Chetan Parikh interviewed Utpal Sheth of Insight Asset Management, son of India's legendary investing grandmaster, Mr. Hemendrabhai Sheth. Utpal, is a highly talented money master in his own right. So keen is Utpal's passion for investing, that he volunteered to jointly interview India's investment greats with Chetan, an offer that we quickly accepted.

Chetan and Utpal will be bringing you fresh perspectives from India's investing cream every month. Whilst Capitalideasonline.com does not take any responsibility for investment decisions that you take based on these ideas, if you do have any suggestions, please let us know.

For this interview we have to thank Utpal for his time and commitment and Mr. Navin Agarwal of Insight Asset Management for the help he so generously gave.

Investing with an Open Mind

Mr. CHETAN PARIKH: Utpal, it is nice to have you here with us. Can you give us a brief background of what investing style do you follow? If there is any particular style or anything that can be generalized into a few paragraphs or.

Colgate - No external change & huge external opportunity

Mr. CHETAN PARIKH: Could you come up with some recent picks on these extremities of change.

Mr. UTPAL SHETH: Okay, on the no-external-change front, I am very optimistic on Colgate

stock, on its business, and on the management. Let me go back to the Change Paradigm that I just mentioned. Colgate is on the extreme of no-external-change due to the basic need to brush teeth in a civilized society. But that statement should be taken with a pinch of salt, as only 30 per cent of the Indian population is covered by modern dentifrices. And therein lies the external opportunity.

Mr. CHETAN PARIKH: Could you give me the investment case for Colgate at the current price of Rs.230.

Mr. UTPAL SHETH: To my mind, Colgate is probably the cheapest bet in the FMCG sector on an EV / (EBIDTA + Ad spend). Besides that, I think Colgate has been treated as an underdog in the fight between Colgate and HLL. I think Colgate has fought valiantly. Certainly the management of Colgate had erred in the past starting with the acquisition of Cibaca at a very high valuation, complacency in the market place, lack of adequate product support or brand support, and so on.

The top management team has been revamped, starting with the CEO to the head of marketing. I believe that Colgate's parent is one of the very shareholder friendly companies which has created a lot of value in the past and which has a fantastic product portfolio, besides having dominant market positions in most of the countries all over the world. I think technologically and in terms of ability to do deliver value to the customers in the oral care segment, Colgate has played a stellar role. Fifty years ago the penetration level for oral care in India was less than three per cent. Today, this is closer to 30 per cent. All this incremental market penetration credit goes only to Colgate. The comparable penetration levels for soaps and detergents is upwards of 90 per cent.

We have seen a very brutal urban marketing war with Colgate losing urban market shares to HLL. But on the rural side Colgate is still as strong. It has been rated as the best Indian brand for seven out of eight years now by A&M magazine. The best brand is equipped with the best distribution network for oral care, both in urban and in rural areas. If Colgate can get its act together, I think Colgate will get an EV / Sales multiple which is superior to what it is getting presently. I see Colgate's future earnings growing at a rapid clip. Colgate's present earnings are abnormally depressed. In my opinion, top line could grow by 15-20 percent and bottom line could grow at 25-30 per cent on a compounded basis for the next five years. And all of this would be free cash flow as there is no need for any more capex or working capital.

Mr. CHETAN PARIKH: It's quite possible then that Colgate will go ahead and double its turnover in the next four years without requiring any additional capital. In fact, substantial amount of earnings will be distributed to shareholders.

Mr. UTPAL SHETH: Absolutely, and that has been the history of Colgate India any way. It had the best dividend and bonus track records, but for the aberration in the last 2 years. Even in the worst of times Colgate has had a return on capital employed which is definitely better than most multinational FMCG companies, in spite of heightened competition and having close to Rs.800 million of cash equivalent assets on its balance sheet. Importantly, RoCE on the operating business of Colgate is certainly the best in the entire FMCG sector.

Mr. CHETAN PARIKH: Utpal, on a normalized basis, you said that earnings are very depressed at this point of time because of the heavy ad spend, that is going both into regaining its market share and introducing new products. Do we have a sense of what you think would be normalized earnings in the absence of all these special factors? What would you put today as the normalized earning per share for Colgate?

Mr. UTPAL SHETH: I'd be very reluctant to put a number on this. Because I think this story should not be looked at in the context of earnings per share but in the context of the internal change that is visible. For example, the present proportion of non-oral care sales to total sales is in the vicinity of 10 percent. We are given to understand that this could be 25 per cent over the next three years. Globally for Colgate the proportion of oral care to total sales is just 32 per cent. The Indian management is already rejuvenating this category with the relaunch of Palmolive soap. Therefore, there is a very good chance that the Indian sales mix too will change. If that change is driven by new product launches in the non-oral care business, with superior products, with the right kind of brand support, I think initial earnings might be constrained but the eventual value that will be created for shareholders will be far greater.

Mr. CHETAN PARIKH: You're saying that clearly increased earnings power is the result of this heavy marketing support that they are giving. That is why you mentioned initially that valuation should be made on an EV / (EBIDTA + Ad spend).

Mr. UTPAL SHETH: In my experience in any DCF valuation the terminal value plays the major role. Up to 75 to 80 per cent of the aggregate valuation is derived from the terminal value. And in my opinion whatever Colgate is doing and will do for the next two to three years will push up the terminal value dramatically, it might not push up the present value of the initial cash flows.

Let me clarify. If you look at the EBIDTA + Ad spend as a proportion of sales, then this is probably among the highest that it has ever been for Colgate. And this is at the heightened competitive activity. And when promotions as a cost is the highest ever for Colgate. If this does not denote Colgate's inherent increasing earnings power, then what does?

Mr. CHETAN PARIKH: Could you tell us something about what's happening with the new products that they have introduced, and also of their overall market share in the oral care business?

Mr. UTPAL SHETH: Colgate has made 13 product innovations in the past 18 months. This is probably more than what Colgate has done in the whole of nineties. For the last 6-8 months we have also seen fairly stable market share numbers for their two lead product categories, which is toothpaste and tooth powder. But, what is getting camouflaged in all of this is the small things that Colgate has been doing.

For example, Colgate distributes more than seven million toothbrushes per annum free of cost. This year it could be as high as 10 million. Last year, Colgate, on its children's dental care initiative contacted an unprecedented 5 million school kids and gave them free dental check ups. Colgate has been doing a rural van program for many years now. I think all this is extremely admirable. I see the penetration levels in the country moving to may be double of what they are today, as both the lead players in this business are concentrating on the rural market. The entry barriers for any third entrant are extremely high.

Mr. CHETAN PARIKH: For the oral care category, what do you see as the sustainable growth rate in value terms?

Mr. UTPAL SHETH: The sustainable secular growth rate in oral care segment is in the vicinity of 8 per cent volume.

Mr. CHETAN PARIKH: Okay, which will translate to a value growth of what? It always would have an inflation-plus sort of a pricing formula.

Mr. UTPAL SHETH: giving a 12 to 13 percent value growth.

Mr. CHETAN PARIKH: And you see that Colgate would be doing better than that on the top line basis because of . . .

Mr. UTPAL SHETH: . . . the faster growth rate of the non-oral care segment.

Mr. CHETAN PARIKH: Would they also have higher margins?

Mr. UTPAL SHETH: Certainly in the oral care business because of several initiatives taken by the company - to cut input costs, putting up the Nepal plant for north-India sourcing, DCP plant, consolidating offices and vendors, installing V-SATs and implementing ERP, etc.

The margins may not improve immediately in the non-oral care business as it still does not have the critical mass and will require substantial marketing support. Given the low share of non-oral care business, its margins are not very relevant today. But as I said my focus is on the terminal valuation.

Mr. CHETAN PARIKH: Any international comparisons that you have -- you know, like normally Colgate is benchmarked against companies like Procter & Gamble, Unilever. Is there anything that you have to say about what is happening internationally? For instance, Colgate has the highest return on net worth. So do you see any parallels between what is happening to Colgate abroad what is happening over here in the domestic market?

Mr. UTPAL SHETH: I think Colgate surely has the potential to deliver the best return on net worth in the country. How fast that potential will be achieved is a matter of debate. But it surely has the potential.

Mr. CHETAN PARIKH: Utpal, If you were looking at Colgate and you were to put a fair private market valuation of Colgate what would be the price you think?

Mr. UTPAL SHETH: Discounting the projected cash flows over the next 10 years and a terminal EV to Sales of 4x, Colgate is selling at less than half its current worth of Rs.500.

Mr. CHETAN PARIKH: That's great.

Mr. UTPAL SHETH: I would like to add a few qualitative aspects to the story. Colgate sells Colgate Dental Cream through 2.7 million outlets. This distribution network is second only to that of Lifebuoy and Lux in the country. And it is far superior to what HLL has for Close Up and Pepsodent. The growth rates in rural areas will be driven by increased penetration. But the growth rates in urban areas, where the penetration levels are in the vicinity of 75 percent or so, will be driven by a shift up the value chain in terms of a better quality product as well as by an improvement in the frequency of brushing. To my mind, Colgate is one of the inevitables. On the lines of what Warren Buffett said about Gillette, I sleep very peacefully having invested in Colgate knowing that the next morning and evening the whole world is going to need to brush their teeth.

Tata Donnelley - Continuous Discontinuities

Mr. CHETAN PARIKH: Only the adult males shave their faces regularly but everybody - males and females, kids and adults and even people sporting beards and moustaches - brushes their teeth. Can you now tell us about a company on the other extreme of change?

Mr. UTPAL SHETH: I am very excited about this stock called Tata Donnelley (TDL). There are ownership issues as of now given the imminent exit of Donnelley, which is an American printing company. But to give you a brief background, less than a decade ago TDL was called Tata Press, which was actually a loss making company. This was a pure printing company. It has evolved itself and kept itself ahead of the curve by concentrating on new age businesses.

You don't get paid subscriptions until you have distribution and you can't afford distribution until you have paid subscriptions. So to my mind this is a very well entrenched business which has the potential of being converted into a strong B2B model.

Peter Drucker says SIP is the most attractive component of Publishing

Let me now focus on SIP. It already has four world class SIP. Overdrive, an automobile magazine; Better Photography, for the photo enthusiasts; Search, an industrial product finder and; AV-max, the latest launch targeted towards the audio video enthusiast. Each of these magazines have extremely good content and a very high print quality. Three out of these four are already cash positive. And more importantly the cash flows being generated by this business is consistently used internally to create more such initiatives in the future.

Extract from Peter Drucker’s latest book - Management Challenges for the 21st Century - on Special Interest Publications: Even faster than the growth of book publishers has been the growth of another print medium: the "specialty mass magazine." A good many of the huge-circulation "general magazines" that dominated 1920s and 1930s America, Life, for instance, or The Saturday Evening Post, have disappeared. They did indeed fall victim to television. But there are in the United States now several thousand - one estimate is more than three thousand - specialty mass magazines, each with a circulation between fifty thousand and a million, and most highly profitable. There are specialty mass-circulation magazines in every field and for every interest - in health care and in running symphony orchestras, in psychology and in foreign affairs, in architecture and home maintenance and computers and, above all, for every single profession, every single trade, every single industry. More and more of the specialty mass magazines now publish an "on-line" edition - delivered over the Internet to be printed out by the subscriber. Instead of IT replacing print, print is taking over the electronic technology as a distribution channel for printed information.

I think this company has very strategically cannibalised its historical business of printing. Let me give you an international example. Softbank acquired Ziff Davis publications and along with it the Net version of Ziff Davis called Zdnet. Today ZDnet's valuation is far more than the valuation of the publishing business. I think that the value of the publishing business of TDL will get unlocked in the near future. Let me quote Peter Drucker (refer box) who believes that SIP is the most attractive segment of publishing business anywhere in the world. TDL has also leveraged on its existing database of authenticated end users to run a Direct marketing service called Direct Edge. It is a very small proportion of aggregate revenues. But this just goes to show that the company has consistently kept re-inventing itself. Not investing in bricks and mortar Mr. CHETAN PARIKH: The printing business also constitutes a fair chunk of their business. Are there any characteristics of this business that you would like to comment upon? Mr. UTPAL SHETH: The printing business is a capital intensive sunset business and the company is clearly committed on not investing in bricks and mortar in the future, so that canibalisation will continue. It's so cheap, it pains me to even do a sum of parts valuation . . . Mr. CHETAN PARIKH: There won't be any major capex in this direction except to support higher value additions. How would you value TDL? Would you do a sum of the parts valuation based on the different divisions, each of which has a separate business profile? Mr. UTPAL SHETH: The present market capitalisation is in the vicinity of Rs.2.5 billion of which the company has cash equivalents in the vicinity of Rs.350 million. So the net market cap for this company is Rs.2.15 billion for very high quality, non-capital intensive content creating businesses which can be ported on the Net. It's so cheap, it pains me to even do a sum of parts valuation. For instance, the present market price barely discounts the value of the YP business alone. The total value of TDL is easily Rs.500 per share, without assigning any value to the Internet business. I am very clear about the fact that this is a core portfolio holding. Only "bricks and clicks" stock outside IT sector - and profitable too, with positive free cash flows Mr. CHETAN PARIKH: Would it be the only quoted "bricks & clicks" stock in India outside the IT sector that's making a profit? Mr. UTPAL SHETH: Yes, it's a potential Internet stock which is making a profit right now, has all the content to build great vertical portals. I don't think we're going to get very many successful Internet stocks with positive cash flows from the Indian markets.

 

Goldiam - Adding value to the Invaluable, the no.2 studded diamond jewelry exporter

Mr. CHETAN PARIKH: Utpal, can we come to some specific picks that you have identified. Can you tell us something about Goldiam International, a stock you have been recommending lately?

Mr. UTPAL SHETH: Goldiam is an obscure B-group company on the Bombay Stock Exchange. It is into the business of jewelry, which is a very recent business, just 8-9 years old. When I say jewelry business, I mean the standardized automated jewelry design making as opposed to the traditional hand set jewelry. Goldiam is the no.2 jewelry exporter from India. No.1 is a company called Intergold. Goldiam has had a fairly impressive compound annual rate of growth from jewelry sales. Although the sales growth rate visible in the Profit and Loss Account is nowhere as impressive. That is because Goldiam cannibalized its traditional business which is diamond processing.

Five years ago, Goldiam sales had a very large component of diamond sales. In FY00, it has a zero component of diamond sales. Given that it is such an obscure company, everybody thought that the management might not be honest & transparent. Being in the diamond business inherently leads to such lack of credibility, since the business as a whole has had many mal-practices in the past. Also, investors do not realize the true difference between diamonds, that is a low value added cyclical business, and jewelry, which is a high value added, stable service business. Jewelry is a fashion product for the western markets.

Goldiam designs 70-80% of its aggregate sales output. So, it is not a contract manufacturer. The quantum of value addition is very significant as compared to diamonds. The operating margins for the diamond business would be in the vicinity of 6-7% whereas, the operating margin in the jewelry business is twice that number. Jewelry exports from India are growing at a very fast pace. I mean we are talking of over 20% compound growth rate in dollar terms against a 6% compounded growth in diamonds. India has an inherent labor cost advantage in jewelry making, but then so do many other countries.

What is so special about India in the field of jewelry making? In the studded jewelry field, India has a huge advantage. This is not just labor cost advantage but another advantage is sourcing of diamonds since it has an existing base of ancillary diamond producers, diamond-polishers, which is not the case, for example, in China. So although China can be a great center for pure gold jewelry making, China can never be a great source of studded diamond jewelry because the sourcing costs will be high & the sourcing skills are absent. Further, sourcing hurdles lead to larger lead times.

The order processing time for Goldiam for diamond studded jewelry is in the vicinity of 1 month while it would take a Chinese studded gold jewelry producer approximately 20 days just to source the diamonds. Even if he stocks them then he is talking of far greater investments in his working capital combined with the risk of diamond price fluctuations, which will render him non-competitive in this business. Therefore, I believe that studded gold jewelry in India has a big competitive advantage, which is borne out by the fact that this segment has grown at a compounded rate of 20% for the last 5 years. Given the strength of the business model, we believe that the external opportunities are large making it an attractive business. The number of domestic players are so few that we believe the sustainable competitive advantage of Goldiam both from an international perspective as well as domestic perspective will last for quite some time to come.

Having talked about the business dynamics, Indian jewelers are far from branding. I don't think that this is going to happen anytime in the next decade. They do not have the critical mass to do this. Goldiam's FY00 sales are just Rs.1 billion and a branding exercise cannot be sustained unless we are talking of a size of Rs.5-6 billion in the jewelry business.

The key strength in this business is the ability to continuously compress delivery times, avoid exposure to gold & diamond price volatility, travel up the value chain by selling first to the wholesalers, distributors internationally, then to the large retail chain stores internationally & finally to launch your own brand.

Has Goldiam made any efforts in traveling up that value chain? We think so. Goldiam started out tying up with an intermediary in international diamond jewelry business and is now selling to several international wholesalers & distributors.

Has Goldiam been able to move beyond these distributors? Yes, Goldiam has struck a tripartite agreement between itself, an intermediary and J C Penney, a very large and well known US retail chain. J C Penney buys $1 billion plus of jewelry per annum. As of today, close to 40% of Goldiam's output goes to J C Penney via this tripartite arrangement but that amounts to only 1% of J C Penney's aggregate annual gold jewelry purchase. It also sells to Sears, and hopes to sell to Wal-Mart in the near future. In the latest collection of "Hint of the Holidays", the latest catalogue by Hezelberg, a leading jewelry chain in the US, 4 out of the 5 displays on the cover page are Goldiam's designs.

We believe Goldiam can significantly expand its market share. We also believe that Goldiam will be able to sell to several other retail chains over the next few years. So we think the external opportunities are large. This is a product which can be marketed only to the US and not to the European segments, as the European segment is far more up-market and far more fashion conscious.

To get into some detail, Goldiam has expertise in what is known as invisible settings. The traditional jewelry has gold to hold the diamond in place so that the setting of the diamond is visible. What Goldiam does is invisible setting which is a higher plane of jewelry making wherein it cuts the diamond with a laser and then welds the diamond with a laser so you cannot see any gold holding the diamond which enhances the visual impact of such jewelry.

. . . Selling Platinum jewelry

Besides this particular skill, Goldiam is now planning to move into platinum jewelry. As of now in the global market platinum jewelry is a fraction of the gold jewelry market. But, the future clearly is in platinum. Platinum jewelry has the potential to grow at a far greater pace over the next 4-5 years. The largest market for platinum jewelry incidentally is Japan and not the US. Therefore, if Goldiam can make a successful transition into platinum jewelry for which it has already made the necessary investments, then the growth rates will only accelerate.

De-risking the business model

In the process, Goldiam will have de-risked its business dramatically both in terms of geographical, product and customer diversification. Platinum is a harder metal as compared to gold. It is far more difficult to stud on platinum and it is much more difficult to achieve invisible setting on platinum. Goldiam claims that it will be able to do invisible diamond setting on platinum. If Goldiam can do that, this will put it in a different league. Goldiam has spent no more than Rs.25 million for the platinum jewelry plant and the first full year's turnover from this project is anticipated to be in the vicinity of Rs.200-250 million.

Mr. CHETAN PARIKH: Do you think that Goldiam has the skill set to go ahead and make this change to platinum jewelry? It is a different market, it is not a market to which they have been traditionally exposed and so what would be the marketing strategies?

Mr. UTPAL SHETH: Initially, Goldiam will enter the existing markets, mainly US, through the existing distributors while it will have to appoint new distributors to enter new markets like Japan. Effectively, Goldaim will, to some extent, leverage on its existing distribution channels. And to that extent Goldiam will have lesser entry barriers. Tapping other specialist distributors will not be very difficult given the track record Goldiam has. But over a period of time Goldiam should pass the acid test of being able to sell directly to the retail shops. And when it does that, it goes into a different plane of operating margins.

Mr. CHETAN PARIKH: Couple of other questions that I have. Can you give us just a brief background on the management? You said that there is not much to distinguish many Indian managements in the jewelry business. So what would be your assessment of the management?

Mr. UTPAL SHETH: There is not much to distinguish between the Indian managements in the diamond business. In the jewelry business, strictly speaking, there have been only 2 or 3 successful players. As I told you, the no.1, Intergold; is owned by B. Arunkumar and the no.2 is Goldiam. Goldiam is run by a young guy called Rashesh Bhanshali. His father Mr. M.R.Bhanshali is in the diamond business and was among the top 5 at one point of time. However, Rashesh has always focussed on jewelry business & not on diamonds. Our degree of comfort with this management is not very high, but when we passed them through the test of objective evidence, we found that this management has over $7 million lying in its EFC account (External foreign currency a/c).

Historically, all managements who played truant, have not held cash in the balance sheet. These guys have held cash on the balance sheet. The lead manager for the IPO was DSP Merill Lynch. Goldiam had announced a buy back few months ago and this scheme is shortly closing. Even for the buy back, DSP ML is the lead manager and we believe they would have done their due diligence.

Insight Asset Management has got certified reports from SEEPZ which state that Goldiam is the second largest jewelry exporter from SEEPZ. There have been no custom infringements at SEEPZ by this company, which leads us to believe that there is no objective evidence of any malpractice. However, as of now the stock markets have tarred this company with the same brush as the diamond business.

Goldiam's management is focussed on consistently moving up the value chain and de-risking its business. We find all this to be quite impressive. Even the financials are excellent.

Compelling valuations - less than 2x prospective FCF, and less than 1x FY01 EPS, net of cash

Mr. CHETAN PARIKH: Can you highlight the financials and the valuation of the company?

Mr. UTPAL SHETH: Ok, presently this company has sales in the vicinity of Rs.1 billion for FY00, a growth of 25% over the previous year. Goldiam has quite a bit of extra space at its existing location and can expand capacities at very low incremental costs. The kind of profitability it achieves has been constantly improving, from an operating profit margin of mid-single digits a few years ago to 12% now. This vindicates our contention of their moving up the value chain.

When they enter platinum jewelry, the margins will move up further. Apart from the raw material costs, the overheads of Goldiam are under control. So while there is a labor cost arbitrage in one sense, it is not a labor-intensive operation. If you see the manufacturing facilities of Goldiam, you can clearly observe that they are using the state of the art machinery. They are on the skill-intensive part of the business and not the labor-intensive part. The bottom line for the company has been growing and it has consistently generated substantial sums of free cash flow. At the current price of Rs.58, the stock is available at less than 2x prospective free cash flow in FY01.

Mr. CHETAN PARIKH: In fact, I went over you notes on the company. I fully agree with you that even if you take the price of Rs.58 and you take out the cash of Rs.44 per share that is on the balance sheet, the effective price that you pay for the business is just Rs.18, which is less than the forecast EPS for the next year. It is generating large free cash flows, zero debt and is growing rapidly.

Mr. UTPAL SHETH: Yes and I am certain that this company will go in for dividend pay out exceeding 20-25% and if they do that I am getting a 8-10% tax-free dividend yield.

Valentines, Marriage anniversaries, Birthdays & Christmas will keep coming

Mr. CHETAN PARIKH: A concern here is that would Goldiam be able to withstand a downturn in the US caused by a stock market crash or any other factor?

Mr. UTPAL SHETH: Goldiam's jewelry is not targeted to be on the high end. It is a mass market item used by working Americans. While one cannot rule out some impact of a crash on the US market, I do not think that it would be severely affected by any such downturn. Importantly, Valentines, Marriage anniversaries, Birthdays & Christmas will keep coming.

Mr. CHETAN PARIKH: Milleniums too, at least this year. Utpal, I wanted to ask you something about the valuation of this whole sector. You know I was just looking at it. PE ratios for the whole sector are quite low and this includes the jewelry manufacturing cos. Goldiam's OPM while higher than most peers, it is lower than Shantivijay and the valuation case for Shantivijay looks more compelling. You know anything of Shantivijay?

Mr. UTPAL SHETH: Yes, Shantivijay is probably the highest value added jeweler in the country. But all of it is hand made studded jewelry. Over the last two years, Shantivijay has had an exceptional deal on an emerald sale. If you exclude that, then the profitability and the valuation of Shantivijay is actually higher than Goldiam. Also the scaleability of Goldiam is far superior to that of Shantivijay. Shantivijay will always remain a small niche company. The kind of growth rate that will be visible in Goldiam will be far superior.

Mr. CHETAN PARIKH: Utpal, gold and diamonds form a very significant portion of the total cost and inventory of Goldiam. Does it not run any risk on price variation in these commodities?

Mr. UTPAL SHETH: Goldiam carries a negligible inventory and all the inventory is against booked orders. As soon as Goldiam gets an order for jewelry, it hedges itself by booking gold and diamonds immediately. Any way, the processing cycle is less than a month. Effectively, Goldiam is not exposed to any commodity price risk at all.

Mr. CHETAN PARIKH: What about debtors?

Mr. UTPAL SHETH: All debtors are backed by irrevocable LCs, so there is no credit risk. Sales under the tripartite arrangement that we talked about earlier are Cash-on-Delivery and hence, debtors are likely to remain quite low even in the future.

Mr. CHETAN PARIKH: There are some investments that are there in the company. They are not very large or material. But the interesting point is that there is an investment of 10 shares of Goldiam Information Technology ltd. That is not much. It is 100 bucks but does this signal that the company is planning to make forays into software field & would the company's funds be ever diverted for that and do the promoters have any prior knowledge of IT?

Mr. UTPAL SHETH: We specifically asked this question to the management and the management has assured us that there will be no transfer of funds from this company into any other business venture. Also, given that the management has Rs.350 million lying in the bank account, if at all they were to fall to such temptations, I am sure there were many opportunities in the last 3 years. The management has committed to us that even the small quantum of investment in the balance sheet will be divested off as the company is very clear that it will focus only on jewelry.

Jewelry is a business of credibility

Mr. CHETAN PARIKH: Does the company have any Internet strategy?

Mr. UTPAL SHETH: No, for having an Internet strategy, the company will have to ensure a brand image first. Secondly, the logistics of managing this will be very difficult. The company might create a web site wherein it will display its designs, which will open it up to other customers. But I think the company is far, far away from selling on the Net.

Mr. CHETAN PARIKH: Utpal, I know you have sort of answered this but I want to highlight this because it appeared in the 26^th Oct'99 issue of "Think Tank" of The Financial Express and they have a report on the diamond industry. This is a paragraph I would like to quote "What is even more worrisome for India is a fact that through the joint ventures, which have been set up, the Chinese would first utilize the Indian marketing expertise and then break-off. Another major cause of concern is that Chinese are also venturing in to jewelry. India with a miniscule presence in the global $70 billion industry is even more vulnerable here. Remember the Chinese don't have to depend solely on import of gold. China is one of the top gold mining country annually producing about 150 tons of gold". Any comments?

Mr. UTPAL SHETH: As I told you China has a great lead on India in terms of pure gold jewelry, but they are far, far behind in terms of studded diamond jewelry since sourcing diamonds will remain a large competitive edge for India.

Mr. CHETAN PARIKH: Ok fine. Are there any moats in this business? What would prevent somebody else in the diamond market from making a transition into this area?

Mr. UTPAL SHETH: Actually speaking, jewelry is a business of credibility. There is nothing preventing anybody else except the fact that the credibility of all Indian diamond players is extremely poor. Secondly, the cream in this business lies in ensuring that you can compress the delivery time or your working cycle times. Most diamond jewelers are unable to do that. They are not capital conscious and they are not cost conscious. They have been working for years in a very highly manned, labor intensive diamond polishing environment, which I think does not provide the right mind set. Shrenuj & Su-raj both have tried making this transition and failed. Goldiam has an in-house design team which is headed by a lady who has been adjudged the Designer of the Year award for gold jewelry studded with diamonds by De Beer's for 3 years in a row.

High margin of safety

Mr. CHETAN PARIKH: What could make this investment into a mistake? Can you visualize any sort of conditions making this investment at this price into a mistake at Rs.58?

Mr. UTPAL SHETH: Any significant indiscretion by the management or a catastrophe in the US markets will threaten this investment idea. But even then I think the margin of safety is so large that . . .

Mr. CHETAN PARIKH: Do you have any projected price target?

Mr. UTPAL SHETH: I only know that it is a multi-bagger, I don't know how many times. Even at a measly 6x 2001 conservative earnings estimate of Rs.33 per share, we are talking of a 3 bagger plus.

Bhartiya - Attractive business characteristics

Mr. CHETAN PARIKH: What is the next investment idea, Utpal?

Mr. UTPAL SHETH: Yes, last year Bhartiya was recognized as the best exporter from India of fashion leather garments.

Mr. CHETAN PARIKH: So this is an award for quality?

Mr. UTPAL SHETH: This is an award for the diversity of sales, for the element of branding in sales, for customer responses and for the growth.

No capital intensity, debt free on net debt basis, high RoCE

Mr. CHETAN PARIKH: Could you run through some of the financials of this company and what its earning power is?

Mr. UTPAL SHETH: We are anticipating sales in the vicinity of Rs.800 million for the year ending March 2000. But, we are expecting close to 30% compounded annual growth rate in sales going forward. It has already been 35% historically and I see no reason why that should not continue. In terms of its debt equity structures we extrapolate that Bhartiya can become a debt free company in 2 years time. In any case, even today, on a net debt basis, Bhartiya is already debt free. In terms of return on capital employed, Bhartiya has been hovering around 30% on an EBIDT basis and we think that in future the return on capital employed will just go through the roof, since this business has no capital intensity. For doubling its turnover it will require capital investments of less than Rs.30 million.

Mr. CHETAN PARIKH: Wow. For Rs.800 million incremental sales they require just Rs.30 million!

Mr. UTPAL SHETH: Incremental ROI's could be in vicinity of 100%.

Secured debtors and conservative accounting

Mr. CHETAN PARIKH: There were a couple of concerns that I had. When I went through the balance sheet, there has been a large growth in debtors. Is that the result of the galloping sales or is there any . . .

Mr. UTPAL SHETH: No, this debtors growth is again a phenomenon driven by the Italian trading unit and branding in the last season. Bhartiya sells all its Italian sales to its Italian trading unit, which in turn sells to customers, mind you this is all within the company. So, Bhartiya has no credit risk on this. Bhartiya has complete credit protection since all its sales are on 100% irrevocable LCs or insured. The quantum of receivables that it factors also determines its debtors position.

Mr. CHETAN PARIKH: One more number was the administrative & selling expense? That has grown faster than the sales increase. Is this pre-operative in nature and is the company writing this off?

Mr. UTPAL SHETH: The rise in administrative and selling expense is disproportionate due to this being the first year of operations of the trading branch in Italy. None of this is pre-operative, and all expenses including design and brand development costs are being written off in the year of occurrence. There is one element of pre-operative expense, which is the issue expense, which used to be amortised over 10 years; Bhartiya has now decided to just write it off.

The launch costs for MONKS ITALIA, its brand, are not going to diminish in the next 2/3 years because Bhartiya will have to maintain brand support.

Branded sales proportion set to increase

Mr. CHETAN PARIKH: But then, would it also not get higher margins from incremental business?

Mr. UTPAL SHETH: Yes, and it will reinvest all of that into creating and building this brand. Since Bhartiya is envisaging taking its branded sales component from 10% to 30% over the next 3-4 years. These are huge jumps we are talking about.

Mr. CHETAN PARIKH: Just looking at the peer group, I am not looking at the shoe companies, just garment companies; It looks good on peer group comparison, both on margins and on Return on Net Worth. But, there is one more company over there by the name of Indo Korean Exports. Can you tell us how it compares on valuation and other aspects?

Mr. UTPAL SHETH: Let me admit that I have no knowledge of Indo Korean Exports. All I know is that Bhartiya is the one that has struggled the most on the path of selling directly to retail chains. From the list that I have seen from the Leather Export Council, I haven't seen Indo Korean anywhere.

Mr. CHETAN PARIKH: What would you say are the moats in this business? Again, how difficult would it be for somebody manufacturing shoes, for instance, to get into this business?

Mr. UTPAL SHETH: Actually, there are very few entry barriers in leather garments. You can actually copy a design overnight. You don't require capital to do that. So in that sense the entry barriers are quite low. But, when you are duplicating a design you are selling to very low-end markets. You are not selling at the fashion fair in Italy. You are not selling to Casual Corners in the US or other retail chains in Europe. Therefore, given its customer profile, I would say entry barriers are high since any competing suppliers to such customers will have to first prove their abilities and then build their credibilities. Over a period of time, I do believe that the design content is a significant entry barrier. Employing some of the best designers is not something that any small player can afford. Therefore, it's a chicken and egg situation. Unless you get the critical mass of sales you can't employ the top designers, unless you employ top designers, you can't get the --

Mr. CHETAN PARIKH: -- what that calls for is significant learning curves, expertise which probably only comes with experience. What would cause this investment at this price to be a mistake? There has already been a large run-up in price, my God! this is a 10 bagger already from its lows. It was Rs.13 a year back and it's Rs.130 right now.

Mr. UTPAL SHETH: Again I think management indiscretion and management structure is the only risk. The business dynamics are extremely favorable. Again the management has demonstrated resistance of institutional imperatives in the past. They have been holding significant amount of cash in their balance sheets, which they could have been indiscriminate with. And the management is extremely transparent in its accounting in terms of writing off expenses with longer-term benefits. There's no capitalization of either interest or any other expenditure in its balance sheet. All design costs are written off in spite of the fact that they can be reutilized again. So I think the demonstrated management intent is quite healthy.

Mr. CHETAN PARIKH: Oh, so they have a large library of designs, which is not valued obviously anywhere, which can be reused at some point of time.

Mr. UTPAL SHETH: Which can be reused. But, I would not assign a high value to that library of designs because every six months all the designs undergo dramatic changes.

Mr. CHETAN PARIKH: Let me sum up the case for you. This is a company that is earning a return on net worth of 30 percent, generating about 80 percent of its profits in free cash, likely to grow at about 30-35 percent plus, net cash of Rs.30 at year end on the balance sheet and a prospective PE of less than 7. That's very attractive.

Mr. UTPAL SHETH: A prospective P/E of less than 5.

Mr. CHETAN PARIKH: Less than 5. I made a mistake. Tell me what's the earning projection this year?

Mr. UTPAL SHETH: This year is clearly going to be Rs.20 per share plus at the bottom line, which will still make it six and a half times present earnings. But in my opinion 2001-02 earnings will grow significantly. And therefore, I would say that I am valuing this company at less than five times its 2001 and less than three times 2002 . . .

Mr. CHETAN PARIKH: . . . And this is without factoring in any rupee devaluation.?

Mr. UTPAL SHETH: This is without factoring in any rupee devaluation. That is also the case with Goldiam.

Mr. CHETAN PARIKH: Any projection on the price target?

Mr. UTPAL SHETH: No price targets. I still believe that it can give above average returns from here.

Competitors made costly mistakes

Mr. CHETAN PARIKH: Utpal, there was one more concern about this business, the leather garments business. Could you tell us something about what happened to Namaste exports? They are, sort of, washed with red ink all over.

Mr. UTPAL SHETH: I think Namaste made very fundamental errors. Namaste went in with very high capital investments in setting up its own tanneries for the leather garment business. It also added on very high number of employees to have this backward integration. Where as, the average wage bill (excluding salaries for managerial staff) for Bhartiya is Rs.1.80 million. Everything is out-sourced. Therefore, in any downturn the quantum of hit that Namaste would have taken on its business would have been far greater. Namaste compounded it by taking on financial risk in the form of . . .

Mr. CHETAN PARIKH: Borrowings, large borrowings . . .

Mr. UTPAL SHETH: Yes, So when those two things hit simultaneously, Namaste just packed up. And to worsen the situation, I think there was a split within the management. Otherwise, Namaste had excellent product output quality and fairly good reputation. But, Namaste never went forward in trying to capitalize by design creation or in trying to brand its output. So it failed to remain ahead of the curve.

Punjab Tractors - Industrial Age and Agricultural Product

Mr. CHETAN PARIKH: Utpal, what's the next idea?

Mr. UTPAL SHETH: I would like to go back to the industrial age for the next idea. I think there is tremendous value in the Indian agricultural sector. And those producers catering to this sector, I think, will make merry in the future. One of the icons of the Indian manufacturing sector, I think, is Punjab Tractors. It should be a core holding in almost any defensive portfolio.

Mr. CHETAN PARIKH: Could you tell us something about Punjab Tractors. What the investment case for Punjab Tractors is?

Mr. UTPAL SHETH: Of the top 7 tractor companies in India - and probably in any Asian country - Punjab Tractors is the only producer without technology from any of the global majors. Its tractors are based on completely indigenous design, and are appropriately branded Swaraj. It has been able to travel up the value chain again, right from 22 HP tractors to as high as 55-60 HP tractors. And ensuring that in terms of ruggedness, in terms of durability, in terms of after sales service costs, and in terms of adaptability to soil condition in various states, this is a tractor of choice for the Indian farmer. This company has been extremely capital conscious and has a RoCE on its core business exceeding 70 per cent.

Mr. CHETAN PARIKH: Fantastic.

Mr. UTPAL SHETH: It has an incremental RoCE exceeding 50 percent and this company has tons and tons of cash on its balance sheet (Rs.600 million). This company has zero debtors.

Mr. CHETAN PARIKH: No debtors?

Mr. UTPAL SHETH: No debtors. All its sales are with advance payments. This company has one of the best track records even in the worst of times. The ability of this company to expand its geographical coverage has been exceptional and to believe that this company is a government sector company is I think ...

Mr. CHETAN PARIKH: It makes you wonder... You mentioned about the geographical diversification of Punjab Tractors. Basically, it was one of the last entrants into the Northern markets and still made a complete success of that. Has it penetrated into the South? South is the big market too. What's happening there? What is the Company strategy?

Mr. UTPAL SHETH: Punjab Tractors has achieved market share gains in every single region in the country consistently for the last 24 to 36 months. Bulk of its incremental growth is actually coming from the Western and the Southern markets. The best example that I can give you about this company is that Punjab Tractors is selling five times the tractors in Bihar today as compared to what it was selling maybe three years ago.

Mr. CHETAN PARIKH: Wow, was that a low base or...

Mr. UTPAL SHETH: Yes, it is certainly a low base effect, but it speaks for the ability to extend its geographical reach.

Withstood multinational onslaught . . .

Mr. CHETAN PARIKH: You know, there are large number of multinational tractor manufacturing players who have come down to India. No doubt they are now targeting the 55 HP plus sort of segment, and maybe there might not be a large enough market for all of them. But, due to these large capacity additions that are taking place, the market I think is moving from being a seller's to a buyer's market. And for New Holland etc, they have got very deep pockets. They can sustain a price war. Could you comment on what the likely scenario in the industry will be and how Punjab Tractors would fare?

Mr. UTPAL SHETH: If you analyze the cropping patterns in the country, the fragmentation of land holdings, less than 1 percent of Indian farmers can contemplate purchasing a tractor in excess of 60 to 80 HP, which is the strength of all the multinationals. At the lower end, only the existing players will be the competition. Don't forget that all the competition that Punjab Tractors has had for the last two decades is multinational Joint Ventures or alliances.

. . . and will withstand further competition due to cost consciousness and customer orientation

I don't think Indian farmers will be able to consolidate their land holdings as fast as China did. I do envision a steady move towards higher HP tractors. The move from 18 HP tractors to 30 HP tractors has already happened and also, a move from 30 HP tractors to 40 HP tractors is happening. Really speaking, the foreign entrants will have about as much impact as Volvo has had with its 12 ton trucks.

I must also reply to the other issue raised by you that it might become a buyer's market. Yes, it could become a buyer's market and whenever selling becomes difficult, the player with advance payments, who has been working on the lowest after sales cost to the consumer will win. A buyer's market will favor Punjab Tractors rather than harm it. In any case even if a price war is unleashed, being the least cost producer, Punjab Tractors will be best positioned to fight that war. It might hamper profit growth for a few years if it really transpires that way, but I have no doubt that Punjab Tractors will emerge the winner.

Mr. CHETAN PARIKH: Specially because of it's very good overhead cost control. It's margins are lower than the competition considering that it sources its engines from Swaraj Engines vs. the other players who are manufacturing them in-house but, you are right, in a price war the operating leverage is much lower in the case of Punjab Tractors.

Mr. UTPAL SHETH: Actually it's a tribute to the management of Punjab Tractors that it achieved such a high degree of outsourcing way back in the late '70s and early '80s whereas all the biggies in automobiles and tractors are talking about outsourcing today.

Market share gains, high cash generation and high sustainable RoE

Mr. CHETAN PARIKH: Could you give us some sort of clear comparison, the valuation case for PT against players like M&M and Escorts?

Mr. UTPAL SHETH: M&M is not a pure tractor company, so it will vitiate the comparison. M&M has also passed through a heavy corrective action phase, even that will make the comparison futile. And I think the same applies to Escorts. Really speaking, on a like to like basis, you can only talk of somebody like Eicher Tractors, which I think is not a very good comparison at all.

But, if you look at any performance parameters, either in terms of return on capital employed or in terms of wastages or in terms of labor cost per vehicle or in terms of growth rates; I think Punjab Tractors wins hands down on any and every parameter. Even though you cannot segregate the financial numbers for businesses for Escorts and Mahindras, if you could look at segregated real numbers, I think Punjab Tractors will be ahead on those.

Mr. CHETAN PARIKH: What would be the valuation case at the current price of Rs.1000 and odd of Punjab Tractors. What will be the current growth rate going forward?

Mr. UTPAL SHETH: Growth rates, going forward, that are sustainable in real numbers for this kind of business would be around 10 percent. I would anticipate Punjab Tractors to keep on taking away market share and therefore achieve maybe 14 to 15 percent real growth year on year. The management is very clear that it has not envisaged any nominal growth driven by price realization improvements, unless it really becomes an extreme case. Therefore, I would say that top line is expected to grow only at around 14-15 percent.

Mr. CHETAN PARIKH: In real terms, in volume terms.

Mr. UTPAL SHETH: But, the key driver is going to be its ability to contain its fixed costs and overheads and distribute them over an ever-expanding base of output. Although I believe that there is not much scope to reduce its variable costs; but Punjab Tractors consistently surprises investors by improving its contribution margins year on year. In FY99 and H1-FY00, for instance, it used its cash pile to extract huge discounts from material suppliers.

Mr. CHETAN PARIKH: So do you think that ROE figures will remain in the high 40 range, 45-48 per cent odd, as they have been in the past?

Mr. UTPAL SHETH: As of today Punjab Tractors is holding significant quantum of non-productive financial assets on its balance sheet. This will keep on expanding. It has two options: either it goes in for high dividend payouts, which it is already doing. It is the highest dividend payer in the country. Or, It may consider a buyback at an appropriate time. But, I think, Punjab Tractors will shift resources to a new third plant, as and when it feels that the demand is in place and the opportunity exists. It can set up plants to double its turnover with just one year's cash flow and existing cash on hand.

Mr. CHETAN PARIKH: Current capacity is 60000 and it might expand further its market share . . .

Mr. UTPAL SHETH: Right,

Mr. CHETAN PARIKH: . . . and use the cash surplus

Mr. UTPAL SHETH: Absolutely.

Mr. CHETAN PARIKH: What will be the earnings per share this year? Any idea about the numbers?

Mr. UTPAL SHETH: I think EPS numbers are not very relevant for this company. The cost per tractor for this company will continuously be diminishing. The company is ensuring that it remains contemporary in its output quality in terms of the aesthetics. It is also ensuring that it remains superior in terms of customization, for example, for the paddy grower in Andhra Pradesh the company has a different kind of accessory for the tractor. Very few companies are so open-minded and are willing to customize output. That shows the consumer focus of this company and their understanding of the needs of the customers. In terms of numbers, we can talk about a Rs.70 earnings per share for March 2000 and its a full tax paying company.

Mr. CHETAN PARIKH: Is it a 15 times PE multiple?

Mr. UTPAL SHETH: 15 times being the multiple for . . .

Mr. CHETAN PARIKH: . . . a 30 percent, 48 percent, 45 percent RoNW company . . .

Mr. UTPAL SHETH: Actually the RoNW you mentioned is not very indicative . . .

Mr. CHETAN PARIKH: . . . it's not from the core business, okay fine, so that's on a very conservative basis, I think it's not a demanding multiple . . .

Mr. UTPAL SHETH: . . . we anticipate a 25 percent plus compounded bottom-line growth going forward. . .

Mr. CHETAN PARIKH: . . . On just the 15 percent topline growth . . .

Mr. UTPAL SHETH: Yes!

Mr. CHETAN PARIKH: Fantastic. In this industry are there any second generation value models, like market capitalization per tractors sold etc. Are there any other valuation metrics that are used in this industry?

Mr. UTPAL SHETH: That would be misleading in my opinion, given that we're talking about a shift from a 18 HP tractor to a 40 HP tractor as the largest segment of the market. The inherent capabilities of these tractors are very different . . .

Significant moats

Mr. CHETAN PARIKH: . . . Granted. So what do you think are the moats of this business? Again there is a large amount of capacity that has come in, and one is confident that Punjab Tractors is going to hold its fort, and maybe increase its market share going forward. Do you see any sort of -- I mean, obviously the foreign multinationals are going to be testing their financial mettle against the entry barriers in this. So what would you say?

Mr. UTPAL SHETH: The service network is one of the biggest entry barriers, which is very positive for both Punjab Tractors as well as for Mahindras and maybe Escorts. And I don't think, given the size of the Indian agricultural sector and the rural sector and the demands of Indian environment, any carpet-bombing is possible. Nor is any smart bombing possible. Within the domestic players, I think Punjab Tractors is well placed, given its least cost structure, as well as, given its ability to react well to customer needs. Even though other players might catch up on each of these parameters, very clearly Punjab Tractors has demonstrated that it can stay one step ahead of its peers.

Just to give you an example, Punjab Tractors has this Harvester Combine Division. Traditionally, Eastern UP is a very good source for cheap labor, during the harvesting season and sowing seasons in North Punjab, which is one of the financially well-off segments of the agricultural sector. They have probably a hundred trains taking labourers from East UP to Punjab every year. Punjab Tractors has gone and sold 10 Harvester Combines in Eastern UP.

Second Agricultural Revolution - A big external opportunity

I am very confident that India needs, and will have, a second agricultural revolution sometime in the next decade. This will be driven by improvements in seeds, in crop management and protection systems, in the ability to use land for multipurpose activities, increase in the number of crop cycles, and the shifting of crop mixes. All of these will herald a very different agricultural environment for India. As India's food processing industry takes off, there is no go but to ensure that the agricultural sector maintains pace.

Ownership risk and Management succession risk

Mr. CHETAN PARIKH: What could make this investment a mistake at this price?

Mr. UTPAL SHETH: I think the big risk is that this company may not have any promoter at all. Punjab State Industrial Development Corporation keeps on disinvesting every year, as has been the case over the last two to three years. This is a pseudo-dilution acts as a sort of dampener. It's like a management selling its stake every year. Although in this case PSIDC is not the management.

The second big risk is management succession. One of the key members of the team that conceived and nurtured Punjab Tractors, Mr. Chandramohan has already retired. Mr. Yash Mahajan, the present Managing Director, was also part of the original team. He has successfully taken up the mantle of managing this company. He still has four years to go. At the end of four years, the true management depth of Punjab Tractors would be tested. Punjab Tractors is taking active steps to ensure that the key people in the organization are exposed to multiple functions so that they can have a very good overview of business and maybe they will be able to successfully make this transition. But, as of today, I do see it as a potential risk. One risk mitigating factor is that Punjab Tractors has always had a professional and stable management in the past that has been moulded in it's unique management culture.

Defensive stock in a defensive sector

Mr. CHETAN PARIKH: Any sort of comments on the price target that you see in Punjab Tractors. Is it a steady grower, say about 30 percent compounding returns for the next two to three years?

Mr. UTPAL SHETH: Historically, Punjab Tractors has definitely given more than this. Going forward, I'd be fairly happy with a 30 percent plus compounded price growth in Punjab Tractors. As I told you it's a very defensive stock in a defensive sector. People, I think, exaggerate the vulnerability of Punjab Tractors to monsoons. The true vulnerability is not to the monsoons, but to agricultural credit. As in commercial vehicles, leverage is a crucial determinant of tractor demand, as it ought to be, given the nature of Indian agricultural industry. But I don't see credit to this sector being constrained, because from the banks' point of view, of all forms of priority sector lending in India, tractor loans have a track record of the lowest NPA (non-performing assets). So, the Indian tractor sector as a whole - and Punjab Tractors in particular - should continue to do well over the long term.

United Breweries - united assets

Mr. CHETAN PARIKH: Utpal, you had mentioned another company of the UB group, United Breweries. What is the investment case there? There have been a lot of fireworks in the past one year and the share price has gone up very sharply. How do you look at valuation going forward?

Mr. UTPAL SHETH: UB is actually an inferior business to McDowell at the present time, but, if you ask me the potential for UB is far greater.

Let me clarify. In worldwide share of throat, the spirits to beer ratio is 1:7. In India the spirits to beer ratio, taking both the organized and unorganized sector together is in the vicinity of 7:1. Which means we're talking of 50 times differential between the two. We have reached this stage because brewing is a more capital intensive business than distilling and therefore there are greater entry barriers.

Secondly, given the levies, illicit liquor is actually available at far cheaper prices compared to mild beer. So, given India's economic conditions, 'kick for the buck' being the norm, beer stands no chance. And therefore over the last three years, we have seen the emergence of strong beer as a category, which actually satisfies this need, but, globally, strong beer is a very, very small component of the market. It is really lager beer, which is the key segment. The day the government begins to distinguish between beer and spirits in terms of the state levies and impositions, in terms of the restrictions on marketing and advertising, I think you'll see a huge opportunity in the beer business. Especially given India's demographics and given the huge purchasing power of the youth in India.

Having said that UB is presently an inferior business but might in future achieve far greater growth, the key element to UB's recent price run-up is re-structuring rather than the business.

Restructuring rewards for shareholders

What is the restructuring story? UB has real estate valued at approximately Rs.2.50 billion to Rs.3 billion in its balance sheet. UB also has equity investments exceeding rupees Rs.10 billion by the present market cap. And UB has its beer business. Its aggregate debt is only Rs.1.40 billion.

Mr. CHETAN PARIKH: What is the enterprise value of...