November 30, 2018
Synopsis ➢ Investment Outlook ➢ Investment Philosophy ➢ Valuation Fundamentals ➢ Performance ➢ Portfolio Strategies ➢ Quest Foundation ➢ Stock Picking – Case Studies 2
Investment Outlook 3
Crude Oil a big positive amidst continued uncertainty on other fronts 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! Uncertainty both domestically and globally to keep markets volatile 4
World in transition – on political, business and economic front! 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 ➢ of 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 ➢ Uncertainty both domestically and globally to keep markets volatile 5
Patience invariably is rewarded despite high volatility 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 Uncertainty both domestically and globally to keep markets volatile 6
Key risks as we see it 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. Uncertainty both domestically and globally to keep markets volatile 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 Uncertainty both domestically and globally to keep markets volatile 9
Our Investment Philosophy • Macro economic factors, technology, Investment Universe commodity prices, market movements • Sound businesses backed bymanagement with vision, Focus List having crisis management capabilities and hunger for growth • Sound businesses as above that are Portfolio available at discount to their intrinsic value Uncertainty both domestically and globally to keep markets volatile 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 Uncertainty both domestically and globally to keep markets volatile 11
Valuation Fundamentals 12
QuestPMS Valuation Fundamentals Current Index - PEs Nifty Full SENSEX NIFTY 50 Nifty-Midcap50 Small100 Index Value 36.194 10,877 4,780 6,216 PE as reported by 23.8 26.3 53.8 34.8 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-2018 22.2 expected to grow at a substantially higher ~27% FY-2019E 17.8 CAGR over the next 3 years (FY18-21) FY-2020E 13.6 Estimated weighted average CAGR QuestPMS portfolio’s weighted average price- growth earnings multiple is 17.8 times FY19 and 13.6 for 3 years till FY21 times FY20 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 Uncertainty both domestically and globally to keep markets volatile 13
Performance 14
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