Kotak Special Situations Value Investment Approach- Series I PMS

Key Attributes

Inception Date: 19 Sep 2017

Number of Stocks: 20-24

Fund Manager Name: Mr Anshul Saigal

Fund Manager Experience: 20 years total. 14 years with Kotak AMC

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

Investment Objective

The main objective of the Investment approach is to generate capital appreciation through investments in equities with a medium to long-
term perspective.

Portfolio Strategy

The portfolio shall essentially target to invest in Value Opportunities and Special Situations in individual stocks and related instruments. Value Opportunities are ones, wherein in the opinion of the fund manager, the company’s Intrinsic Value is ‘X’, while the stock is trading at a discount to X. Special Situations are dependant on the probability of occurrence of one or more corporate events, rather than market events. These situations can largely be classified as follows:

a. Price arbitrage: In such situations securities are bought at a discount to the price, which is/ may be guaranteed by any institution. These situations can arise in the form of buybacks, delistings, etc.

b. Merger arbitrage: In such arbitrage, shares of a company can be created at a discount to the current market price.

c. Corporate restructuring: Such arbitrage is a consequence of specific corporate action in the form of spin offs, asset sales, management change, etc. leading to either value unlocking or cash payouts to investors

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.