L&T FINANCIAL SERVICES

L&T Financial Services Case Study

Increasing the market share profitably

Strategy & Finance Case Study

2010

L&T MUTUAL FUND BUILT ON STRONG FOUNDATIONS

L&T Financial Services Case Study

Contents
Introduction .................................................................................................................................................. 3 About L&T Investment Management Limited .............................................................................................. 4 Mutual Fund Segment .............................................................................................................................. 4 Portfolio Management Services Segment ................................................................................................ 6 AUM, Revenues and Fees ......................................................................................................................... 7 Sales and Distribution of products............................................................................................................ 8 Investment philosophy, research and disciplines ..................................................................................... 9 Financial summary of L&TIM .................................................................................................................... 9 Targets & Deliverables ................................................................................................................................ 10 Growth targets ........................................................................................................................................ 10 Profitability targets ................................................................................................................................. 10 Deliverables............................................................................................................................................. 10 Format & Other details ........................................................................................................................... 11 Annexure A.................................................................................................................................................. 12

L&T Financial Services Case Study

Introduction
Date: September 9, 2010 Venue: Corporate Office, L&T Investment Management Limited. It was the time of the year when the board meeting had just concluded. A review of the operations was undertaken, and the management had unanimously decided on a 5 year goals to be achieved by December 2015/March 2016. The CEO was sitting in his room, giving the performance of the company a lot of thought. He had some specific ideas on where he would like to see the company in the next 5 years. Admittedly, the current industry scenario was a little volatile, but given the figures of the company in the last 3 years, and his vision on where to take them, he believed that the time had come to come up with a realistic strategy on how those could be achieved.

L&T Financial Services Case Study

About L&T Investment Management Limited

On January 20, 2010, L&T Finance Ltd. acquired DBS Cholamandalam Asset Management Limited (which was renamed as "L&T Investment Management Limited (L&TIM) on February 15, 2010) and DBS Cholamandalam Trustee Limited (which was renamed as "L&T Mutual Fund Trustee Limited" on February 11, 2010) along with DBS Chola Mutual Fund (which was renames as L&T Mutual Fund). L&TIM is a wholly-owned subsidiary of L&T Finance Ltd. The holding structure of L&TIM is as follows:

The investment management business conducted by L&TIM currently consists of two business segments: the Mutual Fund Segment, which is comprised of the management, administration and distribution of L&T Mutual Fund; and the Portfolio Management Services Segment, which is comprised of portfolio management and sub-advisory services.

Mutual Fund Segment

L&T Mutual Fund is a SEBI-registered mutual fund with 25 individual schemes as at August 31st, 2010. Of these 25 schemes, eleven are equity schemes, thirteen are fixed income schemes (including liquid funds and fixed maturity plans) and one is a hybrid equity/fixed income scheme. L&T Mutual Fund is established as a trust under the Indian Trust Act, 1882, with L&T

L&T Financial Services Case Study

Finance acting as the sponsor/settler, L&T Mutual Fund Trustee Limited acting as the Trustee Company and L&TIM acting as the investment manager to the various schemes. The funds and portfolio management services of L&TIM are available to both Indian and nonresident Indian retail customers, as well as Indian and foreign institutional customers. The objective is to establish L&TIM as a leader in the Indian asset management business. L&TIM endeavors to accomplish this by providing the customers with favorable investment returns and superior customer service. Evaluation of opportunities to develop further services and products to better serve the investing needs of the customers is an ongoing process. For example, the company recently launched a daily investment plan which will allow its customers to more easily take advantage of rupee-cost averaging. The equity schemes include: 1. L&T Opportunities Fund, 2. L&T Growth Fund, 3. L&T Midcap Fund, 4. L&T Multi-Cap Fund, 5. L&T Global Advantage Fund, 6. L&T Tax Saver Fund, 7. L&T Contra Fund, 8. L&T Hedge Equity Fund, 9. L&T Infrastructure Fund, 10. L&T Small Cap Fund, 11. L&T Tax Advantage Fund Series-I. The three largest equity funds are L&T Opportunities Fund, L&T Midcap Fund and L&T Infrastructure Fund, which have AUMs of Rs. 762.80 million, Rs. 453.00 million and Rs. 361.90 million, respectively, as at August 31, 2010. Of these three funds, L&T Opportunities Fund is rated 4-star by Value Research1 and L&T Midcap Fund is rated 3-star by Value Research as at August 31, 2010. L&T Opportunities Fund and L&T Midcap Fund are also rated "Gold" by the

Value Research Fund Ratings are a composite measure of historical risk-adjusted returns. In the case of equity and hybrid funds this rating is based on the weighted average monthly returns for the last 3 and 5-year periods. These ratings do not take into consideration any entry or exit load. 5-stars indicate that a fund is in the top 10% of its category, next 22.50% indicates 4 star, middle 35% receive 3 star rated fund in terms of historical risk-adjusted returns. Under Equity Diversified category L&T Opportunities Fund is a 4-star fund. Under Hybrid: Monthly Income category L&T Monthly Income Plan is a 5-star fund. These Fund Ratings are as on June 2010. The Value Research Ratings are published in Monthly Mutual Fund Performance Report and Mutual Fund Insight. The Ratings are subject to change every month. The Rating is based on primary data provided by respective funds; Value Research does not guarantee the accuracy.

L&T Financial Services Case Study

Economic Times Intelligence Group2 as at August 31, 2010. The balance equity funds are either unrated or rated below "Gold". The fixed income schemes include: 1. 2. 3. 4. 5. 6. 7. L&T Triple Ace Fund L&T Freedom Income - Short Term Fund L&T Gilt Fund L&T Liquid Fund L&T Short Term Floating Rate Fund L&T Select Income Fund - Flexi Debt Plan and Seven fixed maturity plans as at August 31, 2010.

The three largest fixed income funds are L&T Freedom Income - Short Term Fund, L&T Select Income Fund, and L&T Liquid Fund, which have AUMs of Rs. 10,218.50 million, Rs. 6,480.10 million and Rs. 11,959.70 million, respectively, as at August 31, 2010. Of these three funds, L&T Freedom Income Short Term Fund is rated 4-star by Value Research and L&T Liquid Fund are rated 3-star by Value Research as at August 31, 2010, and L&T Select Income Fund Flexi Debt is not rated. The balance fixed income funds are rated below 3-stars or are unrated. There is also one hybrid income scheme, L&T Monthly Income Plan. L&T Monthly Income Plan has AUM of Rs. 1,234.00 million as at August 31, 2010, and is rated 5-star by Value Research as at August 31, 2010. L&T Monthly Income Plan is also "Platinum" rated by the Economic Times Intelligence Group as at August 31, 2010. The funds are sold both directly by L&TIM to retail and institutional customers, as well as through other intermediaries.

Portfolio Management Services Segment

L&TIM obtained a SEBI license for conducting portfolio management services on May 31, 2010. Within the portfolio management services segment, the company has the capability and flexibility to customize and personalize portfolios in order to achieve individual customer's desired investment objective. The company may pursue portfolio management services mandates with both institutional customers and high net worth individuals. With respect to institutional customers, the company may pursue sub-advisory mandates with third-party investment funds.

The Economic Times Intelligence Group list Mutual Fund schemes on the basis of their risk adjusted performance. The period under consideration is three years. The return score is arrived by allotting 60% weight to the past 3 year's absolute return and 40% weight to the past 1 year return. These weighted returns are compared vis-a-vis the average return for the category under consideration to arrive at the return score for each scheme. The top 10% funds in each category are then classified as "Platinum" funds; the next 20% are graded "Gold" while the next 40% are classified as "Silver". The quarter under consideration is April 2010 to June 2010.

L&T Financial Services Case Study

AUM, Revenues and Fees

L&TIM earns revenues by charging fees for managing the investment assets of customers. The company generally calculates investment advisory fees as a percentage of the value of AUM, with such fees varying by type of asset class, investment service, size of account, and total amount of assets managed under the mutual fund segment and the portfolio management services segment. Accordingly, fee income generally increases or decreases as AUM increase or decrease. Increases in AUM generally result from market appreciation, positive investment performance for customers, or net asset inflows from new or existing customers. Similarly, decreases in AUM generally result from market depreciation, negative investment performance for customers, or net asset outflows due to customer redemptions, account terminations, or asset withdrawals. Fees paid by the funds to L&TIM are reflected in the applicable investment management agreement entered into between L&TIM and L&T Mutual Fund Trustee Limited. The investment management agreement between L&T Mutual Fund Trustee Limited and L&TIM provides for termination by L&TIM on 180 days' written notice to L&T Mutual Fund Trustee. L&T Mutual Fund may terminate the agreement in accordance with relevant SEBI rules and regulations, and with the prior approval of SEBI. Fees paid by the portfolio management customers to L&TIM will be reflected in the applicable investment management agreement. Investment management agreements for portfolio management services, including sub-advisory services, are typically terminable by the customer at will. With respect to the portfolio management services, the company may also charge a performance-based fee in addition to or in lieu of a base fee. Performance-based fees are calculated as either a percentage of absolute investment results or a percentage of investment results in excess of a stated benchmark over a specified period of time, and they are recorded as revenue at the end of the measurement period. Accordingly, if performance-based fees were to become an important part of our business, the seasonality and volatility of revenues and earnings may become more significant. The company sometimes experiences periods when the number of new accounts or the amount of AUM increases significantly, as well as periods when the number of customer accounts or the amount of AUM decreases significantly. These shifts result from wide-ranging factors, including conditions of financial markets, the investment performance for customers, and changes in the investment preferences of our customers. The tables below summarize the AUM and revenues by category of investment. As the company has obtained the license for portfolio management services on May 31, 2010, and is still in the process of establishing this business segment, none of the AUM or revenues (as at the dates indicated) is attributable to portfolio management services.

L&T Financial Services Case Study

Sales and Distribution of products

L&TIM has entered into various selling and distribution agreements pursuant to which it pays sales commissions to the financial intermediaries that distribute funds. L&T Finance also acts as a distributor for the various schemes of L&T Mutual Fund. None of the distributors of the L&T Mutual Fund, including L&T Finance, is under any obligation to sell a specific amount of L&T Mutual Fund units, and each of them may also sell shares of mutual funds sponsored by other affiliates and unaffiliated organizations. Computer Age Management Services Pvt. Ltd. acts as registrar for L&T Mutual Fund, and HDFC Bank Limited provides custodian and related services for the funds as well as unitholder servicing for each fund's unitholder accounts. Each of these service providers receives a fee under each of its servicing agreements with L&TIM and L&T Mutual Fund Trustee Limited. Each servicing agreement must be approved annually by the L&T Mutual Fund Trustee Limited board of trustees, including a majority of the independent trustees. L&TIM has discretion to select brokers to execute trades on behalf of L&T Mutual Fund and other customers. These brokers are selected in accordance with an internal approval process (which conforms to the appropriate SEBI guidelines and regulations) involving a panel of portfolio managers and analysts, and are subject to annual review and confirmation by the compliance team. These brokers are paid commissions for executing orders and, in certain instances, may receive commissions which reflect the provision of research that benefit the customers

L&T Financial Services Case Study

Investment philosophy, research and disciplines

The company believes in utilizing research-based stock selection and active portfolio management to provide long-term gains for its customers. The company has established the infrastructure required to conduct fundamental research backed by effective analysis, as evidenced by our research teams and portfolio managers with experience in their respective disciplines. The research teams apply fundamental research, quantitative research, and microand macro-economic research models normally using a top-down approach and application of both growth and value models in the research and selection of securities. The investment disciplines are generally focused on market capitalization (e.g., large-, mid-, and small-cap equities) and term (for example, long-, intermediate-, and short-duration debt securities)

Financial summary of L&TIM

For the financial year ending March 31st 2010, the revenues for L&TIM have taken a dip by 12% to Rs.4.4 crores. The company made net loss after tax of Rs.27.2 crores for the financial year ending March 31st 2010. The excerpts from the balance sheet and income statement are mentioned below:

L&T Financial Services Case Study

Targets & Deliverables

Growth targets
As of August 2010, there were 44 individual registered mutual fund providers, with a total average AUM, for the month of August, excluding funds of funds, of Rs. 6.9 lakh crores. As of August 2010, the company ranks 25th out of 44 registered AMCs in terms of average AUM. The market share in the average AUM stands at a mere 0.6%. (Refer Annexure A for details.) Assuming that the industry size would reach Rs.14.4 lakh crores in AUM by December 2015, the company aims to be among the top five by AUM size till then.

Profitability targets
In addition to above, the focus should also be on returning to profitability. As mentioned in the tables above, for the financial year ended March 31st 2010, the company reported a net loss after tax of Rs. 27.2 crores. It was discussed by the management that the loss is a function of 4 factors: 1. Increase in establishment costs, a direct function of new branches opened up in different cities across the country 2. Increase in the salary costs of management staff 3. Reduction in fee income because of SEBI clamping down on entry fees 4. Higher costs incurred towards distribution of products In light of the above, the company aims to achieve profitable growth in the market share in the medium term.

Deliverables
The CEO has to come up with a turnaround plan for the company, using precise financial and marketing strategies. Specifically, it should address the following: 1. Fund/AUM mix: In order to achieve profitable growth in AUM as targeted above, including a plan for breakeven and rapid growth in profitability thereafter 2. Distribution strategy: Recommend the deployment of innovative mechanism for distribution of mutual fund products In addition to the above, strategy can also cover the following, among other things: 1. New Product strategy 2. Marketing strategy 3. Risks anticipated in the near future, and ways to mitigate them

L&T Financial Services Case Study

Please ensure that your financial plan is consistent with the strategies you plan to suggest. Also quantify any/every qualitative suggestion/strategy and incorporate the same in the financial plan.

Format & Other details

1. Submission should include a PowerPoint presentation for strategic plan (not more than 10-15 slides) and an Excel for financial plan. 2. Please submit a detailed excel for the financial plan, with a separate sheet capturing the assumptions used in building the model. Please add 1-2 slides presenting snapshot of the model, and capturing the key assumptions used in building the model. 3. Wherever data sources are referred to (for company or industry data), clearly indicate the source of data. 4. Additional data requests, if any, should be routed to the company through the event organizing committee. The company shall apply its discretion, while responding to any such requests. 5. For more details related to financials, refer to FY2010 annual report. (sent alongwith the case study). 6. For more information about the company, visit the websites of www.ltfinance.com and www.lntmf.com 7. For more details about the industry, visit www.amfiindia.com.

L&T Financial Services Case Study

Annexure A