Global Challengers 2011

Earlier this year BCG (Boston Consulting Group) came up with BCG Global Challengers 100 list, rising stars from rapidly developing economies are reshaping global industries. The 2011 global challengers are a diverse group, reflecting the dynamic nature of global competition. The list came from 16 countries, with China, India, Russia, Brazil, and Mexico dominating the list –although less so then they did in previous years.

Western corporate now fully recognize – even if they don’t understand – the rise of companies with global aspirations from rapidly developing economies. Established western brands such as Jaguar and Land Rover are now owned by Tata Group of India. Huawei Technologies and ZTE, both of China, are the second and fifth largest global manufacturers of mobile equipment, ranked by overall revenues. Mexico’s Grupo Bimbo is the largest bread baker in the world. Brazil’s JBS, the largest meat producer; and Russia’s United Company Rusal, the largest producer of aluminium. Revenue from these global challengers rose 18% annually from 2000 through 2009, triple the average annual growth achieved by both global peers and non-financial firms from S&P 500. All this reflects in return created by these global challengers. A long term, emerging market investor earned 17% p.a. compared to -0.7% from S&P 500 and 0.5% from Global peers.

The economic downturn took a tall on the total shareholder return of nearly all companies. But the performance of the global challengers has bounced back more quickly and strongly than that of other companies. It is very important for Long Term investors from developing economies to look at this new wave of growth engines of future. In 2011, BCG listed 20 companies from India, next only to china. This has been the greatest shift since 1999.

Seven Global challengers are from conglomerates; the most notable is Tata Group from India, which is operations in chemicals, communication, IT, beverages, automotive and steel sector. Over the last decade, the Tata Group has completed cross-border acquisitions whose value exceeds $17.5 billion. Tata Group now owns global names like Anglo-Dutch group Corus, General chemical industrial product, Eight’O Clock (a leading Coffee brand), Land Rover, Jaguar, British Salt and Tetley Tea. The Tata Group works collaboratively with its acquisitions. The acquired companies generally remain separate organizations and have operation freedoms. Tata also emphasizes the retention of top managers. The link that holds the acquisitions together is Tata’s corporate centre.

List of Indian companies part of BCG Global Challengers 2011

Name	Price (INR)	Market Cap (INR in Billions)	P/E
Bajaj Auto	1640.00	474.94	13.72
Bharat Forge	284.35	66.37	18.99
Bharti Airtel	377.90	1435.47	19.88
Crompton Greaves	137.90	88.43	13.93
Dr. Reddy Laboratories	1530.15	259.28	23.51
Hindalco Industries	121.65	233.09	10.37
Infosys Technologies	2722.70	1563.35	22.83
Larsen & Toubro	1336.00	816.08	20.22
Lupin Pharmaceuticals	465.00	208.32	28.63
Mahindra & Mahindra	801.10	492.44	18.19
Reliance Industries	835.40	2736.58	12.50
Suzlon Energy	36.15	64.34	19.33
Tata Chemicals	308.90	78.53	21.38
Tata Communications	182.70	52.16	30.91
Tata Consultancy Services	1048.25	2054.79	22.68
Tata Global Beverages	84.90	52.38	20.60
Tata Motors	177.95	526.25	31.06
Tata Steel	432.15	415.34	4.37
Vedanta Resources*
Wipro	353.90	870.12	16.30

 * Not Listed in India

Revenues at Indian equities are growing annually at more than 20% for last 3 years and are expected to grow at 20-30% for next 5 years. India provides a unique investment opportunity to create a lifetime wealth for long-term investors. Indian equities provided 717% returns in last 10 years compared to -0.7% for S&P 500.

For more information, please call us at +91-9925001805 or email us at investors@pisquareinvestments.com

-Vishrut Pathak

Pi Square Investments

(Download detailed copy of this report at  http://www.bcg.com/documents/file70055.pdf)

Steve Jobs – Visionary, Inventor, Leader and above all the greatest entrepreneur

In India, we find it difficult to replicate FaceBook, Google or Apple business models where inherited entrepreneurship and wealth accumulation works against product innovation and long term sustainability. Even at “Local Innovation” Infosys or Tata Nano are still rare case-studies.  Let’s introduce innovation or product valuation in financial valuation models. As Apple and Pixar’s example show, investing in firms that have an innovation edge can generate returns few other investment styles can beat.

Steve Jobs will perhaps be best remembered for the innovative devices and industry-changing technologies he built as co-founder Apple Inc. Apart from his huge impact on the computing industry; the Silicon Valley entrepreneur has left an indelible mark on the entertainment and cell- phone industries. Besides, through the computer animation work of Pixar Animation Studios Inc., he has had a large influence on the movie-making business as well.

Steve Jobs, an entrepreneur taught Investors that product innovation and product placement is more important in the business world compared to quarterly financial success and wall-street views. Apple’s investors gained 17.25% since company’s initial public offer more than 31 years ago. While in his second innings Steve Jobs leadership and vision resulted in 39% annual average rate of return compared to 1.5% for S&P 500 Index. $10,000 invested with Apple from July 1997 would turn in to $1.1 million in October 2011 (10,000% return in 14 years)

Apple not only redefined business case studies in management schools but also re-created history in product innovation. It’s an “ijourney” for Investors from iMacs to iTunes to iPods to iPhones to iPads. Today Apple is the world’s most valued company with fraction of sales compared to companies like ExxonMobil or Wal-Mart. Apple’s sales grew from $4 billion in Q4 2006 to $18 billion in Q4 2010 (4X in 4 years). Apple began selling iPhone in June 2007. Job’s goal was sell 10 million of them in 2008, equivalent of 1% of the global cellphone market. The company sold 11.6 million iPhones in 2008.

My Apple investments introduced me to P.I (product innovation) ratio which I find much more important than commonly discussed P.E (Price Earning) ratio or D.C.F models (Discounted Cash Flow).  Retail investors, looking for long term capital appreciation should look at leadership, product innovation, and product growth cycles. As Peter Lynch famously quoted “I find more investment opportunities in a shopping mall than on balance-sheets”. Look for next opportunities around you - in your shopping baskets, in malls, in banks, in movie-theatres.

In Financial valuations, we need to introduce product innovation premium. Let’s not judge a company based on P/E (Price/Earnings) or ROE (Return on Equity) alone. We need to understand leadership and products as a consumer before we invest our hard-earned money in capital markets. How many investors accumulated Apple shares when they bought their first iPod or iPhone? I was happy to off-load my Apple shares in 2009 with just 50% returns (loosing most of those gains in Mutual Funds in 2011).  Investors need to evaluate his or her portfolio every quarter but I recommend that we allocate 10% of our funds to companies with strong brand recognition and product innovation.

An era of Innovation – “24/Feb/1955 – 05/Oct/2011”

Thanks,

Vishrut Pathak

Pi Square Investments