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Sundaram Select Micro Cap
NEW FUND OFFER – Series 1
From – 16th December 2013
To – 30th December 2013
INTRODUCING
(A five-year closed-end equity scheme)
Micro to Mega – Case Study #1
Right Product at the Right Time
Rising per capita incomes
Inadequate public transportation
system
Need for reliable & safe personal
transportation
Fuel-efficient value for money
product
During this 20-year period, the
company’s sales grew by over 800 times
- from Rs 300 crore to Rs 23,770 crore
HERO MOTOR COMPANY LIMITED
Company tapping exploding markets
Source: Bloomberg; Data as of October 31, 2013
Market Capitalization
Micro to Mega – Case Study #2
Micro caps are under-
researched, or mostly not
researched
Hence, no market price
discovery in these stocks
As these companies scale up,
they start getting into the
radar of institutional investors
Consequently, greater stock
returns are realized not only
by capturing higher growth,
but also better valuation
multiples
While profits grew 6.4x, the valuations
increased 5x and hence, the stock
returned 32x
IPCA LABORATORIES LIMITED
Multiplier effect on returns
Source: Bloomberg; Data as of October 31, 2013
Micro to Mega – Case Study #3
1997: S&P Acquires 9.68 % in
CRISIL from ADB
February 2005: Open offer to
acquire 3.53mn shares
representing 55.57% equity at
Rs 68 per share
April 2005: Revised Open offer
at Rs 77.5 per share to
acquire 4.17mn shares
representing 65.57% equity;
Premium of 55.74% over
average weekly high
June 2013: S&P made another
open offer at Rs 1210
CRISIL LIMITED
Growth due to acquisition
Market Capitalization
Source: Bloomberg; Data as of October 31, 2013
Post Feb 2005, in a one-year period the
market cap of the company grew 2.9 times
- from Rs 340 crore to Rs 1000 crore
Many mega caps have started as micro caps
India, being a land of entrepreneurs, provides opportunities for young people
to build on their dreams
Market opportunity is small in the starting phase and hence not meaningful for
larger players
Companies go through a significant evolution process (regulatory and
otherwise) which requires entrepreneurs to be nimble footed
Over time, businesses move from unorganized to organized segment (e.g.,
retail, multiplexes, fashion)
As these new business are established and scaled up meaningfully, they:
Witness large expansion in sales and profits
Enter the radar of institutional owners and price discovery happens
Become valuable acquisition targets
Significant buying opportunity
Across Cap Curve
The Small Cap Index is currently trading at significant discount compared to
mid & large caps
S&P BSE Sensex S&P BSE Mid Cap S&P BSE Small Cap
*Price Earning Ratio
19.4 13.7 11.9
Discount vs S&P BSE Sensex 42% 63%
Across Time
The Small Cap Index is trading at a 73% discount from its historical high in
January 2008
January 2008 October 2013
20.6 11.9
* Current PE based on FY 13 earnings Source: Bloomberg; Data as of October 31, 2013; Research: In-house
Growth has bottomed out; the recovery is here to stay
MSCI India*, Net Sales (%YoY) MSCI India*, PAT (%YoY)
Q2 GDP has clearly established the troughing of growth
FY14 inflation will be at least 100bps below last fiscal and monetary policy
easing is round the corner
Q2 results have been encouraging and are reflecting the recovery
Net Sales and PAT have seen a clear pick-up in growth
* MSCI India Ex-Energy Source: Morgan Stanley, Sundaram Mutual Data as of October 31, 2013; Research: In-house
Micro Cap sector profile displays cyclical bias
Sectors Weights
Materials 22.7
Industrials 22.0
Consumer Discretionary 20.6
Financials 11.9
Health Care 6.1
Consumer Staples 5.9
Information Technology 5.2
Utilities 2.9
Energy 1.9
Telecommunication Services 0.8
Share in NSE Market Cap (%)
6%
Micro Cap sector profile Total universe is 1108 stocks
The total market cap of micro cap
stocks is Rs 4 lakh crore
Microcaps are 6% of the total
universe of NSE stocks
They are diversified among sectors
with a bias towards cyclical
Source: Bloomberg; Data as of October 31, 2013; Computation: In-house
Hence, micro caps tend to outperform in upcycles
Micro-caps are high-beta stocks
Hence, during the economy and market up
cycle they have returned 14x in the 5-year
period 2003-08
10-year Performance of Large, Mid & Small cap indices
CAGR of Large, Mid & Small Cap indices
Source: Returns in %; Bloomberg; Data as of October 31, 2013
As we believe that the stage is set for the
next up-move in the economy and
markets, we believe the micro caps are
set to outperform their larger cap space
Investment Strategy
The fund will invest in stocks that are equal to & greater than the 301st stock
in the NSE (after sorting the stocks by market-cap in descending order)
The portfolio will predominantly invest in multi-national companies:
companies that have more than 26 per cent foreign promoter ownership
The fund manager will aim at building a reasonably diversified, 30-stock
portfolio
The fund proposes to adopt an investor-friendly dividend policy (surpluses
permitting) to ensure that liquidity is not restricted for a 5-year horizon.
Dividends maybe declared between NAV band of Rs 12 to Rs 16
The fund manager will book 50% of the profits in stocks that rise more than
400%
If the 400% rise happens within the first 3 years, the fund manager will
reinvest in new micro cap ideas
Should the 400% rise happen after the first 3 years, the fund manager will
deploy the proceeds outside the micro cap theme to help protect investor
interest
Why MNC?
Technology
Leaders
As India evolves, technological excellence will become more important
Possess the required expertise and experience of dealing in many
developing markets
Immense pricing power
Importance of
India
Significant part of growth for MNCs for the next decade will come from
markets like India
Hence, the management in MNCs are giving more importance to their
Indian subsidiaries
Export
Potential
Over time, some of the companies would achieve critical scale, where
exports from Indian entities would become viable
We have already seen some of the growth stories based on exports
Why MNC?
The “25% free
float” advantage
It has taken away “de-listing premium”; cheaper valuations
Free float has increased and hence made the universe more investible
Managements have become more accessible
Scarcity
Advantage
FDI opening up is reducing the opportunity to play MNC in listed space
More and more companies going for 100% owned entities; hence,
limited number of players in the listed space
Corporate
Action
MNCs are looking to increase their stake in Indian subsidiaries
CY13 witnessed the largest ever buy-back in India whereby Unilever
increased its stake in Indian entity; This leads to a permanent re-rating
of the stock
Global
Consolidation
Global consolidation has also led to value creation
This has led to open offers due to “change in management”
In many cases, since the parent already owns 75%, another open offer
has resulted into eventual de-listing
Micro cap MNCs have outperformed their larger peers
10-year Performance of MNC micro caps
An equal weighted portfolio of top
30 stocks by market-cap
Displayed stronger performance
across cycles
While they have returned 8x in the
5-year period 2003-08, they have
hugely outperformed all market
segments in the next 5-years
Outperformance due to:
better balance sheet with zero
debt
better pricing power because
of technology edge leading to
no impact on profitability
Source: Bloomberg; In-house computation ; Data as of October 31, 2013
Strong re-rating in MNC microcap in upcycle
Source: Bloomberg; In-house computation
MNC microcaps got re-rated from a PE of 8.5x to a peak PE of 21x during
the period FY03-08
Micro Cap MNCs – Case Study
Revenue (Rs Crore) PAT (Rs Crore) Market Cap (Rs Crore) PE Ratio (x)
FY03 FY08 FY13 FY03 FY08 FY13 FY03 FY08 FY13 FY03 FY08 FY13
Amara Raja 199 1083 2961 7.4 94 287 57 1114 4690 7.7 11.8 16.4
Bata India 650 868 1843 -7.2 41 172 142 914 4616 -19.9 22.5 26.8
Fag Bearings 244 641 1436 20 80 159 86 988 2443 4.4 12.4 15.3
Whirlpool 1095 1565 2773 21 32 128 190 567 2811 8.7 17.5 22.0
Source: Bloomberg; In-house computation
Disclaimer
Mutual Fund investments are subject to market risks, read all scheme related documents carefully. Copies of the Statement of Additional
Information, Scheme Information Document and application form with Key Information Memorandum may be obtained from the offices / Investor Service
Centres of Sundaram Mutual or its authorized distributors or downloaded from www.sundarammutual.com. Past performance is no guarantee of future
result. General Risk Factors: There can be no assurance or guarantee that fund's objectives will be achieved. NAV may go up or down, depending on
the factors and forces affecting the securities market. Main types are market risk, liquidity risk, credit risk and systemic risks. At times, liquidity of
investments may be impaired. There is uncertainty of dividend distribution and risk of capital loss. Past performance of the Sponsor/Asset Management
Company/Fund does not indicate the future performance. Investors in the schemes are not being offered any guaranteed or indicated returns. Sundaram
Select Micro Cap Series I is only the name of the scheme and do not in any manner indicate either quality or future prospects and returns. General
Disclaimer: This document is issued by Sundaram Asset Management, an Investment Manager registered with the Securities and Exchange Board of
India in India and is produced for information purposes only. It is not a prospectus or Offer Document or Scheme Information Document or an offer or
solicitation to buy any securities or other investment. Information and opinion contained in this document are published for the assistance of the recipient
only; they are not to be relied upon as authoritative or taken as a substitution for exercise of judgment by any recipient. They are subject to change
without any notice and not intended to provide the sole basis of any evaluation of the instrument discussed or offer to buy. It is neither a solicitation to
sell nor shall it form the basis of or be relied upon in connection with any contract or commitment whatsoever or be taken as investment advice. The
information and opinions contained in this communication have been obtained from sources that Sundaram Asset Management believes to be reliable; no
representation or warranty, express or implied, is made that such information is accurate or complete and it should not be relied upon as such. Sundaram
Asset Management neither guarantees its accuracy and/or completeness nor does it guarantee to update the information from time to time. This
communication is for private circulation only and for the exclusive and confidential use of the intended recipient(s) only. Any other distribution, use
or reproduction of this communication in its entirety or any part thereof is unauthorized and strictly prohibited. By accepting this document you agree to
be bound by the foregoing limitations. This communication is for general information only without regard to specific objectives, financial situations and
needs of any particular person who may receive it and Sundaram Asset Management is not soliciting any action based on this document. Sundaram Asset
Management in the discharge of its functions, may use any of the data presented in this document for its decision-making purpose and is not bound to
disclose the same. For scheme specific risk factors, asset allocation, load structure, fund facts and taxation aspects please refer the Statement of
Additional Information and Scheme Information Document available online and at branches/Investor Service Centres. Statutory: Mutual Fund: Sundaram
Mutual Fund is a trust under Indian Trusts Act, 1882 Liability for sponsor is limited to ` 1 lakh. Sponsor: Sundaram Finance Ltd. Investment Manager:
Sundaram Asset Management Company Ltd. Trustee: Sundaram Trustee Company Ltd.
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