India Cap Fund - unificap.com

IndiaLarge CapFund

1

Investment Philosophy

We have identified the BSE-200 as the broad

universe from which company wise

investments will be determined post

identification of the right sector. More often

than not, our stock selection will be from the

BSE-30 with the BSE-200 giving us greater

bandwidth in stock selection.

The Indian benchmark index, Sensex,

consists of leaders in their respective

industries, and are broadly representative of

the relative importance of each industry to

Why BSE-30?

the

command the highest market capitalizations in

their respective industry and are known as

Largely Capitalized Companies, or, Large Caps.

They constitute approximately 36% of the entire

market capitalization (BSE) in India. The

average market capitalization of BSE-200

companies in India is Bn.

Out of the approx. Rs. 2 Lac Crore worth of AUM

of mutual funds in India, approximately 70%

of the same is invested in large cap companies

that are a part of the Sensex or the Nifty.

economy. By virtue of their leadership, they

US$ 5

History emphasizes that only a few sectors drive market performances at any given point in time.

In other words, across a period of time, a few sectors depending upon macroeconomic conditions

find favor with market participants and carry with them the performance of the market as a whole.

Thus, an investment in the right company and sector at the right time is a definitive means of earning

superior returns compared to the benchmark indices.

Weight of BSE 200 relative to BSE (Updated till 30th November, 2011)

Particulars Value (Rs. Mn.) Percentage

Market Cap – BSE 58,638,807.5 100%

Market Cap – BSE Sensex 13,343,511.0 23%

Market Cap – BSE 100 18,937,234.9 32%

Market Cap – BSE 200 21,316,671.8 36%

Large Cap Allocation relative to Total Mutual Fund Industry AUM (Rs. Mn.)

Particulars Value (Rs. Mn.) Percentage

Total Equity Mutual Funds AUM 193,284,750 100%

Large Cap schemes as a % of above 135,299,330 70%

Unifi Capital Pvt. Ltd.

Table No. 1

Table No. 2

Source: www.bseindia.com

Source: AMFI, www.amfi.com

2

Pedigree of BSE 30

The benchmark indices evolve over time and only the most resilient of companies manage to stay in

the same. For instance, since inception in 1977, till date only 4 companies have managed to be a part

of the original sensex. On an average, every 10 years, around 10 companies move in and out of the

index, thereby assuring only industry leaders constitute the barometer of the country’s economic

performance.

Companies that moved in and out of the index

Companies that moved out Year Companies that moved in

Reliance Communication, 2011 Coal India, Bajaj Auto, Jindal Steel

Ranbaxy 2010 Hero Honda

Ambuja Cements, Satyam 2009 JP Associates, Sun Pharma

ACC, Grasim

It’s far better to buy a wonderful company at a fair price than

a fair company at a wonderful price.”

- Warren E. Buffett, Letter to Shareholders, 1989


Table No. 3

Source: Unifi Research

3

Merit of investing inLarge CapsLarge Cap stocks have long reigned supreme in the portfolio of sovereign funds, non-profit

foundations funds and conservative individuals; often residing at the core of India’s business.

Some of the characteristics they exhibit due to which they have emerged as constituents of India’s

benchmark indices are as follows:

• An established record of high quality earnings across time periods (Example: ITC, RIL)

• Strong balance sheets with little or moderate debt burden (Infosys, ITC, RIL)

• High credit ratings in the bond and commercial paper markets (HDFC, HDFC Bank)

• Large size relative to Indian businesses as a whole in terms of revenue and market

capitalization (TCS, ICICI, HDFC, L&T)

• A competitive advantage in the market place due to cost efficiencies, franchise value or

distribution control (all the companies mentioned above)

• High liquidity and high levels of corporate governance

• Frontline performance leaders in times of market rally

Given these resilient characteristics, large caps have the best of abilities to manage

downturns. The market’s rally around the competitive advantage of such companies and is

the first to lead performance when the markets turnaround after periods of under performance.

Keeping this in perspective and the fact that markets are trading at an attractive valuation

(FY 12E PE of 14x; Sensex 16,500)* hitherto commanded by mid-cap companies, it provides a great

opportunity to take exposure to large caps for the medium to long term.

When a management with a reputation of brilliance tackles

a business with a reputation for bad economics, it is the

reputation of the business that remains intact.”

- Warren E. Buffett


* (EPS Estimate: Rs. 1178)

The most important decision of a Fund Manager should be Sector SelectionThe importance of fundamental research in selecting the right sector that will lead the growth

cannot be over estimated.

It can be seen above how the exclusion of IT Sector, ITC and Baking Sector would have led to

considerable underperformance of the portfolio. One the other hand, it also shows how a

considerable overweight stance on the bottom performers would have dented portfolio returns.

The table below ranks sector performances over the last 10 years. (RED – Underperformers; GREEN –

Performers). It may be noticed that NO Performer stays in the same rank for more than 2 years.

Index Performance (April 2009 – September 2011) 69%

Index performance excluding performers

• IT Sector, ITC Limited and the Banking Sector

Index performance from Bottom 6 performers

• Realty, JP Associates, Metals, Power, Pharma and HUL

For instance, the period of high growth exhibited post 2009, have the following characteristics.

4

2001 -02

2002 -03

2003 -04

2004 -05 2005 -

06 2006 -07 2007 -

08 2008 -09 2009 -

10 2010 -

11

Auto 1 6 4 12 2 10 11 8 2 4

BFSI 9 1 6 4 10 3 6 5 4 3

Capital Goods 7 2 2 5 1 5 1 9 6 9

Cement 4 10 8 2 4 8 8 10 5 13

Chemicals 12 4 14 - - - - - - -

FMCG 8 11 13 8 3 12 5 1 11 1

Diversified 5 3 1 7 7 7 7 6 7 12

IT 11 8 12 1 11 4 12 3 3 2

Media 2 13 5 9 13 - - - - -

Metals 10 5 3 3 12 11 2 12 1 7

Oil and Gas 13 7 7 11 6 2 3 4 9 6

Health Care 3 9 11 10 9 9 10 11 8 11 Power - - 10 13 8 6 4 2 10 8

Real Estate - - - - - - 13 13 13 10 Telecom

6

12

9

6

5

1

9

7

12

5

45%

5%


In Summary

As demonstrated in the previous table, it may be concluded that SECTOR SELECTION and SECTOR

ROTATION are key to achieving superior portfolio performance. This is further elucidated by the

following two illustrations:

a. Effect of missing out on OUTPERFORMING Sectors: As the chart below showcases, it can

be seen that if bottom 2 or 3 sectors are identified, returns are significantly higher than the

benchmark

b. Removing UNDERPERFORMING Sectors: As a corollary to the above, the chart below

showcases how avoiding underperforming sectors leads to returns over and above the

benchmark.

5

0%

5%

10%

15%

20%

10 year 5 year 3 year 1 year

Sensex

Removing Top 2 sectors

Removing Top 3 sectors

0

200

400

600

800

1000

1200

1400

1600

1800

Sensex

Removing Bottom 2 sectors

Removing Bottom 3 sectors

Equal Sector Weightage


1-Jan 2001

1-Jan 2002

1-Jan 2003

1-Jan 2004

1-Jan 2005

1-Jan 2006

1-Jan 2007

1-Jan 2009

1-Jan 2010

1-Jan 2011

1-Jan 2008

In the above analysis, it is clear that the only piece of consistency is the inconsistency of the same

sector’s performance over a one year period. Individual sector performances are driven by economic

events and business cycles. Given that (a) changing economic climate is a constant and (b) business

cycle occurs with material periodicity, it is of utmost importance to identify sectors on the basis of

business cycles that will be at the cusp of performance.

Accordingly, the factors that go into building a portfolio that will merit the right sector as well as

rotate between sectors as and when deemed appropriate are as follows:

a. Understanding the phase of economic cycle

b. Understanding and anticipating business cycles

c. Identify sector leaders, and

d. Determine sector allocation

Keeping in perspective the above, Unifi has constructed a model portfolio that seeks to deliver alpha over the benchmark BSE-30

The table below shows various sectoral performances at various market cycles:

Mar 2001 – Mar 2003

Mar 2003 – Mar 2006

Mar 2006 – Dec 2007

Dec 2007 – Mar 2009

Mar 2009 – Mar 2011

6


25.53% 104.56% 92.21% -4.79% 77.90%

11.51% 82.82% 84.23% -28.72% 69.73%

10.41% 74.35% 76.07% -35.01% 66.03%

6.31% 72.23% 57.29% -38.41% 65.92%

3.22% 67.88% 41.72% -43.75%

2.57% 57.81% 38.66% 39.03%

-5.02% 57.50% -47.12% 30.52%

33.76% -47.42% 25.57%

-8.27% 50.14% 19.13% -48.92% 21.93%

-9.15% 46.65% 6.58% -51.02% 21.34%

-13.55% 42.99% -1.70% -51.67% 17.73%

-14.18% 32.89% -6.00% -59.25% 15.08%

-14.79% 32.47% -6.56% -66.35% 0.34%

-28.31% 30.60% - -77.41% -13.50%

- - - - -

- - - - -

41.52%

-44.54%

34.11%

-8.03% 53.99%

Auto

BFSI

Capital Goods

Cement

FMCG

Diversified

IT

Media

Metals

Oil and Gas

Health Care

Power

Real Estate

Telecom

Chemicals

Sensex

Fund Objective

Investment Strategy

Methodology

Our objective is to build a long term portfolio of large cap stocks that will seek to generate superior

risk adjusted return relative to the benchmark (SENSEX). While the Sensex has 30 stocks across

11 sectors; we will build a portfolio of around 25 stocks across sectors that will outperform the

relative constituents of the Sensex over the long run. The universe for this purpose will be BSE 200.

The investment strategy will be to manage differential sector exposure levels to constituents of

BSE 200, relative to the Sensex. Alpha will be generated by maintaining an overweight stance on

sectors expected to lead the market and by going under weight/ avoiding sectors that are expected

to lag the market.

In the sections above, we have seen that no two sectors lead the market performance in

consecutive years. Meaning, at different points in time, different sectors drive the markets.

As India’s economy grows, certain sectors will enjoy growth rates faster than the others due to their

inherent strengths, industry cycles and other macro-economic factors. Portfolio weights will be

decided on the basis of two parameters:

a. Current Economic Indicators, and

b. Company Fundamentals

Sector weights will be determined on the basis of companies expected to benefit the most from the

current economic indicators (for instance, interest rates, foreign exchange movements, global

economic health and others) and business cycles. Individual stocks will be identified on the basis of

their underlying fundamentals, the extent of positivity of prevailing economic indicators relevant to

them and the comfort levels on the quality of their earnings, growth and valuation.

Unifi India Large Cap Fund

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Great investment opportunities come around when excellent

companies are surrounded by unusual circumstances that

cause the stock to be misappraised.”

- Warren E. Buffett


Market Top

EarlyExpansion

MiddleExpansion

LateExpansion

EarlyContraction

LateContraction

Energy

Consumer Staples

Drugs

Utilities

Financials

Consumer Cyclicals

Basic Materials

Capital Goods

Services

Technology

Transportation

At markettops, basicmaterials,

energy andconsumer

staples sectors are

the strongest

At market lows,the transportation

sector normallyleads first

followed bythe technology

sector

For instance, in FY11, the Sensex generated a return of 11% as against 24% and 33% generated by

Banks and the FMCG sector, while, the real estate sector posted negative returns of 27%. A significant

out-performance to Sensex can be obtained by maintaining an overweight stance on Banks and

FMCG and avoiding exposure to Realty. Capital reallocation will occur every time an industry finds or

falls out of favor.


Sectoral Returnover the last 10 years

9

31 Mar 2002

31 Mar 2003

31 Mar 2004

31 Mar 2005

31 Mar 2006

31 Mar 2007

31 Mar 2008

31 Mar 2009

31 Mar 2010

31 Mar 2011

Cement

24.39%

-15.42%

84.00%

38.48%

103.82%

-1.28%

12.85% -51.14%

115.62%

-26.78%

Chemicals

-18.99%

1.88%

2.46%

-

-

-

-

-

-

-

IT

-8.72%

-7.82%

33.34%

68.49%

52.50%

24.64%

-27.13% -28.03%

123.09%

29.14%

Pharma 33.34%

-8.57%

40.49%

-1.00%

61.46%

-10.23%

2.61%

-60.12%

73.43%

-14.28%

Consumer Durables -2.04% -24.81% 27.81% 8.56% 113.00% -23.85% 27.58% -6.57% 28.34% 32.74%

Metals -8.69% -1.21% 157.80% 35.38% 37.73% -21.68% 57.28% -65.59% 190.73% -5.19%

Oil -21.70% -4.55% 89.88% -1.39% 70.38% 50.82% 51.89% -30.70% 40.90% -1.62%

BFSI -7.18% 14.77% 111.34% 22.02% 54.51% 26.27% 24.75% -31.28% 122.77% 23.58%

Auto 60.02% -1.53% 152.79% -1.99% 117.54% -16.50% -13.66% -44.69% 159.08% 22.16%

Diversified 15.96% 7.24% 223.39% 13.48% 69.57% 1.62% 23.12% -38.76% 78.45% -17.49%

Telecom 11.45%

-34.86%

68.77%

17.59%

99.58%

81.29%

11.34%

-41.48%

-3.06%

3.85%

Capital Goods

1.59%

11.25%

209.55%

19.94%

135.60%

15.94%

88.80% -48.91%

107.25%

-6.74%

Media

37.99%

-62.75%

114.72%

3.50%

6.52%

-

-

-

-

-

Power

-

-

49.94%

-5.19%

64.92%

10.42%

31.55% -16.87%

40.24%

-5.58%

Real Estate

-

-

-

-

-

-

-30.59% -74.14%

-13.50%

-13.50%

Sensex

-3.75%

-12.12%

83.38%

16.14%

73.73%

15.89%

19.68%

-37.94%

80.54%

10.94%

The basic ideas of investing are to look at stocks as business,

use the market’s fluctuations to your advantage, and seek a

margin of safety in your purchase price. Even hundred years

from now they will still be the cornerstones of investing.”

- Warren E. Buffett


Portfolio Characteristics

Universe

65-80% of the portfolio will be invested in Top-5 sectors of BSE- 30 and the remaining will be invested

in bottom up ideas from BSE 200; all sectors participating in India’s growth is represented in BSE 200.

The average market cap of companies in BSE 200 is US$ 5 bn. and the median market cap is 2.5 bn.

Our Universe will be limited to BSE 200. BSE 200 companies consist of front line leaders in their

respective industries and are companies that have the best operating levers, financial metrics and

governance norms to perform. Among the BSE 200, BSE 30 stocks (SENSEX) will likely have a majority

of the exposure.

US$

CAGR Returns generated by various sectors

10

Industry 5 year

Banking and Financial Services 24.40%

Oil and Gas 17.08%

Capital Goods 16.67%

IT 13.50%

Sensex 11.51%

Power 9.84%

Consumer Durables 9.11%

Auto 4.76%

Telecom 3.52%

Metals 3.16%

Diversified 2.44%

Cement -3.01%

Pharma -11.39%

Industry 3 year

IT 27.21%

Banking and Financial Services 23.41%

Auto 20.29%

Consumer Durables 16.58%

Sensex 7.44%

Power 3.22%

Capital Goods -0.41%

Oil and Gas -1.32%

Metals -1.73%

Diversified -3.36%

Cement -8.25%

Pharma -15.84%

Telecom -16.02%

Real Estate -41.84%


Limits and Risk Management

Investment Risks

Structure

The Portfolio will comprise of approximately 25 stocks. Exposure per company will range between

2-5% except when the company’s weight in the Sensex is above 5%. Typically, we will

underweight/overweight a sector to the extent of 25%-200% of its weight in the Sensex. In any case,

no sector will constitute more than 40% of the portfolio. The average market capitalization of the

portfolio will be more than the median market capitalization of BSE 200. While the portfolio focuses

primarily on a buy and hold strategy, we will balance the same with a rational approach to selling

when fundamentals have deteriorated or valuations become too demanding even in the face of

reasonable growth prospects in the long run. Cash and Cash equivalents shall not exceed 20%

of Portfolio. Derivatives will typically not be used except on rare occasions as a hedge, but

never for leverage.

Risks include general market risks, sector selection risk and valuation downgrade risks.

The fund will operate on the PMS platform where the investor’s assets will remain either in cash with

HDFC Bank/Axis Bank/Liquid Fund (pending deployment) or in the form of stock with CDSL, both in

the investor’s name. While the tracking and monitoring of the investments will be active, the activity

at account level will be passive, resulting in lower transaction costs and better post-tax return. The

fund manager will be paid a management fee of 2% p.a. of the funds managed or 20% on profits

generated above 10% p.a. on the investor’s capital. While the fund will be open-ended, it would be

advisable to keep an investment perspective of 18-24 Months.

11



Unifi’s successful approachto Client Management

Reporting

Audit

Unifi’s Back Office operations are equipped

with appropriate technology and processes to

handle accounting, settlement, custody and

reporting in a totally secure environment.

At the end of each working day we have the

capability to provide a 100% up-to-date

statement to the customer. While interim

reports are available on request via e-mail,

Unifi maintains a monthly reporting cycle for all

customers. The monthly report, containing a

transaction statement, bank statement and

securities custody statement, provides

confirmation of holdings as well as a

comprehensive and up-to-date status of an

account’s performance. Confidentiality of

client information is assured through multiple

levels of security.

All customer accounts are audited annually by

Brahmayya & Company – one of India’s oldest

and most reputed C.A firms. An audit

certificate with detailed financial statements is

provided to the client by Brahmayya &

Company – Unifi’s statutory auditors.

Performance Review

Process

A quarterly meeting is scheduled between the

client and RM to review the performance for

the quarter and the year to date. Significant

transactions and positions are discussed.

Unifi’s market view and its near term plans are

presented. Customer feedback and specific

requests can be recorded and handled. If the

customer is located abroad, the review will

happen over a call. Unifi believes that nothing

can replace human contact and strives to

do in-person meetings to the extent feasible.

Unifi provides a wide range of customized

solution to help address a variety of situations

but many things are common.

• We leverage technology and best

practices for providing high quality service

• We make decisions and advice based on

research, never on hearsay and tips

• Safety of capital and low risk approach is

our prime concern

To keep things simple for the customer, we assign ownership of each customer to a Relationship

Manager (RM). It is the RM’s responsibility to co-ordinate internally to exceed service requirements

of the customer. Unifi’s Relationship Managers have proven track record in capital markets and are

capable of experienced advisement in line with Unifi’s market view and investment philosophy.

While the RM is accountable on day to day basis, the CEO retains overall accountability and is

available to assist in any situation.

12

About Unifi

Unifi Capital was established in 2001 as a

specialized Portfolio Management company,

offering unique investment strategies into the

equity markets in India. Unifi manages a total

asset under management (AUM) of about Rs.

500 crores, and offers investment advisory

services for domestic as well as international

clients.

Unifi’s Fund Management expertise has been

built through a dedicated in-house research

function that is supported by relationship

managers committed to offering continuity in

relationships and the best levels of customer

service.

Unifi Capital manages funds for several

high networth families in India and overseas.

Unifi also advises institutional capital managed

by its investment management subsidiary

in Mauritius.

At Unifi, safety of a client’s capital assumes

utmost importance and is rigorously enforced

through a disciplined investment process and

robust risk management controls.

To know more: Visit us on www.unificap.com

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Ph: +91-44-3022 4466, 2833 1556 Ph: +91-40-6675 2622/23 Ph: +91-80-2555 9418/19Fax: +91-44-28332732 Fax: +91-80-2555 9418

www.unificap.com

Disclaimer:

This information has been compiled from sources we believe to be reliable, but we do not hold ourselves responsible for its completeness or accuracy. It is not an offer to sell or solicitation to buy any securities or any financial instruments mentioned in the report. Unifi Capital Pvt. Ltd. and their officers and employees may or may not have a position within or with respect to the securities / other financial instruments mentioned herein. Unifi Capital Pvt. Ltd. may from time to time, have a consulting relationship with a company being reported upon. All opinions and estimations included in this report constitute our judgment as of this date and are subject to change without notice.

Sarath K. Reddy +91 98410 39884

G. Maran +91 98410 96034

Glenn Roger +91 98840 21059

Christopher Vinod +91 96322 44747

Prabhakar +91 98496 69488

Ajo George +971-50-2037486

Sudhan +971-50-7251418

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