Capital Market

capital market is a market for securities which can be either debt or equity, where business enterprises which includes companies and governments can raise long-term funds. In other words it is defined as a market in which money is provided for a period of more than a year.

The capital market includes the stock market where the equity securities are traded and the bond market where the debt securities are traded. Financial regulators, such as the India’s Securities and Exchange Board of India (SEBI) or the U.S. Securities and Exchange Commission (SEC), oversee the capital markets in their designated jurisdictions to ensure that investors are protected against fraud, among other duties. Certain rules and regulations are formulated by them which must be adhered to so as to safeguard the interest of the investors.

Classification of Capital Market

Based on the type of securities traded capital market is divided into two parts: stock market and bond market.

  • Stock Market A stock market or equity market is a public entity for the trading of company stock i.e., shares and derivatives at an agreed price. For Example: Bombay Stock Exchange or BSE is one of the oldest stock exchanges and also enjoys its stature of being the fourth largest stock exchange in Asia, deals with the trading of securities where about 5,085 Indian companies are listed.

Read On GWI How to invest in the India Stock Market where Management Quality is a choice between Bad and Ugly.

  • Bond Market The bond market which is also known as the credit, or fixed income market is that part of capital market market where participants buy and sell debt securities which are usually in the form of bonds. The Securities Industry and Financial Markets Association, SIFMAclassifies the bond market into five different specific segments:
    • Corporate
    • Government & agency
    • Municipal
    • Mortgage backed, asset backed, and collateralized debt obligation
    • Funding

Also the Capital markets may be classified as primary markets and secondary markets based on the nature of trading facilitated by it.

  • Primary Market – It is that part of capital market in which new stock or bond issues are sold to investors via a mechanism which is known as underwriting.
  • Secondary Market – It is that part of capital market where the existing securities are traded among investors or traders usually on a securities exchange, over-the-counter, or elsewhere,

Challenges of the Indian Capital Market

Indian Economy is the tenth largest economy in the world by nominal GDP and the fourth largest by purchasing power parity (PPP). Following a strong economic reform post-independence socialist economy, the country’s economic growth progressed at a rapid pace, as the LPG policy was implemented in 1991 for international competition and foreign investment. Despite fast economic growth, India still faces massive income inequalities, high unemployment and malnutrition.

Following are the main challenges which act as a hurdle in the growth of capital market:

1) Inflation – Inflation is the rate at which the prices for goods and services are rising and subsequently, purchasing power is falling. The inflation situation in the economy continues to be a cause of concern. Despite tightening of the monetary policy by the apex of India, RBI and other steps taken by the government, inflation continues to remain close to the double digit mark. High international oil prices, high global food prices are some of the causes of high inflation.

2) GDP – The growth figures for Indian economy are highly disappointing and highlight an unmistakable downward trend. GDP is expected to grow by ~5-6% 2012-13. Sectors like manufacturing and mining have seen a considerable erosion of growth momentum.

3) Index of Industrial Production – Weakness in industrial production trend continues to be a point of concern for the economy. The recent IIP numbers was registered below expectation. Weakness was seen with growth in the capital goods segment, intermediate goods segment and consumer goods segment which slowed down drastically during these months.

4) Population – The current population of India is over 1.23 billion, making it the second most populous country in the world after China, with over 1.35 billion people. India represents almost 17.31% of the world’s population which is a serious concern. If the trend of growth continues, the crown of the world’s most populous country will move on India from China by 2030. The population growth rate is at 1.58% with which it is predicted India would reach 1.5 billion mark by 2030.

India’s Population in 2012 1.23 billion
Population of India in 1947 350 million


5) Non uniform Tax reforms – With the non uniformity in the tax system across the states it is a difficult task to carry out the businesses which resulted in undergrowth of the same. The different tax rates implemented in some states across pan India is a major challenge to carry out the business smoothly and also it accounts for a reason of increasing prices of goods and services.

6) Foreign Policy – Foreign investment flows into India saw a dip of about 17% in the year 2010-11 over the previous year. This dip is largely on account of a slowdown seen in case of FDI. In 2009-10, FDI inflows totaled US$ 37.7 billion which was reduced to US$ 27 billion in 2010-11. Of the top 25 sectors, 15 sectors have seen a dip in FDI flows during April – Feb 2010-11, compared to the same period in 2009-10. These sectors involve services, construction, housing and real estate, telecommunication and agricultural services, where investment flows have slowed down considerably.

7) Education and Unemployment9.4 % of the population is unemployed which is yet another alarming issue for the growing nation. The literacy rate in India is 74.04% as of April 2011 which constitutes of 65.46% females and 82.14% males. The literacy rate is increasing but the rate of increment is low, which again is a matter of concern.

8) Poverty – About 37 % of Indian population lies below poverty line which is a very alarming situation for a growing economy like India. The main reason for such diversity is the uneven distribution of wealth in the economy where a handful of people are the owner of maximum revenue and the majority of the population is too poor to even arrange for their daily bread. The distribution of wealth in India resembles the pyramid model. The pyramid states that the base of the pyramid is the poor people which is maximum in number, while the high net worth people is very few in numbers which resembles to the top of pyramid. As the wealth increases the number of people in the category decreases.


Though it is very difficult to conclude about the capital market in short but still to maintain the legacy it should go on like:

Indian market is a booming market; it has scope of development in sectors like Pharmaceuticals, Retail industry, Automobiles, Education, etc. FDI should be allowed in sectors to attract the foreign investors though keeping our own economy stable of its own and not mostly dependent on global market. Inter and Intra terrestrial issues should be dealt with proper policy making and divestment of PSU’s and inviting private players in sectors like Railways, Infrastructure should be done so as to boost the overall growth of the economy and thus the market as it is the market which drives the economy and vice-versa.

“Market and Economy are the two sides of the same coin and cannot be separated”

Andhra Pradesh which is the largest southern Indian state has seen a good response to its tender for 900 MW of solar capacity. The state is using the tried and tested solution of reverse auction to promote solar energy in the state. Indian states particularly the southern ones are heavily power deficient with industries leaving the state due to lack of power. Thermal plants have run into huge time and cost delays, due to problems in procurement of fuel as environmental issues. Solar Energy is environment friendly and also can be set up quickly. More importantly it does not need fossil fuel which India does not have.

Other states like Gujarat and Tamil Nadu have also held successful subsidy schemes. TN is already implementing a scheme to boost solar energy by ~1 GW a year. Andhra Pradesh looks like it will manage to successfully follow the examples of others. The prices of the solar bids were to be known in March. Reverse auctions have led to sharper fall in solar energy power prices and current expectations are for bids as low as ~11c/kwh. This is a huge fall from the ~20c/kwh solar prices seen in the JNNSM solar auction 3 years ago. At that time this 20c/kwh had surprised analysts for being too low. The continuous solar panel price declines have made even these super low price fall by another ~50%, thanks to the Chinese manufacturing juggernaut.

Andhra Pradesh Solar Policy

AP had earlier announced a solar policy in which it had given a number of sops such as there will be no wheeling and transmission charges for wheeling of power generated from the Solar Power Projects, to the desired location/s for captive use/ third party sale within the state through 33 KV system, subject to industries maintaining their demand within its contracted demand. Cross subsidy surcharge shall not be applicable for Open Access obtained for third party sale within the state subject to the industries maintaining their demand within its contracted demand with the DISCOMs.

All Solar Power projects will be exempted from paying Electricity Duty for captive consumption and third party sale within the state. All projects developed with the above incentives will also be eligible for REC benefits. Deemed injection into the grid for in-house captive solar generation plant (in the same premises) will be considered for issue of REC. Solar projects will get refunds on value-added tax paid for equipment and on land duty and registration charges for sites. Fast Track Approval Process permits to build grid connections within 21 days. These incentives will be in force for a period of seven years from the date of implementation. New and Renewable Energy Development Corporation of A.P. Ltd (NREDCAP) shall be the State Govt. Nodal Agency for clearance, facilitation and implementation of the proposed Solar Power Policy. These incentives will be available for 7 years for solar power plant developers building a solar panel plant till June 2014.

The Policy has been tweaked now with the government giving out solar power plants using a reverse auction tender for 1160 MW to make the process more transparent.

Read more about Solar Panels in India – Complete Guide on Buying Low Cost PV Panels.

1160 MW Andhra Pradesh Solar Tender – Highlights

1) Tender submission date is January 19, 2013 – Close to the last dates of submission of solar tender in TN which will lead to complexity and confusion. I think this could have been avoided but collaboration between different arms of the governments in India is non-existent.

2) Nodal Agency is APTransco – The state owned transmission and distribution company APTrasco will be the nodal agency responsible for the entire process of tender opening, awarding and execution. The agency has already allocated transmission capacity by reservicing substations. This is a good move as evacuation of solar energy to the power grid is a major headache for solar developers.

3) Size of the Solar Power Plant – Solar energy ground plants can be built in minimum 1 MW and maximum 20 MW.

4) Technology – There is no difference in the price being given for different solar technologies. This means that the expensive solar thermal technology is effectively out of the race.

5) PPA Term – The winning solar developer will get a Power Purchasing Agreement for 25 years.


1) Capacity – Selection of Solar power projects in Andhra Pradesh under competitive bidding route for a capacity about 1,000 MW is as per the AP Solar State Policy.

2) Net worth – The net worth of the bidder should be equal to or greater than the value calculated at the rate of Rs 1 Crore per MW.

3) Technical – The bidder shall deploy commercially established solar PV/STP technology.

4) Lowest Bid Price will have to be matched – Selection of eligible bidders will be based on least quoted price per commercial unit of electricity.

Andhra Solar Energy Policy Problems

1) Solar Power Purchase price too low – There are number of issues that have already cropped up with the solar energy policy. The state owned power generation company AP Genco has decided not to bid even for a single MW blaming the subsidy price for buying solar power as too low. The generation company says that the price of 12-14c/ Kwh will not allow decent returns.

2) Lack of clarity on timely payments – This is another problem faced by all power producers (fossil fuel and renewable alike). Most of the distribution utilities in the country are bankrupt due to the crazy uneconomic policies followed by the state government . Getting money from them becomes a tough game as wind power developers in TN will attest too.

3) High processing costs – The solar developers are also finding problems for the high processing costs being charged by APTransco.

4) Differential tariffs depending on region – The state wants to give different feed in tariffs depending on the location’s solar insolation. This is a good measure in my view which should be followed by all governments. However solar developers unaccustomed to differential geographic tariffs are finding faults.

You can get more details about the solar policy and tenders.

Tamil Nadu Solar Energy Policy Review and Analysis

Title and Enforcement

This policy will be known as the “Tamil Nadu Solar Energy Policy – 2012”. The Government of Tamil Nadu will undertake a review of this Policy as and when required in view of any technological breakthrough or any changes taking place in the policy at the National level.

Key Objectives

  • To project Tamil Nadu as a Solar Hub
  • To generate 3000 MW of Solar Energy by 2015
  • To achieve grid parity by 2015
  • To encourage indigenous solar manufacturing facilities in the State

Development of Solar Power in Tamil Nadu

Phase (2013-2015)                Target (MW)

2013                                          1000

2014                                          1000

2015                                          1000

Total (by 2015)                     3000

With average solar incidence of 5.5-6 kWh/m2/day, Tamil Nadu is amongst the states with the highest solar insolation in India. To retain its leadership position, Tamil Nadu will promote setting up solar power projects to the extent of 3000 MW over a period of 3 years, as furnished above.

Tamil Nadu will actively promote the solar energy sector by prescribing a certain percentage of electricity consumption through solar energy as mandatory. This will be progressively increased.

Solar Purchase Obligation (SPO)

The State will mandate 6% SPO (starting with 3% till December 2013 and 6% from January 2014) for the following category of consumers:

HT Consumers (HT Tariff I to V)

This category will cover all HT consumers including:

  • Special Economic Zones (SEZs)
  • Industries guaranteed with 24/7 power supply
  • IT Parks, Telecom Towers
  • All Colleges & Residential Schools
  • Buildings with a built up area of 20,000 sq.m or more

The SPO will be administered by TANGEDCO.

The above obligated consumers may fulfill their SPO by

  • Generating captive Solar Power in Tamil Nadu equivalent to or more than their SPO
  • Buying equivalent to or more than their SPO from other third party developers of Solar Power projects in Tamil Nadu
  • Buying RECs generated by Solar Power projects in Tamil Nadu equivalent to or more than their SPO
  • Purchasing power from TANGEDCO at Solar Tariff
  • Consumers desirous of availing SPO exemption by captive solar generation shall necessarily install separate meters to measure captive generation

This mechanism will require generation of 1000 MW by 2015.

Mechanism to generate 3000 MW by 2015

The 3000 MW of Solar Power will be achieved through Utility Scale Projects, Rooftops, and under REC mechanism as follows:

Utility Scale (MW) Solar Roof Tops (MW) REC (MW) Total (MW)
(a) (b) (c) a + b +c
2013 750 100 150 1000
2014 550 125 325 1000
2015 125 125 675 1000
Total 1500 350 1150  3000

In utility scale out of 1500 MW, 1000 MW will be funded through SPO and balance 500 MW through Generation Based Incentive (GBI) provided by the Government.


The Andhra Pradesh Government has received more than 180 bids for setting up solar photovoltaic power plants in the State. On the extended date for solar bids, which ended at 3 pm on Saturday, it is learnt that the response was good. However, the details of the participants and the prices they have quoted will be known later when the bid documents submitted by the participants are scrutinised.

The price quotes will be known on March 1 when the bids are processed. There was indication that the bids could be for projects with total capacity of about 900 MW. Following the State Government solar policy, AP Transco, which was appointed the nodal agency for the solar photovoltaic power project implementation, had invited bids to set up a capacity of about 1,000 MW in the State. It is proposed to set up these power projects within one year.

As India grows more prosperous and more citizens get educated, the country is facing a major problem. While every country would kill for millions of graduates passing out every year, India is finding them to be a problem. The reason is that India is seeing jobless growth with a paucity of decent jobs on offer. The real topline growth of companies has stagnated and profits are not growing. In such an environment, hiring is anemic and restricted to a few sectors only. Corruption infested sectors such as telecom, aviation, construction have seen massive layoffs in recent times. The IT industry which used to be major employer of fresh graduates is also getting saturated and cannot find jobs for the torrents of graduates that pass out every year. The income inequalities are becoming more and more stark as billion dollar houses get built, while hundreds of millions finding it difficult to find two meals a day. This socioeconomic malaise is generally ignored by kool aid drinking investors pouring the billions of dollars into the India stock market fulled by zero interest rates.


If you look at what happened in 2012, NASSCOM numbers, for example say 1.7 lakh people got additional jobs, are significant. In this environment, 1.7 lakh jobs are being created and these are good paying jobs. These are jobs that are created primarily for graduate. Under these circumstances, I would rate this very good.Now, even if the industry grows at around, let us say, 12% to 14% in 2013, an additional 1.7 to 2 lakh jobs will be created, and that is very significant. There are very few other sectors that are creating that many numbers of new jobs. I am actually optimistic. Having said that, of course we are about 7,00,000 to 8,00,000 graduates coming out, means that many of them will have to look for jobs in other sectors rather than just the IT sector. So there is some positive news in this, but it also means that the other sectors will also have to grow for the job scenario to improve. This is where I look at the overall growth of the Indian GDP. We need to get the growth back to 7-8%, which seems to be challenging right now. We all need to work together to see the growth goes back to 7-8%.

Asian White collar workers face Unemployment and Low Wages due to Increasing College Education

The spectacular growth in Asian economies like China, South Korea, HK, Taiwan over the last two decades has raised millions from poverty to a middle class life. This has led to increasing education levels among the new generation of Asians. Parents have poured a large part of their earnings into children education, which was seen as a ticket to a better life. But many of these newly entered work force participants are not finding the pot of gold at end of the rainbow. This is because the population of college graduated workers has increased significantly, putting  the laws of supply-demand against these workers. In fact  the wages of college educated workers have declined in some cases.

Perversely for these educated Asians, the wages of Blue Collar workers has increased at a much faster pace compared to the White Collar workers. While the wages for highly in demand skill-sets and experience approach those of the western counterparts, the wages for those with little experience and “commoditized  college degrees” continues to remain stagnant. This has been the experience in many countries across Asia like South Korea, India, China.

Fuel Price Hike

The first expert committee for the de-regulation of diesel was set up by the government over 15 years ago. It is now after a decade and half that the government has taken the steps towards the deregulation of the fuel. It is quite understood that the government is bound to control the price of the fuel, as majority of the population of the country is not privileged enough to afford fuel price hike. Given that a substantial part of India’s population is still struggling to actually stay afloat, price hike in case of the most widely used fuel in the country would have made life impossible for these people.

On the other hand, if we talk about the rising fiscal deficit and the subsidy provided by the government, every nook and corner of the country is being eaten up; and the country is being deprived of the growth, the economy is expected to achieve. These huge subsidies are threat to cripple some of the oil companies which provides diesel, petrol and cooking gas across every part of the country.

Diesel Price

If we talk of Diesel, it accounts for over 66% of the annual fuel loss which is over Rs 1.6 Lakh Crore. Companies such as IOC, HPCL and BPCL are hard pressed to invest in improving retail infrastructure, so that the amount of subsidy which is being given by these companies could be managed well with the help of revenue generated from these facilities. It is needless to say that the government decision to deregulate diesel prices would marginally increase the monthly inflation in the short-run, but talking of the long run it will help the country control its ever rising fiscal deficit which is a sign of danger for the economy. There will a spike seen in inflation to the tune of 6-7 basis points but the effect will be observed for a shorter duration and would be a short-run phenomenon. This negative effect of rising inflation will eventually translate into lower fiscal deficit so as to attain the revised target of 5.3% of the GDP. The deregulation of diesel would definitely open the opportunities towards other utility fuels like LPG and kerosene, where a reduction in subsidy could be possible.

Read more about Advantages and Disadvantages of Oil.

It is expected that the Indian economy will be successful in restructuring its fiscal deficit at 5.3% of the GDP in the current fiscal year. This will be achieved with the help of proceeds generated from the divestment and spectrum sale to the telecom companies.

Industry voice, FICCI recently said that the decision to authorize oil marketing companies to hike diesel prices by a marginal amount, varying from 50 paise per liter per month is a much needed step as this will help in reducing the annual loss due to the retailing of fuel.

Effects of Diesel Price Control

With the controlling of price of diesel going in the hands of oil companies, the diesel price hike will result in the increase in the freight rate. Use of diesel in running electricity generators will be reduced significantly, which will result in increased electricity bills for factories and residential communities.

Read more about Oil & Gas companies in India.

Regarding the hike of diesel price, the Vijay Kelkar Committee had suggested a clear roadmap of hiking prices by Re 1 a liter every month till the entire under-recovery on diesel, currently Rs 9.6, is eliminated. Where as on the other hand government has “authorized” the OMCs to decide how much and when to increase. Such a step of authorizing the OMCs to increase the price of diesel every month for small consumers and collectively for bulk consumers like Railways and State Transport will only add to the financial woes of the companies. The dual pricing system will only worsen uncertainties for consumers.

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In this article, we focus on Nokia’s large patent portfolio providing a solid floor price to the stock. The company has spent almost $40 billion in R&B over the last decade in accumulating a huge war chest of patents related to the to the telecommunication industry. The company won a large settlement from Apple last year and has won another big settlement from Research in Motion (RIMM). The settlement details are not available to the general public so we can’t quantitatively value the benefits. However, Nokia has revealed that it will get a large upfront payment with recurring payments from RIMM. In return RIMM will get to license Nokia’s patent portfolio without fear of litigation. The deal is similar to that with Apple with Nokia getting a license fee for every phone that RIMM sells.

Why Nokia is going to war over patents

Nokia was the leader in the mobile market for a long time and complacency had set it. However things have changed dramatically as Nokia was forced to sell its HQ to generate cash. In the past, the company management never really used patents to extract fees from its competitors. But the company is being forced to look at all potential revenue streams as FCF turns negative. Nokia has belatedly realized it can extract hefty fees from its competitors after its win against Apple.

Due to its long term dominance of the telecom market, Nokia has got a large number of valuable telecom patents along with Qualcomm (QCOM), Alcatel Lucent (ALU) and Ericsson (ERIC). Nokia makes almost $650 million each year by licensing its patents. The company is trying to claw back its lost market share from the likes of Apple and Samsung. Patents are going to be Nokia’s biggest weapons against its competitors. The lack of this weapon prompted Google to pay $12.5 billion for the struggling Motorola. Like Nokia, Motorola is one of the pioneers of the mobile phone market and had a large number of crucial patents to its name. Nokia has got a bigger patent portfolio than Motorola and is starting to use it to devastating effect against its rivals. We think that these patents not only provide a solid floor for the stock but can lead to additional upside. The upside could happen as Nokia receives potential settlements from telecom rivals like Samsung, LG and others.

Read more about Mobile Phone Companies in India.

Nokia’s Patent Fight with Apple

Nokia’s war with Apple was a long drawn and costly one starting on Oct 22, 2009 when Nokia sued Apple over 10 patents. Apple retaliated with a countersuit for Nokia infringing on 13 patents. The war then continued in multiple countries and cases. The war ended with a victory for Nokia as Apple agreed to pay a licensing fee for its phones. Nokia also got access to some of Apple’s path breaking touch screen and design patents. Nokia had probably started the case hoping to win access to some of Apple’s patents.  The win turned out to be better as Nokia not only won access to those patents, but also a huge sum of money from Apple.

Nokia’s Patent Fight with HTC

Nokia has lodged a number of patent infringement cases against HTC in US and German courts. HTC has become everyone’s favorite whipping boy due to its small size and lack of a sizable patent portfolio. The company has already been savaged by Apple and now Nokia is determined to extract its pound of flesh. HTC has almost no chance of avoiding a settlement with Nokia. Google has also joined the fight to protect its Android platform. Given the recent wins over Apple and RIMM, Nokia will be even more confident of winning over HTC. While this won’t provide Nokia with too much money, this will lay the foundation of a bigger settlement against the current mobile goliath – Samsung.

Nokia to target Samsung, LG Next?

The Korean giant Samsung is not an easy target like HTC, as the company has got almost 65,000 patents to its name. However, the defeat against Apple shows that Samsung is weak in its telecom and wireless patent portfolio. This gives an opening for Nokia to launch simultaneous attacks against Samsung in multiple geographies. The company lost a billion dollar patent case to Apple last year which hurt the company’s reputation more than its balance sheet. Nokia has already shown its patent prowess by winning against Apple and RIMM. We think Nokia has a great chance of winning against Samsung and LG as well. This will mean that Nokia will be getting royalties for almost every mobile device sold on the plant.

What is the worth of Nokia’s patent portfolio?

Nokia says that it has licensing arrangements with more than 40 companies for its 10,000 patent families. This provides Nokia with a diversified base of customers and derisks the patent royalty model. It is hard to come up with an accurate figure with regard to the worth of Nokia’s patent war chest. However the recent wins indicate that Nokia has every chance of increasing its patent royalties. We conservatively estimate the value of Nokia’s patent portfolio to be $12.46bb. We have used simplistic back of the envelope calculations and made the following assumptions

  • $1 billion in payments every year
  • 5% discount rate
  • Payments received over 20 years.


Nokia is strongly marketing its Lumia range of phones which seem to have excellent features at a reasonable price. While it is too early to tell how they will match up to Samsung and Nokia, we are getting increasingly positive. Nokia has got a great reputation for the longevity and durability of its mobile phones. In the last couple of years, Nokia has started to appear like a tired brand because of the sameness of its offerings. The company lacked the zing leading to an exodus of its loyal customers towards Samsung’s Android lineup. We think that Nokia’s Windows phones bring freshness to Nokia’s phone lineup and could recoup a large percentage of its market share. The company’s stock is not factoring a turnaround in its fortune. Nokia’s stock has rallied strongly from its all time low. But we think the stock might still be cheap as the management starts to really leverage its undervalued assets.

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“Safe” and “Technology” Stock do not go together. Again “Value” and “Technology” do not go together though this category is showing a growing number of companies. Cisco (CSCO) like Intel (INTC) and Microsoft (MSFT) belongs to the older technology generation compared to new kids on the block like Zynga (ZNGA), Facebook (FB) and LinkedIn (LNKD). Like older technology companies, Cisco also trades at a lower valuation multiple due to the lower expected growth rate. However unlike the other technology value plays, Cisco does not suffer from the same competition intensity. The company is also expanding rapidly into newer technology areas like mobile computing, cloud computing, video conferencing, web-based collaboration, data center servers. and network storage. Cisco’s large size implies that it will not show dramatic growth, but it will not show a big decline either (HP, Dell).

Why We Like Cisco

Offers Good Value

Cisco has traded in a range of $14 to $28 over the last five years and is currently lying in the middle of that range at ~$20. The company is trading near its 52 week high of $21 which is somewhat in line with the general stock market. Cisco trades at a forward P/E of ~10x with a solid dividend yield of 2.8%. The company has produced an average FCF of $9 billion in the last five years giving it a FCF yield of 12x. The company has a massive war chest of $29 billion in cash which implies that the ~27% of the company’s stock price or $6 is accounted by cash alone. If you leave out the cash, then the P/E is only ~7.5x.

The company has managed to keep on growing slowly and steadily without making any big waves. Cisco has shown an 8.5% growth in revenues and a 12.5% growth in earnings over the last 3 years. The book value and OCF have also grown at the same steady rate. Cisco did not give a dividend till 2010, but now has started giving a handsome yield along with its massive billion dollar buybacks. The management has committed to use 60% of its FCF for buybacks and dividends.

Intel like dominance in Networking

Cisco is like the Intel of networking, with only one competitor that is much smaller in size. Juniper Networks (JNPR) has been competing with Cisco for a long time now but has never really been a serious threat to Cisco. While Cisco has not managed to decimate Juniper like Intel vanquished AMD, Juniper isn’t going to challenge Cisco dominance anytime soon.

$10 billion of FCF per year used to gobble up any potential competition

Cisco has built its reputation as the premier global supplier of enterprise-class networking equipment and software over a long period. The company keeps buying networking startups and companies to keep up with technology innovation. The company has used ~$68 billion in the past to buy a large number of companies. M&A integration is a separate function in Cisco, given the large number of acquisitions it makes.

Getting out of the Consumer Technology Space

Some companies are just not good with consumers and are best in B2B segment. Cisco is one such company that has repeatedly failed to achieve success in consumer technology markets. It bought the maker of the Flip camcorders, but failed to leverage this buy and had to ultimately shut down it down. Same thing with the Wi-Fi router maker Linksys. The company bought one of the leaders in the segment but is now trying to sell it as well. The company has belatedly realized its weakness and is remedying it. We consider this to be a good sign.

Growth in New Segments and Customer Diversification

One of strengths of Cisco is its ability to grow in newer product areas. The company in its most recent quarters showed strong growth in the Data Center (61% growth), Wireless (38% growth) and SP video revenue (30% growth). None of its competitors have such a strong and a wide product range. The company is also not dependent too much on one type of customer such as Telecom providers or Enterprises or Government.

Read about List of Cloud Computing Companies in India.


Cisco like other mega cap technology stocks such as Corning (GLW) will never be multi baggers. That is the curse of being a mega cap as the law of large numbers catches up with you. However, Cisco like Corning has a huge competitive moat and generates billions of dollars in FCF each year. These companies have started giving a decent dividend besides buybacks, making them ideal for patient value investors.

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