Indian Entrepreneur Fund A 5 Star Rated Fund by Morningstar. Advised by

Transcription

1 Indian Entrepreneur Fund A 5 Star Rated Fund by Morningstar

2 Contents Indian Entrepreneur Fund: The Strategy Philosophy Value Creating Traits The Study: Indian Entrepreneur Businesses About ASK Investment Managers Fund Features Biography 2

3 Indian Entrepreneur Fund The Strategy A 5 Star Rated Fund by Morningstar Invests into Indian entrepreneurial businesses of size, superior quality and high growth at fair valuations IEF follows a very rigorous, disciplined, strong filters-based investment approach, while embracing value-creating traits (more about it later) Invests into quality entrepreneurs with Vision and dynamism High standards of governance Wisdom Demonstrated capital allocation and capital distribution skills Superior quality achieves the preservation of value and high growth is sought to achieve expansion of value Note: Promoter / Family stake of at least 26% is desired in portfolio companies, except in rare and fit cases. Promoter with adequate skin in the game ensures alignment of management and shareholder interests 3

4 Why Entrepreneurial/Family Businesses? We believe Entrepreneurial / Family Businesses have Passion, Conviction and Commitment Longer term view Own skin in the game Alignment of interest Ability to spot opportunities early Dynamic leadership High score on innovation and intellectual capital 4

5 Key Investment Objectives 1) Capital Preservation 2) Capital Appreciation over a period of time 5

6 Overarching Investment Philosophy and Principles Greater certainty of earnings Vs mere quantum of earnings growth Superior and consistent quality of earnings Vs mere quantum of earnings growth High quality at a reasonable price Vs inferior quality at arithmetically cheap price. 6

7 Investment Approach Price the value rather than valuing the price Buy growth businesses at value prices Disciplined investing into outstanding businesses Seek compounding opportunities 7

8 Value Creating Traits that we seek in our investments Material Size of Opportunity Superior Management Quality Strong Earnings Growth A Compounding Machine Superior Quality of Business Favorable Value 8

9 Value Creating Traits Size of Opportunity Size of Opportunity is a foundation for Continual Growth (of profits) and creating a Compounding Machine: Foundation on which large Value Creation rests It is Less about How Large a Business is and more about what it Can Be. Debate is really about Future Size rather than the Present One. Size of pond Vs. size of fish: It is more about size of pond rather than size of fish. Even a small capable fish can grow big if it is in a big pond and if the pond conditions are right. The debate between Large-Cap and Mid-Cap is largely an artificial one 9

10 Value Creating Traits Management Quality Two vital tests for Management: Capital Allocation and Capital Distribution Conglomerate Complexity leads to less Value Creation Corporate Governance is not a Jargonistic Buzz-Word. Honest Mistakes, even if significant, are punished less by the markets compared to relatively less significant but Deliberate Violations of the Value System. Capital Allocation has a deep Impact on the Investment Returns Good Businesses typically seems to attract Good Management and Vice versa Management Quality has far higher impact on returns than investors care to imagine 10

11 Value Creating Traits Earnings Growth Price is nothing but a slave of earnings and its relentless growth over a period of time When Growth goes away, Equities reduce to a Bond Growth has a Way of covering Valuation Mistakes and fighting with Prolonged Period of Market Machinations (Capital) Dilutive Growth results in lower Relative Value Compounding compared to Non-Dilutive Growth. Qualitatively growth has to be secular, predictable, less volatile and business having character simple enough to understand, even for a lay person 11

12 Value Creating Traits Quality of Business Two vital tests for Quality are Capital Intensity and Capital Efficiency Persistent and Superior Capital Efficiency is the single most important evidence of Quality Earnings Growth is necessary but not a sufficient condition for Value Creation Growth and Quality of Growth are not co-incidental for creating value but they actually cohabit to do so Root to Preservation of Wealth solely resides in Quality i.e. Quality of Business and Quality of Management.. Even with significant but Temporary Earnings Destruction, a High-Quality Business will manage to shrug-off the blues 12

13 Value Creating Traits Value Price is Servant, Value is Master: Our investing is about Pricing the Value, rather than Valuing the Price Price value gap: Margin of safety (or Implied Returns) Cash Flow is the only enduring reality: Accounting Profits and PE Multiples are Popular, but Unreal, Pastimes Quality of Business Vs Valuation: Superior Business at a Reasonable Price is Wealth Creating rather than Inferior Business at a Mathematically Cheap Price 13

14 Key Investment Attributes Size of the Opportunity Size of pond Vs. size of fish Dominance Resilience Liquidity Quality of Business High quality of business (Superior RoCE) Strong moat. Impregnability. Sustainability Key pivot of strong wealth creation Earnings Growth Quantum Consistency Durability Predating (Early Vs Later) Compounding power Four key investment attributes Value Favorable Price-Value Gap Margin of Safety In addition to the above, good management quality is a given constant 14

15 Imperatives of Equity Investing Equity investing comes as a package! Returns Quantum Qualitative Consistency Permanence Degree of Certainty Volatility Inherent in the character of equity investing Diminishes with time Time Period Time is more important than timing Risk inversely correlated to time Real Risk Margin of Safety / Risk of permanent loss of capital Paying excess price over value Buying inferior quality Investor psychology towards investing Proper calibration needed across all aspects Quantum of returns being just one of them 15

16 Rigorous Filters Based Approach Value Creating Traits Parameters Tangible Rule Value Creating Traits are converted into Rules as below Trait Parameter Tangible Rule Size of Opportunity Scale and Resilience Top 500 businesses Bottom-line Top 500 businesses as per Market Capitalization Minimum PBT of INR 100 cr. (Trailing 12 months or current fiscal) Management Quality Integrity, Vision, Execution, Capital Allocation and Capital Distribution skills Earnings Growth Quality of Business Earnings growth without capital dilution Strong Capital Efficiency (Demonstrated or Imminent) Minimum 20 to 25% earnings growth over the next 3 to 5 years without capital dilution Minimum ROCE of 25% Value Margin of Safety Price Value Gap of 20% or better 16

17 Portfolio Research Methodology and Filteration 500 Top 500 as per market capitalization 306 Only companies > 25% promoter / family holding (except in very rare and fit cases) Universe of Entrepreneur and/or Family Owned Business = 306 cos 210 Condition of minimum PBT of INR 100 cr (USD 16 mn) 123 Subjective evaluation on management quality, their integrity, vision, past track record, execution, capital allocations and distribution skills, corporate governance standards etc. 59 Quality of Business (Capital Efficiency) Minimum ROCE of 25% 20 Two more filters for selection of stocks a) Minimum 20 to 25% earnings growth over the next 3 to 5 years without capital dilution and b) Price-Value gap (margin of safety) of 20% Indian Entrepreneur Fund 17

18 The Study Indian Entrepreneurial Businesses 18

19 Indian Entrepreneur Fund The Study and the Origins We analyzed the top 500 companies over a period of ten years (from 1999 to 2009) on four principal parameters Top-line Profitability (Operating Profit, Profit Before Tax, Profit After Tax) Capital Efficiency (Return on Capital Employed, Return on Equity) Actual Investment Value delivered (net of any capital dilution) Four ownership buckets were examined Entrepreneur led firms Public Sector Undertakings Multi-national Corporations Pure Professional Firms 19

20 The Study Empirical Findings on Family Owned Businesses (FOBs) Continued Dominance Fastest growing businesses Superior operating performance Strong capital efficiency Biggest wealth creators On most parameters entrepreneurial firms had done far better than the other forms of ownership and Indian Entrepreneur Fund was launched in March 2010 following our study 20

21 The Study Indian Entrepreneurial Firms Categories No. of Firms Avg. Market Cap. % of Market Cap. (Top 500) % of Market Cap. (Top 500) Entrepreneur run and/or Family Owned Businesses (FOB) 306 $1.8 bn Public Sector Undertakings (PSU) 39 $ 4.2 bn Multi-National Corporations (MNC) 57 $ 1.9 bn Entrepreneur/Family Owned Firms comprise ~50% of market cap of top 500 companies. Note: Source: Capitaline Top 500 publically listed companies as per market capitalization (as on 31-Dec-13) Banks and Financial firms are excluded throughout this research study for definitional consistencies 21

22 The Study Growth of FOBs Source: Capitaline Note: Banks & Financial firms are excluded from the above study for definitional consistencies. Audited consolidated results as on 31-March-2013 are considered for the above study. 22

23 The Study Sectoral Spread Top 5 - FOB Top 5 - MNC Top 5 - PSU IT - Software 21% FMCG 35% Crude Oil & Natural Gas 27% Pharmaceuticals 11% Pharmaceuticals 10% Mining & Minerals 24% Automobile 9% Capital Goods 9% Power Generation & Distribution 20% Refineries 9% Automobile 8% Refineries 9% Telecom-Service 7% Cement 7% Gas Distribution 6% Source: Capitaline Entrepreneurial firms are present across vibrant and emerging sectors Entrepreneurs identify sunrise sectors early e.g. Pharmaceuticals, IT, Telecom etc. Entrepreneurial firms include a blend of both manufacturing as well as service sectors Note: Banks & Financial firms are excluded from the above study for definitional consistencies. Audited consolidated results as on 31-Dec-2013 are considered for the above study. Figures above are percentage of market cap of that category (FOB,MNC & PSU) within Top

24 The Study Capital Efficiency Source: Capitaline High operating efficiency for Entrepreneurial firms Tight cost control High RoE for Entrepreneurial firms Note: Banks & Financial firms are excluded from the above study for definitional consistencies Audited company results as on 31-March-2013 are considered for the above study. 24

25 The Study Wealth Creators TOP PERFORMERS Investment Returns: 5-Year price CAGR (as on Dec 2013) FOBs PSUs MNCs PI Industries 100% Petronet LNG 28% Hexaware Tech. 72% TTK Prestige 97% G M D C 25% WABCO India 65% Eicher Motors 86% Indraprastha Gas 24% Bata India 60% Eclerx 82% Guj Gas Company 22% GlaxoSmith C H L 53% Page Industries 77% Engineers India 19% Blue Dart 53% TOP PERFORMERS Investment Returns: 10-Year price CAGR (as on Dec 2013) FOBs PSUs MNCs P I Industries 80% NMDC 25% United Spirits 44% TTK Prestige 73% MMTC 25% CRISIL 39% Amara Raja 51% Guj Gas Company 19% Blue Dart Exp. 37% Havells 46% G M D C 19% Accelya Kale 34% Emami 45% B H E L 15% Bata India 34% Entrepreneurial firms have significantly outperformed PSUs and MNCs in Wealth Creation Note: Data as on Dec-13 Bank & Financial firms are excluded from the above study for definitional consistencies Source: Capitaline & Bloomberg 25

26 The Study Snapshot Criteria / Category FOBs PSUs MNCs Growth Highest Growth rates In aggregate, underperform FOB companies Shown steady but lower growth than FOBs Capital Efficiency High Growth coupled with strong capital efficiency Good efficiency ratios; although much lower growth High capital efficiency Alignment of Interest Wealth Creation of Shareholders' Sector/Industries Decision Making Promoter's own skin in the game Social priorities, Low-float? Transparency may be an issue and may impact minority shareholders Highest Wealth Creation Low contribution Steady contribution of wealth Value-creating business areas, innovation led, intellectual property rich businesses Speedy and Dynamic Natural resources, Commodities, Power and Energy Over-regulated /bureaucratic and hence could often lack speed, tends to be rigid Pharma, FMCG, Automobile Usually driven by parent company priorities Business Environment Competitive environment; often results in more efficiency Natural monopolies in many sectors they operate Often satellite operations of parent companies abroad Corporate Governance Improving with emphasis on independent professional boards Governmental practices Overall good governance 26

27 Some Successful Family Firms Industry Spectrum NEW AGE TO TRADITIONAL Size Spectrum TECHNOLOGY HEALTHCARE AUTO CONSUMER FINANCE AGRO COMMODITIES COMMODITY LARGE TCS Sun Pharma, Lupin Eicher Motors Asian Paints, Dabur Kotak Bank Coromandel Shree Cement MID-SIZED Eclerx Divis Lab, Apollo Hospitals Motherson Sumi Marico, Emami Bajaj Finance PI Industries Hindustan Zinc 27

28 Risks Risks Associated with Investments in Entrepreneurial Businesses Succession planning Corporate governance concerns Centralized decision making Nepotism Control retention concerns can affect capital structures Capital allocation issues However, we have addressed these issues by adopting rigorous filters on management quality for stock selection 28

29 Examples Lupin Only Indian firm to make successful foray in US branded and Japanese market Focused on the large and evolving generic pharma opportunity Strong product pipeline Track record of strong and sustained domestic growth Earnings growth of 20-25% for the next few years 29

30 Examples Pidilite Market leader in adhesives and sealants, construction chemicals, hobby colours and polymer emulsions in India. Brand name Fevicol has become synonymous with adhesives in India and is ranked amongst the most trusted brands in India. Expanded its presence in emerging segments like mechanized joinery, modular furniture, flooring, auto care and waterproofing through brands like Dr Fixit and Roff Sales and EBIDTA grown at CAGR of 24% and 26% respectively over the last 5 years. 30

31 Examples Motherson Sumi Motherson Sumi is a JV of the Sumitomo Group of Japan and the Motherson group in India. It has transformed itself from a domestic player to a global tier 1 supplier by acquiring Visiocorp and Peguform recently. Has been growing through expanding its product portfolio in the wiring harness, plastic moulds and rear view mirrors business through JVs and acquisitions and has thereby increased its customer base significantly. The company will benefit from the recovery in the global car demand, improving share of premium vehicles in the domestic business and increasing content per vehicle. Reasonable balance sheet strength with 5 year average core ROCE at 26% and average payout of 25%. 31

32 About ASK Investment Managers 32

33 Introduction : ASK Investment Managers Leading private money management firm in India Singular focus on managing money in Indian equities long only style Long term investors Bottom-up fundamentals driven, value-based stock picking Disciplined research and investment process Experienced team of 3 portfolio managers and 5 investment professionals headed by a CIO Purely discretionary money management Clients include family offices, pension funds, private clients across the globe 33

34 Introduction: Profile Investment Universe Listed Indian Equities Investment Style Long only Active / Passive Actively managed equity portfolios Investment Vision Long term wealth creation Investment Approach Bottom up stock picking Discretionary / Non-Discretionary Discretionary money management 34

35 Research Process 35

36 Investment Edges Disciplined adherence to investment philosophy / process Strong in-house proprietary research Team bandwidth and experience Strong relationships and industry interfaces Comprehensive understanding of Indian businesses and industries Comprehension of long term secular nature of India opportunity 36

37 Portfolio Construction Investment universe of nearly 200 companies Based on defined character of each strategy, a sub-universe for each strategy is determined Detailed evaluation of the character of business and valuation of each firm Strict Buy discipline: Focus on margin of safety, pre-defined levels for each strategy/concept Adequate sector diversification Optimal aggregation of about 20 stocks, to construct a stable and consistent portfolio, to generate superior returns over time Model portfolios for all strategies Portfolio Psychographics - proprietary portfolio review tool 37

38 Risk Management Integrated risk management and review mechanism throughout the investment process Disciplined Buy and Sell mechanism Discipline of buying businesses with reasonable margin of safety High discount factor (of 15%) for cash flows in our financial models builds conservatism in value estimation 6-8 interactions per year with the management team of every portfolio company Individual stock cap at 10% Risk Manager is responsible for monitoring and supervising the risk of the portfolio and implementing the risk management framework Regular and ongoing monitoring and reporting Independence of Risk Management Function reports to Group CFO & Head Compliance 38

39 Fund Features 39

40 Fund Features Name Indian Entrepreneur Fund Launch March 26, 2010 Geography Strategy Domicile Base Currency Fund Structure Umbrella Fund ISIN/WKN Liquidity Indian Equities Long only Mauritius USD Pooled/Commingled fund India Emerging Opportunities Fund* (IEOF) MU0185S00191 (Retail T1) MU0185S00035 (Retail B) MU0185S00217 (Institutional T1) Weekly once (every Thursday) Note: * 1) IEOF is the flagship fund under ASKIM s advise. It facilitate creation of customized accounts under the defined strategy like Growth, India Select & Strategic (Value) portfolios. 2) IEF is a pooled share class under IEOF. 40

41 Fund Features Administration Auditors Global Banker Custodian Service Providers Apex Fund Services (Mauritius) Limited KPMG, Mauritius SBM Bank (Mauritius) Ltd Kotak Mahindra Bank Limited (India) Fee Structure (Retail) Fee Structure (Institutional) Minimum Investment US$3,000 US$250,000 US$ 250,000 US$1million Above US$ 1 million Management Fee 2.50% p.a 2.25%p.a % p.a Exit Charges Up to 1% in the First year Note: Please refer to the subscription agreement for details on subscription fees. 41

42 Biography Bharat Shah Executive Director ASK Group Bharat provides strategic guidance to the CEOs in managing their respective businesses while closely supervising the IM business of the group. Internationally renowned with nearly 29 years of experience in the Indian capital markets. Deep interface in Indian corporate world and comprehensive insights in Indian capital markets (equity and fixed-income). Bottom-up investment philosophy, with stock picking being a special strength. Prior to joining ASK, was CIO at Birla MF, the then largest mutual fund of India, managing nearly USD 1.65 bn. Built ASK Investment Managers into one of India s largest providers of discretionary PMS services, managing currently close to USD 1.1 bn. Prateek Agrawal Business Head & CIO ASK Investment Managers Has 22 years of experience in capital markets with SBI Capital Markets as Head of Research (10yrs), and Head of Equity with ABN Amro and Bharti Axa AMCs (3.5yrs each) In SBI Capital Markets besides heading research he was part of team that handled VSNL privatization for the government and handled Hindustan Zinc for Vedanta group. On the advisory side he was actively involved in the power sector and in the oil and gas space, two areas where SBI Caps had leadership. At ABN AMRO MF, he was head of equity and managed / advised over $ 1 bn of equity assets ($ 300 mn domestic & $ 700 mn offshore) and delivered stellar performance. He then helped set up the equity business at Bharti Axa IM in the post Lehman period. He joined ASK Investment Managers as CIO in April 2011 Sumit Jain Portfolio Manager Sumit has over 12 years of total experience and has been working with ASK Investment Managers since the last 11 years. He has been managing Indian Entrepreneur Fund since inception. He is also engaged in research of business within ASKIM universe, identifying new investment opportunities and tracking their performance at regular intervals. 42

43 Disclaimer RISK FACTORS: Equities as an asset class carry a higher risk in comparison to debt. While risk cannot be totally eliminated, it can be mitigated through a well-designed investment strategy. ASK Investment Managers Portfolios seek to mitigate risk and deliver superior returns through research-based investing. However, this objective may not be fully achieved due to various reasons such as unfavorable market movements, misjudgment by portfolio manager, adverse political or economic developments etc. DISCLAIMER: Any information contained in this material shall not be deemed to constitute an advice, an offer to sell/purchase or as an invitation or solicitation to do for security of any entity and further ASK Investment Managers Private Limited (ASKIM) and its employees/directors shall not be liable for any loss, damage, liability whatsoever for any direct or indirect loss arising from the use of this information. Recipients of this information should exercise due care and caution and read the offer document (if necessary obtaining the advice of finance/other professionals) prior to taking any decision on the basis of this information. ASK Investment Managers Private Limited has not independently verified all the information and opinions given in this material. Accordingly, no representative or warranty, express or implied, is made as to the accuracy, completeness or fairness of the information and opinions contained in this material. This information is of a general nature only and does not constitute an invitation or an offer in respect of any financial product or a recommendation to buy or sell any financial product or to carry out any other transaction. This or any material is provided to parties that are clients/ potential clients of ASK Investment Managers Private Limited (ARBN ) ( ASKIM ), corporate authorized representative of Falconer & Co Ltd (AFSL No ). 43

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