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Ten-baggers 8.0
THEMATIC January 28, 2019
Last year’s equally-weighted portfolio for the first time underperformed JCHAC IN Johnson Con. Hit 672
BSE500 (ex BFSI), but this approach’s last 7-year cumulative TSR has CCLP IN CCL Products 510
NTCPH IN Natco Pharma 1,799
been ~182% (~23% CAGR) vs. ~111% (~14% CAGR) for the BSE500 (ex
JYL IN Jyothy Lab. 983
BFSI). Dominance of richly valued stocks in last year’s portfolio possibly
TMKN IN Timken India 595
led to this underperformance; this year’s portfolio is dominated by
DMART IN Avenue Super. 11,922
attractively valued stocks (relative to historicals) with an equal mix of
AVNT IN Avanti Feeds 708
small/mid/large-cap names. Last year’s sub-BSE500 portfolio witnessed
LOG IN La Opala RG 337
declines (~-19%) but lower than the Small Cap index (~-28%); quality
NILK IN Nilkamal Ltd 278
saved the day. Our Ten-bagger 8.0 portfolio’s business quality can be WIL IN WABCO India 1,677
gauged by relatively high RoCE of ~27% vs BSE500 (ex BFSI) of ~20%. DAGRI IN Dhanuka Agritech 281
Ten-bagger iterations have continued to outperform JBCP IN J B Chem & Pharm 363
Whilst the BSE500 ten-baggers have managed to outperform the BSE500 Index GOAGRO IN Godrej Agrovet 1,348
by ~10% points per annum (on a cumulative basis) over the last seven years, DLPL IN Dr Lal Pathlabs 1,223
the ten-baggers from the sub-BSE500 universe that we highlighted in the SOMC IN Somany Ceramics 216
previous six iterations have managed to outperform the BSE Small-cap Index by HEIM IN Heidelberg Cem. 482
~19% points per annum (on a cumulative basis). Outperformance for all our SFL IN Sheela Foam 863
live ten-baggers from the BSE500 and the sub-BSE500 universe demonstrates TPW IN Torrent Power 1,738
KNPL IN Kansai Nerolac 3,423
that the construct works in the real world too. CY18 poor performance could be
MSIL IN Maruti Suzuki 30,142
explained by high share (63%) of very richly valued mainly large cap companies.
Moderate valuations**
Performance of the BSE500 ten-bagger portfolios (since 19 January 2012) WH IN Venky's (India) 451
PVRL IN PVR 1,051
80.0 73.3 71.2 SCHI IN Sudarshan Chem. 316
57.1 KJC IN Kajaria Ceramics 1,220
60.0 51.7
3M IN 3M India 3,271
42.8
Return (%)
Rich valuations***
40.0
SF IN Sundram Fasten. 1,540
BRIT IN Britannia Inds. 10,708
20.0 6.7 9.5
WHIRL IN Whirlpool India 2,620
ATLP IN Atul 1,472
-
1.0(2012) 2.0(2013) 3.0(2014) 4.0(2015) 5.0(2016) 6.0(2017) 7.0(2018) Source: Ambit Capital research. Note: Market cap as on
19 Jan 2019. Above are sorted on Greatness score
(20.0) * Trading below five-year P/E, P/B, EV/EBITDA
(on at least two of these three measures)
Tenbagger iteration return index return cumulative alpha ** Trading below either five-year P/E, five-year P/B or five-
year EV/EBITDA (on one of these three measures)
*** Trading above five-year P/E, P/B, EV/EBITDA
Source: Bloomberg, Ambit Capital research. Note: Performance is on a total-return basis; i.e. assuming
dividends are reinvested back into the same stock on the ex-dividend date. Index is BSE500 index (ex-
BFSI). Returns are calculated on 1-year forward basis; i.e. from date of one iteration to next.
Relook at our existing greatness framework
We modify our ‘greatness’ framework, thereby evaluating/incorporating the Research Analysts
drivers of greatness (e.g. incremental capex, efficiency in capital employed Nitin Bhasin
turnover etc) rather than the actual outcomes (i.e. RoE, RoCE, PAT etc.) to +91 22 3043 3241
identify the great firms. We observe that great firms identified using new nitin.bhasin@ambit.co
framework have outperformed the great firms identified using old framework by
~2.2% (average returns) in CAGR terms, over a 15-year period (2004-2019). Vinit Powle
+91 22 3043 3149
Key financials of our BSE500 (ex BFSI) ten-bagger portfolios vinit.powle@ambit.co
1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 BSE500
Nikhil Pillai
Cash conversion 65% 58% 67% 76% 67% 81% 69% 67% 6% +91 22 3043 3265
RoE (%) 35% 29% 30% 30% 31% 34% 25% 21% 15% nikhil.pillai@ambit.co
RoCE (%) 45% 35% 37% 37% 38% 41% 30% 27% 20% Karan Khanna, CFA
Debt / equity ratio (0.1) 0.1 (0.0) (0.1) (0.0) 0.0 0.0 0.0 0.6 +91 22 3043 3251
EBIT margins 20% 17% 18% 16% 19% 20% 18% 15% 15% karan.khanna@ambit.co
Source: Ambit Capital research
allresearch@ambit.co;ambitresearch@ambitcapital.com
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital
may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
Strategy - Ten-baggers 8.0
CONTENTS
Quantifying greatness…………………………………………………………………………. 6
Ten-baggers 8.0………………………………………………………………………………. 10
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Strategy - Ten-baggers 8.0
We rank the entire universe of firms with market cap greater than `1,000mn
(excluding financial services firms) on this score to arrive at this year’s rankings on Both improvement and the
this measure of improvement in company’s RoCE or profitability. After removing consistency of those
financial services firms and firms with insufficient data, 407 firms from the BSE500 improvements are important
and 1009 firms from the sub-BSE500 universe were ranked based on greatness
scores.
Note that to calculate the greatness scores, we have divided the entire universe into
two parts: (a) all BSE500 companies; and (b) all sub-BSE500. The highlights from the
distribution of firms (BSE500) on our ’greatness‘ score are displayed in the next page.
On pages 7-8, we show a back-test of this framework over 2004-2019 and find that
it works on a consistent basis. On pages 18 and 21, we show the real world
performance of these sets of portfolios over the past year and demonstrate that the
construct works in the real world as well. On a total shareholder returns basis (i.e.
assuming dividends are reinvested into the same stock on the ex-dividend date), the
lists from the BSE500 (ex-BFSI) universe cumulatively delivered ~23% total CAGR
returns (over the past seven years) vs. ~14% total CAGR returns for the BSE500 Index
(ex BFSI). Similarly, the lists from the sub-BSE500 universe that we had published in
our previous six iterations have cumulatively delivered ~25% total CAGR returns
(over the past five years) vs. ~15% CAGR returns for the BSE Small-cap Index.
On pages 10 and 15, we delve into this year’s list of 30 firms that constitute our ten-
baggers 8.0. This is followed by a list of 15 firms (on page 15) from the sub-BSE500
universe that do well on the same framework.
Using the new methodology, we observe that the number of ‘great firms’ reduce by
20 (~22%) as compared to the number of ‘great’ firms identified under the old
methodology. The new methodology emerges as a more stringent method of
evaluating the companies.
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Strategy - Ten-baggers 8.0
Exhibit 3: Number of great firms under the new methodology reduce by 20 (~22%)
as compared to the number of ‘great’ firms identified under the old methodology
Year No. of great companies Reduction
New methodology Old methodology
2003 57 88 -35%
2004 67 101 -34%
2005 76 98 -22%
2006 72 99 -27%
2007 75 86 -13%
2008 63 90 -30%
2009 68 100 -32%
2010 64 89 -28%
2011 62 70 -11%
2012 60 85 -29%
2013 61 76 -20%
2014 71 84 -15%
2015 78 83 -6%
2016 85 99 -14%
2017 99 125 -21%
2018 72 84 -14%
Average 71 91 -22%
Source: Ambit Capital research
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Strategy - Ten-baggers 8.0
Quantifying greatness
Within the BSE500 universe (ex BFSI), after removing firms with insufficient data, 407 *The greatness score is
firms were scored on the six headings highlighted on the previous page. The cut-off calculated by assigning
for greatness was placed at 67%* and only 72 firms (~18% of the total population of
equal weightages to the six
407 firms) could manage a score above this cut-off.
factors outlined in Exhibit 2
Exhibit 4: Distribution of firms on the greatness score (total population: 407 firms) on page 4.
140
120 Thus, each of these six
100 factors carries a weightage
of 16.7%. The scoring on
80 161 firms 72 firms sub-criteria within each of
60 score < 50% score >67% these factors is binary, with
40 174 firms a firm getting either 1 or 0
(between 50% based on whether it has
20
and 67%) done better than the
0
respective threshold or not.
0%-10%
100%
10%-20%
20%-30%
30%-40%
40%-50%
50%-60%
60%-70%
70%-80%
80%-90%
90%-
These scores are then
cumulated to arrive at a
Source: Ambit Capital research. Note: Universe for this exhibit is BSE500 companies.
final greatness score on 100
In the next exhibit, we present key financial data on the three zones defined above: for the firm.
Mediocrity (161 firms), Good but not great (174 firms), and Great (72 firms).
Exhibit 5: Zone of greatness – Financial summary
Mediocre Good but not great Great
Number of firms 161 174 72
Mcap (US$ mn)* 927 1,020 1,017
Share price (3-year CAGR)# 8% 12% 17%
Gross block (3-year CAGR) 9% 9% 11%
Sales (3-year CAGR) 4% 9% 11%
Adj PAT (3-year CAGR) 6% 18% 22%
CFO (3-year CAGR) 4% 13% 21%
EBIT Margin (3-year average) 13% 14% 15%
RoE (3-year average) 11% 17% 22%
RoCE (pre-tax) (3-year average) 13% 19% 24%
Net debt equity (3-year average) 0.2 0.3 0.1
FY19 P/E (x) 21.3 20.4 21.4
FY19 P/B (x) 2.7 3.1 3.8
FY20 P/E (x) 16.6 16.3 17.7
FY20 P/B (x) 2.4 2.7 3.3
Source: Capitaline, Ambit Capital research. Note: Universe for this exhibit is BSE500. All figures are based on
median values of the firms analysed. *Market cap as of 22 January 2018. # indicates share price performance
from January 2016 to January 2019. 3 years is based on data for the FY16/FY17/FY18
With regard to fundamentals, the superiority of the great firms compared with the
other two groups is evident in Exhibit 5 above. Of the great firms from BSE500 index,
we identify the ones that perform the best on our accounting and corporate
governance filters, which leads to our final list of 30 great companies. Before we
move on to these 30 potential ten-baggers, we shall discuss a back-test of the
‘greatness’ framework in the next section to see whether ‘great’ firms have indeed
managed to deliver superior returns historically.
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Strategy - Ten-baggers 8.0
Source: Ambit Capital research. Note: The back-test is based on annual rebalancing with forward-looking returns
being calculated from December 31 of year X to December 31 of year X+1; for example, in the exhibit above, for
the most recent year, the framework included numbers until FY17 and returns have been calculated from 31
December 2017 to 31 December 2018. (Note: The above exhibit only considers the share price returns and not
the total shareholder returns).
Outperformance was also seen on a median basis. A median firm in the universe has
delivered 4.9% CAGR returns (over 2004-2018). In contrast, a median ‘great’ firm
has managed to deliver 9.7% CAGR returns, thus resulting in an outperformance of
4.8% (on a CAGR basis) for ‘great’ firm vs. the universe.
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Strategy - Ten-baggers 8.0
Exhibit 7: Median performance of ‘Great’ firms vs the Universe (2004-2018) under Outperformance was also seen
our NEW framework on a median basis
600 Greatness model Universe (median basis)
500
400
9.7% CAGR
300
200 5.4% CAGR
100
0
Nov-13
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-15
Jan-16
Jan-17
Jan-18
Jan-19
Source: Ambit Capital research; Note: The back-test is based on annual rebalancing with forward-looking returns
being calculated from December 31 of year X to December 31 of year X+1; for example, in the exhibit above for
the most recent year, the framework included numbers until FY17 and returns have been calculated from 31
December 2017 to 31 December 2018. (Note: The above exhibit only considers the share price returns and not
the total shareholder returns).
Note that this back-test does not consider accounting or management quality, which
we believe are factors that should improve the performance of our live portfolios.
That’s what the next section of this note focuses on.
Performance of ten-bagger portfolios with a hypothetical Sensex-based ETF
Assume that you invested US$100mn in our first ten-bagger portfolio (Ten-baggers
1.0) released on 19 January 2012. Assume further that you churn/sale the entire ten-
baggers 1.0 portfolio on the 366th day to avoid short-term tax implications on capital
gains (taxable @15% on net gains) and reinvest the entire proceeds post bearing the
total price impact cost and brokerage cost (considered as 100bps) in our new ten-
baggers iterations (Ten-baggers 2.0) and you continue the same process every year.
The ten-bagger portfolios would have generated a CAGR of ~21% till Jan 2019 as
against ~11% CAGR which would have been earned by any hypothetical SENSEX
based ETF.
Further, note as per the latest amendments in the income tax laws with effect from
FY19, capital gains earned on sale of equity based portfolios or funds (e.g. MFs, ETFs)
would attract a tax of 10% on net gain even if the sale is made beyond the holding
period of 365 days). Also dividend (above Rs10 lacs) earned on these portfolios or
funds are taxable at rate of 10%. Given the similar tax implications and tax rate for
both, i.e. any equity based portfolio or ETFs, we have ignored the tax implications for
our calculation purpose, as a similar tax % cut from returns of either ten-bagger
portfolio or ETFs will not change the end-results of our analysis.
Exhibit 8: Average performance of ten-baggers and hypothetical Sensex-based ETF
100%
80%
60%
40%
20%
0%
(1.0)2012 (2.0)2013 (3.0)2014 (4.0)2015 (5.0)2016 (6.0)2017 (7.0)2018
-20%
Ten-bagger iterations (1.0 to 7.0)
Source: Bloomberg, Ambit Capital research. Note: Performance in above exhibit is on a total-return basis; i.e.
assuming that dividends are reinvested into the same stock on the ex-dividend date. Returns are calculated on 1-
year forward basis, i.e. from date of 1 iteration to next.
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Strategy - Ten-baggers 8.0
40.0
20.0 9.5
6.7
The live performance of our
- ten-bagger portfolios has been
1.0(2012) 2.0(2013) 3.0(2014) 4.0(2015) 5.0(2016) 6.0(2017) 7.0(2018) impressive too
(20.0) Tenbagger iterations (1.0 to 7.0)
Tenbagger iteration return index return cumulative alpha
Source: Bloomberg, Ambit Capital research. Note: Performance in the exhibit above is on a total-return basis; i.e.
assuming that dividends are reinvested into the same stock on the ex-dividend date. We have used BSE500 index
(ex-BFSI). Returns are calculated on 1-year forward basis; i.e. from date of 1 iteration to next.
41.5
50.0
-
2.0(2013) 3.0(2014) 4.0(2015) 5.0(2016) 6.0(2017) 7.0(2018)
Source: Bloomberg, Ambit Capital research. Note: Performance in exhibit above is on a total-return basis; i.e.
assuming that dividends are reinvested back into the same stock on the ex-dividend date.
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Strategy - Ten-baggers 8.0
Ten-baggers 8.0
In the latest iteration of the ten-bagger exercise, to identify stocks for the portfolio,
we select firms which clear our ‘greatness’ filters (i.e. where the ‘greatness score’ is
more than 67%) as well as ‘accounting’ filters (i.e. where the stock does not fall in the
bottom three deciles on accounting in our accounting model).
An overlay of accounting and
To identify the stocks for our Ten-bagger 8.0 iteration, we start with firms with the corporate governance checks to
highest ‘greatness score’. Within these firms, we remove firms: the greatness framework is the
That fall in the ‘Zone of Darkness’ in our accounting model (i.e. the bottom 3 last but critical step
deciles on accounting quality; for a full exposition of our accounting filter, please
refer to our 21st December 2018 note“ Accounting quality strikes back”); and
Firms with suspect corporate governance.
This overlay of ‘greatness’, ‘accounting’ and corporate governance checks allows us
to identify the 30 firms that comprise our ten-bagger portfolio. We highlight that we
do not exclude the companies where our analysts may have a negative view for near-
term earnings or valuations.
Exhibit 11: Ten-baggers 8.0 portfolio
S.no Ticker Company Greatness score Accounting decile
1 ADVENZY IN Advance. Enzyme. 92% D4
2 JCHAC IN Johnson Con. Hit 92% D6
3 CCLP IN CCL Products 92% D7
4 NTCPH IN Natco Pharma 92% D5
5 JYL IN Jyothy Lab. 83% D2
6 TMKN IN Timken India 83% D2
7 DMART IN Avenue Super. 83% D4
8 AVNT IN Avanti Feeds 83% D4
9 LOG IN La Opala RG 83% D6
10 NILK IN Nilkamal Ltd 75% D1
11 WIL IN WABCO India 75% D2
12 DAGRI IN Dhanuka Agritech 75% D2
13 JBCP IN J B Chem & Pharm 75% D6
14 GOAGRO IN Godrej Agrovet 75% D7
15 DLPL IN Dr Lal Pathlabs 75% D2
16 SOMC IN Somany Ceramics 75% D5
17 HEIM IN Heidelberg Cem. 83% D3
18 SFL IN Sheela Foam 83% D6
19 TPW IN Torrent Power 75% D1
20 KNPL IN Kansai Nerolac 75% D3
21 MSIL IN Maruti Suzuki 75% D7
22 WH IN Venky's (India) 92% D3
23 PVRL IN PVR 92% D5
24 SCHI IN Sudarshan Chem. 92% D7
25 KJC IN Kajaria Ceramics 75% D2
26 3M IN 3M India 75% D3
27 SF IN Sundram Fasten. 83% D3
28 BRIT IN Britannia Inds. 83% D4
29 WHIRL IN Whirlpool India 75% D2
30 ATLP IN Atul 75% D4
Source: Ambit Capital research, Company
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Strategy - Ten-baggers 8.0
Having identified the 30 great firms that exhibit the ingredients required to be
tomorrow’s winners, we run a valuation check to ascertain if they are currently
trading at reasonable prices for outright investments. In our view, whilst valuations do
matter on a tactical basis, how the underlying fundamentals evolve for the firm over
long periods plays a more important role in determining returns than the beginning-
of-the-period valuation itself. Further, the performance of the previous iterations of
our ten-bagger portfolio corroborates our finding that beginning-of-the-period
valuations do not play a significant role in shaping subsequent investment
returns. We discuss this in detail in the final section of this note.
To determine whether a particular stock is cheap or not, we categorise these stocks
into three buckets based on their relative attractiveness on valuations with respect to
their own history. We compare these firms with respect to their five-year average
valuations on three metrics — P/B, P/E and EV/EBITDA. We find 21 firms to be
inexpensive (on at least two of the three metrics). However, for the long term, all 30 For the long-term investor,
stocks remain candidates to be ten-baggers from our perspective (as we have beginning-of-period valuations
reiterated time and again that current period valuations do not have a significant do not have a significant impact
effect on long-term returns! Please see pages 18-19 for details). on returns
We have bottom-up coverage with BUYs on 2 of these – Maruti Suzuki and PVR.
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Strategy - Ten-baggers 8.0
** Trading below either five-year average P/E, five-year P/B or five-year EV/EBITDA (on one of these three measures)
*** Trading above five-year average P/E, P/B and EV/EBITDA
For the ‘greatness’ and accounting scores for the entire listed companies universe (ex-financials), clients can now use our HAWK platform
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Strategy - Ten-baggers 8.0
** Trading below either five-year average P/E, five-year P/B or five-year EV/EBITDA (on one of these three measures)
*** Trading above five-year average P/E, P/B and EV/EBITDA
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Strategy - Ten-baggers 8.0
Exhibit 14: January 2019 ten-baggers – forward looking data using consensus
3M median
Ticker Company Mcap FY20 P/E FY21 P/E FY18-FY21E FY18-FY21E
ADV
US$ mn) (US$ mn) EPS CAGR BPS CAGR
Attractive valuations*
1 ADVENZY IN Advance. Enzyme. 261 0.7 11 N/A 21% N/A
2 JCHAC IN Johnson Con. Hit 672 0.3 33 28 21% 20%
3 CCLP IN CCL Products 510 0.3 17 14 20% 18%
4 NTCPH IN Natco Pharma 1,799 3.6 17 18 -1% 16%
5 JYL IN Jyothy Lab. 983 0.8 29 25 15% 8%
6 TMKN IN Timken India 595 0.2 26 22 23% 24%
7 DMART IN Avenue Super. 11,922 8.6 67 52 27% 22%
8 AVNT IN Avanti Feeds 708 2.9 14 11 1% 19%
9 LOG IN La Opala RG 337 0.1 27 23 -9% 14%
10 NILK IN Nilkamal Ltd 278 1.3 14 N/A 6% 15%
11 WIL IN WABCO India 1,677 0.5 31 30 14% 20%
12 DAGRI IN Dhanuka Agritech 281 0.2 14 12 9% 14%
13 JBCP IN J B Chem & Pharm 363 0.5 12 11 22% 11%
14 GOAGRO IN Godrej Agrovet 1,348 1.8 30 24 20% 17%
15 DLPL IN Dr Lal Pathlabs 1,223 0.8 35 30 20% 21%
16 SOMC IN Somany Ceramics 216 0.2 18 15 14% 11%
17 HEIM IN Heidelberg Cem. 482 0.7 14 11 32% 14%
18 SFL IN Sheela Foam 863 0.1 29 25 23% 48%
19 TPW IN Torrent Power 1,738 5.3 9 9 15% 15%
20 KNPL IN Kansai Nerolac 3,423 1.2 38 32 13% 11%
21 MSIL IN Maruti Suzuki 30,142 62.2 22 18 14% 13%
Moderate valuations**
22 WH IN Venky's (India) 451 3.0 13 N/A 25% 29%
23 PVRL IN PVR 1,051 3.6 33 27 31% 19%
24 SCHI IN Sudarshan Chem. 316 0.4 15 N/A 19% N/A
25 KJC IN Kajaria Ceramics 1,220 2.4 29 24 16% 15%
26 3M IN 3M India 3,271 0.4 N/A N/A N/A N/A
Rich valuations***
27 SF IN Sundram Fasten. 1,540 1.1 22 18 18% 24%
28 BRIT IN Britannia Inds. 10,708 9.2 53 44 20% 20%
29 WHIRL IN Whirlpool India 2,620 0.5 40 35 15% 14%
30 ATLP IN Atul 1,472 0.6 20 17 31% 19%
Source: Bloomberg, Ambit Capital research
* Trading below five-year average P/E, P/B, EV/EBITDA (on at least two of these three measures)
** Trading below either five-year average P/E, five-year P/B or five-year EV/EBITDA (on one of these three
measures)
*** Trading above five-year average P/E, P/B and EV/EBITDA
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Strategy - Ten-baggers 8.0
Note that unlike the ten-baggers’ list for the BSE500 universe (where we only
consider firms that meet the greatness score cut-off of 67% whilst being in the top 7
deciles of our forensic accounting model), the criteria used to screen for ten-baggers
from the sub-BSE500 universe has been made much more stringent. Only firms
with a greatness score above 80% that also fall in the top four deciles on accounting
quality in the sub-BSE500 universe have been included in this list.
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Strategy - Ten-baggers 8.0
On a separate note, in the wake of several clients requesting access to both our
‘forensic’ and ‘greatness’ models, in July 2016, we launched our ‘HAWK’ platform
giving clients access to Ambit’s proprietary ‘forensic’ and ‘greatness’ models in an
easy to use and intuitive format (click here for the User Guide). Our ‘HAWK’ platform
allows clients to screen the entire universe ex-financials (~1,500 listed Indian
companies) on the basis of their accounting quality (quantified using our ‘forensic’
model) and capital allocation track record (quantified using our ‘greatness’
framework’) over the last 10 years. Whilst the platform currently has the accounting
scores for all the companies updated until FY17, in a few weeks from now, we will
refresh our platform to incorporate FY18 financials as well.
Please contact your relevant sales representatives at Ambit if you have not yet
received the login credentials for ‘HAWK’ or if you would like a demo on how
to use the product.
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Strategy - Ten-baggers 8.0
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Strategy - Ten-baggers 8.0
Attractive valuations
ITC IN ITC 50,263 100 110 10%
HCLT IN HCL Technologies 18,435 100 104 4%
CDH IN Cadila Healthcare 4,934 100 79 -21%
PI IN PI Industries 1,668 100 89 -11%
AJP IN Ajanta Pharma 1,469 100 78 -22%
Average for this bucket -8%
Moderate valuations
DMART IN Avenue Supermarts 11,989 100 111 11%
BRIT IN Britannia Industries 10,782 100 134 34%
UBBL IN United Breweries 5,381 100 127 27%
MACA IN Mahindra CIE Automotive 1,260 100 92 -8%
GPPV IN Gujarat Pipavav Port 602 100 54 -46%
TELX IN Tata Elxsi 848 100 93 -7%
Average for this bucket 2%
Rich valuations
PIDI IN Pidilite Industries 8,185 100 128 28%
MRCO IN Marico 6,827 100 122 22%
KNPL IN Kansai Nerolac Paints 3,405 100 83 -17%
BRGR IN Berger Paints India 4,384 100 123 23%
WHIRL IN Whirlpool Of India 2,626 100 97 -3%
AIAE IN AIA Engineering 2,191 100 107 7%
HTSMF IN Hatsun Agro Products 1,501 100 83 -17%
KJC IN Kajaria Ceramics 1,224 100 75 -25%
AVNT IN Avanti Feeds 703 100 44 -56%
FNXC IN Finolex Cables 927 100 61 -39%
VGRD IN V-Guard Industries 1,197 100 88 -12%
ARTO IN Aarti Industries 1,758 100 139 39%
ATLP IN Atul 1,478 100 114 14%
RLXF IN Relaxo Footwears 1,251 100 109 9%
JCHAC IN Johnson Controls - Hitachi 678 100 67 -33%
CCLP IN CCL Products (India) 510 100 91 -9%
LOG IN La Opala RG 338 100 62 -38%
Sudarshan Chemical
SCHI IN 317 100 74 -26%
Industries
SRTY IN TVS Srichakra 256 100 66 -34%
Average for this bucket -9%
Ten-bagger -6.53%
BSE500 index(ex BFSI) 100 96 -4.45%
Outperformance -2.08%
Source: Bloomberg, Ambit Capital research. Note: Performance is on a total-return basis; i.e. assuming that
dividends are reinvested into the same stock on the ex-dividend date.
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Strategy - Ten-baggers 8.0
Whilst the total returns of broader markets (read BSE500 index) declined by ~5% last
year, last year’s iteration of ten-baggers published on 06 January 2017 declined by
~7% (implying ~2% underperformance relative to the BSE500). The relative
underperformance of ~2% could be partially explained by the fact that the previous
year’s portfolio (Ten-baggers 7.0) consisted of larger proportion (~63%) of
companies with expensive valuations which experienced significant decline in their
share prices in the previous 12 months. This year’s portfolio (Ten-baggers 8.0) on the
contrary consists of a higher number of companies (~70%) with attractive valuations.
Moreover, the above exhibit also highlights that beginning-of-the-period valuations
have not made much difference to investment returns, with the stocks categorised as
attractively valued, based on initial valuations, underperforming those classified as
moderately valued and almost performing at par with those classified as richly valued
on average basis. This finding also emerged from earlier ten-bagger iterations. In
effect, what our models have shown time and again is that once you screen
rigorously for high quality, there is little value-add in further screening
through a demanding valuation filter.
Exhibit 19: Last year’s portfolio was dominated by Exhibit 20: Current year’s portfolio is dominated by
companies with expensive valuations companies with attractive valuations
Attractive Expensive
valuations, valuations,
17% 13%
Moderate
valuations,
Moderate 17%
valuations,
Rich 20%
valuations, Attractive
63% valuations,
70%
Ten-baggers 7.0 Ten-baggers 8.0
Also, basis our new greatness framework and FY18 AR-based accounting scores, it is
observed that large-cap companies may not necessarily continue to dominate the
greatness and good quality accounting space over a period of time. Whilst ~57% of
previous years’ iteration consisted of large companies, only ~37% of current years’
iteration consists of large-cap companies.
Exhibit 21: A large portion (~57%) of last year’s portfolio Exhibit 22: Almost equal distribution between large-cap,
consisted of large-cap companies mid-cap and small-cap in current year’s portfolio
Small cap
companies,
4 Small cap
companies, Large cap
~13% 9 companies,
~30% 11
~37%
Mid-cap ~30% ~57% Large cap
companies, companies,
9 17 Mid-cap ~33%
companies,
10
Ten-baggers 7.0 Ten-baggers 8.0
Source: Ambit Capital research note: Large cap companies (market cap: Source: Ambit Capital research note: Large cap companies (market cap:
Above Rs.200bn), mid-cap companies (market cap: Rs40bn to Rs200bn), Above Rs.200bn), mid-cap companies (market cap: Rs40bn to Rs200bn),
small cap companies (market cap: Less than Rs40bn) small cap companies (market cap: Less than Rs40bn)
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January 29, 2019 Ambit Capital Pvt. Ltd. Page 19
Strategy - Ten-baggers 8.0
Exhibit 23: Barring 2014, relative returns have moved broadly in line with the
proportion of attractively valued stocks
125% 40%
105% 35%
13% 30%
85% 24%
47% 17% 25%
53% 60%
65% 70% 63%
24% 73% 20%
45% 15%
20% 27%
10% 70% 10%
25% 52% 7% 3% 20%
27% 27% 23% 23% 30% 5%
5% 17%
0%
-15% 2012 2013 2014 2015 2016 2017 2018 2019 -5%
Attractive valuations Moderate valuations
Rich valuations Relative returns (RHS)
12 large-cap companies from the previous year’s iterations (Ten-baggers 7.0) were
unable to make their way to current year’s iteration. Summary of reasons for such slip
is explained in the exhibit below
Exhibit 24: Reasons for large-cap stocks exiting our ten-baggers portfolio
Company name Reasons for exclusion
ITC Marginally misses the ‘greatness’ cut-off; gets a low score on improvement in capital employed turnover
HCL Technologies Misses the ‘greatness’ cut-off ; gets a low score on capital employed turnover improvement and EBIT margin discipline
Cadila Healthcare Features in D8 on our accounting framework, which may be for recent business and cash generation weakness
PI Industries Marginally misses the ‘greatness’ cut-off; gets a low score on improvement in capital employed turnover
Ajanta Pharma Features in D9 on our accounting framework, which may be for recent business weakness
United Breweries Misses the ‘greatness’ cut-off; gets a low score on capital employed turnover improvement and EBIT margin discipline
Pidilite Industries Features in D9 on our accounting framework, which may be for recent business weakness
Marico Marginally misses the ‘greatness’ cut-off; gets a low score on incremental capex criteria on greatness framework
Marginally misses the ‘greatness’ cut-off; gets a low score on incremental capex criteria and capital employed turnover
Berger Paints India
improvement criteria
AIA Engineering Misses the ‘greatness’ cut-off; features in D8 on our accounting framework, which may be for recent business weakness
Marginally misses the greatness cut-off; gets a low score on debt-equity and improvement in capital employed turnover
Hatsun Agro Products
criteria
Marginally misses the ‘greatness’ cut-off ;gets a low score on debt-equity and improvement in capital employed turnover
Aarti Industries
criteria
Source: Ambit Capital research, Company
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January 29, 2019 Ambit Capital Pvt. Ltd. Page 20
Strategy - Ten-baggers 8.0
In a more normal market scenario witnessed in the previous 12 months, poor quality
small/mid-caps have seen sharp declines. Consequently, the sub-BSE500 list of ten-
bagger firms published on 15 January 2018 has over performed the benchmark BSE
small-cap index (~19% decline for the portfolio versus ~28% decline for the BSE
small-cap index, implying ~9% outperformance for the portfolio; see exhibit 25
above) over the past year. That said, our previous six iterations have cumulatively
delivered ~25% total TSR CAGR (over the past six years) vs. ~15% TSR CAGR for the
BSE small-cap Index. This suggests that over long periods of time the framework
indeed does a reasonably good job in the sub-BSE500 universe as well.
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January 29, 2019 Ambit Capital Pvt. Ltd. Page 21
Strategy - Ten-baggers 8.0
40% R² = 0.003
FY08-FY18 share price CAGR
30%
20%
10%
(rel. to sensex)
0%
-10% - 30.0 60.0 90.0 120.0 150.0 180.0
-20%
-30%
-40%
-50%
-60%
FY08 Price to Book ratio
Source: Ambit Capital research; Note: FY08-18 returns here are stock returns relative to Sensex
The value of the R-squared makes the story self-explanatory. A low value for this
parameter indicates that the beginning-period valuations do not play any meaningful
role in explaining stock returns over the next ten years. This holds true for both P/B
and P/E as measures of valuation.
Exhibit 27: Valuation impact on long-term returns – P/E
40% R² = 0.0113
FY08-FY18 share price CAGR
30%
20%
10%
(rel. to sensex)
0%
-10% - 20.0 40.0 60.0 80.0 100.0 120.0
-20%
-30%
-40%
-50%
-60%
FY08 Price to Earnings ratio
Source: Ambit Capital research; Note: FY08-18 returns here are stock returns relative to Sensex. Trailing P/E has
been restricted to 100.
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January 29, 2019 Ambit Capital Pvt. Ltd. Page 22
Strategy - Ten-baggers 8.0
40% R² = 0.0072
Share price performance
20%
0%
- 10.0 20.0 30.0 40.0
-20%
-40%
-60%
-80%
Trailing Price to Book ratio
Here again, a low R-squared value indicates that the beginning-period P/B does not
influence stock returns to a significant extent. This holds true for P/E as a measure of
valuation as well.
R² = 0.0261
40%
Share price performance
20%
0%
- 20.0 40.0 60.0 80.0 100.0 120.0
-20%
-40%
-60%
-80%
Trailing Price to Earnings
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January 29, 2019 Ambit Capital Pvt. Ltd. Page 23
Strategy - Ten-baggers 8.0
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January 29, 2019 Ambit Capital Pvt. Ltd. Page 24
Strategy - Ten-baggers 8.0
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January 29, 2019 Ambit Capital Pvt. Ltd. Page 25
Strategy
Source: Bloomberg, Watchout investors, NSE infobase, BSE filings, Ambit HAWK, Ambit Capital Research
Except Menon bearing (~8.6% shares are pledged as at quarter ended Dec 2018) and Rushil Décor (~2% shares
are pledged as at quarter ended Dec 2018) no other company has pledged the shares.
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January 29, 2019 Ambit Capital Pvt. Ltd. Page 26
Strategy
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January 29, 2019 Ambit Capital Pvt. Ltd. Page 27
Strategy
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