December, 9 2019

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Dear Subscriber

Being part of a herd worked well for our earliest ancestors.

It was probably the best and only way to survive attacks from predators. And it may
take many more generations for human beings to shed that notion.

To this day, the elders in the family insist that youngsters follow religion, pursue
education, take up jobs and get married as per the family tradition. All with the
purpose of staying part of the herd and staying safe.

But thanks to Buffett, Munger and other value investing gurus, the herd mentality is
considered a sin in investing.

Every financial bubble known till date, starting with the tulip bubble, has its origins in
the herd mentality. Yet people get trapped in it time and again.

So, you have heard stories of investors who found comfort in Harshad Mehta stocks in
the early 1990s. Then dotcom stocks in 2000. And then real estate and infrastructure
stocks in 2007.

The herd mentality was that no one wanted to be left behind when everyone else
around them was making money in these stocks. And the consensus about the rising
stocks amongst the herd members, made everyone comfortable about them.

If you look for consensus today, bluechips have become a ‘no-go’ area. Simply because
the Sensex stocks appear far too expensive as compared to smallcap stocks.

In fact, if I were to ask you to list the drawbacks of blue-chip stocks, these are some
that might come to your mind.
• Low probability of being a multi-bagger
• Slow capital appreciation

• Not so great dividend yield (due to of higher stock prices)

You wouldn't be wrong.

The 2 Exponential Growth Stocks | 2

Yet, these are not convincing reasons to shun blue chips altogether. Remember there
are always exceptions.

Bluechips can, in fact, be a safe haven. Especially when smaller businesses are staring
at big disruptions.

The world is awash in technologies that are transforming the social and physical
landscape in which we live. These disruptions have reoriented consumers, businesses,
and the markets in ways few could have anticipated just a few years ago.

Pagers, wrist watches, landline phones, Sony Walkman, Yellow Pages, travel and
insurance agents and restaurant guides were all victims of disruption. Exponential
change is already remaking the investment map. And more shape-shifting is likely in
store.

The need for agility remains constant. Companies which have the experience of tiding
over disruptions and the moat to remain sustainable, will see exponential growth
over the long term.

I have identified two bluechip stocks for you which I believe have a long runway of
exponential growth ahead of them, simply because of the nature of the businesses.

Do take note of the maximum buy price and maximum allocation to these stocks.

Happy investing!

Tanushree Banerjee
Editor, StockSelect
Equitymaster Agora Research Private Limited (Research Analyst)

3 | The 2 Exponential Growth Stocks

MNC that is 'Power'ing India's Capex Cycle with its R&D
The government accounted for 68% of infrastructure investments between financial
year 2012-13 and 2016-17. In the previous five years (between financial year 2007-08
and 2011-12), the government's contribution was 63%. So, typically two thirds of all
infrastructure capex, in India, are government funded. But a narrow fiscal headroom
leads to capital constraints for government led capex. It is here that banks, especially
public-sector banks and NBFCs, must step in.

Growth in bank lending to the infrastructure sector plummeted to 4% in the last

five years from 28% in the previous five. And this was amply reflected in the sharp
slowdown in infrastructure capex. In fact, while industrial and infrastructure capex
grew 400% between FY00 and FY10, the past decade saw growth of just 50%.

Much Needed Recovery in Infra Capex Around the Corner

The 2 Exponential Growth Stocks | 4

That means the private sector, whose share in infrastructure spending has fallen to
29% from 35% in FY16, needs to start showing better traction.

However, in recent months, banks have become reluctant to lend to non-banking

financial companies (NBFCs), after the recent IL&FS fiasco. This resultant liquidity
crunch has increased the cost of funds for most NBFCs. And infrastructure companies
have been the worst affected by the drying up of credit.

The funding gap in infrastructure has been difficult to fill. CRISIL estimates the
cumulative funding gap for infrastructure capex could be around Rs 15 trillion in
FY19. Meanwhile, thirty engineering and construction (E&C) companies have an order
backlog of US$ 119 bn. Of this, the power sector alone accounts for 27%.

In a bid to accelerate GDP growth and create jobs, the new government is
expected to focus on its Rs 100 lakh crore infrastructure sector plan. It may also
raise funds by issuing government backed infrastructure bonds.

Cummins is a world leader in power capital goods equipment. It is also one of the few
multi-national capital goods companies in India, which houses the global research
and development center in India. Cummins does global R&D in Pune, the spend on
which is equally shared between Cummins Inc and Cummins India.

What is also comforting is that Cummins like its peers MNC peers, has sufficient cash
and very low debt on its books.

Therefore, as the cycle of infrastructure activity in India takes an upward turn over the
next five years, Cummins India, could be amongst the few capital goods companies,
powering it with its R&D capabilities.

The Upside Potential

Cummins India, given its market leadership in the domestic genset segment, strong
after-sales service and distribution, and its preparedness to take advantage of the
upcoming changes in emission norms, seems very well poised to ride the upturn in
infrastructure capex.

5 | The 2 Exponential Growth Stocks

Exports may continue to remain a bleak spot in the near term given the decline
in demand for HP engines from its parent. But, we are upbeat on the long-term
prospects of exports as we expect capex cycle recovery in the key markets of Europe
and Africa, post firming up of oil and base metal prices.

Further, Cummins India has done much better with rising production mandates
from the parent entity, over past two to four years. This reflects the latter's higher
confidence in Cummins India.

We recommend subscribers to buy the stock at the current price.

The FY23 target price for the stock is Rs 990. The stock is expected to generate
CAGR of around 20% (excluding 2.2% dividend yield) over the next three to four years
from the recommended buy level.

According to us, in a scenario of ideal allocation of funds, bluechip stocks could be

considered to comprise at least 60% of one's total equity portfolio. Further, we believe
that a single bluechip stock should ideally not form more than 5-6% of the total
portfolio. However, please note that this allocation will vary from person to person.
For something that works best for you, we recommend you talk to your investment
advisor.

Action to Take

• Buy Cummins India at current price or lower

• Maximum Buy price: Rs 650

Valuation Rationale
At the current price, the stock of Cummins India is trading at a multiple of 25 times
our estimated FY22 earnings per share.

The 2 Exponential Growth Stocks | 6

Cummins India has traded at an average price to earnings multiple of 25 times
over the past 10 years and 30 times over the past 5 years. Having said that,
Cummins' average return on equity during FY14 to FY19 has been 21% as against
25% in the previous decade. We value the stock at 22 times estimated FY22 earnings.

7 | The 2 Exponential Growth Stocks

Financials at a Glance

Consolidated (Rs mn) FY17 FY18 FY19 FY20E FY21E FY22E

Sales 51,064 51,119 56,973 62,944 71,718 81,741
Sales Growth 8% 0% 11% 14% 14% 14%
Operating Profit 8,011 7,323 8,646 11,582 13,196 15,040
Operating Profit Margin (%) 15.8% 16.5% 17.4% 18.4% 18.4% 18.4%
Net Profit 7,363 7,118 7,426 9,968 11,133 12,471
Net Profit Margin (%) 12.0% 12.1% 11.4% 15.8% 15.5% 15.3%

Balance Sheet
Current Assets 20,249 27,241 31,859 34,338 39,640 45,981
Fixed Assets 16,971 13,285 14,456 16,195 17,727 19,144
Other Assets 14,924 16,622 14,288 17,100 17,376 17,680
Total Assets 52,143 57,148 60,603 67,634 74,743 82,804

Current Liabilities 12,159 14,560 15,341 14,108 16,075 18,321

Debt Funds 2,521 2,568 3,126 - - -
Net Worth 38,711 41,186 42,830 48,140 53,268 59,066
Other Liabilities (1,248) (1,166) (694) 1,432 1,448 1,464
Total liabilities 52,143 57,148 60,603 63,681 70,790 78,851

Valuation Table FY17 FY18 FY19 FY20E FY21E FY22E

Revenue (Rs mn) 51,064 51,119 56,973 62,944 71,718 81,741
PAT (Rs mn) 7,363 7,118 7,426 9,968 11,133 12,471
Adj. EPS (Rs) 26.6 25.7 26.8 36.0 40.2 45.0
Price to earnings (x) 19.6 20.3 19.4 14.5 13.0 11.6
Price to sales (x) 2.8 2.8 2.5 2.3 2.0 1.8
Price to book value (x) 3.7 3.5 3.4 3.0 2.7 2.4

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Market Data
Price on 6 December 2019 (Rs) 521

52 week High/Low (Rs) 885 / 520

NSE symbol CUMMINSIND

BSE code 500480 

No. of shares (mn)* 277.2

Free Float (%) 49.0

Market Cap (Rs mn) 144,421

Face Value (Rs) 2

FY18 DPS (Rs)* 17

Dividend Yield (%, FY19 at current price) 3.3%

Shareholding (September 2019)

Category (%)
Promoters 51.0

Banks, MFs, FIs 30.0

Other Institutions 8.0

Indian Public 8.8

Others 2.3

Total 100

9 | The 2 Exponential Growth Stocks

HDFC's Loss Was this Rating Agency's Gain. The Rest is
History...
Pradip Shah, a young management graduate from Harvard, working with HDFC,
wrote to IFCI Chairman S.S Nadkarni, in 1986. IFCI was then India's leading financial
institution. Shah, had already been marked out for a leadership role by HDFC's
founder, H T Parekh. But he suggested to Mr. Nadkarni that IFCI should start a
credit rating agency.

Those were early days of foreign investment in the auto sector and easing of import
of white goods. Stock market growth was at a nascent stage. And the concept of a
credit rating company, though popular in global markets, was still alien to Indian
firms. This was also an age when individual banks did not have the freedom to
decide lending rates.

Before Mr. Nadkarni could respond, he was moved to IDBI. Pradip Shah then took
the idea to N Vaghul, the head of another top financial institution then, ICICI. Vaghul
quickly bought into the idea, and threw ICICI's weight behind the venture.

Although HDFC and Mr Parekh were reluctant to let go of Shah, he went on to

set up India's first credit rating agency, CRISIL in 1987. Pradip Shah as Managing
Director and N Vaghul as Chairman of CRISIL, roped in Asian Development Bank as
an investor.

Policymakers, including regulators, intermediaries and importantly, issuers of debt

papers such as listed companies, had to be educated about CRISIL's relevance.
The new rating firm had to invest in long hours of discussions with company
managements.

CRISIL's business took off in a few years after companies realized that a good
credit rating could help them borrow at cheaper rates compared to competitors.
In the pre-liberalisation days, financials and business models of even the biggest
corporates were far from being accessible and transparent. As India opened up in
the first half of the 1990s, the Finance Ministry reached out to CRISIL on possible
policy measures.

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By 1994, CRISIL was well positioned to ride on the back of the prevalent investor
euphoria. It had already rated about 200 debt instruments worth Rs 42 billion,
including fixed deposits, debentures and commercial paper. Post listing, CRISIL
diversified into areas such as advisory services, risk solutions, rating of IPOs and
mutual funds, grading real estate firms, etc.

The world's largest rating agency, Standard & Poor's (S&P), started buying stake in
CRISIL from 1997, until it had majority control by 2005.

CRISIL, today stands as a Rs 17 billion global credit rating and analytics company
with overseas research centres in Argentina, China, Singapore, Hong Kong, Poland,
the US and UK. CRISIL Research is India's largest independent research house
covering nearly 70 industries and serving more than 1,200 Indian and global clients.

CRISIL's Journey Over 3 Decades

11 | The 2 Exponential Growth Stocks

In 2017, market regulator SEBI asked rating companies to downgrade any
company to 'junk' if it misses loan repayment. That was part of India's war on
over Rs 8 trillion non-performing assets (NPAs) in the banking system. To prevent
any conflict of interest, the RBI also proposed that the rating agencies be paid from
a fund to be created out of contributions from the banks and the RBI.

Making rating agencies the watchdog of quality of bank loans has clearly
made them more systemically important. And being the leader of the pack, in a
market where there are just four critical players (ICRA, CARE and India Ratings being
the other three), CRISIL is very well positioned to ride India's lending reforms and
economic revival.

The Upside Potential

Credit rating agencies trade at steep valuations on the back of oligopolistic market,
asset-light nature of the business, limited capex requirement and strong operating
cash flow. Their incremental profit growth and good deployment of cash leads to
healthy return ratios. Dividend payout is also on the higher side for these firms.

CRISIL is no exception. Being the market leader in the sector supports high pricing
power. Also, CRISIL's diversified revenue steam de-risks it from rating cyclicality.
And as we wrote earlier. CRISIL has been a consistent dividend payer for nearly two
decades. The healthy dividend acts as an additional safety net for investors.

Based on our estimates, we have arrived at the target price Rs 2,066 for
CRISIL, from FY21 perspective. Although muted capex and credit demand may
temper revenue and profit growth in the near term, we believe that its business
model will allow CRSIL to beat the benchmark index in terms of long term returns.

Although we have valued the stock at the highest spectrum of valuation band,
we believe that the current valuations of the stock warrant some more margin of
safety.

Thus, we recommend subscribers to consider buying the stock of CRISIL at

the current price. The FY21 target price of Rs 2,066 implies a CAGR of 14%
including the current dividend yield of 1.6%.

The 2 Exponential Growth Stocks | 12

According to us, in a scenario of ideal allocation of funds, bluechip stocks could
be considered to comprise at least 60% of one's total equity portfolio. Further, we
believe that a single bluechip stock should ideally not form more than 5-6% of the
total portfolio. However, please note that this allocation will vary from person to
person. For something that works best for you, we recommend you talk to your
investment advisor.

Action to Take

• Buy CRISIL at current price or lower

• Maximum Buy price: Rs 1,660

Valuation Rationale
At the current price, the stock of CRISIL is trading at a multiple of 39 times trailing
twelve month earnings.

CRISIL has traded at an average price to earnings multiple of 34 times over the
past 10 years and 40 times over the past 5 years. We value the stock at 27 times
estimated FY21 earnings.

13 | The 2 Exponential Growth Stocks

Consolidated Financials at a glance

(Rs m) CY16 CY17 CY18 CY19E CY20E CY21E

Revenue 15,475 16,585 17,485 19,596 22,269 25,432
Revenue growth (%) 12.1% 7.2% 5.4% 8.9% 13.6% 14.2%
Operating profit 4,433 4,553 4,712 5,791 6,714 7,668
Operating profit margin (%) 28.30% 26.20% 28.70% 29.6% 30.2% 30.2%
Net profit 2,943 3,044 3,631 4,047 4,749 5,493
Net profit margin (%) 19.0% 18.4% 20.8% 20.7% 21.3% 21.6%

Balance Sheet
Current assets 20,387 5,674 6,419 10,722 13,075 15,896
Fixed assets 3,830 3,982 5,073 3,064 3,045 3,001
Investments 4,651 5,254 4,766 4,549 4,549 4,549
Other non current assets 60 37 79 744 838 948
Total Assets 28,929 14,947 16,338 19,078 21,507 24,394

Current liabilities 3,852 4,287 4,759 6,075 6,848 7,821

Net worth 9,854 10,486 11,363 13,095 14,709 16,577
Deffered tax liabilities (172) (348) (568) (385) (385) (385)
Other Liabilities 147 175 216 294 334 381
Total liabilities 13,681 14,600 15,770 19,079 21,507 24,394

(Rs m) CY16 CY17 CY18 CY19E CY20E CY21E

Revenue (Rs m) 15,475 16,585 17,485 19,596 22,269 25,432
PAT (Rs m) 2,943 3,044 3,631 4,047 4,749 5,493
EPS (Rs) 41.3 42.6 50.4 56.4 66.1 76.5
Price to earnings (x) 39.8 38.5 32.6 29.1 24.8 21.5
Price to sales (x) 0.1 0.1 0.1 0.1 0.1 0.1
Price to book value (x) 11.9 12.0 11.1 9.0 8.0 7.1

The 2 Exponential Growth Stocks | 14

Market Data
Price on 6 December 2019 (Rs) 1,642

52-week High/Low (Rs) 1676 / 1135

NSE Symbol CRISIL

BSE Code 500092

No. of shares (m)* 72

Free float (%) 32.6

Market cap (Rs m) 118,716.6

Face value (Re) 1.0

CY18 DPS (Rs)* 30.0

Dividend Yld (%, CY18 at current prices) 1.8%

Shareholding (%, September 2019)

Category (%)
Promoters 67.4

Indian public 32.6

Total 100

15 | The 2 Exponential Growth Stocks

 DISCLOSURES UNDER SEBI (RESEARCH ANALYSTS)
REGULATIONS, 2014

INTRODUCTION:
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Disclosures under SEBI (Research Analysts) Regulations | 16

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17 | Disclosures under SEBI (Research Analysts) Regulations

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Top 5 Stocks of The Thousand Crore Club | 18