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Motilal Oswal MOSt Focused 25 Fund: Reaffirming our conviction
July 4, 2014

This note is a detailed analysis on Motilal Oswal MOSt Focused 25 Fund over a period of 13 Months.


Author : iFAST Research



 Fund Managers on Short-Term Funds

It has been more than a year since Motilal Oswal Mutual Fund launched their first actively managed fund: Motilal Oswal MOSt Focused 25 Fund. At that time, our views on the fund were on these lines: “We are of the view that this fund will be a good bet in this volatile market considering the fact that a concentrated portfolio with a buy-and-hold strategy will definitely create wealth for investors in the long term. The expertise of the fund management team in running a successful PMS desk along with their investment strategy of looking at EMCs gives us all the more confidence in recommending this fund to our investors. Hence, our conviction stems from this being a fund house belonging to a stable having a disciplined style of investment that has evolved over a period of 25 years. It will only help our investors experience for themselves the advantages of holding onto their investments for the long term without fearing short-term blips.”. A year later, we continue to be positive on this fund and would recommend investors to repose their faith in the same.

The intention of this note is to get an insight into the portfolio that has been created over a period of 1 year and to understand the conviction behind the cherry picked stocks included in the fund. For this purpose, we have done a detailed analysis of the fund which was then followed by an hour long conversation with Taher Badshah, a veteran in the fund management space, who has been managing this fund since inception.

Investment Strategy

Motilal Oswal MOSt Focused 25 Fund’s strategy is to invest into companies with strong competitive position, good industry prospects and good business prospects along with quality management that may help them to achieve good growth over medium to long term. As per the mandate of the fund, it is supposed to have a compact portfolio with around 25 stocks. A glimpse through the data points show that the fund which started with 18 stocks in the portfolio increased it to 21 by January 2014 after which the stock count was reduced and as of May 2014 stands at 20. This is a clear indication that the fund has been religiously following its mandate of being a highly concentrated portfolio.

As of today, the fund can be easily categorized as a large cap fund. This is because during the initial month (May 2013), the fund had around 79% of the surplus concentrated into large caps in addition to which a small proportion of the corpus was also allocated into midcaps. During the same time period, the fund was sitting on cash to the tune of 15%. However, over the course of 1 year, the fund has moved into a position whereby more than 90% of the surplus is invested into large cap stocks while there is nil exposure into midcaps. During the course of our discussion, Badshah made it clear that the fund had undergone a change in the fundamental attributes as a result of which he had to exit from the midcap stocks like Bata, Page Industries and Sundaram Finance which were included to generate extra alpha. Elaborating on this point further, Badshah added that the fund which initially had the flexibility to invest into stocks whose market capitalization was above INR 1400 crore was later on forced to raise the market capitalization limit to  INR 6500 crore on account of regulatory requirements.

The basic philosophy of all the funds from Motilal Oswal Mutual Fund has always been “Buy Right Sit Tight” and this fund is definitely not an exception to this rule. This can be clearly seen from the fact that as of May 2014, around 60% of the stocks have been a part of the portfolio during the 13 months of analysis. If we go deeper into the portfolios, then it can be seen that stocks like TCS, HDFC Bank, ITC, Container Corporation of India, Tech Mahindra and Idea Cellular have been among the most preferred picks with an average allocation of 8.20%, 7.73%, 6.39%, 6.08%, 5.77% and 5.67% respectively during the entire period of analysis. Although Badshah is confident about the long term prospects of these companies, the selection of the same were done on the basis of their earnings potential over the next 2 years.

Badshah’s views on some of his favourite picks are on the following lines.

TCS

Tata Consultancy Services Limited (TCS) was set up in 1968, since then it pioneered IT services exports and is India's largest exporter. It provides a comprehensive range of IT services to industries such as banking and financial services, insurance, manufacturing, telecommunications, retail, and transportation. TCS is well placed to gain market share and continues to enjoy strategic vendor status with most of its top customers. Over the last five years, TCS has almost doubled its revenue contribution from the top 10 as well as non top 10 clients. Its aggressive deal-making capability helps it in achieving industry- leading growth and its focus on high employee utilization and on improving operational efficiencies helps it in being amongst the highly profitable Indian IT companies. With the recovery of the US economy, client spending on discretionary IT services is expected to increase.

Container Corporation of India:
Container Corporation of India Limited (CCRI) is engaged in providing inland transport by rail for containers, ports, air cargo complexes and establishing cold-chain. Its business includes three distinct activities, that of a carrier, a terminal operator, and a warehouse operator. CCRI is a debt-free company (net cash of INR 29 billion as at March 2013) and enjoys steady Operating Cash Flow (OCF) and Free Cash Flow (FCF).

ITC

ITC Limited is engaged in FMCG, Hotels, Paperboards and Specialty Papers, Packaging and Agri-Business. The FMCG segment includes Cigarettes, which consists of cigarettes, cigars, smoking mixtures, branded packaged foods, garments and personal care products.ITC has an 84 percent value market share in Cigarette business implying virtual monopoly in this segment. The cigarette business is cash cow and generates huge cash for the company. Management has intentions to become an important player in FMCG business especially in processed food and also want to enter into Beverages and Diary Segment. We believe that India has good scope in Food process and Diary business but it requires massive investment in back end for sourcing and storage, ITC is one of the players who has sufficient cash generation from existing business and can continuously invest in this business.

Idea Cellular

Idea Cellular (Idea) is an Aditya Birla Group Company and operates in two business segments: Mobility Services and Long Distance. Amongst the large listed players Idea is favorably placed, given its sole focus on domestic market and quality management. Furthermore, Idea is currently a small player in key metro markets like Mumbai/ Delhi - it is well placed to leverage on its established brand to make inroads into these markets, which is likely to allow it to benefit disproportionately to other industry players. Idea also enjoys low debt/equity ratio which makes the stock further attractive as an investment option.
The key rationale for Idea is the positive industry outlook. Telecom industry after having gone through fierce competition has started to witness slow consolidation. While the telecom industry in India is experiencing the closure and downsizing of smaller and regional operators, bigger operators are likely to get benefit of this in their market shares. Idea is certainly a beneficiary of this change and consolidation.

Badshah also confided to us that the fund had taken a huge hit on account of its holding in 2 stocks that is MCX and Titan. During the month of May 2013, MCX had a 3.64% allocation in the portfolio which was reduced to nil by October 2013. According to him, “We suffered a fairly large blow in that, although we take comfort in the fact that MCX even today does not have any corporate governance issues by itself, the issues were more to do with the promoter group company that is Financial Technologies. Sadly for us, MCX suffered the collateral damage as a result of the group related troubles. From the inception, MCX came into the portfolio mainly because it had the QGL characteristic that we desired. Hence, it is the only company in a business which is relatively new and evolving and has a great potential going forward. As an exchange, it had significantly high level of profitability with margins in the vicinity of 60% to 65% and clear pricing power and the ability to drive volumes. We take solace in the fact that, in terms of identification of idea in terms of our framework it was not misplaced. Secondly, we do not have any corporate governance issues directly linked to MCX as a company and we had pursued that company because it was independently managed with 75% of the investors being institutional private equity and the promoter holding was only 25%”.

Now, coming to the other stock, Titan, Badshah held the same only for 1 month (May 2013) and the allocation was to the tune of 3.85%. The fund manager had to make a quick exit from this stock on account of the regulatory headwinds which started in the month of June. During this time, the INR had depreciated on account of gold imports which in turn led the government to put restrictions on gold business. The biggest hit was the government’s decision to clamp down on the gold lease scheme of Titan. Although Titan’s 2 big attractions were its brand and franchisee, Badshah picked the stock on account of its strategy of running on a negative working capital. Due to these measures, the working capital scenario became positive instead of negative and hence in a matter of 1.5 months, Titan was moved out from the portfolio.

By quoting the example of MCX and Titan, Badshah made it very clear that that if there is a change in the management quality or business, then they will not be averse to selling out the positions. This will be irrespective of where they trade at that point in time in terms of valuations or absolute levels of stock prices.

Badshah then touched upon Idea Cellular which initially had a 5.91% allocation in the portfolio which was increased to 7.47% in September 2013 after which there was a decline almost to the tune of 3.31% by May 2014. Although this stock did well during the initial months, later on, the issues surrounding the 2G/3G auctions played spoilsport. Although the allocation to this stock has reduced, Badshah continues to place his confidence on its long term potential and hence the stock is still a part of the portfolio.

Coming to the sectoral allocation, banks and software have been among the preferred sectors of the fund management team. The allocation to banking stocks at 11.78% in May 2013 was increased to 15.33% by May 2014. Badshah continues to be positive on this sector and hence we are of the view that this sector will continue to get a good allocation in the fund in the months to come as well. As far as the sector is concerned, he had not been positive on any public sector banks and has been picking up only private sector banks and NBFCs. Hence, he had only handpicked a few stocks like HDFC Bank, Kotak Mahindra Bank and Sundaram Finance in the portfolio. Coming to the Software sector, the fund initially started with a 5.53% (May 2013) allocation into the same which was gradually increased to 20.12% in January 2014 and now as on May 2014 stands at 12.41%. The biggest bet in this space was TCS whose average allocation has been to the tune of 8.2% over the course of 13 months. Badshah’s other favourite sector was Auto which during the period of our analysis had an average allocation of 11.95%.

Performance
If an investor had parked a surplus of INR 10,000 into the fund and its benchmark, the CNX Nifty on May 13, 2013, then the surplus accumulated would have been 11,521.10 and 12,089.31 respectively.

 

FMI
Our Take

When Motilal Oswal had come out with their NFO- Motilal Oswal MOSt Focused 25 Fund in April 2013, we were in a scenario wherein there was one or the other bad news hitting the market every other day. A year later, the market is filled with optimism with the arrival of a stable government in New Delhi. Inspite of the fact that although there are still negative events haunting the markets, the Modi wave have hit the investors so hard that they think nothing can go wrong. We would advice Motilal Oswal MOSt Focused 25 Fund to those investors who want to create wealth over a long time period without being worried about the volatility that they may face in their fund. A fund management team with a strong conviction and who is willing to openly talk about the ups and downs of their fund along with an investment philosophy based on buy and hold strategy are the biggest advantages of having this fund in an investor’s portfolio.

 

Details of Motilal Oswal MOSt Focused 25 Fund


Investment Objective


The investment objective of the Scheme is to achieve long term capital appreciation by investing in upto 25 companies with long term sustainable competitive advantage and growth potential.

Inception Date

May 13, 2013

Benchmark Index

CNX Nifty Index

Fund Manager

Taher Badshah

AUM (28 February 2014)

Rs.  142.27 Crore

Exit Load within 12 months

Nil

 

 


Disclaimer: iFAST and/or its content and research team’s licensed representatives may own or have positions in the mutual funds of any of the Asset Management Company mentioned or referred to in the article, and may from time to time add or dispose of, or be materially interested in any such. This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any mutual fund. No investment decision should be taken without first viewing a mutual fund's scheme information document including statement of additional information. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Investors should seek for professional investment, tax, and legal advice before making an investment or any other decision. Past performance and any forecast is not necessarily indicative of the future or likely performance of the mutual fund. The value of mutual funds and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. Please read our disclaimer on the website.Please read our disclaimer in the website.



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