RNRL = RCOM = RINFRA

The three stocks are moving in tandem for the last one and a half years, more since october 2008.

Where are the losses coming from?

I was looking at the annual results of Exide Industries for the last five years. I found big losses in the associated companies mentioned in their consolidated profit and loss statement for year 2008 and 2007, Page 192. The big divergence between standalone results and consolidated results started with FY2006 when the standalone company's net profit was around INR 100 Crore and consolidated profits were only INR 72 Crore. Between 2003 and 2005, the associate companies were making profits as shown in annual reports of 2005, Page 141, and 2003, Page 81. The difference between standalone and consolidated results have become quite wide as can be seen in 2009, 2008 and 2007. The subsidiaries mentioned in their annual report as well as on their website are all profitable. The loss of associates was around INR 88.45 Crore in 2007, INR 95.35 Crore in 2008 and INR 99.59 Crore in 2009. The 2008 annual report is in image scanned format so I am unable to search for text inside and is a tedious job to find more about this. Leaving it to others to find out. Found the name of the associates companies in 2009, ING Vysya Life Insurance and CEIL Motive Power Pty. Limited. Insurance seem to be a pretty tough business.

Let's discuss P/E

The biggest criteria for selection of a stock for Ben Graham was P/E. Most of the people talk about a stock or index trading at a P/E ratio of X or Y. But Ben Graham never considered one year's results very important. He always liked to take averages. So I took five year averages of Nifty EPS and calculated Nifty P/E for average of five years earnings. Since the Nifty P/E data is available only from 1st January 1999, I could only start my average EPS from 1st January 2004. We had seven significant corrections between January 2004 and today. The P/E ratios of Nifty at the peak and at the bottom of this corrections were as below:

Top Start	Top Nifty P/E	Bottom End	Bottom Nifty P/E
9 Jan 2004	28	17 May 2004	19.32
8 March 2005	26.46	29 April 2005	22.6
4 Oct 2005	28.91	28 Oct 2005	24.78
10 May 2006	36.17	14 June 2006	24.85
7 Feb 2007	35.04	5 Mar 2007	29.17
8 Jan 2008	42.51	27 Oct 2008	14.68
10 Nov 2008	18.2	9 Mar 2009	14.21

The Nifty P/E of last five years' average EPS had rallied to 19.01 till 15th April but has come down to 18.93 as of 25th April. The 14.21 P/E of Nifty's average EPS of last five years is the lowest among the last five years. The investors really remained very enthusiastic between 2004 and 2008. At the peak of 8 Jan 2008, the ratio of last year's EPS and average of five year's EPS was about 1.53, high compared to 1.15 today. The P/E fell below 20 only after 15th October when Nifty went below 3500 and is below 20 over the last six and a half months. It seems good investment opportunities were searching for investors in the last six and a half months. Where were you?

The impact of competition on profits

Let me give you an example of what impact the competition has on company's profits. Following are the profits of two companies:

Year	Profit 1	Profit 2
1992	98.48	21.5
1993	127.27	33
1994	189.96	40.5
1995	239.22	53.2
1996	412.7	54.2
1997	580.25	74.3
1998	837.44	86.2
1999	1069.94	98.5
2000	1310.09	118.6
2001	1540.95	173.15
2002	1701.46	201.52
CAGR 1992-2002	32.96%	25.08%

Now look at the results of these same companies after 2002:

Year	Profit 1	Profit 2
2002	1701.46	201.52
2003	1771.79	263.08
2004	1208.4	251.92
2005	1408.1	309.57
2006	1890.53	315.1
2007	1914.88	413.81
2008	2117.18	534.08
CAGR 1992-2002	3.71%	17.64%

The first company is none other than HUL and the second one is Nestle. Both of them started on the same footing in 1992 where HUL's profits were almost 4.5 times that of Nestle. Since there were no competition, HUL ran up very fast to achieve a ratio of almost 11(1310.09/118.6) in 2000, more than twice what it was in 1992. Then P&G and Colgate realized the potential of India becoming huge market, increased their penetration and threw HUL on the back foot. Look at the sluggish growth of HUL between 2002-2008. The FMCG market has grown phenomenally well over the last 6 years but HUL couldn't capture most of it since the competition went ahead of it. We can conclude that the profits of HUL between 1995-2002 were inflated because of no real competition from anybody. When you invest in a blue-chip, make sure it is facing tough competition otherwise your investment will go sour.