Franklin India High Growth Companies FundAn equity fund with a high growth focus
Agenda
The India Story
Why focus on Growth ?
Franklin India High Growth Companies Fund
Why Franklin Templeton ?
India : Economy Past
Source : Source: Angus Maddison, The World Economy: Historical Statistics, OECD 2003.
0
10
20
30
40
1 1000 1500 1600 1700 1820 1870 1913 1950 1973 2001
China India Europe United States
Share of World GDP (%)India
China
Europe
US
India and China starting to pick up
India : Economy Present
Source: CSO, RBI, Ministry of Finance, Citigroup estimates (March end)
1059
929
805
603695
509475460
4.4%
5.8%
8.5%
7.5%
9.0% 9.2% 9.3%
3.8%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
FY01 FY02 FY03 FY04 FY05 FY06 FY07E FY08E
0
200
400
600
800
1000
1200
1400
1600
GDP (US$ bn) Real GDP growth (%)
GDP & Real GDP growth
One of the fastest growing economies
India : Economy Economic Power of the future
Source: Economist
India to be among the biggest economies
India : Economy Relatively insulated to global upheavals
Source: CRIS INFAC Low export to GDP ratio compared to other Asian markets, but high forex reserves
Share of Exports as a % of GDP
205.6
162.8
107.9
63.0 62.2
41.1 35.727.6
18.5
0
50
100
150
200
250
Sin
ga
po
re HK
Ma
lay
sia
Ta
iwa
n
Th
aila
nd
Ph
illip
ine
s
Ch
ina
Ind
on
es
ia
Ind
ia
Source: Citigroup
Source: Mckinsey Global Institute
Macro drivers Increasing affluence leads to higher consumption
Macro Drivers Potential ‘Services Capital’ of the world
Services are tradable: India has cost and skill set advantagesIndia has the 2nd largest pool of scientists and engineers in the worldGap in price of labor between India and the rest of the world plus a young population are the main drivers
Source: Citigroup
6.27.7
9.612.8
17.7
23.4
65
0
10
20
30
40
50
60
70
FY01 FY02 FY03 FY04 FY05 FY06E FY10E
CAGR 26-27%
US$bn
Macro Drivers Infrastructure spending on the rise
Driven by -
• Government Infrastructure spending especially in the rural areas
• Port/airport modernization/expansion
• Cross-country road corridors
• Upstream/midstream investments
• Significant capacity additions driven by rising demand and utilization
• Rising telecom demand driven by lower handset prices and newer technologies
Source: CRIS INFAC GDP growth could be 2-3% higher with proper infrastructure backbone
Rs in bn FY03-07 FY 08-12 %
Roads 1,020
2,150
110.8
Ports 125
560
348.0
Railways 606
2,340
286.1
Power 1,800
3,720
106.7
Total 3,551
8,770
147.0
* Source : CLSA - expected investments in 10th/11th plans
Macro Drivers Corporate India is a value creator
Source: CLSA
Capex phase in the late nineties sets foundation for value creation
10
12
14
16
18
20
22
24
26
28
FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07CL FY08CL
(% )
Value created
Cost of Equity
Return on equity
Current cost of equity
LiquidityIndia dedicated funds
Source: Bloomberg, Apr 07
Sharp rise in assets and number of India funds - $34 billion
Fund Domicile Launch Assets (US Mln)
HSBC GIF-Indian Equity-Ad Luxembourg 23-Jan-96 6115
JPMorgan F-India Fund-A$ Luxembourg 31-Aug-95 3970
Fidelity Fund-India Focus-AGBP Luxembourg 23-Aug-04 3370
India Fund Inc USA 23-Feb-94 1913
PCA India Equity Open Japan 30-Sep-04 1293
Aberdeen Gl-India Opportu-A2 Honk Kong 28-Mar-06 1269
HSBC India Open Japan 30-Nov-04 1268
Eaton Vance Greater India-B USA 02-May-94 1082
Nomura Indian Stock Fund Japan 22-Jun-05 1055
Blackrock India Stock Fund Japan 13-Dec-05 1022
LiquidityDomestic savings
Vast pool of untapped household savings can provide support to equity markets:
Financial savings accounting for 16.8% of GDP : $ 148.03 bln *
Available savings pool if household accumulations
are assumed at 6-7 years’ savings : $888 - $1036 bln
Equity inflows at different levels of allocation
Allocation USD Bln Rs. Crores
2% 17.76 – 20.72 82,567 – 95,849
5% 44.41 – 51.81 205,392 – 239,624
10% 88.82 – 103.60 410,783 - 479,247
*Source: RBI data-FY06, 1 USD = Rs.45.25
Why High Growth ?
Economy and investment styles
1 year 10 years
Developed Economy
MSCI USA Growth 9.84% 5.31%
MSCI USA Value 16.23% 6.51%
Emerging Economy
MSCI India Growth 29.04% 16.03%
MSCI India Value 27.20% 9.82%
Source: MSCI (Compounded & Annualised returns as on April 30, 2007 and in US$ terms)
Different styles are pertinent for the various stages of the economic/business cycle
What is Growth Style?MSCI measures
Growth investment style characteristics Long-term forward earnings per share growth rate
Short-term forward EPS growth rate
Current Internal Growth Rate
Long-term historical EPS growth trend
Long-term historical sales per share growth trend
Companies with above average revenue growth/potential and ROE
Value investment style characteristics Book value to price ratio
12-month forward earnings to price ratio
Dividend yield
Out-of-favour stocks/sectors with good fundamentals, turn-around opportunities and undervalued
Growth Drivers
India is undergoing a paradigm shift due to changing lifestyles and dynamics
Industry-specific investment themes are used to identify sectors/companies with above-average market growth
• Luxury Goods• Specialty Retail• Tour Operators• Fashion Apparel• Mail Order• Games• New Media
• Financial Services• Insurance Products• Asset Management• Retail chains• Housing
• Capital Goods• Infrastructure• Construction• Power• Telecom• Utilities
• IT/ IT Enabled services
• Auto Components• Engineering goods• Pharmaceuticals• Financial Research• Risk Management• Training &
Development
• Biopharmaceuticals• Specialized
Software• Videoconferencing• Testing Equipment• Networking
Products• Smart / SIM Cards• Consumer
Electronics• Flat Panel
Components• Cell Phone
Components
CHANGING LIFESTYLES
DEMOGRAPHICS INVESTMENTS OUTSOURCINGNEW
TECHNOLOGIES
High Growth Companies
Companies expanding sales as well as earnings at a much higher rate than that of the general economy.
Because these companies tend to grow earnings at a fast pace, they will typically have higher valuations (P/E)
Enjoy competitive advantages
Proprietary intellectual property
Strong management
Distribution/cost advantages
Entry barriers specific to the respective sector
High Growth strategy
How the strategy would have worked with a focus on “high growth companies”
May 02 – Apr 07$ Q1 Q II Q III Q IV Q V
Earnings Revision Ratio
51.9% 51.0% 39.4% 35.1% 23.5%
Long Term PEG Ratio
54.2% 45.0% 50.1% 29.0% 26.3%
Source: Citigroup investment research (compounded and annualised as on April 30, 2007). Quintile-I being the top 20% and Quintile-V the bottom 20% of the group.
$The table denotes Annualised Compounded returns over the specified period on a portfolio of companies constructed based on the following two parameters. Earnings Revision Ratio (ERR) = the number of upward revisions (of estimates of company's earnings by analysts) over the past month minus the number of downward revisions over the past month divided by the total number of estimates. Long Term Price / Earnings to Growth (PEG) Ratio = Trailing P/E ratio divided by Annualised Mean Earnings Growth Rate over the company's Next Business Cycle, usually 3 to 5 yrs. Annualised Mean Earnings Growth Rate is the Mean value of Growth forecasts of all contributing analysts. The companies considered are forming part of the S&P Emerging markets global indices.
High Growth Companies
Some well known examples from the last decade - .
1 year 3 years 5 years 7 years 10 years
Infosys 29.0 47.1 34.7 10.6 56.9Bharti Airtel 99.1 68.5 87.4 - -ABB 31.3 73.5 72.6 58.3 20.3HDFC 26.5 40.8 38.5 32.1 26.4Kotak Mahindra Bank
74.7 90.3 72.0 68.0 49.9
BSE Sensex 17.1 34.8 32.9 16.9 13.7
CNX Midcap 4.5 31.3 N.A N.A N.A
S&P CNX 500 12.1 30.9 34.3 17.8 17.0
For illustrative purposes only. Source: DB Research. Compounded and annualised returns as on April 30, 2007. Please note that this should not be construed as an investment advice.
High Growth Companies Infosys
Industry : IT Services
Opportunity : To deliver software services in a cost effective manner remotely. US & Europe became target markets
Macro drivers : Global offshoring trend and friendly regulatory environment
Competitive Advantages : Strong team, flexibility to reinvent itself along with market opportunities, Ability to build long-term drivers of cost efficiency, brand name, High quality of services, Corporate Governance
Management Quality/Execution : Built capable & stable management; attracted new and skilled talent with strong retention policies, delivered de-risked growth without dilution in profitability, followed shareholder friendly practices
1996 2006 CAGR
Sales 89 9028 58.8%
PBIDT 34 3146 57.2%
PAT 21 2421 60.8%
Market Cap 359 81830 72.1%
RONW (%) 29.53 39.89
Rs. in Crs
High Growth Companies Bharti Airtel
Industry : Telecom Services
Opportunity : New market for mobile telephony with evolving regulatory environment
Macro drivers : Changing lifestyles and aspirations helped in rapid growth for the sector
Competitive Advantages : Spearheaded a unique business model which competitors took time to catch up with, Presence in wider geographic segment providing scale benefits, Innovative service packages, Brand equity
Management Quality/Execution : Entrepreneurial and highly innovative, exhibited ability to generate consistently high growth rates, trend-setting financial management and leadership
High Growth Companies ABB
Industry : Engineering capital goods
Opportunity : Huge demand for Power & Urban infrastructure
Macro drivers : Infrastructure spending and capex
Competitive Advantages : World class product and services, Higher-end technology, Dependable execution, Strong support of the parent
Management Quality/Execution : High quality management with strong track record, sound financial management, consistent ability to introduce new products and deliver growth.
1999 2006 CAGR
Sales 776 4274 27.6%
PBIDT 75 560 33.2%
PAT 37 340 37.2%
Market Cap 1036 15729 47.5%
RONW (%) 9.16 32.88
Rs. in Crs
High Growth Companies HDFC
Industry : Home Loan Mortgages
Opportunity : Rising middle-income households and their need for affordable housing
Macro drivers : Strong economic growth and rising income levels
Competitive Advantages : Strong brand name, competitive pricing, customer-friendly practices, Reliability and stability, Efficient management of balance sheet, Low cost structure & Focus
Management Quality/Execution : Stable management team with strong corporate philosophy, Shows consistent ability to understand the environment well, willingness to forego unprofitable growth, Minimal dilution to fund growth.
1996 2006 CAGR
Sales 970 4208 15.8%
PBIDT 931 4074 15.9%
PAT 196 1257 20.4%
Market Cap 3859 33342 24.1%
RONW (%) 16.52 30.11
Rs. in Crs
High Growth Companies Kotak Bank
Industry : Financial Services
Opportunity : Growing affluent middle class with high savings and need for comprehensive financial services
Macro drivers : Changing financial landscape
Competitive Advantages : Complete range of services under one brand, Customer-focused approach, competitive pricing, Unique business model, Brand Equity
Management Quality/Execution : Strong and aggressive team, Highly entrepreneurial, Stable and confident top management, Have shown ability to build a large retail franchise without dilution of quality
2002 2006 CAGR
Sales 122 694 54.4%
PBIDT 134 542 41.8%
PAT 55 118 21.4%
Market Cap
845 8598 78.6%
RONW (%) 10.90 14.75
Rs. in Crs
Franklin India High Growth Companies FundBenefit from the fastest growing companies in India
Franklin India High Growth Companies Fund
Investment style is ‘growth’ & Blend of top-down and bottom-up approach of investing
An open end diversified equity fund that seeks to achieve capital appreciation through investments in Indian companies/sectors with high growth rates or potential
Type of instruments Normal Allocation#
Equity & Equity Linked Instruments 70% - 100%
Debt securities* and Money Market Instruments 0% - 30%
Asset Allocation:
# including investments in foreign securities as may be permitted by SEBI/RBI up to 35% of the net assets of the scheme, exposure in derivatives up to a maximum of 50%. * including securitised debt upto 30%
Investment Style
Primary focus will be to identify ‘high growth’ companies, especially in sectors witnessing above-average growth.
Blend of top-down (macro analysis to identify sectors) and bottom-up approach (micro analysis to pick stocks within these sectors)
The top-down considerations will include an analysis of –
Domestic and global economic drivers
Macro factors such as interest rates, inflation, regulatory environment, political environment and global market dynamics
Identification of sectors based on the above and relative valuations & liquidity
Investment Process
Identify key trends based on various economic drivers
Analyze and ascertain the nature, certainty and predictability of such growth trends
List companies that provide exposure to these growth themes
Research further for Management quality, business strengths, competitive advantages, financial strength
Value these businesses through appropriate measures
High Growth – High returns
The impact of an extra 5% on an initial investment of Rs.1 lakh
% returns 1 year 3 years 5 years 7 years 10 years
10% 1.10 1.33 1.61 1.95 2.59 15% 1.15 1.52 2.01 2.66 4.0520% 1.20 1.73 2.49 3.58 6.19 25% 1.25 1.95 3.05 4.77 9.31
(Please note that this is for illustrative purpose only and the actual returns would depend on the market conditions and the performance of the fund)
Longer the horizon, higher the potential
Volatility is part & parcel of stock market investing. Staying invested for a longer period reduces the risks
Maximum returns
Minimum returns
Average of rolling returns
Possibility of making money
Possibility of losing money
1 Year 199.4% -36.4% 34.9% 75.6% 24.4%3 Year 81.0% -9.6% 29.7% 86.3% 13.7%5 Year 50.9% 14.0% 28.2% 100.0% 0.0%7 Year 41.1% 9.5% 27.2% 100.0% 0.0%9 Year 40.9% 16.0% 28.4% 100.0% 0.0%
Past performance may or may not be sustained in future. Annualised compounded returns based on growth plan NAV; Period - Inception date (1.12.1993) to 30.4.2007; Sales load has not been taken into consideration. Dividends are assumed to be reinvested and bonus is adjusted. BSE Sensex rolling returns for the same period: Maximum returns, Minimum returns, Average returns, Possibility of making money, Possibility of losing money: 1 Year, 101.7%, -41.3%, 13.8%, 57.8%, 42.2%; 3 Year, 62.2%, -18.5%, 9.9%, 64.1%, 34.9%; 5 Year, 36.4%, -7.8%, 7.1%, 71.1%, 28.9%; 7 Year, 20.4%, -7.6%, 5.8%, 71.5%, 28.5%; 9 Year, 17.9%, -2.9%, 7.2%, 82.1%, 17.9%. Sales load has not been taken into consideration. Dividend/Bonus are adjusted.
As the investment time horizon increases, the numbers change in favour of investors... the possibility of losing money reduces and so do the minimum returns.
Simulation for Bluechip Fund
Equity investing is attractive
* However investors are liable to pay securities transaction tax (STT). As per current tax laws
No long term capital gains tax for investments over a 1-year period*
Short term capital gains are only 10%*
Dividends are totally tax-free in the hands of the investors and no dividend distribution tax is required to be paid by the Fund
Why Franklin Templeton ?
Franklin Templeton Worldwide
# As on April 30, 2007
More than 50 years of experience in global investing
Extensive international presence and breadth of product line with offices in 29 countries, supported by over 450 investment professionals
Over US$ 601.1 billion assets under management#; over 17.1 million billable investor accounts world-wide
Offers more than 200 investment solutions under the Franklin, Templeton, Mutual Series, Bissett, Fiduciary Trust and Darby names globally
20%
57%
23%
23%
49%
28%
26%
41%
33%
46%
21%
33%
58%
15%
27%
58%
22%
20%
Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Apr-07
Equity Debt Cash
Established office in 1996 and currently one of the leading fund houses in India. Manages Rs.24,510 crores# for over 21 lakh shareholder accounts
One of the largest equity assets in India*
Franklin Templeton in India
*# Source: AMFI Website (as on April 30, 2007)
Assets Under Management & Asset Mix (in Rs. Crs)
8193
13403
18492 17435
2306024510
Rich Experience & Product innovation
Manages 4 equity funds with a track record of over 10 years
Manages 3 of the 15 largest equity funds* in the country
First to launch an open end private sector fund – Prima Fund
First to launch a value fund - Templeton India Growth Fund
India’s first Infotech/Pharma Fund
India’s first fund of funds – FT India Dynamic PE Ratio Fund of Funds
Category starters – Franklin India Flexi Cap Fund, Franklin India Smaller Companies Fund
First Capital Protection Fund
Templeton India Equity Income Fund* Source: AMFI Website (April 30, 2007)
Equity team - Key strengths
People: Continuity and depth of experience of the team.
Contacts and Presence: Constant company visits and frequent meetings with industry people help in forming independent views.
Local and Global: Team focused on local needs, at the same time, tuned in to global trends.
Discipline : Consistent adherence to investment objectives and philosophy.
Global standards : Disclosure and compliance with independent dealing desk. Constant interaction with risk management team to gauge risk-adjusted performance.
Long Term: The longevity of the team has led to combined experience of market cycles which has inculcated a long term perspective and the ability to take out emotions out of investing
Investment process
4STE P Portfolio Construction
5STE P Portfolio and Risk Management
3STE P Stock Recommendations
1STE P Idea Generation
2STE P Business Analysis
Fund Facts
Minimum Investment Amount: Rs.5000/1
Load Structure - Entry: <Rs.5 Crs: 2.25%, =>Rs.5 Crs: Nil; Exit Load : <Rs.5 Crs: 0.5% (for redemption within 6 months of allotment), =>Rs.5 Crs: 1% (for redemption within 1 year of allotment)
Fund Managers: Sivasubramanian K.N & Anand Radhakrishnan
Options: Growth & Dividend Plan (Payout & Reinvestment options)
Systematic Investment Plan: Rs.1000 or more for atleast 12 months & all installments should be for the same amount (Only through ECS/Direct debit)
New Fund Offer : May 31, 2007 to June 29, 2007
New Fund Offer Price: Rs.10 plus applicable load
Summing up…
Participate in India’s robust economic growth
Access the potential of India’s fastest growing companies in terms of revenue and earnings
Benefit from FT’s rich investment experience in the Indian equity markets for over a decade
You can do all of this with a single investment in Franklin India High Growth Companies Fund
Thank You
*The information contained in this commentary is not a complete presentation of every material fact regarding any industry, security or the fund and is neither an offer for units nor an invitation to invest. This communication is meant for use by the recipient and not for circulation/reproduction without prior approval. The views expressed by the portfolio managers are based on current market conditions and information available to them and do not constitute investment advice. Scheme classification and investment objective: Franklin India Bluechip Fund (FIBCF) is an open end growth scheme with an objective to primarily provide medium to long term capital appreciation. Entry Load: 2.25%, Exit Load: Nil. FIHGCF is an open-end diversified equity fund that seeks to achieve capital appreciation through investments in Indian companies/sectors with high growth rates or potential. Asset allocation: Equity and Equity Linked Instruments#: 70% - 100%, Debt securities* and Money Market Instruments: 0% - 30%. #including investments in Foreign Securities as may be permitted by SEBI/RBI up to 35% of the net assets of the scheme, exposure in derivatives up to a maximum of 50% * including securitised debt up to 30%. Terms of the offer: The Units are being offered at Rs.10 per unit plus applicable load during the NFO and NAV based prices upon reopening. Risk Factor: All investments in mutual funds and securities are subject to market risks and the NAV of the scheme may go up or down depending upon the factors and forces affecting the securities market. There can be no assurance that the schemes investment objectives will be achieved. The past performance of the mutual fund managed by the Franklin Templeton Group and its affiliates is not necessarily indicative of future performance of the schemes. The above is only the name of the scheme and does not in any manner indicate the quality of the scheme, its future prospects or returns. The Mutual Fund is not guaranteeing or assuring any dividend under the scheme and the payment of the dividend is subject to availability of distributable surplus. The investments made by the schemes are subject to external risks. Please read the offer document carefully before investing. Offer Documents / Application Form are available free of cost at any of the Investor Service Centres or distributors or from the website www.franklintempletonindia.com. Statutory Details: Franklin Templeton Mutual Fund in India has been set up as a trust by Templeton International Inc. (liability restricted to the seed corpus of Rs.1 lac) with Franklin Templeton Trustee Services Pvt. Ltd. as the Trustee (Trustee under the Indian Trusts Act, 1882) and Franklin Templeton Asset Management (India) Pvt. Ltd. as the Investment Manager.
Product Positioning
Product Positioning Investment Style
Franklin India Bluechip Fund Invests in large cap stocks Blend, bottom up
Franklin India Prima Fund Invests in mid and small cap stocks
Blend, bottom up
Franklin India Prima Plus Primarily large cap fund, with a marginal small/mid cap exposure
Blend, bottom up
Franklin India Opportunities Fund*
Takes concentrated stock exposure based on four themes
Blend, bottom up
Franklin India Flexi Cap Fund Invests in companies across market caps
Blend, bottom up
Templeton India Growth Fund Value fund, investing predominantly in large cap stocks
Value, bottom up
Templeton India Equity Income Fund
Focuses on Indian/overseas stocks that are attractive from a
dividend yield perspective
Value, bottom up
Franklin India High Growth Companies Fund (FIHGCF)
Invests in high growth companies across market caps
Growth, mix of top-down (macro analysis to identify
sectors) and bottom-up approach (micro analysis to
pick stocks within these sectors)
Product Positioning