Equirius Core Equity Strategy

Why Equities?

Equities as an asset class are the biggest wealth creator over time

• Equities have traditionally delivered much higher returns vs other asset classes
• Annualized return over 2001-2023: 14.76% in Nifty TRI, 9.25% in gold, 6.00% in fixed income (current SBI FD rate for 1-yr TD as proxy) and 4.27%/-0.09% in Mumbai/Delhi real estate**
• Equities provide opportunity to generate huge wealth over long periods of time
• Investment into equities can be made through mutual funds, PMS strategies or direct stocks
• An investor can invest any amount that they want, unlike real estate
• Equities are usually highly liquid and can be sold within a short span of time if required
• Equities in general enjoy a more favourable taxation structure in India

Why Portfolio Management Services?

Mutual Funds are constrained by several factors; are increasingly becoming retail

• Post regulatory changes in Apr 2018, many portfolios look alike
• Little lee way for the manager to go outside mandate; have to hug benchmark
• Can not build concentrated high conviction portfolio
• No customization or accommodation of preferred themes or sectors
• Beating benchmarks is becoming increasingly difficult for MFs
• Benchmarks now include dividend yield (Total Return Indices)
• Large size of funds - performance falls as size increases
• Information arbitrage is getting thinner as market is getting competitive
• Fees of 1.25-2% or more for an underperforming product is high
• Greed and fear often drive the flows in retail investments like MFs: Inflows occur when least wanted and outflows when least desirable

Why Portfolio Management Services?

Mutual Funds have been underperforming MFs as a category have been underperforming their benchmarks in recent years

A concentrated well-managed portfolio of high conviction stocks should be part of HNI portfolios

PMS strategies can offset some of the limitations and constraints of mutual funds A portfolio of limited number of high-conviction stocks, built for long term, can:

• Outperform markets over time. Most returns are generated from limited number of high-conviction stocks
• Offer flexibility to play different themes at different times
• Help lower drawdowns by increasing cash percentage during times of extreme overvaluations
• Offer opportunity of outperformance through higher active share compared to mutual funds
• PMS strategies potentially offer better risk management due to flexibility to maneuver between market capitalizations

Equirus Core Equity Returns

Equirus Core Equity Returns vs the Benchmark

Equirus has a great track record in equity investing

Equirus Long Horizon Fund has delivered stellar returns since inception

Team with solid background and pedigree

Equirus boasts of a strong PMS team with wide and varied experience

Differentiated approach to portfolio management

Differentiated investments and non-model portfolio approach

• Equirus does not follow a model portfolio for investments. We believe there is a buy zone, a hold zone and a sell zone where stocks trade and following a non-model-portfolio approach is the most optimum way
• Portfolios with different inception dates will likely have different stock weightages and even different stocks at times
• We look at overlooked/ignored/out-of-fashion businesses with solid and/or improving fundamentals. This, by definition, means that our portfolios are likely to have low overlap with other PMS / mutual fund portfolios

Illustration of investing thought process

Investment theses behind some of the recent stock picks

JB Pharmaceuticals

One of the fastest growing Indian pharma companies; Strong brands and smart acquisitions to aid growth

• One of the fastest growing Indian pharma companies, JB has 4 strong brands in the top 300 in the domestic market where its market share is >30%
• It is expanding into newer therapies such as respiratory and paediatrics with cross-sell opportunities with existing products
• Acquisitions (Probiotics & Cardiology) will add to growth and offer cross-selling opportunities with existing products and specialists
• Salesforce productivity has a lot of room to improve thereby aiding margins

Supreme Industries

Leader in Pipes, Packaging segment and significant position in Plastic furniture and Industrial handling segments

• Supreme is expected to be a big beneficiary of the ‘Nal Se Jal’ programme of the Govt and the buoyant real estate market. Agri demand should also pick up (after 2 down years) benefiting from higher Rabi crop poduction
• The company enjoys a significant distribution advantage due to the pan-India presence of its 25 plants with an asset base of over Rs33 bn
• The company has demonstrated superior capital allocation skills (average ROCE of 5 years is 33%) vs peers’ (24-25%) due to its focus on value added products

Axis Bank

Formidable bank with performance converging with peers; valuation discount still material

• Credit growth has picked up across segments in India and large private banks with sticky and low-cost liabilities are likely to be big beneficiaries of the same
• Axis Bank has been trading at a significant discount to peers like HDFC Bank and ICICI Bank despite bridging the gap – NIMs advancing from ~3% to 3.96% (in Q2FY23) and ROEs improving from sub 10% to 18.9% (in Q2FY23). We believe that the valuation gap with peers is likely to converge significantly

Why Multicap PMS?

While small caps can generate superior alpha over time, large caps lend stability to the portfolio and at times, provide better risk- adjusted return NSE Smallcap valuation premium over Nifty as measured by 1-yr fwd P/E. Currently, are trading little above long period average.

Why Multicap PMS?

Large cap companies have certain inherent advantages

• Size
• Survivability
• Diversification
• Technology/ Human Capital

Investment Philosophy

Profitable Growth and Longevity at a reasonable Price

Investment Strategy

Investment Horizon: Minimum 3 years

Investment Objective and Style The investment objective is to generate capital appreciation predominantly through investments in equities with a long-term perspective. Parameters for a potential investment:

• Secular growth at a reasonable price
• Existing leader or worthy competitor – sustainable competitive advantage
• Increasing profitability as a result of business turnaround and/or turn in cycle
• Try to avoid over-owned companies unless highly compelling opportunity. On the contrary, look for potentially ignored/under-owned companies
• Strong and/or improving balance sheet strength
• Strong management track record
• Fairly priced or undervalued opportunities. Avoid overpaying

Alpha generation opportunities for next 2-3 years For the next 2-3 years, we see opportunity for alpha generation in:

• Companies benefitting from recovery in capex cycle. Companies in corporate lending, capital goods, infrastructure/EPC, power, building products should outperform the broader economy
• Traditional value outperforming traditional growth as interest rate cycle potentially turns after several years
• Long term secular themes such as increasing digitization & adoption of internet, financialization of economy, growth in exports (market share gains globally), urbanization, formalization of economy and increase in spending on discretionary/luxury/aspirational segments

Other areas We also look for opportunities in the following areas, provided other parameters are met:

• Special situations such as spinoffs, M&A, management changes etc.
• Insider buying by management and employees
• Ignored IPOs, companies with scarcity premia etc.

Exit strategies

Key details

Strategy Name Equirus Core Equity Portfolio Manager Gaurav Arora Date of Inception 27th May 2022 Applicable Regulations SEBI (Portfolio Managers) Regulations, 2020 Investment Philosophy Profitable Growth and Longevity at a reasonable Price Management Fee 2.5% per annum charged on monthly basis based on average AUM of the month (i.e. average of starting and ending AUM of the month) Exit Load 2% in Year 1, 1% in Year 2 Redemption Notice At least 30 days Minimum Investment Amount INR 50 lakh NAV Calculation Daily Reporting Monthly account statement, quarterly letter, annual audit PMS Administrator Orbis Financial Corporation Ltd. PMS Internal Auditor Aneel Lasod and Associates