Multibagger

Midcaps

28th March 2009

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Equitymaster Agora Research Private Limited
15, Khetan Bhavan, 198, J Tata Road, Churchgate, Mumbai-20 Multibagger Midcaps
Tel: (91-22) 6631-4055 Fax: (91-22) 2202-8550

Report date: 28th March 2009

Index
Investment Summary……………………………………………………………………………………… 3
Opto Circuits.………………………………………………………………………………………………… 4
Yes Bank………………………………………………………………………………………………………………… 7
Sintex Industries………………………………………………………………………………………………………… 10
Shriram Transport Finance Co. Ltd…………………………………………………………………………………… 13

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Equitymaster Agora Research Private Limited
15, Khetan Bhavan, 198, J Tata Road, Churchgate, Mumbai-20 Multibagger Midcaps
Tel: (91-22) 6631-4055 Fax: (91-22) 2202-8550

Report date: 28th March 2009

Investment Summary
Imagine a company - recession proof, minimal competition, niche products, scorching pace of growth and…
available cheap! Indeed an investor’s dream come true by any standards. But do such companies really exist?

We at Equitymaster have been working on finding the answer to that very question. And guess what? The answer
is yes! Read on…

The first company has been showered by accolades and laurels by some top business publications recently. Its
CEO proudly claims "The healthcare industry is recession-proof! It has made 3 major acquisitions over the last
year. People have to continue spending on healthcare whether they like it or not, so the prospects for healthcare
on the whole are terrific. It witnessed a 65% increase in revenues and 47% growth in profits in the third quarter of
FY09.

Even from a longer term perspective, between FY01 and FY08, the company witnessed a 13-fold growth in
standalone sales and 17-fold growth in standalone profits. Perhaps even more remarkable is the fact that it has
done all this without taking on any significant debt.

And guess what, none other than the promoter and MD of the company himself has found the opportunity too
hard to resist; he has been buying shares of his own company at a premium to the market price!

The list of positives goes on. For the benefit of our subscriber, we have compiled in this report the entire details of
this magnificent opportunity. Not only that, it includes three more such companies that promise equally great
investment opportunities. We expect these stocks to deliver some great returns over the next 2 to 3 years. So
read on to be the lucky few to grab on to these fabulous businesses while the price is still right...

Happy investing!
Team Equitymaster

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 Equitymaster Agora Research Private Limited
15, Khetan Bhavan, 198, J Tata Road, Churchgate, Mumbai-20 Multibagger Midcaps
Tel: (91-22) 6631-4055 Fax: (91-22) 2202-8550

Report date: 1st April 2009

OPTO CIRCUITS

Market data Investment rationale

Current price Rs 84 (BSE) ƒ In the fast lane: Opto Circuits can easily qualify as one of the fastest
Market cap Rs 7,910 m growing companies in the mid cap space. Between the period FY03
Face value Re 10.0
and FY08, the company has consistently grown its topline at a
CAGR of 47%. The growth in operating profit has been even more
FY08 DPS (Rs) 5.1
spectacular, a CAGR of 63%, pointing towards company’s consistent
BSE Code 532391 improvements on operational front. The growth in net profits, a
NSE symbol OPTOCIRCUI CAGR of 74%, has however been the best of all, an indication that
No. of shares 94.0 m the company has not compromised on the quality of earnings at the
Free float 69.5% expense of quantity.
52 week H/L Rs 217 / 70
This remarkable performance clocked by the company has come
about on the back of its ability to establish, slowly and steadily, a
Rs 100 invested is now worth
significant position in invasive and non invasive segments of medical
600 Opto Cir.: Rs 152 electronic devices and health care industry in both the domestic and
BSE Midcp: Rs 57 international markets.
460

320 ƒ Diverse product portfolio and geographical reach: Subsidiaries

that specialize in niche products and a distribution network that
180
virtually spans the globe combine together to give the company an
40 edge that will ensure robust growth for many more years to come.
Mar-06 Mar-07 Mar-08 Mar-09 Hence, let us try and elaborate on these strengths of the company.

Stock price Performance The company designs, develops, manufactures and distributes
Opto products in invasive and non invasive segments of health care and
Index* medical electronic devices industry. Its non invasive products include
Circuits
6-Mth -55.7% -48.4% opto- electronic devices like SpO2, multi-parameter monitors, pulse
1-Yr oxy-meters, digital thermometers, and fluid warmers. Its invasive
-56.1% -55.0%
products on the other hand, include ‘DIOR’ and ‘Taxcor’, names that
3-Yr 14.9% -17.2%
are popular in the stents segments (stents are devices that are put
Returns over 1 yr are compounded
annual averages
into a patient’s heart to facilitate blood flow) and have been the key
* BSE Midcap growth drivers for company. Both the invasive as well as non
invasive segments have been growing at a fair clip. The company
Shareholding (Dec-2008) has CE Certification for its stents that makes it available for sale in
nearly 34 countries. It is also making an effort to get US FDA
Category (%)
approval for the same. Its non invasive products also enjoy
Promoters 30.5
approvals from various nations. Thus, the ready acceptance of its
Institutions (Banks,
3.1 products in various countries, both in the invasive as well as non
MFs, FIs)
invasive space, ensure that the company is not overly dependent on
FIIs 25.6
just one product or one segment for its revenues.
Indian public 32.0
Others 8.8 As far as distribution network is concerned, the company has a
Total 100.0 strong distribution network across domestic as well as international
markets through its various subsidiaries. Medi Aid, 100% US based
Report prepared by subsidiary has strong presence in US and South America. Opto
Equitymaster Agora Research Circuits has also strengthened its distribution network in India
Private Limited. through its listed subsidiary Advanced Micronic Devices Ltd (AMDL)
www.equitymaster.com which is a specialised critical cardiac care equipment company.
info@equitymaster.com Eurocor, Opto’s German subsidiary has a strong network in 36
countries, including Germany, Poland & other parts of Europe. Just

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Equitymaster Agora Research Private Limited
15, Khetan Bhavan, 198, J Tata Road, Churchgate, Mumbai-20 Multibagger Midcaps
Tel: (91-22) 6631-4055 Fax: (91-22) 2202-8550

Report date: 1st April 2009

as a vast product portfolio enhances growth been impressed with the manner in which the
potential and reduces earnings volatility, a vast company has gone about in managing its
distribution network also achieves similar financial resources. Its growth and acquisitions
functions, the net effect being an exponential have been funded with a prudent mix of debt
rise in the company’s fortunes as has been and equity, translating into low financial risk. The
witnessed in the recent past. fact that the company generated high returns on
its capital also ensured strong internal accruals.
ƒ Recession resistant industry: The health care Furthermore, it has also managed to reward its
industry is believed to remain unaffected by the shareholders with liberal dividend payouts, with
global recession as it forms the part of non- the payout ratio averaging a strong 36%
discretionary spending for the consumers. The between FY03 and FY08. Infact, at the current
company operates in both the invasive and non market price, yield on its FY08 dividend per
invasive segments of medical electronics share stands at an attractive 5%. These policies
devices and health care products, an industry go a long way towards pointing out
that has grown at a rate of over 15% p.a and is management’s intentions of ensuring not just
expected to grow between 10% -20% over the growth but profitable growth.
next ten years. Apart from the growth, there has
also been a shift towards products from low cost
countries such as India. This provides Opto
Circuits immense potential to grow in the coming Investment concerns
decade. We expect the company’s consolidated
topline to register a robust CAGR of 33% ƒ Product obsolescence: Opto Circuits operates
between FY08 and FY11. Although the growth in the industry that is exposed to product
projections look aggressive, it is significantly obsolescence. Furthermore, the growth of the
lower than the company’s historical CAGR of company substantially depends upon the
47% between FY03 and FY08 and the research and development undertaken by the
company’s own projection in the region of 45%- company and the expertise of its research team.
50% in the medium term. The company has to employ, attract and retain
highly skilled research team. As any loss of such
ƒ Inorganic growth strategy paying off: Not personnel services may have an adverse impact
satisfied with just organic growth prospects, the on the company. Although, the company has
company, in FY02 embarked upon an inorganic built in systems to combat obsolescence and is
growth strategy, which has continued till date. endeavoring to be a leader in innovations with
Just to put things in perspective, between then newer products, loss of market share to rivals
and now, Opto Circuits has made a record who have far deeper pockets cannot be ruled
seven acquisitions and its thirst is still not out.
quenched. These acquisitions have given the
company the necessary product muscle as well ƒ Regulatory policies and approvals: The
as the distribution teeth to enable it to grow at a revenues of the company are significantly
robust pace. Most of its acquisitions seemed to derived from exports to the European and US
have proved value accretive with the companys’ markets and thus the performance of the
consolidated RONW improving from 23% in company is majorly dependent on the regulatory
FY03 to 43% in FY08 and that too, with policies adopted there. Any change in the policy
reduction in its debt to equity ratio from 0.9x to or delay in getting the regulatory approvals may
0.3x during the same period. Thus, given the affect the revenues of the company adversely.
company’s past track record with respect to Furthermore on the domestic side changes in
acquisitions, we feel confident of its ability to government policies, regarding excise duty,
engage in few more value creating acquisitions service tax, import and export policies/duty,
in the future as well. income tax, fringe benefit tax, VAT and any
other Central/ State levy can impact the
ƒ Prudent financial management: With high company adversely.
growth and acquisitions being regular features
for the company, it has surely kept its finance ƒ High working capital: The working capital
team busy. But that has certainly not made it cycle of the company is lengthy which calls for
inefficient at capital management. We have higher working capital requirement .The average
debtor’s days for the past few years has
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Equitymaster Agora Research Private Limited
15, Khetan Bhavan, 198, J Tata Road, Churchgate, Mumbai-20 Multibagger Midcaps
Tel: (91-22) 6631-4055 Fax: (91-22) 2202-8550

Report date: 1st April 2009

remained above 160 days. Things are not good
on the inventory front either with average Valuations
inventory days ruling at similar levels. Although A vast product portfolio, strong distribution network
the company may not run into trouble if the and a history of well managed acquisitions make
current trend persists, any sizeable increase will Opto Circuits one of our preferred plays in the so-
hurt its cash flows and ultimately, its inorganic called recession proof health care and opto
growth plans. It should be noted that as per the electronic devices space. Furthermore, its current
company, debtor days at some of its rivals stand strong balance sheet also puts it in an ideal position
as high as 2-3 years, thus not completely ruling to consummate few more acquisitions at the current
out a similar possibility at Opto Circuits as well. depressed asset prices. In light of these factors and
Hence, one should guard against the same. its attractive valuations, we recommend a BUY on
the stock expecting it to be a 2 to 3 bagger over a 2
Background year period.
Opto Circuits is involved in designs, develops,
Key numbers
manufactures and distributes products in the
medical electronic equipments and health care Consolidated (Rs m) FY08 FY09E FY10E FY11E
industry across 36 countries through its various Revenue (Rs m) 4,681 7,099 8,874 11,093
subsidiaries. It has emerged as a leading player in
PAT (Rs m) 1,313 1,766 2,287 2,928
the non-invasive segment and its product portfolio
includes SpO2, multi-parameter monitors, pulse EPS (Rs) 13.9 11.0 14.1 18.1
oxy-meters, digital thermometers, and fluid CEPS (Rs) 14.6 11.5 14.7 18.8
warmers. Medi Aid, a 100% US based subsidiary of
company has strong distribution network spread Price to earnings (x) 6.0 7.6 5.9 4.6
across the US, Latin America and Europe. It has Price to cash flow (x) 5.7 7.3 5.7 4.5
enabled Opto Circuits to market its brands in these
regions. In India, Advanced Micronic Devices
Limited (AMDL), a listed company in which Opto
Circuits holds a majority stake does the marketing
and distribution of products for the company.

Opto Circuits also operates in invasive segment

through its 100% subsidiary EuroCor, which
specialises in research, development, and
manufacture of interventional cardiology products. It
is one of the largest manufacturers of stents in the
world. It has enabled Opto Circuits to get access to
the existing as well as potential market for Stents
globally.

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 Equitymaster Agora Research Private Limited
15, Khetan Bhavan, 198, J Tata Road, Churchgate, Mumbai-20 Multibagger Midcaps
Tel: (91-22) 6631-4055 Fax: (91-22) 2202-8550

Report date: 28th March 2009

Yes Bank

Market data Investment rationale

Current price Rs 55 (BSE) ƒ Choosing margins over size: At a time when the banking
Market cap Rs 16,330 m behemoths across the globe, irrespective of their size, are facing the
Face value Re 10.0
jitters due to quality and sustainability issues, Yes Bank, despite
being one of the smallest entities in the Indian banking sector, has
FY08 DPS (Rs) NIL
chosen to safeguard its profitability rather than be aggressive in
BSE Code 532648 terms of growth in size. The banking sector has witnessed a visible
NSE symbol YESBANK slowdown in asset growth due to interest rate and asset quality
No. of shares 296.9 m concerns. While Yes Bank’s growth performance in FY09 has been
Free float 67.4% largely safeguarded due to its differentiated lending approach and
well-hedged revenue stream, the same has been at a moderated
52 week H/L Rs 188 / 41
pace as compared to the last fiscal. Clocking a growth of 27% YoY in
advances and 22% YoY in deposits in 9mFY09, Yes Bank has made
Rs 100 invested is now worth an appreciable attempt to grow its balance sheet size without diluting
450 its net interest margins. Infact, sensing the risks of foraying into the
Yes Bk: Rs 91
retail consumer lending space, the bank has deferred its growth
350
plans in this segment by another fiscal. We see the bank sustaining
250 its growth rate at a multiple of 2.0 to 2.5 times the sector growth in
the next 2 fiscals.
150
BSE-Midcap: Rs 81
50 ƒ Fees hedged against ‘risks’: Yes Bank managed to have a high
Sep-06 Jul-07 May-08 Mar-09 proportion of non-funded income (61% of total income in 9mFY09)
over funded income this fiscal, notwithstanding the risks on the
Stock price Performance treasury portfolio. More than 60% of the fee income portfolio
Yes Bank Index* comprised of fees from advisory services and financial markets. The
bank has set a target of maintaining its non-interest income at 48%
1-Yr -70.3% -55.2%
of total income until FY10. While Yes Bank derives a significant
2-Yrs -38.9% -26.4% proportion of its fee income from advisory and financial markets
3-Yrs -17.0% -18.1% businesses, in case of most other private and PSU banks, the same
Returns over 1 year are compounded largely comprises of third party sales (which can be less
annual averages (CAGR)
* BSE Midcap remunerative and inconsistent). Also, since the bank caters to a very
niche segment of customers, through its differentiated strategy, it is
Shareholding (Dec-2008) able to cross-sell its service products (like transaction banking and
treasury) besides its credit products to its clients and garner a larger
Category (%) share of their wallet.
Promoters 32.6%
Foreign financial ƒ Returns at par
23.5%
institutions (%) (Rs m)
with the best in Efficiency filtering into returns
FIIs 28.8% 20 0.7
the industry: Yes
Public 9.1% Bank’s return ratios 0.6
Others 15 0.5
6.0% compare
Total 100.0 favourably with 0.4
10
some of the best- 0.3
Report prepared by managed smaller 5 0.2
private sector 0.1
Equitymaster Agora Research
banks. Further, 0 -
Private Limited.
potential FY07 FY08 FY09E FY10E FY11E
www.equitymaster.com
improvement in net Ro E Ro A P ro fit / empl. (RHS)
info@equitymaster.com
interest margins
(NIMs) due to higher proportion of low cost deposits coupled with an

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Equitymaster Agora Research Private Limited
15, Khetan Bhavan, 198, J Tata Road, Churchgate, Mumbai-20 Multibagger Midcaps
Tel: (91-22) 6631-4055 Fax: (91-22) 2202-8550

Report date: 28th March 2009

increase in other income reasonably shield the Bank has managed to retain its cost to income
same. This justifies the bank’s earnings ratio at 48% over the last 12 months. The bank
capability going forward. Nonetheless, from a sees this ratio sustaining at the current levels in
conservative standpoint, we have estimated FY10. Yes Bank has received additional
marginally lower NIMs and stable return ratios licenses to open 8 new branches and 125 ATMs
for the bank until FY11. taking the total licensed network to 117
branches and 200 ATMs. However, what worries
ƒ Delinquency risks well managed: At the end is the ability of the bank to execute its growth
of five years of completion of its operating plans while sustaining a high operating leverage.
history, Yes Bank continues to have the best This is particularly because of the bank’s limited
asset quality amongst Indian banks (net NPA operating history and lack of experience in
0.2% of advances, gross NPAs 0.4% in inorganic growth as well and non-banking
9mFY09). This provides us with reasonable ventures. It is thus, difficult to evaluate the
credit history to believe that the bank has been volatility in its revenue stream and calls for a
prudent in its lending business in terms of cautious approach on the provisioning aspect as
guarding the quality of assets. Further, Yes well.
Bank has very little exposure to the equity
market. We therefore, do not see it facing any Background
significant risks on the treasury side going
forward. The bank has deferred its plans of Yes Bank, which received its banking license (the
venturing into the lucrative retail lending only greenfield license given by RBI in the last 10
business particularly personal and home loans, years) in May 2004, commenced its lending
given the poor pricing environment and operations in October 2004 and was listed on the
deteriorating asset quality in that segment. We bourses in 2QFY06. The bank at present is
therefore do not see the bank experiencing any operating through 109 branches and has received 8
negative surprises on the NPA front in the additional branch licences.
medium term.
The bank has divided its business into three distinct
genres:
Investment concerns ƒ Corporate & Institutional Banking (C&IB) that
ƒ Frequent dilution: Given the fact that Yes Bank caters to large corporate and institutional
does not yet have a wide access to low cost clients, multinational corporations and
funds that are imperative to garner a sizeable Government owned organizations
market share (CASA at 9.2% of its deposits in
ƒ Business Banking that caters to emerging local
9mFY09), the bank has had to dilute its equity
corporates and entities that are present in the
base at regular intervals. Until FY08, the bank
supply chain of C&IB customers and
had opted for equity dilution in every fiscal since
FY05. While the same was justifiable during a ƒ Retail Banking that caters to individual
high growth period, wherein the internal accruals customers.
were not sufficient for the bank to sustain its
growth rates, with a moderation in incremental
offtakes, the ability of the bank to generate Yes Bank - Business segments
sufficient returns on the additional capital is
uncertain. Having said that, the bank chose to
raise capital by way of Tier II borrowing in FY09
Co rpo rate & B usiness B anking Retail B anking
and has sufficient capital (CAR 14.6% in Institutio nal
9mFY09) to defer its equity dilution plans in the B anking
medium term. Further, if the bank is able
Individuals with
leverage the capital to garner low cost deposits Co mpanies with Co mpanies with turno ver annual inco me
through its retail franchise at a faster pace and turno ver o ver between 0.5 bn to between Rs 0.5
access relatively cheaper funds, there may be Rs 7.5 bn Rs 7.5 bn m to Rs 5 m

an upside to our estimates to that extent.

ƒ Cost and execution risks: Despite growing its While the C&IB segment was the principle source of
branch franchise by nearly 63% in 9mFY09, Yes revenue in the early years of the bank, income from
Business Banking and Retail Banking is expected to
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Equitymaster Agora Research Private Limited
15, Khetan Bhavan, 198, J Tata Road, Churchgate, Mumbai-20 Multibagger Midcaps
Tel: (91-22) 6631-4055 Fax: (91-22) 2202-8550

Report date: 28th March 2009

gain momentum, in line with the branch rollout. The The enhanced capital base, retention of margins and
asset mix is expected to change from C&IB (62%), asset quality and attempts of inorganic growth and
Business Banking (37%) and Retail Banking (1%) in diversification are seen as important facets that will
FY09 to C&IB (46%), Business Banking (47%) and lend the bank the edge to compete with its peers.
Retail Banking (7%) by FY11. The bank had 109 Given its unique positioning in the banking sector,
operational branches and more than 3,000 we recommend investors to BUY the stock expecting
employees at the end of December 2008. it to be a 3 bagger over a two year period.

Valuations Key numbers

Yes Bank’s competence in terms of high (Rs m) FY08 FY09E FY10E FY11E
technological expertise, quality of management and Total Revenues (Rs m) 6,913 8,334 10,269 13,669
differentiated ‘knowledge banking’ approach has Net Profit (Rs m) 2,000 2,467 2,859 3,522
enabled it carve a niche for itself in the
commoditised banking sector. Also, the bank’s EPS (Rs) 6.7 8.3 9.6 11.8
business model is based on those of multinationals Adju. book value (Rs) 44.3 52.3 61.6 72.9
like Rabo Bank (one of its key promoters) which rely
P/E (x) 8.2 6.6 5.7 4.6
largely on steady fee income. What we are
particularly enthused about the bank is that it has P/Adj BV (x) 1.2 1.1 0.9 0.8
positioned itself differently and competes in a niche
area.

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Equitymaster Agora Research Private Limited
15, Khetan Bhavan, 198, J Tata Road, Churchgate, Mumbai-20 Multibagger Midcaps
Tel: (91-22) 6631-4055 Fax: (91-22) 2202-8550

Report date: 28th March 2009

Sintex Industries

Market data Investment rationale

Current price Rs 99 (BSE) ƒ Eyeing mass housing and infrastructure opportunity: Sintex is
Market cap Rs 13,513 m one of the prominent plays on India’s mass housing and
Face value Re 2.0
infrastructure spaces in the long run. India is a country where water
is a scarce commodity in large number of areas and therefore, there
FY08 DPS (Rs) 1.0
is an ardent need to store the same, safely, and for a longer period
BSE Code 502742 of time. And this is unlikely to change in the future. This is one
NSE symbol SINTEX fundamental growth driver for the company. Sintex, through its
No. of shares 136.5 m prefab and monolith construction businesses, also caters to the need
Free float 70.9% of other focused sectors of the government, like education and
affordable housing for the common man. Also, with increased
52 week H/L Rs 491 / 70
demand for lightweight plastic components from the automobile
industry, and protective shelters from telecom and power companies
Rs 100 invested is now worth (as these are more cost effective and less time consuming in terms
640 of installation and construction), Sintex’s plastics business is in for a
Sintex: Rs 411
480 BSE Midcap: superior growth going forward.
Rs 216
320 As far as the company’s textiles business is concerned, we believe
160 that Sintex has differentiated itself from others by eyeing the non-
commoditised textiles space. In this business, the company does not
0 have a direct market presence. Rather, it has positioned itself as a
Apr-05 Jul-06 Nov-07 Mar-09 supplier to international and domestic design houses of repute.
Despite significant increase in competition over the last decade,
Stock price Performance Sintex has been able to move into newer segments, thereby
Sintex Index*
consolidating its market share.
1-Yr -73.4% -55.0%
On an overall basis, Sintex’s story is that of innovation in the usual
2-Yr -32.9% -26.7% (plastics) and extension and differentiation in the niche (structured
3-Yr -25.1% -19.9% fabric), factors that will help the company sustain decent growth over
Returns over 1 year are compounded the long term.
annual averages (CAGR)
* BSE Midcap
ƒ Plastics-On a roll: Sintex’s plastic division has been the star
Shareholding (Dec-2008) performer for the company over the past 4-5 years. The company is
a leader in the manufacturing and sales of plastic products in India,
Category (%) and holds a 60% share in the water tank business. It is also amongst
Promoters 29.2 the prominent players in the prefab structure and custom moulding
Mutual funds, FIs 17.2 businesses in the country. Through these businesses, the company
FIIs 41.1 serves the education, defense, housing, automobile and power
Public 6.1 transmission industries. While the company is gradually reducing its
Others 6.4 focus on the water tanks business, we expect prefabs and custom
moulding to drive growth in this segment going forward.
Total 100.0

Report prepared by ƒ Monolithic and prefabs: The growth in Sintex’s monolithic and
prefab businesses is expected mainly on the back of the
Equitymaster Agora Research government’s focus on universal education and housing. Need
Private Limited. for providing education to more and more children and creation
www.equitymaster.com of quality yet cost effective infrastructure (classrooms), combined
info@equitymaster.com with construction of quality houses at much lower cost and in
much lesser time than traditional concrete houses, are expected

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Equitymaster Agora Research Private Limited
15, Khetan Bhavan, 198, J Tata Road, Churchgate, Mumbai-20 Multibagger Midcaps
Tel: (91-22) 6631-4055 Fax: (91-22) 2202-8550

Report date: 28th March 2009

comprises of yarn-dyed structured fabrics and
to be the biggest drivers for Sintex’s prefab
corduroy. Importantly, the division focuses on
business in the future. Futher, given that
quality conscious Europe over the volume driven
Sintex already has in place necessary
US market. The company’s focus and growth
approvals and product registrations with
strategy in the textile business is not purely led
major states in the country, it has a head
by the quota story and, thus, the company is not
start over competition.
focusing on a volume-based growth (as is the
case with most of the textile companies in the
Simply put, monolithic construction is a country). Rather, Sintex’s thrust is more on
substitute to conventional method of
customisation and creativity in structured fabric
construction, and is cost effective and less (the penultimate stage prior to garmenting in the
time consuming when it comes to mass production of premium fashion shirting). This is
housing schemes.
probably the reason the company earns
ƒ Custom moulding: This is another fast amongst the best margins in the textile industry
growing segment for Sintex. In this segment, in India. The company holds a 70% share of the
the company manufactures industrial structured fabric market in India (with other
products specific to the requirements of its players being Arvind Mills and Ashima Textiles).
major clients in the chemical,
pharmaceutical, telecom and power sectors. Investment concerns
Sintex’s major clients in this business
ƒ Weak overall environment: Sintex’s
segment include the likes of GE, Cummins,
management has maintained that the overall
Coca Cola and Pepsi. Its key products in the
business environment remains utterly
custom moulding business include electrical
challenging. While commodity prices have come
enclosures, meter boxes, auto components
down, the fact that the company is passing on
and FRP tanks (mainly used in storing oil
the benefits of the same to customers has
and chemicals). Client acquisition is difficult
meant that realisations are under pressure.
in this business and clients’ sharing of
Apart from that, volumes have also come under
internal specifications (due to the products’
pressure. The company foresees the impact of
customized nature) leads to significant lead-
the same on its business as sales are expected
time before agreement on contracts. For
to remain flat or at best grow by 5% in FY10
these very reasons, relationships tend to be
while profits are expected to grow by 15% to
for very long durations (around 8 to 9 years)
20% on the back of margin expansion (due to
with increasing contributions over time. The
fall in raw material prices). Most of the
acquisition of Wausaukee in June 2007
subsidiaries (Nief, Wausaukee, Bright Brothers)
(explained later) shall also help the
are expected to witness flat to declining
segment’s growth going forward.
performance during the coming fiscal. During the
current year, on the back of less troublesome
Sintex’s past track record with respect to
first half, sales and profits are expected to grow
innovation and identifying new usage
at a rate of 35% apiece.
opportunities in the plastic business is what
enthuses us. The company has also taken care
ƒ Potential losses from a subsidiary’s
of the logistics issue (especially in the prefab
bankruptcy: One of Sintex’s European
business), by spreading its manufacturing
subsidiaries, Geiger Technik, had recently filed
capacities across the country, thus reducing set
for bankruptcy. Sintex had started the process of
up time as well as costs. The company also
acquiring this company in August 2008 and has
scores over its competitors (largely from the
paid around Euro 7 m for the same for a 10%
unorganised segment) in terms of possessing all
stake so far. The management has indicated
the key and stringent regulatory approvals
that if Geiger were to go bankrupt, Sintex will
required for scouting clients in the domestic as
lose the entire amount that it has invested so far.
well as international markets.
Alternately, if the company (Geiger) revives from
bankruptcy and the German government were to
ƒ Textiles-Weaving a differentiated story: In the
call bids again, Sintex will be in a position to pick
textile business, Sintex is engaged primarily in
up the remaining 90% stake at a valuation lower
manufacture of fabric for premium retail
than the Euro 35.6 m that was finalised earlier.
garmenting and industrial fabric. Its product mix
Sintex will not be providing for the potential loss

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Equitymaster Agora Research Private Limited
15, Khetan Bhavan, 198, J Tata Road, Churchgate, Mumbai-20 Multibagger Midcaps
Tel: (91-22) 6631-4055 Fax: (91-22) 2202-8550

Report date: 28th March 2009

of Euro 7 m (amount that it has paid so far for
Geiger) till the final outcome of the bankruptcy Valuations
proceedings is clear by the middle of this year. At the current price of Rs 99, the stock is trading at
an attractive multiple of 4.1 times our estimated
Background FY11 earnings. We believe that Sintex can be a part
of long-term investors’ portfolio considering its niche
Sintex Industries Limited is a dominant player in the
focus in textiles and leadership position in plastics.
plastic and textile business segments. The company
The company also has high innovative content and
manufactures a range of plastic products, including
deep domestic and global relationships working in its
water storage tanks, pre-fabricated structures and
favour in both these divisions, which act as entry
industrial custom molding. The company is also a
barriers for new players and provides the company
leading player in the monolithic construction space.
with competitive advantages against the existing
In the textile business, the company is focused on
ones. We thus recommend a ‘BUY’ on the stock,
niche offerings, possessing specialisation in men’s
expecting it to turn a 2 to 3 bagger over a 3 year
structured shirting in the premium fashion category
period.
wherein it enjoys leadership position in India. The
company has a long-lasting relationship with
Key numbers
international design majors like Canclini and Indian
companies like ITC Wills and Pantaloons, and has (Rs m) FY08 FY09E FY10E FY11E
benefited from the same in the past. It is also Asia’s Net sales 22,743 31,531 33,510 36,594
third largest manufacturer of corduroy fabrics.
Net profit 2,304 2,865 2,932 3,271
During the period between FY03 and FY08, Sintex
grew its topline and bottomline at compounded Fully diluted EPS (Rs) 16.9 21.0 21.5 24.0
annual rates of 39% and 57% respectively. Price to earnings (x) 5.9 4.7 4.6 4.1
Price to sales (x) 0.6 0.4 0.4 0.4

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 Equitymaster Agora Research Private Limited
15, Khetan Bhavan, 198, J Tata Road, Churchgate, Mumbai-20 Multibagger Midcaps
Tel: (91-22) 6631-4055 Fax: (91-22) 2202-8550

Report date: 28th March 2009

Shriram Transport Finance Co. Ltd.

Investment rationale
Market data
Current price Rs 183 (BSE) ƒ Grace in adversity: The organised sector accounts for 71% of the
entire auto finance market with the balance being serviced by the
Market cap Rs 37,241 m
local moneylenders. The total organised auto finance market is
Face value Re 10.0 expected to grow at a compounded annual growth rate (CAGR) of
FY08 DPS (Rs) 4.0 around 15% over the period FY08 to FY12 (SIAM estimates). There
BSE Code 511218 are however two facets to this. While the disbursement for new
NSE symbol SRTRANSFIN commercial vehicles will remain sensitive to the interest rate cycle
No. of shares 203.5 m
(as seen in the past few months), disbursement for pre-owned
commercial vehicles (50% of which is for working capital) will remain
Free float 58.0%
relatively stable and grow at a faster pace than new vehicle loans.
52 week H/L Rs 355 / 150
We believe that STFC, being the largest organised sector financier
Rs 100 invested is now worth of pre-owned commercial vehicles (CVs) will continue to witness a
800 higher growth momentum in its loan disbursement as compared to
STFC Rs 237 its peers and the sector average. The company has shown a
600
BSE Midcap Rs 83 negative correlation to the trend in new truck sales in the past,
400 despite considering the fact that FY06 was an aberration, as in that
200 fiscal STFC started taking most of the assets in its own books rather
- than securitising the same. We have estimated the company’s
Mar-06 Mar-07 Mar-08 Mar-09 disbursements in the pre-owned and new commercial vehicle
segments to grow at a CAGR of 28% and 18% respectively during
Stock price Performance the period FY08 to FY11.
STFC Index*
1-Yr -48.0% -53.2% The potential demand…
2-Yr 21.2% -25.6% ('000 units) FY07 FY08 YoY (%) FY12E CAGR (%)
3-Yr 10.9% -17.2% Passenger cars 1,076 1,201 11.6% 2,138 15.5%
Returns over 1 year are compounded
annual averages (CAGR) Commercial vehicles 303 344 13.5% 561 13.0%
* BSE Midcap
Total domestic demand 1,379 1,545 12.0% 2,699 15.0%
Shareholding (Dec-2008) Source: M&M Finance presentation
Category (%)
Promoters 42.0%
(Ref Table2 on Pg 15)
Mutual Funds 1.1% ƒ Freight capacity to grow 1.25x GDP: India spends around 13% of
Banks/FIs 1.3% its GDP on logistics as compared to 10% by the US. Currently, over
FIIs 13.2%
70% of the total cargo in the country is transported by road as
opposed to just 11% in 1950-51. This includes commodities like
Public 9.8%
cement, fertilisers, food grain and steel, general cargo like FMCG
Foreign corporate products, leather goods and high-value cargo like refrigerators,
20.8%
bodies
electronics and other white goods. Statistical analysis proves that an
Others 11.8%
improvement in road infrastructure results in roadways gaining an
Total 100.0 upper hand over railways in terms of freight movement within the
country. Better roads result in lower delivery time and accommodate
Report prepared by vehicles with larger tonnage capacity. The improvement in India’s
Equitymaster Agora Research road infrastructure has facilitated medium & heavy commercial
Private Limited. vehicle (M/HCV) sales to achieve a compounded annual growth rate
www.equitymaster.com of 20% between FY01 and FY07. With the Golden Quadrilateral
info@equitymaster.com project nearing completion and other major road projects in the
pipeline, it is estimated that the growth in freight capacity will be

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Equitymaster Agora Research Private Limited
15, Khetan Bhavan, 198, J Tata Road, Churchgate, Mumbai-20 Multibagger Midcaps
Tel: (91-22) 6631-4055 Fax: (91-22) 2202-8550

Report date: 28th March 2009

nearly 1.25 times the GDP growth going size Rs 300 bn by FY10) and passenger CV
forward, as against 1.1 times the GDP growth financing (estimated market size Rs 59 bn in
currently. FY08). The company envisages the new
ventures to contribute 15% of its revenues by
FY10. We have, however, not factored in the
same in our projections.
Market potential Truck profile (4m)
ƒ Returns superior to banks: In terms of net
12+ yrs (33%) interest margins (NIMs), the superior yields
12+ yrs (Rs 60 bn)
derived by STFC on the pre-owned CV assets
gives it a lead of nearly 5% to 7% basis over the
5 - 12 yrs STFC's 5 - 12 yrs most risky assets of banks (personal loans and
(Rs 300 bn) target (35%) credit cards). Having said that, the change in the
t composition of assets (with higher composition
0-4 yrs (Rs 0-4 yrs (32%) of new CVs going forward) that will bring down
250 bn) its yields and the lack of access to low cost
deposits will reduce the difference in spreads to
that of banks. Nevertheless, the return on equity
The CV industry will also stand to benefit from derived by the NBFC is far superior to its
certain structural changes that will be witnessed banking peers.
in the future. Besides consolidation of the bigger
freight operators, replacement demand is With an average loan size of Rs 200,000,
expected to be a major catalyst of the duration of 3 years, NIMs of 7.3% (nearly double
incremental demand. Of the current CV of that enjoyed by banks) and an impressive
population of 3 m vehicles on road, nearly 33% asset quality (0.9% net NPA in 9mFY09), STFC
are more than 10 years old. As per STFC, the positions itself very favourably against its
replacement of nearly 1.1 m trucks will require banking peers. Its loan to value ratio of 65%
funding to the tune of Rs 1,078 bn. To add to it, (80% in case of banks) makes it one of the most
there are several policy and legislative factors conservative players in the industry. Also, the
(Bharat-III emission norms and legislation on RBI incentive of allowing NBFCs to offer co-
banning trucks of age greater than 15 years) branded credit cards (STFC has already tied up
that are expected to propel the demand for with Axis Bank for the same) has opened up
‘younger’ vehicles in the industry - leading to the scope for the company to earn fee income that it
phasing out of vehicles in the 5 to 12 years age was so long devoid of.
profile and thus reducing the dominance of
unorganised financers in the market.
Investment concerns
ƒ Building alliances: STFC currently finances 1
out of every 8 trucks sold in the country ƒ Margin dampener: With the economic
annually. Over the next four years, the company slowdown and its resultant impact on demand
is targeting to increase its market share to 40% for commercial vehicles, the change in STFC’s
from the current levels of 25% in the pre-owned asset base towards relatively higher allocation to
vehicle segment (estimated asset size of Rs 210 new CVs (29% of total assets under
bn, from the current Rs 138 bn). To ensure management in FY08 from 27% in FY06) has
commensurate reach, the company has tied up impacted the company’s asset yields. Also,
with 490 private financiers to grow across India notwithstanding the shift from retail to
on a franchisee basis - to source loans for old institutional source of funds (banks), the NBFC’s
trucks and share the profits therein. It has cost of funds continued to remain relatively
engaged the erstwhile moneylenders for this steep due to liquidity issues. Given this, we
purpose. expect STFC’s NIMs to remain capped in the
range of 7.0% to 7.5% over the next three years
In addition, STFC will be foraying into the new and align with that of banks (focused on auto
ventures of used tractor financing (estimated loans) in the longer term.
market size of Rs 176 bn in FY08) through a
joint venture (JV) with Mahindra & Mahindra,
construction equipment financing (estimated

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Equitymaster Agora Research Private Limited
15, Khetan Bhavan, 198, J Tata Road, Churchgate, Mumbai-20 Multibagger Midcaps
Tel: (91-22) 6631-4055 Fax: (91-22) 2202-8550

Report date: 28th March 2009

(%) At a time when asset financing companies are

NIMs to remain capped getting crippled with lower growth rates and poor
15.0
margins, there is little STFC needs to worry about
13.0 thanks to its well hedged business model. STFC’s
return on equity (26.9% in FY08) would improve
11.0
exponentially to 31.9% by FY11. It must be noted
9.0 that the company has maintained an average return
on equity of 27% over the last 5 years, which is
7.0 comparable to the best in the industry. The board of
STFC has also approved increase in FII
5.0
shareholding limit from 49% to 74%.
FY03 FY05 FY07 FY09E FY11E
Given the positives in the offing, we recommend
investors to BUY the stock expecting it to be a 2 to 3
Background bagger over a 2 year period.
STFC is the country’s largest asset financing NBFC
(non-banking finance company) with 20% to 25% Key numbers
market share in pre-owned truck financing and 7% (Rs m) FY08 FY09E FY10E FY11E
to 8% market share in new truck financing. The
Total Revenues (Rs m) 11,975 13,824 18,649 26,138
company has niche presence in the high-yielding
pre-owned CV financing business with expertise in Net Profit (Rs m) 3,898 4,591 7,365 11,090
loan origination and valuation. It had 430 branches EPS (Rs) 18.5 21.7 34.9 52.5
across India with 4 m customers (91.3% of the
Adjus. book value (Rs) 82.5 102.8 133.5 187.2
country’s truck owners) at the end of December
2008. P/E (x) 9.9 8.4 5.2 3.5
P/Adj BV (x) 2.2 1.8 1.4 1.0
Valuations
STFC enjoys the distinction of being the country’s
largest asset financing NBFC with 25% market share
in pre-owned truck financing and 7% to 8% market
share in new truck financing. Its niche presence in
the high-yielding pre-owned CV financing business
earns it an edge over its peers in terms of net
interest margins and provides substantial cushion in
a rising interest rate scenario. Also, the NBFC’s
asset valuation and loan recovery skills are verified
in the low delinquency levels.

Table 2: Potential funding required…

(Rs bn) FY02 FY05 FY06 FY07 FY08 FY12E CAGR* (%)
New passenger car finance 108 211 240 270 293 447 11.1%
New UV finance 79 94 106 164 11.5%
New comm. vehicle finance 36 69 197 268 280 405 9.7%
Total new auto finance 144 280 516 632 679 1,016 10.6%
Used car finance N.A. 57 81 112 137 351 26.5%
Used vehicle finance N.A. 57 - 138 178 353 18.7%
Total auto finance market 144 394 597 882 994 1,720 14.7%
Source: M&M Finance presentation *CAGR is calculated between FY08 to FY12E

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Equitymaster Agora Research Private Limited
15, Khetan Bhavan, 198, J Tata Road, Churchgate, Mumbai-20 Multibagger Midcaps
Tel: (91-22) 6631-4055 Fax: (91-22) 2202-8550

Report date: 28th March 2009

Disclosure: The author of this article does not hold shares in the recommended company. Equitymaster Agora
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