Emkay Investment Managers Ltd

Emkay Investment Managers Ltd

Emkay’s 12 An equal weighted twelve stock large cap oriented PMS strategy as on 30 April 2021

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Mitigating "Selection bias" and "Allocation bias"

● Selection Bias : Stock selection going wrong

» Picking up stocks outside the mandate to generate alpha

» Looking at under-researched stocks in search of the next multi-bagger

» Holding on to underperforming stocks despite evidence to the contrary

● Allocation bias : Allocation of weights to stocks going wrong

» Overweight on a few performing stocks

» Underweight on potentially high performing stocks

● Risk management framework gets triggered post facto

» No discipline to book profits/ cut losses

» It gets triggered, post the occurrence of the above events

● “Selection” bias and “Allocation” bias, if mitigated, can lead to

superior risk adjusted returns consistently

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Presenting Emkay’s 12 - pioneering the concept of “Smart Alpha”

Where every performing stock gets equal attention

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Mitigating “Selection bias” through a rigorous framework

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Value Migration

IT, Chemicals, Unorganised to Organised, Voice to Data etc.

Domestic Consumption

Auto, Building Materials, FMCG, Consumer Durables, etc.

Domestic Infra

Cement, Capital Goods, etc.

Emkay’s 12 – Key Investment Themes

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Key Investment Themes : Value Migration

Beneficiaries

● Value Migration is “the flow of economic and

shareholder value away from obsolete business

models to new, more effective designs that are

better able to satisfy customers’ most important

priorities”

● The framework tries to identify industries where

Value Migration is underway and helps pick

potential winners early in the cycle.

● Few examples: Onshore to Offshore IT services,

Private banks vs PSU banks, Chemicals, Voice

to Data, Organised vs Unorganised Retail,

Unorganised lending to Organised lending etc.

Low cost producers

Technology leaders

Efficient products/ delivery models

The portfolio seeks to achieve long term capital appreciation by investing in these themes

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Value Migration : Reliance Industries

Reliance Industries - FY 2020

Financial Performance

Financial

PerformanceFY 2020

Revenue (Rs Cr) 5,96,743

PAT (Rs Cr) 42,851

ROC 10%

ROE 9%

Market Cap * (Rs Cr) 13,09,731

Price * (Rs) 1,994

*As on 30 April 2021

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Reliance Industries Nifty 50

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Reliance Industries

● RIL’s strength lies in its ability to build businesses of global scale and execute complex,

time critical, and capital-intensive projects which will prove advantageous as it embarks

on large investments in all core segments.

● Reliance has changed the dynamics of telecom industries by moving the value of revenues from voice

to data through the launch of Reliance Jio.Jio Platforms has expanded its portfolio of services to

become a multiplay service provider, equipment supplier, content producer and developer in new

technologies (eg. Jio Glass).

● This has forced incumbents to aggressively roll out data networks and re-align their business

design/networks from being traditionally tailored for voice to increasingly cater to explosive data

demand as data climbs up the consumer priorities list for communication and as market value of

telcos increasingly gets linked to data growth.

● Due to value migration, global investors such as Facebook, Google, Qualcomm and Intel have

invested in Jio platform. It has raised approximately $20 billion from 13 global investors by selling

32.9% stake.

● With the acquisition of Future Group, the deal adds to Reliance Retail’s offline presence and they get

access to wide network, logistics and warehousing business. With control over the value chain,

Reliance can beat down prices to earn higher margins.

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Key Investment Themes : Domestic Consumption

● India’s GDP is expected to grow from

$2.7tn in FY19 to $5.0 tn by 2024.

● Domestic private consumption as a %

of GDP in FY19E stands at 60% which

is $ 1.6tn.

● The strategy aims to benefit from the

growth in GDP and the attendant

impact on domestic consumption

driven sectors.

● Few examples: FMCG, Consumer

Discretionary, Housing finance,

Auto & Auto Ancillary


Source: Emkay Research

10

Domestic Consumption : Titan Company

Titan Company - FY 2020


Financial

PerformanceFY 2020

Revenue (Rs Cr) 21,051

PAT (Rs Cr) 1,501

ROC 24%

ROE 23%


Price * (Rs) 1,492


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Titan Nifty 50

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Titan Company

● Eye on unorganised: Titan is a specialty retailer with strong presence in jewellery,

watches and eyewear, alongwith fashion accessories and fragrances among others.

Most of the segments are characterized by the presence of significant unorganized market

● Long run way for growth: Titan is a strong play on the consumption theme and rides on the

long term opportunity of rising per capita income, increased discretionary spending, gains from

penetration and premiumization trends. Given Titan has 10% market share in jewellery shows

that it has significant headroom for growth

● Strong Fundamentals: Titan has consistently delivered ROCE of 20%+ and has demonstrated

tremendous discipline in investing the incremental cash in the business that continues to deliver

top quartile ROCE.

12

Key Investment Themes : Domestic Infra

● Infrastructure are the basic systems that

undergird the structure of the economy.

● These systems tend to be capital intensive and

high-cost investments, and they are vital to a

country's functioning, economic development,

and prosperity.

● The strategy aims to identify companies

that are poised to benefit from the rise

in demand for infrastructure in the country

– both retail and institutional spending.

● Few examples: Cement, Capital Goods, etc.

Source: Emkay Research


13

Domestic Infra : Ultratech Cement

Ultratech Cement FY 2020


Financial

PerformanceFY 2020

Revenue (Rs Cr) 42,125

PAT (Rs Cr) 5,747

ROC 12%

ROE 16%


Price * (Rs) 6,272


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Ultratech Cement Nifty 50

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Ultratech Cement

● Enough room for growth: Ultratech Cement has consolidated cement capacity

of 117mn tonne. With FY20 volumes of 82mn tonne or capacity utilisation of 70%,

Ultratech has enough room to grow volumes without adding new capacities.

● Working aggressively on cost cutting: Ultratech Cement is aggressively working on cutting

costs with recently commissioning 33MW WHRS plant and has already started working on

another 11MW WHRS and also 32MW solar power plant to cut power cost which is 23.6% of

total cost.

● One of the lowest cost manufacturer in India : Ultratech is one of the lowest cost producer

of cement in India. Low cost and premium pricing has helped Ultratech to consistently report

one of the highest EBIDTA/tonne of Rs1000+

● Strong Fundamentals: Ultratech’s RoCE is currently at 11%. However, as the capacity

utilisation rises, the RoCE is expected to improve to 16% by F23. RoIC will be better at 18%.

Despite high capex over last few years, net debt/equity is at just 0.2x and net debt/EBIDTA at

1x. The company is expected to be almost net debt free by FY23.

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Core Investment Framework

Leadership● Market-share Leadership

● Profit-pool Leadership (Apple vs Rest of the manufacturers)

● Cost efficient Leadership (Export oriented sectors like IT, Textiles, Chemicals)

● Growth Leadership (Companies with best growth in the sector like Private banks vs PSU Banks)

● Product Leadership

● Moat / Niche in the Business

How different is the company?

» Edge, Entry-barrier, Competition, Pricing-power

» Bargaining power of the industry

Strong Management Credentials

● Track record of past decisions

● Management Comments v/s Delivery

● Futuristic vision

● Avoid aggressive accounting policies

● Management background

Excellence

Strong Earnings Visibility & Quality

● How big the sector can be (3x, 4x....)

● Revenue/ PAT/ Cash-flow growth

● RoE, RoCE analysis

● High operating/ Free cash-flow generation

Ambition

● Identifying Price-Value gap with focus on margin of safety

● Comparative valuations

● Market-cap vs Opportunity size

Discipline

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Emkay’s 12

A Unique Strategy in the Indian Large cap investment space !

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Focus on large and mid cap companies

● >50% exposure in companies with Market capitalization >$ 3 bn

● Investment only in top 100 companies by market capitalization

● Companies with minimum turnover of INR 500 cr

Risk Management

● Equi-weighted portfolio

● >15% price movement in a month triggers review of the stock

● Focus on Liquidity risk

● No use of leverage

● Monthly portfolio review

Diversification across industries and companies

● < 30%* exposure in one sector

● <10%* exposure in one stock

● Maximum investment in 12 stocks

● <20%* exposure in turnarounds or special situation stocks

Earnings growth and Quality Filters

● ROCE > WACC

● Earnings growth > GDP growth

Strong risk

management

strategy with

focus on

Capital

Preservation

*At the time of initiation

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Typical issues faced by conventional large cap MF schemes

● Compressing alpha

» The average alpha generated by large cap schemes has been

3.1% over their respective benchmarks in the last 5 years.

» Large cap schemes have been waylaid by ETFs with shorter timeframes

● High expense ratio

» Regulator defined, rigid expense ratios

● Unwieldy “diversified” portfolio

» Average number of stocks in the top few schemes is 40-50

» Leads to “closet indexing” rather than alpha generation

● Rapid flows in and out of the scheme

» Fund managers have to manage sufficient liquidity most times

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Financial Snapshot – Emkay’s 12 v/s Nifty 50

Emkay’s 12 CAGR 12%

Nifty 50 CAGR 5%

Note: Emkay’s 12 portfolio went live on 1st August’19. The back tested performance data is for

illustration purpose only. All fund data have been rebased to 100 from FY-2010.

0

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Emkay 12 Nifty 50

Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20

FY2020 Sales Growth (%) Ebitda Growth (%) PAT Growth (%) ROCE (%) ROE (%)FY22E

P/E* PEG*

Emkay’s 12 11.9 15.5 29.8 34.1 24.5 34.9 0.8

Nifty 50 0.0 5.7 2.5 10.9 11.4 19.9 0.7

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SchemeEmkay 12

(Rebased)A1 (G) A2 (G) D (G) F (G) H (G) I (G) K (G) S (G) M (G) Nifty 50

From Apr’09 Apr’09 Jan’10 Apr’09 Apr’09 Apr’09 Apr’09 Apr’09 Apr’09 Apr’09 Apr’09

To 1st April, 2021

Minimum -21.41 -29.73 -20.36 -27.88 -31.10 -34.05 -27.84 -24.56 -27.03 -26.83 -29.20

Maximum 68.41 78.17 56.02 71.12 85.42 74.95 77.66 79.19 82.50 94.54 80.13

Average 15.89 12.24 11.10 10.01 10.70 10.13 13.26 11.10 12.56 16.02 9.72

Std. Deviation 14.22 18.26 14.54 16.01 16.96 21.59 17.16 16.26 18.27 20.45 15.59

No of

Observations 86 85 78 85 85 85 85 85 81 85 86

More than 10% 66.28% 51.76% 55.13% 45.88% 48.24% 42.35% 52.94% 51.76% 55.56% 58.82% 51.16%

More than 15% 50.00% 40.00% 43.59% 34.12% 35.29% 38.82% 42.35% 36.47% 44.44% 42.35% 33.72%

1 Year Monthly Rolling from 2009 (Rolling Return From 29-04-2009 to 31-03-2021)

Emkay’s 12 vis-à-vis leading Large Cap MF schemes

Source : Independent analysis done by MSJ MisterBond Pvt Ltd

Average of Peers is 11.9% Average of Peers > 10% is 51.4% Average of Peers > 15% is 39.7%

20

21


SchemeEmkay 12



To 1st April, 2021

Minimum 4.05 -2.10 0.98 -1.96 -3.10 -8.96 0.75 -2.37 -1.11 0.99 -2.01

Maximum 31.07 28.32 26.44 20.55 22.70 24.57 24.89 24.54 29.50 29.38 20.32

Average 15.54 11.68 12.96 9.09 9.63 8.58 12.14 10.35 12.35 14.51 9.11

Std. Deviation 6.05 7.19 5.54 5.52 6.05 8.06 5.68 6.15 7.99 7.28 4.86

No of

Observations 71 71 64 71 71 71 71 71 67 71 71

More than 10% 85.92% 54.93% 70.31% 39.44% 49.30% 43.66% 71.83% 47.89% 56.72% 71.83% 45.07%

More than 15% 49.30% 28.17% 39.06% 14.08% 19.72% 19.72% 29.58% 25.35% 32.84% 49.30% 8.45%



Average of Peers is 11.25 % Average of Peers > 10% is 56.21% Average of Peers > 15% is 28.65%

21

22

SchemeEmkay 12



To 1st April, 2021

Minimum 2.23 -0.69 4.95 -1.72 -1.92 -4.65 0.54 0.20 -0.01 2.69 -0.79

Maximum 26.62 21.02 18.38 15.43 17.18 19.15 20.13 18.12 22.03 23.97 15.36

Average 15.88 13.50 13.18 10.41 11.26 10.59 13.64 11.96 14.07 16.48 9.88

Std. Deviation 5.08 4.52 3.00 3.56 4.00 5.64 4.07 3.46 4.60 4.50 3.27

No of

Observations 55 55 48 55 55 55 55 55 51 55 55

More than 10% 90.91% 80.00% 85.42% 60.00% 65.45% 56.36% 81.82% 72.73% 90.20% 94.55% 56.36%

More than 15% 69.09% 43.64% 31.25% 7.27% 12.73% 27.27% 49.09% 18.18% 52.94% 61.82% 1.82%

More than 20% 21.82% 3.64% 0.00% 0.00% 0.00% 0.00% 1.82% 0.00% 3.92% 23.64% 0.00%




Average of Peers

is 12.79%

Average of Peers

> 10% is 76.28%

Average of Peers

> 15% is 33.8%

Average of Peers

> 20% is 3.67%

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23

Significant outperformance over well known Large Cap Mutual Funds

Emkay’s 12 CAGR 12%

MF Avg CAGR 7%

Nifty CAGR 5%

*

*Source : Independent analysis done by MSJ MisterBond Pvt Ltd

Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20

-

50

100

150

200

250

300

350

400

450

Emkay's 12 Mutual Funds Nifty 50

Note: Emkay’s 12 portfolio went live on 1st August’19. The back tested performance data is for

illustration purpose only. All fund data have been rebased to 100 from FY-2010.

10-years performance for the portfolio has been

significantly above well-known Large Cap Mutual Funds

24

Emkay’s 12 - Portfolio Snapshot

Market Cap

*Data as on 30 April 2021

Top Sectors

31.2%

10.1%

8.3%8.9%

8.5%

8.6%

8.0%

7.3%7.8% Financial Services

Cement

Oil & Gas

Pharmaceuticals

IT

Gems & Jewellery

Specialty Chemicals

Auto & Auto Ancillary

FMCG

Top 5 Holdings

Divi's Laboratories Ltd. 10.1%

Ultratech Cement Ltd. 9.6%

ICICI Bank Ltd. 9.0%

Reliance Industries Ltd. 8.4%

Titan Ltd. 8.3% 98.7%

1.3%

Large Cap

Cash

25

Emkay’s 12 Strategy - Performance Update

Inception Date : 1st August 2019 Data as on 30.04.2021

3M 6M 12M Since Inception

Emkay'12 (Model Portfolio) 6.3 19.1 41.3 18.8

Emkay'12 (TWRR) 6.0 18.9 38.9 16.7

Nifty 7.3 25.7 48.4 17.9

Outperformance (Model v/s Nifty) -1.0 -6.5 -7.1 0.9

Outperformance (TWRR v/s Nifty) -1.3 -6.8 -9.4 -1.2

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

50.0

60.0

3M 6M 12M SinceInception

Emkay'12 (TWRR)

Nifty

Outperformance (TWRR v/s Nifty)

-10.0

0.0

10.0

20.0

30.0

40.0

50.0

60.0

3M 6M 12M SinceInception

Emkay'12 (Model Portfolio)

Nifty

Outperformance (Model v/s Nifty)

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Emkay’s 12 Strategy : a “Smart Alpha” large cap portfolio

Key features

Focus on risk

adjusted returns

Steady performance

over medium term

framework

Low portfolio turnover

Lower portfolio volatility

and high liquidity

Portfolio of 12

structural growth

companies

Possible alternative to

Large cap MFs

• Emkay’s 12 is an equal weighted twelve stock large cap oriented strategy.

• A buy and hold strategy focusing on companies with wider economic moat and dominant position in the sector.

• Combination of value and growth to deliver medium to long term wealth creation.

EMKAY’s

12

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Fund Managers – Emkay L.E.A.D.

Kashyap Javeri is a fund manager with more than a decade of experience in company and sector research.

He brings exceptional insights into stocks and economy. Prior to joining Emkay Investment Managers,

he was a rated BFSI analyst in Emkay Institutional Equities for eight years and also worked with Sharekhan

Ltd as midcap analyst. Kashyap brings with him immense in-depth knowledge on not only variety ofmanufacturing and services sectors but also on banking and economics.

Sachin is a seasoned fund manager with over two decades of experience in the Indian equity markets.

By virtue of his extensive research, Sachin realised early-on the need for a framework in which companies

with evasively tricky standing needed to be filtered out very objectively, leading to the development of E-Qual

Risk, EIML’s proprietary module which helps us to evaluate and compare listed companies on various

aspects of governance. Sachin shares his knowledge and insights through various media interactions acrossprint and digital platforms.

Sachin Shah Co-fund Manager

Kashyap Javeri Fund Manager

28

Our Team

EGFSL: Emkay Global Financial Services Ltd | EIML: Emkay Investment Managers Limited

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Our reach & research across

Institutional Clients

Stocks Research Coverage Industries Research Coverage

Non-institutional Clients

member investment team with collective experience of years

As on 30 April 2021

30

About Emkay Global Financial Services Limited

31

Promoters

Krishna Kumar Karwa, Managing Director

A rank holder from the Institute of Chartered Accountants of India (ICAI), Krishna

is the promoter and Managing Director of the Company. He has rich and varied

experience of more than three decades in all aspects of the Equity Capital Markets

and overlooks the Research, Equity Asset Management and Corporate Advisory

divisions at Emkay.

Prakash Kacholia, Managing Director

A qualified Chartered Accountant of the 1987 batch, Prakash is the Promoter and

Managing Director of the Company. He has a rich experience of more than three

decades in the Capital Market and overlooks the Derivatives business and Retail

division at Emkay. He has been on the board of the SEBI Committee on

Derivatives. He has also served as a Director on the boards of Bombay Stock

Exchange Limited, BOI Shareholding Limited and Central Depository Services

(India) Limited.

32

The figures speak for themselves

Institutional Clients

Stock Research Coverage

(Active + Soft coverage)

Sectors (Asset Mgmt, Retail, Insurance

are among the other sectors under coverage)

Data as on 30 April 2021

Non-institutional Clients

Branches Franchisees

Employees Pan India

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Collaboration with DBS Vickers Securities

Emkay Global Financial Services Ltd. signed an

exclusive agreement with DBS Vickers Securities

(Singapore) Pte. Ltd., a wholly owned subsidiary of

DBS Bank, the largest bank of South-east Asia, for

sharing of knowledge, co-branding of research and

it’s distribution to the global clients of DBS Vickers.

34

Contact Us

Emkay Investment Managers Ltd

7th Floor, The Ruby, Senapati Bapat Marg, Dadar - West, Mumbai 400028. India

CIN: U67190MH2010PLC203819 | PMS: INP000004458

Website: www.emkayim.com

For Sales

Ashu Tomar +91 98673 03861

Samir Merchant +91 99876 06786 | Kyra Ahuja +91 98219 14842

For Support

Namrata Momaya +91 22 6617 5453 | Email: [email protected]

Janhavi Surve +91 22 6612 1279 | Email: [email protected]

Disclaimer: This document has been prepared by Emkay Investment Managers Ltd (EIML) for information purposes only. This document and the

information contained herein shall not be disclosed or reproduced in whole or in part for any other purpose or furnished to any third party without the

express prior written permission of EIML.

EIML does not represent or warrant (express or implied) of any nature nor takes any responsibility or liability of any kind for any error or inaccuracy or any

losses suffered on account of information contained in this document. Information and/or data contained in this document is obtained from sources believed

to be reliable but cannot be guaranteed as to the completeness, timeliness, adequacy or accuracy of the information, hence EIML advises each recipient of

this document to verify the veracity / appropriateness of the information before taking any investment decisions. Past Performance if mentioned herein, is

not an indicator of future performance. Performance related information enclosed in this document is not verified by SEBI.

EIML and its group companies, its directors and employees shall have no liability for any misstatement or omission (by reason of negligence), opinions,

derivations, information or matters (express or implied) contained in the document. Each recipient of this document are advised to consult and/or make its

own independent evaluation and/or investigation before taking any investment decision.

PMS Investment products are subject to market risks, investors are advised to read all the PMS scheme related documents carefully before investment. For

further details, please visit: www.emkayim.com

http://www.emkayim.com/

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