Monthly Communiqué November 2014

Transcription

1 Monthly Communiqué November 2014 Dear Investors and my dear advisor friends, It's the time in the market that matters, not timing the market! I am sure anyone who has ever read anything about investing into equities has read the clichéd "equities are for long term" statement a zillion times. Most of the time these statements are also backed by a lot of statistics which prove that if you try to time the market for its bottoms and peaks and by mistake or by a stroke of bad luck, if you missed the best 10 days then your returns would be quite a few percentage points lower. Equally, on the other hand, you will find a lot of articles and data which will tell you that when there is profit to be had, take it off the table. There is no definition of long term and if you had invested in CNX Nifty exactly on August 31, 1994 and withdrew 10 years later on August 31, 2004 you wouldn't even beat PPF or Bank's Saving Accounts returns as CNX Nifty had given mere 2.19% compounding returns for this period. I have no love for this kind of analysis because I have one of those habits where I read the preface, introduction, foreword, afterword everything in a book before I actually read the book. First year of management studies I read a book called Statistics for Management written by Levin-Rubin. The introduction to this book says that there are three types of people in this world liars, damned liars and then there are statisticians. So much for using numbers to prove a point in favour or against long term investing. I believe in logic. And hence, I will spare you the horror of reading graphs, charts and tables. I do believe that while investing in equities one must invest for the long term and really one has no idea when the market will do what you have been waiting for it to do. I read a famous statement by John Maynard Keynes which said that The market can remain irrational longer than you can remain solvent and then there's another equally apt one which goes something like Markets go up till the last person has bought and markets keep going down till the last person has sold. These statements mean that if you have a definite time horizon to your investment which is not sufficiently long term in nature, then forget fundamentals, your future will depend on gyrations of the stock market. So what is the definition of long term? Our industry started off by saying that long term means 3 years; if you go by taxation policies for investing, long term means one year, after a real bad fall in markets sometimes people tend to say long term means five years!!! Look, let me be honest, there is no fixed definition of long term. And only put that money into equities, which you are OK to forget about for next few years. Money which will be needed in a visible time frame, should never be allocated to equities. After hearing this kind of statement from me, a lot of times people talk about investing in equities as if they have alternative options. Let me quote a hypothetical situation, if you have a saving of Rs 5 lacs now or if you get an inflow of Rs 5 lacs and you need it to be Rs 10 lacs in the next 5 years, you may need somewhere in range of 15% compounded returns to meet that goal. There are very few asset classes including equities which will absorb a sum like 5 lacs and still leave you the scope to reach your goal. And what is the point thinking that if I keep in a bank at least it will be safe! Yes, it will be safe, but the goal will remain a goal and not a score. The best of companies are in business for decades. It takes decades to implement a business plan, exploit a market opportunity to the fullest and to build a scale business. If you think that Flipkart is the new kid on the block, think again they started 8 years back in 2006! Our Investment philosophy - BUY RIGHT : SIT TIGHT (Continued overleaf) Buy Right stock Characteristics QGLP Q uality denotes quality of the business and management G rowth denotes growth in earnings and susained RoE L ongevity denotes longevity of the competitive advantage or economic moat of the business P rice denotes our approach of buying a good business for a fair price rather than buying a fair business for good price Sit Tight Approach Buy and Hold: We are strictly buy and hold investors and believe that picking the right business needs skill and holding onto these business to enable our investors to benefit from the entire growth cycle, needs even more skill. Focus: Our portfolios are high conviction portfolios with 20 to 25 stocks being our ideal number. We believe in adequate diversification but over-diversification results in diluting returns for our investors and adding market risk.

2 L&T started in 1946, HDFC in 1970, ICICI in 1955, Infosys in 1981, TCS in 1971 and so on and so forth. There are many examples of long term investment in companies that has generated outstanding results. If we take a call on the businesses by way of buy, hold and sell recommendations every quarter we will always miss the wood for the trees. When people send messages on s, FaceBook (FB) and whatsapp they come and talk about Wipro and Maruti stories but then what do they do in real life? I recently read on FB that Rs 10,000 invested in Wipro stock in 1980 if held all through would have been valued around Rs 700 crs as of today. Wow, nice. Shouldn't we practice this? So long term to me is all about identifying good quality companies and participating in their entire growth cycle such that we don't just get couple of percentage points of extra return, we should aim for multiplication and wealth creation. After reading that Wipro example, I thought that I must go back and ask my father what he was doing when he could have bought Rs 10,000/- worth and Wipro and saved me all the hard work. Can I ask that question? And what can he answer? I am sure he would have said that there was no Economic Times, there was no CNBC TV 18, and all said and done Azim Premji's company only made oil back then and not software!!! He is absolutely right in saying this and then I think what will I answer if my son asks me 25 years later than when TCS market capitalization was barely Rs 5 lacs crores what were you doing? What do you think I will answer??? The question still remains - are we here for getting few percentage points more return or are we here for creating wealth? If you wish to create wealth by way of multiplication, you need to remain invested in equities absolutely like those FB and whatsapp messages seem to suggest. And also think, do the promoters of these much FB'ed and whatsapp'ed companies go to office and work after checking the share price? At Motilal Oswal Asset Management Company we manage mainly only equity and we advertise ' BUY RIGHT : SIT TIGHT'. I had a funny experience because recently at a conference one of the gentlemen told me what is so special you have said, we are SIT TIGHT since last 7 years since we invested in the peak of 2007! The entire audience burst into peals of laughter leaving me to point out rather meekly that the SIT TIGHT has to be preceded by BUY RIGHT. And long term investing has to be preceded by buying the right stocks and for selecting right funds which buy high quality companies is a must. The issue is not that most of us don't buy the right stocks. The issue is that whenever we buy the right stock, we book profits, we sell. And whenever we buy a bad stock, how can we sell at a loss? So we hold on. Portfolios are more often than not riddled with profits from good investments being successively ploughed into bad investments in the name of booking profits and averaging losses. At least a long term investing orientation holding on to good quality equities; more time spent in the market will ensure you hold on to winners. So the next time you buy a stock, please visualise you are buying a business which will grow over the years, the owners will become wealthier and you will be one of them! Aashish P Somaiyaa Managing Director and CEO Motilal Oswal Asset Management Company Limited

3 Value Strategy The Strategy aims to benefit from the long term compounding effect on investments done in good businesses, run by great business managers for superior wealth creation. Value based stock selection Investment Approach: Buy & Hold Investments with Long term perspective Maximize post tax return due to Low Churn Fund Manager : Manish Sonthalia Strategy Type : Open ended Date of Inception : 24th March 2003 Benchmark : CNX Nifty Investment Horizon: 3 Years + Pharmaceuticals FMCG Bosch Ltd. HDFC Bank Ltd. Tech Mahindra Limited Housing Development Finance Corporation Ltd. State Bank Of India Sun Pharmaceuticals Ltd. Tata Consultancy Services Ltd. Larsen & Toubro Ltd. Hero Motocorp Limited Divis Laboratories Ltd Asian Paints Ltd. Performance Data Value Strategy & CNX Nifty Value Strategy CNX Nifty All Figures in % Year 2 Year 3 Year 4 Year 5 Year Since Inception s

4 Next Trillion Dollar Opportunity Strategy The strategy aims to deliver superior returns by investing in focused themes which are part of the next Trillion Dollar GDP growth opportunity. It aims to predominantly invest in Small & Mid Cap stocks with a focus on Identifying Emerging Stocks/Sectors. Stocks with Reasonable Valuation Concentration on Emerging Themes Buy & Hold Strategy FMCG Diversified Page Industries Ltd. Bajaj Finance Ltd & Bosch Ltd. Voltas Ltd Fund Manager Strategy Type : Manish Sonthalia : Open ended Date of Inception : 11th Dec Benchmark : CNX MIDCAP Investment Horizon: 3 Years + Performance Data NTDOP CNX MIDCAP Next Trillion Dollar Opportunity Strategy CNX MIDCAP All Figures in % Year 2 Year 3 Year 4 Year 5 Year Since Inception

5 Invest India Strategy The Strategy aims to generate long term capital appreciation by creating a focused portfolio of high growth stocks having the potential to grow more than the nominal GDP for next 5-7 years across market capitalization and which are available at reasonable market prices. Buy Growth Stocks across Market capitalization which have the potential to grow at 1.5 times the nominal GDP for next 5-7 years. BUY & HOLD strategy, leading to low to medium churn thereby enhancing post-tax returns Fund Manager : Kunal Jadhwani Strategy Type : Open ended Date of Inception : 11th Feb Benchmark : BSE 200 Investment Horizon: 3 Years + FMCG Pharmaceuticals Furniture / Thermoware Page Industries Ltd. Tata Consultancy Services Ltd. Bajaj Finance Ltd. Larsen & Toubro Ltd. HDFC Bank Ltd. Ipca Lab Ltd. Lupin Ltd. Housing Development Finance Corporation Ltd. City Union Bank Ltd. Supreme Industries Limited Hero Motocorp Limited Month 3 Month 6 Month 1 Year 2 Year 3 Year Since Inception Performance Data IIS BSE Invest India Strategy BSE 200 All Figures in % &

6 Focused Series IV - Flexi Cap Strategy The Strategy aims to generate superior returns over a medium to long term by investing in only 8-10 companies across market capitalization. The Fund Manager will take active asset allocation calls between cash & equity. The strategy will also take active equity allocation calls between investments in large caps & mid caps & it will follow a policy of profit booking with predefined price targets. Active Equity Allocation between Mid caps & Large caps Active Asset Allocation calls between and Equity Strategy will follow a policy of profit booking with predefined price targets When the Client s AUM appreciates by 15%, the appreciation amount will be automatically paid-out. Portfolio Manager : Kunal Jadhwani Date of Inception : 07th Dec Benchmark : BSE 200 Investment Horizon: Months Subscription : No FMCG Furniture / Thermoware Pharmaceuticals Kotak Bank Bosch Ltd. HDFC Bank Ltd. Tech Mahindra Limited Page Industries Ltd. Supreme Industries Limited Ipca Lab Ltd. Cummins India Ltd. Performance Data Focused Series - IV BSE & Focused Series IV BSE 200 All Figures in % Month 3 Month 6 Month 1 Years 2 Years 3 Years Since Inception

7 Focused Series V - A Contra Strategy The strategy aims to invest in fundamentally sound companies that can benefit from changes in a company's valuation which reflects a significant change in the markets view of the company over a horizon of three years. The Strategy focuses on investing in stocks that can benefit from growth in earnings, re-rating of business or higher valuation of assets. Objective is to increase return rather than reduce risk for Investors. Buy and hold philosophy low portfolio churn Follows the principle to pick best rather than diversification Concentrated Strategy Structure of less than 10 stocks Investment Horizon : Medium to Long term Fund Manager : Manish Sonthalia Date of Inception : 27th Sept Benchmark : BSE 200 Investment Horizon: 2 to 3 Years Oil and Gas J&k Bank Bharat Petroleum Corpn. Ltd Petronet LNG Limited Ing Vysya Bank Limited Infosys Technologies Ltd. Triveni Turbine Limited Performance Data Focused Series - V BSE & Focused Series V BSE 200 All Figures in % Month 3 Month 6 Month 1 Year 2 Year 3 Year Since Inception

8 Bulls Eye Strategy The Strategy aims to deliver returns in the short to medium term by investing in fundamentally sound stocks coupled with active profit booking. Active management Multi Cap Stategy Regular Profit Booking Portfolio Manager : Kunal Jadhwani Strategy Type : Open ended Date of Inception : 15th Dec Benchmark : BSE 200 Investment Horizon: 12 Months + Pharmaceuticals FMCG HDFC Bank Ltd. Axis Bank Ltd. Bajaj Finance Ltd. Cummins India Ltd. Tech Mahindra Limited Larsen & Toubro Ltd. Lupin Ltd. Tata Consultancy Services Ltd. Ipca Lab Ltd. Page Industries Ltd Performance Data Bulls Eye BSE & Bulls Eye Strategy BSE 200 All Figures in % Year 2 Year 3 Year 4 Year 5 Year Since Inception

9 Optima Strategy The Strategy aims to generate superior returns over the long period by investing in companies with growth potential and which are available at reasonable market price. Growth At Reasonable Price (GARP) Investment Horizon of 2 years + Active Portfolio Rebalancing Market Timing Situation based Multi Cap approach Portfolio Manager : Kunal Jadhwani Strategy Type : Open ended Date of Inception : 30th Dec 2008 Benchmark : BSE 200 Investment Horizon: 2 Years + Oil and Gas J&k Bank Bharat Petroleum Corpn. Ltd Petronet LNG Limited Ing Vysya Bank Limited Infosys Technologies Ltd. Triveni Turbine Limited Performance Data Optima BSE & Optima Strategy BSE 200 All Figures in % Years 2 Years 3 Years 4 Years 5 Years Since Inception

10 Insights Sun Pharmaceuticals (7.06% Value Strategy) Sun Pharma is among the largest players in the domestic formulations market and the most profitable one. It makes and markets specialty medicines and Active Pharmaceuticals Ingredients (APIs) for chronic therapy areas such as cardiology, psychiatry, neurology, etc. Sun Pharma has ability to identify niches in long term therapy areas with high entry barriers and build strong franchise to ensure sustainable growth and high margins. Sustaining superior profitability on higher base is a strong positive. One of the strongest Abbreviated New Drug Application (ANDA) pipelines from India with 131 ANDAs pending approval. The pipeline includes a combination of low-competition, patent challenge and normal product opportunities. Sun Pharma acquired Ranbaxy for USD 4 billion, diversifies India business, strengthens position in emerging markets, deal valued at 2.2x sales. Post the acquisition, Sun Pharma will be a leading player in 13 therapies in India, gaining entry into the fast growing OTC space in India with brands like Revital & Volini. It has establish a footprint across 55 emerging markets. The company expects to realize its synergies through stronger sales growth, efficient procurement and supply chain efficiencies. It also intends to leverage the human resources. Keeping the strong acquisition track record in mind, we expect Ranbaxy's assets to show a better performance under Sun Pharma. However, synergy benefits will take time to materialize and may only happen over a period of months Tata Consultancy Services (6.91% Value Strategy) TCS retained its outlook for FY15 of a healthy demand environment, accelerating organic revenue growth in FY15 and with normal seasonality of a stronger 1H v/s 2H Over the past four years, TCS has led the incremental revenues as well as operating profits not just domestically, but also in the global arena (compared to peers multiple times its size); and its market cap is second only to IBM. At 18.8% USD revenue CAGR over FY14-16E, TCS is expected to continue leading the industry growth with excellent execution. TCS has significantly invested in digital capabilities and strengths in these areas should be a major driver of revenue and profitability in the future. TCS has started to re-imagine its HR processes, use digital technologies namely, mobile, social, cloud and analytics in an integrated manner to make the internal processes simple and more efficient. United Spirits Limited (4.61% Value Strategy) United Spirits (UNSP) is the largest spirits company in India, both by volume and value. While the company has lost some market share over the past five years, it remains India's largest spirits company in volume terms (41% in 2008, vs. 36% in 2013). UNSP has a strong portfolio of brands across all price points and across the Whiskey, Brandy and Rum segments, with McDowell's No 1, Royal Challenge, White Mischief and Romanov being among the leading brands in their respective segments in India. UNSP is the market leader, with 36% volume share of the India spirits market as of 2013, according to Euromonitor. However, UNSP has had among the lowest profitability in the sector. We believe this is an anomaly, given that the market leader in such an attractive segment would typically be near the top as far as profitability is concerned. Diageo is now the majority owner of UNSP with a controlling stake and its team now runs the business. A key investor concern on UNSP prior to the deal with Diageo was the lack of a coherent long-term strategy to drive profitability. This is clearly laid out when looking at the company financials, which show EBITDA margin dropping from the 16% level in 2010 to less than 12% in We believe from a longer-term perspective, there is now confidence that Diageo will have a clear path to improve profitability from current levels. Diageo globally makes 31% EBIT margins v/s single digit EBIT margins of United spirits. We see two factors driving profitability higher over the medium term. First, company is focusing more on premium products which are more profitable and second is cost rationalization. We believe that, over the next five years, the company may deliver average top-line growth of 16-18%. Volume growth may start to pick up as GDP growth improves and price/mix contribution should help drive 16-18% top-line growth annually for the company over the next five years.

11 Bosch (7.62% NTDOP Strategy) Motor Industries Company (BOSCH), the flagship company of the Bosch group in India, is the country's largest manufacturer of diesel fuel injection equipment. It is also a leading global supplier of technology & services and comprises Robert Bosch GmbH and 360 subsidiaries and regional companies in 50 countries with 77,000 patents and utility models to its name. Using parentage, Bosch Limited has garnered 81% market share in diesel systems and currently enjoys around 65% market share in spark. The strong performance will be on the back of robust margin trajectory due to higher exports, localization, and support from replacement and non automotive revenues. Bosch has increased its focus on the gasoline fuel injection system (FIS) for four-wheelers (introducing it with the Ford EcoSport) and also developed a cost-effective FIS for two-wheelers (a huge opportunity given the current carburettor system for twowheelers). Increasing its thrust in the non-auto segment will further diversify its revenue mix. The core diesel FIS segment will recover gradually on the back of CV and diesel car sales recovery. With 30% of revenue coming from Commercial vehicles (primarily M&HCV OEM) Bosch is expected to be the biggest beneficiary of the revival in M&HCV segment in 2HCY14 on back of recovering macros. Colgate Palmolive India (2.70% NTDOP Strategy) Colgate Palmolive India Limited (CPIL's) volume growth at close to double-digit YoY for 23 consecutive quarters is not only unparalleled among fast moving consumer goods (FMCG) peers, but it is also sustaining this level, which is remarkable given the sharp slowdown witnessed by FMCG peers. Oral care product consumption per gram is much lower in India compared to some emerging market peers. Less than 10% of Indians brush their teeth twice a day, a habit which is not widely prevalent even in urban areas. Over 325 million people in the country do not use toothpaste at all. Volume growth is led by strong rural toothpaste demand (low rural penetration of 63%, as per IMRB), CPIL's rapidly increasing rural reach (the plan to double rural reach in three years is already underway), its dominance at the lower end (market share higher than its overall 56% toothpaste market share), unmatched category development efforts in schools and villages, and the ongoing shift in consumer preference from toothpowder to toothpaste. Other industry entry barriers are brand power, category development efforts, dedicated focus, and track record in emerging markets where CPIL take the edge. CPIL's valuation at 30xFY15E earnings is attractive, particularly when strong EPS growth of 22-24% CAGR likely over the next two years is accompanied by high RoE and RoCE of approximately 90% each and a dividend yield of around 3%. Source for stock write ups : MOAMC Internal Research and External Research. The given stocks are part of portfolio of a model client of Value Strategy and NTDOP Strategy as on 31st October The stock forming part of the existing portfolio under Value Strategy and NTDOP Strategy may or may not be bought for new client. Past performance may or may not be sustained in future and should not be used as a basis for comparison with other investments. Name of the PMS Strategies does not in any manner indicate its future prospects and returns. The Companies mentioned above is only for the purpose of explaining the concept and should not be construed as recommendations from MOAMC. Disclaimer: This document has been prepared and issued on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this document is for general purposes only and not a complete disclosure of every material fact and terms and conditions. The information / data herein alone is not sufficient and shouldn't be used for the development or implementation of an investment strategy. It should not be construed as investment advice to any party. All opinions, figures, charts/graphs, estimates and data included in this document are as on date and are subject to change without notice. While utmost care has been exercised while preparing this document, Motilal Oswal Asset Management Company Limited does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. The statements/graphs contained herein may include statements of future expectations and other forward-looking statements that are based on our current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Readers shall be fully responsible / liable for any decision taken on the basis of this presentation. No part of this document may be duplicated in whole or in part in any form and/or redistributed without prior written consent of the Motilal Oswal Asset Management Company Limited. Readers should before investing in the Strategy make their own investigation and seek appropriate professional advice. Investments in Securities are subject to market and other risks and there is no assurance or guarantee that the objectives of any of the strategies of the will be achieved. Clients under are not being offered any guaranteed/assured returns. Past performance of the Portfolio Manager does not indicate the future performance of any of the strategies. The name of the Strategies do not in any manner indicate their prospects or return. The investments may not be suited to all categories of investors. The material is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon as such. Neither Motilal Oswal Asset Management Company Ltd. (MOAMC), nor any person connected with it, accepts any liability arising from the use of this material. The recipient of this material should rely on their investigations and take their own professional advice. Opinions, if any, expressed are our opinions as of the date of appearing on this material only. While we endeavor to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. The Portfolio Manager is not responsible for any loss or shortfall resulting from the operation of the strategy. Recipient shall understand that the aforementioned statements cannot disclose all the risks and characteristics. The recipient is requested to take into consideration all the risk factors including their financial condition, suitability to risk return, etc. and take professional advice before investing. As with any investment in securities, the value of the portfolio under management may go up or down depending on the various factors and forces affecting the capital market. Any forward - looking statements are not predictions and may be subject to change without notice. For tax consequences, each investor is advised to consult his / her own professional tax advisor. This document is not for public distribution and has been furnished solely for information and must not be reproduced or redistributed to any other person. Persons into whose possession this document may come are required to observe these restrictions. No part of this material may be duplicated in any form and/or redistributed without' MOAMCs prior written consent. 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