economic reality of a business.
Under GAAP, intangible assets such as patents,
trademarks, special managerial expertise, and
reputation would be carried at little or no value,
but they might be very valuable in economic
reality. GAAP measured results in terms of net
profit, whereas, in economic reality, the results
of a business where its flows of cash.
Warren Buffett also defined economic reality at
the level of business itself, not the market, the
economy, or the security.
2. The opportunity cost Warren Buffett
compared an investment opportunity against the
next best alternative, the lost opportunity. He
made his business decisions by framing his
choices as either/or decisions rather than yes/no
decisions. In addition, he employed the potential
rate of return from investing in the common
stocks of other companies as an important
standard of comparison in testing the
attractiveness of an acquisition. He also used the
comparison of an investment against other
returns available in the market as a significant
benchmark of performance.
6
3. The time value of money Warren Buffett
defined intrinsic value as the discounted value of
the cash that can be obtained from a business
during its remaining life. To calculate intrinsic
value, it is necessary to exhibit a highly
subjective figure that will change when estimates
of future cash flows are modified and interest
rates alter. In spite of its uncertainty, intrinsic
value is important because it is the only logical
way to assess the relative attractiveness of
investments and businesses.
4. Measure performance on the basis of gain in
intrinsic value, not accounting profit Warren
Buffett’s long-term economic goal is to
maximize Berkshires average annual rate of gain
in intrinsic business value on a per-share basis.
He does not measure the economic significance
or performance of Berkshire by its size, but by
per-share progress. In addition, he will be
disappointed if the rate of per-share progress
does not exceed that of the average large
American corporation.
5. Risk and discount rates Warren Buffett
defined risk as the possibility of loss or injury.
His company used almost no debt financing. To
avoid risk, he also put a heavy weight of
investments on certainty by focusing on
companies with predictable and stable earnings.
Thus, the idea of a risk factor does not make
sense to him so that he utilized a risk-free
discount rate such as the rate of return on the
long-term (for example, 30-year) U.S. Treasury
bond.
6. Diversification Warren Buffett suggested that
investors typically purchased far too many stocks
rather than waiting for one exceptional company.
Investors should pay attention to only businesses
that they understand. Therefore, the need for
diversification decreases substantially.
7. Invest on the basis of information and analysis
with respect to Ben Graham, Warren Buffett
agreed that, instead of following Mr. Market’s
opinion, it would be wiser for investors to form
their own ideas of the value of their holdings,
based on full reports from the company about its
operation and financial status. Warren Buffett
did not believe in the stock market. When he
invested in stocks, he invested in businesses. He
behaved according to what is rational rather than
according to what is fashionable. He didn’t try to
time the market (i.e., trade stocks based on
expectations of changes in the market cycle).
Instead, he employed a strategy of patient, long-
term investing.
8. Alignment of agents and owners to explain his
ownership interest in Berkshire Hathaway,
Warren Buffett claimed that he is a better
businessman because he is an investor. And he is
a better investor because he is a businessman.
More than 50 percent of the family net worth of
four of Berkshires six directors contained shares
in Berkshire Hathaway. Moreover, the senior
managers of Berkshire Hathaway subsidiaries
held shares in the company, or were
compensated under incentive plans that related to
the potential returns from an equity interest in
their business unit.
5.3.3 Buffett’s Tenets
Business Tenets:
• The business the company is in should be
simple and understandable.
• The firm should have a consistent operating
history, manifested in operating earnings that are
stable and predictable.
• The firm should be in a business with favorable
long term prospects.
Management Tenets:
• The managers of the company should be
candid. As evidenced by the way he treated his
own stockholders, Buffett put a premium on
managers he trusted. •
The managers of the company should be leaders
and not followers.
Financial Tenets:
• The company should have a high return on
equity. Buffett used a modified version of what
he called owner earnings
Owner Earnings = Net income + Depreciation &
Amortization – Capital Expenditures
• The company should have high and stable
profit margins.
Market Tenets:
• Use conservative estimates of earnings and the
riskless rate as the discount rate.
• In keeping with his view of Mr. Market as
capricious and moody, even valuable companies
can be bought at attractive prices when investors
turn away from them.
5.3.4 Value Methods
Price to Book ratios: Buy stocks where
equity trades at less than or at least a low
multiple of the book value of equity.
Price earnings ratios: Buy stocks where
equity trades at a low multiple of equity
earnings.
Return on Capital Employed (ROCE):
A ratio that indicates the efficiency and
profitability of a company's capital investments.
7
Return on Equity (ROE): The
amount of net income returned as a percentage of
shareholders equity. Return on equity measures a
corporation's profitability by revealing how
much profit a company generates with the
money shareholders have invested.
Price/Book Value
 A low price book value ratio has been
considered a reliable indicator of undervaluation
in firms.
 The empirical evidence suggests that over
long time periods, low price-book values stocks
have outperformed high price-book value stocks
and the overall market.
Price/Earnings Ratio Screens
 Investors have long argued that stocks with
low price earnings ratios are more likely to be
undervalued and earn excess returns. For
instance, this is one of Ben Graham’s primary
screens.
 Studies which have looked at the relationship
between PE ratios and excess returns confirm
these priors.
Return on Capital Employed - ROCE
 ROCE should always be higher than the rate
at which the company borrows; otherwise any
increase in borrowing will reduce shareholders'
earnings.
 ROCE is used in finance as a measure of the
returns that a company is realizing from its
capital employed. It is commonly used as a
measure for comparing the performance between
businesses and for assessing whether a business
generates enough returns to pay for its cost of
capital.
Calculated as:
Return on Equity - ROE
 The ROE is useful for comparing the
profitability of a company to that of other firms
in the same industry.
 Investors may also calculate the change in
ROE for a period by first using the shareholders'
equity figure from the beginning of a period as a
denominator to determine the beginning ROE.
Then, the end-of-period shareholders' equity can 1. Lupin
be used as the denominator to determine the 2. Glaxo
ending ROE. Calculating both beginning and 3. Aventis
ending ROEs allows an investor to determine the 4. Ranbaxy
change in profitability over the period. 5. Piramal
6. Wockhardt
7. Cipla
Calculated as: 8. Matrix
9. Cadila
10. Divis

TELECOM
1. Idea
6. DATA ANALYSIS 2. Bharti
3. Rcom
6.1 Selection of stocks using filters 4. Mtnl
The following companies have been short listed 5. Onmobile
for carrying out Value investing research. 6. Tata Com
7. Tulip Com
FMCG 8. Nettlinx
1. Dabur
2. Britannia
3. HUL 6.2 Using the first Filter P/E (3 stocks with
4. ITC high P/E) was eliminated and following stocks
5. Marico was shortlisted
6. Godrej consumer
7. Colgate Palmolive FMCG
8. Tata Tea 1. Britannia
9. Gillete 2. ITC
10. Nestle 3. Marico
4. Godrej consumer
5. Colgate Palmolive
CAPITAL/ENGINEERING
6. Tata Tea
1. L&T
7. Gillete
2. BHEL
3. Punj Lloyd
4. Siemens CAPITAL/ENGINEERING
5. Thermax 1. L&T
6. Alstom Projects 2. BHEL
7. Everest Kanto 3. Siemens
8. Praj Inds. 4. Thermax
9. Walchannagar 5. Praj Inds.
10. Crompton greaves 6. Walchannagar
BANKS 7. Crompton greaves
1. SBI
2. Axis BANKS
3. HDFC Bank 1. SBI
4. BOB 2. Axis
5. ICICI 3. HDFC Bank
6. Federal 4. BOB
7. IndusInd 5. ICICI
8. DCB 6. Federal
9. Kotak 7. Corporation
10. Corporation
PHARMA
PHARMA 1. Lupin

8
2. Glaxo 1. Rcom
3. Aventis 2. Mtnl
4. Piramal 3. Tulip Com
5. Wockhardt 4. Nettlinx
6. Cadila
7. Divis 6.4 Using the third filter ROCE (2 companies
with low ROCE) from each sector were
TELECOM eliminated.
1. Idea FMCG
2. Bharti 1. ITC
3. Rcom 2. Gillete
4. Mtnl
5. Tulip Com CAPITAL/ENGINEERING
6. Nettlinx 1. Siemens
2. Praj Inds.
6.3 Using the second filter Price/Book (further
3 stocks with high price to book value) was BANKS
eliminated. Following stocks were shortlisted 1. BOB
FMCG 2. ICICI
1. Britannia 3. Federal
2. ITC 4. Corporation
3. Tata Tea
4. Gillete
PHARMA
1. Lupin
CAPITAL/ENGINEERING 2. Aventis
1. L&T
2. Siemens
TELECOM
3. Praj Inds
1. Rcom
4. Walchannagar
2. Mtnl

BANKS 6.5 Finally using the last filter ROE one stock
1. BOB from each sector was selected for further
2. ICICI research
3. Federal 1. FMCG-ITC
4. Corporation 2. CAPITAL/ENGINEERING-PRAJ INDS
3. BANK-BOB
PHARMA 4. PHARMA-LUPIN
1. Lupin 5. TELECOM-RCOM
2. Aventis
3. Wockhardt 7. DATA INTERPRETATION
4. Cadila Interpretation of ITC LTD is done on the basis of
valuemethods:
TELECOM

9
10
ITC LTD.
COMPANY BACKGROUND
Company description
ITC is an associate of BAT (British American
Tobacco) controls more than 2/3rd of the
cigarette market in India.ITC has emerged as a
diversified conglomerate with leading presence
in Paperboards, Hotels and Processed foods.
EChoupal, the agri rural initiative of the
company has been widely appreciated for its
foresight in harnessing the potential in the rural
market.
Sector view
 Many analysts have a cautious view on the
sector on the back of inflationary tendency in the
economy, which might impact volumes as well
as profit margins of companies.
 Companies with low competitive pressures
and broad product portfolios will be able to
better withstand any slowdown in a particular
segment.
 Longer-term prospects are bright, given rising
incomes and low penetration.
Segment results
FMCG – Cigarettes
Cigarette business registered a sales growth of
10.5% to Rs 3901.5 crores with volumes
showing a decline of 3.5% after sales of non-
filter cigarettes, which formed 19% of total
volumes, were discontinued. This was after an
increase in excise duty on non-filter cigarettes in
the 2008 Union budget. This resulted in
consumers shifting to cheaper options thus
impacting the overall cigarette volumes. The
Company increased the prices of some of its
brands. The PBIT grew by 18% to Rs 1134.1
crores as the margins expanded by 190 bps to
29.1%. Going forward, we expect cigarette
volumes to decline further as a result of
increasing headwinds such as imposing of VAT,
increase in excise duty and ban on smoking in
public places.
Other FMCG business
The ‘Other FMCG’ business registered a growth
of 11.7% in sales to Rs 722.3 crores.The losses
of the business increased by 97% to Rs 127
crores mainly due to newer business. The
margins declined by 760 bps YoY.
11
Branded Packaged Foods
This segment witnessed modest growth due to
slowdown in urban demand due to the economic
downturn. High raw material costs and input
prices impacted margins during the quarter.
Lifestyle Retailing
The economic slowdown and weak consumer
sentiment has adversely affected growth. The
business is re-negotiating rental costs and
rationalizing unviable stores to improve store
margins.
Personal Care Products
The business continued to register healthy
growth and improved its footprint among the
national branded players through its range of
personal care products under the brands ‘Fiama
Di Wills’, ‘Vivel Di Wills’, ‘Vivel’ and
‘Superia’. The product portfolio was further
enhanced with the launch of the ‘Vivel’
Ultrapro range of anti-dandruff shampoo. High
raw material cost and increase in advertising
spend has impacted the operating performance of
the division.
Hotels
Hotel business recorded a decline of 13.7% in
revenues to Rs 270.5 crores and a fall of 34% in
PBIT to Rs 91.1 crores with margins declining
by 10.2% to 33.7%. Economic slowdown and
terror attacks in Mumbai resulted in a sharp drop
in traffic triggering a significant slide in
occupancies and average room rates.
Construction activity in respect of the super
deluxe luxury hotel projects at Bangalore and
Chennai is progressing satisfactorily as per the
respective project plans.
Paperboards, Specialty Papers &
Packaging
Revenues of this business increased by 10.9% to
Rs 669.9 crores. High raw material costs and
high depreciation impact of new investments in
the pulp and paper machine facilities resulted in
a 6.1% fall in PBIT to Rs 111.1 crores while
margins declined by 300 bps to 16.6%.
Agriculture Business
Agri business reported a decline of 6.2% in
revenues to Rs 621.5 crores due to lower soya
volumes and rationalisation of the agri-
commodity portfolio. PBIT increased by 80% to
Rs 50.2 crores on increase in margins by 390 bps
to 8.1%.
FINANCIAL HIGHLIGHTS KEY HIGHLIGHTS
 Net Sales grew by 10.9% Y-o-Y in Dec08Qtr Key Developments:
to Rs 3833 crore, Operating Profit grew by
14.9% to Rs 1378 crore and net profit grew by  Buoyed by the success in personal care
8.7% to Rs 903 crore. products (PCP) in 2008, ITC Ltd is planning to
enter into anti dandruff shampoo category
through Vivel brand. Anti dandruff shampoo is
 During the quarter under review, net sales one of the fastest growing categories of PCP
grew by 11.1% to Rs 3833.3 crores. Slowdown with annualizing growth of 16%.
in the hotel segment and lower growth in
cigarettes resulted in slower growth in revenues.
Operating profit grew by 9.6% to Rs 1378
 At a time when liquidity crunch and global
crores, while the margins maintained a flat trend.
meltdown appears to have deterred almost all
PAT grew by 8.7% to Rs 903.2 crores.
companies across different segments to put their
future growth plans on hold, ITC is looking to
 Cigarette business registered a sales growth
spice up its spices business in a big way. The
of 10.5% to Rs 3901.5 crores with volumes
company is planning to set up modernized
showing a decline of 3.5% after sales of nonfilter
processing infrastructure in Rajasthan for
cigarettes, which formed 19% of total volumes,
grading, sorting and cleaning of seed spices like
were discontinued. The PBIT grew by 18% to Rs
cumin, coriander and pepper.
1134.1 crores as the margins expanded by 190
bps to 29.1%.
 The proposed integrated ‘cleaning-cum-
sorting’ facility will enable ITC supply clean and
 The ‘Other FMCG’ business registered a
graded seed spices procured from the mandis of
growth of 11.7% in sales to Rs 722.3 crores. The
Rajasthan, Gujarat and Madhya Pradesh to a
losses of the business increased by 97% to Rs
growing and discerning domestic and
127 crores mainly due to newer business. The
international customers. The mechanized
margins declined by 760 bps YoY.
processing is intended to create value for
customers in terms of supply of consistent
 Hotel business recorded a decline of 13.7% in
hygienic products, adhering to specific quality
revenues to Rs 270.5 crores and a fall of 34% in
specifications. The new facility will be in
PBIT to Rs 91.1 crores with margins declining
addition to ITC’s spices cleaning, grinding,
by 10.2% to 33.7%. Economic slowdown and
packing and steam sterilization facility at Guntur.
terror attacks in Mumbai resulted in a sharp drop
in traffic triggering a significant slide in
 Launch of Vivel Shampoo.
occupancies and average room rates.
 Exit from the non-filter cigarette segment.
 Revenues of this business increased by 10.9%
to Rs 669.9 crores. High raw material costs and
high depreciation impact of new investments in Key investment risks
the pulp and paper machine facilities resulted in
a 6.1% fall in PBIT to Rs 111.1 crores while  A high indirect tax regime could dampen
margins declined by 300 bps to 16.6%. cigarette growth.

 Agriculture business reported a decline of
6.2% in revenues to Rs 621.5 crores due to lower
soya volumes and rationalization of the
agricommodity portfolio. PBIT increased by
80% to Rs 50.2 crores on increase in margins by
390 bps to 8.1%.
 Higher than expected losses in New FMCG
business will impact profitability.
 The requirement of pictorial health warnings
on tobacco products.

12
13
14
15
9. CONCLUSION 10. BIBLOGRAPHY
Any investment strategy that is based upon [1] www.nseindia.com
buying well-run, good companies and expecting
the growth in earnings in these companies to [2] www.bseindia.com
carry prices higher is dangerous, since it ignores
the reality that the current price of the company [3] www.investopedia.com
may reflect the quality of the management and
the firm. [4] www.moneycontrol.com
If the current price is right (and the
market is paying a premium for quality), the [5] www.finance.yahoo.com
biggest danger is that the firm loses its luster
over time, and that the premium paid will [6] www.itcportal.com
dissipate.
If the market is exaggerating the value of Research reports:
the firm, this strategy can lead to poor returns The evolution of the idea of “value investing”:
even if the firm delivers its expected growth. from benjamin graham to warren buffett
It is only when markets under estimate the By Robert F. Bierig Duke University Durham,
value of firm quality that this strategy stands a North Carolina
chance of making excess returns.

16
QUESTIONNAIRE

1. Do you invest?
a. YES
b. NO

2. Why do you invest in share market?

a. Make more money in stock market.
b. Not to lose money in stock market.

3. What is your risk taking capability?

a. stable growth
b. high growth
c. average growth

4. How much return do you expect from your investment?

a. average
b. high
c. low

5. In which sector do you invest?

a. FMCG.
b. CAPITAL/ENGG.
c. PHARMA.
d. BANK.
e. TELECOMM.

6. On what basis do you invest?

a. Price to Book ratio. c. Return on Capital employed (RCOE).
b. Price earning ratios. d. Return on Equity (ROE).

7. What do you see in the company?

a. Present assets/earnings
b. Future growth
c. Future growth and Cash flow

8. In which company you invest?

_____________________________________________________________

9. How much you invest in the stock market?

_____________________________________________________________

10. Does your valuation gives you expected return?

17
a. YES
b. NO

18