Special

Situations Value Portfolio

Strategy Details

Key Information - Special Situations Value Portfolio

Benchmark NIFTY 500

Investment Tenor • Open ended
• 10-20 stocks
Portfolio Composition
• Addressable Market Capitalization: Agnostic
• Bottom-up
Investment Approach
• Agnostic to business segment/sectors
• Fixed Management fees: 2.5% per annum (payable quarterly)

• Performance fees: NIL; Brokerage: 0.1%;

Fee
• Custodial charges: As levied by custodian

• Exit Load: 3% (1st Year), 2% (2nd Year), 1% (3rd Year)

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 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.

Key Advantages

Investment results of Special Situations opportunities are largely independent of market moves

The Universe

Kotak Mahindra Asset Management Co Ltd

2nd Floor, 12 BKC, G Block, Bandra Kurla Complex, Bandra (E), Mumbai – 400 051
 Chambal Fertilizers and Chemicals Limited - A Case Study

Why We Invested?

Chambal diversified into Shipping, Textiles and IT, which were loss making biz
Given its significant expansion plan (1.34mtpa Urea unit) we anticipated the company would need capital. Sources of capital
would be:
Raising Debt or Equity
Exiting non core businesses which had a 5% contribution to total EBIT and 30% of total capital employed
Since the company had already indicated its plan to raise equity, there was a high likelihood exiting non core businesses to make
up for equity contribution
This would help them achieve a leaner and pure agri input entity, resulting in ROCE rise from 6% to 12%.
We anticipated that higher ROCEs would impact valuations positively

Value Unlocking

Investors immediately re-rated the urea business thus leading to value unlocking

Kotak Mahindra Asset Management Co Ltd

2nd Floor, 12 BKC, G Block, Bandra Kurla Complex, Bandra (E), Mumbai – 400 051


Disclaimer: The above example is for illustrative purposes only. The Portfolio Manager may or may not invest in this company

Business

Chambal Fertilizers and Chemicals Limited is one of the largest private sector fertilizer producers in India promoted by Zuari
Industries Limited
The Company has a vast marketing network comprising 15 regional offices, 2,000 dealers and 20,000 village level outlets.

Marico Kaya Enterprises (MaKE) Demerger - A Case Study

MaKE Stock triples in 6 months

Kotak Mahindra Asset Management Co Ltd

2nd Floor, 12 BKC, G Block, Bandra Kurla Complex, Bandra (E), Mumbai – 400 051
 Disclaimer: The above example is for illustrative purposes only. The Portfolio Manager may or may not invest in this company

Background

Kaya, incubated by Marico since 2013, is a pioneer in skin care (beauty and cure) in the country.
Marico decided to demerge Kaya. For 50 shares of Marico, 1 share of MaKE was issued on July1, 2014

Why we invested in MaKE?

MaKE became a tiny position in portfolios of large institutional investors. On listing these institutions sold their holdings,
irrespective of valuations
Stock was trading at Rs 290 Cr market cap, with over Rs 180 Cr cash
The company was PBT positive. It has nearly 100 clinics and 140 Doctors
With a fixed cost model - all incremental revenues would flow straight to the bottom line increasing the profits multifold
MaKE indicated its intent to grow the business with available capital and focus on the more profitable cure rather than beauty

Intellect Design Arena Demerger - A Case Study

Value Unlocking

With increased management focus, revs exhibited greater growth (over20%) than market expectn (15%)
As the absolute amount spent on R&D remained constant; operating leverage kicked in and margins started expanding

Disclaimer: The above example is for illustrative purposes only. The Portfolio Manager may or may not invest in this company

Reasons for mispricing

Certain large funds which owned Polaris; started selling their stake in Intellect as it was a very small proportion of their overall
AUM.
As the company was continuously investing in R&D & Marketing, it reported a loss and market failed to look at future profit
potential

Background

Kotak Mahindra Asset Management Co Ltd

2nd Floor, 12 BKC, G Block, Bandra Kurla Complex, Bandra (E), Mumbai – 400 051
 Polaris Financial Technology demerged its BFSI focussed products business into a newly listed company Intellect Design Arena
Intellect started trading with a market capitalization of Rs. 750 cr
As part of the Demerger, Intellect got 305 cr of Cash and Intellectual Property (IP) for which Polaris had spent 700 cr. Even on
EV/Sales, the stock was trading at 0.8x vs. Global Peers at 3.8x
Arun Jain, the promoter expressed confidence in the company by resigning from Polaris to become the CMD at Intellect.
Management had stock options which had accelerated vesting if EPS grows faster than 25% or 40%.

What is Value Investing?

Thinking as business owners

We look at stocks not as pieces of paper but as fractional ownership in the business. If the business does well, we will do well

The Universe

Above is an illustration of how different screeners are used to filter a large universe and identify potential Value Opportunities

“Value investing is the discipline of buying stocks at a significant discount from their current underlying values. The
element of a bargain is the key to the process.â€​ – Seth Klarman

Bottom Up

We believe that good quality companies will outperform the market irrespective of the sector they are in

Concentrated Portfolios

Kotak Mahindra Asset Management Co Ltd

2nd Floor, 12 BKC, G Block, Bandra Kurla Complex, Bandra (E), Mumbai – 400 051
 We have significant conviction in our investments. So we have concentratedportfolios with 10-20 stocks

Downside Protection

We require a significant margin of safety when we buy a stock, so that even if things don’t work out as we expected, we don’t
lose money

National Building Construction Corporation (NBCC) - A Case Study

Why was it a good investment opportunity?

Large market opportunity: Redevelopment projects of the government were gaining pace and medium term opportunity size was 6
times more than current order book
Competitive Advantage: Being an arm of the government NBCC would get a preferred place in government spending on projects
Good corporate governance: Transparency in the company was high as it was subjected to various government audits
Strong financial position: The company had a robust balance sheet, which made it stand apart from peers in this space. It had a
Return on Equity of 25%, considerable higher than peers
Attractive valuations: The market capitalization was Rs 1680 Cr. However the company had Rs 1330 Cr of Net Cash. Effectively
we were getting the company at Rs. 350 cr., while the Net Profit previous year was ~200 cr

Business

NBCC is in the business of Project Management Consultancy for Government and Government linked construction projects.
Government activity had ground to a halt toward the end of the previous government.
Both construction and real estate sectors were faced with severe headwinds. Further, players in these sectors were associated
with low transparency
The stock had underperformed the market by 21% in 2013

Disclaimer: The above example is for illustrative purposes only. The Portfolio Manager may or may not invest in this company

Value Unlocking

NBCC declared strong results in coming quarters

Because of its government ownership, NBCC was likely to get majority of government orders. This was visible in its increasing
order book
NBCC was subject to government audits, which allayed any concerns on corporate governance
As the markets realized the potential the stock rallied 5.8x in coming months

Kotak Mahindra Asset Management Co Ltd

2nd Floor, 12 BKC, G Block, Bandra Kurla Complex, Bandra (E), Mumbai – 400 051


Disclaimer: The above example is for illustrative purposes only. The Portfolio Manager may or may not invest in this company

Polaris Consulting & Services Ltd - A Case Study

Value Unlocking

With parentage support from Virtusa, Polaris emerged as one of the top 5 preferred vendors for Citi and revenues from Citi started
growing on QoQ basis.
With revenue drag from Citi declining and rest of the business growing in early double digits, we anticipated that Polaris can grow
revenues at 7-10% CAGR for next 3 years.
Margins were also expected to improve from 10.5% to 13% led by 1)Operating leverage 2)Higher Fixed price contracts and
3)Higher margin Digital business.
The company has substantial cash on books (approx. 28% of market cap) which gives optionality from future growth perspective.

In the period FY18, the stock rallied over 160% as revenues improved and the markets started building in higher margins. The
announcement of probable delisting further lead to price increase

Disclaimer: The above example is for illustrative purposes only. The Portfolio Manager may or may not invest in this company

Reasons for mispricing

Inspite of other business growing, Citi revenues had de-grown from $175 mn to $120 mn over FY14 to FY17 because of which stock
remained flat.

Kotak Mahindra Asset Management Co Ltd

2nd Floor, 12 BKC, G Block, Bandra Kurla Complex, Bandra (E), Mumbai – 400 051
 Background

Polaris is a BFSI focussed IT Services company

The company got acquired by Virtusa in March 2016. The company used to derive 40% of the revenues from Citigroup.

NIIT Ltd - A Case Study

Reasons for mispricing

Company’s ROEs depressed due to under-utilization of assets and high costs

New Management incurred one time expenses through write-offs and provisions, hence lowering FY15 PAT
Margins on a downtrend in SCG since 2011 due to a slowdown in IT market and SLS government biz

Background

The company operates in three main segments Skills and Career group SCG (34%), Corporate Learning Solutions CLS (50%) and
Schools Learning Solutions SLS (15%)
Company amongst the leading global players in CLS and largest domestic brand in SCG. Management decided to exit
government school biz in SLS and bring in a strategic partner here
Company holds 23.7% stake in sister company NIIT Tech

Value Unlocking

New Management enhanced focus on sales execution and large wins in CLS
Rationalized assets and enhanced usage of cloud for teaching to ensure greater resource utilization
Profitability positively impacted in Jun15 qrtr due to lower losses in SCG and robust growth in CLS
With valuations at 2x FY16E EV/E, risk reward highly favorable and significant room for upside
ROEs likely to cross 20% from approx. 10% levels, in the next 1-2 years

In the period April’15- Aug’15, the stock rallied over 100% as the markets realized true earning potential and hence long term ROE profile

Disclaimer: The above example is for illustrative purposes only. The Portfolio Manager may or may not invest in this company

Kotak Mahindra Asset Management Co Ltd

2nd Floor, 12 BKC, G Block, Bandra Kurla Complex, Bandra (E), Mumbai – 400 051