SUNDARAM ALTERNATE ASSETS LIMITED - Sundaram Emerging Leadership Fund (S.E.L.F) Portfolio - IIFL
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SUNDARAM ALTERNATE ASSETS LIMITED
Sundaram Emerging Leadership Fund (S.E.L.F) Portfolio
May 2020EXPERT SOLUTIONS SUNDARAM ALTERNATE ASSETS
HAND DELIVERED S.E.L.F Portfolio
Strategy Review (S.E.L.F Portfolio)
As the lockdown eases and infection data flattens in many parts threat. From a long-term perspective, SELF has managed to
of the world, we expect economic activity to see a gradual consistently outperform the benchmark over the 1Y and 2Y
positive momentum. Since, the market is forward looking, it will period by 7.7% and 7.1%, respectively. The performance is on
track economic recovery post lockdown. In the current fiscal the back of a well-positioned portfolio that plays to the recovery
year, we expect a start in economic recovery in Q2, stability in story with substantial exposure to quality stocks within the
Q3, and normalcy in Q4. Although, a risk of a second wave of discretionary space. This track record disproves the high-risk
infection can derail this recovery globally, currently there is myth associated with the mid and small- cap space and shows
limited data suggesting the same. Nevertheless, this remains a the benefit of investing in quality companies.
crucial risk factor for markets across the globe. Infection numbers Stock Performance
in India are rising, but lower number of critical cases and fatality During the month, the strategy’s top performer, Birla
rates are likely to support the pace of unlocking the economy. Corporation, generated a meaningful alpha of 28% over the
From a sectoral point of view, the key to recovery is the period benchmark due to better than expected earnings per tonne.
within which sectors and companies reach January-February GMM Pfaudler continues to be an impressive performer,
2020 operational levels. We believe a few sectors like staples delivering an excess return of 11% over the benchmark
and pharma can do this in 6-months, low-ticket consumer benefitting from capex in specialty chemical and pharma sectors.
discretionary and financials in a year, and others like travel and Dixon Technologies delivered an alpha of 9% over the
hotels only after 2-years. Current low valuations and unlocking benchmark. The production-linked incentive scheme for mobile
process will aid stock returns in some of these sectors. manufacturing in India is likely reduce dependence on China
Consumer discretionary: During the month, the discretionary and Dixon is well-placed to gain from this shift. Financials
witnessed a correction post the announcement of a moratorium
space saw initial signs of revival as stores opened and pent-up
extension. But as the unlocking phase gains steam, we expect a
demand returned, post easing of lockdown. Within the apparel
recovery in collection efficiency, which is the key variable to
segment, 88% of Trent’s standalone operations resumed in
monitor.
permitted zones with signs of eagerness among consumers to
shop post lockdown. As the lockdown norms ease with Unlock Changes In The Portfolio
1.0 materializing in June, low-ticket names like dining, fashion, Whirlpool of India Ltd is a recent addition to the SELF portfolio
and entertainment will recover quicker. Demand in this segment and is aligned with our positive stance on the consumption
is likely to gain ground during the festive season. We expect space. Prior to Covid-19, the company had turned around in
consumer discretionary to recover over the next 6-months and terms of its distributive strategy and margin improvements in
resume to nearly 80-85% of pre-Covid19 levels. comparison to its peers. Although there is a slowdown in
consumer spending, industrial parameters like rising income
Financials: Within the financials space, the government’s MSME
levels and low penetration pose strong headwinds for Whirpool
scheme appears helpful as it will ease stress in the sector, but
to expand reach in the medium-term. In our opinion, the
RBI’s moratorium extension announcement is likely to delay the
durables industry will return to normalcy in a year with superior
recovery process in banks and NBFCs. The key to monitor is the
performance from Whirlpool.
collection improvement over the next 6-months. We are negative
on mid and small-cap financials expect for few bets with strong Another addition to the portfolio during the month is Mindtree.
liquidity and well-capitalised books. Amidst this outbreak, work-from-home models are considered
to be a viable long-term option with companies like TCS
Overall, we expect volatility to remain across sectors, and
planning to allow 75% of its workforce to work from home by
markets might react in extremes over the next 3-months.
2025. Post-Covid19, we expect this culture to make global
Investors should make use of such volatility and invest in a
structural changes although the extent depends on sectors like
phased manner.
financial services adopting such strategies. The work-from-home
Portfolio Performance model will result in an incremental growth in cloud computing
The SELF strategy witnessed a correction of 4% during the month platforms like Microsoft’s Azure, a key player. Mindtree is likely
on account of exposure to the consumer discretionary. This to benefit as it is the service provider for the Azure platform and
sector faced maximum near-term impact due to the Covid-19 going forward, we expect superior growth from this space.
May 2020EXPERT SOLUTIONS SUNDARAM ALTERNATE ASSETS
HAND DELIVERED S.E.L.F Portfolio
Objective Target Investors
To seek long-term capital appreciation with investments in mid and Long term investors seeking high returns through investments
small cap companies. predominantly in midcap stocks and are comfortable with short
term volatility.
3Q Quality Approach To Stock Selection Performance (%)
1Y 2Y 3Y 5Y
Quality of Business
Scalability, Brand Strength, Cost leadership Strategy - S.E.L.F -18.3 -9.1 -2.2 2.9
Benchmark - Nifty Midcap -26.1 -16.2 -8.8 0.1
Quality of Management
Excess returns 7.7 7.1 6.6 2.8
Management Bandwidth, Corporate Governance,
Visionary Time-weighted rate of returns; Returns are in percentage points
Quality of Financials Performance Since Inception - June 2010 (%)
High ROCE, Excellent Cash flows, Low Debt Equity ratio 12.7
Sector allocation to capture the India Story 7.6
5.1
Financial
Services
Pharma
Industrial Strategy Benchmark Excess returns
Manufacturing
Time-weighted rate of returns; Returns are in percentage points
Value of ` 50 Lakhs invested at launch
Consumer
Goods
250
200
150
Key Features ` 1.65 Cr.
100
• Bet on Sundaram mid & small cap strength but yet differentiated
50 ` 81.97 Lakhs
with a concentrated portfolio and attractive cap curve positioning
-
• Concentrated 20-30 stocks, Multi sector portfolio Jun 2010 Fund Benchmark May 2020
• Stocks with less than Rs. 500 bn market cap
• We like companies – “EASE” portfolio
i. Emerging leaders – clean and high quality promoters / Performance Measures - Since Inception
management Strategy Benchmark
ii. Asset light & High ROCE businesses are preferred
Arithmetic Mean 13.4 6.7
iii. Scalable companies: mid cap to large cap, small cap to mid
cap transitioning companies Annualised Standard Deviation 16.5 18.4
iv. Excellent cash conversion from operations Beta 0.7 -
• Identify stocks in the Mid & Small Cap space that are in early stages Sharpe Ratio 0.4 0.0
of their business cycle and could emerge as tomorrow’s large caps.
Correlation 0.8 -
• India 2025 - Themes
i. Consumer discretionary Alpha 6.7 -
ii. Financial Services Tracking Error 11.1 -
iii. Chemicals
All data as of 31st May 2020 Source: Inhouse computation
iv. Cement
May 2020EXPERT SOLUTIONS SUNDARAM ALTERNATE ASSETS
HAND DELIVERED S.E.L.F Portfolio
Calendar Year Performance (%) Sector Bets (%) - Underweight/Overweight vs Benchmark
Industrial Manufacturing 10.7
Strategy Benchmark Excess return
Consumer Goods 10.3
2010 2.9 9.4 -6.5
Cement & Cement Products 7.3
2011 -11.6 -31.0 19.4 Fertilisers & Pesticides 5.2
2012 35.3 39.2 -3.8 Media & Entertainment 3.6
2013 23.0 -5.1 28.1 Services 1.9
2014 71.4 55.9 15.5 Pharma -0.1
2015 6.3 6.5 -0.2 Telecom -0.3
Metals -2.0
2016 6.0 7.1 -1.1
Construction -3.6
2017 44.8 47.3 -2.5
Healthcare Services -3.6
2018 -11.3 -15.4 4.1
Power -3.7
2019 7.7 -4.3 12.0 IT -5.7
2020 YTD -18.8 -22.4 3.6 Oil & Gas -6.9
Time-weighted rate of returns; Returns are in percentage points. CY2010 returns is from Financial Services -7.5
Inception date (June 2010) to December 2010 Automobile -9.9
Key Contributors to the Strategy Top Holdings - # Stocks -18
GMM Pfaudler Ltd.
Weighted Market Gain/Loss
Name of the stocks
Avg Cost (`) Price (`) (%)
PI Industries Ltd.
GMM Pfaudler Ltd. 1,566 3,808 143 Trent Ltd
Dixon Technologies Ltd 2,131 4,876 129 Natco Pharma Ltd.
PI Industries Ltd. 909 1,539 69 Dixon Technologies Ltd
Sector Allocation Market Capitalization (%)
Cash
4.3% Large Cap Mid Cap Small Cap Cash & Others
Others Consumer
18.1% Goods
19 41 37 4
27.8%
All data as of 31st May 2020 Source: Inhouse computation
Cement &
Cement
Products Industrial
9.7% Manufacturing
17.5%
Pharma
11.0%
Financial Services
11.6
Wt. Avg. Market cap 20,869 Crs
May 2020EXPERT SOLUTIONS SUNDARAM ALTERNATE ASSETS
HAND DELIVERED S.E.L.F Portfolio
Key Holdings
GMM Pfaudler Limited Key reason to invest
Attractiveness of the Industry PI Industries has seen 12% top-line CAGR over the last five years with
GMM’s core business and market leadership (over 55% share) is in niche 14.7% CAGR in the CSM business and agri inputs being 7.2%. As PI’s
glass lined reactors which contributed 69% of company’s revenues. Their largest brand goes generic, growth in the agri inputs space did see a
key customer is pharma (ingredient and Bulk drug processors), chemicals slowdown. However, with strong new launches and the base stabilizing,
and agrochemicals and other segments like heavy engineering. GMM’s growth is expected to rebound going forward. It also saw 14% / 16%
product is critical for end customer for quality compliance. CAGR in EBITDA / PAT during the last five years. With the above catalysts
in place, top line / EBITDA / PAT in the next two years should grow at
Competitive advantage of the company
20% / 22.5% / 24.5% respectively.
GMM has a strong brand with the customers due to its quality and better
Valuation
throughput, which enables it to command higher pricing when compared
to its peers. End-user market is highly compliance and quality oriented. The stock currently trades at ~34x FY21E P/E.
India is expected to become a large hub for chemicals, and we expect to Dixon Technologies (India) Limited
see significant capex addition aided by new orders for chemicals by
Attractiveness of the Industry
global MNCs and shift from China to India for incremental demand.
GMM being the leading supplier for equipment will be the leading EMS (Electronics manufacturing services) industry has grown at a brisk
beneficiary of the growing chemical industry. Apart from that, GMM has pace over the past 5-6 years (25%+ CAGR). We expect this trend to
an MNC parentage of Pfaudler Inc and will enable it to benefit from continue in the coming years as well: A. Low penetration levels for most
Pfaudler’s long term plan to source from India. Currently, GMM is categories, rising per capita income and improving electricity availability
focussing only on India due to strong and continuous order flows over resulting in continued growth in India’s Consumer Durable market; B.
the last 2 years. The company has highlighted a strategic plan wherein Rising proportion of outsourcing as brand owners are focussing on their
they expect revenues to grow from Rs. 6 bn+ in FY20E to Rs.10 bn+ in core competencies of innovation, differentiation, marketing and
FY23E and Rs.13 bn + in FY25E implying a 3-year CAGR of 20 % + on a distribution; C. Rising labour cost in China; D. Various government
base of 25 % in last year highlighting the growth momentum ahead. initiatives (phased manufacturing programs, revising custom duties, etc).
Earnings Analysis Competitive advantage of the company
We expect GMM to deliver 18% revenue CAGR over FY19-21E and EPS Dixon enjoys various advantages compared to peers: A. With recent client
CAGR of 40% over the next 2 years aided by improved margins on acquisitions, Dixon has achieved cost leadership and scale in several of
operating leverage and lower taxes. The company delivered healthy its categories which has also opened export opportunities for the
return ratios of above 30% and earnings growth of 25% during FY17-19 company in few segments. In the Lighting segment, Dixon is amongst the
period. top 4 LED bulbs manufacturers globally. Dixon is likely to cater to 25%
Key reason to invest of semi-Automatic Washing Machine requirement in India in FY20E. B.
It has established strong customer relationships with companies like
India is expected to become a large hub for chemicals, and we expect to Phillips (sourcing most of its India requirement from Dixon), Samsung
see significant capex addition aided by new orders for chemicals by (Assembles/ manufactures Washing Machines (WM), Mobile Phones and
global MNCs and shift from China to India for incremental demand. MNC LED TVs), Panasonic, etc. C. Dixon has showcased its ability to
parentage, strong orderbook with good visibility of order flows aided by
successfully enter newer product categories – Mobile Phones (in FY16),
firm capex plans of end users and reasonable valuations at 28x FY21 EPS
Security Systems (FY18). D. Dixon’s manufacturing facilities are flexible
of Rs.70 relative to peers. Our sales estimates factor sales CAGR of 20%
with standardized equipment used to manufacture various products.
over the next 2 years. But we believe that management initiatives to
expand offerings in non-GL equipment revenues (services and export Earnings Analysis
markets) and exports with expanded capacity can lead to better than We expect Dixon's revenues to grow at 30% CAGR over FY19-22E
expected sales growth of 14%. Hence providing us better than expected (assuming only contribution margins are recorded as revenues from new
earnings growth and EPS over the next 2 years. China’s exit from many Mobile Phone contract and excluding Fully Automatic WM) driven by
chemical segments along with Indian companies getting strong approvals LED TV, Lighting and Washing Machine segment. Ramp up of Xiaomi
is one of the key catalysts. and Samsung contract should drive LED TV growth while focus on
Valuation battens, down lighters and exports should aid its lighting growth. Further,
Currently, the stock is trading at ~47x FY22 PE, which is justified given higher procurement from Samsung should drive Washing Machine
the healthy earnings and growth potential for the company. revenues. We expect 34% and 44% CAGR growth for EBITDA and PAT
respectively, largely driven by operating leverage benefits.
PI Industries Limited
Key reason to invest
Attractiveness of the Industry
Rising penetration and import substitution are likely to drive significant
The Custom Synthesis and Manufacturing Solutions (CSM) business is growth in the domestic manufacturing of consumer durables over the next
benefitting from A. Pollution control norms which led to capacity closure 10 years. Dixon is an excellent play on this story given its scale in TV,
thereby leading to more outsourcing to Indian companies, B. Global Washing machine, LED, etc. Rising penetration, increasing proportion
innovators focusing more on outsourcing which should benefit players in of outsource manufacturing and customer additions should aid Dixon in
the value chain. growing faster than the consumer durable industry. Dixon recently
Competitive advantage of the company commenced Mobile Phone assembly for Samsung, providing scale in its
Over the years, the company has built relationships with several mobile phone business. Dixon recently won a contract to assemble LED
innovators. PI initially started off with Japanese innovators and progressed TVs for Samsung. Reduction of import duty for open cell panels (key input
to include innovators in the US and EU. The company has gone through for LED TV) should fillip domestic manufacturing in the LED TV segment.
a massive learning curve over the years. With capacities coming up in its Imposition of import duty by USA on Chinese Lighting products provides
multi-purpose plants at Jambusar, the company should be able to export opportunity for the company. We expect revenue CAGR of 32%
capitalize on the opportunities ahead. over FY19-22 period.
Earnings Analysis Valuation
Tailwinds visible in the CSM space and impending new launches driving Dixon is currently trading at ~19x on FY22 EPS. An upside to add new
growth in Agri inputs shows visibility of growth pick up in the next 18-24 customers and enter newer product categories look reasonable given high
months. asset turnover and impressive ROEs (20-25%).
May 2020EXPERT SOLUTIONS SUNDARAM ALTERNATE ASSETS
HAND DELIVERED S.E.L.F Portfolio
Customer Services
Reporting Statements and Monthly performance Statements Transactions, Holding & Corporate action reports, Annual CA certified
Servicing Statement of the account & Online access
Why Sundaram PMS ? Fund Facts
1. Strong Track Record Investment Horizon Above 3 years
2. Low Churn Benchmark Nifty Mid-Cap
3. Time Tested Stock Selection Process
Fund Manager Madanagopal Ramu
4. Reach Across Country
5. Transparency
6. Strict Adherence to Risk Guidelines
7. Shared Research Capabilities
Disclaimer
General Disclaimer: Returns are on time weighted rate of return basis • All returns are in percentage • Performance is as of 31st May 2020 • Securities investments
are subject to market risks and there is no assurance or guarantee that the objective of the investments will be achieved. • Past performance may or may not be
sustained in future • Returns represented are of a model portfolio. The model portfolio return indicated in this document may not represent the returns of individual
portfolio. It should not be construed as investment advice to any party. All opinions, figures, charts/graphs, estimates and data included in this document are as on 31st
May 2020 and are subject to change without notice. While utmost care has been exercised in preparing this document, Sundaram Alternate Assets Limited does not
warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information.
This document is issued by Sundaram Alternate Assets Limited registered with the Securities and Exchange Board of India. This document is produced for information
purposes only and not a complete disclosure of every material fact and terms and conditions. It does not constitute a prospectus or disclosure document or an offer or
solicitation to buy any securities or other investment. The statements contained herein may include statements of future expectations and other forward-looking
statements that are based on our current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance
or events to differ materially from those expressed or implied in such statements. Investors shall be fully responsible /liable for any decision taken on the basis of this
document. The material relating to economy, market and industry is based upon information sourced from different agencies - Government as well as Private. Therefore,
the Portfolio Manager will not attest for the reliability of such information. Investors should before investing in the portfolio make their own investigation and seek
appropriate professional advice. Investments in Securities are subject to market and other risks and there is no assurance or guarantee that the objectives of any of the
strategies of the Portfolio Management Services will be achieved. • Clients under Portfolio Management Services are not being offered any guaranteed/assured returns.
• Securities investments are subject to market risks and there is no assurance or guarantee that the objective of the investments will be achieved. • Past performance
of the Portfolio Manager does not indicate the future performance of any of the strategies. • The name of the Strategies do not in any manner indicate their prospects
or return. • The investments may not be suited to all categories of investors. • The material is based upon information that we consider reliable, but we do not represent
that it is accurate or complete, and it should not be relied upon as such. • Neither Sundaram Alternate Assets Limited. , nor any person connected with it, accepts any
liability arising from the use of this material. The recipient of this material should rely on their investigations and take their own professional advice. • Opinions, if any,
expressed are our opinions as of the date of appearing on this material only. While we endeavour to update on a reasonable basis the information discussed in this
material, there may be regulatory, compliance, or other reasons that prevent us from doing so. • The Portfolio Manager is not responsible for any loss or shortfall
resulting from the operation of the strategy. • Recipient shall understand that the aforementioned statements cannot disclose all the risks and characteristics. The
recipient is requested to take into consideration all the risk factors including their financial condition, suitability to risk return, etc. and take professional advice before
investing. As with any investment in securities, the Value of the portfolio under management may go up or down depending on the various factors and forces affecting
the capital market. Disclosure Document shall be obtained and read carefully before executing the PMS agreement. • Prospective investors and others are cautioned
that any forward - looking statements are not predictions and may be subject to change without notice. • For tax consequences, each investor is advised to consult his
/ her own professional tax advisor. • This document is not for public distribution and has been furnished solely for information and must not be reproduced or
redistributed to any other person. Persons into whose possession this document may come are required to observe these restrictions. Distribution Restrictions – This
material should not be circulated in countries where restrictions exist on soliciting business from potential clients residing in such countries. Recipients of this material
should inform themselves about and observe any such restrictions.
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