ICICI Prudential PMS PIPE Strategy

Fund Snapshot

The Circle of Competence

• Meaningful Growth
• Evaluate Moat
• Cash, not accounting profits
• Improving HHI#
• Management Leadership
• Evaluate Margin of Safety

Evaluation, Selection and Sizing

• Initial in-house screening process
• Active coverage of company
• Applying the BMV Filtration
• Strategy Level Filter
• Portfolio Construction

Key Features of the Investment Approach

Investment Objective: ICICI Prudential PMS PIPE Strategy (the “PIPE Strategy”) aims to provide long-term capital appreciation and generate returns by investing predominantly in the mid- and Small Cap segment of the market by having exposure to companies enjoying some economic moat and/or undergoing special situations or in the midst of unfavourable business cycles.

Basis for selection of securities as a part of investment approach: The Portfolio Manager under the Strategy predominantly invests in mid- and small-capitalisation companies which may be undergoing special situations or are in the midst of unfavourable business cycles.

Investment Philosophy

ICICI Prudential PMS PIPE’s primary exposure is in small-cap and mid-cap companies enjoying some economic moat. These may also be companies amidst unfavourable business cycles or undergoing special situations.

They particularly seek companies with strong fundamentals. The PIPE strategy aims at value investing in companies which can potentially become market leaders. They focus on margins, management, and other business dynamics. The assessment of ICICI Prudential PMS PIPE concentrates on beating the average returns of capital over the long-run. This concept is termed as ‘moat’, which is significant to their investment philosophy.

Key Structural Reforms in Past and its Impact on India Corporates

• RERA & Goods & Services Tax
• Insolvency & Bankruptcy Code
• Corporate Tax Rate
• Production Linked Incentive / China Plus One Business Strategy
• Increase in Budgeted capital expenditure in the Union Budget of FY 2022-23 of 35%

Investment Framework

Core Belief: Companies create wealth, not markets

Aims to Identify Prominent Businesses, Competent Management, at Reasonable Valuations

1st Filter: Business

• Company growing faster than industry & industry faster than market
• Qualitative assessment based on the concept of “economic moats*”
• Foreseeable changes in business leading to a positive outcome

2nd Filter: Management

• Focused on growth, improving margins & prudent capital allocation
• Competent managers with a credible track record
• Fair corporate governance standards, with aligned shareholder interests

3rd Filter: Valuation

• Cash flow is central in our Investment Process about a company’s value
• Evaluation of margin of safety required according to the ‘moat’ and competence of management
• Better risk reward profile

ICICI Prudential PMS PIPE Strategy Investment Objective

ICICI Prudential PMS PIPE Strategy (the “PIPE Strategy”) aims to provide long-term capital appreciation and generate returns by investing predominantly in Mid and Small Cap segment of the market by having exposure  to companies enjoying some economic moat, and undergoing special situations or in the midst of unfavourable business cycle. The strategy is a key part of ICICI Portfolio Management Services for investors seeking concentrated exposure to growth opportunities.

Basis for selection of securities as a part of investment approach

The Portfolio Manager under the Strategy predominantly invests in mid and small capitalisation companies which may be undergoing special situations or are in the midst of unfavourable business cycle.

Types of Securities

Predominantly invests in listed equity and equity related securities. The PIPE Strategy may also take exposure to exchange-traded derivative instruments for hedging purpose.For liquidity or defensive considerations or pending deployment, the Portfolio Manager may invest in debt, money market instruments, mutual fund schemes or debt ETFs.

Basis for selection of securities as a part of investment approach

The Portfolio Manager under the PIPE Strategy predominantly invests in mid and small capitalisation companies. Nifty Mid-Small cap 400 Index includes all companies from Nifty Madcap 150 and Nifty Small cap 250 Index. Nifty Mid-400 Index intends to measure performance of the mid and small market capitalisation companies and hence, it is an ideal benchmark as it represents mid and small cap companies’ universe.

The Proposition : Potential Sources of Alpha

Investing in growth stories which seem sustainable: Potential of price appreciation backed by Earnings Per Share growth.

Investing in companies with possibilities of demand explosion and margin expansions: Expansion of revenue and profit growth rates surpasses historical averages leading to PE re-rating. Improves visibility and valuations leading to PE re-rating.

Buying businesses undergoing special situations, cyclically and mispriced by market, now available at giant discount: Aiming to provide margin of safety.

About the Strategy

• The Portfolio Manager under the PIPE Strategy predominantly invests in mid and small capitalisation companies which may be undergoing special situations or are in the midst of unfavourable business cycle.
• The Strategy shall follow a top-down approach in sector selection and a bottom up process for stock selection.
• The Strategy may look to invest in companies which are fundamentally strong, and which may be considered to be one of the market leaders in their industries.

Strategy-Specific Risks

Investing in mid and smaller companies may lack depth of management, be unable to generate funds necessary for growth or development, or be developing or marketing new products or services for which markets are not yet established and may never become established. They could also suffer from disadvantages such as outdated technologies, lack of bargaining power with suppliers, low entry barriers and inadequate management depth. Overall, the risks of investing in mid and small companies are:

• Transparency may not be on par with established companies;
• Liquidity on the exchanges may be lower than large companies;
• Corporate governance may be an issue with some companies; and
• Resilience to withstand shocks of business/economic cycles may be comparatively lower than large companies.

The Strategy invests in mid and small capitalisation companies that are undergoing special situations or are in midst of an unfavourable business cycle. Such a strategy may take longer than anticipated to play out as desired by the Portfolio Manager, which may fluctuate the PIPE Strategy returns.

The Strategy predominantly invests in equity and equity related securities including exchange trade derivatives and liquid and other short term mutual fund schemes including liquid ETF. Please refer the Disclosure Document for the below risk factors:

• Risks related to equity and equity linked investments
• Risks related to derivative investments
• Risks related to investments in debt and debt related instruments

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