Aditya Birla Core Equity Portfolio

Fund Snapshot

Investment Philosophy

To identify & capitalize upon the prevailing market inefficiencies in a Simple, Timely & Efficient manner

• Focus on Businesses: With ability & commitment to grow earnings faster than Nominal GDP
• Purchase at a Reasonable Price: Entry Level valuations which accord “Margin of safety”
• Buy Companies that have: Large Opportunity Canvas, Credible Management, Emphasis on Capital Efficiency, Superior return ratios

Investment Process

• Investment Universe: Portfolio Universe as per fund mandate
• Stock Screening: Financial Modelling & Due Diligence, Quantitative & Qualitative Screener
• Portfolio Optimization: Risk reward analysis & Portfolio optimization
• Portfolio Construction: Portfolio of high conviction 20–30 names
• Monitoring: Periodic monitoring, Stop loss Triggers, Maintain Sell Discipline
• Investor Servicing: Fund Performance, Reporting & Investor Servicing

Screening & Monitoring

Screening

Fundamentals

• Return on Equity >15%
• Net Debt / EBITDA less than 2x
• Improving margins & Turnover Ratios
• Aggregate Portfolio liquidity

Valuation

• Higher EPS Growth, RoCE & Net Debt to EBITDA vs benchmark
• Large Opportunity Canvas

Governance

• Promoter’s conduct & Management Integrity
• High Pledge & Accounting Red Flags
• Limited Equity Dilution in recent past

Financial Modelling & Due Diligence

• Visible Earnings CAGR > 15% in medium term
• Sustained Competitive Advantage led by Unique Value Proposition
• Interaction with investee companies & its ecosystem

Monitoring

• Stop loss Triggers: If loss on stock is higher than benchmark on trailing 3 months by more than 30%
• Periodic Monitoring: Quarterly Monitoring, Event-Based Triggers
• Maintain Sell Discipline: Poor Capital Allocation, Weakening Competitive Position, Any emerging governance issues

Core Equity Portfolio: Investment Objective & Strategy

Investment Philosophy

• Follows both Top down & Bottom up approach
• Industries with strong operating dynamics
• Businesses core to the India growth story
• Unconstrained by Market Caps, Sectors, or Themes
• Attractive Valuation with “Margin of safety”

Wealth Creation Approach

• Recurring Winners – High Quality businesses with consistent growth/returns profile
• Companies with Scalability and Resilience
• Benchmark-agnostic
• Multi Cap Universe
• Concentrated Portfolio ~ 20–30 stocks

Value Drivers

• High ROEs/ROCEs
• Sustainable earnings growth
• Low leverage
• High quality franchise, product, service
• Superior management team

4 Pillars of the Investment Process

Concentrated Portfolio | Benchmark agnostic | Multi-cap universe

• GDP growth pattern tilted in favor of few industries

Sustainable growth over medium to long term in select industries

• Recurring Winners: Focus on businesses that have consistently created VALUE

Favorable industry operating dynamics key to wealth creation, Consistent growth/returns profile, reflected in high ROE/ROCE

• Unique strategy based on Superior Screening process

Extensive research to identify future winners, Comprehensive alert system to track industry wise valuations

• Attractive Valuation with “Margin of Safety”

Buy quality businesses at a discount to their intrinsic value

Pillar 1: GDP growth patterns favor some sectors more

India GDP

Decoupled, stable and sustainable returns over long term

Private Consumption (55-65%)

• Food, beverages, tobacco
• Housing, fuel, power, water
• Transport & Communication
• Misc. goods & services
• Clothing & Footwear
• Furnishing & Maintenance
• Healthcare
• Restaurants & Hotels
• Education & Recreation

Cyclical, levered to domestic policy and global economic recovery

Exports (20-25%)

• Export of goods
• Export of services

Gross Capital Formation (30-35%)

• Public Sector
• Pvt Sector
• Household

Pillar 2: Recurring Winners

• Research over the long term proves that shareholder wealth creation is mainly determined by strong operating dynamics such as competition levels, ease of entry by new players, bargaining power of buyers/suppliers etc.
• Focus on industries with lower competitive intensity that are more direct beneficiaries of consumer spending, enjoying stable growth, and are less vulnerable
• Companies with superior management and strong business models coupled with favorable industry operating dynamics generate superior value and returns consistently

Industry dynamics – Key to capture value

Commercial Banks

• Entry barriers in the form of licenses
• Very limited customer bargaining power

Pharmaceuticals

• Large and growing addressable market
• Entry barriers in form of size, capital, regulations & research capabilities

IT Services

• Arbitrage-India’s cost advantage vs. global players
• Limited supplier power (employees) in terms of salary costs

Capital Goods

• Large & growing addressable market
• Strong and large balance sheets acting as performance anchors

FMCG

• Brand franchise and distribution scale-driven entry barriers
• Ingrained sustainability, healthy margins & return ratios

Pillar 3: Effective Screeners backed by Fundamental Research

Superior screening process

• Extensive fundamental research to identify future winners that create superior and sustained value
• Comprehensive alert systems to track industry wise valuation of each company
• Identify growth industries and businesses at attractive valuations

Bottom-up Fundamental Research adds conviction

• Focus on understanding company strategy, management, and execution
• Track sector developments, meet industry participants across value chains and company management to discern changing trends

Bottom-up Fundamental Research

• Industry Analysis
• Financial Analysis
• Company Meetings
• Plant/Factory Visits
• Dealer/Channel Checks
• Management Evaluation

Pillar 4: Attractive Valuation with “Margin of Safety”

• Buy quality growth stocks at a discount to their intrinsic value
• Proprietary screeners enable discovery of the undervalued stocks that will create significant value over medium to long term
• Invest in a company only if there is a visibility of a minimum threshold return and limited down-side

Investment Approach

The portfolio invests or proposes to invest in listed equity & equity related instruments with the aim of generating long term capital appreciation & income in the form of dividends. It can also invest in money market instruments & units of mutual fund. Stock selection is done through a combination of ‘Bottom up’ approach, i.e. analyzing the fundamental attributes of the company & competition & ‘Top down’ approach, i.e., analyzing the macro economic factors & industry growth characteristics. Features of the companies can include – High quality with consistency in growth, high ROE, low leverage & high potential for growth. It is a Multicap portfolio unconstrained by any market segments like market capitalization (large cap – mid cap), sectors, themes etc.