June 28, 2019questinvest.com/new_launch/wp-content/uploads/2019/07/...increase in insurance cost, higher safety norms as well as due to cyclical factors Very low food inflation and

June 28, 2019

➢ 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

➢ Business practices earlier considered ‘par for the course’ now being questioned andchallenged like never before

▪ Premium for ‘quality’ or more importantly ‘discount’ for non-quality becoming stark

➢ Governance issues hidden under the carpet now coming to the fore rattling stock pricesof companies where business practices are not considered completely overboard

▪ Recent statement by Piyush Goel urging industry and consultants to not violatespirit of law or try to find loopholes reflects mindset of the incumbent government

➢ Structural changes in the rules of the game manifesting in many forms

▪ Sudden deratings, defaults, unexpected financial losses, resignations of Directorsand / or Auditors, whistle blower complaints, sale of pledged shares, investigationsagainst promoters, directors, managements and auditors becoming commonplace

➢ Indian corporate sector going through a churn which is essential for cleaning up of thebusiness practices

▪ Evolution of the governance practices in the corporate sector currently underway isgood for the minority investors from a longer term perspective

➢ Companies attuned to new way of doing business to outperform markets going forward

▪ As Mr. Uday Kotak mentioned in his recent shareholders’ letter “this is a new Indiawhere governance and transparency will be the pillars of progress”

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Changing ‘rules of business’ now reflecting in market dynamics

Markets finely balanced today with respect to the risk reward equation

➢ Growth impulses have steadily weakened over the last few quarters, particularlysince the last festive season

▪ Slowdown has coincided with the IL&FS debacle last September 2018

➢ While views differ, few of the reasons contributing to the slowdown are as under:

▪ Financing of lower grade credit becoming difficult with tightening of liquidity; hasresulted in froth in demand going away

▪ Automobile demand has also been impacted due to change in axle load norms,increase in insurance cost, higher safety norms as well as due to cyclical factors

▪ Very low food inflation and ‘below normal’ monsoons over the last couple ofyears have reduced purchasing power of rural India

➢ Global growth too has slowed down with growth rates lower by ~ 0.75% in the lastone year; Recession fears resulting in one of the fastest reversal in interest rate cycle

➢ Indian merchandise exports too have almost stagnated and have grown at a CAGR of~ 1% in dollar terms in the last 7 years (vis-à-vis ~ 20% in the previous 7 years)

➢ However, good news is that in the next three months, lower growth will be built intothe base and from Q3FY20 onwards, we should see better growth rates

➢ NDA government too is seized of the matter and we expect it to announce number ofmeasures to kick start manufacturing and exports growth, in the next few months

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Demand Slowdown – What is ailing the economy?


➢ Broader markets have underperformed since Q1CY18 and have seen both time andprice correction

➢ However, Indian economy is far stronger today than it was 5 years back

▪ While growth visibility is currently being masked by cyclical issues, India towitness benefits of structural reforms of the last 5 years in the next 5 years

➢ Global slowdown too will have some silver linings for India!

▪ Multinationals / global organizations to shift part of their manufacturing to Indiaas they seek alternative options to China

▪ Lower global growth will keep brent crude and commodity prices under check; asignificant positive for India

▪ Lower global interest rates will result in cheaper funds for Indian corporates

➢ ‘Modi’ government is expected to continue with the good work and build upon thereforms of the first term by carrying out the unfinished agenda

▪ Continued investment in the infrastructure sector

▪ Labour and land reforms, fine-tuning of GST & IBC, etc.

▪ Further improvement in governance, ease of doing business, etc.

➢ However, given the slowdown and rural stress, some luck too will be required suchthat global economy doesn’t go into recession and monsoons do well this time around

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Despite short term issues, medium term outlook for India has improved


➢ Global

➢ Spiralling of trade war, initiated by United States

➢ Slowing global growth across most major economies

➢ Geopolitical situation in the Middle East region – impacting crude oil price

➢ Local

➢ Continued stress in the wholesale NBFC / HFCs and residential real estate space

➢ Deepening of slowdown across sectors witnessed in India in the last few months

➢ Finding enough resources to provide fiscal impetus to the Indian economy in theface of lower than expected tax collections

➢ 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


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Investment Philosophy

➢ Our Passion is to identify superior and high quality businesses at early stage of growth

➢ Quest’s long term outperformance 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 businesses whose intrinsic / fair value is not yet reflected in the market

➢ Bottom-up approach through a MULTICAP investment universe

➢ 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 upward journey - gaining from earnings growth, P/E expansion and price discovery

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Why Quest


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Our Investment Philosophy

• Macro economic factors, technology, commodity prices, market movements

Investment Universe

• Sound businesses backed by management with vision, having crisis management capabilities

and hunger for growth

Focus List

• Sound businesses as above that are available at discount to their intrinsic valuePortfolio


➢ 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

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Few Quotes which describe our Philosophy


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Valuation Fundamentals

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QUESTPMS Companies – Composite PE

FY-2019E 22.6

FY-2020E 18.3

FY-2021E 15.4

Estimated weighted average CAGR growth

for 3 years till FY22

Revenue 13%

EPS 20%

Current Index - PEs

SENSEX NIFTY 50 Nifty-Midcap50Nifty Full Small100

Index Value 39,394 11,788 4,872 6,200

PE as reported by exchange (TTM basis)

28.4 28.9 30.4 36.1

QuestPMS portfolio companies’ revenues areexpected to grow at CAGR of ~13%, however,due to margin expansion, projected earnings areexpected to grow at a substantially higher ~20%CAGR over the next 3 years (FY19-22)

QuestPMS portfolio’s weighted average price-earnings multiple is 18.3 times FY20 and 15.4times FY21 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


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Performance

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• The Above returns are of a Model Client as on Jun 28, 2019. • 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

other investments.

Period

XIRR Performance %

Portfolio Sensex Nifty50

BSE Midcap

Nifty Midcap

50

BSESmallcap

NiftySmall 100

3 Months 0.4 2.2 1.9 (3.4) (3.0) (4.6) (6.8)

6 Months 5.2 9.2 8.6 (3.6) (0.8) (2.5) (3.1)

1 Year 2.7 12.4 11.3 (2.4) 2.5 (9.5) (11.6)

2 Years 2.3 13.1 11.5 1.0 4.4 (3.1) (7.4)

3 Years 9.9 14.1 13.2 8.9 12.6 7.3 3.2

5 Years 13.7 9.4 9.4 10.0 8.2 7.3 3.2

Flagship Performance as on Jun 28, 2019 - XIRR

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• The Above returns are of a Model Client as on Jun 28, 2019. • 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

other investments.

Flagship Performance as on Jun 28, 2019 - Absolute

Period

XIRR Performance %


BSE Midcap

Nifty Midcap

50

BSESmallcap

Nifty Small100

3 Months 0.4 2.2 1.9 (3.4) (3.0) (4.6) (6.8)

6 Months 5.2 9.2 8.6 (3.6) (0.8) (2.5) (3.1)

1 Year 2.7 12.4 11.3 (2.4) 2.5 (9.5) (11.6)

2 Years 4.7 27.9 24.3 2.0 9.0 (6.1) (14.3)

3 Years 32.7 48.5 45.1 29.1 42.8 23.5 9.9

5 Years 90.1 56.7 56.7 61.1 48.3 42.3 17.1

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• The Above returns are of a Model Client as on Jun 28, 2019. • 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

other investments.

Flagship Performance as on Jun 28, 2019

190.1

156.7 156.7161.1

148.3142.3

117.1

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QUESTPMS

Sensex Nifty50

BSE Midcap NiftyMidcap 50

BSESmall Cap

NiftySmall 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 Jun 28, 2019. • 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

other investments.

Period

XIRR Performance %


BSE Midcap

Nifty Midcap

50

BSESmallcap

NiftySmall100

3 Months 4.5 2.2 1.9 (3.4) (3.0) (4.6) (6.8)

6 Months 8.3 9.2 8.6 (3.6) (0.8) (2.5) (3.1)

1 Year (2.7) 12.4 11.3 (2.4) 2.5 (9.5) (11.6)

2 Year 2.6 13.0 11.3 0.4 3.8 (3.9) (8.2)

3 Year 15.9 13.6 12.5 6.6 10.3 4.5 0.2

Since Inception –27-May-2016

16.8 13.2 12.1 6.6 10.3 5.3 2.2

Focus Performance as on Jun 28, 2019 - XIRR

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Quest Foundation

Quest Foundation

20Our obligation to Society

Stated objective

➢ Quest Founders have publicly pledged to use all their profits for charitable andspiritual activities; contributed over Rs. 44.4 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 over5,000 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 - [email protected]

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)

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Investment Date: 17-Oct-2015

Rationale at time of Investment:

• EMD business was struggling due to declining sales ofmicro-grit (a key RM used in solar panels) & challengeswith South African acquisitions. However, turnaroundwas in sight with Management restructuring operations,developing new capabilities & value added products

• Ceramic business to be mainly driven by strong demandfor engineered ceramics & acquisition of metallizedcylinder plant

• Domestic abrasive growth to be driven by Make in Indiaand infrastructure focus of the Government

Current Outlook:

• CUMI has created a strong portfolio of value addedproducts which will augment revenue & margin of EMDbusiness going forward. Capacity expansion at VAWand restoring of power plants in India to drive revenuegrowth and margins over next 2-3 years

• Ceramic division to benefit from sustained growth inengineered ceramic coupled with demand revival forrefractories and ramp up of Metz cylinder plant to aidgrowth over next 2-3 years

• Abrasive business to benefit from strong domesticgrowth coupled with capacity expansion of coatedabrasives to drive growth over medium term

• Topline expected to grow @ CAGR of ~13.5% (FY19-23) & margins to expand 130 bps to 17.6% in FY 2023

Valuation then: Was available at 16 times FY2016 estimated consolidated EPS of Rs. 11.2

Current Valuation: At CMP of Rs. 357, sharetrades at P/E of 21.7 times FY 2020E earnings

Source: Internal Research

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CUMI

NSE 500

Federal Bank

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Investment Date: 06-Jun-2016


• Slippage & provisioning was expected to improve inFY17: Federal’s FY16 financial performance was marredby higher slippages and provision. And large part ofstress was recognised in FY16. Hence it was aturnaround story

• Federal was strengthening management bandwidthalong with beefing up of credit appraisal processes

• Federal has one of the best liability franchise: Retaildeposit represented ~98% of the total

• Value of Federal’s holding in NBFC (100%) and Lifeinsurance (26%) was ~Rs 8/share

Current Outlook:

• Continues to have a well diversified Asset book and astrong Liability franchise: The bank’s Asset book is welldiversified across Corporate (~43%), SME (20%) andRetail & Agri. (37%) categories

• Relationship banking to result in increased cross sell

• Extensive Distribution Franchise

• We believe that the Bank is high on governance and isconsciously pursuing growth which is reflected infinancial performance

• Bank is expected to grow by 18 to 20% per annum andcan double the bank size in four years

Valuation then: Was available at 1.1 timesFY 2017 estimated adjusted book value (ABV)of Rs. 45.4

Current Valuation: At CMP of Rs. 108,Federal is trading at 1.5 times FY 2020E ABVof Rs 66.


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Bank

NSE 500

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Kalpataru Power Transmission (KPTL)

Investment Date: 9-Nov-2012


KPTL, is leading multidimensional Turnkey player havingglobal footprint across 40 countries with diversifiedportfolio in• Power – Integrated solutions provider in T&D (India

and Overseas), Green Power Generation (2 biomassbased power plant of ~ 16 mw) and Power PlantConstruction

• Infrastructure – Presence in verticals such as Oil &Gas, Railways, Building/Factories, Roads & Bridges(thru 67.2% subsidiary JMC projects)

• Asset Creation – thru projects under PPP model in– Transmission System – 51:49 JV with Technoelectric -

Jhajjar KT Transco– Roads - 67.2 % subsidiary, JMC Projects,– Logistics & Warehouse - thru 85% subsidiary Shree

Shubam Logistics (SSLL)

Current Outlook:

• KPTL’s presence across geographies (India, Africa,Middle East, South East Asia) has resulted in significantde-risking of the business for KPTL

• Monetisation of T&D BOOT - Proceeds of monetisationwould be utilised towards debt repayment, investing insimilar BOOT projects and to grow domestic &international T&D business

• Strong order book of over Rs. 14,068 cr & L1 of overRs. 1,500 cr provides good growth visibility for thenext few years

Valuation then: Was available at 9.1 times FY2013 estimated consolidated EPS of Rs. 9.1


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Kalpataru

Power

NSE 500

Tech Mahindra

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Investment Date: 28-Oct-2016


• Part of Mahindra Group and leading provider of IT,Networking technology solutions and business supportServices to global telecommunication companies (48%);Enterprise services in BFSI/Manufacturing/Media.

• Telecommunication business was facing temporaryhead-winds because of global consolidation and M&Aactivities in Media sector; impacting growth and hencemargins.

• Management guided that normalization of business overnext few quarters would reflect in margins positively.

Current Outlook:

• Based on the recent deal momentum and commercialrollout of 5G technology, strong growth is expected inthe Communication segment over the next 3 – 4 years.

• Tech M is chasing 2 large deals in BFSI segment – ifthese goes through, Enterprise revenue growth in FY20will be strong.

• Additionally, Enterprise segment is expected to be a bigbeneficiary of 5G given that ~60-65% of US$1.1 tnopportunity would come from Enterprise solutions.

• In addition to near-term operational levers, betterprofits in portfolio companies and higher mix ofCommunication revenue (due to 5G) to boost marginstarting FY21.




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TECH M

NSE 500

The Ramco Cement (TRCL)

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Investment Date: 06-Jul-2015


• Cement demand was languishing in Southern Indiadue to political instability & capacity overhang.Demand revival seemed inevitable & prominentplayers like TRCL expected to be prime beneficiaries

• TRCL was planning to increase its usage of pet coketo reduce its fuel cost and improve margins

• TRCL had plans to expand regionally by furtherpenetrating into newer regions like Orissa

Current Outlook:

• The company has emerged as one of the mostefficient cement player in India

• TRCL is on capacity expansion spree with plannedaddition of 3 MTPA grinding capacity in EAST, 1MTPA in South and 3.8 MTPA of clinker capacityaddition in South. On completion over next 18-24months, this capacity is expected to drive growthand margins over medium term

• Operating leverage benefit will be realized onceutilization levels improve (demand revival from corehigh margin markets of TN & Kerala)

• Cement realizations have improved since Feb 2019coupled with tepid energy cost which is expected todrive margins and profitability for the company

• We expect TRCL to increase revenues at a CAGR of10.4% and EPS at a CAGR of 21% over FY19-23




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Ramco Cemnt

NSE 500

Documents

June 28, 2019questinvest.com/new_launch/wp-content/uploads/2019/07/...increase in insurance cost, higher safety norms as well as due to cyclical factors Very low food inflation and