You are on page 1of 39

Spot potential early

Contents

India: Macro Outlook

Equity Market Overview

HDFC Mid-Cap Opportunities Fund


India: Macro Outlook
India Growth Story: Overview
GDP growth is likely to be sustained at +8% levels
Structural shift - Over the years, % share of industry and services in GDP has
increased making India more resilient to vagaries of monsoons
Industry and Services driven by growing Consumption and Investments
Focus on agriculture could provide further impetus to growth

GDP growth (%) - Quarterly GDP growth (%) – Regional Comparison


(%)
10 Industry & Services Agriculture 10
8 8
6 6
4 4
2 2
0 0

Phillipines

India

China
Thailand
Hong

Malaysia
Japan

Indonesia
Kong

Singapore
Korea

Taiwan
-2
1QFY05

2QFY05

3QFY05

1QFY06

2QFY06

3QFY06

4QFY06

1QFY07

2QFY07
4QFY05

Source: CLSA, GDP 2007


India Growth Story: Key Drivers
Theme Reason Sectors likely to
benefit
Consumption Domestic Banking
1. Positive demographics - growing consumer class FMCG

2. Rising penetration rates


3. Rising per capita GDP
International
1. Low cost manufacturing, strong engineering,
language and technology skills Technology
2. IT/BPO and Pharma now well established; Pharma
emerging manufacturing base Auto components

Investments 1. Corporate capex recovery - high capacity Engineering


utilization, cash flows and low debt Construction
2. Infrastructure Investments supported by Cement
government policies and private-public initiatives
India Growth Story: Demographics
Population(m) (%)
600 60

51% of the Indian population is Absolute population below 25 years (m)


500 50
below 25 years of age
400 40
By 2015, the net addition to the
300 30
productive population (25-44
years) will be 90m, 1/3rd of USA’s 200 20

current population or five new 100 10

Australias 0 0
India China Indo Phil Japan Thai Korea Malay HK Sing
Source: CLSA
India Growth Story: Penetration
Low product penetration offers tremendous opportunities…
120

Penetration Rates (%) *


Mobile penetration (%)

Mobile penetration (%)


100
Taiwan
Refrigerator 58.4
SK
Aus
80 Cars 12.5
Sing Japan

PC/Laptop 12.5
60
Malay
Thai
Phil Air Conditioners 7.6
40

Digital Cameras 3.6


China
20
India
Indo
Credit Cards 1.9
GDP per capita (US$)
0
0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000
Source: National Readership Survey, 2006
India Growth Story: Emerging Manufacturing Base

India becoming a hub for manufacturing 250 (US$m) 1,500


(units)
given lower cost, design capabilities and
200 1,200
improved infrastructure
150 900
India is the small-car hub for Hyundai,
100 600
Ford; engg companies ABB, Cummins
have centres for global sourcing, global 50 300

R&D 0 0
FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06
Wal-Mart is already sourcing goods Auto exports Auto component exports (RHS)
worth US$2.5bn from India
centers in
MNC R&D

India

Source: CLSA
India Growth Story: Global Size
(mt)

Achieving
Tata+Corus will become 5th largest steel company
120 110
100

Global 80
60

Size!!! 40
20
32 31 30 24 23 19 18 18
5
Tata Steel targets to be a 40mt 0

Tata+Corus

Tata Steel
Baosteel
JFE Steel

US Steel
Arcelor-

Nippon

Posco

Nucor

Corus
Steel
Mittal
company by 2012, from 7mt today

Reliance will have the world


Reliance ranks amongst top 10 globally in its businesses
largest single location refinery
Rank Polyester PX MEG PTA PP
complex in the world. 1 Reliance
2
Infosys will be a 100,000 3
employee company in three years 4 Reliance
5 Reliance
6
Suzlon will have more than 10% 7 Reliance Reliance
share of the wind energy market in 8
the US, Australia, China, Korea 9
markets in 2006 10
Source: CLSA

PX: Paraxylene
MEG: Mono Ethylene Glycol
PTA: Purified Terephthalic Acid
PP: Polypropylene
India Growth Story: Infrastructure
SPENDING
Spend on key infrastructure to double in next five years TO BOOST
GROWTH!
Public-private partnership – airports, ports, roads
Buoyancy in tax revenues supports enhanced government participation

Investment by 2012 as projected by Committee of Infrastructure (Rs. bn)


Planned Exp in next 5
Rsbn FY03 FY04 FY05 FY06 FY07E
yrs

Airports 20 15 15 24 25 400
Irrigation 151 139 208 222 252 1300
Ports 7 5 5 10 20 500
Power 232 312 340 350 346 2000

Railways 121 135 153 146 140 750

Roads 206 190 199 212 213 1700


Telecom 133 126 89 116 116 800
Urban Infra 162 174 184 220 250 1400
Source: Committee on Infrastructure (CoI), CLSA Asia-Pacific Markets
Equity Market Overview
Equity Market
Valuations

Earnings growth

Risks

Overview
Equity Market: Valuations

Valuations are 16000 30


14000
at Long Term 12000
25

Average 10000 20
8000
15
Driver to returns 6000
4000 10
Earnings Growth 2000
0 5

Aug-99

Jun-00

Aug-04

Jun-05
Apr-96

Apr-01
Feb-97

Dec-97

Oct-98

Feb-02

Dec-02

Oct-03

Apr-06

Feb-07
PE Rerating

Dividend Yield Sensex (LHS) 1 Yr Fwd PE (RHS)

Earnings growth will drive returns….


Market Timing

“ Should I Time The Market” – Can be very expensive!!


11.83%
12
10.17% US Stock Market Returns (1963-1993)
10
7.09%
8 Excluding only 1.2%
of trading days!
6
4 3.28%
2
0
All 7802 days Miss 10 Miss 40 Miss 90
Source: University of Michigan Best Days Best Days Best Days

The Index was a capitalization weighted composite of stocks traded on the New York Stock Exchange
(NYSE), American Stock Exchange (ASE) and the National Association of Securities Dealers Automated
Quotation system (NASDAQ)

All returns are annualized by compounding the arithmetic average of daily returns
Equity Market: Earnings Growth
Earnings may slow but should remain at >15%
Profit growth has Net Profit Growth (%)
consistently Sector FY06 FY07E FY08E
outperformed Auto 25.0% 20.1% 8.4%
expectations Banks 17.5% 21.0% 26.9%
45
(%) Expected profit growth
Cement 22.7% 124.7% 1.4%
40 Consumer 21.2% 19.9% 8.7%
Actual profit growth
35 E&C 59.8% 42.4% 23.6%
30 Energy 15.8% 17.9% 10.8%
25 IT 32.7% 46.4% 29.0%
20 Metals 8.2% 35.7% 1.7%
15 Pharma -16.4% 121.2% 11.3%
10 Telecom NA 158.2% 54.2%
5 Utility 12.8% 18.7% 17.5%
0 Sensex Total 19.6% 36.3% 17.1%
Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep
Source: Merrill Lynch
03 03 04 04 04 04 05 05 05 05 06 06 06
Source: CLSA
Equity Market: Risks

Inflation and interest rates


1. Caused by Demand and 14
%YoY primary product prices up due
Supply factors 12
to supply constraints
10
2. Impact - On Growth,
Earnings and Valuations 8
6
3. Debt returns look more
4
attractive
2
Inflation likely to moderate - manufactured products prices
1. Government has been up due to demand pressures
(2)

May-05

Jan-07
Jan-05

Jan-06
Sep-05

Sep-06
May-06
proactive
Global slowdown
Headline WPI Primary Articles Manufactured Products
Liquidity
Political risks

Source: CLSA, HSBC, Deutsche Bank AG/Hong Kong


Equity Market: Overview
Have moderate return expectations

Invest with a minimum view of two-three years

Take advantage of volatility

Be genuinely diversified

Stock picking to be more rewarding

Focus on Small and Mid Caps


Presenting
HDFC Mid-Cap
Opportunities Fund
(A 3 year Close - Ended Equity Scheme with
automatic conversion into an Open – Ended
scheme upon maturity)

The NFO closes for subscription on June 8, 2007


Why “Small & Mid Cap” Companies?
Growth
Superior Growth
Presence in generally new
MATURITY
& faster growing segments

Ability to gain share due to DECLINE


new technology, better GROWTH
products / services etc.

Small base INCEPTION


Time

Focus on Small and Mid Caps here


Why “Small & Mid Cap” Companies?

Faster but cheaper!

Large Cap Mid Cap Small Cap

Growth - PAT (%)* 15% 26% 31%

PE (12m forward)* 16.0x 12.3x 10.0x

Source: HSBC, Thomson Financial, IBES


* FY 2008 net income growth, 12m fwd PE (x) – Date 6/03/2007
Market cap definition : Large cap >$1000m, Mid cap $500-1000m, Small Cap <500m
Why “Small & Mid Cap” Companies?

Faster but cheaper!


Relative PE (x) of CNX Midcap & Nifty
28 138%
26 P/E-CNX Midcap P/E-Nifty
128%
24
22 118%
20
108%
18
16 98%
14
88%
12
10 78%
Jul-04

Jul-05

Jul-06
Jan-04

Apr-04

Jan-05
Oct-04

Apr-05

Jan-06
Oct-05

Apr-06

Jan-07
Oct-06

Apr-07

68%

Jul-04

Jul-05

Jul-06
Jan-04

Apr-04

Jan-05

Jan-06
Oct-04

Apr-05

Oct-05

Apr-06

Jan-07
Oct-06

Apr-07
Source: NSE
Why “Small & Mid Cap” Companies?
Faster but cheaper!
Sector Comparison - Large vs Mid Cap

Mcap (Rs PAT g% Mcap (Rs PAT g%


Sector Large Cap Cr) (08)* PE (08) Mid Cap Cr) (08)* PE (08)

IT Infosys 107,170 29.7 22.0x Infotech Ent 1,600 37.8 14.8x

TCS 116,300 29.7 21.6x Sasken 1,340 73.1 15.6x

Pharma Ranbaxy 12,710 16.3 21.6x Jubilant 3,580 33.1 15.7x

Sun Pharma 19,370 19.3 24.6x Lupin 4,840 44.4 16.9x

FMCG HLL 43,100 16.5 25.2x Marico 3,630 42.4 19.4x

Nestle 9,070 17.0 23.7x Godrej Cons 3,240 31.9 18.5x


Source: Motilal Oswal, 5th April 2007
* Ranbaxy, Sun Pharma, HLL & Nestle - CY07 December Infosys, TCS, Infotech Enterprises, Sasken, Jubilant, Lupin, Marico & Godrej Consumer - FY08 March
Why “Small & Mid Cap” Companies?
Superior return prospects*
Discovery - Relatively less known by market participants - price discovery is not full
P/E Expansion - if the company transitions from small/mid cap to large cap

Large number of companies < Rs 500cr Mcap!


Fundamentally attractive 2500
2096
Responsive to external
2000
environment
# of Companies
1500
Entrepreneur driven
Unique nature of business 1000 80%
in some cases 500
454
73 17%
0
> Rs 9000cr Rs 500 - 9000cr < Rs 500cr
Mcap (Rs cr)
*Small and Mid-Cap companies carry higher risk than large cap
companies, particularly over the short and medium term Source: Capitaline, as on 10th April, 2007
Why “Small & Mid Cap” Companies?
Diversification – market fancy shifts between large
and mid caps
Mid caps in flavor Large Caps in flavor
(Jan 2003 to Sept 2005) (Oct 2005 to March 2007)
600
170
500
155
400
140
300
125
200
110
100 95
0 80
1/03 7/03 1/04 7/04 1/05 7/05 10/05 12/05 2/06 4/06 6/06 8/06 10/06 12/06 2/07
NIFTY Index CNXMCAP Index NIFTY Index CNXMCAP Index
Why “Small & Mid Cap” Companies?
Small in size, big on stature!
Did You Know India’s…. Company Market Cap# Category
(Rs crore)
Largest Batteries Company * Exide Industries Ltd. 3,199 Mid Cap

Largest AC and Commercial Blue Star Ltd. 1,889 Mid Cap


Refrigeration Company **

Largest Inks company *** Micro Inks 842 Mid Cap

* Largest power storage solutions company in India. Company website – www.exideindustries.com


** India's largest air conditioning and commercial refrigeration company. Company website – www.bluestarindia.com
*** Company website – www.microinks.com
# Mcap as on March 31, 2007 from Capitaline
Why “Small & Mid Cap” Companies?
Company (Rs. millions) Sales CAGR % Adj.Net Profit CAGR %
Some FY04 FY07E 4 Yrs FY04 FY07E 4 Yrs
Examples Crompton Greaves Ltd 16650 56906 36% 534 2920 53%
Blue Star 6947 14744 21% 255 636 26%
Of Superior Godrej Consumer Products Ltd 4896 9478 18% 648 1402 21%
Returns! Carborundum Univ 2748 5793 20% 274 784 30%
Thermax Ltd 7772 21371 29% 650 1793 29%
806%
80,000 FY04
70,000 FY07 414%
60,000
Market Cap 50,000
257% 593%
642%
Change 40,000
30,000
20,000
10,000
0

Carborundum

Thermax Ltd
Greaves Ltd

Products Ltd
Blue Star
Crompton

Consumer
Godrej

Univ
Source: Enam
HDFC Mid-Cap Opportunities Fund
Investment Objective The investment objective of the Scheme is to
generate long-term capital appreciation from
a portfolio that is substantially constituted of
equity and equity related securities of Small
and Mid-Cap companies
What are Mid-Cap Those companies that are either a
Companies? constituent of CNX Midcap Index or
companies that have market capitalisation of
Rs. 500 crore or more but does not exceed
the market capitalisation of the largest
constituent of CNX Midcap Index
What are Small-Cap Those companies whose market
Companies? capitalisation is lower than Rs. 500 crore
HDFC Mid-Cap Opportunities Fund: Product Features

Options The scheme offers investors two options:


Growth Option
Dividend Option(with payout and reinvestment facility)
Dividend reinvestment facility will be available only after the scheme is
converted into an open-ended scheme
Application Amount Minimum of Rs. 5,000 per application and in multiples of Rs. 1,000 thereafter
New Fund Offer Price Rs. 10 per unit
Maturity of Scheme The duration of the scheme is 3 years from the date of allotment and upon
maturity, the scheme shall be automatically converted into an open-ended
scheme
Load Structure (during NFO) Entry Load: Nil (the scheme being a close ended scheme, cannot charge an
entry load)
Exit Load: Nil*
Liquidity The scheme will offer for Redemption/Switch-out of units on an ongoing
basis at quarterly intervals at NAV based prices. The Redemption/Switch-out
will be available only during the Specified Redemption Period I.e. 15th day
(or immediately succeeding Business Day if that day is not a Business Day)
immediately after end of each calendar quarter
Benchmark CNX Midcap Index

*The balance proportionate unamortised initial issue expenses will be recovered from the unitholder if
the unitholder exits the scheme before the amortisation of initial issue expenses is completed.
HDFC Mid-Cap Opportunities Fund: Asset Allocation

Type of Instruments Minimum Maximum Risk Profile


Allocation Allocation of the
(% of Net (% of Net Instrument
Assets) Assets)
Equity and equity related
securities of Small and Mid-
Cap companies of which 75 100 High
Small-Cap companies 5 15
Mid-Cap companies 70 85
Equity and equity related 0 25 High
securities other than above

Debt and Money Market 0 25 Low to


Securities Medium

The investment in Securitised Debt will not normally exceed 25% of the net assets of the Scheme
HDFC Mid-Cap Opportunities Fund: Risk Management

Small and Mid-Cap companies carry higher risk than large cap companies,
particularly over the short and medium term. The Scheme endeavors to control risk
by adopting following investment strategy:

Maximum exposure to single small and mid-cap company to be restricted to


10% of net assets

Number of stocks in the portfolio to be at least 25

Investment in Small Cap to be restricted to 15% of net assets

Scheme permits investments in companies other than small and mid-cap


companies upto 25% of net assets

Due diligence – regular company visits and financial analysis


Why HDFC Mid-Cap Opportunities Fund?

Attractive valuations of small and mid-cap

companies

Experienced fund management and research team

HDFC AMC has a track record of managing equity

assets across market cycles

Risk Management
Why “Close – Ended” Fund?

Small and Mid cap companies may take time to


mature, therefore need to remain invested for a
longer period of time

Flexibility to develop core portfolio with longer time


horizon to reap full benefits of investments as there
is no pressure to invest/divest in hurry

Helps take advantage of volatility


HDFC Mutual Fund
An overview
Composition of Assets under Management
Liquid Debt Equity
30000

25000

13404
20000
12606

7002 11632
15000
3596
5382
5612 8390
10000 4420
6150 3900 4424
5000
7443 7420 6564
5289 5679 5493
0

Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07


Month

… And equity as % of total AUM increased from 24% to 47%


Track record of our following Equity Fund NFOs
Value of Rs. 1 Lakh invested in NFOs of our following
Open Ended Equity Funds (Growth Plans) as at March 30, 2007
Scheme Inception No. of Years Value of Benchmark
Date since investment Index#
inception (Rs. Lakhs)^ (Rs. Lakhs)

HDFC Equity Fund 1-Jan-95 12.24 14.26 3.22

HDFC Top 200 Fund $ 11-Oct-96 10.47 12.74 4.96

HDFC Capital Builder Fund 1-Feb-94 13.16 6.03 2.95

HDFC Growth Fund 11-Sep-00 6.55 4.54 2.78

HDFC Core & Satellite Fund 17-Sep-04 2.53 2.39 2.14

HDFC Premier Multi-Cap Fund 6-Apr-05 1.98 1.76 1.74

^Past performance may or may not be sustained in the future


#Benchmark Index: HDFC Equity Fund, HDFC Capital Builder Fund and HDFC Premier Multi-Cap Fund – S&P CNX 500,
HDFC Top 200 Fund and HDFC Core and Satellite Fund – BSE 200,
HDFC Growth Fund – SENSEX
$Adjusted for dividend declared under the scheme prior to its splitting into the Dividend and Growth Plans
Value of scheme investment and Benchmark Index are on compounded annualised basis
Performance of our following Equity Funds
Fund Returns Benchmark Returns#
Equity Top 200 Cap. Bldr. Growth PMC C&S SENSEX S&P CNX BSE 200
Fund (%)^ Fund (%)$$^ Fund (%)^ Fund (%)^ Fund(%)^ Fund (%)^ (%) 500 (%) (%)
Last 1 Year 12.24* 8.36* 1.35* 10.83* 5.34* 1.25* 15.61* 8.42* 10.58*
Last 3 Years 40.84** 38.38** 38.88** 36.29** N.A. N.A. 33.29** 29.71** 28.96**
Last 5 Years 44.83** 44.99** 40.38** 39.81** N.A. N.A. 30.33** 32.26** 31.57**
Last 10 Years 37.18** 27.73** 25.47** N.A. N.A. N.A. 13.54** 16.51** 15.92**
24.23** 27.51** - 26.01** - 16.91** 10.04** 16.54**
Since Inception
14.62** 41.16** 8.59** 35.25**
33.15** 32.29**
(1/1/95) (11/10/96) (1/2/94) (11/9/00) (6/4/2005) (17/9/04)
NAV (Growth Plan/Option)
as at 30/3/07 142.602 104.504 60.300 45.461 17.631 23.935
^ Past performance may or may not be sustained in the future. Returns are of Growth Plan/Option.
*Absolute Returns**Compounded Annualised Returns
# Benchmark Index - HDFC Equity Fund, HDFC Cap. Bldr. Fund and HDFC PMC Fund - S&P CNX 500, HDFC Top 200 Fund and
HDFC Core & Sat. Fund - BSE 200 and HDFC Growth Fund - SENSEX
$$ Adjusted for the dividends declared under the Scheme prior to its splitting into the Dividend/Growth Plans
CRISIL Fund House – Level 1
CRISIL has assigned ‘CRISIL Fund
House Level – 1’ rating to HDFC
AMC

This is its highest Fund


Governance and Process Quality
Rating. The rating reflects the
highest governance levels and
fund management practices at
HDFC AMC

HDFC AMC is the first AMC in


India to have been assigned this
rating
Risk Factors: All mutual funds and securities investments are subject to market risks and there can be no assurance that the scheme’s objectives will be achieved and the NAV of the Scheme may go up or down
depending upon the factors and forces affecting the securities market. Past performance of the Sponsors, their affiliates / AMC / Mutual Fund, its scheme(s) do not indicate the future performance of the Scheme of
the Mutual Fund. There is no assurance or guarantee to unit holders as to the rate of dividend distribution nor that dividends will be paid regularly. Investors in the Scheme are not being offered any guaranteed /
assured returns. Scheme Specific Risk Factor: Small & Mid Cap Stocks can be riskier and more volatile on a relative basis. The NAV of the units issued under the Scheme may be affected, inter-alia by changes in
the interest rates, trading volumes, settlement periods, transfer procedures and performance of individual securities. The NAV will inter-alia be exposed to Price / Interest Rate Risk and Credit Risk. The Scheme
(at portfolio level) to have >/= 20 investors and no single investor to account for >25% of its corpus, at the time of allotment. The Scheme offers redemption facility at a quarterly intervals and to that extent has
limited liquidity. HDFC Mid-Cap Opportunities Fund, a 3 year close-ended equity scheme with automatic conversion into an open-ended scheme upon maturity, is only the name of the scheme and does not in
any manner indicate either the quality of the scheme, its future prospects and returns. Please read the offer document before investing. Investment Objective: to generate long-term capital appreciation from a
portfolio that is substantially constituted of equity and equity related securities of Small and Mid-Cap companies. Asset Allocation Pattern: Equity and Equity related securities of Small and Mid-Cap companies
(min. 75%; max 100%) of which Small Cap Companies (min 5%; max 15%); Mid-Cap Companies (min 70%; max 95%); Equity and Equity related securities other than that of Small and Mid-Cap companies
(min. 0%; max 25%) and Debt and Money Market Securities (min. 0%; max 25%). Investment in securitised debt not to exceed 25% of the net assets of the Scheme. Load Structure: Entry Load: The Scheme
being a close ended scheme is not permitted to charge entry load; Exit Load: Nil. The balance proportionate unamortised initial issue expenses will be recovered from the Unit holder if the Unit holder exits the
scheme before the amortisation of initial issue expenses is completed. Terms of Issue: The Units are available at face value of Rs. 10/- per unit during the New Fund Offer Period. The Scheme will offer
redemption facility only during the Specified Redemption Period (i.e. the 15th day (or immediately succeeding Business Day if that day is not a Business Day) immediately after the end of each calendar quarter)
as mentioned in the Offer Document. The scheme will mature after 3 years and upon maturity, the Scheme will automatically be converted into an open-ended scheme. The AMC will calculate and publish the first
NAV of the scheme not later than 30 days from the closure of the New Fund Offer Period. Subsequently, the NAVs will be calculated and disclosed at the close of every Business Day.

Statutory Details: HDFC Mutual Fund has been set up as a trust sponsored by Housing Development Finance Corporation Limited and Standard Life Investments Limited (liability restricted to their contribution
of Rs. 1 lakh each to the corpus) with HDFC Trustee Company Limited as the Trustee (Trustee under the Indian Trusts Act, 1882) and with HDFC Asset Management Company Limited (“HDFC AMC”) as the
Investment Manager.

Disclaimer: CRISIL Fund Governance & Process Quality Rating (FGP) reflects CRISIL’s current opinion of HDFC AMC’s (“the AMC”) governance and process quality. The rating of CRISIL is not an opinion
of the HDFC AMC’s willingness or ability to make timely payments to the investor. The rating is also not an opinion on the stability of the NAVs of the funds under the management of this AMC, which could vary
with market developments. A CRISIL rating is not a recommendation to buy / sell/ hold the units of various schemes of the AMC. CRISIL ratings are based on the current information provided to CRISIL by the
AMC or obtained by CRISIL from sources it considers reliable.

CRISIL may revise, suspend or withdraw a rating as a result of new information or changes in circumstances or unavailability of information. CRISIL is not responsible for any errors in transmission and
especially states that it has no financial liability whatsoever to the subscribers / users / transmitters / distributors of this rating.

Fund House ratings involve a detailed assessment of all aspects of an AMC’s functioning: organisational structure and corporate governance; investment processes; risk management practices; operational
processes, selling and client servicing practices.
Thank You

You might also like