small cap midcap 5

8/8/2019 Small Cap Midcap 5

1/19

Why invest in Small & Mid cap

Companies


2/19

The Big Picture First

India is among the three most attractiveFDIdestinations in the world

- A T Kearney, FDI Confidence Index 2005

We came to India for the costs, stayed for the qualityand are now investing for innovation

- Dan Scheinman, Cisco System Inc. astold to Business Week, August 2005

India is a developed country as far as

intellectual capital is concerned- Jack Welch, General Electric


3/19

Conducive Business Environment in India

Manpower

Capital

Consumption Demand

Infrastructure Demand

OutsourcingDemand

Entrepreneurial Talent

Growth Opportunities

O

pportu

nities

Resourc

es

Rural

Transformation

SEZs


4/19

Consumption Infrastructure Outsourcing

220 of the Fortune 500 companiessource software from India

One-fifth of Fortune 500 companieshave set up R &D centers in India

By 2009-10, over 50 cr. Indians areexpected to have a household income

of over Rs. 4,50,000* per annumOver $250 billion of investment

needed in 5 years

30-crore-strong consumingclass and growing at 8% p.a.

5-year Expected Growth

150%

150%

100%

100%

80%

75%Colour TV Sales

Processed Foods

Power Generation

Health Care Services

Car Sales

Telecom Subscribers

50% share in the Global Off-shore IT and BPO services by

2008

Urban India

Urban India 44

49

107

44

34

27

24

18

8Aviation

Ports

Railways

Telecom

Roads

Oil & Gas

Power

Strong InvestmentDemand (USD bn)

ource: NCAER, Investment Commission of India, RBI, Edelweiss Research

* in PPP terms

Opportunities


5/19

Rural Transformation

Opportunities

SEZs

Corporate taking initiatives toreduce inefficiencies ITC EChaupal

Infrastructure inadequacy &connectivity problems could be

out of the way with villagesgetting networked AkshOptifibre providing internet,cable and telephone on onenetwork for the whole village

Micro credit could becomereality

Growth in rural income canincrease demand and propeleconomy to higher growthtrajectory

A new catalyst for growth bycreating world class infrastructureand reducing the cost of businessthereby fuelling overall growth

To benefit the labor intensive and

competitive businesses like textiles Currently only 14 SEZs in India,

collectively contributing only 6% toexports. This could change due to anentry of new private sector playerslike Bajaj Auto, M&M, Ranbaxy, TCS,Wipro etc., fiscal incentives, and

labor flexibility In China, SEZs account for 12% of its

GDP. India too can replicate theChina experience

A second green revolution could take growth to adifferent trajectory

SEZs promote infrastructure, trade, employmentgeneration and investments

Source: Citigroup


6/19

Manpower Capital

25 crore people will join Indias workforce by 2020

USD 35.4 bn FDI in India since FY00

Incidentally, this amount is higher than total equity AUMof mutual funds industry in India today

Since 2001

Rs. 1,10,000 cr.raised through

IPOs

2001 2002 2003 2004 2005 2006

0

5,000

10,000

15,000

20,000

25,000

30,000

Source: Source: The World Fact Book (www.cia.gov), CMIE, Investment Commission of India, AMFI website, The econimist Intelligence Unit,Deutsche Bank Research

India accounts for over 25% of the worlds youth

India has the largest number of English speakingengineers and scientists

Resources


7/19

Why invest in Small & Mid cap Companies


8/19

Above graph is a representation from different theories on the various business stages of a company

Main Source: The seven business stages of business life, by Darrell Zahorsky

Seed Capital Startupcapital

IPO Expansion orDevelopment

Capital

IncreasedInstitutional

flows

Maturity

Market

Value

Inflexion Point

Transition from Small / Mid cap to Large cap

Strongfundamental

growth andPE re-rating trigger

Small / Midcaps to

transition toLarge caps

Business Stages and Market Valuation


9/19


Growth

Growing Market Size Bharti Telecom

Geographical Expansion Deccan Chronicle

New Product Breakthrough I Flex

Consolidation Bajaj Hindustan

Focus on Niche Markets Kotak Mahindra Bank

Conducive Environment Robust Economic Growth

The above representation is NOT a stock recommendations and is discussed solely for illustrative purposes. Prudential ICICI AMC may or may not haveany present positions in these stocks. Past performance is not a guide to future returns. Source: Motilal Oswal


10/19

Growth

0

5000

10000

15000

20000

25000

30000

3500040000

45000

2001 2006

Rs.crores

250

300

350

400

450

500

550600

650

Rs.'000crores

Net Profits Sales

Net Profit & Sales of companies with < Rs. 1000 cr.

M-Cap in FY 2001

Number of companies with PAT of > 125 crores have grown from 78 to 199 over the last 6 years

Source: Motilal Oswal Securities

Growth Registered by Yesteryears Mid caps

Small / Mid

capsCompanies withmarket cap of Rs. 1000 cr in

2001

Net profitGrowth

(FY 01 till FY06)

360% 152%


11/19


PE Re-rating

Investors Interest

Awareness & Coverage

Size and Scale

Corporate Governance

Credit Worthiness

Liquidity, Growing Assets withProfessional Asset Managers


12/19

PE Re-rating

Number of companies with Market cap of more than Rs. 1000 crores have increased from 99 to350 over the last 5 years

Source: Motilal Oswal Securities. * Extrapolating the same P/E and assuming the same capital.

Emerging to Surging - A Dramatic PE Re-rating

Market cap of companies

with < Rs. 1000 cr in 2001

2001 2006

Rs. 0.93 trillion Rs. 10.26trillion

0

200,000

400,000

600,000

800,000

1,000,000

2001 2006

Rs.crore 993% Growth PE Re-rating*

Attributable to

EPS Growth*

Growth in Market Cap of Small / Mid capCompanies,

Market Cap of companies with < Rs. 1000 cr. in FY 2001


13/19

Growth Followed by PE Re-rating

Leading English Daily in Hyderabad

Re-rating Rationale: Increase in Geographical spread. Starting from Hyderabad, it hasexpanded into Chennai. Planning to become a dominant regional player by entering intoKarnataka market.

Stock Price Indexed and adjusted for bonuses and share splits. Data Source: Motilal Oswal Securities Limited. ^ Annualised for FY07 # Internalcalculations - based on EPS declared as on Dec-06 and price as on Jan 17, 2007 @ Internal calculations - based on EPS declared as on Mar-05 andprice as on Mar 31, 2005. The above representation is NOT a stock recommendations and is discussed solely for illustrative purposes. Prudential ICICI

AMC may or may not have any present positions in these stocks. Past performance is not a guide to future returns. * Extrapolating the same P/E andassuming the same capital.

0

100

200

300

400

500

600

700

800

900

Dec-04

Jan-05

Feb-05

Mar-05

Apr-05

May-05

Jun-05

Jul-05

Aug-05

Sep-05

Oct-05

Nov-05

Dec-05

Jan-06

Feb-06

Mar-06

Apr-06

May-06

Jun-06

Jul-06

Aug-06

Sep-06

Oct-06

Nov-06

Dec-06

Deccan Chronicle

4x in two years

PE Re-rating*

Attributable to

EPS Growth

EPS: 9.62

PE:15.12@

EPS:43.30^

PE:19.79#


14/19

Telecom-vertical-focused IT products company with leadership status in fraudmanagement and revenue assurance space.

Re-rating Rationale: Expansion of markets through acquisitions (6 acquisitions in thelast 7 years). Acquisition of Lightbridge, Alcatels Fraud Management Group and AzureSolutions has helped increased the size of the business manifold.


Subex Azure

0

100

200

300

400

500

600

700

800

Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07

7x in six years

PE Re-rating*

Attributable to

EPS Growth

EPS: 2.94

PE:24.73@

EPS:18.40^

PE:39.80#

Stock Price Indexed and adjusted for bonuses and share splits. Data Source: Motilal Oswal Securities Limited. ^ Prabhudas Liladhar estimate EPS forFY07 # Internal calculations - based on the estimated EPS for FY07 and price as on Jan 17, 2007 @ Internal calculations - based on EPS declared as onMar-02 and price as on April 01, 02. The above representation is NOT a stock recommendations and is discussed solely for illustrative purposes.Prudential ICICI AMC may or may not have any present positions in these stocks. Past performance is not a guide to future returns.


15/19

Manufacturer of Mill Internals for Cement & Mining Industry

Re-rating Rationale: Market Expansion from Cement Industry to Mining Industry andproviding tailor-made solutions to requirements of the mining industry.


0

200

400

600

800

1000

1200

1400

1600

Dec-05 Mar-06 Jun-06 Sep-06 Dec-06

AIA Engineering3x in 1 year

PE Re-rating*

Attributable to

EPS Growth

EPS: 25.59PE: 24.03@

EPS: 33.86^

PE: 33.89#

Stock Price Indexed and adjusted for bonuses and share splits. Data Source: Motilal Oswal Securities Limited. ^ Annualised for FY07 # Internalcalculations - based on EPS declared as on Sept-06 and price as on Jan 17, 2007 @ Internal calculations - based on EPS declared as on Mar-06 and priceas on Mar 31, 2006. The above representation is NOT a stock recommendations and is discussed solely for illustrative purposes. Prudential ICICI AMCmay or may not have any present positions in these stocks. Past performance is not a guide to future returns.


16/19

Rs. 10000 invested in April 2003 would have grown to

Historical Performance

Data Source: Bloomberg

10000

20000

30000

40000

50000

60000

70000

80000

90000

100000

Apr-03 Oct-03 Apr-04 Oct-04 Apr-05 Oct-05 Apr-06 Oct-06

BSE Small Cap BSE Mid cap Sensex

Rs.90000 +

Rs.68000 +

Rs.45000 +

Jan 07


17/19

Small and Mid caps Available @

DiscountSince September 05, Small and Mid caps have under performed

Large caps;Select Small and Mid caps have potential to catch up

As on January 17, 2007. Internal Analysis. Data Source: Bloomberg

MarketCapital

isa

tion

Ratios

0.6

0.65

0.7

0.75

0.8

0.85

0.9

0.95

1

Sep-05 Nov-05 Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07

BSE Small Cap / Sensex ratio BSE Mid Cap / Sensex ratio

~ 16%

discount

~ 30%discount

Concern ofliquidity keeps

short terminvestors away

from theseexciting long

terminvestment

opportunities

Concerns for short term investors provide an opportunity for long terminvestors


18/19

Investing in Small and Mid caps Needs

Superior stock selection capability

Constant monitoring

Calibrated entry and exit

Evaluation of corporate governance standards

Diversification


19/19

Thank you

small cap midcap 5

Documents