india strategy long term growth with reduced volatility
TRANSCRIPT
India Value Investments Limited
Established 1996
India Strategy Long Term Growth with Reduced Volatility
June’17
Advised by
Presentation Flow
• About INVIL
• Performance
• Portfolio
• Service Providers
• Structure
• About investment advisors – ASK Investment Managers
• About Strategic Investment Advisors
• India Opportunity
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Advised by
INVIL
• Launched in 1996, INVIL is one of the longest running India focused strategies and one of the earliest to identify India’s high growth potential
• Aims to achieve medium to long term capital appreciation from investments with a `long’ bias in Indian companies with a proven track record
• Ability to tactically hedge the portfolio to lessen the impact of downward market movement
• ASK Investment Managers, India, are the ‘long only’ advisors and carry superior long term performance track record and independent recognition
• 2011- INVIL ranked as the best performing India focused Fund in the Morningstar India Funds category (Source : Morningstar Fund Spy Report)
• INVIL was Ranked No. 1 in all India offshore funds category by Forsyth Partners for 3 year
performance ending Feb 2005 and for 1 year performance ending Dec 2003.
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Performance : as on 30 Jun 2017
% INVIL NAV (GBP) NIFTY (GBP) [Benchmark]
FTSE (GBP) S & P 500 (USD)
1 year (Absolute) 13.8 23.4 12.4 15.5
2 year (CAGR) 13.6 16.3 5.9 8.4
3 year (CAGR) 23.1 15.0 2.7 7.3
5 year (CAGR) 17.1 13.5 5.6 12.2
10 year (CAGR) 7.0 7.9 1.0 4.9
Since inception** (CAGR)
11.3 8.8 3.3 6.4
Since inception (Absolute)
867.0 497.3 97.7 275.4
Note; (1) 2 to 10 years numbers are in CAGR terms; and Note (2) ** INVIL was launched in 1996 (3) Source of INVIL NAV: Fund administrator. (4) Source of indices : Bloomberg.
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INVIL Performance since 1996
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GBP 10,000 invested in March 1996 had grown to GBP 96,700 in June 2017
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INVIL performance since April 2010 – with selective use of hedging
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Psychographics : as on June, 2017
Portfolio Quantitative Variables FY18
P/E ratio 27.2
ROE (%) 29.4%
Business ROCE (%) 61.9%
EBIT/EV 6.3%
EPS Growth (%) 20.5%
PBT/Market Capitalization (%) 6.5%
Dividend Yield (%) 0.8%
Market Capitalization Break up (%)
Large Caps 84
Mid Caps 0
Small Caps 0
Cash 16
Total 100
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Auto, 20%
Financials, 16%
Materials, 10%Industrials, 9%
Energy, 9%
FMCG, 6%
Retail, 5%
Chemicals, 5%Healthcare, 4%
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Portfolio Characteristics (%)
Market
Domestic 71
International 14
Theme
Consumption 66
Investment 18
Value
Income 84
Asset -
Owner
MNC 22
Non-MNC 62
Characteristic
Replicable 64
Episodic 20
Nifty/Non Nifty stocks %
Nifty 20
Non Nifty 64
Cash 16
Total 100
Top 10 Holdings %
HDFC Bank Ltd 6
Maruti Udyog Ltd 6
Bajaj Finance Limited 6
National Buildings Const Corp Ltd 6
Britannia Industries Ltd 6
Motherson Sumi Systems Ltd. 5
Eicher Motors Ltd. 5
Hindustan Petroleum Corp Ltd. 5
PI Industries Ltd 5
Page Industries Ltd. 5
Psychographics : as on June, 2017
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Service Providers
Service Providers
Investment Advisor ASK Investment Managers Private Ltd., Mumbai
Strategic Investment Advisor Strategic Investment Advisor Limited
Fund Administrator International Financial Services Ltd., Mauritius
Fund Auditor PricewaterhouseCoopers, Mauritius
Global Banker Barclays Bank, Mauritius
Custodian HDFC Bank Limited, India
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Mauritius
India
ASK Investment Managers
(Investment Advisor)
INVIL (Foreign Institutional
Investor [FII] )
Investment Management &
Advisory Fee
Structure
SIA (Strategic
Investment Advisors)
Advisory Services
Advisory Fee
Advisory Services
Investors
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• NAV based Investment Company structure
• Regulated by Financial Services Commission, Mauritius
• Indo-Mauritius tax treaty protection
• No capital gain/dividend tax in India or Mauritius
Investment Management &
Advisory Fee
Advised by
Fund Features
Launch March 28, 1996
Geography Indian Equities
Strategy Long Only
Domicile / Status SEBI registered FII domiciled in Mauritius
Base Currency GBP/ USD/ EURO
Fund Structure Pooled/Commingled fund
ISIN MU0188S00006
Bloomberg Ticker INVILMS MP Equity
Dealing / Valuation Weekly / Daily
Minimum Investment GBP 15,000 / USD 25,000
Subscription Charges Up to 4%
Fees 1.5% p.a. management fee & 20% p.a. performance fee subject to higher watermark
Tax treatment No withholding tax on capital gain/ dividend in India or Mauritius
Eligibility Eligible for SIPP investments for UK investors and also being offered through IFAs to suitable investors. Funds current status for UK tax purposes is ‘Reporting Fund’
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ASK INVESTMENT MANAGERS (Investment Advisors)
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• 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 philosophy
• Disciplined research and investment process
• Experienced team of CIO, 3 portfolio managers and 6 investment professionals
• Purely discretionary money management
• Clients include Institutions, Family Offices, pension funds and private clients across key regions
ASK Investment Managers
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Investment Philosophy
• Key Tenets of the Investment Philosophy
• Capital Preservation
• Capital Growth….and in that order
• Investment Approach
• Price the value rather than valuing the price
• Buy “growth” businesses at “value” prices
• Disciplined investing into outstanding businesses
• Seek compounding opportunities
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Investment Process
• Combination of thorough research and disciplined portfolio construction process
• Research is a judicious blend of qualitative analysis and carefully crafted quantitative approach
• Daily team meetings and discussions – focus on idea generation
• Rigorous bottom-up analysis forms the core of its research
• Top-down overlay applied to align portfolios to benefit from the macro structural positives of the Indian economy
• Risk management is systematically integrated at every step of the investment process
• “ASK WARE” - Proprietary database tool with detailed financials on all companies under coverage
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Portfolio Construction Strategy
• Investment universe of ~223 companies (~70% of India’s market cap.)
• Evaluation of detailed financials and valuation on each of these companies
• Optimally aggregate 19-22 stocks to construct a stable and consistent portfolio with ability to generate superior returns over time
• Portfolios are an amalgamation of well researched businesses with a clear strategy
• Model portfolios for all strategies/concepts
• Constant review of model portfolios to keep them updated with best ideas
• Weekly portfolio manager meetings to discuss portfolio strategy
• “Portfolio Psychographics” - proprietary portfolio review tool
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Key investment attributes for wealth creation
Size of the Opportunity
• Size of pond Vs. size of fish
• Dominance
• Resilience
• Liquidity
Quality of Business
• Superiority of ROCE
• Strong moat. Impregnability.
• Sustainability
• Key pivot of strong wealth creation
Earnings Growth
• Quantum
• Consistency
• Durability
• Predating (Early Vs Later)
• Compounding power
Value
• Value – Price Gap
• Margin of Safety
Four key investment attributes
In addition to the above, good management quality is a given constant
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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 of 15% for cash flows in financial model builds conservatism in value estimation
• 6-8 interactions per year with the management team of every portfolio company
• Individual stock cap at 10% and Sector cap at 25%
• Risk manager on board to implement and supervise the risk management
• Compliance & Risk management – focussed on regular monitoring and reporting
• Use of Nifty Index Futures to lessen the impact of downward movement in market
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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
• Long-term performance track record
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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 known 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 - 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
Gaurav Misra – Senior Portfolio Manager 21 years of experience in the field of equity research and portfolio management. His responsibilities include managing
all institutions and family office mandates under Growth strategy. He has also been responsible for in the past.
Has worked with IL&FS Investsmart, Vickers Ballas Securities (Private Equity), Alchemy Share & Stock Brokers and Classic Share & Stock broking
Biographies
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STRATEGIC INVESTMENT ADVISORS
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Strategic Investment Advisors Limited
Consultants INVIL, through Strategic Investment Advisor Limited has appointed the following individuals as Consultants to provide analytical, commercial and taxation advice to the Fund. They have served in this capacity since the inception of the Fund. Jayesh Manek BSc (Hons), MRPharmS, (British), aged 55, was a Director and Shareholder of Dallas Chemists Limited, a retail pharmacy chain based in the UK. In 1994 and 1995 he won the Sunday Times Fantasy Fund Manager contest. He has been Fund Manager of Manek Growth Fund since 1998 and a Director of the Company, Manek Investment Management Limited since October 1995. Vipool Shah MA (Cantab) FCA, CTA, Dip PFS (British), aged 64, is Tax Partner at Godley & Co, a London-based firm of Chartered Accountants specializing in taxation and advising non -UK domiciliaries, NRIs and successful family companies in the SME sector. In recent years, he has been advising a growing number of Indian companies setting up in the UK. Mr. Shah is the co-author of the book "Inward and Outward Investment: India and the UK". He read economics at Queens' College, Cambridge and qualified as a chartered accountant with Grant Thornton. Subhash V Thakrar
Subhash V Thakrar B.Com (Acc), FCA, FRSA, aged 61, is a Consultant to CBW LLP, a top 50 UK accounting firm, Former Director, Blackstone Franks Premnarayen Pvt (India) Limited and ICS Infrastructure Pvt (India) Ltd.. He has also been involved in a number of joint ventures and collaborations between UK, South African, Australian companies and Indian companies. He is the Co promoter of Triangle Real Estate India Fund, listed on Mauritius Stock Exchange and has been Director since July 1998. Mr. Thakrar is the past Chairman and current Vice President of London Chamber of Commerce and Industry, UK. Sanjiv Shah
Sanjiv Shah MA (Cantab) (British) aged 53, is the Chief Investment Officer at Sun Global Investments in London. He started his career at the Bank of England and has worked for Paribas Capital Markets, Lazard Brothers and The Financial Services Authority. He has an M.A. in Economics from Cambridge University. Sanjiv Shah was a Portfolio Manager and Director of Agra India Fund Limited, a Mauritius-domiciled Hedge Fund that invested in Indian Equities. He also manages a number of Managed Portfolios across various asset classes such as Bonds and Equities. He is a Director of a number of Offshore Investment Funds.
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Directors
In addition to Jayesh Manek and Subhash Thakrar there are three other Directors:
K Dev Joory
He is the co-founder and Executive Director of International Financial Services Ltd. (IFS), a leading management company specializing in International Tax. He presently looks after International Taxation and Marketing. His prior experience has been with PWC, Touché Ross (London), Arthur Young and as a Senior Tax Executive at Ernst & Young, London office. He has over twenty years of experience in International Tax planning and business structuring. Areas of specialization cover International Banking, Financial services including Islamic banking, offshore fund structuring and administration, Intellectual and Real property planning, Aircraft and ship leasing, franchising and retail operations.
Qualification - Fellow of the Institute of Chartered Accountants in England and Wales and Associate member of the Society of Trust and Estate Practitioners.
Couldip Basanta Lala
He is the co-founder and Executive Director of International Financial Services Ltd (IFS). He has also led and directed the production of the “IFS Guide to Mauritian Company Law”. He is also a member of the Executive Committee of the Global Board of Trade. He has been a partner of one of the Big Four Accounting Firms and in the past has lead audit assignments of World Bank financed projects in East and West Africa. He was the Chairman of the Stock Exchange Commission. He has also been called upon by the Mauritius Government in the past to serve on commission and fact-finding committees. Mr. Lala presides on numerous other Board of companies, with diverse interests, ranging from financial institutions, private equity and hedge funds, tourism ,to oil and general trade business.
Qualification - Fellow of the Institute of Chartered Accountants in England and Wales.
Abdool Fareed Soreefan
Joined IFS in August 1995 and is presently overseeing corporate secretarial matters, compliance issues and fund set up/ administration. He has 11 years experience as a Court Officer with the Mauritius Judicial Department and worked for about a year with the secretarial arm of KPMG as Deputy Manager, being in charge of its secretarial and insolvency departments. Mr. Soreefan also serves as Director of offshore companies and investment funds. Qualification – Chartered Secretary from the UK Institute of Chartered Secretaries and Administrators and holds a Masters in Business Administration (Finance), UK.
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INDIA OPPORTUNITY
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Indian Economy – Size and Diversity
• In current dollars terms, the GDP stands at US$ 2tn.
• In purchasing power parity terms, India is the third largest economy at US$ 4.5tn
• Holy trinity of key bulwarks: Consumption, Savings and Investments
• Consumption accounting for 57% of GDP, Savings at 31% and Investments also at 29%
• GDP is well-balanced across Services (56% of GDP), Manufacturing and Industry (29%)
and Agriculture (15%)
• Largely domestic economy (94% of GDP), making it more resilient to external shocks
• Rising middle class
• Robust banking sector and well-developed capital markets
• Strong capital efficiency of corporate sector
• Favorable demographics
Advised by
Global Situation and India: A Study in Contrast
• Global situation stable – India emerging even better
• US Policy, post Trump, could have a global impact
• Greater internal focus especially if accompanied by protectionism could harm ROW
• However India could benefit overall and a few sectors specifically
• Recent global volatility could sustain from
• Further surprise from the political side – Brexit, Trump. Italy and France Next
• Stronger US Fed rate hike / expectation
• Highly Leveraged EMs & their corporate sector
• India – not only doing well, but also improving
Advised by
India Update: Demonetization • An epoch-making step - will fundamentally alter how business and policy is conducted in India.
• Notwithstanding short-term adjustments , longer-term effect will be salubrious.
• Fundamental long-term shift from physical assets in favour of financial assets
• The cleansing of the system will have therapeutic and curative effect and this step, along with
Goods and Service Tax (GST), will go a long-way in giving a body blow to the parallel economy.
• Money under mattress will start making positive contribution to productivity of capital.
• Whatever raises Return on Capital Employed (ROCE) in the system will eventually raise the
value of the system.
• Over time,
• banks and formal financial system will gain,
• cost of capital will decline and
• yield-poor assets like gold will lose the relative importance in the system.
• Consumption may, in the short-term, get affected but will gain immensely over long-term
• Not just for now, but for future as well, the process of parallel economy will get stymied
• In sum, over time, economy will get boosted materially and on a permanent basis
Advised by
Indian Macros have been improving
• Concerted policy actions and monetary management have led to
• Recent budget continues on path of fiscal discipline
• Early stages of pick up in activity
• Demonetization to spur the formal economy
• Inflationary pressures to ease further
• Accelerate the drop in interest rates
• Earlier policy has helped 175 bps cut in interest rates
• Reduction of fiscal and current account deficits to comfortable levels
• India’s trade deficit at a decadal low
• Good Monsoons, decent MSP price hikes
• INR might be volatile on short-term global cues; expect medium-term stability
• Pick up in Foreign Direct Investments (FDI) – 45% y-o-y growth
• Forex reserves at $360 billion – the highest ever
Advised by
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India Update: Policy Actions
Policy Action Expected Benefits
Demonetization A long-term positive as the country moves to cashless modes of
transactions & better monitoring
Fuel Deregulation Market determined pricing has led to more efficient utilization /
consumption of fuels
Auction of Natural Resources Coal, Minerals and Spectrum: increased transparency and efficiency
through e-auctions
Jandhan Yojna Financial Inclusion: Opening of 350 million + new bank accounts for the
unbanked
Direct Benefit Transfer Cooking gas, fertilizer and food subsidy: Reduces leakages and
government subsidy bill
Make In India Strong focus on Manufacturing sector
Ease of Doing Business Marked improvement seen in the past few quarters
Liberalized FDI Defense sector opened up, many other sectors have been beneficiaries
Insurance Health and Insurance cover for the needy
Housing “Housing for All” by 2022 and sanitation by 2019
Electricity “Electricity for All” including un-electrified regions by 2018
Road, Irrigation and
Infrastructure
Strong ramp up in road and renewed focus on irrigation; major
expenditure in public infrastructure programme
Advised by
Parameters Trends and Outlook
Inflation Declining slope; To remain within RBI target of 5%
Oil Outlook steady
Interest Rate 175 bps rate cut since Jan 2015; more expected in FY18
Earnings FY17 impacted by demonetization (yet positive for our portfolios); FY18
expectations are better
Valuation Slightly below Long-Term average; rather attractive
Capex Cycle Private sector revival may take time; Government and FDI related capex
cycle is performing healthily
Sentiments Remain overall positive
Rupee INR has emerged as one of the most robust currencies against USD
Global Stable but uncertain
Outlook: India
Advised by
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Outlook: Indian Markets
• Markets have been flat for 2016 and have started on a good note in 2017
• Our portfolios have done better
• Fundamentals are clearly getting better for the medium and long-term
• While we don’t want to opine on a short period, we remain very positive for long-term
• Our investment model continues to identify and invest into outstanding businesses and
investments
• which continue to do well over long run
• without much reference to underlying economy or markets
• our good micro stock-picking coincides with improving macro economic fundamentals
Advised by
Long-term Earnings Growth is a great proxy for Long-term Investment Returns, subject to:
• Quality of Growth (ROCE or Capital Efficiency) being superior
• Valuation at a point of purchase being favorable
Road Ahead: Indian Equity Markets
Advised by
Earnings Growth
• GDP growth rate to expand from 4.5% in FY 14 to around 8% by FY 19. for FY17, it is expected to
be over 7%
• The long-term GDP to Corporate Profit multiple has been over 2.5 times
• Earnings growth are on a structural rise and for FY 18-22, it is expected at 15%+ CAGR
The Road Ahead
Advised by
Quality of Growth: Improving ROCE
• Average Corporate Return on Capital Employed for FY 16 stood at 16.5%
• It is expected to climb back to over 20% by FY 19
• Rising capital efficiency typically implies, and results into, expanding valuations
The Road Ahead
Advised by
Valuations: Fair
• Valuations are at around 15 times on a one-year forward (at 10-year average)
• Twin effects of rising corporate profits and improved valuations will imply healthy investment
returns over a long period of time
• Interest rates: 10 year G-sec yields(at 6.4%) are currently at multi-year low levels and expected to
decline further; Equity yield, on the other hand, is at 6.7% presently.
The Road Ahead
Advised by
• Over last 25 years, Indian markets have never experienced a real bull market
• Previous cycles of 1987 – 89, 1991 – 92 and 2000 – 01 have all been shallow, narrow, of a short
duration or inadequately supported by fundamentals
• Even the rise of 2004 – 07, a relatively superior cycle, lost fundamental legs from 2006 onwards
• The decade ahead will witness the first, real, secular, compounding, transformational rise of
Indian equity markets
• Misallocation or under-allocation to equities, now, will result in serious real cost extracted from
the wealth
The Road Ahead
Advised by
Long Term Returns of Indian Markets Vs Global Markets
Analysis as on 30th Jun 2017 (CAGR %)
Markets 20 years 10 years 5 years
India 11% 8% 13%
China 5% -2% 7%
USA 4% -1% 7%
UK 5% 5% 12%
Japan 2% 1% 6%
Australia 0% 1% 17%
Brazil 8% 1% 3%
Russia N.A. 1% 6%
MSCI EM Index 3% 0% 2%
Source: Bloomberg
Note: Returns are in local currency of respective countries
Advised by
Fair Valuations are supported by long term view
Advised by
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. INVIL 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 INVIL 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.
INVIL 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.
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India Value Investments Limited
Established 1996
Thank You
Registered office: International Financial Services Ltd., IFS Court, TwentyEight, Cybercity, Ebene, Mauritius Ph: (230) 467 3000 / Email : [email protected]