1. Learnings…
Ananth shenoy

2. 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

3. 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

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

5. 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 ?)

6. 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

7. 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

8. 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
perspective/10477
ALL this means SUPPLY GOING TO INCREASE

9. 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

10. 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??)