Hello Teddies,

Zudus Wellness replaces IDFC into The Equity Desk XI  - Zydus (CMP Rs 382) is a classic Peter Lynch spin-off, promoted by the Cadilla groups who have had a long history of rising sales and profitability. Zydus makes and sells Nutralite (Low cholesterol butter); Sugar Free and EverYouth range of face wash, scrubs and other skin care products. Stock trades at 18-20 times Fy11; Market Cap Rs 1560 crores; debt free with free cash flow; Top line should grow at more then 30% and the bottom line at more then that because of the high operating leverage resulting from 65% gross margin. Company is a dominant leader in all its products. In Sugar free for instance it has 82% of the market share and similarly it has a dominant share in all the other product lines. Company is aggressively contemplating extension of its different brands and should generate good returns.

The installation of its new Sikkim plant later this year will bring down the tax incidence of the company from the full rate to near about MAT.

This is a good play on the urban consumer focused on health and skincare - suffering from cardiovascular disease or diabetes. Additionally it also targets the consumer who believes in the adage “Prevention is better then cure”.

This business earns a RoE of more then 50% and works on negative working capital while the stock is not cheap who said good things ever came cheap?

The General Story: The last quarter has been quite good for the small and mid cap companies. Analysts cal this the catch up move but the fact is mid and small caps always tend to out perform the larger capitalized companies so whether the smaller companies are catching up to their old trend or to their larger capitalized counterparts needs no debate.

The analysts who are short of words say it is now a stock picker’s market. Now when was this ever not  a stock picker’s market? If the marker were not a stock picker’s market then the Efficient market hypothesis would have been in vogue and Index investing the most desired and profitable route so for anyone who is suggesting a stock picker’s market and did not suggest index investing earlier is actually displaying his incompetence rather then his skill. The market was, is and will remain to be a stock picker’s market if anyone thinks differently he can pick up a book on the efficient market hypothesis and invest in index funds.

The stupidity that goes along with predicting markets quarter wise has been clearly exposed. No one and his brother has successfully been able to predict markets so trying to make a case for a sector rotational strategy based on spring, summer, autumn and winter is a clear reflection of a confused state of mind.

Good businesses run by able and honest managers bought at reasonable (not necessarily cheap) valuations will outperform mediocre businesses.

The Ted XI Report Card is tabled below:

Basant Maheshwari