• Long term wealth creation solution• A close-ended equity scheme that seeks to generate capital appreciation by investing in Equity securities
which are specified as eligible securities for Rajiv Gandhi Equity Savings Scheme (RGESS)* Investors should consult their financial advisers if in doubt about whether the product is suitable for them.
HIGH RISK(BROWN)
This product is suitable for investors who are seeking*:
(BLUE) investors understand that their principal will be at low risk
(YELLOW) investors understand that their principal will be at medium risk
(BROWN) investors understand that their principal will be at high risk
Note: Risk may be represented as:
Equity Savings Fund - Series1Equity Savings Fund - Series1NFO Period: January 20, 2014 to February 07, 2014
2
Contents
Prelude1
Capturing ROE Expansion4
Equity Investing - Framework2
Triggers – Short term and Long term3
ICICI Prudential Equity Savings Fund - Series 15
Prelude
3
• We launched ICICI Prudential Value Fund - Series 1 & 2 with an aim to capture mispriced stocks in a “polarized” market with focus on mid and small cap segment.
• Value opportunities were available in large cap as well as in mid and small cap segment.
• We ended up allocating more to large caps than initially anticipated (upto 40%).
• Our learning's
• Bleak macro overhang had caused even some very good quality, large cap company stocks to be rebutted by the market
• Such companies with outlook for improving Return on Equity (ROE) are expected to see better price appreciation
Equity Investing - Framework
4
Equity Investing - Framework
5
• MACRO INDICATORS • Invest when GDP growth is low • Invest when IIP is low • Invest when Fiscal Deficit is high
• VALUATIONS • Invest when markets are not over valued
• SENTIMENT • Invest when investors sentiment is bad
GDP: Gross Domestic Product; IIP: Index of Industrial Production
GDP: Gross Domestic Product; IIP: Index of Industrial Production 6
Macro Indicators
500
1500
2500
3500
4500
5500
6500
2.03.04.05.06.07.08.09.0
10.0
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
India GDP growthNifty
Invest when GDP growth is low
01000200030004000500060007000
(7.0)(6.0)(5.0)(4.0)(3.0)(2.0)(1.0)0.0
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Fiscal Deficit Nifty
Invest when Fiscal Deficit is high
0
1000
2000
3000
4000
5000
6000
7000
0.02.04.06.08.0
10.012.014.016.0
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
India IIP growth Nifty
Invest when IIP growth is low
7Source: Bloomberg
Valuations
• India's market cap to GDP indicates market valuations are below 10 year average.
0.00
0.20
0.40
0.60
0.80
1.00
1.20
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Market Cap to GDP Ratio Average
8Source: AMFI, RBI
Sentiment
• The above table shows that domestic investors sentiment has been weak over the past few years.
• Indian investors are massively under weight in equities as compared to other asset classes.
India’s Allocation to various asset classes
AUM in ` Bn Nov-13 Sep-07 Change
Equity Funds 1811.92 1578.63 14.8%
Deposits in ` Bn 29-Nov-13 28-Sep-07 Change
Aggregate Deposits ofScheduled Commercial
Banks74779.28 28737.35 160%
Triggers
9
Local Event - 2014 General Elections
Triggers - Short Term
10
6.8%
7.0%
5.6%
6.3%
7.6%
6.5%
7.7%
7.9%
5.0%
5.5%
6.0%
6.5%
7.0%
7.5%
8.0%
8.5%
-100.00
0.00
100.00
200.00
300.00
400.00
500.00
600.00
700.00
800.00
900.00
6 - 10monthsprior to
elections
5 monthsprior to
elections
Electionmonth
5 monthspost
elections
6 - 10months
postelections
11 - 15months
postelections
GDP growth rate USD mn
Source: UBS Securities, data considered for last 4 elections
GDP Growth tends to pick up Post Elections Foreign Institutional Inflows have been robust after elections
Better prepared to deal with taper now than in May
Triggers - Short Term
11Source: Bloomberg, CS Estimates CAD: Current Account Deficit, FCNR: Foreign Currency Non-resident
• CAD has shrunk to 1.2% of GDP in Q2FY14 and it is slated to slip to 2.5-3% of GDP for full FY14. • USD 34 bn by way of FCNR deposits and bank capital has improved funding prospects of CAD.
-25 -20 -15 -10 -5 0 5 10 15 20 25 30
ChinaBrazil
TurkeyIndonesiaMalaysiaS Africa
ArgentinaMexico
ThailandHungary
Hong KongPakistan
IsraelChile
Czech RepTaiwan
KoreaRussia
India
Change in last 5m of trade deficit over same period last year ($bn)
Reducing trade deficit /increasing trade surplus
Reducing trade surplus /increasing trade deficit
Triggers - Long Term
12
Inflationpoised to
ease
Interest ratecycle canreverse
Investmentcycle topick up
CorporateHealth toimprove
Improvement inGDP growth
StructuralReforms
13
Capturing ROE Expansion
14
Why is ROE Important?
• A healthy ROE is a sign of good corporate management and efficient use of capital
• High correlation between ROE and real GDP growth rate
• Increasing market share leads to high ROE
• Healthy margins; good financial health echoes in ROE
• ROE reflects in stock prices
• Effectively, increasing ROE means increase in shareholders’ wealth.
ROE, GDP growth and market performance
There is a strong correlation between Sensex ROE and India’s real GDP growth rate & Sensex movement
15Source: Edelweiss Securities Ltd
3
4
5
6
7
8
9
10
14.0
16.0
18.0
20.0
22.0
24.0
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
Sensex ROE (%, LHS) India real GDP growth(% yoy, RHS)
0
5000
10000
15000
20000
25000
10
12
14
16
18
20
22
24
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
Sensex ROE (%, LHS) S&P BSE Sensex
ROE and Interest Rates
16Source: Edelweiss Securities Ltd and Bloomberg
Broad market ROE is at multi year low, and is expected to increase as the rate cycle reverses.
4
5
6
7
8
9
10
11
0
5
10
15
20
25
Sensex ROE (%, LHS) 10 year Gsec
This illustration is to explain the concept of stock price movement basis the change in ROE of the Company. Actual results may vary significantly from the ones mentioned here. The stocks given above should not in any manner be construed as recommendation and ICICI Prudential Mutual Fund/AMC may or may not have any future position in these stocks. The performance of stocks would ultimately depend on various factors such as prevailing market conditions, global political scenario, exchange rate etc.
Source: Edelweiss Securities Ltd
Relationship between ROE and Stock Prices
17
Increasing ROE’s and relative stock price outperformance
25
27
29
31
33
35
37
100
150
200
250
300
350
400
Mar04 Mar05 Mar06 Mar07 Mar08 Mar09 Mar10 Mar11 Mar12 Mar13
RO
E (
%)
(Pri
ce, x
)
ITCPrice relative to NiftyROE
-30
-20
-10
0
10
20
30
40
020406080
100120140160180
RO
E (
%)
(Pri
ce, x
)
Dr. Reddy'sPrice ROE
Mar04 Mar05 Mar06 Mar07 Mar08 Mar09 Mar10 Mar11 Mar12 Mar13
Decreasing ROE’s and relative stock price underperformance
Mar04 Mar05 Mar06 Mar07 Mar08 Mar09 Mar10 Mar11 Mar12 Mar1310121416182022242628
050
100150200250300350400
RO
E (%
)
(Re-
base
d to
100
, x) RIL
Price relative to Nifty ROE
Mar04 Mar05 Mar06 Mar07 Mar08 Mar09 Mar10 Mar11 Mar12 Mar1310
15
20
25
30
35
40
45
100
150
200
250
300
350
RO
E (
%)
(Pri
ce, x
)
L&T
Price relative to Nifty
ROE
18Source: Motilal Oswal
Spotting the TREND
• More companies now have ROE lower than 10 years back – Opportunity to do bottom fishing
ROE band FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13
<15 29 32 26 19 23 35 24 26 34 38 Increase in numberof companies15-20 14 17 20 18 20 14 23 21 23 24
20-25 18 13 18 15 13 19 22 20 19 15 Lesser number ofcompanies in this
range25-30 18 15 8 14 15 10 14 9 5 8
30-35 6 6 9 12 6 6 3 8 9 6Same number ofcompanies, more
or less. Names neednot be same
35-40 3 4 5 6 8 8 2 6 2 3
40-45 5 2 4 6 1 1 5 3 2 4
>60 3 4 4 4 6 3 3 4 2 2
FY04 FY0762 66
Number of companies in CNX100 with FY13 ROE lower than
Number of companies as per ROE band for CNX100 constituents
19Source: Bloomberg
Opportunities for ROE Expansion
Identifying companies where there could be turnaround based on above parameters, leading to increase in Return on Equity (ROE)
RegulatoryChanges
EconomicLeverage
FavourableIndustry
Dynamics
CompanySpecificfactors
Example 1 : Regulatory Issues�
20Source: Edelweiss Securities Ltd
• Increase in global crude prices and depreciation of INR led to increase in under recoveries for the Oil marketing companies.
• Deregulation of diesel prices can reduce subsidy burden and improve earnings of PSU Oil and Gas companies.
MSCI Oil and Gas
ROE (%)
10121416182022242628
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Example 2 : Industry Dynamics
21Source: Edelweiss Securities Ltd
• The telecom market in India is a highly competitive market with a number of small regional players.
• Consolidation in the industry with smaller players reducing their presence may lead to improvement in margins for bigger players.
0
5
10
15
20
25
30
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
ROE (%)
MSCI Telecom
Example 3 : Economic Leverage�
22Source: Edelweiss Securities Ltd
• Any reversal in the interest rate cycle may lead to improvement in the earnings for industrial sector.
• Recovery in the global markets may lead to increase in demand for commodities which can improve earnings in this sector.
Domestic Macro
Global Macro
MSCI Industrials
1012141618202224262830
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
ROE (%)
MSCI Industries
ROE (%)
MSCI Metals
5
10
15
20
25
30
35
40
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Example 4 : Company Specific Factors
23Source: Edelweiss Securities Ltd
• The company has allocated capital to businesses like telecom, retail, etc. which have not generated enough ROE in the past few years.
• Optimal allocation of capital may be beneficial for the company in the long term.
Reliance Industries Ltd
10121416182022242628
0
50
100
150
200
250
300
350
400
Mar04 Mar05 Mar06 Mar07 Mar08 Mar09 Mar10 Mar11 Mar12 Mar13
RO
E (%
)
(Re-
bas
ed t
o 1
00, x
)
Price relative to Nifty ROE (%, RHS)
This illustration is to explain company specific factors that can impact Return on equity. It is necessary to note that the list given above is not exhaustive and there may be other factors impacting ROE. Past performance may or may not be sustained in future. The stock mentioned above does not constitute any recommendation and ICICI Prudential Mutual Fund/AMC may or may not have any future position in this stock.
24
Factors for Improvement in ROE
• Stable political environment
• Better resilience to taper and related news
• Good monsoon supporting agricultural output
• Anchored inflationary expectation
• India’s twin deficits improving
• Stable currency
• Global recovery
MACRO FACTORS
• Deregulation of diesel prices
• Dividend pay outs by PSU’s
• Industry-friendly regulation in telecom e.g. spectrum price, license fees etc.
• Continuation of SEB reforms - tariff hikes
REGULATORY FACTORS
SEB: State Electricity Boards
25
Factors for Improvement in ROE
• Increase in market share
• Increase in profits due to operating leverage
• Improved margins due to better pricing power or decreasing costs.
• Optimal capital structure
• Cheaper cost of leverage
COMPANY SPECIFIC FACTORS
• Improved competitive dynamics in the industry
INDUSTRY DYNAMICS
26
The Product
Equity SavingsFund - Series 1Equity SavingsFund - Series 1
About the Fund
27
# The number of stocks provided is to explain the investment philosophy and the actual number may go up or down depending on then prevailing market conditions at the time of investment.
• A 3 year close ended fund investing in focused 20-25 stocks#
• Aims to provide long-term capital appreciation by:
• Identifying companies which are likely to see expansion in ROE over next 3 years period.
• Identifying companies which are likely to gain from improving economy, a favourable regulatory change, change in industry dynamics or company specific factors.
• Being adequately diversified, while not restricting itself to benchmark sector weights.
Investment Approach
28
High Conviction Portfolio (20-25 stocks)
Data Integrity ScreensCompany Characteristics
• Strong competitive edge • Sustainable market position
Investable Universe(Constituents of CNX 100, BSE 100, Maharatna, Navratna, Miniratna)
Valuation & Fundamental verificationValuation Parameter
• Increasing trend in ROE • Improving B/S structureRec
urrin
g pr
oces
s
Daily Risk control
• Proven business model • Financial Strength • Business Durability
Scheme Features
29
Type of scheme A Close ended RGESS qualifying equity scheme
Investment Objective The primary investment objective of the Scheme is to seek to generate capital appreciation, from a portfolio that is constituted of equity securities which are specified as eligible securities for Rajiv Gandhi Equity Savings Scheme (RGESS). The Scheme may also invest a certain portion of its corpus in money market instruments from time to time.
There can be no assurance that the investment objective of the Scheme will be realized.
Options Direct Plan – Growth and Dividend Option;Regular Plan – Growth and Dividend Option
Minimum Application Amount Rs 5,000 (plus in multiple of Rs.10)
Entry & Exit Load Not Applicable
Benchmark Index CNX 100 Index
Fund Manager Manish Gunwani & Venkatesh Sanjeevi
30
• Long term wealth creation solution• A close-ended diversified equity fund that aims to provide capital appreciation by investing in a well
diversified portfolio of stocks through fundamental analysis.* Investors should consult their financial advisers if in doubt about whether the product is suitable for them.
HIGH RISK(BROWN)
This product is suitable for investors who are seeking*:
(BLUE) investors understand that their principal will be at low risk
(YELLOW) investors understand that their principal will be at medium risk
(BROWN) investors understand that their principal will be at high risk
Note: Risk may be represented as:
Product Labeling for ICICI Prudential Value Fund – Series 1 & 2
Rajiv Gandhi Equity Savings Scheme or RGESS is a new equity tax advantage savings scheme for equity investors in India, with the stated objective of "encouraging the savings of the small investors in the domestic capital markets." The Scheme qualifies under Rajiv Gandhi Equity Savings Scheme (RGESS), 2012.
Note: Please refer to the RGESS, 2012 notified by the Central Government on November 23, 2012 and SEBI Circular number CIR/ MRD/DP/32/2012 dated December 06, 2012 for additional details.
What is Rajiv Gandhi Equity Savings Scheme?
31
All figures and other data given in this document are as on 31st December 2013 unless stated otherwise. The same may or may not be relevant at a future date. The AMC takes no responsibility of updating any data/information in this material from time to time. The information shall not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of ICICI Prudential Asset Management Company Limited.
Prospective investors are advised to consult their own legal, tax and financial advisors to determine possible tax, legal and other financial implication or consequence of subscribing to the units of ICICI Prudential Mutual Fund.
Disclaimer: In the preparation of the material contained in this document, ICICI Prudential Asset Management Company Ltd. (the AMC) has used information that is publicly available, including information developed in-house. Some of the material used in the document may have been obtained from members/persons other than the AMC and/or its affiliates and which may have been made available to the AMC and/or to its affiliates. Information gathered and material used in this document is believed to be from reliable sources. The AMC however does not warrant the accuracy, reasonableness and / or completeness of any information. We have included statements / opinions / recommendations in this document, which contain words, or phrases such as “will”, “expect”, “should”, “believe” and similar expressions or variations of such expressions, that are “forward looking statements”. Actual results may differ materially from those suggested by the forward looking statements due to risk or uncertainties associated with our expectations with respect to, but not limited to, exposure to market risks, general economic and political conditions in India and other countries globally, which have an impact on our services and / or investments, the monetary and interest policies of India, inflation, deflation, unanticipated turbulence in interest rates, foreign exchange rates, equity prices or other rates or prices etc.
ICICI Prudential Asset Management Company Limited (including its affiliates), the Mutual Fund, The Trust and any of its officers, directors, personnel and employees, shall not liable for any loss, damage of any nature, including but not limited to direct, indirect, punitive, special, exemplary, consequential, as also any loss of profit in any way arising from the use of this material in any manner.
Further, the information contained herein should not be construed as forecast or promise. The recipient alone shall be fully responsible/are liable for any decision taken on this material.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
Disclaimers
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