Kotak Special Situations Value

Portfolio is a mix of value opportunities and special situations.

Key Attributes

Inception Date: 19 Sep 2017

Number of Stocks: 20-24

Fund Manager Name: Mr Anshul Saigal

Fund Manager Experience: Total Exp – 13 years, With Kotak – 8 Years

Fund Manager Qualification: MBA (Finance) from Management Development Institute, Gurgaon and an Engineer (Industrial Engineering) from SIT, Tumkur.

Investment Objective

To aim long term wealth creation by investing in two kinds of opportunities:

1) Corporate events that may lead to value unlocking. For example- Demergers, Delistings and Corporate Restructurings.

2) Stocks which are trading at a discount to intrinsic value

Portfolio Strategy

1) Large market opportunity: Market size should be at least 2x company of current sales. Growing at 1.5x of India’s GDP

2) Businesses with robust competitive advantages: Strong brands, High Switching costs, Network economics, Low cost advantages or Innovative products.

3) Strong Financials and Earnings Growth: Low debt companies; portfolio debt to equity is under 0.5x. Companies with earnings growth and margins higher than their peers.

4) Management Dynamism and Good Corporate Governance: Companies with passionate and transparent management. Asset turns and working capital turns at industry levels or trending there.

5) Fair Valuations: Businesses at fair valuations, where future earnings growth is not priced in.

Investment Philosophy

The Universe – Value Opportunities

• 1000 – Total universe of top 1000 market capitalization companies
804 – Companies having greater than 30% promoter shareholding
536 – Rank companies based on ROE and 1/PER (Earnings Yield). Add the two parameters to arrive at a combined rank. Identify the top 2/3rd of this combination to arrive at stocks likely to perform best
421 – Capital Efficiency i.e. ROE of at least 15% trending toward and higher than 20%
227 – Compounded PAT Growth of at least 10% in the last three years
50 – Assess companies based on Management quality, Integrity, Balance Sheet strength, Capital Allocation, Execution Capabilities, Vision for the business, fairness to stakeholders, etc
12-18 – Valuation not more expensive than peer set and Price to Value Gap of at least 30%

Fundamental Analysis Process

Management

• Is management trustworthy and rational
Is it candid with its shareholders

Return ratios

• Is ROCE/ROE stable over the last few years? Why?
Expectation of ROCE/ ROE going forward
Expansion or contraction because of – a) Asset turns, b) Margin changes or, c) Leverage

Capital Allocation

• Asset turn
Assets tied up in non-core businesses
Revenues from core activities

Earning Power

• Revenue growth expectation
Expense trend (as % of sales)
Margin trend
What are the company’s owner earnings i.e. the FCF

Valuation

• EV/EBITDA, PER, FCF Yield, P/B, Replacement Cost
Comparison with other players within sector and benchmark indices
Can the business be bought in the market at a discount to current market value

What are Special Situations?

Investment operations whose results are dependent on happening or not happening of one or more corporate events rather than market events

Key Advantages – Investment results of Special Situations opportunities are largely independent of market moves

Key variants

• Price related – Securities bought at a discount to (expected) price guarantees by buyer in the form of de-listings, buy-backs, open offers, etc.
Merger related – Shares can be created at a discount to current market price
Corporate restructurings – Value unlocking due to corporate restructuring, assets sales, demergers, business triggers, etc.

Don’t Just Invest. Make an Informed Decision.