Indian Entrepreneur Fund A 5 Star Rated Fund by Morningstar Advised - - PowerPoint PPT Presentation

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Indian Entrepreneur Fund

A 5 Star Rated Fund by Morningstar

Advised by

• Indian Entrepreneur Fund: The Strategy
• Philosophy
• Value Creating Traits
• The Study: Indian Entrepreneur Businesses
• About ASK Investment Managers
• Fund Features
• Biography

Contents

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Indian Entrepreneur Fund

The Strategy

Note: Promoter / Family stake of at least 26% is desired in portfolio companies, except in rare and fit cases.

• Invests into Indian entrepreneurial businesses of size, superior quality and high growth at fair

valuations

• IEF follows a very rigorous, disciplined, strong filters-based investment approach, while embracing

value-creating traits (more about it later)

• Invests into quality entrepreneurs with
• Vision and dynamism
• High standards of governance
• Wisdom
• Demonstrated capital allocation and capital distribution skills
• Superior quality achieves the preservation of value and high growth is sought to achieve expansion
• f value
• Promoter with adequate skin in the game ensures alignment of management and shareholder

interests

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A 5 Star Rated Fund by Morningstar

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Why Entrepreneurial/Family Businesses?

We believe Entrepreneurial / Family Businesses have

• Passion, Conviction and Commitment
• Longer term view
• Own skin in the game – Alignment of interest
• Ability to spot opportunities early
• Dynamic leadership
• High score on innovation and intellectual capital

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1) Capital Preservation 2) Capital Appreciation over a period of time

Key Investment Objectives

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• Greater certainty of earnings Vs mere quantum of earnings growth
• Superior and consistent quality of earnings Vs mere quantum of earnings growth
• High quality at a reasonable price Vs inferior quality at arithmetically “cheap” price.

Overarching Investment Philosophy and Principles

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• Price the value rather than valuing the price
• Buy “growth” businesses at “value” prices
• Disciplined investing into outstanding businesses
• Seek compounding opportunities

Investment Approach

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Value Creating Traits that we seek in our investments…

• Material Size of Opportunity
• Superior Management Quality
• Strong Earnings Growth – A Compounding Machine
• Superior Quality of Business
• Favorable Value

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Value Creating Traits

Size of Opportunity

• Size of Opportunity is a foundation for Continual Growth (of profits) and creating a Compounding

Machine: Foundation on which large Value Creation rests

• It is Less about “How Large a Business is” and more about “what it Can Be”. Debate is really about

Future Size rather than the Present One.

• Size of pond Vs. size of fish: It is more about size of pond rather than size of fish. Even a small

capable fish can grow big if it is in a big pond and if the pond conditions are right.

• The debate between Large-Cap and Mid-Cap is largely an artificial one

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Value Creating Traits

Management Quality

• Two vital tests for Management: Capital Allocation and Capital Distribution
• Conglomerate Complexity leads to less Value Creation
• Corporate Governance is not a Jargonistic Buzz-Word. Honest Mistakes, even if significant, are

punished less by the markets compared to relatively less significant but Deliberate Violations of the Value System.

• Capital Allocation has a deep Impact on the Investment Returns
• Good Businesses typically seems to attract Good Management and Vice versa
• Management Quality has far higher impact on returns than investors care to imagine

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Value Creating Traits

Earnings Growth

• Price is nothing but a slave of earnings and its relentless growth over a period of time
• When Growth goes away, Equities reduce to a Bond
• Growth has a Way of covering Valuation Mistakes and fighting with Prolonged Period of Market

Machinations

• (Capital) Dilutive Growth results in lower Relative Value Compounding compared to Non-Dilutive

Growth.

• Qualitatively growth has to be secular, predictable, less volatile and business having character simple

enough to understand, even for a lay person

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Value Creating Traits

Quality of Business

• Two vital tests for Quality are Capital Intensity and Capital Efficiency
• Persistent and Superior Capital Efficiency is the single most important evidence of Quality
• Earnings Growth is necessary but not a sufficient condition for Value Creation
• Growth and Quality of Growth are not co-incidental for creating value but they actually cohabit to

do so

• Root to Preservation of Wealth solely resides in Quality i.e. Quality of Business and Quality of

Management…..

• Even with significant but Temporary Earnings Destruction, a High-Quality Business will manage to

shrug-off the blues

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Value Creating Traits

Value

• Price is Servant, Value is Master: Our investing is about Pricing the Value, rather than Valuing the Price
• Price–value gap: Margin of safety (or Implied Returns)
• Cash Flow is the only enduring reality: Accounting Profits and PE Multiples are Popular, but Unreal,

Pastimes

• Quality of Business Vs Valuation: Superior Business at a Reasonable Price is Wealth Creating rather

than Inferior Business at a Mathematically Cheap Price

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Key Investment Attributes

Size of the Opportunity

• Size of pond Vs. size of fish
• Dominance
• Resilience
• Liquidity

Quality of Business

• High quality of business (Superior RoCE)
• Strong moat. Impregnability.
• Sustainability
• Key pivot of strong wealth creation

Earnings Growth

• Quantum
• Consistency
• Durability
• Predating (Early Vs Later)
• Compounding power

Value

• Favorable Price-Value Gap
• Margin of Safety

Four key investment attributes

In addition to the above, good management quality is a given constant

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Imperatives of Equity Investing

• Proper calibration needed

across all aspects

• Quantum of returns being

just one of them Equity investing comes as a package! Returns

• Quantum
• Qualitative

Consistency Permanence Degree of Certainty Volatility

• Inherent in the character of equity investing
• Diminishes with time

Time Period

• Time is more important than timing
• Risk inversely correlated to time

Real Risk

• Margin of Safety / Risk of permanent loss of capital

 Paying excess price over value  Buying inferior quality

• Investor psychology towards investing

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Trait Parameter Tangible Rule Size of Opportunity Top 500 businesses Top 500 businesses as per Market Capitalization Scale and Resilience Bottom-line Minimum PBT of INR 100 cr. (Trailing 12 months or current fiscal) Management Quality Integrity, Vision, Execution, Capital Allocation and Capital Distribution skills Earnings Growth Earnings growth without capital dilution Minimum 20 to 25% earnings growth

• ver the next 3 to 5 years without

capital dilution Quality of Business Strong Capital Efficiency (Demonstrated or Imminent) Minimum ROCE of 25% Value Margin of Safety Price Value Gap of 20% or better

Rigorous Filters Based Approach

Value Creating Traits Parameters Tangible Rule

Value Creating Traits are converted into Rules as below

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Portfolio Research Methodology and Filteration



Top 500 as per market capitalization

500



Only companies > 25% promoter / family holding (except in very rare and fit cases)



Universe of Entrepreneur and/or Family Owned Business = 306 cos

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

Condition of minimum PBT of INR 100 cr (USD 16 mn)



Two more filters for selection of stocks a) Minimum 20 to 25% earnings growth over the next 3 to 5 years without capital dilution and b) Price-Value gap (margin of safety) of 20%



Indian Entrepreneur Fund

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

Subjective evaluation on management quality, their integrity, vision, past track record, execution, capital allocations and distribution skills, corporate governance standards etc.

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Quality of Business (Capital Efficiency) – Minimum ROCE of 25%

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The Study Indian Entrepreneurial Businesses

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Indian Entrepreneur Fund

The Study and the Origins

We analyzed the top 500 companies over a period of ten years (from 1999 to 2009) on four principal parameters

• Top-line
• Profitability (Operating Profit, Profit Before Tax, Profit After Tax)
• Capital Efficiency (Return on Capital Employed, Return on Equity)
• Actual Investment Value delivered (net of any capital dilution)

Four ownership buckets were examined

• Entrepreneur led firms
• Public Sector Undertakings
• Multi-national Corporations
• Pure Professional Firms

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The Study

Empirical Findings on Family Owned Businesses (FOBs)

• Continued Dominance
• Fastest growing businesses
• Superior operating performance
• Strong capital efficiency
• Biggest wealth creators

On most parameters entrepreneurial firms had done far better than the other forms of

• wnership and Indian Entrepreneur Fund was launched in March 2010 following our study

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The Study

Indian Entrepreneurial Firms

Note:

• Source: Capitaline
• Top 500 publically listed companies as per market capitalization (as on 31-Dec-13)
• Banks and Financial firms are excluded throughout this research study for definitional consistencies
• Entrepreneur/Family Owned Firms comprise ~50% of market cap of top 500 companies.

2013 2003 Categories

• No. of Firms
• Avg. Market Cap. % of Market Cap.

(Top 500) % of Market Cap. (Top 500) Entrepreneur run and/or Family Owned Businesses (FOB) 306 $1.8 bn 50 38 Public Sector Undertakings (PSU) 39 $ 4.2 bn 15 32 Multi-National Corporations (MNC) 57 $ 1.9 bn 10 15

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The Study

Growth of FOBs

Note:

• Banks & Financial firms are excluded from the above study for definitional consistencies.
• Audited consolidated results as on 31-March-2013 are considered for the above study.

Source: Capitaline 22

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The Study

Sectoral Spread

• Entrepreneurial firms are present across vibrant and emerging sectors
• Entrepreneurs identify sunrise sectors early e.g. Pharmaceuticals, IT, Telecom etc.
• Entrepreneurial firms include a blend of both manufacturing as well as service sectors

Note:

• Banks & Financial firms are excluded from the above study for definitional consistencies.
• Audited consolidated results as on 31-Dec-2013 are considered for the above study.
• Figures above are percentage of market cap of that category (FOB,MNC & PSU) within Top 500

Top 5 - FOB Top 5 - MNC Top 5 - PSU IT - Software 21% FMCG 35% Crude Oil & Natural Gas 27% Pharmaceuticals 11% Pharmaceuticals 10% Mining & Minerals 24% Automobile 9% Capital Goods 9% Power Generation & Distribution 20% Refineries 9% Automobile 8% Refineries 9% Telecom-Service 7% Cement 7% Gas Distribution 6%

Source: Capitaline 23

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The Study

Capital Efficiency

• High operating efficiency for Entrepreneurial firms
• Tight cost control
• High RoE for Entrepreneurial firms

Note:

• Banks & Financial firms are excluded from the above study for definitional consistencies
• Audited company results as on 31-March-2013 are considered for the above study.

Source: Capitaline 24

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The Study

Wealth Creators

Note:

• Data as on Dec-13
• Bank & Financial firms are excluded from the above study for definitional consistencies

TOP PERFORMERS – Investment Returns: 5-Year price CAGR (as on Dec 2013) FOBs PSUs MNCs

PI Industries 100%

Petronet LNG

28%

Hexaware Tech.

72% TTK Prestige 97%

G M D C

25%

WABCO India

65% Eicher Motors 86%

Indraprastha Gas

24%

Bata India

60% Eclerx 82%

Guj Gas Company

22%

GlaxoSmith C H L

53% Page Industries 77%

Engineers India

19%

Blue Dart

53%

TOP PERFORMERS – Investment Returns: 10-Year price CAGR (as on Dec 2013) FOBs PSUs MNCs

P I Industries 80%

NMDC

25%

United Spirits

44% TTK Prestige 73%

MMTC

25%

CRISIL

39% Amara Raja 51%

Guj Gas Company

19%

Blue Dart Exp.

37% Havells 46%

G M D C

19%

Accelya Kale

34% Emami 45%

B H E L

15%

Bata India

34%

Source: Capitaline & Bloomberg

• Entrepreneurial firms have significantly outperformed PSUs and MNCs in Wealth Creation

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The Study

Snapshot

Criteria  / Category  FOBs PSUs MNCs Growth Highest Growth rates In aggregate, underperform FOB companies Shown steady but lower growth than FOBs Capital Efficiency High Growth coupled with strong capital efficiency Good efficiency ratios; although much lower growth High capital efficiency Alignment of Interest Promoter's own skin in the game Social priorities, Low-float? Transparency may be an issue and may impact minority shareholders Wealth Creation of Shareholders' Highest Wealth Creation Low contribution Steady contribution of wealth Sector/Industries Value-creating business areas, innovation led, intellectual property rich businesses Natural resources, Commodities, Power and Energy Pharma, FMCG, Automobile Decision Making Speedy and Dynamic Over-regulated /bureaucratic and hence could often lack speed, tends to be rigid Usually driven by parent company priorities Business Environment Competitive environment; often results in more efficiency Natural monopolies in many sectors they operate Often satellite operations of parent companies abroad Corporate Governance Improving with emphasis on independent professional boards Governmental practices Overall good governance 26

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Some Successful Family Firms

Industry Spectrum   NEW AGE TO TRADITIONAL  Size Spectrum  TECHNOLOGY HEALTHCARE AUTO CONSUMER FINANCE AGRO COMMODITIES COMMODITY LARGE TCS Sun Pharma, Lupin Eicher Motors Asian Paints, Dabur Kotak Bank Coromandel Shree Cement MID-SIZED Eclerx Divis Lab, Apollo Hospitals Motherson Sumi Marico, Emami Bajaj Finance PI Industries Hindustan Zinc 27

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However, we have addressed these issues by adopting rigorous filters on management quality for stock selection

Risks

• Succession planning
• Corporate governance concerns
• Centralized decision making
• Nepotism
• Control retention concerns can affect capital structures
• Capital allocation issues

Risks Associated with Investments in Entrepreneurial Businesses

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• Only Indian firm to make successful foray in US branded and Japanese market
• Focused on the large and evolving generic pharma opportunity
• Strong product pipeline
• Track record of strong and sustained domestic growth
• Earnings growth of 20-25% for the next few years

Examples

Lupin

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Examples

Pidilite

• Market leader in adhesives and sealants, construction chemicals, hobby colours and polymer

emulsions in India.

• Brand name Fevicol has become synonymous with adhesives in India and is ranked amongst the

most trusted brands in India.

• Expanded its presence in emerging segments like mechanized joinery, modular furniture, flooring,

auto care and waterproofing through brands like Dr Fixit and Roff

• Sales and EBIDTA grown at CAGR of 24% and 26% respectively over the last 5 years.

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• Motherson Sumi is a JV of the Sumitomo Group of Japan and the Motherson group in India. It has

transformed itself from a domestic player to a global tier 1 supplier by acquiring Visiocorp and Peguform recently.

• Has been growing through expanding its product portfolio in the wiring harness, plastic moulds

and rear view mirrors business through JVs and acquisitions and has thereby increased its customer base significantly.

• The company will benefit from the recovery in the global car demand, improving share of

premium vehicles in the domestic business and increasing content per vehicle.

• Reasonable balance sheet strength with 5 year average core ROCE at 26% and average payout of

25%.

Examples

Motherson Sumi

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About ASK Investment Managers

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Introduction : ASK Investment Managers

• 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
• Disciplined research and investment process
• Experienced team of 3 portfolio managers and 5 investment professionals headed by a CIO
• Purely discretionary money management
• Clients include family offices, pension funds, private clients across the globe

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Investment Universe Listed Indian Equities Investment Style Long only Active / Passive Actively managed equity portfolios Investment Vision Long term wealth creation Investment Approach Bottom up stock picking Discretionary / Non-Discretionary Discretionary money management

Introduction: Profile

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Research Process

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• 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

Investment Edges

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Portfolio Construction

• Investment universe of nearly 200 companies
• Detailed evaluation of the character of business and valuation of each firm
• Optimal aggregation of about 20 stocks, to construct a stable and consistent portfolio, to

generate superior returns over time

• Adequate sector diversification
• Model portfolios for all strategies
• “Portfolio Psychographics” - proprietary portfolio review tool
• Strict buy discipline: Focus on margin of safety, pre-defined levels for each strategy/concept

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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 factor (of 15%) for cash flows in our financial models builds conservatism in value

estimation

• 6-8 interactions per year with the management team of every portfolio company
• Individual stock cap at 10%
• Risk Manager is responsible for monitoring and supervising the risk of the portfolio and

implementing the risk management framework

• Regular and ongoing monitoring and reporting
• Independence of Risk Management Function – reports to Group CFO & Head Compliance

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Fund Features

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Fund Features

Name Indian Entrepreneur Fund Launch March 26, 2010 Geography Indian Equities Strategy Long only Domicile Mauritius Base Currency USD Fund Structure Pooled/Commingled fund Umbrella Fund India Emerging Opportunities Fund* (IEOF) ISIN/WKN MU0185S00191 (Retail T1) MU0185S00035 (Retail B) MU0185S00217 (Institutional T1) Liquidity Weekly once (every Thursday)

Note: * 1) IEOF is the flagship fund under ASKIM’s advise. It facilitate creation of customized accounts under the defined strategy like Growth, India Select & Strategic (Value) portfolios. 2) IEF is a pooled share class under IEOF.

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Fund Features

Service Providers Administration Apex Fund Services (Mauritius) Limited Auditors KPMG, Mauritius Global Banker Deutsche Bank, (Mauritius) Limited Custodian Kotak Mahindra Bank Limited (India) Fee Structure (Retail) Fee Structure (Institutional) Minimum Investment US$3,000 – US$250,000 US$ 250,000 – US$1million Above US$ 1 million Management Fee 2.50% p.a 2.25%p.a. 1.75 % p.a Exit Charges Up to 1% in the First year

Note: Please refer to the subscription agreement for details on subscription fees.

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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 renowned 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 – Business Head & 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.

 At ABN AMRO MF, he was head of equity and managed nearly INR 1200 cr of equity domestically and

advised offshore assets worth USD700 mn 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

Sumit Jain – Portfolio Manager

 10 years of experience with ASK Investment Managers  Manages Indian Entrepreneur Portfolio and Lighthouse Infrastructure strategy  Also engaged in research of business within ASKIM universe, identifying new

investment opportunities and tracking their performance at regular intervals

Biography

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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. ASK Investment Managers Portfolios 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 ASK Investment Managers Private Limited (ASKIM) 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. ASK Investment Managers Private Limited 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. This information is of a general nature only and does not constitute an invitation or an offer in respect of any financial product or a recommendation to buy or sell any financial product or to carry out any other transaction. This or any material is provided to parties that are clients/ potential clients of ASK Investment Managers Private Limited (ARBN 146 559 980) (“ASKIM”), corporate authorized representative of Falconer & Co Ltd (AFSL No. 244315).

Disclaimer

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Thank You

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