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November 30, 2016
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
Two huge events, with massive implications for the world and Indianeconomy, took place on 9th November, 2016
Trump winning the US Presidential election and
Indian Government banning Rs. 500 and Rs. 1,000 currency notes
In the short term, both events are negative for the market
Trump’s radical policy beliefs will keep markets on tenterhook; accentuated by FIIoutflow from emerging markets on expectation of rise in US’ interest rates
Disruption of economic activity due to demonetization will impact GDP and earningsforecasts for Q3 as well as Q4 of FY17, post which the recovery will be sharp
However, seeing through the near term haze of clouds is important as theunfolding opportunities can be immense for Investors
Modi government’s demonetization drive in every sense is a ‘Big Bang’ reformwhich will have far reaching positive implications for the Indian economy
The organized sector will gain disproportionately, possibly at the cost of theunorganized sector
Also, we believe that in medium to long term, Trump’s election as President mayhave several possible tailwinds for India
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Two huge events – Not an end, but a new beginning
Setting the stage for a bigger play
The short, medium and long term economic benefits for the Indianeconomy are several, and more importantly, sustainable
The estimate windfall gain (USD 40–75 billion) to the government will provide fiscalammunition to increase spending in infrastructure and social sectors giving a bigpush to growth in FY18 & FY19
Wider tax base, improvement in tax to GDP ratio providing flexibility to thegovernment to reduce both Corporate and Income Tax rates; will structurally reducecost of doing business in India and move the country to a overall lower tax regime
Bring in large part of the informal economy within the fold of the formal bankingsystem; will have a ‘multiplier’ effect on the economy
Inflation and interest rates will continue to trend downwards reducing the cost ofcapital and positively impacting stock market valuations
‘Indian equities’ to become amongst the most attractive investmentavenues in the medium term
High growth & lower cost of capital makes a very strong case for Indian equities
Flow of domestic money is already rising and to some extent is balancing out thecurrent FII (largely ETF) outflow
While FDI flows have already become much larger than FII flows, we believe in themedium term, FII flows too will be supportive of the market
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Two huge events – Not an end, but a new beginning
Setting the stage for a bigger play
PM Modi’s has set his eyes on 2019 general elections and 2nd term forhimself; Clear focus is on Politics and Governance
Politics: Winning people’s confidence and ‘vote’ by cracking down on ‘Black Money’and
Governance: Successful implementation of the demonetization drive as well asnumerous other union government’s initiatives (starting from ‘Swachh Bharat’)announced over the last 30 months
The February 1st budget will be another step in furthering this agendawherein PM Modi may announce one or all of the following measures
Reduction in corporate and income tax rates (may raise exemption limit)
Greater push to infrastructure; creating employment and boosting economy
Utilizing part of the windfall from the demonetization drive to provide relief to theweaker sections of the society
The organized sector clearly has an advantage; however some will benefit more than others; identifying those businesses can result in
disproportionate reward for investors
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Two huge events – Not an end, but a new beginning
Setting the stage for a bigger play
Local Risks
Unexpected delays in normalization post demonetization
GST rate and delay in implementation of GST
Elections in the state of Uttar Pradesh and Punjab
Global Headwinds
Timing and number of hikes in interest rates by the US Fed
Commodities market boom – post Trump election
Prevailing uncertainty in Eurozone
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Short term risks to outlook
Setting the stage for a bigger play
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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 researched mid-cap company whose intrinsic value is yet to be discovered by the market
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
Setting the stage for a bigger play
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Our Investment Philosophy
• Macro economic factors, technology, market movements
• Forecasting these is not our strength
Investment Universe
• Sound businesses backed by management with honesty and
integrity with respect to minority shareholders
Focus List
• Sound businesses backed by management with honesty and integrity with respect to minority shareholders that are available at
discount to their intrinsic value
Portfolio
Setting the stage for a bigger play
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
Keep all your eggs in one basket, but watch that basket closely. ― Warren Buffett
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
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Few Quotes which describe our Philosophy
Setting the stage for a bigger play
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Valuation Fundamentals
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QUESTPMS Companies – Composite PE
FY-2016A 20.3
FY-2017E 15.6
FY-2018E 11.7
Estimated weighted average CAGR growth
for 3 years till FY19
Revenue 11%
EPS 29%
Current Index - PEs
SENSEX NIFTY 50 Nifty-Midcap50Nifty Full Small100
Index Value 26652 8224 3750 5841
PE as reported by exchange (TTM basis)
20.7 21.6 31.9 74.1
QuestPMS portfolio companies’ revenues areexpected to grow at CAGR of 11%, however, dueto margin expansion, projected earnings areexpected to grow at a substantially higher 29%CAGR over the next 3 years (FY16-19)
QuestPMS portfolio’s weighted average price-earnings multiple is 15.6 times FY17 and 11.6times FY18 earnings
(Source: Quest Internal Research)
QuestPMS Valuation Fundamentals
QuestPMS portfolio is trading at very reasonable valuations, giving us confidence in its ability to continue to outperform in future as well
Setting the stage for a bigger play
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Performance
15Consistent outperformance across benchmarks and time periods
• The Above returns are of a Model Client as on Nov 30, 2016. Returns shown above are post 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
BSE Small Cap
NiftySmall100
3 Months (5.2) (6.3) (6.4) (5.4) (3.6) (2.5) (5.4)
6 Months 7.9 (0.1) 0.8 10.0 11.1 10.7 12.0
1 Year 11.2 1.9 3.6 13.7 10.1 6.0 5.3
2 Years 14.8 (3.6) (2.1) 10.3 4.7 4.6 6.1
3 Years 38.7 12.0 13.4 30.4 25.9 33.3 29.8
5 Years 24.8 12.5 12.7 16.1 14.9 13.7 14.1
Quest PMS Performance as on Nov 30, 2016 - XIRR
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• The Above returns are of a Model Client as on Nov 30, 2016. Returns shown above are post 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.
Quest PMS Performance as on Nov 30, 2016 - Absolute
Consistent outperformance across benchmarks and time periods
Period
XIRR Performance %
Portfolio Sensex Nifty50
BSE Midcap
Nifty Midcap
50
BSE Small Cap
NiftySmall100
3 Months (5.2) (6.3) (6.4) (5.4) (3.6) (2.5) (5.4)
6 Months 7.9 (0.1) 0.8 10.0 11.1 10.7 12.0
1 Year 11.2 1.9 3.6 13.7 10.1 6.0 5.3
2 Years 31.8 (7.1) (4.2) 21.7 9.6 9.4 12.6
3 Years 166.8 40.5 45.8 121.7 99.6 136.9 118.7
5 Years 202.9 80.3 81.9 111.0 100.3 90.1 93.5
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• The Above returns are of a Model Client as on Nov 30, 2016. Returns shown above are post 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.
Quest PMS Performance as on Nov 30, 2016
Consistent outperformance across benchmarks and time periods
302.9
180.3 181.9
211.0200.3
190.1 193.5
100
150
200
250
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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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Quest Foundation
Quest Foundation
Stated objective
Quest Founders have publicly pledged to use all their profits for charitable andspiritual activities; contributed ~ Rs. 20 crores in ~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
− Sion Hospital – Mumbai (Medical)
− SNDT College – Wadala – Mumbai (Education)
− Tribal Integrated Development Trust – Mumbai (Tribal work)
− Shri Ram Hospital – Gondal – Gujarat (Rural Healthcare)
− Bellur BKS Iyengar Trust – Bangalore (Education and Medical)
− Chinmaya Mission – Mumbai (Spiritualism)
19Our obligation to Society
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
Biocon Limited
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Investment Date: 02-July-2015
Rationale at time of Investment:
• Biocon is the only Indian company with rich biosimilarpipeline targeting the regulated market
• It restructured its domestic formulation business and wasexpected to reap significant benefits
• Syngene (listed subsidiary of Biocon) expected to sustaingood growth supporting Biocon financials in the shortterm
Current Outlook:
• Biocon is on-course to file 4 biosimilars for approvals inUS & EU markets in FY 2017 with market size of thesemolecules being over US $ 30 bn. It has also receivedapprovals for Insulin Glargine from advance regulatedmarkets like Japan and Mexico
• Biocon is expected to receive regulatory approvals for itsInsulin plant in Malaysia which will ease the currentcapacity constraints. Once these biosimilars get launchedin US & EU, it will propel Biocon amongst the top leagueof players in Indian Pharma industry
• Domestic formulation business has revived strongly withmargins improving from low single digits to currentdouble digit margins
• Biocon’s Management is confident of achieving US$ 1 bnrevenue by FY2019 (CAGR of ~19% over FY 15-19)
Source: Internal Research
Valuation then: At the market price of Rs. 461,stock was available at PE of 16x on FY 2017Eearnings
Current Valuations: At CMP of Rs. 915, sharetrades at P/E of 32.4 times FY 2017 earnings
Setting the stage for a bigger play
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Jul-15 Nov-15 Mar-16 Jul-16 Nov-16
Biocon
Nifty
BSE MID_Cap
Kirloskar Ferrous
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Investment Date: 28-May-2014
Rationale at the time of Investment:
• Post the expansion, KFL would be one of the largestfoundries, with capacity of 1.5 lac tons – tomanufacture intricate engine blocks for marquee clientslike Daimler, Volvo, HINO, M&M and all major domestictractor manufacturers. It is also one of the mostefficient pig iron manufacturer
• Higher contribution from casting business (highermargin) will transform the company from primarily acommodity player to a value added auto componentcompany
Current Outlook:
• We expect gradual improvement in utilization of newfoundry to increase profits. Improved profitability andefficient management of working capital will helpmaintain its borrowings at current levels despiteincreasing sales
• Acquisition of iron ore mine by the company (to beauctioned by the government in the near future) canhave a very substantial positive impact on the Pig Ironbusiness
• Company is confident of achieving superior marginsresulting in faster growth in bottomline vis-à-vis toplinegrowth
Valuation then: At Rs. 32, share was available atP/E of 8 times FY 2015 earnings
Current Valuation: At CMP of Rs. 74.8, sharetrades at P/E of 11 times FY 2017 earnings
Source: Internal ResearchSetting the stage for a bigger play
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May-14 Oct-14 Mar-15 Aug-15 Jan-16 Jun-16 Nov-16
KirFerro
Nifty
BSE - Midcap
KEC International
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Investment Date: 20-Dec-2011
Rationale at time of Investment:
• A global infrastructure EPC major with presence in thearea of power transmission/systems, railways andwater. Company is also into manufacturing of powerand telecom cables
• Present in 45 countries across South Asia (includingIndia), Middle East, Africa, Central Asia and America
• It is a dominant player in transmission line towers inIndia and many other countries overseas
Current Outlook:
• Topline expected to grow at 10% for next couple ofyears
• Improvement in EBIDTA (by 50 bps) coupled withinterest savings (Interest to Sales to improve by 25bps) would enable PAT to grow at faster pace thantop line. Earnings are expected to grow @ CAGR of~23% for next 3 years (FY16-19)
• Savings in interest is expected to be on two counts –reduction in working capital requirements anddecrease in interest rate on borrowings
Valuation then: Was available at 5 times FY 2012estimated consolidated EPS of Rs. 6.54
Current Valuation: At CMP of Rs. 145, sharetrades at P/E of 14 times FY 2017 earnings
Source: Internal Research
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500
Dec-11 Aug-12 Apr-13 Dec-13 Aug-14 Apr-15 Dec-15 Aug-16
KEC International
Nifty
BSE - Midcap
Setting the stage for a bigger play
The Ramco Cement (TRCL)
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Investment Date: 06-JULY-2015
Rationale at time of Investment:
• Cement demand was languishing in Southern Indiadue to political instability & capacity overhang.Demand revival seemed inevitable & prominentplayers like TRCL expected to be prime beneficiaries
• Company was planning to increase its usage ofpetcoke to reduce its fuel cost and improve margins.
• Company had plans to expand regionally by furtherpenetrating into newer regions like Orissa
Current Outlook:
• Ramco Cement has emerged as one of the mostefficient cement player in India and has clockedhighest EBITDA per ton in the country in 1H FY 2017
• Company’s current capacity utilization is around 60%and higher operating leverage benefit will be realizedonce these utilization levels improve (with strongdemand emanating from AP/Telangana region) goingforward
• Company continues to work on improving its freight(100% coastal shipping used to transport clinker toWest Bengal unit) and fuel cost (optimum use of pet-coke which is still 15-20% cheaper than coal onK/Cal basis)
• Company will be net debt free within next 2 years
Valuation then: Was available at 18 times FY2017 estimated consolidated EPS of Rs. 19.1
Current Valuation: At CMP of Rs. 609, sharetrades at P/E of 20 times FY 2017 earnings
Source: Internal Research
Building a portfolio that can endure global uncertainty
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Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16
Ramco Cem
Nifty
BSE MID_Cap
