To us the 2 most important investment rules are: 1. Strive to never lose money 2. Never forget Rule 1!

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Dwain Edwin Mosley
6 years ago
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1 To us the 2 most important investment rules are: 1. Strive to never lose money 2. Never forget Rule 1! This adage, made famous by Warren Buffet is our guiding light and we strive to ensure Capital preservation. We believe that if we contain the downside, superior returns will be taken care of by a multitude of options i.e. business/ strategic developments, appreciation of earning power of companies, investor psychology, etc.

Thoughts on the Economy Key highlights: Combination of global and domestic factors resulted in market volatility in the month of March 2018.

2 Thoughts on the Economy Key highlights: Combination of global and domestic factors resulted in market volatility in the month of March Imposition of import tariff on steel and aluminium by the US resulted in fears of an all-out trade war across the globe. India at this point in time appears to be relatively immune. With the new norms announced by RBI (Reserve Bank of India) on the removal of all restructuring forbearance for banks, the higher provision requirements for banks could impact profitability in FY19E. HIFY19 borrowing calendar: Lower quantum came as a surprise; will help stabilize the G-Sec market for now; Borrowing to be back ended in nature; H2 trends require close monitoring; RBI likely to keep policy rates on hold Expectations of a widening current account deficit in FY18/19E sets a cautious tone for our INR/USD outlook; expect a mild depreciating trend Note: Past performance is not an indicator of expected future performance. Net FII inflows into debt and equity (USDBn) Source: Bloomberg, Kotak Institutional Equities Amidst fears of a global trade war, higher crude oil prices and domestic political uncertainties, the large cap Nifty Index was down 3.6% in the month of March 2018 in USD terms. The NSE Midcap 100 index also fell 4.6% during the month (USD terms) On global front, the US imposed import tariffs on steel and aluminum which resulted in fears of an all-out trade war across the globe. The US President also signed an executive memorandum to impose retaliatory tariffs on up to USD60bn of Chinese imports. While the risk of the trade war spreading to other countries remains, at present we believe even in an adverse scenario, the impact on India will be limited. India s trade surplus with the US is only about 1% of India s GDP, and at the gross level, India s exports to the US is USD77bn or 3% of India s GDP. Along with the imposition of the import tariff, the month also saw the new Federal Reserve Chairman helm his first Fed meeting. The US Federal Reserve raised interest rates by 25 bps which was largely in line with market expectations. On domestic economy front, January IIP (Index of Industrial Production) growth came in at 7.5% compared to 7.1% in December. The second consecutive month of 7% plus growth has resulted in further conviction of a slow but steady improvement in growth outlook in India. CPI (Consumer price index) inflation eased to 4.44% in February from 5.07% in January. With Inflation trends moderating albeit on the back of lower food prices, we expect that the RBI will keep policy rates on hold on April 5, 2018 when it holds its first monetary policy for FY18.

3 Volumes (USDmn) Mar-18 % Chg 1M India BSE & NSE 7, Delivery Vol (%) Mar-18 Feb-18 Jan Bond Markets (%) Mar-18 Feb-18 Jan-18 10yr Gov Bond Interbank call Inflation (CPI) N/A Net flows (USDmn) Mar-18 Feb-18 Jan-18 FII (Equity) 2,057 (1,666) 2,075 FII (Debt) (1,123) (153) 1,191 DII (Equity) 1,030 2,755 (140) Currencies Mar-18 Feb-18 % Chg 1M USD/INR % USD/JPY % USD/EUR % Commodities Mar-18 Feb-18 Jan-18 Gold (USD/oz) 1,325 1,318 1,345 Brent Crude (USD/bbl) We would keep a close watch on the developing macro parameters in India especially trends in Current account deficit, tax collection and the fiscal deficit even as corporate earnings trajectory shows signs of revival in FY19E. The news flow on corporate lenders both private and state owned bans remains negative and something to keep an eye on. Further with the new norms announced by RBI on the removal of all restructuring forbearance for banks, the higher provision requirements for these banks could impact near term profitability. HIFY19 borrowing calendar: quantum came as a surprise; will help stabilize the G-Sec market for now; H2 trends require close monitoring The announcement of the HIFY19 government borrowing calendar surprised positively with its quantum, tenure and nature of the borrowing. Overall FY19 gross borrowing via dated bonds has been reduced by INR500Bn (USD 7.7Bn), with government increasing its funding requirement through the NSSF (National Small Savings Fund) and also reducing its buyback plan. Out of the total gross browning for FY19, only 51.8% will be issued in 1HFY19, against the usual front-loading pattern of ~60-65%. The weekly dated securities auctions size will be INR120bn or USD 1.8Bn (this compares to ~INR bn or US Bn in 1HFY18), evenly distributed between 24 weeks. The bigger takeaway however was the reduction in concentration of supply in the year segment to 29.2% of 1HFY19 gross borrowing from ~52% in H1FY18. The supply at the short end of the curve has increased (1-4 year segment). The extreme long end of 20yr+ segment also sees 22.6% of total issuances (as against ~14% in 1HFY18). Around 10% of the issuance will be of Floating rate bonds and CPI indexed bonds. Clearly the government has taken cognizance of the present lack of appetite for duration bonds by banks (especially the state owned banks) who already have excess SLR (Statutory Liquidity Ratio) on their books. The borrowing announcement helped alleviate some of the pressure on the G-sec yields as well as reduce some of the marked to market impact hardening bond yields on the investment portfolios of banks. Further, supply of securities being skewed at shorter end will imply some flattening of the yield curve in the near term. While the announcement of the lower borrowing calendar stabilizes the near term trends in the government bond market, one would have to be watchful of possible risks that may emerge in H2FY19. With a lighter bond issuance calendar in HIFY19, the higher than usual H2 borrowing calendar could result in some pressure given that it is a busy season for credit offtake. Further one would need to monitor trends in GST (goods and Services tax) collections which would have a bearing on the fiscal deficit target for FY19E (budgeted at 3.3% of GDP). The fiscal deficit in April February 2018 was 120.3% of the FY18 RE(revised estimate). Gross tax collections grew 15.8%; higher than the 13.4% growth set in FY18RE. Indirect tax collections (including GST) grew 13% and direct taxes grew 18.9% (corporate tax collections growth was at 19.7% while income tax collections grew 17.7%). GST collections stood at INR3.9Trn. Total expenditure increased 14%.

Widening current account deficit in Q3FY18 set a cautious tone for our INR/USD outlook; expect a mild depreciating trend India s current account deficit (CAD) widened to USD13.5bn in Q3FY18 from USD7.

4 Widening current account deficit in Q3FY18 set a cautious tone for our INR/USD outlook; expect a mild depreciating trend India s current account deficit (CAD) widened to USD13.5bn in Q3FY18 from USD7.2bn in the previous quarter. The deterioration reflected a much wider trade deficit as higher commodity prices and a domestic recovery resulted in imports outpacing exports. However, invisibles surplus surprised positively, rising a strong 21% YoY in the quarter led by higher services exports and increased private remittances. Net capital inflows also rose to USD22.1bn in the quarter (USD16.4bn in the previous quarter), but net FDI inflows slowed sharply to USD4.3bn. Despite the widening CAD, the good news is that the balance of payments surplus (BOP) remained steady at USD9.4bn, as capital inflows more than financed the wider current account deficit. INR/USD Outlook: We expect some downward pressure on the INR based on our CAD/BOP estimates and expectations of gradual global monetary policy tightening in FY19. We expect INR (against USD) to trade with a mild depreciation bias in in CY18, depreciating by 2-3% on an average. INR Is expected to trade in a range of in the near term. The healthy forex reserves would help the central bank prevent any disorderly movement of the currency. Table 1: India s Balance of payments position (USD Bn) We expect FY18E CAD at 1.9% of GDP and at 2.1% of GDP in FY19E. We factor in a widening of the trade deficit on the back of: (1) Non-oil imports remaining robust given our expectations of a slow recovery in domestic growth. (2) Muted trends on exports growth- while it is likely that exports would show some signs of a pickup with better global growth outlook, it would still lag growth in imports. In FY19, we do expect that the overall BOP would continue to remain in surplus, the key risks are in the form of lower than expected capital flows and higher crude oil prices. Source: RBI; Kotak estimates

5 Investment Strategy The main objective of our strategy is to generate capital appreciation through investments in equities with a medium to long-term perspective. This strategy invests in all listed equity and equity related instruments with emphasis on capturing Value and Special Situation opportunities. Key investment strategy parameters A. Large market opportunity 1. Market Size at least 2 times of current company sales, and/ or 2. Growing at 1.5x of India's GDP B. Robust competitive strength or economic moat 1. Intangible assets like brands, patents or regulatory licenses 2. High switching costs for customers thus giving pricing power 3. Companies having network economics 4. Robust cost advantages 5. Innovative products or services which consistently serve unique client needs C. Strong financials and earnings growth 1. Portfolio Debt to Equity under 1x 2. Compounded earning growth at least in line with industry growth 3. Healthy margins, having the ability to withstand business volatility D. Management dynamism and corporate governance 1. Passion to become a larger player in field of business 2. No unrelated diversifications 3. Capital allocation which optimises business performance 4. Asset turns and working capital turns at industry levels or trending there 5. High promoter shareholding E. Fair valuations 1. Companies having negligible implied growth in Discounted Cash Flow valuations 2. Relative valuations are at reasonable levels vs growth and return ratios Investment Philosophy The portfolio shall be a mix of Value Opportunities and Special Situations. 1. Value Opportunities -are ones, where in the opinion of the fund manager, the company s Intrinsic Value is X, while the stock is trading at a discount to X. The discount should be such that it offers reasonable Margin of Safety for an investment in the stock. This discount to Intrinsic Value is a result of multiple reasons i.e. temporary miss in performance, risk aversion at broad market level, regulation uncertainty, etc. As uncertainty regarding these aspects abates, the Intrinsic Value is expected to be realized. 2. Special Situations- These shall be investment opportunities dependent on the probability of occurrence of one or more corporate events, rather than market events. These situations can largely be classified as: a. Price related situations: In Price related situations, stocks shall be bought at a discount to the price, which is/ maybe guaranteed by any institution. These situations can arise in the form of buybacks, delistings, etc. b. Merger related situations: In Merger related situations, shares of a company can be created at a discount to the current market price. c. Corporate Restructurings: In Corporate restructurings, consequence of specific corporate action in the form of spin offs, asset sales, management change, etc. could lead to either value unlocking or cash payouts to investors.

6 Model Portfolio Details Top 10 Holdings as of 31st March 2018 Sectoral Exposure as of 31st March 2018 Security Name % Wt Siyaram Silk Mills Ltd 11.3 Coal India Ltd 9.5 KRBL % 7.10% 6.60% 20.90% Agri Commodities Banking and Financial Services Consumer Products Engineering and Capital Goods Media Finolex Cables Ltd 6.6 Mining Repco Home Finance Limited 4.7 ICICI Bank Ltd 4.6 Heritage Foods Limited 4.6 Ashiana Housing Ltd 4.5 WELCORP % 4.40% 4.50% 1.20% 3.50% 9.50% 3.80% 11.00% 7.70% Paper Pharmaceutical & Healthcare Real Estate Development Technology Others Textiles NIIT Ltd 4.4 Cash & Cash Equivalent Risk ratios Portfolio Nifty 500 Fee Structure Date of activation 31-Jul-12 Fee Structure Fixed Fee 2.5% per annum for the tenor, No performance Fee Volatility 14% 12% Sharpe ratio Exit Load 3% (1st Year), 2%(2nd Year), 1% (3rd Year) Brokerage 0.10% Custodial Charges As levied by the custodian. Treynor ratio 23% 7% Beta Annual Tracking Error 0.09 Information ratio 1.53 R2 76% Jensen's Alpha 14% Frequency of MIS *Indicative Fee Structure Portfolio Strategy No. of Stocks Benchmark Min Initial Investment Disclosure of portfolio through printed MIS on a quarterly basis. Strategy Details Special Situations Value Portfolio stocks Nifty 500 Index Rs 25 lakhs

7 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Model Portfolio Details Performance of 100 invested at Inception (31st July 2012 ) Kotak SSV Nifty Date of Inception 31-Jul-12 INR (%) 3 Months 6 Months 9 months 1 Year 2 Year 3 Year 4 year 5 year Since Incp. KMAMC Special Situations Nifty * Returns are of Model Portfolio (net of management fee) ** Returns are annualised for periods greater than 1 year Risk Disclosure: Investments in securities are subject to market risk and there is no assurance or guarantee of the objectives of the Portfolio strategy being achieved. The investment returns from the portfolio strategy may be a function of stock selection and portfolio actions as well as market conditions during the investment tenor of the portfolio strategy. Past performance does not indicate the future performance of the strategy. Investors must keep in mind that the aforementioned statements/presentation cannot disclose all the risks and characteristics. The investors are requested to take into consideration all the risk factors including their financial condition, suitability to risk return profile, and the like and take professional advice before investing. Since this is intended to be a concentrated portfolio there could be situations that the scheme may not match the underlying benchmark.

To us the 2 most important investment rules are: 1. Strive to never lose money 2. Never forget Rule 1!

To us the 2 most important investment rules are: 1. Strive to never lose money 2. Never forget Rule 1! This adage, made famous by Warren Buffet is our guiding light and we strive to ensure Capital preservation.