November 30, 2018 Synopsis Investment Outlook Investment - - PowerPoint PPT Presentation

November 30, 2018

➢ Investment Outlook ➢ Investment Philosophy ➢ Valuation Fundamentals ➢ Performance ➢ Portfolio Strategies ➢ Quest Foundation ➢ Stock Picking – Case Studies

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Synopsis

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Investment Outlook

➢ Fall in Brent Crude prices by over 30% in the last few weeks changes the domestic macro picture dramatically ▪ Positively impacts both the twin deficits – current account and fiscal ▪ Lowers inflation expectations and eases pressure on interest rates and INR ▪ Provides head room to the government both politically and from a fiscal perspective ➢ Corporate revenue growth numbers has been encouraging in the recent quarters, though margins continue to be under pressure ➢ Tight liquidity in the money markets can impact the SME segment which has only recently shown recovery post demonetization and GST ➢ Further, the simmering issues within the real estate sector can finally come to the fore if the tap from NBFCs shuts down for more than a quarter or two ➢ Finally, political atmosphere continues to remain vitiated with assembly elections underway and general elections only a few months away ▪ Low food prices, while a boon for urban consumers, is resulting in farm distress ▪ Outcome of assembly elections on December 11, 2018 crucial in the short term ➢ Volatility, which has been the hallmark of the market for the last few quarters, is likely to continue for another quarter or two!

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Crude Oil a big positive amidst continued uncertainty on other fronts

Uncertainty both domestically and globally to keep markets volatile

➢ Consensus on globalization under pressure as changing political dynamics forces countries and leaders to look inwards ➢ Trade war initiated by United States nearing a critical stage – its evolution over the next few months can have serious bearing on the global economy as well as on India ➢ Deadline for Brexit is fast approaching (March 29, 2019) as Theresa May struggles to convince even her own party to support the deal with European Union ➢ Technological advances continue to disrupt increasing number of businesses ➢ Oil continues to be extremely volatile; makes planning very difficult for countries and businesses ➢ Monetary tightening in United States continues; European Central Bank targets end

• f bond purchases next month

▪ While increase in interest rates has recently been tempered, the trajectory remains upward ➢ Global leverage (debt) is probably at the highest ever – yet the global GDP growth and corporate earnings in most of developed and emerging markets remain robust for the time being ➢ Markets to remain fluid in the near term as the world grapples with these challenges

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World in transition – on political, business and economic front!

Uncertainty both domestically and globally to keep markets volatile

➢ Volatility in markets becoming more a norm than an exception; likely to continue even in the medium to long term ▪ World becoming less predictable with time; to quote Nassim Nicholas Taleb “…in spite of our progress and the growth in knowledge, or perhaps because of such progress and growth, the future will be increasingly less predictable…” ▪ However, despite growing uncertainties, Indian economy in all likelihood will expand by at least 7% in real terms in the next twelve months! ➢ Despite the volatility, we expect equity markets to continue to give double digit returns over the long term ▪ Last 5 year, 10 year, 15 year and 20 year CAGR for both Nifty50 and Sensex have been in low to mid double digits ▪ Equities continue to be the best asset class to own for patient investors ➢ Indian economy is far stronger today than it was 5 years back; benefits of last 4 years’ reforms to provide tailwinds to the economy despite macro uncertainties ➢ Portfolios that will witness strong earnings growth over next 2-3 years will outperform the markets, though there may be short term fluctuations due to market volatility ➢ Quest philosophy of bottom up stock picking is more relevant than ever before in the current market environment

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Patience invariably is rewarded despite high volatility

Uncertainty both domestically and globally to keep markets volatile

➢ Nervousness in the market around the impending state and general elections ➢ Tightening liquidity for the NBFC sector and higher cost of funds ➢ Access to funding and risk of default in the real estate sector ➢ Volatility in crude oil price and rupee ➢ Lower than budgeted GST collections ➢ 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 ➢ Trade war between United States and China, Brexit and increasing concern with respect to the fiscal situation in Italy ➢ Geo-political risks emanating from Ukraine, Syria and Iran ➢ Disruption caused by new technologies such as artificial intelligence, electric cars, internet of things, biotechnology, etc.

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Key risks as we see it

Uncertainty both domestically and globally to keep markets volatile

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Investment Philosophy

➢ 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

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Why Quest

Uncertainty both domestically and globally to keep markets volatile

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Our Investment Philosophy

• Macro economic

factors, technology, commodity prices, market movements

Investment Universe

• Sound businesses backed

bymanagement with vision, having crisis management capabilities and hunger for growth

Focus List

• Sound businesses as above that are

available at discount to their intrinsic value

Portfolio

Uncertainty both domestically and globally to keep markets volatile

➢ 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

• ur 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

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Few Quotes which describe our Philosophy

Uncertainty both domestically and globally to keep markets volatile

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Valuation Fundamentals

13 QUESTPMS Companies – Composite PE FY-2018 22.2 FY-2019E 17.8 FY-2020E 13.6 Estimated weighted average CAGR growth for 3 years till FY21 Revenue 14% EPS 27% Current Index - PEs

SENSEX NIFTY 50 Nifty-Midcap50 Nifty Full Small100

Index Value 36.194 10,877 4,780 6,216 PE as reported by exchange (TTM basis) 23.8 26.3 53.8 34.8

QuestPMS portfolio companies’ revenues are expected to grow at CAGR of ~14%, however, due to margin expansion, projected earnings are expected to grow at a substantially higher ~27% CAGR over the next 3 years (FY18-21) QuestPMS portfolio’s weighted average price- earnings multiple is 17.8 times FY19 and 13.6 times FY20 estimated earnings

(Source: Quest Internal Research)

QuestPMS Valuation Fundamentals

QuestPMS portfolio is trading at reasonable valuations providing margin of safety & giving us confidence in its ability to outperform in future as well

Uncertainty both domestically and globally to keep markets volatile

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Performance

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• The Above returns are of a Model Client as on Nov 30, 2018.
• Returns shown above are post all billed fees & expenses.
• Returns of individual clients may differ depending on time of entry in the Strategy. Returns above 1 year are CAGR
• Past performance may or may not be sustained in future and should not be used as a basis for comparison with
• ther investments.

Period

XIRR Performance %

Portfolio Sensex Nifty 50 BSE Midcap Nifty Midcap 50 BSE

Smallcap

Nifty Small 100 3 Months (5.9) (6.3) (6.9) (10.9) (10.6) (16.1) (18.9) 6 Months (11.6) 2.5 1.3 (6.1) (4.6) (16.4) (20.6) 1 Year (13.1) 9.2 6.4 (11.1) (8.3) (20.9) (28.7) 2 Years 8.6 16.6 15.0 9.7 12.9 8.2 3.2 3 Years 9.5 11.5 11.1 11.0 12.0 7.4 3.9 5 Years 22.2 11.7 12.0 18.9 17.0 18.8 14.3

Flagship Performance as on Nov 30, 2018 - XIRR

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• The Above returns are of a Model Client as on Nov 30, 2018.
• Returns shown above are post all billed fees & expenses.
• Returns of individual clients may differ depending on time of entry in the Strategy.
• Past performance may or may not be sustained in future and should not be used as a basis for comparison with
• ther investments.

Flagship Performance as on Nov 30, 2018 - Absolute

Period

XIRR Performance %

Portfolio Sensex Nifty 50 BSE Midcap Nifty Midcap 50 BSE

Smallcap

Nifty Small 100 3 Months (5.9) (6.3) (6.9) (10.9) (10.6) (16.1) (18.9) 6 Months (11.6) 2.5 1.3 (6.1) (4.6) (16.4) (20.6) 1 Year (13.1) 9.2 6.4 (11.1) (8.3) (20.9) (28.7) 2 Years 17.9 35.8 32.2 20.3 27.5 17.0 6.4 3 Years 31.2 38.4 37.1 36.8 40.3 24.0 12.1 5 Years 172.9 74.1 76.1 137.8 119.5 136.5 95.2

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• The Above returns are of a Model Client as on Nov 30, 2018.
• Returns shown above are post all billed fees & expenses.
• Returns of individual clients may differ depending on time of entry in the Strategy.
• Past performance may or may not be sustained in future and should not be used as a basis for comparison with
• ther investments.

Flagship Performance as on Nov 30, 2018

272.9 174.1 176.1 237.8 219.5 236.5 195.2 100 140 180 220 260 300 QUEST PMS Sensex Nifty 50 BSE Midcap Nifty Midcap 50 BSE Small Cap Nifty Small 100

Growth of Rs. 100 Lacs Invested in QuestPMS v/s Investments into various indices (In Last 5 years)

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• The Above returns are of a Model Client as on Nov 30, 2018.
• Returns shown above are post all billed fees & expenses.
• Returns of individual clients may differ depending on time of entry in the Strategy. Returns above 1 year are CAGR
• Past performance may or may not be sustained in future and should not be used as a basis for comparison with
• ther investments.

Period

XIRR Performance %

Portfolio Sensex Nifty 50 BSE Midcap Nifty Midcap 50 BSE

Smallcap

Nifty Small 100 3 Months (8.9) (6.3) (6.9) (10.9) (10.6) (16.1) (18.9) 6 Months (20.0) 2.5 1.3 (6.1) (4.6) (16.4) (20.6) 1 Year (15.7) 9.2 6.4 (11.1) (8.3) (20.9) (28.7) 2 Year 13.6 15.5 13.8 7.5 10.6 5.0 (0.4) Since Inception – 27-May-2016 15.9 12.4 11.4 9.2 12.2 7.4 2.9

Focus Performance as on Nov 30, 2018 - XIRR

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Quest Foundation

Quest Foundation

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Our obligation to Society

Stated objective ➢ Quest Founders have publicly pledged to use all their profits for charitable and spiritual activities; contributed over Rs. 35.5 crores in over 5 years ➢ Quest Foundation presently operates Iyengar Yoga classes from a 4,000 sq. ft. premises in Sion ➢ Quest Foundation also runs Nutun Gyan Dhara, a free public library with over 5,000 titles on various subjects like spirituality, healthcare, etc. ➢ Currently Quest Foundation is actively associated with

− KEM, Sion Hospital and SR Mehta & Kikabhai Hospital – Mumbai (Medical) − SNDT College – Wadala – Mumbai (Education) − Shri Ram Hospital – Gondal – Gujarat (Rural Healthcare)

Disclaimer

➢ Investors are NOT BEING offered any guaranteed / assured returns. ➢ Investments in equities are subject to market and other risks. ➢ Value of investments may go up or down due to various factors and forces affecting the capital market. ➢ Our past performance does not indicate the future performance of the portfolio manager and/or the portfolio management scheme. ➢ Investors are urged to apply appropriate caution while making investment in the QuestPMS. ➢ There is no capital guarantee in the QuestPMS.

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Thank you

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Quest Investment Advisors Private Limited

For more information contact: Hiten Sampat - Landline +91 22 24066700 (B)/703 (D)Mobile +91 9820131125 Email - hiten@questinvest.com 188/3, Gurukrupa Building, 1st Floor, Next to Jain temple, Jain Society, Near Sion Hospital, Sion, Mumbai - 400 022

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Stock picking case studies

Carborundum Universal (CUMI)

24 Investment Date: 17-Oct-2015 Rationale at time of Investment:

• EMD business was struggling due to declining sales of

micro-grit (a key RM used in solar panels) & operational challenges with South African acquisitions. However, turnaround was in sight with Management restructuring

• perations, developing new capabilities & value added

products

• Ceramic business to be mainly driven by strong demand

for engineered ceramics & acquisition of metallized cylinder plant

• Domestic abrasive growth to be driven by Make in India

and infrastructure focus of the Government Current Outlook:

• CUMI has created a strong portfolio of value added

products which will augment revenue & margin of EMD business going forward. Ramp up of relocated plants to drive growth in FY 19

• Ceramic division to benefit from sustained growth in

engineered ceramic coupled with demand revival for refractories and ramp up of Metz cylinder plant to aid growth in FY 2019

• Abrasive business to benefit from strong domestic

growth coupled with robust performance from Russian abrasives in FY 2019

• Topline expected to grow @ CAGR of ~15% (FY18-21)

& margins to expand 220 bps to 16% in FY 2021 Valuation then: Was available at 15 times FY 2017 estimated consolidated EPS of Rs. 11.2 Current Valuation: At CMP of Rs. 362, share trades at P/E of 25.4 times FY 2019E earnings

Source: Internal Research

80 100 120 140 160 180 200 220 240 260

Sep-15 Feb-16 Jul-16 Dec-16 May-17 Oct-17 Mar-18 Aug-18

CUMI NIFTY BSE MIDCAP

Tech Mahindra

25 Investment Date: 28-Oct-2016 Rationale at time of Investment:

• Part of Mahindra Group and leading provider of IT,

Networking technology solutions and business support Services to global telecommunication companies (48%); Enterprise services in BFSI/Manufacturing/Media;

• Telecommunication

business was facing temporary head-winds because of global consolidation and M&A activities in Media sector; impacting growth and hence margins;

• Management guided that normalization of business over

next few quarters would reflect in margins positively. Current Outlook:

• As per the management guidance – sales growth as

well as profitability expansion has began from Q2FY18;

• While Enterprise business revenue growth is in place;

telecom segment sales growth, though slow currently in view of business stabilisation, would pick-up soon.

• Bigger opportunity in the coming years will be from

telecommunication sector moving to 5G; pilot work has already started at small scale by global majors; with expected roll-out in 2nd half of FY20. Consequently, Tech M to witness disproportionate growth in telecom segment profit (vis-à-vis sales) for next 3-4 years.

• We expect margin expansion traction to continue for

the coming 8 quarters; further aided by INR depreciation. Valuation then: Was available at 12 times FY 2017 estimated consolidated EPS of Rs. 36.5 Current Valuation: At CMP of Rs. 706, share trades at P/E of 14.7 times FY 2019E earnings

Source: Internal Research

80 100 120 140 160 180 200 Oct-16 May-17 Dec-17 Jul-18 Tech M Nifty BSE MIDCAP

KEC International

26 Investment Date: 20-Dec-2011 Rationale at time of Investment:

• A global infrastructure EPC major with presence in the

area of power transmission/systems, railways and

• water. Company is also into manufacturing of power

and telecom cables

• Present in 45 countries across South Asia (including

India), Middle East, Africa, Central Asia and America

• It is a dominant player in transmission line towers in

India and many other countries overseas Current Outlook:

• Outlook in the international markets such as MENA,

SAARC & LATAM is improving.

• Slowdown

in PGCIL will be

• ffset

by higher investments by intra-state & private TBCB developers.

• Traction in Railway business to continue for next few

years.

• Recently it has forayed into Civil EPC segment – see

good traction in this space.

• Topline expected to grow @ CAGR of ~14% for next

3 years (FY18-21)

• Improvement

in EBIDTA margin coupled with interest savings would enable PAT to grow at faster pace than top line. Earnings are expected to grow @ CAGR of >20% for next 3 years (FY18-21) Valuation then: Was available at 5 times FY 2012 estimated consolidated EPS of Rs. 6.54 Current Valuation: At CMP of Rs. 294, share trades at P/E of 14.0 times FY 2019E earnings

Source: Internal Research

20 220 420 620 820 1020 1220 1420 Oct-11 Jun-13 Feb-15 Oct-16 Jun-18 KEC Nifty BSE MIDCAP

The Ramco Cement (TRCL)

27 Investment Date: 06-Jul-2015 Rationale at time of Investment:

• Cement demand was languishing in Southern India

due to political instability & capacity

• verhang.

Demand revival seemed inevitable & prominent players like TRCL expected to be prime beneficiaries

• TRCL was planning to increase its usage of pet coke

to reduce its fuel cost and improve margins

• TRCL

had plans to expand regionally by further penetrating into newer regions like Orissa Current Outlook:

• The company has emerged as one of the most

efficient cement player in India

• It has identified EAST region as the new growth

frontier (setting up 3 MTPA grinding unit in EAST in next 18 months)

• Management is targeting volume growth (9% YoY in

FY19 & 13% YoY in FY19) & improving EBITDA to Rs 1300 per ton in medium term

• Operating

leverage benefit will be realized

• nce

utilization levels improve (with strong demand emanating from AP & Telangana and demand revival from core high margin markets of TN & Kerala)

• We expect TRCL to increase revenues at a CAGR of

13% and EPS at a CAGR of 20% over FY18-21 Valuation then: Was available at 18 times FY 2017 estimated consolidated EPS of Rs. 19.1 Current Valuation: At CMP of Rs. 603, share trades at P/E of 26.3 times FY 2019E earnings

Source: Internal Research

80 100 120 140 160 180 200 220 240 260 280 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Ramco Cem Nifty BSE MIDCAP