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This document is provided for informational purposes and is not intended as an offer to sell or solicitation of an offer to buy securities or other instruments. Our services will be rendered strictly in accordance with the SEBI (Portfolio Managers) Regulations, 1993. Please read the Disclosure Document prior to engaging our services. The information contained herein is based on our assumptions and can be changed without any prior intimation. This information must not alone be taken as the basis for an investment decision. Please consult your financial, legal or tax advisors. Investment in securities is risky and there is no assurance of returns or preservation of capital. Neither the firm, nor its directors, employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost capital, lost revenue or lost profits that may arise from or in connection with the use of this information. No part of this material may be copied or duplicated or redistributed without prior written consent.
Agenda
1
2 3 4 5
Outlook
Market Cycles Emerging India Portfolio
Opportunity
Size and attractiveness Addressability
Longevity
Sustainable competitive advantages and their lead time
Management
Intellect + Integrity Alignment of objectives
Value Accretive
EVA Positive, duration and magnitude Free cash flows Return on incremental capital Improper capital allocation can be destructive
Discipline
Focus Avoid distractions Volatility is not a threat, its an opportunity ! Correcting mistakes ought to be a religion Ignorance and denial drive averaging
Selection criteria
Market cap > INR 10 Bn (~USD180 mn) Key ratios Qualitative aspects Thematic views
UNIVERSE SELECTION IS A COMPREHENSIVE & ON-GOING FEATURE OF OUR INVESTMENT PROCESS: 1) Quarterly review by the Investment team 2) Process involves comprehensive analysis based on various criteria
WE UNDERTAKE A VERY COMPREHENSIVE BUT A SIMPLE MODEL FOR FINANCIAL ANALYSIS. THIS INVOLVES: 1) Dissecting the P&L to arrive at real profits from Operations - This goes a long way to determine the sustainable margins 2) Balance Sheet Analysis to evaluate efficient utilization of capital 3) Close monitoring of key drivers that may impact the operating performance
TEAM HAS EXTENSIVE KNOWLEDGE OF COMPANIES AT GRASS ROOT LEVEL
OUR PROCESS INVOLVES: 1) Financial Analysis 2) Discussions amongst internal and external analysts 3) Management meetings 4) Understanding of internal and external levers governing the sustainability of performance 5) Meeting competitors to assess competitive strengths 6) Evaluating attractive entry levels and potential returns 7) Strict adherence to risk management guidelines
PORTFOLIO MONITORING INVOLVES: 1) Closely monitoring domestic and global macro factors 2) Actively engaged with the company management 3) FORECAST SHEET Acts like an investment monitoring radar screen across our investee Cos and alternate opportunities in the market 4) Track portfolio as per risk management guidelines 5) Target valuations to rebalance portfolio
Risk Management
The investment team strictly follows a well designed, dynamic and prudent risk management policy to mitigate the inherent risk in equities Comprehensive risk management comprises:
Flexibility to deploy the total portfolio in cash for downside protection
BSE Sensex
Global Trade Import Export Foreign Exchange Reserves Population Working Age Population INR / USD
Source: Bloomberg, IMF, Business Beacon, ENAM Research * 2012 Estimates
Index
781
5,001
17,528
17,404
21 17 6 838 58 18.1
50 37 38 1,006 61 46.7
India took more than 60 years to cross a GDP of USD 1Trn By end of this decade, Indias GDP may rise over USD 6 Trn
Enam / Asset Management / India Fundamental Equities Platform / EIP / - 9 -
5138
3,000
2,500
2,000 1,500
30% CAGR
1,000
500 0 109
0
FY99 FY04 FY09 FY14(e)
2010-30 Estimated GDP growth (%) 2020 (e) 14.6 5.7 China US 23.2
India
China
9.3
7.0
US Japan
2.8
1.7
1.7
1.2
1.2
France
3
4 5 6 7 8 9 10
Germany
UK France China Italy Canada Brazil Mexico India
1.9
1.4 1.3 1.2 1.1 0.7 0.6 0.6 0.5
Japan
Germany France UK Italy Brazil Canada Russia India
5.4
3.3 2.6 2.3 2.0 2.0 1.6 1.5 1.4
Japan
India Germany Brazil Russia UK France Canada
6.8
6.5 4.6 4.3 3.8 3.6 3.6 2.7
16.0 12.0 8.0 4.0 0.0 (4.0) (8.0)
Mar-99
Germany
Japan
Italy
Mar-12
Mar-10 Mar-11
Mar-98
Mar-00
Mar-01
Mar-02
US
Mar-03
23.0
Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
Improvements in infrastructure, deregulation and education could allow India to grow rapidly for decades
Enam / Asset Management / India Fundamental Equities Platform / EIP / - 11 -
Mar-09
GDP
USD Bn
GDP / Capita
USD (PPP)
Market Cap
USD Bn
MKT / GDP
Developed
US Canada UK Germany France Japan Italy Brazil China India* 311 34 62 82 66 128 61 191 1,341 1,210 14,587 1,577 2,249 3,281 2,560 5,459 2,051 2,088 5,927 1,750** 48,387 40,541 36,090 37,897 35,156 34,740 30,464 11,769 8,382 3,694** 11,661 1,894 3,034 1,239 1,412 3,502 460 1,195 3,131 1,131 0.8 1.2 1.3 0.4 0.6 0.6 0.2 0.6 0.5 0.7
CONSUMPTION
INFRASTRUCTURE
Savings: Favourable demographics, rising urbanization and higher income levels are likely to boost Indias savings pool to ~USD 1.4 Trn by 2020 (~todays GDP), of which financial savings corpus is likely to be ~USD 540 Bn This will form the bulwark of discretionary consumption and also fund infra creation A bulk of Indias savings come from households rather than corporates, making it a stable source of funds
Consumption J-Curve: Indias already sizeable domestic consumption will take off in ~201520 as demographics result in the figure of 50:40 for dependency : working pop, as it did for the US in the 60s & China in the 90s
Infra & Capex: India is putting up a massive across-the board Core Infra backbone with an overall investment of ~USD 1 Trn over the next five years Power, roads, ports, airports etc will be the key segments that will witness explosive growth
In sharp contrast to major economies which have long term issues to be addressed, Indias issues are more immediate term, with structural pillars in place
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
Source: RBI
FY11
Consumption
MULTIPLE SECTORS SET FOR HIGH GROWTH
100 75 50 25 0
(%)
80
86 93
Units
US$ bn US$ bn mn p.a. mn subs mn p.a. US$ bn
2010
24 91 3 24 6 22
2020(e)
266 646 18 116 25 89
CAGR(%)
27 22 20 17 16 15
7
India
12
17
32 26 29
39 41
48
Two-Wheelers
mn p.a.
US$ bn
9
10
35
34
14
13
Thailand
Taiwan
Singapore
Denmark
Germany
China
Malaysia
Korea
HK
USA
UK
HPC Products
Total USD Bn
165 70 88 50 63 28 10 10 3 33
% of total invt.
32% 14% 17% 10% 12% 5% 2% 2% 0.4% 6%
% of total invt.
30% 17% 13% 11% 11% 11% 4% 2% 1% 1%
300 250 200 150 100 50 0 155 178 203 230 9.0% 9.5% 10.3% 9.9%
10.7%
260
8.5% 8.0%
2012-13 2013-14 2014-15 2015-16 2016-17 Total Infra Investment (USD Bn) Infra Investment as % of GDP
513
100%
1,025
100%
Household Savings: $230bn Low leverage Wealth effect: Property Stocks Gold
Corporate profits ~$80bn High RoE Competitiveness Low leverage Earnings slowing, but not at precipice unlike developed world
WAY OUT
Asset sales & Collections
Telecom: Spectrum auction Coal auctions Disinvestment of PSUs Land bank unlocking (ie land etc) Railways, LIC etc Higher Tax/ GDP collections GST, DTC NELP VIII/ KG Basin Gas profit share
The deficit of the government can be funded with proactive asset sales
Enam / Asset Management / India Fundamental Equities Platform / EIP / - 17 -
Indias tax incidence is the lowest among its EM peers Increase leads to
additional revenue
Outlook
Positives Building Up
10.0 9.0
8.0 7.0 6.0 5.0 4.0 3.0 2.0
(2.0)
1.0 0.0
Feb-10
Nov-10
Nov-06
Nov-07
Nov-08
Nov-09
Nov-11
Feb-07
Feb-08
Feb-09
Feb-11
Aug-06
Aug-07
Aug-08
Aug-09
Aug-10
May-06
May-07
May-08
May-09
May-10
May-11
Aug-11
Feb-12
Repo Rate
May-12
Positives Building Up
CAD Likely to Shrink in FY 13
M ar-13e ( USD bn) Exports Imports o/w Oil imports o/w Non oil imports Trade balanc e ( I) Trade balance/GDP (%) Invisibles ( net) ( II) o/w Software o/w Remittances Current ac c ount ( I+II=A) CAD/G DP ( %) Foreign investment FDI FII Banking capital NRI deposits ECBs+supplier's credit etc Rupee debt service Other capital account items Capital ac c ount ( B) % of GDP Overall balanc e ( A+B)
Source: ENAM Research
Oil @ 100 340 521 132 389 ( 181) (9) 120 52 68 ( 61) ( 3.1) 20 12 12 5 24 (1) 5 72 4 11
INR depreciation is a positive for exports Reduction of gold imports by ~25% YoY, can shave off ~USD 12 bn from the import bill (at current gold prices) USD 10/bbl correction in oil prices will shave off ~USD 14 bn from the import bill
Crude oil + Gold account for ~44% of total imports. Any correction in the quantum of these could reduce the strain on CAD significantly
Enam / Asset Management / India Fundamental Equities Platform / EIP / - 21 -
Positives Building Up
Commodities Showing Signs of Softening
600 550 500 CRB Comm Index
450
400 350 300 250 Aug-06 Aug-07 Aug-08 Aug-09 Aug-10 May-06 May-07 May-08 May-09 May-10 May-11 Aug-11 May-12
Mar-11 Feb-12 Mar-12
Feb-07
Feb-08
Feb-09
Feb-10
Feb-11
Nov-06
Nov-07
Nov-08
Nov-09
Nov-10
51
51
51
45
44 43 42 41 40 OECD 42.5
43.2
Feb-12 Mar-12
10
0 Non-OECD OPEC Non-OPEC
Source: Bloomberg
Nov-11
Feb-12
Sensex FY16E
P/E 17: @ 41,508 (26.9% CAGR) P/E 15: @ 36,625 (23.0% CAGR) P/E 13: @ 31,685 (18.6% CAGR)
Source: Bloomberg
Pharma & Bio-Technology May 2012 P/E 11.80 Software Services Telecommunication
19 15 12
11 9
9
Value Investing
DIFFERENT PHASES OF A MARKET CYCLE
4: Bubble 2-3: Fair to Over valuation
1: Undervaluation
Asset & Cost inflation Capex/ IPO/ Credit cycle revives Boom spreads, initially earnings driven (phase 2), later multiples-driven (ph 3)
P/E expansion, Easy credit New Themes and Valuation Paradigms Virility Symbols (Towers, diversification/ M&A) Capex > near-future requirements Retail & IPO euphoria Shock/ Leaders in trouble We are here
Leading stocks fall sharply, followed by pull back as Left outers jump in & earnings still growing Leadership narrows Profits OK, but P/E falls Sharp, swift, short-lived no-reason rallies
Bust
Phase 0
Phase 1
Phase 2
Phase 3
Phase 4
Phase 5
Phase 6
Phase 0
Value and Growth Investment styles change leadership during different phases of market cycles
Enam / Asset Management / India Fundamental Equities Platform / EIP / - 25 -
DENIAL
OPTIMISM
DESPAIR
HOPE
REINFORCEMENT FATIGUED EXIT
CONVICTION
FEAR
PANIC
Source: ENAM
Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell. Sir John Templeton
Enam / Asset Management / India Fundamental Equities Platform / EIP / - 26 -
Challenges remain
Political uncertainty and regional differences Governance and Corruption Fiscal situation
Curbing Expenditure
Efficiency
A positive surprise on Reforms could spur growth, inward flows , currency & markets
Enam / Asset Management / India Fundamental Equities Platform / EIP / - 28 -
Market valuations witnessing huge disparity across sectors which offer immense
opportunity With a few favourable changes market could cross its previous peak by March 2013
Market Cycles
Gulf war I
3,500
INR: BoP crisis as CAD rose to ~3%. India forced to pledge gold. INR depreciated by 11% pa from 88 to 91 to reach Rs 20
Inflation: High teen Primary & Fuel inflation Interest rates: Thus, market interest rates at >20% The bull market of 1991-92 was against the backdrop of the Gulf war, liberalisation (incl. INR devaluation from Rs 20 to 29), culminating in the market scam
3,000
2,500
2,000
1,500
1,000
500
Source: Bloomberg; ENAM Research Enam / Asset Management / India Fundamental Equities Platform / EIP / - 31 -
S.E Asian crisis Politics: Coalition politics at its worst: 3 PMs in 3 yrs
International sanctions
5,500
Global: SE Asian crisis & Russian debt default vitiate global flows INR: Depreciates sharply from Rs 36 to 42 as international sanctions imposed post Indias peaceful nuke tests
5,000
4,500
4,000
3,500
3,000
Sx returns: INR: -0.2% / $: -5% Sx returns: INR: 16% / $: 5% GDP: 4.3% Sx returns: INR: -4% / $: -11% GDP: 6.7%
2,500
GDP: 7.9%
Apr-96
Apr-97
Apr-98
Source: Bloomberg; ENAM Research Enam / Asset Management / India Fundamental Equities Platform / EIP / - 32 -
9/11
Gulf war II
7,000
6,000
5,000
4,000
3,000
Sx returns - INR: -21% / $: -26% GDP FY01: 4.3% Sx returns - INR: -18% / $: -21% GDP FY02: 5.5% Sx returns - INR: 4% / $: 4% GDP FY03: 3.9%
2,000 Jan-00
Source: Bloomberg; ENAM Research
Jan-01
Jan-02
Jan-03
* whatever you touch turns to shit (except PSUs & HDFC gp)
16,000
11,000
6,000
8th
Jan 2008
16,000
11,000
Politics: Congress retains the house in the second term with a coalition government Global: Lehman Crisis, American Housing bubble crash, EU Crisis INR: Global uncertainty and strengthening of US $ pulled INR down to 55 from 44 Inflation: Double digit inflation and high interest rates
6,000
Mar-09
Mar-11
Mar-12
Portfolio Strategy
This document is provided for informational purposes and is not intended as an offer to sell or solicitation of an offer to buy securities or other instruments. The information contained herein is based on our assumptions and can be changed without any prior intimation. This information must not alone be taken as the basis for an investment decision. Please consult your financial, legal or tax advisors. Investment in securities is risky and there is no assurance of returns or preservation of capital. Neither the firm, nor its directors, employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost capital, lost revenue or lost profits that may arise from or in connection with the use of this information. No part of this material may be copied or duplicated or redistributed without prior written consent.
Monitor macro dynamics, respond quickly to the new environment and fine tune the
investment strategy accordingly
Portfolio Positioning
EMERGING INDIA PORTFOLIO (EIP)
2.8
2.6
2.5
Consumption Global
21.7 38.6
Diversified& Others
Cash
31.7
Portfolio Summary
2012 2013 Domestic macro issues, more than global issues, are impacting our markets We now see signs of the economy bottoming out
Our investment strategy has been designed to reduce volatility in the portfolio
The focus of our strategy is to minimize earnings cyclicality with a greater focus on risk-adjusted returns to improve the overall performance of the portfolio Current portfolio positions include growth and value stocks across sectors, offering superior returns All portfolio positions undergo a strict evaluation process and constant monitoring Objective is to deliver superior returns on a risk adjusted basis
Portfolio Performance
This document is provided for informational purposes and is not intended as an offer to sell or solicitation of an offer to buy securities or other instruments. The information contained herein is based on our assumptions and can be changed without any prior intimation. This information must not alone be taken as the basis for an investment decision. Please consult your financial, legal or tax advisors. Investment in securities is risky and there is no assurance of returns or preservation of capital. Neither the firm, nor its directors, employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost capital, lost revenue or lost profits that may arise from or in connection with the use of this information. No part of this material may be copied or duplicated or redistributed without prior written consent.
Portfolio performance
06 Oct-10
31 May-12 84.1*
100.0
8,426.5
4.8
9.3
85 80 75 70 65 60
81.6
CNX500
BSE Midcap
Thank You