Learnings… Ananth shenoy

Usually excited by.. …the demand scenario Indian specialty chemical industry estimated at 25$bn growing 13% US Generics worth 50$bn will go off patent in next 4-5 years Indian housing finance – Housing for all schemes – Huge opportunity for HFCs Global agrochem CRAMS is 30$bn opportunity …the demand scenario

Capital Cycle – From Capital Returns Capital is attracted into high return businesses and leaves when returns fall below the cost of capital The process is cyclical The inflow of capital leads to new investment which increases capacity and pushes down returns Conversely, when returns are low, capital exits, capacity is reduced and profitability recovers Key is to understand how changes in capital employed in an industry is likely to impact future returns http://www.amazon.in/Capital-Returns-Investing-Through-Managers/dp/1137571640/ref=sr_1_1?ie=UTF8&qid=1501163865&sr=8-1&keywords=capital+cycle

Transformer industry - cyclicality Note: Crompton greaves pre-demerger not available, Alstom t&d – into multiple segments

Transformer Industry FY05-FY10 strong sales growth ROE FY09 FY08 Voltamp 42% 50% TRIL 16% 17% Bharat bijlee 25% 44% IMP 19% 28% FY05-FY10 strong sales growth FY09-FY10 every company reached peak operating margins FY08-FY11 almost every company took significant capex looking as ROE reached excellent numbers (FY08,FY09) Demand stopped increasing, causing OPM to plummet From FY11-17 industry capex is down Only TRIL took capex during this time (management showing counter cyclical behavior ?)

Management - capital allocation High profitability often leads to over confidence to managers and boost capital spending In good times of a industry, demand forecasts tend to be too optimistic by managers When returns are high, companies are inclined to boost capital spending Stock prices usually go on capex announcements

Pharma ROEs ROE FY13 FY14 FY15 FY16 FY17 Alembic 32% 34% 31% 45% 20% Torrent 30% 35% 50% 25% Lupin 26% 19% Sun 17% 15% DRL 24% 23% 18% 13% Auro 28% Glenmar 22% 12% 14% When returns are high, companies are inclined to boost capital spending

Significant increase in R&D/capex Last few years excellent ROEs for pharma companies Which is causing significant rise in capex/R&D spend in last two years Last two years R&D spend equal to that of previous 5 year Capex of last two years significantly higher than previous 5 years Almost every company will increase US filings significantly in FY18 http://forum.valuepickr.com/t/indian-pharma-industry- perspective/10477 ALL this means SUPPLY GOING TO INCREASE

Kenneth Andrade interview SUMMARY Usually supply side constraints give pricing power Usually in a country like India, demand will increase 5-7% But if capacity is not added in 3-4 years, profitability will increase disproportionately Demand/Growth is difficult to predict Supply is more predictable http://economictimes.indiatimes.com/markets/expert-view/time-to-monetise-financial-stocks-revisit-commodities-kenneth-andrade/articleshow/55259717.cms http://economictimes.indiatimes.com/markets/expert-view/there-is-opportunity-in-smaller-it-and-select-pharma-stocks-kenneth-andrade/articleshow/59048657.cms

Summary Look at how the investments is happening across the industry ( one of the main parameter is Fixed asset increase) Don’t get excited just looking at one company doing big capex (look at the asset growth across the industry) – the inside view Focus on studying supply side and the competitive positioning evolving instead of just demand side drivers. Read and focus more industry related articles regarding capacity increase/ capability increase Look for oligopolistic industries (easier to predict supply side changes/capacity increases) Supply side disruption can increase pricing power ( in real estate with RERA??)