Portfolio Management Services
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Hexagon : Small-Midcap Focused Portfolio The Four ‘P’s of Hexagon Portfolio
Philosophy
Positioning Small-midcap focused portfolio.
Stock Prices are slaves of earning power
Process
Period
Stringent investment process and Risk Management
Long term Investing with minimum churn
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Small & Midcaps : Wealth Creation Over long term Mid Caps have outperformed Large Caps INR 1 cr invested in 2001 in Nifty Mid Cap is INR 22 cr today Vs just INR 9 cr in Nifty (Large Cap)
Nifty MidCap Index Vs Nifty Index 3000 2500
22x
2000 1500
9x
1000
500
Nifty Free Float MidCap Index
Mar-18
Mar-17
Mar-16
Mar-15
Mar-14
Mar-13
Mar-12
Mar-11
Mar-10
Mar-09
Mar-08
Mar-07
Mar-06
Mar-05
Mar-04
Mar-03
Mar-02
Mar-01
0
Nifty Index
Some examples are Lupin, Crisil, Titan Source: Capitaline
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Small & Midcaps : Home of Multi Baggers
97% of the multi baggers were from Small & Midcap universe (
INR 1000 cr to INR 5000 cr
152
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Greater than INR 5000 cr
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Note: Multi bagger is defined as stocks which have given more than 25% CAGR for more than 3 years. Market cap filtering is done based 4 on initial Mcap.
Wealth Creation: Stock Picking Matters !! Returns since January 2008
Multibaggers = 100% Multibaggers = 75% Index = 25% Multibaggers = 50% Index = 50%
Multibaggers = 25% Index = 75% Mutual Funds
Index = 100%
1.8x
2.6x
34x
26x
18x
9.8x If 25% of the portfolio comprised of Multibaggers & remaining 75% was invested in index funds, the portfolio would have still delivered a stellar 9.8X returns
Returns calculated from 1st April 2008 till 31st March 2015 taking top 50 multibaggers into . Multibaggers are stocks that have grown by more than 5 times from 2008 till 2015. Mutual funds returns have been calculated using HDFC Equity Fund, HDFC Top 200 Fund, Birla SL Frontline Equity Fund, ICICI Pru Focussed BlueChip Equity Fund, Franklin India BlueChip Fund, DSP BR Top 100 Equity Fund, Reliance Vision Fund. Index returns have been calculated using CNX NIFTY.
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Portfolio Management Services
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Investment Philosophy 1. Identify Companies with strong Earnings Growth potential Portfolio of companies which are going to double their cash flows in 3 years- Price will follow!
“Stock Prices are slaves of earning power” 9,000
500
8,000
450
7,000
400 350
6,000
300
5,000
250
4,000
200
3,000
150
2,000
100
1,000
50
0
0
Nifty (LHS)
EPS (RHS)
Over last 16 years Nifty Index has followed Nifty Earnings - Nifty EPS up by 6.6x Vs Nifty Index up 6.4x
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Investment Philosophy: Key Tenets 2. Do not overpay – Take advantage of ‘Mispricing’
• Invest at reasonable or relatively cheaper valuations • Mispriced buys protect downside and have a higher re-rating potential
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Hexagon: Investment Strategy
CONSISTENT EXCELLENCE COUNTER CYCLICAL
CLIMBING THE VALUE CURVE
EMERGING INDUSTRY LEADERS
TURNAROUND COMPANIES CORPORATE ACTIONS
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Hexagon: Investment Strategy explained
Consistent excellence
Corporate action
• Steady growth in profits • Cheap valuation
• Value unlocking due to special situations
Climbing the value curve
Turnaround companies
• Better product mix • Forward integration, rising margins
• Erstwhile winners who faltered, but are coming back now
Emerging industry leaders
Counter cyclical
• Leaders in relatively new industries • Fast growing stocks
• Performance negatively correlated with the overall economy • Good hedge to standard market declines
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Illustrations of our approach
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Consistent Excellence : APL Apollo Tubes Ltd. APL APOLLO TUBES LTD. APL Apollo Tubes Ltd
•
APL Apollo Tubes (APL) makes steel pipes that find application across a wide range of uses in agriculture, infrastructure, construction and household.
•
Due to scale economies and distributed manufacturing, it is the lowest cost manufacturer commanding market share that is 3X the market share of the No.2 player (Tata, Jindal)
•
To further fortify its position and maintain leadership, the company has introduced new technology DFT (Direct Forming Technology) which will enable APL to decrease the cost further and expand customer base.
•
With GST implementation, APL is in a strong position to grab market share from unorganized players which is 50% of the tube industry. Based on the shift from unorganized to organized, new use-cases (import substitution, rust-proof), new markets (exports) and margin expansion (DFT technology), we expect the company to deliver strong EPS growth of 47% CAGR over FY18E-20E
Nifty
700 600
465
500 400 300
200
130
100
Prices are rebased to 100 for comparison purpose
Mar-18
Dec-17
Sep-17
Jun-17
Mar-17
Dec-16
Sep-16
Jun-16
Mar-16
Dec-15
Sep-15
0
Source : Capitaline | Stocks referred to are not an endorsement of their soundness or a recommendation to buy or sell. The same may or may not be a part of the Hexagon Portfolio.
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Turnaround Companies: Himadri Sp. Chem. Ltd HIMADRI SPECIALITY CHEMICAL LTD (HSCL) Himadri Sp. Chem. Ltd
•
Himadri Speciality Chemical Ltd (HSCL) continues to be a market leader in its core business of coal tar pitch (CTP) with a 70% market share and is a cost leader in carbon black and CTP due to integrated manufacturing.
•
It was able to improve margins from 9% in FY15 to 20% plus in H1FY18 due to better pricing arrangement with its customers. The margins would further improve as HSCL looks to expand capacities.
•
A new opportunity in the form of Advanced Carbon materials (ACM) is also taking shape.
•
ACM finds application in Lithium Ion batteries. ACM should be a key growth driver with the demand for Lithium Ion batteries skyrocketing.
•
Profit margins in ACM are superior and volume growth rate is quite rapid.
•
HSCL could become the lowest cost producer in this segment as well, as they are fully backward integrated. We expect the company to deliver strong EPS growth of 37% CAGR over FY18E-20E
Nifty
1400 1200 1000 961
800 600 400 200
130
Prices are rebased to 100 for comparison purpose
Mar-18
Dec-17
Sep-17
Jun-17
Mar-17
Dec-16
Sep-16
Jun-16
Mar-16
Dec-15
Sep-15
0
Source : Capitaline | Stocks referred to are not an endorsement of their soundness or a recommendation to buy or sell. The same may or may not be a part of the Hexagon Portfolio.
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Consistent Excellence: Mold-Tek Packaging Ltd MOLD-TEK PACKAGING LTD Mold-Tek Packaging Ltd
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Mold-Tek Packaging Ltd (MTPL) is into manufacturing of plastic containers used in paint, FMCG and lubricant packaging and its ability to integrate backward has resulted in 35% lower capital and variable costs.
•
Packaging being an integral function for B2C companies, IML Packaging (In-Mould Labeling) is better compared to screen printing (older technology) as brand visibility (as seen on the container which does not peel off) remain for a longer period of time.
•
FMCG players have shown interest in adopting this new technology and revenue is growing quite rapidly.
•
Another source of growth is expansion into the Middle East market where MTPL has set up a plant.
•
The stock is an excellent long term consumption play with limited competition. The EPS is set to grow at 39% CAGR over FY18E-FY20E.
Nifty
500
400
300 305 200 130 100
Prices are rebased to 100 for comparison purpose
Mar-18
Dec-17
Sep-17
Jun-17
Mar-17
Dec-16
Sep-16
Jun-16
Mar-16
Dec-15
Sep-15
0
Source : Capitaline | Stocks referred to are not an endorsement of their soundness or a recommendation to buy or sell. The same may or may not be a part of the Hexagon Portfolio.
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•
Shree Pushkar Chemicals & Fertilisers Ltd (Shree Pushkar) is a dye intermediates (DI) manufacturer and is forward integrating into dyes stuff (DS) manufacturing. Dyes are colouring agents which are mainly used in textile.
•
In an industry where effluent treatment is a major risk for sustenance of the business, Shree Pushkar has achieved status of ‘zero-waste plant’. They have achieved that by converting effluents into saleable products like fertilizer.
322
•
The company is “moving up the value curve” by forward integrating into dye-stuffs. It is in the process of establishing its own brand as well.
130
•
The company is expanding capacity backed by orders from MNCs and establishing its own brand. We expect 21% PAT CAGR over FY18E-20E.
Mar-18
Turnaround Vaibhav Climbing theCompanies: Value Curve: Shree Global Pushkar
•
Improving asset utilization, no debt and efficient working capital management will enable it to maintain free cash flows for future expansion.
SHREE PUSHKAR CHEMICALS & FERTILISERS LTD Shree Pushkar
Nifty
600 550 500 450 400 350 300 250 200 150 100
Dec-17
Sep-17
Jun-17
Mar-17
Dec-16
Sep-16
Jun-16
Mar-16
Dec-15
Sep-15
50
Prices are rebased to 100 for comparison purpose
Source : Capitaline | Stocks referred to are not an endorsement of their soundness or a recommendation to buy or sell. The same may or may not be a part of the Hexagon Portfolio.
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Investment Process
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Small-Midcaps- High Returns ≠ High Risk Larger Selection Pool allows for high rejection- Investable Pool for Small-Midcaps is 5x of large caps
High Rejection rate ensures cherry picking stocks with strong fundamentals- Out of 100 companies we reject 80 companies Stringent Stock selection process and diversification lowers the risk
Investment universe – Market capitalisation wise 874
336 87 INR 100-1,000 cr
INR 1,000-5,000 cr
INR 5,000-10.000 cr
159
INR 10,000 cr > 17
Stringent Investment Process
Stock Identification
Evaluation
Access
• Hexagon approach to shortlist • Strong incremental cash flows • Good corporate governance • Strong Competitive Advantage • Attractive valuation
• Intense Private Equitylike process • Detailed business analysis & industry mapping • Build detailed financial models
• Meeting with senior management of potential investee companies to understand strategy and focus and key growth drivers • Meeting with competitors, lenders, industry experts etc to get a holistic perspective • Channel checks • Reference checks on management
Investment Decision Meeting with Investment Advisory Committee for detailed discussions on key investment hypothesis and risks Investment decision taken based on the recommendation provided by the Investment Advisory Committee
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Risk Management Framework
Diversification
Review
20 Stock Portfolio
No Over Exposure to single sector
Stock Liquidity
Time Diversification (SOP,COP)
Spend 50% of time revisiting stocks within portfolio
Regularly meet management, and track quarterly results/news
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Risk Management - Time Diversification Why Time diversification ? Certain events are un predictable (Brexit, China, Interest rates etc) Benefit from short term volatility Dollar Cost Averaging principle - Potential for lower average cost of buying
Client On-boarding Protocol* (COP)
*Assuming target equity weight in portfolio for client is 100%
How do we do that ? New clients or New stocks are on-boarded in 3 tranches over 30 days COP – Client On boarding Protocol SOP – Stock On boarding Protocol
Stock On-boarding Protocol** (SOP)
**Assuming target weight of 5% in each stock
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Note: In few cases portfolio manager might take new clients or stocks directly to Step 2 /Step 3 of COP/SOP depending upon the market scenario.
Performance and Portfolio
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Hexagon Portfolio Performance Hexagon Portfolio has delivered 21% annualized returns (since inception till 30-April-18) HEXAGON PORTFOLIO PERFORMANCE
Hexagon Portfolio S&P BSE SmallCap Index
1 Month
3 Month
6 Month
1 Year
2 Year
5.4% 8.3%
-5.5% -1.7%
-7.1% 4.6%
15.0% 19.7%
23.9% 29.2%
Since Inception 21.0% 22.4%
Returns are calculated on compounded annualised basis for a period of more than a year & absolute basis for a period of less than or equal a year. Inception Date: 1-Sep-15
Hexagon Portfolio NAV comparison Vs S&P BSE SmallCap Index
Hexagon Portfolio
S&P BSE SmallCap Index
Apr-18
Mar-18
Jan-18 Feb-18
Dec-17
Nov-17
Oct-17
Sep-17
Aug-17
Jul-17
Jun-17
May-17
Apr-17
Mar-17
Jan-17 Feb-17
Dec-16
Nov-16
Oct-16
Sep-16
Aug-16
Jul-16
Jun-16
May-16
Apr-16
Mar-16
Jan-16 Feb-16
Dec-15
Nov-15
Oct-15
Sep-15
Aug-15
200 190 180 170 160 150 140 130 120 110 100 90 80
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Hexagon Portfolio Characteristics Valuations are lower 60.0
Growth is high 49.4
50.0 40.0 30.0
22.4
23.9
20.0 10.0
70% 60% 50% 40% 30% 20% 10% 0%
66% 38% 24%
Hexagon Portfolio
Sensex
S&P BSE MidCap Index
Hexagon Portfolio
Quality of Business is Better 25% 20%
Sensex
S&P BSE MidCap Index
Risk is Lower 6.0
19%
4.2
15%
15%
10%
10%
4.0 1.8
2.0
5%
0.3
0%
0.0 ROE-FY20E
Hexagon Portfolio
`
EPS Growth (FY18E-20E)
P/E FY 18E
Sensex
S&P BSE MidCap Index
Net Debt/EBITDA-FY20E Hexagon Portfolio
Sensex
S&P BSE MidCap Index
*Estimates of S&P BSE SmallCap Index are not included for comparison purposes as the volatility of these estimates is high. Source of Indices Data: Bloomberg Hexagon Portfolio Vs BSE Sensex & BSE Mid Cap Index - Growth is High, Quality of business is better, Balance sheet risk is lower while valuations are lower Vs BSE Sensex & BSE Mid Cap Index 23
Top 5 Alpha Contributors
Average % Holding Period Returns* (Days)
Sr No
Stock Name
1
APL APOLLO TUBES LTD
942
345%
2
HIMADRI SPECIALITY CHEMICAL LTD
425
190%
3
MOLD – TEK PACKAGING LTD
809
134%
4
SHREE PUSHKAR CHEMICALS & FERTILISERS LTD
838
65%
5
V2 RETAIL LTD
268
47%
* Returns mentioned are the returns of the stock since their buying, till date i.e. 30th April 2018
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Portfolio – Salient Features
NO USE OF DERIVATIVES SMALL MID CAP BIASED PORTFOLIO
SECTOR AGNOSTIC PORTFOLIO
• Small & Mid Cap: 70-100% • Large cap: 0-30% • Cash: 0-30%
PORTFOLIO TARGET RETURN
CONCENTRATION • Min 4% PER STOCK • Max 15%
BENCHMARK: S&P BSE SmallCap Index
NUMBER OF STOCKS
• 25% p.a. • 2x in 3 years
• Min 15 • Max 25
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Edelweiss Advantage
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The Edelweiss Advantage – 3 fold approach Edelweiss Edge • Generation of synergies help us in providing more detailed and insightful analyses
• Strong corporate relationships enable us in taking a holistic view
Equity Research
Investment Banking
Lending
The Edelweiss Advantage
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Awards and recognitions
March 2010
July 2013
Feb 2014
July 2014
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Investment Team
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Investment Specialists Anil Sarin, Chief Investment Officer – Equity, Global Asset Management
• More than 20 years of fund management experience • Managed investments for institutions like SBI, Birla SL, ICICI Prudential • Served as MD and Partner at India office of Bessemer Venture Partners, a top tier US based venture capital firm • Experience of investing in both private and public equity • Anil holds a bachelor’s degree in commerce and a MBA from IMT Ghaziabad • Funds managed by Anil have won awards for sector leading performance • Permanent Invitee as Investment Specialist in the Hexagon Investment Committee and Mentor to the Investment Management Team. 30
Investment Specialists
2011-2015
AQF Advisors Co-Founder Start-up providing outsourced asset management services
Bessemer Venture Partners MD and Partner Handled private investment for a top-tier US based venture capital fund 2004-2006
2006-2011
ICICI Pru AMC Co head-Equities and Fund Manager ed as a fund manager and got promoted to Co-Head of Equities in a short time period
Birla Sun Life AMC Fund Manager Started as a research analyst, Played a pivotal role in the launch of Birla Dividend Yield Plan, first of its kind in India
Anil was named as a Platinum Fund Manager by Economic Times -2006 ICICI Pru Dymanic Fund was awarded by CRISIL – 2005 Birla Equity Fund was named Beat ELSS Tax Saving Fund – 2003
1995-2003 Birla IT Fund was named as the Best IT Fund for three consecutive years by CNBC – 2001, 2002, 2003 31
Investment Specialists Sahil Shah, Fund Manager – Hexagon Portfolio • Experienced in both buy and sell side of the business • 8 years of experience as an equity research analyst • Prior to Edelweiss, Sahil worked at Anagram Capital Limited
• Sahil has earned a CFA degree from ICFAI university
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DISCLAIMER & RISK FACTORS Disclaimer and Risk Factors Past Performance is not an indication of future performance. Investments in securities market are subject to market risks. Please read the Disclosure Document carefully before investing. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the readers. This document has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. The Portfolio Manager, it’s Holding Company, associate concerns or s or any of their respective directors, employees or representatives do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and opinions given are fair and reasonable. Recipients of this information should rely on information/data arising out of their own investigations. Readers are advised to seek independent professional advice and arrive at an informed investment decision before making any investments. None of the Portfolio Manager, its Holding Company, associate concerns or s or their respective directors, employees or representatives shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profits arising in any way from the information contained in this material. This document has been provided on a strictly private and confidential basis and is being furnished to you solely for your information and is not intended as an offer or solicitation for the purchase or sale of any financial instrument/security. The information contained in this document should not be reproduced or redistributed or ed on directly or indirectly in any form to any other person or published, copied, in whole or in part, for any purpose. The investments in the PMS Strategies may not be suited to all categories of investors. The Strategies may be exposed to various risks depending on the investment objective, investment style and the asset allocation pattern of the Portfolio. The value of the portfolio can go up or down depending on various market factors. Investors are not being offered any guaranteed or indicative returns through the Strategy. The name of the Strategy does not in any manner indicate its prospects or returns. The performance of the PMS strategies may be adversely affected by changes in the market conditions, micro and macro factors and forces affecting capital markets in particular like interest rate risk, credit risk, liquidity risk and reinvestment risk. The Portfolio Manager is not responsible or liable for any loss resulting from the operations of the Strategy/ Portfolio. Investors are advised to refer to the Disclosure Document for detailed risk factors/disclaimers. Stocks referred to in this document are not an endorsement of their soundness or a recommendation to buy or sell. The same may or may not be a part of the PMS Strategy in future or any other PMS Strategies launched from time to time.
Edelweiss Multi Strategy Funds Management Private Limited is ed with Securities and Exchange Board of India as a Portfolio Manager vide Registration Number INP000004631 and has its ed office at Edelweiss House, Off. CST Road, Kalina, Mumbai 400 098 and correspondence address at 801, 802 & 803, 8th floor, Windsor, Off C.S.T. Road, Kalina, Santacruz(E), Mumbai – 400098 Corporate Identity No.:U67120MH2009PTC194273
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