icici prudential equity savings fund series 1- presentation

• Long term wealth creation solution• A close-ended equity scheme that seeks to generate capital appreciation by investing in Equity securities

which are specified as eligible securities for Rajiv Gandhi Equity Savings Scheme (RGESS)* Investors should consult their financial advisers if in doubt about whether the product is suitable for them.

HIGH RISK(BROWN)

This product is suitable for investors who are seeking*:

(BLUE) investors understand that their principal will be at low risk

(YELLOW) investors understand that their principal will be at medium risk

(BROWN) investors understand that their principal will be at high risk

Note: Risk may be represented as:

Equity Savings Fund - Series1Equity Savings Fund - Series1NFO Period: January 20, 2014 to February 07, 2014

2

Contents

Prelude1

Capturing ROE Expansion4

Equity Investing - Framework2

Triggers – Short term and Long term3

ICICI Prudential Equity Savings Fund - Series 15

Prelude

3

• We launched ICICI Prudential Value Fund - Series 1 & 2 with an aim to capture mispriced stocks in a “polarized” market with focus on mid and small cap segment.

• Value opportunities were available in large cap as well as in mid and small cap segment.

• We ended up allocating more to large caps than initially anticipated (upto 40%).

• Our learning's

• Bleak macro overhang had caused even some very good quality, large cap company stocks to be rebutted by the market

• Such companies with outlook for improving Return on Equity (ROE) are expected to see better price appreciation

Equity Investing - Framework

4

Equity Investing - Framework

5

• MACRO INDICATORS • Invest when GDP growth is low • Invest when IIP is low • Invest when Fiscal Deficit is high

• VALUATIONS • Invest when markets are not over valued

• SENTIMENT • Invest when investors sentiment is bad

GDP: Gross Domestic Product; IIP: Index of Industrial Production

GDP: Gross Domestic Product; IIP: Index of Industrial Production 6

Macro Indicators

500

1500

2500

3500

4500

5500

6500

2.03.04.05.06.07.08.09.0

10.0

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

India GDP growthNifty

Invest when GDP growth is low

01000200030004000500060007000

(7.0)(6.0)(5.0)(4.0)(3.0)(2.0)(1.0)0.0

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Fiscal Deficit Nifty

Invest when Fiscal Deficit is high

0

1000

2000

3000

4000

5000

6000

7000

0.02.04.06.08.0

10.012.014.016.0

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

India IIP growth Nifty

Invest when IIP growth is low

7Source: Bloomberg

Valuations

• India's market cap to GDP indicates market valuations are below 10 year average.

0.00

0.20

0.40

0.60

0.80

1.00

1.20

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Market Cap to GDP Ratio Average

8Source: AMFI, RBI

Sentiment

• The above table shows that domestic investors sentiment has been weak over the past few years.

• Indian investors are massively under weight in equities as compared to other asset classes.

India’s Allocation to various asset classes

AUM in ` Bn Nov-13 Sep-07 Change

Equity Funds 1811.92 1578.63 14.8%

Deposits in ` Bn 29-Nov-13 28-Sep-07 Change

Aggregate Deposits ofScheduled Commercial

Banks74779.28 28737.35 160%

Triggers

9

Local Event - 2014 General Elections

Triggers - Short Term

10

6.8%

7.0%

5.6%

6.3%

7.6%

6.5%

7.7%

7.9%

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

-100.00

0.00

100.00

200.00

300.00

400.00

500.00

600.00

700.00

800.00

900.00

6 - 10monthsprior to

elections

5 monthsprior to

elections

Electionmonth

5 monthspost

elections

6 - 10months

postelections

11 - 15months

postelections

GDP growth rate USD mn

Source: UBS Securities, data considered for last 4 elections

GDP Growth tends to pick up Post Elections Foreign Institutional Inflows have been robust after elections

Better prepared to deal with taper now than in May

Triggers - Short Term

11Source: Bloomberg, CS Estimates CAD: Current Account Deficit, FCNR: Foreign Currency Non-resident

• CAD has shrunk to 1.2% of GDP in Q2FY14 and it is slated to slip to 2.5-3% of GDP for full FY14. • USD 34 bn by way of FCNR deposits and bank capital has improved funding prospects of CAD.

-25 -20 -15 -10 -5 0 5 10 15 20 25 30

ChinaBrazil

TurkeyIndonesiaMalaysiaS Africa

ArgentinaMexico

ThailandHungary

Hong KongPakistan

IsraelChile

Czech RepTaiwan

KoreaRussia

India

Change in last 5m of trade deficit over same period last year ($bn)

Reducing trade deficit /increasing trade surplus

Reducing trade surplus /increasing trade deficit

Triggers - Long Term

12

Inflationpoised to

ease

Interest ratecycle canreverse

Investmentcycle topick up

CorporateHealth toimprove

Improvement inGDP growth

StructuralReforms

13

Capturing ROE Expansion

14

Why is ROE Important?

• A healthy ROE is a sign of good corporate management and efficient use of capital

• High correlation between ROE and real GDP growth rate

• Increasing market share leads to high ROE

• Healthy margins; good financial health echoes in ROE

• ROE reflects in stock prices

• Effectively, increasing ROE means increase in shareholders’ wealth.

ROE, GDP growth and market performance

There is a strong correlation between Sensex ROE and India’s real GDP growth rate & Sensex movement

15Source: Edelweiss Securities Ltd

3

4

5

6

7

8

9

10

14.0

16.0

18.0

20.0

22.0

24.0

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

Sensex ROE (%, LHS) India real GDP growth(% yoy, RHS)

0

5000

10000

15000

20000

25000

10

12

14

16

18

20

22

24

FY97

FY98

FY99

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

Sensex ROE (%, LHS) S&P BSE Sensex

ROE and Interest Rates

16Source: Edelweiss Securities Ltd and Bloomberg

Broad market ROE is at multi year low, and is expected to increase as the rate cycle reverses.

4

5

6

7

8

9

10

11

0

5

10

15

20

25

Sensex ROE (%, LHS) 10 year Gsec

This illustration is to explain the concept of stock price movement basis the change in ROE of the Company. Actual results may vary significantly from the ones mentioned here. The stocks given above should not in any manner be construed as recommendation and ICICI Prudential Mutual Fund/AMC may or may not have any future position in these stocks. The performance of stocks would ultimately depend on various factors such as prevailing market conditions, global political scenario, exchange rate etc.

Source: Edelweiss Securities Ltd

Relationship between ROE and Stock Prices

17

Increasing ROE’s and relative stock price outperformance

25

27

29

31

33

35

37

100

150

200

250

300

350

400

Mar04 Mar05 Mar06 Mar07 Mar08 Mar09 Mar10 Mar11 Mar12 Mar13

RO

E (

%)

(Pri

ce, x

)

ITCPrice relative to NiftyROE

-30

-20

-10

0

10

20

30

40

020406080

100120140160180

RO

E (

%)

(Pri

ce, x

)

Dr. Reddy'sPrice ROE


Decreasing ROE’s and relative stock price underperformance


050

100150200250300350400

RO

E (%

)

(Re-

base

d to

100

, x) RIL

Price relative to Nifty ROE


15

20

25

30

35

40

45

100

150

200

250

300

350

RO

E (

%)

(Pri

ce, x

)

L&T

Price relative to Nifty

ROE

18Source: Motilal Oswal

Spotting the TREND

• More companies now have ROE lower than 10 years back – Opportunity to do bottom fishing

ROE band FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13

<15 29 32 26 19 23 35 24 26 34 38 Increase in numberof companies15-20 14 17 20 18 20 14 23 21 23 24

20-25 18 13 18 15 13 19 22 20 19 15 Lesser number ofcompanies in this

range25-30 18 15 8 14 15 10 14 9 5 8

30-35 6 6 9 12 6 6 3 8 9 6Same number ofcompanies, more

or less. Names neednot be same

35-40 3 4 5 6 8 8 2 6 2 3

40-45 5 2 4 6 1 1 5 3 2 4

>60 3 4 4 4 6 3 3 4 2 2

FY04 FY0762 66

Number of companies in CNX100 with FY13 ROE lower than

Number of companies as per ROE band for CNX100 constituents

19Source: Bloomberg

Opportunities for ROE Expansion

Identifying companies where there could be turnaround based on above parameters, leading to increase in Return on Equity (ROE)

RegulatoryChanges

EconomicLeverage

FavourableIndustry

Dynamics

CompanySpecificfactors

Example 1 : Regulatory Issues�


• Increase in global crude prices and depreciation of INR led to increase in under recoveries for the Oil marketing companies.

• Deregulation of diesel prices can reduce subsidy burden and improve earnings of PSU Oil and Gas companies.

MSCI Oil and Gas

ROE (%)

10121416182022242628

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Example 2 : Industry Dynamics


• The telecom market in India is a highly competitive market with a number of small regional players.

• Consolidation in the industry with smaller players reducing their presence may lead to improvement in margins for bigger players.

0

5

10

15

20

25

30

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

ROE (%)

MSCI Telecom

Example 3 : Economic Leverage�


• Any reversal in the interest rate cycle may lead to improvement in the earnings for industrial sector.

• Recovery in the global markets may lead to increase in demand for commodities which can improve earnings in this sector.

Domestic Macro

Global Macro

MSCI Industrials

1012141618202224262830

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

ROE (%)

MSCI Industries

ROE (%)

MSCI Metals

5

10

15

20

25

30

35

40

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Example 4 : Company Specific Factors


• The company has allocated capital to businesses like telecom, retail, etc. which have not generated enough ROE in the past few years.

• Optimal allocation of capital may be beneficial for the company in the long term.

Reliance Industries Ltd

10121416182022242628

0

50

100

150

200

250

300

350

400


RO

E (%

)

(Re-

bas

ed t

o 1

00, x

)

Price relative to Nifty ROE (%, RHS)

This illustration is to explain company specific factors that can impact Return on equity. It is necessary to note that the list given above is not exhaustive and there may be other factors impacting ROE. Past performance may or may not be sustained in future. The stock mentioned above does not constitute any recommendation and ICICI Prudential Mutual Fund/AMC may or may not have any future position in this stock.

24

Factors for Improvement in ROE

• Stable political environment

• Better resilience to taper and related news

• Good monsoon supporting agricultural output

• Anchored inflationary expectation

• India’s twin deficits improving

• Stable currency

• Global recovery

MACRO FACTORS

• Deregulation of diesel prices

• Dividend pay outs by PSU’s

• Industry-friendly regulation in telecom e.g. spectrum price, license fees etc.

• Continuation of SEB reforms - tariff hikes

REGULATORY FACTORS

SEB: State Electricity Boards

25

Factors for Improvement in ROE

• Increase in market share

• Increase in profits due to operating leverage

• Improved margins due to better pricing power or decreasing costs.

• Optimal capital structure

• Cheaper cost of leverage

COMPANY SPECIFIC FACTORS

• Improved competitive dynamics in the industry

INDUSTRY DYNAMICS

26

The Product

Equity SavingsFund - Series 1Equity SavingsFund - Series 1

About the Fund

27

# The number of stocks provided is to explain the investment philosophy and the actual number may go up or down depending on then prevailing market conditions at the time of investment.

• A 3 year close ended fund investing in focused 20-25 stocks#

• Aims to provide long-term capital appreciation by:

• Identifying companies which are likely to see expansion in ROE over next 3 years period.

• Identifying companies which are likely to gain from improving economy, a favourable regulatory change, change in industry dynamics or company specific factors.

• Being adequately diversified, while not restricting itself to benchmark sector weights.

Investment Approach

28

High Conviction Portfolio (20-25 stocks)

Data Integrity ScreensCompany Characteristics

• Strong competitive edge • Sustainable market position

Investable Universe(Constituents of CNX 100, BSE 100, Maharatna, Navratna, Miniratna)

Valuation & Fundamental verificationValuation Parameter

• Increasing trend in ROE • Improving B/S structureRec

urrin

g pr

oces

s

Daily Risk control

• Proven business model • Financial Strength • Business Durability

Scheme Features

29

Type of scheme A Close ended RGESS qualifying equity scheme

Investment Objective The primary investment objective of the Scheme is to seek to generate capital appreciation, from a portfolio that is constituted of equity securities which are specified as eligible securities for Rajiv Gandhi Equity Savings Scheme (RGESS). The Scheme may also invest a certain portion of its corpus in money market instruments from time to time.

There can be no assurance that the investment objective of the Scheme will be realized.

Options Direct Plan – Growth and Dividend Option;Regular Plan – Growth and Dividend Option

Minimum Application Amount Rs 5,000 (plus in multiple of Rs.10)

Entry & Exit Load Not Applicable

Benchmark Index CNX 100 Index

Fund Manager Manish Gunwani & Venkatesh Sanjeevi

30

• Long term wealth creation solution• A close-ended diversified equity fund that aims to provide capital appreciation by investing in a well

diversified portfolio of stocks through fundamental analysis.* Investors should consult their financial advisers if in doubt about whether the product is suitable for them.

HIGH RISK(BROWN)

This product is suitable for investors who are seeking*:

(BLUE) investors understand that their principal will be at low risk

(YELLOW) investors understand that their principal will be at medium risk

(BROWN) investors understand that their principal will be at high risk

Note: Risk may be represented as:

Product Labeling for ICICI Prudential Value Fund – Series 1 & 2

Rajiv Gandhi Equity Savings Scheme or RGESS is a new equity tax advantage savings scheme for equity investors in India, with the stated objective of "encouraging the savings of the small investors in the domestic capital markets." The Scheme qualifies under Rajiv Gandhi Equity Savings Scheme (RGESS), 2012.

Note: Please refer to the RGESS, 2012 notified by the Central Government on November 23, 2012 and SEBI Circular number CIR/ MRD/DP/32/2012 dated December 06, 2012 for additional details.

What is Rajiv Gandhi Equity Savings Scheme?

31

All figures and other data given in this document are as on 31st December 2013 unless stated otherwise. The same may or may not be relevant at a future date. The AMC takes no responsibility of updating any data/information in this material from time to time. The information shall not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of ICICI Prudential Asset Management Company Limited.

Prospective investors are advised to consult their own legal, tax and financial advisors to determine possible tax, legal and other financial implication or consequence of subscribing to the units of ICICI Prudential Mutual Fund.

Disclaimer: In the preparation of the material contained in this document, ICICI Prudential Asset Management Company Ltd. (the AMC) has used information that is publicly available, including information developed in-house. Some of the material used in the document may have been obtained from members/persons other than the AMC and/or its affiliates and which may have been made available to the AMC and/or to its affiliates. Information gathered and material used in this document is believed to be from reliable sources. The AMC however does not warrant the accuracy, reasonableness and / or completeness of any information. We have included statements / opinions / recommendations in this document, which contain words, or phrases such as “will”, “expect”, “should”, “believe” and similar expressions or variations of such expressions, that are “forward looking statements”. Actual results may differ materially from those suggested by the forward looking statements due to risk or uncertainties associated with our expectations with respect to, but not limited to, exposure to market risks, general economic and political conditions in India and other countries globally, which have an impact on our services and / or investments, the monetary and interest policies of India, inflation, deflation, unanticipated turbulence in interest rates, foreign exchange rates, equity prices or other rates or prices etc.

ICICI Prudential Asset Management Company Limited (including its affiliates), the Mutual Fund, The Trust and any of its officers, directors, personnel and employees, shall not liable for any loss, damage of any nature, including but not limited to direct, indirect, punitive, special, exemplary, consequential, as also any loss of profit in any way arising from the use of this material in any manner.

Further, the information contained herein should not be construed as forecast or promise. The recipient alone shall be fully responsible/are liable for any decision taken on this material.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

Disclaimers

icici prudential equity savings fund series 1- presentation

Business

roe roe

equity roe

gdp ratioaverage1

real gdp growth rate

india gdp growth nifty0

healthy roe

roe expansion13

roe important