Equity Savings Fund - Series1 NFO Period: January 20, 2014 to February 07, 2014 This product is suitable for investors who are seeking*: Long term wealth creation solution A close-ended equity scheme that seeks to generate capital appreciation by investing in Equity securities which are specified as eligible securities for Rajiv Gandhi Equity Savings Scheme (RGESS) * Investors should consult their financial advisers if in doubt about whether the product is suitable for them. Note: Risk may be represented as: (BLUE) investors understand that their principal will be at low risk (YELLOW) investors understand that their principal will be at medium risk HIGH RISK (BROWN) (BROWN) investors understand that their principal will be at high risk
Contents 1 Prelude 2 Equity Investing - Framework 3 Triggers Short term and Long term 4 Capturing ROE Expansion 5 ICICI Prudential Equity Savings Fund - Series 1 2
Prelude We launched ICICI Prudential Value Fund - Series 1 & 2 with an aim to capture mispriced stocks in a polarized market with focus on mid and small cap segment. Value opportunities were available in large cap as well as in mid and small cap segment. We ended up allocating more to large caps than initially anticipated (upto 40%). Our learning's Bleak macro overhang had caused even some very good quality, large cap company stocks to be rebutted by the market Such companies with outlook for improving Return on Equity (ROE) are expected to see better price appreciation 3
Equity Investing - Framework 4
Equity Investing - Framework MACRO INDICATORS Invest when GDP growth is low Invest when IIP is low Invest when Fiscal Deficit is high VALUATIONS Invest when markets are not over valued SENTIMENT Invest when investors sentiment is bad GDP: Gross Domestic Product; IIP: Index of Industrial Production 5
Macro Indicators 10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 Invest when GDP growth is low India GDP growth Nifty 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 6500 5500 4500 3500 2500 1500 500 0.0 (1.0) (2.0) (3.0) (4.0) (5.0) (6.0) (7.0) Invest when Fiscal Deficit is high Fiscal Deficit Nifty 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 7000 6000 5000 4000 3000 2000 1000 0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 Invest when IIP growth is low India IIP growth Nifty 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 7000 6000 5000 4000 3000 2000 1000 0 GDP: Gross Domestic Product; IIP: Index of Industrial Production 6
Valuations 1.20 1.00 Market Cap to GDP Ratio Average 0.80 0.60 0.40 0.20 0.00 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 India's market cap to GDP indicates market valuations are below 10 year average. Source: Bloomberg 7
Sentiment India s Allocation to various asset classes AUM in ` Bn Nov-13 Sep-07 Change Equity Funds 1811.92 1578.63 14.8% Deposits in ` Bn 29-Nov-13 28-Sep-07 Change Aggregate Deposits of Scheduled Commercial Banks 74779.28 28737.35 160% The above table shows that domestic investors sentiment has been weak over the past few years. Indian investors are massively under weight in equities as compared to other asset classes. Source: AMFI, RBI 8
Triggers 9
Triggers - Short Term Local Event - 2014 General Elections GDP growth rate 8.5% USD mn 900.00 8.0% 7.5% 7.6% 7.7% 7.9% 800.00 700.00 600.00 7.0% 7.0% 500.00 6.5% 6.8% 6.3% 6.5% 400.00 300.00 6.0% 200.00 5.5% 5.6% 100.00 0.00 5.0% -100.00 6-10 months prior to elections 5 months prior to elections Election month 5 months post elections 6-10 months post elections 11-15 months post elections GDP Growth tends to pick up Post Elections Foreign Institutional Inflows have been robust after elections Source: UBS Securities, data considered for last 4 elections 10
Triggers - Short Term India Russia Korea Taiwan Czech Rep Chile Israel Pakistan Hong Kong Hungary Thailand Mexico Argentina S Africa Malaysia Indonesia Turkey Brazil China Better prepared to deal with taper now than in May Reducing trade surplus / increasing trade deficit -25-20 -15-10 -5 0 5 10 15 20 25 30 Change in last 5m of trade deficit over same period last year ($bn) Reducing trade deficit / increasing trade surplus CAD has shrunk to 1.2% of GDP in Q2FY14 and it is slated to slip to 2.5-3% of GDP for full FY14. USD 34 bn by way of FCNR deposits and bank capital has improved funding prospects of CAD. Source: Bloomberg, CS Estimates CAD: Current Account Deficit, FCNR: Foreign Currency Non-resident 11
Triggers - Long Term Interest rate cycle can reverse Inflation poised to ease Structural Reforms Investment cycle to pick up Corporate Health to improve Improvement in GDP growth 12
Capturing ROE Expansion 13
Why is ROE Important? A healthy ROE is a sign of good corporate management and efficient use of capital High correlation between ROE and real GDP growth rate Increasing market share leads to high ROE Healthy margins; good financial health echoes in ROE ROE reflects in stock prices Effectively, increasing ROE means increase in shareholders wealth. 14
ROE, GDP growth and market performance 24.0 10 24 25000 22.0 20.0 9 8 7 22 20 18 20000 15000 18.0 6 16 10000 16.0 5 4 14 12 5000 14.0 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 3 10 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 0 Sensex ROE (%, LHS) India real GDP growth (% yoy, RHS) Sensex ROE (%, LHS) S&P BSE Sensex There is a strong correlation between Sensex ROE and India s real GDP growth rate & Sensex movement Source: Edelweiss Securities Ltd 15
ROE and Interest Rates 25 20 15 10 5 0 11 10 9 8 7 6 5 4 Sensex ROE (%, LHS) 10 year Gsec Broad market ROE is at multi year low, and is expected to increase as the rate cycle reverses. Source: Edelweiss Securities Ltd and Bloomberg 16
Relationship between ROE and Stock Prices (Price, x) (Re-based to 100, x) 400 350 300 250 200 150 Price relative to Nifty ROE Increasing ROE s and relative stock price outperformance ITC 100 Mar04 Mar05 Mar06 Mar07 Mar08 Mar09 Mar10 Mar11 Mar12 Mar13 37 35 33 31 29 27 25 ROE (%) This illustration is to explain the concept of stock price movement basis the change in ROE of the Company. Actual results may vary significantly from the ones mentioned here. The stocks given above should not in any manner be construed as recommendation and ICICI Prudential Mutual Fund/AMC may or may not have any future position in these stocks. The performance of stocks would ultimately depend on various factors such as prevailing market conditions, global political scenario, exchange rate etc. (Price, x) 180 160 140 120 100 80 60 40 20 0 Price ROE Dr. Reddy's Mar04 Mar05 Mar06 Mar07 Mar08 Mar09 Mar10 Mar11 Mar12 Mar13 Decreasing ROE s and relative stock price underperformance RIL 400 350 300 250 200 150 100 50 0 Price relative to Nifty ROE Mar04 Mar05 Mar06 Mar07 Mar08 Mar09 Mar10 Mar11 Mar12 Mar13 28 26 24 22 20 18 16 14 12 10 ROE (%) (Price, x) 350 300 250 200 L&T 150 ROE Price relative to Nifty 100 Mar04 Mar05 Mar06 Mar07 Mar08 Mar09 Mar10 Mar11 Mar12 Mar13 40 30 20 10 0-10 -20-30 45 40 35 30 25 20 15 10 ROE (%) ROE (%) Source: Edelweiss Securities Ltd 17
Spotting the TREND Number of companies as per ROE band for CNX100 constituents ROE band FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 <15 29 32 26 19 23 35 24 26 34 38 Increase in number 15-20 14 17 20 18 20 14 23 21 23 24 of companies 20-25 18 13 18 15 13 19 22 20 19 15 Lesser number of companies in this 25-30 18 15 8 14 15 10 14 9 5 8 range 30-35 6 6 9 12 6 6 3 8 9 6 35-40 3 4 5 6 8 8 2 6 2 3 40-45 5 2 4 6 1 1 5 3 2 4 >60 3 4 4 4 6 3 3 4 2 2 Number of companies in CNX100 with FY13 ROE lower than FY04 FY07 62 66 Same number of companies, more or less. Names need not be same More companies now have ROE lower than 10 years back Opportunity to do bottom fishing Source: Motilal Oswal 18
Opportunities for ROE Expansion Regulatory Changes Economic Leverage Favourable Industry Dynamics Company Specific factors Identifying companies where there could be turnaround based on above parameters, leading to increase in Return on Equity (ROE) Source: Bloomberg 19
Example 1 : Regulatory Issues MSCI Oil and Gas 28 26 24 22 20 18 16 14 12 10 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 ROE (%) Increase in global crude prices and depreciation of INR led to increase in under recoveries for the Oil marketing companies. Deregulation of diesel prices can reduce subsidy burden and improve earnings of PSU Oil and Gas companies. Source: Edelweiss Securities Ltd 20
Example 2 : Industry Dynamics 30 25 MSCI Telecom 20 15 10 5 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 ROE (%) The telecom market in India is a highly competitive market with a number of small regional players. Consolidation in the industry with smaller players reducing their presence may lead to improvement in margins for bigger players. Source: Edelweiss Securities Ltd 21
Example 3 : Economic Leverage Source: Edelweiss Securities Ltd MSCI Industries Industrials 30 28 26 24 22 ROE (%) 20 18 16 14 12 10 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 40 35 30 25 20 15 10 MSCI Metals 5 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 ROE (%) Domestic Macro Any reversal in the interest rate cycle may lead to improvement in the earnings for industrial sector. Global Macro Recovery in the global markets may lead to increase in demand for commodities which can improve earnings in this sector. 22
Example 4 : Company Specific Factors (Re-based to 100, x) 400 350 300 250 200 150 100 50 Reliance Industries Ltd 0 Mar04 Mar05 Mar06 Mar07 Mar08 Mar09 Mar10 Mar11 Mar12 Mar13 Price relative to Nifty ROE (%, RHS) The company has allocated capital to businesses like telecom, retail, etc. which have not generated enough ROE in the past few years. Optimal allocation of capital may be beneficial for the company in the long term. This illustration is to explain company specific factors that can impact Return on equity. It is necessary to note that the list given above is not exhaustive and there may be other factors impacting ROE. Past performance may or may not be sustained in future. The stock mentioned above does not constitute any recommendation and ICICI Prudential Mutual Fund/AMC may or may not have any future position in this stock. 28 26 24 22 20 18 16 14 12 10 ROE (%) Source: Edelweiss Securities Ltd 23
Factors for Improvement in ROE MACRO FACTORS Stable political environment Better resilience to taper and related news Good monsoon supporting agricultural output Anchored inflationary expectation India s twin deficits improving Stable currency Global recovery REGULATORY FACTORS Deregulation of diesel prices Dividend pay outs by PSU s Industry-friendly regulation in telecom e.g. spectrum price, license fees etc. Continuation of SEB reforms - tariff hikes SEB: State Electricity Boards 24
Factors for Improvement in ROE COMPANY SPECIFIC FACTORS Increase in market share Increase in profits due to operating leverage Improved margins due to better pricing power or decreasing costs. Optimal capital structure Cheaper cost of leverage INDUSTRY DYNAMICS Improved competitive dynamics in the industry 25
The Product Equity Savings Fund - Series 1 26
About the Fund A 3 year close ended fund investing in focused 20-25 stocks # Aims to provide long-term capital appreciation by: Identifying companies which are likely to see expansion in ROE over next 3 years period. Identifying companies which are likely to gain from improving economy, a favourable regulatory change, change in industry dynamics or company specific factors. Being adequately diversified, while not restricting itself to benchmark sector weights. # The number of stocks provided is to explain the investment philosophy and the actual number may go up or down depending on then prevailing market conditions at the time of investment. 27
Investment Approach Investable Universe (Constituents of CNX 100, BSE 100, Maharatna, Navratna, Miniratna) Recurring process Data Integrity Screens Company Characteristics Strong competitive edge Sustainable market position Proven business model Financial Strength Business Durability Valuation & Fundamental verification Valuation Parameter Increasing trend in ROE Improving B/S structure High Conviction Portfolio (20-25 stocks) Daily Risk control 28
Scheme Features Type of scheme Investment Objective Options Minimum Application Amount Entry & Exit Load Benchmark Index Fund Manager A Close ended RGESS qualifying equity scheme The primary investment objective of the Scheme is to seek to generate capital appreciation, from a portfolio that is constituted of equity securities which are specified as eligible securities for Rajiv Gandhi Equity Savings Scheme (RGESS). The Scheme may also invest a certain portion of its corpus in money market instruments from time to time. There can be no assurance that the investment objective of the Scheme will be realized. Direct Plan Growth and Dividend Option; Regular Plan Growth and Dividend Option Rs 5,000 (plus in multiple of Rs.10) Not Applicable CNX 100 Index Manish Gunwani & Venkatesh Sanjeevi 29
What is Rajiv Gandhi Equity Savings Scheme? Rajiv Gandhi Equity Savings Scheme or RGESS is a new equity tax advantage savings scheme for equity investors in India, with the stated objective of "encouraging the savings of the small investors in the domestic capital markets." The Scheme qualifies under Rajiv Gandhi Equity Savings Scheme (RGESS), 2012. Note: Please refer to the RGESS, 2012 notified by the Central Government on November 23, 2012 and SEBI Circular number CIR/ MRD/DP/32/2012 dated December 06, 2012 for additional details. Product Labeling for ICICI Prudential Value Fund Series 1 & 2 This product is suitable for investors who are seeking*: Long term wealth creation solution A close-ended diversified equity fund that aims to provide capital appreciation by investing in a well diversified portfolio of stocks through fundamental analysis. * Investors should consult their financial advisers if in doubt about whether the product is suitable for them. HIGH RISK (BROWN) Note: Risk may be represented as: (BLUE) investors understand that their principal will be at low risk (YELLOW) investors understand that their principal will be at medium risk (BROWN) investors understand that their principal will be at high risk 30
Disclaimers All figures and other data given in this document are as on 31st December 2013 unless stated otherwise. The same may or may not be relevant at a future date. The AMC takes no responsibility of updating any data/information in this material from time to time. The information shall not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of ICICI Prudential Asset Management Company Limited. Prospective investors are advised to consult their own legal, tax and financial advisors to determine possible tax, legal and other financial implication or consequence of subscribing to the units of ICICI Prudential Mutual Fund. Disclaimer: In the preparation of the material contained in this document, ICICI Prudential Asset Management Company Ltd. (the AMC) has used information that is publicly available, including information developed in-house. Some of the material used in the document may have been obtained from members/persons other than the AMC and/or its affiliates and which may have been made available to the AMC and/or to its affiliates. Information gathered and material used in this document is believed to be from reliable sources. The AMC however does not warrant the accuracy, reasonableness and / or completeness of any information. We have included statements / opinions / recommendations in this document, which contain words, or phrases such as will, expect, should, believe and similar expressions or variations of such expressions, that are forward looking statements. Actual results may differ materially from those suggested by the forward looking statements due to risk or uncertainties associated with our expectations with respect to, but not limited to, exposure to market risks, general economic and political conditions in India and other countries globally, which have an impact on our services and / or investments, the monetary and interest policies of India, inflation, deflation, unanticipated turbulence in interest rates, foreign exchange rates, equity prices or other rates or prices etc. ICICI Prudential Asset Management Company Limited (including its affiliates), the Mutual Fund, The Trust and any of its officers, directors, personnel and employees, shall not liable for any loss, damage of any nature, including but not limited to direct, indirect, punitive, special, exemplary, consequential, as also any loss of profit in any way arising from the use of this material in any manner. Further, the information contained herein should not be construed as forecast or promise. The recipient alone shall be fully responsible/are liable for any decision taken on this material. Mutual Fund investments are subject to market risks, read all scheme related documents carefully. 31