|IPM Project Report |
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|Investment Portfolio Creation |
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|Investment Philosophy – of Joel Greenblatt’s |
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|August 20th , 2011 |
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|For the partial fulfilment of |
|Masters in Business Administration (2010-12) |
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|Submitted to: Submitted By: |
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Introduction:

Joel Greenblatt (born December 13, 1957 in Great Neck, New York) is a value investor, and adjunct professor at the Columbia University Graduate School of Business. He is the former chairman of the board of Alliant Techsystems and founder of the New York Securities Auction Corporation. Greenblatt is a graduate of the “The Wharton School” at the University of Pennsylvania, receiving his B.S. in 1979 and M.B.A. in 1980.

The Little Book That Beats the Market:

In the “The Little Book That Beats The Market,” Greenblatt describes a quantitative strategy –which he calls the ‘magic formula’- to pick stocks. It’s actually a very simple quantitative stock ranking scheme. It uses return on capital and earnings yield as inputs. Return on capital is the metric that shows whether a business is a good one or not. Earnings yield is the metric that shows whether a company is cheap or not. Greenblatt suggests using these measures to identify good but cheap businesses, and buy them. That’s the secret behind the ‘magic formula’. In “The Little Book That Beats The Market,” Greenblatt calculated hypothetical returns for the 1988-2004 period. The magic formula returned an average 30.8% per year, while the market return was 12.3% and the S&P 500 returned an average 12.4%. So this formula beats the market by 18% per year.

The two things he looks at are earnings yield, which is how cheap the company is. A simple earnings yield would be the inverse of the P/E ratio or earnings to price. So, in other words, if something earned $2 and it cost you $10 a share, you’d have a 20% earnings yield.

It uses a more sophisticated metric than just earnings, than just price. But the concept is the same. It uses EBIT–earnings before interest and taxes and compares that to enterprise value, which is the market value of a company’s stock plus the long-term debt that a company has. That adjusts for companies that have different ratios of leverage, different tax rates, and all those things.

So what the magic formula does is ranks companies first according to cheapness based on their earnings yield; the higher the earnings yield, the cheaper it is. So it ranks all companies, thousands of companies based on how cheap they are, based on their earnings yield. Then in a totally separate way we rank all companies again, but this time we are just ranking them based on their return on capital; the higher the better. So we do two rankings–one based on cheapness and one based on return on capital. Then what the magic formula does is combine those rankings. So, in other words, if we were the cheapest company on this list, we’d get a 1 for cheapness and if we were the 200th highest return on capital, our combined score would be 201. If we were the 60th cheapest out of 2,000 companies and we were the 60th best return on capital, we’d get a combined score of 120.

It is simple value investing. It’s a systematic, very quantitative and disciplined way of effectively being a value investor. Value investing works over long periods of time but doesn’t necessarily work in any particular month or year. And that’s what’s going on here.
The Magic Formula seeks to identify “good” businesses selling at “bargain” prices. It uses two factors to rank stocks so that you can identify the best businesses selling at bargain prices.

Factors Affecting His Investment Philosophy
There are various factors that affect his investment philosophy as follows:

• The first factor identifies a good business as one that produces a high return on capital (ROC). Return on capital is calculated by dividing earnings before interest and taxes (EBIT) by the sum of net working capital and net fixed assets.

ROC = EBIT / (Net Working Capital + Net Fixed assets)

• The second factor identifies businesses selling at bargain prices by examining earnings yield, which is basically the in inverse of the price earnings ratio (P/E). More specifically, earnings yield is defined as earnings before interest and taxes divided by enterprise value.

EY = EBIT/EV

Steps Followed in Selecting Portfolio:

The formula selects good companies when they are cheap. This is in contrast to first selecting cheap companies like all previous methods, and then determining what the best companies are of that selection. There are a series of steps that are followed sequentially to select the final portfolio as follows [Figure 2]:
Step 1: The magic formula selects the good companies by sorting on ROIC or Return on Invested Capital. There is discussing whether to use net return after taxes or operating profit. Invested Capital means all resources used to achieve these profits. Also described as all of the assets (current and non-current) – Cash surplus – non-interest bearing liabilities (e.g. suppliers). In essence, it does not really matter what kind of return or profit you use, as long as you use the same method of calculation for all stocks.

Step 2: Joel Greenblatt then sorts these companies from high to low with the company with the highest ROIC gets number 1 the next number 2 and so on.

Step 3: The next step is to sort companies from cheap to expensive. Greenblatt does this by using the Earnings Yield. Bluntly, this is done by replacing an inverted price/earnings ratio. A P/E of 12 is equal to an earnings yield of 8.33%. This is not exactly like Greenblatt makes his formula, but for the small investor it is easily calculable and easily available data. The stocks are sorted from high to low. The company with the highest earnings yield is the cheapest company and it has number 1. This is applied to the whole list.

Step 4: As a final step a sum of the numbers is done in both lists for each company. This is his Magic Formula score [Figure 1]. When we sort the companies in ascending order using this Magic Formula score, the companies with the lowest score are the companies we seek. Joel Greenblatt filters out all utilities and companies in the financial sector like banks and insurance first.

Step 5: Once a list has been prepared and ranked for all the companies the final goal is to buy the 20 to 30 companies with the lowest Magic Formula score. Greenblatt recommends not buying them all at once, but for example 5-7 different stocks, and then after a few months again 5 to 7 shares.

These shares are held in the portfolio for one year, and then we sell them and replace them with new companies that we have found using the previous described method. Joel Greenblatt does not include financial industry stocks or utilities due to the unique nature of their financial accounting statements.

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Figure 1: Magic Formula Rank

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Figure 2: Steps used in Magic Formula Investing

Another more popular measure to check the cheapness of a stock is the P/E ratio. Greenblatt however likes to use a more stringent measure and uses enterprise value as this includes not only market capitalization but also other factors such as debt. Instead of earnings he likes to use the operational profit or EBIT.

Remarks: • Banks and insurance companies are excluded.

• For some companies we don't get all the data to complete the calculation. These get ranked at the bottom.

Steps Followed in Selecting Portfolio:

Using the above mentioned factors, a portfolio of companies has been created. BSE 500 companies have been used as a base data and by applying the following steps, a portfolio of seven companies has been created.

Step 1: sheet name - BSE 500 Base Data
BSE 500 companies have been listed in the first excel sheet and ROCE, P/E and Earnings Yield (%) are calculated corresponding to each company.

Step 2: sheet name - BSE 500 Ranking
Two ranks are assigned to each company on the basis of their ROCE and Earning yields. First the companies are assigned ranking on the basis of ROCE. The company with the highest ROCE is ranked first while the company with the lowest ROCE is ranked last. Similarly ranks are assigned on the basis of earning yields in the same manner. A combined rank is then calculated by adding the two ranks. The organisations are then reorganised on the basis of their combined rank in increasing order.

Step 3: sheet name - Top-30 & Short listing
The first thirty companies from sheet 2 are selected as the top thirty companies to be included in the portfolio. To further narrow down the list, following Benjamin Graham’s filters have been applied to these thirty companies. Step 3.1: Industry P/E of the industry corresponding to each company is listed. Step 3.2: Company P/E of each company is listed. Step 3.3: All the companies whose P/E ratio is less that 40% of the industry’s P/E ratio are shortlisted. This reduces the number of companies to twelve. Step 3.4: Post that Debt to equity ratio is calculated for each company. All those companies with D/E less than 1 are shortlisted. This further narrows the list to ten companies. Step 3.5: Lastly Current ratio of all these ten companies is calculated. According to Benjamin companies with ratio of more than 2 should be selected. But since applying this filter would leave the portfolio with only five companies, a filter of current ration > 1.75 is applied. This helps in narrowing the number of companies to exact seven.

Step 4: sheet name – Final-7
This sheet contains the list of final seven companies to be included in the portfolio. The seven companies are:
|1. |Sesa Goa Ltd. |
|2. |Allied Digital Services Ltd. |
|3. |Sasken Communication Technologies Ltd. |
|4. |Prakash Industries Ltd. |
|5. |Geodesic Ltd. |
|6. |I C S A (India) Ltd. |
|7. |Rolta India Ltd. |

Step 5: sheet name – Data
Average weekly return, Standard Deviation, Correlation, Covariance and Beta has been calculated for all these seven companies using the weekly closing price of last five years. However bonus shares were declared for Sesa Goa Ltd. in August 2009. Hence beta calculations have been done using past three years data.

Step 6: sheet name – Covariance
Correlation and covariance matrix has been created for the seven companies

Step 7: sheet name – Efficient Frontier
Weights for each security have been calculated for minimum variance and optimal portfolio. Various variables including expected return, portfolio variance, portfolio standard deviation (weekly as well as annually) and sharpe ratio has been calculated and efficient frontier has been prepared.

Step 8: Valuations
All the companies have been valued using Gordon’s Dividend discount model and thus equity research has been prepared and investment advice has been given.

Calculation of Risk Free Rate and Market Premium

Risk free rate:
We have taken the risk-free rate of 91 days treasury bills government security bills. This is currently 8.311% as taken from the RBI website.

Risk premium:
We have taken the risk premium of 12.5% based on the research paper, “A first cut estimate of equity risk premium in India” published by Jayanth R. Varma and Samir K. Barua. This is the arithmetic mean based on the previous 25 years data on market premium and risk free rates.

Risk Free Rate (Rf) = 8.311% , Risk Premium (Rm - Rf) = 12.50%
|Company |Beta |Expected Return |
|Allied Digital Services Ltd. |0.819863764 |0.18559297 |
|Geodesic Ltd. |0.232464393 |0.11216805 |
|I C S A (India) Ltd. |0.066537526 |0.09142719 |
|Prakash Industries Ltd. |0.669412964 |0.16678662 |
|Rolta India Ltd. |0.273254558 |0.11726682 |
|Sasken Communication Technologies Ltd. |0.470529113 |0.14192614 |
|Sesa Goa Ltd. |0.285896939 |0.11884712 |

After the calculation of expected returns, a covariance matrix has been formed using the excel add-in covariance between the returns of the above selected stocks. After this, for the optimal portfolio and minimum variance portfolios, a bordered covariance matrix has been formed to calculate the standard deviation and mean return of the portfolio at different weightings of stocks. Using the solver function, the variance and mean return can be calculated at different levels for constructing the efficient frontier. For the optimal portfolio, the slope is to be maximised.
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The constraints while formulating the portfolio are that each stock should have at least 5% investment in it and short selling is not allowed.

The following table includes the allocation of investment into stocks at different levels of standard deviations and therefore resulting expected returns:

|Expected Return |11.5% |
|Allied Digital Services Ltd. |0.182 |
|Geodesic Ltd. |0.124 |
|I C S A (India) Ltd. |0.081 |
|Prakash Industries Ltd. |0.156 |
|Rolta India Ltd. |0.128 |
|Sasken Communication Technologies Ltd. |0.163 |
|Sesa Goa Ltd. |0.164 |

|Expected Return |13.90% |
|Standard Deviation |7.27% |
|Sharpe Ratio |0.769150025 |

Efficient Frontier
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Equity Research and Valuation Reports

Equity Research and Valuation Reports for the following portfolio have been created:

1. Allied Digital Services Ltd.

2. Geodesic Ltd.

3. Prakash Industries Ltd.

4. Sasken Communication Technologies Ltd.

5. I C S A (India) Ltd.

6. Sesa Goa Ltd.

7. Rolta India Ltd.

Allied Digital Services Limited

Background:

Allied Digital Services Ltd (Allied) provides a range of IT Infrastructure services and solutions including managed services and physical and information security solutions to leading Indian and global corporations. The company has a presence in over 132 locations in India, and over 40 states in the USA, through its acquisition of Enpointe Global Services.

Allied is an ISO 9001: 2000 certified company with a global command centre certified under ISO 27001:2005. Allied Digital Services Ltd. is among the few companies with a truly pan India direct presence in 132 locations across the length and breadth of the country – servicing over 40, 000 pincodes on the same day.

Financial Ratios:

|Ratio |Mar-10 |Mar-09 |Mar-08 |
|Debt-Equity |0.11 |0.12 |0.1 |
|Current Ratio |3.03 |3.07 |2.89 |
|Invtry Turnover |56.25 |62.56 |94.9 |
|Debtors Turnover |2.3 |2.33 |2.86 |
|Interest Cover |33.53 |37.8 |47.86 |
|PBIDTM (%) |27.27 |25.32 |23.34 |
|PBDTM (%) |26.5 |24.66 |22.88 |
|APATM (%) |20.54 |20.31 |14.66 |
|ROCE (%) |22.9 |35.19 |50.15 |
|RONW (%) |20.27 |31.85 |36.35 |
|EV/EBIDTA |7.93 |3.49 |19.93 |

Key highlights for estimating the growth prospects for the company:

a. More concentration on cloud computing and virtualization through joint venture with eCop, Singapore based security solutions provider and Digicomp.

b. Major transformation program within the company with focuses on three areas of change: people, process and delivery management

c. Reducing the focus on low margin legacy business and strengthening in delivering high value high margin business.

d. Reduction in operating margins due to increase in wages and other investments done in developing the robust systems processes.

e. Keeping concentration on RIM (Remote Infrastructure Management).

f. Economic conditions, foreign currency fluctuations and pricing pressure may further result in decreasing the operating margin of the company.

Valuation:

As per CAPM model, Cost of equity of the company will be 18.55%. From the previous year dividend of Rs. 4.65 and the ROE of 20.27, the growth rate comes to be 19.25%. Considering the current macroeconomic conditions and the pressure on operating margins, we estimate the growth rate for the company to be 5% lower at 15.25% which is also a high growth rate expected for the company. The steady growth for the company is taken as the economic growth of country at around 8%. Using the two-stage Dividend discount model for perpetuity gives the value of Rs. 62.71 for the company stock today. The current market price is Rs. 28.60 which is well below the calculated value, so we recommend buying the stock for the holding period of approx. 12 months for good returns.

Geodesic Limited
Background:

Genesis of Geodesic Limited (Geodesic) was started on 8th July of 1999 as Geodesic Information Systems Private Limited. The Company is an innovator in software products focused on Information, Communication and Entertainment for mobile phones and desktop computers under the 'Mundu' brand name for the retail segment. Headquartered in Mumbai, India, Geodesic's Mundu suite of award-winning products includes solutions for Instant Messaging, Voice-over-IP and Internet Radio. Geodesic has offices in Mumbai and Bangalore in India, USA (Silicon Valley), as well as Sweden, Hong Kong and Singapore. The Company had launched Hamarashop.net (a Mumbai-specific e-commerce portal) and Mundu IM (the world's first truly Interoperable Messaging System) in the year 2000.

Financial Ratios:

|Ratio |Mar-10 |Mar-09 |Mar-08 |
|Debt-Equity |.89 |1.09 |.66 |
|Current Ratio |7.96 |9.85 |14.43 |
|Invtry Turnover |253.79 |32919.33 |25546 |
|Debtors Turnover |1.45 |2.45 |3.54 |
|Interest Cover |5.67 |5.58 |18.08 |
|PBIDTM (%) |52.53 |51.97 |64.46 |
|PBDTM (%) |43.33 |45.60 |52.24 |
|APATM (%) |35.89 |34.23 |43.22 |
|ROCE (%) |16.28 |20.69 |21.3 |
|RONW (%) |25.26 |32.03 |28.99 |

Key highlights for estimating the growth prospects for the company:

a. Geodesic was ranked amongst the top 100 companies as part of Dataquest’s survey -- DQ Top 200 Fastest Growing IT companies.

b. Geodesic added 30 new employees to strengthen the products management, software engineering, electronic computing and marketing teams.

c. Geodesic launched a unique business continuity solution for the enterprise to manage contacts and information

d. Geodesic made its foray into the online gaming space with Carrom MP, a multiplayer board game for the iPad. The game can be downloaded from the Apple Appstore for 99 cents. Carrom MP was ranked #1 on the Apple Appstore charts in India, Pakistan and Saudi Arabia.

e. Geodesic’s Spokn expanded its product portfolio by launching two innovative click-to-call services.

f. Geodesic launched a unique business continuity solution for the enterprise to manage contacts and information.

Valuation:

As per CAPM model, Cost of equity of the company will be 11.21%. From the current year dividend of Rs. 1.75/Share and the ROE of 25.26, the growth rate comes to be 22.81%. Considering the current macroeconomic conditions and the pressure on operating margins, we estimate the growth rate for the company to be 7% lower at 15.81% which is also a high growth rate expected for the company. The steady growth for the company is taken as the economic growth of country at around 8%. Using the two-stage Dividend discount model for perpetuity gives the value of Rs. 82 for the company stock today. The current market price is Rs. 49.65 which is well below the calculated value, so we recommend buying the stock for the holding period of approx. 12 months for good returns.

Prakash Industries Limited
Background:

Prakash Industries (PIL) produces steel through the induction furnace method, in which it uses sponge iron and steel scrap or pig iron as input. With a steelmaking capacity of 700,000tpa, its sponge iron (capacity of 600,000tpa) meets only 70-80% of its metallic requirement. Most of its steel production is consumed to produce higher value-added products like structural/TMT and wire rods. PIL's operations are concentrated in the mineral rich state of Chhattisgarh. It has been allotted three coal mining blocks and two iron ore mines. Captive mines have reserves of 150mt of coal and 85mt of iron ore. Coal is produced from its captive mine at Chotia (1mtpa) and the iron ore mine at Kawardha is expected to start production in 2011.

Sector view:

Indian steel demand is expected to grow 10-12% over FY11-12 driven by planned infrastructure investment by the government and continued industrial capex. However supply is also likely to grow faster in the next few quarters as many large projects (JSW, Tata, Essar, RINL and SAIL) are likely to be commissioned. This will increase the likelihood of aggressive pricing in domestic markets and can put significant pressure on margins of non-integrated small scale players.

Financial Ratios:

|Ratio |Mar-10 |Mar-09 |Mar-08 |
|Debt-Equity |0.23 |0.38 |0.71 |
|Current Ratio |1.79 |2.15 |3.73 |
|Invtry Turnover |18.39 |18.93 |14.77 |
|Debtors Turnover |17.75 |15.32 |13.67 |
|Interest Cover |11.72 |4.38 |5.8 |
|PBIDTM (%) |21.03 |18 |20.31 |
|PBDTM (%) |19.52 |14.46 |17.39 |
|APATM (%) |15.74 |11.94 |14 |
|ROCE (%) |23.05 |24.06 |23.67 |
|RONW (%) |24.89 |25.17 |32.78 |
|EV/EBIDTA |7.97 |2.47 |10.96 |

Key highlights for estimating the growth prospects for the company:

a. PIL will spend Rs33b over five years to increase steel capacity to 1mtpa, expand its sponge iron capacity to capitalize on iron ore integration and put up a 625MW power plant.

b. The Sirkaguttu and Kawardha iron ore mines are expected to start production this year (subject to getting statutory clearances) which will make PIL 100% self-sufficient in raw material.

c. The company raised Rs1.25b through loans in 3QFY11 at an interest rate of 12.5%. Thus the rupee debt as of 31 December 2010 increased to Rs2.5b and outstanding FCCB was Rs3.5b.

d. Although equipment for the next phase of 200MW capacity has been ordered, the company expects a delay of six months from its earlier guidance. Thus, the first unit of 100MW is expected to be commissioned by June 2012 and the remaining 100MW by March 2013.

e. PIL is expanding its power capacity from 100MW to 775MW by March 2015E. The company is setting up a 625MW coal-based power plant, with each unit being set up in 12 months, starting from 1HFY2012. The company is expected to have surplus power of 40MW in FY2012, which it plans to sell in the merchant power market.

f. The current market conditions can hamper the operating margins of the company, as well as company can see delay in its some of the projects.

Valuation:

As per CAPM model, Cost of equity of the company will be 16.88%. As the company had not paid dividend in the previous years but had started paying dividend from this year, we have assumed the retention ratio of 0.9 because of the expansion projects of the company. This gives the dividend for the next year to be Rs. 3 for the next year on the basis of EPS and ROE of the company. Also computed growth for the company comes out to be 22.40%. Accounting for the slowdown in economy and the delay in the projects, we have also lowered the expected high growth of the company for the next 5 years to be 17%. The steady growth for the company is taken as the economic growth of country at around 8%. Using the two-stage Dividend discount model for perpetuity gives the value of Rs. 45.17 for the company stock today. The current market price is Rs. 51.85 which is above the calculated value, so we recommend the investors to be neutral regarding this share.

Sasken Communication Technologies Limited

Background:

Sasken Communication Technology Limited (SCTL), SEI CMM Level 5 certified embedded communications Solutions Company, was incorporated on 13th February 1989 as ASIC Technologies Private Limited in the State of Gujarat. The Company helps businesses across the communications value chain accelerate product development life cycles. Sasken offers a unique combination of research and development consultancy, wireless software products and software services, and works with Network OEMs, Semiconductor Vendors, Terminal Device OEMs and Operators across the world. In addition to being directly involved in the development of a variety of technologies, Sasken is a member of premier technology bodies including ITU, 3GPP, GCF, MPEG-ISO, WiMAX, NFC, DLNA and ATM, DSL & SDR forums. Sasken acquired iSoftTech Private Limited, Chennai in June 2006 and also acquired 100% stake in Botnia Hightech(Now Sasken Finland) headquartered in Kaustinen, Finland during September of the year 2006, with other offices in Tampere, Oulu and Turku in Finland. In January 2007, Sasken entered into a Joint Venture with Tata Autocomp (A prominent member of Tata Group) known as TACO Sasken Automotive Electronics Pvt Ltd (TSAE).

Financial Ratios:

|Ratio |Mar-11 |Mar-10 |Mar-09 |
|Debt-Equity |0.0 |0.0 |0.0 |
|Current Ratio |2.3 |2.2 |2.71 |
|Invtry Turnover |302.07 |483.75 |518.65 |
|Debtors Turnover |5.56 |4.69 |4.77 |
|Interest Cover |0.0 |0.0 |0.0 |
|PBIDTM (%) |27.98 |27.83 |18.37 |
|PBDTM (%) |27.98 |27.83 |18.37 |
|APATM (%) |22.75 |18.94 |7.18 |
|ROCE (%) |21.02 |19.97 |14.16 |
|RONW (%) |20.18 |16.79 |8.09 |
|EV/EBIDTA |3.43 |3.96 |1.04 |

Key highlights for estimating the growth prospects for the company:

a. During Q1 FY11, Sasken added 18 new customers. With this Sasken’s total number of active customers has increased to 116 at the end of Q1 FY11.

b. Topline increased QoQ from products business while declined in services business in Q1 FY11. Products business witnessed a topline growth of 23% QoQ and stood at 8.5% of total revenues.

c. Sasken is in an expansion mode. Net addition of 131 software professionals during Q1 FY11. The increased hiring reflects an uptick in demand and Sasken has announced a wage hike to arrest the attrition rate.

d. Sasken’s VyapaarSEWA™ launched as part of Sanchar Shakti' pilot project scheme of the Department of Telecommunications – Universal Service Obligation Fund (DoT-USOF), a suite of mobile Value Added Services (mVAS) to provide a variety of useful information to women's self-help groups about government schemes and health and social issues, besides inputs related to and training in livelihood in March 2011.

e. Economic conditions, foreign currency fluctuations and pricing pressure may further result in decreasing the operating margin of the company.

Valuation:

As per CAPM model, Cost of equity of the company will be 14.19%. From the current year dividend of Rs. 7/Share and the ROE of 20.18, the growth rate comes to be 15%. In-spite of the current macroeconomic conditions and the pressure on operating margins, we estimate the company would be able to sustain its growth rate of 15% which is almost at par with the expected growth of the industry. The steady growth for the company is taken as the economic growth of country at around 8%. Using the two-stage Dividend discount model for perpetuity gives the value of Rs. 167.51 for the company stock today. The current market price is Rs. 97.15 which is well below the calculated value, so we recommend buying the stock for the holding period of approx. 12 months for good returns.

ICSA

Background:

ICSA is empowering the Energy Sector with its Innovative Solutions. It has always been in the forefront of adopting advanced technologies to ensure customer satisfaction with a suite of embedded solutions and comprehensive quality infrastructure, customized for specific requirements of the enterprises across a spectrum of industries & utilities especially the Energy Sector, which includes Power, Oil, Natural Gas & Water.

ICSA technologies are proven and time tested. A leader in real-time, embedded, and high-performance communications software provides its customers with advanced real-time software developed for use in products throughout the energy sector. Our growing clientele of both private and government organizations and repeat orders proves our growing potential.

Financial Ratios:

|Ratio |Mar-11 |Mar-10 |Mar-09 |
|Debt-Equity |0.93 |0.77 |0.61 |
|Current Ratio |1.92 |2.16 |2.26 |
|Invtry Turnover |4.07 |10.07 |20.89 |
|Debtors Turnover |2.43 |2.37 |2.71 |
|Interest Cover |2.82 |3.73 |4.84 |
|PBIDTM (%) |21.18 |20.53 |24.25 |
|PBDTM (%) |14.18 |15.49 |19.47 |
|APATM (%) |8.93 |9.84 |13.61 |
|ROCE (%) |18.85 |20.85 |35.03 |
|RONW (%) |16.12 |18.62 |31.47 |
|EV/EBIDTA |4.46 |4.53 |2.73 |

Key highlights for estimating the growth prospects for the company:

a. Highly concentrated in providing services to the niche power sector. The GSM platform that it uses to provide services ensures low OPEX and high expandability. This uniqueness of technology ensures good growth for the company in the coming years.

b. The company has floated a subsidiary in Singapore to cater to Asia Pacific Market and foster growth.

c. Partnership with Govt. & top Private Sector players is helping it have a strong hold in the power sector.

d. Growth prospects are high as the Indian power sector is poised to emerge as one of the most sophisticated ones in the world. The government is rolling out distribution franchisees for efficient and profitable distribution; ICSA possesses the capability to conduct relevant projects.

e. The government intends to implement SCADA- based Distribution Management System (DMS) solutions across India in 80 cities. Thus, ICSA sees this as an emerging growth opportunity

f. Economic conditions, foreign currency fluctuations and pricing pressure may further result in decreasing the operating margin of the company.

Valuation:

As per CAPM model, Cost of equity of the company will be 9.14%. From the previous year dividend of Rs. 1.8 per share and the ROE of 16.12, the growth rate comes to be 15.01%. Considering the current macroeconomic conditions and the pressure on operating margins, the fluctuating dollar rates we estimate the growth rate for the company to be 5% lower at 10.01% which is also a high growth rate expected for the company. The steady growth for the company is taken as the economic growth of country at around 8%. Using the two-stage Dividend discount model for perpetuity gives the value of Rs. 186.95 for the company stock today. The current market price is Rs. 64.9 which is well below the calculated value, so we recommend buying the stock for the holding period of approx. 12 months for good returns.

Sesa Goa Ltd.
Background:

Sesa Goa Limited is part of the Vedanta Group, a diversified global metals and mining conglomerate. It is the largest private sector iron ore producer and exporter in India.

Sesa Goa’s primary business is exploration, mining and processing of iron ore concentrated in the states of Goa and Karnataka, with more than 4600 employees including more than 600 professionals.

Financial Ratios:

|Ratio |Mar-10 |Mar-09 |Mar-08 |
|Debt-Equity |0.16 |0 |0 |
|Current Ratio |3.29 |2.35 |1.89 |
|Invtry Turnover |16.65 |20.53 |13.89 |
|Debtors Turnover |19.92 |14.53 |10.75 |
|Interest Cover |50.51 |779.31 |1,482.42 |
|PBIDTM (%) |51.94 |52.69 |63.32 |
|PBDTM (%) |50.94 |52.63 |63.28 |
|APATM (%) |39.73 |38.22 |41.42 |
|ROCE (%) |39.72 |72.06 |104.17 |
|RONW (%) |36.12 |53.15 |69.44 |
|EV/EBIDTA |13.97 |2.96 |5.4 |

Source: Capitaline Plus Databases

Key highlights for estimating the growth prospects for the company:

a. Seaborne Iron ore trade is expected to grow continuously primarily due to demand in China and other emerging nations.

b. Limited additions to seaborne capacity along with strong demand due to improved sentiment in the steel sector could drive growth in the medium term.

c. Dedicated infrastructure like mining road corridor being added in Goa and Karnataka as well as continuous improvement in port/river logistics capabilities would help reduce costs.

d. The company recently signed a definitive share purchase and operations agreement with Elenilto Minerals & Mining LLC for a project execution company in Liberia with 25 years of mining concessions and 1bt of resources

Valuation:

As per FY 11 Annual report, with a dividend of Rs. 3.5 per share, the ploughback ratio b=0.9289 and ROE=36.52%, the growth rate comes to be 33.92%. The cost of equity by the CAPM is 11.88 %. Additional supplies in the seaborne market are expected only after 2013 and we can expect the strong demand for iron ore to be sustained in the medium term. We will consider a growth rate of 25% for the next two years followed by a stable growth of 10%. The two stage dividend discount model gives the value of Rs. 263.91. The current market price of Rs. 222.75 is below this value, and we would recommend buying the stock for a period of 1 year.

Rolta India Ltd.
Background:
Rolta India Limited (Rolta) is an Indian multinational organization in IT-based geospatial solutions, and caters to industries as diverse as infrastructure, telecom, electric, airports, defence, homeland security, urban development, town planning and environmental protection. The Company was incorporated in 27th June of the year 1989 at Mumbai. K.K. Singh promoted it and Rolta obtained the Certificate of Commencement of Business in 5th July of the same year. The Company serves these markets by providing innovative solutions in Geospatial Information Systems (GIS); Engineering & Design Services (EDS); and Enterprise Information & Communications Technology (EICT), which includes Software Development, Advanced Security, Network Management, Oracle Apps, ERP Consulting and Business Intelligence. Rolta, through its joint venture with The Shaw Group Inc. USA - Stone & Webster Rolta Ltd., provides comprehensive Engineering, Procurement and Construction Management (EPCM) services to meet turnkey project requirements of power, oil, gas and petrochemical sectors.

Financial Ratios:

|Ratio |Jun-10 |Jun-09 |Jun-08 |
|Debt-Equity |0.61 |0.57 |0.53 |
|Current Ratio |3.26 |3.27 |4.55 |
|Invtry Turnover |163.36 |59.41 |40.87 |
|Debtors Turnover |1.95 |1.75 |1.97 |
|Interest Cover |11.36 |25.38 |62.78 |
|PBIDTM (%) |59.63 |64.19 |52.43 |
|PBDTM (%) |37.47 |45.25 |36.52 |
|APATM (%) |30.8 |39.33 |30.9 |
|ROCE (%) |15.41 |18.67 |16.55 |
|RONW (%) |20.42 |25.41 |21.46 |
|EV/EBIDTA |5.54 |4.73 |9.9 |

Key highlights for estimating the growth prospects for the company:

a. Rolta is one of the major providers of Geospatial solutions and services in the world

b. Rolta has set up state-of-the-art Centers of Excellence worldwide, equipped with infrastructure and facilities that match global norms

c. Over the years Rolta has established strong partnerships with industry leaders

d. Rolta's Human Resources are valued at Rs.136.44 Billion in the 2008-2009 annual report

Valuation:

As per CAPM model, Cost of equity of the company will be 11.72%. From the previous year dividend of Rs. 3.247 and the ROE of 20.42, the growth rate comes to be 17.45%. Considering the current macroeconomic conditions and the pressure on operating margins, we estimate the growth rate for the company to be 5% lower at 12.25% which is also a high growth rate expected for the company. The steady growth for the company is taken as the economic growth of country at around 8%. Using the two-stage Dividend discount model for perpetuity gives the value of Rs. 113.75 for the company stock today. The current market price is Rs. 93.05 which is well below the calculated value, so we recommend buying the stock for the holding period of approx. 12 months for good returns.

References:

1. The search for undervalued stocks, The Magic Formula of Joel Greenblatt Sam Hollanders; June 21, 2011 http://www.beinvestors.com/magic-formula-joel-greenblatt/

2. All-Star Stock Strategy: Joel Greenblatt Marc H. Gerstein, June 20, 2009 http://www.portfolio123.com/blog.jsp?postid=124&topic=models

3. Greenblatt Magic Formula Stock Screener http://www.value-investing.eu/en/Strategies/Greenblatt_Magic_Formula_Stock_Screener

4. http://www.magicformulainvesting.com/faq.html

5. http:// http://www.capitaline.com

6. http://www.moneycontrol.com/stocksmarketsindia/

7. The Little Book That Beats the Market , Joel Greenblatt

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CMP: Rs. 28.60

Target Price: Rs. 62.71

Recommendation: Buy

Investment Period: 12 Months

Stock Info | | |Sector |Computers- Software Medium/Small | |Market Cap (Rs.) |133.22 Cr. | |Beta |0.82 | |52 Week High/Low |265/28.60 | | | | |Face Value(Rs.) |5 | |BSE Sensex |16469.71 | |Nifty |4944.15 | |

Shareholding Pattern |% | |Foreign |17.17 | |Institutions |1.47 | |Govt. Holding |0 | |Non Promoter Corp. Hold. |8.44 | |Promoters |43.62 | |Public & Others |29.31 | |Totals |100 | |

Share Price Trend:

[pic]

CMP: Rs. 49.65

Target Price: Rs. 82

Recommendation: Buy

Investment Period: 12 Months

Stock Info | | |Sector |Computers- Software Medium/Small | |Market Cap (Rs.) |473.738 | |Beta |.23 | |52 Week High/Low |142.75 / 47 | | | | |Face Value(Rs.) |2 | |BSE Sensex |16469.71 | |Nifty |4944.15 | |

Shareholding Pattern |% | |Foreign |40.88 | |Institutions |1.23 | |Govt. Holding |0 | |Non Promoter Corp. Hold. |9.44 | |Promoters |23.22 | |Public & Others |25.23 | |Totals |100 | |

Share Price Trend:

[pic]

CMP: Rs. 51.85

Target Price: Rs. 45.17

Recommendation: Neutral

Stock Info | | |Sector |Steel Rolling | |Market Cap (Rs.) |697.32 Cr. | |Beta |0.67 | |52 Week High/Low |193.40/50 | | | | |Face Value(Rs.) |10 | |BSE Sensex |16141.67 | |Nifty |4845.65 | |

Shareholding Pattern |% | |Foreign |11.54 | |Institutions |3.79 | |Govt. Holding |0 | |Non Promoter Corp. Hold. |21.2 | |Promoters |46.15 | |Public & Others |17.33 | |Totals |100 | |

Share Price Trend:

[pic]

CMP: Rs. 97.15

Target Price: Rs. 167.51

Recommendation: Buy

Investment Period: 12 Months

Stock Info | | |Sector |Computers- Software Medium/Small | |Market Cap (Rs.) |249.384 | |Beta |.47 | |52 Week High/Low |237 / 95 | | | | |Face Value(Rs.) |10 | |BSE Sensex |16469.71 | |Nifty |4944.15 | |

Shareholding Pattern |% | |Foreign |10.37 | |Institutions |9.81 | |Govt. Holding |0 | |Non Promoter Corp. Hold. |9.73 | |Promoters |29.68 | |Public & Others |40.41 | |Totals |100 | |

Share Price Trend:

[pic]

CMP: Rs. 64.90

Target Price: Rs. 186.95

Recommendation: Buy

Investment Period: 12 Months

Stock Info | | |Sector |Computers - Software - Converts | |Market Cap (Rs.) |311.195 Cr. | |Beta |0.066 | |52 Week High/Low |162 / 64.25 | | | | |Face Value(Rs.) |2 | |BSE Sensex |16469.71 | |Nifty |4944.15 | |

Shareholding Pattern |% | |Foreign |25.64 | |Institutions |5.03 | |Govt. Holding |0 | |Non Promoter Corp. Hold. |16.33 | |Promoters |21.88 | |Public & Others |31.21 | |Totals |100 | |

Share Price Trend:

[pic]

CMP: Rs. 222.75

Target Price: Rs. 263.91

Recommendation: Buy

Investment Period: 12 Months

Stock Info | | |Sector |Mining/Minerals | |Market Cap (Rs.) |19341.85 Cr. | |Beta |.28 | |52 Week High/Low |384/221 | | | | |Face Value(Rs.) |1 | |BSE Sensex |16141.67 | |Nifty |4845.65 | |

Shareholding Pattern |% | |Foreign |0.24 | |Institutions |29.07 | |Govt. Holding |0 | |Non Promoter Corp. Hold. |2.98 | |Promoters |55.13 | |Public & Others |12.58 | |Totals |100 | |

Share Price Trend:

[pic]

CMP: Rs. 93.05

Target Price: Rs. 113

Recommendation: Buy

Investment Period: 12 Months

Stock Info | | |Sector |Computers- Software Medium/Small | |Market Cap (Rs.) |1501.18 Cr. | |Beta |.27 | |52 Week High/Low |188.5/91.2 | | | | |Face Value(Rs.) |10 | |BSE Sensex |16469.71 | |Nifty |4944.15 | |

Shareholding Pattern |% | |Foreign |32.83 | |Institutions |2.44 | |Govt. Holding |0 | |Non Promoter Corp. Hold. |0.06 | |Promoters |41.97 | |Public & Others |23.7 | |Totals |100 | |

Share Price Trend:

[pic]

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