May 31, 2018
Synopsis ➢ Investment Outlook ➢ Investment Philosophy ➢ Valuation Fundamentals ➢ Performance ➢ Portfolio Strategies ➢ Quest Foundation ➢ Stock Picking – Case Studies 2
Investment Outlook 3
After a hiatus, volatility is truly back and is likely to stay this year Sharp correction in broader markets in February & March was followed by a smart ➢ recovery in April, only to lose steam again in May Bond markets and commodities (crude, aluminium, etc.) too have witnessed sharp ▪ increase in volatility Enough and more reasons for markets to remain on the edge in the short term ➢ Rich valuations; becoming more reasonable now with both price & time correction ▪ Politically charged atmosphere; likely to remain so for rest of the year ▪ Increased volatility with rising trend in bond yields & crude oil prices ▪ Spike in slippages / NPAs of PSU and corporate banks due to the February circular ▪ (further accentuated by banking frauds) Favourable global growth, sharp rupee depreciation and recovery in domestic demand ➢ (particularly rural) providing support to select sectors IT, consumption and rural theme have been the flavour of the last few months ▪ Earnings too (except PSU & corporate banks) have provided support ▪ Prediction of normal monsoon has further added to the comfort ▪ Crude prices, bond yields trajectory and political developments on the domestic front ➢ over the next few months and quarters will be critical for the markets in the near term Tussle between faltering macro & improving micro to determine market outcome 4
While macro is getting murkier, micro has begun to shine India’s perennial problem of twin deficits had in any case been raising its ugly head ➢ over the last few months with rise in Brent Crude prices between $75 – 80 per barrel Increasingly fluid domestic political situation and rising bond yields has further ➢ muddled the already faltering macro picture Intensely fought elections in Karnataka in May will keep the political temperature ▪ high in the near term Synchronized global growth may come under question mark with US imposing ▪ tariffs on imports, liquidity getting tighter & interest rate cycle reversing globally However, steadily improving GDP data (7.7% in Q4FY18) implies that on the ground ➢ situation is improving for businesses Corporate earnings (ex PSU and Corporate Banks) too have shown some traction in ➢ the last couple of quarters; expected to show robust growth going forward Margins continue to be weaker than historical averages, though now they are ▪ showing some signs of improvement After almost 5 years, corporate earnings are expected to grow in mid to high ▪ double digits in FY19 Numbers are being looked at closely once again - Portfolios that are likely to witness ➢ strong earnings growth over the next 2-3 years will outperform the broader market Tussle between faltering macro & improving micro to determine market outcome 5
Bottom up stock picking skills are at premium again! India has arguably seen the biggest ever clean up of its banking system, tax and ➢ administrative processes in the last 4 years Government & RBI seems to be finally cleaning up the banks; importantly ▪ amended regulations (though stringent) to ensure that the problem doesn’t recur GST, while still work in process, is irreversible and with passage of time bring ▪ about significant benefits DBT (to cover all central schemes by next year) strikes at the root of corruption ▪ and ensures that benefits reach the intended beneficiaries in an effective manner However, while lot of work has been done, expectations created by Mr. Modi himself, ➢ has been even higher Ability of the government to carry with the reform momentum and keep the fiscal ➢ deficit under check (crude prices and GST collections to play a key role) will be critical in this year of elections Going forward, companies with reasonable valuations supported by earnings ➢ trajectory are likely to find greater support in an increasingly volatile market Sharp bouts of volatility may provide the right entry point for investors who have ➢ missed out in the 2014-17 bull run Quest philosophy of bottom up stock picking at reasonable valuations and investing in ➢ ignored stocks is more relevant than ever before in the current market environment Tussle between faltering macro & improving micro to determine market outcome 6
Key risks as we see it Further rise in crude oil prices ➢ Ability of the Modi government to keep reforms going and fiscal deficit under control ➢ in the 5 th year of its term After BJP loosing UP Lok Sabha by-poll to combined opposition, there will be ➢ nervousness in the market regarding Modi’s ability to fight combined opposition Lower than budgeted GST collections ➢ Continued stress in the banking sector impacting flow of credit ➢ Rise in bond yields both locally and globally ➢ Risk to global liquidity as US Federal reserve increases the pace of shrinking its ➢ balance sheet and European Central Bank tapers off its bond buying program Escalation of trade war initiated by United States ➢ Geo political risks emanating from Syria, Iran and North Korea ➢ Disruption caused by new technologies such as artificial intelligence, electric cars, ➢ internet of things, biotechnology, etc. Tussle between faltering macro & improving micro to determine market outcome 7
Investment Philosophy 8
Why Quest Our Passion to identify tomorrow's blue chip yesterday ➢ Quest’s out performance is due to consistently investing in growth oriented quality ➢ stocks at a reasonable price Avoid wasting time on understanding global macros – The Lesson of Oil ➢ Like governance - investing is a long term process ➢ Our Investment Strategy Identify under research , ignored ( out of favour) and/or turn around stories ➢ whose intrinsic / fair value is not yet reflected in the market price Look for fundamentally sound companies that are coming out of slow growth phase ➢ vs their long period averages and are moving into much higher growth trajectory Construct a reasonably concentrated portfolio and nurture the investment as a ➢ private equity investor over 3 to 5 years Remain invested though company’s journey from being a mid cap to a large mid -cap ➢ - gaining from earnings growth, P/E expansion and price discovery Tussle between faltering macro & improving micro to determine market outcome 9
Our Investment Philosophy • Macro economic factors, technology, Investment Universe commodity prices, market movements • Sound businesses backed by management with vision, having Focus List crisis management capabilities and hunger for growth • Sound businesses as above that are Portfolio available at discount to their intrinsic value Tussle between faltering macro & improving micro to determine market outcome 10
Few Quotes which describe our Philosophy ➢ Herd-like stock selection can only lead to herd-like performance. To get to the top of the performance distribution you have to escape the crowd – Howard Marks ➢ Our portfolios are set up to outperform in bad times, and that's when we think our performance is essential. Clearly, if we can keep up in good times and outperform in bad times, we will have above average results over full cycles and below average volatility, and our clients will enjoy outperformance when others are suffering. – Howard Marks ➢ In stocks as in romance, ease of divorce is not a sound basis for commitment. If you have chosen wisely to begin with, you won’t want a divorce. – Peter Lynch ➢ A concentrated portfolio of strong and predictable companies acquired at a price that makes sense will do the job. - Charles T. Munger ➢ You learn quickly in this business that you are not going to look smart all the time, which invariably brings criticism. We always remind ourselves of a quote “I had rather lose clients then lose clients’ money” – David Samara ➢ Successful investing is about managing risk, not avoiding it – Benjamin Graham ➢ The important quality for an investor is temperament, not intellect – Warren Buffet Tussle between faltering macro & improving micro to determine market outcome 11
Valuation Fundamentals 12
QuestPMS Valuation Fundamentals Current Index - PEs Nifty Full SENSEX NIFTY 50 Nifty-Midcap50 Small100 Index Value 35,322 10,736 5,013 7,829 PE as reported by 22.9 27.0 68.6 66.2 exchange (TTM basis) QuestPMS portfolio companies’ revenues are QUESTPMS Companies – Composite PE expected to grow at CAGR of ~14%, however, due to margin expansion, projected earnings are FY-2018E 25.4 expected to grow at a substantially higher ~27% FY-2019E 19.7 CAGR over the next 3 years (FY18-21) FY-2020E 15.4 Estimated weighted average CAGR QuestPMS portfolio’s weighted average price- growth earnings multiple is 25.4 times FY18 and 19.7 for 3 years till FY20 times FY19 estimated earnings Revenue 14% (Source: Quest Internal Research) EPS 27% QuestPMS portfolio is trading at reasonable valuations providing margin of safety & giving us confidence in its ability to outperform in future as well Tussle between faltering macro & improving micro to determine market outcome 13
Performance 14
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