INDIAN ENTREPRENEUR FUND (I) FUND FACTSHEET I FEBRUARY 2013 Indian Entrepreneur Fund (IEF): Objective: Launched in March 2010, Indian Entrepreneur Fund aims to invest in “Entrepreneur run and/or family owned businesses”*; listed on the Indian stock markets, for compounding gains over the medium to long term. Indian Entrepreneur Fund aims to invest in high growth (listed) businesses owned and managed by Indian entrepreneurs/families for superior long term wealth creation. IEF will be a portfolio of 18-20 high growth, high quality businesses (mostly mid-size) led by entrepreneurs with vision and integrity, capable of at least doubling their bottom line in the next 3-4 year period. Research methodology and brief rationale: Our study covered the universe of Top 500 listed companies by market cap and we segregated them into four categories based on their ownership structures - Entrepreneur run/ Family Owned Businesses (FOBs), Public Sector Undertakings (PSUs), Multi National Corporations (MNCs) and Pure Professional Firms. Since the widely held professional firms were only a handful in number, the three categories were taken up for intensive analysis and compared against a host of criteria i.e. sales growth, profit growth, operating margins, capital efficiency – RoE & RoCE and wealth creation. In each of the above comparisons, the entrepreneur run/family owned businesses fared exceedingly well. The summary of the findings are as below: Following are the findings and salient features of the research on Indian Entrepreneur and for Family Owned Companies: § Continued Dominance of Entrepreneur / Family owned firms § Entrepreneur/Family Owned Firms comprise ~70% of India’s market cap (in 1999 it was ~60% ) § Fastest growing businesses § Both Sales and Profits grew at ~30% CAGR over last 8 years § Superior operating margins § Over 20% OPMs consistently since 2002 to 2011. § Improving capital efficiency § With rising turnover and profitability § Despite doubling the capital expenditure in the last 3 years § Most sunrise businesses in India are run by entrepreneurs § New age, cutting edge, innovation led businesses like Information Technology, Telecom, Pharmaceuticals etc. § Biggest wealth creators Portfolio Manager’s Commentary: After seeing off a slow start to the year in January, Indian equities were in for a month of weakness in February. The benchmark BSE 500 dropped 6.5%, while the drop in CNX Midcap Index was sharper at 9.8%. IEF with its focus on quality businesses, outperformed the benchmark significantly. Key action in the fund during the month was inclusion of PI Industries. Though we have booked some profits in Sun Pharma and Pidilite Industries, we continue to remain positive on these businesses, given the management pedigree, strong product profile and business characteristics. PI Industries’ is one of the leading players in the Crop protection industry. Company has a niche portfolio of 26 products, which includes 5-6 in-licensed products in tie up with MNCs such as Bayer, BASF & Kumiai chemicals. Unique business model, strong relationship with global innovators, good revenue visibility, well spread distribution network coupled with high business growth and attractive valuation make it a compelling investment case. Overall, during the month we have further increased the Agri weightage in the fund. We remain almost fully invested with bias towards quality companies that meet our filtering criteria. Each business in the fund has its unique strength and has significant ability to counter the market volatility. Top three sectors in the fund are FMCG, Healthcare and Banking. Fund Details Performance Snapshot (% US$) Investment geography India 2013 Since 1mth 3mth 6mth 1yr 2yr Investment style Long only (Feb YTD) inception Domicile Mauritius Indian Entrepreneur Fund (2) 1 13 2 1 1 9 Base currency US $ BSE 500 (7) (3) 12 (5) (12) (4) (13) NAV frequency Every Thursday Dividend policy None * Inception date 26th March 2010 Website www.ieof.com Sector allocation Top 10 holdings ISIN MU0185S00050 (Institutional A) MU0185S00068 (Institutional B) Sectors Portfolio Stock NAV (%) Bloomberg ticker code INDENI2MP (Institutional A) / (% ) INDENI1MP ( Institutional B) Healthcare 20.1 Sun Pharmaceutical Industries Ltd. 7.1 Fund Size (IEF) US $ 22 mn Auto 14.0 Divi's Laboratories Ltd. 6.7 Fund Size (IEOF) US $ 132 mn Financials 13.9 Asian Paints Ltd. 6.5 Materials 10.6 Bajaj Finserv Ltd. 6.4 NAV details as on 28 February, 2013 FMCG 10.4 Lupin Ltd. 6.4 NAV Retail 10.0 Pidilite Industries Ltd. 5.3 Class Fee Type ( US$ / Share ) Information Technology 7.6 Page Industries Ltd. 5.2 Chemicals 6.5 Shree Cement Ltd. 5.2 Institutional A Fixed 1.093 Consumer Discretionary 4.7 Kotak Mahindra Bank Ltd. 5.2 Institutional B Variable 1.105 CASH 2.2 Dabur India Ltd. 5.1 Note: Please refer to the terms of the fund overleaf. Total 100.0 Total 59.0 INDIAN ENTREPRENEUR FUND (I) FUND FACTSHEET I FEBRUARY 2013 Brief on top 5 companies l Sun Pharmaceuticals Industries Ltd. is a fully integrated pharma company with strong presence in the US, India and emerging markets. It derives around 40% revenues from the domestic market and has dominant position in specialty therapies such as CNS, CVS, Ophthalmology, Gynecology, Urology, Gastroenterology etc. Sun Pharma has delivered strong performance over last couple of years led by high exposure to chronic therapies and a strong track record in execution and is expected to continue going forward. Sun Pharma is also the largest Indian pharma company in the US and operates through Caraco, Taro and its own subsidiary. With turnaround seen in Taro, we expect US to remain the key growth driver over the next couple of years. Sun Pharma has entered into strategic tie-up with MSD which would augment its presence in emerging markets. With over 60% of revenues from overseas operations, Sun pharma is better placed to gain in coming years. We expect 18% revenue CAGR over FY12-14E for Sun driven by consolidation of Taro, strong growth in the US and domestic business. Sun has the best operating profit margins in the industry (30-35% range) and continues to sustain its margins through a focused approach. Sun Pharma has cash surplus close to INR 60bn and ROCE of +30%. l Divi's Laboratories Ltd. is a leading player in the CRAMS (Contract Research and Manufacturing Services) segment and has a strong CCS (Custom Synthesis segment) pipeline. It is well positioned in the global pharmaceutical outsourcing market as a research focused custom manufacturing player. About 47% of Divi’s revenues are derived from this segment while the balance is derived from generic exports. It has the first mover advantage to capture significant share of pharma outsourcing by innovator companies. Divi’s has a strong business model, best in class margins and return ratios, strong balance sheet. We expect Divi’s to be a key beneficiary of the increased pharmaceutical outsourcing from India given its strong relationships with global innovator pharmaceutical companies. l Asian Paints is the market leader in the US$3.8bn domestic decorative paints industry with ~60% market share (2.5x greater than the nearest competitor) and an unmatched distribution reach and a presence across price points. This dominant position translated into ROCEs of over 50% with high and consistent dividend payout ratio of ~40%. The decorative paint volumes continue to grow at 1.5 - 2x GDP led by up-trading from the non-branded segment, conversion of lime wash users, housing penetration and product innovations. With strong management capability and sound strategy we expect Sun Pharma to sustain high profitability going forward. l Bajaj Finserv Limited is the holding company of the following businesses: Life insurance, general insurance and consumer finance. Standalone BFL is into the business of wealth management and financial services distribution and operates windmills in Maharashtra. It’s a play on underpenetrated insurance sector in India. Growth to be driven by new product launches and strong agency network. Well established life insurance business, rapidly growing lending business, brand equity of Bajaj group and strong management team will be the key going forward. l Lupin Ltd. is a direct play on the evolving generic Pharma opportunity in both the developing world as well as the developed world. It has a consistent track record of steady growth in last few years. The company is strongly positioned in its top 3 markets of US, India & Japan where it is witnessing robust performance driven by healthy product pipeline and different strategies for each markets. Lupin is the 5th largest player in the Indian market growing above industry average rate. It has significant presence in the domestic market in therapeutic areas like cardiovascular, diabetology, asthma, pediatrics and CNS, besides holding global leadership position in anti TB and cephalosporins segments. Lupin has also made a foray in the export markets including US & Japan. It is the only Indian player to be present in the branded generic space in US. Acquisition of Kwoya Pharma in 2007 marked its entry into Japan, recent acquisition of I’rom Pharma would further consolidate its presence. Currently, Lupin is the largest Indian generic company in Japan and is much ahead on the curve in terms of product pipeline. With Lupin's strong pipeline of OC portfolio,pick up in US launches and steady growth in branded markets, we expect earnings growth of 25% cagr over FY12-14E Terms of the Fund Class Fee type Investment Amount Management Fees Performance fees** Institutional A Fixed 1.75%p.a. Nil US$1mn and above 1.00%p.a. Institutional B Variable 20% over 10% on XIRR basis at the end of 3 years Notes: l ** First Performance linked fees will be charged on 31st March 2013 or on early exit due to partial or full redemption whichever is earlier.