Cover Portfolio Construction in four modules:

Find an Investment Philosophy

Put a process around it

Define how the process works▪ How do you select a stock▪ How do you weight your convictions

Risks▪ Concentration Risk ▪ Diversification Risks

And the one that you learn through experience▪ You will be wrong

– Acknowledgement and Correction– Static and Failure

STRUCTURE

2

DEFINE YOUR STYLE

▪ Value

▪ Growth

▪ Momentum

▪ Income

▪ Passive

3

DEFINE YOUR PHILOSOPHY

It is your statement on what your definition of your portfolio will look like

▪ Its has to be unique – Value/ Growth style is inbuilt but with what measure

▪ Try and define as to which part of the market you will underperform OR are relevant in

A Philosophy is a statement

▪ If you invest in a certain way you know the out come, borrowed styles don’t have outcome which have synergy

You cannot borrow conviction

4

OUR INVESTMENT PHILOSOPHY…

Concentrate on identifying businesses early into a cycle.

The underlying companies in the portfolio would demonstrate leadership skills and have financial

discipline. The endeavor would be to look for companies in industries that are consolidating.

5

STORY BEHIND OLD BRIDGE CAPITAL

In ancient Rome, when a bridge was constructed, the engineers of the bridge had to stand underneath it

when the scaffolding came off. With their lives at risk, the engineers left no room for error. To design for

safety and longevity, the engineers ensured that the load carrying capacity of the bridge was much higher

than the actual or expected loads. They thus built a higher margin of safety into their construction.

Our portfolio construction echoes a similar principle. Our priorities are to buy enduring business models

with emphasis on limiting capital losses, which is why we give emphasis on buying at the right price and

value. By doing this, a margin of safety is built in to protect our portfolios even if our estimates are on the

wrong side.

6

Selection of Companies

What is the process ▪ Where did the idea come from ▪ How repetitive can the process be ▪ How much deviation can you explain in the process

Value chain of event

Signal companies that don’t make the cut

Always assess companies that are outliers and are sitting in the portfolio

INVESTMENT PROCCESS

7

WHAT WE LOOK FOR

Monopolistic/Consolidators of the Industry

▪ Preference for consolidating businesses▪ Companies gaining market share with no

change in capital employed▪ Companies with lowest cost in their industry▪ Leaders at the end of consolidating cycle

usually end up with higher market share and pricing power

Capital efficient business

▪ Companies that migrate upwards from a low RoE

▪ Look for capital employed to be controlled▪ Cash flow positive nature of the business with

low gearing

Low financial leverage

▪ Companies with negligible debt▪ Businesses leveraging into an economic up-

cycle & deleveraging at the top of the cycle

Low valuations

▪ “Out of favour” businesses where current value of the stock reflects its depressed earnings

▪ EV / Sales▪ Market Cap / Cash Profit (Flows)

8

Source: Capital Returns

CAPITAL CYCLE & INVESTOR BEHAVIOUR

9

Companies rarely make money in Isolation:

▪ In year 2000, it was IT

▪ In year 2007, it was Capex and Materials

▪ In year 2015, it was Pharma

▪ In year 2019, Financials were at a weightage of ~40% of the Indices

It is important to capture these cycles

Anticipate v/s participate

INDUSTRY CAPITAL CYCLES

10

Selection of Companies

▪ How active is your portfolio▪ What is the measure of outperformance

INVESTMENT PROCCESS

11

INDEX COMPONENTS 2008

12

Stock Industry Weightage Stock Industry Weightage

HINDALCO Aluminium 0.7% MARUTI Automobile - 4 wheelers 0.8%

NATIONALUM Aluminium 1.0% M&M Automobile - 4 wheelers 0.6%

TATAMOTORS Automobile - 4 wheelers 0.9% BAJAJAUTO Automobiles - 2 & 3 wheelers 0.8%

ICICIBANK Banks 4.3% HEROHONDA Automobiles - 2 & 3 wheelers 0.5%

PNB Banks 0.7% HDFCBANK Banks 1.9%

SBIN Banks 4.6% ITC Cigarettes 2.5%

ACC Cement & Cement Products 0.5% HCLTECH Computers - Software 0.5%

GRASIM Cement & Cement Products 0.9% INFOSYSTCH Computers - Software 2.9%

AMBUJACEM Cement & Cement Products 0.6% SATYAMCOMP Computers - Software 0.9%

UNITECH Construction 2.1% TCS Computers - Software 2.9%

ABB Electrical Equipment 0.8% WIPRO Computers - Software 2.1%

BHEL Electrical Equipment 3.4% HINDUNILVR Diversified 1.5%

SIEMENS Electrical Equipment 1.0% HDFC Finance - Housing 2.7%

SUZLON Electrical Equipment 1.6% ZEEL Media & Entertainment 0.4%

LT Engineering 3.6% CIPLA Pharmaceuticals 0.5%

STER Metals 1.8% DRREDDY Pharmaceuticals 0.3%

CAIRN Oil Exploration 1.2% GLAXO Pharmaceuticals 0.2%

ONGC Oil Exploration 7.1% RANBAXY Pharmaceuticals 0.4%

GAIL Gas 1.2% SUNPHARMA Pharmaceuticals 0.8%

BHARTIARTL Telecommunication - Services 5.5%

IDEA Telecommunication - Services 1.1%

RCOM Telecommunication - Services 4.2%

VSNL Telecommunication - Services 0.5%

NTPC Power 5.5%

REL Power 1.6%

TATAPOWER Power 0.9%

BPCL Refineries 0.4%

SAIL Steel & Steel Products 3.0%

TATASTEEL Steel & Steel Products 1.8%

62.3% 23.2%

RPL Refineries 2.4%

RELIANCE Refineries 12.2%

14.6%

Consensus Everything Else

INDEX COMPONENTS 2020

13

Stock Industry Weightage Stock Industry Weightage

AXIS BANK Banks 2.2% HINDALCO Aluminium 0.5%

HDFC BANK Banks 10.3% VEDANTA Aluminium 0.4%

ICICI BANK Banks 5.4% GRASIM Cement 0.6%

INDUSIND BANK Banks 0.6% SHREE CEMENT Cement 0.7%

KOTAK BANK Banks 4.1% ULTRATECH Cement 1.1%

SBI Banks 1.6% HCL TECH Computers - Software 1.5%

ITC Cigarettes 4.3% INFOSYS Computers - Software 6.4%

EICHER MOTORS Commercial Vehicles 0.6% TCS Computers - Software 5.2%

TITAN Gems Jewellery & Watches 0.9% TECH MAHINDRA Computers - Software 0.8%

BRITANNIA Consumer- Food 1.0% WIPRO Computers - Software 0.8%

NESTLE INDIA Consumer- Food 1.6% L&T Engineering-Construction 2.9%

HUL Consumer- Diversified 3.7% GAIL (INDIA) Gas Transmission/Marketing 0.4%

HDFC LTD. Finance - Housing 7.2% COAL INDIA Industrial Minerals 0.7%

ASIAN PAINTS Paints 1.9% ONGC Oil Exploration 0.8%

M&M Automobile - 4 wheelers 1.1% UPL Pesticides & Agro Chemicals 0.6%

MARUTI SUZUKI Automobile - 4 wheelers 1.9% CIPLA Pharmaceuticals 0.8%

TATA MOTORS Automobile - 4 wheelers 0.4% DR. REDDY'S Pharmaceuticals 1.2%

BHARTI AIRTEL Telecommunication - Services 3.1% SUN PHARMA Pharmaceuticals 1.3%

ZEE ENTERTAINMENT Media & Entertainment 0.4% ADANI PORTS Port 0.6%

BAJAJ FINSERV Insurance 0.7% NTPC Power 1.2%

BAJAJ AUTO Automobiles - 2 & 3 wheelers 0.9% POWER GRID CORP. Power- Transmission 1.0%

HERO MOTOCORP Automobiles - 2 & 3 wheelers 0.8% BPCL Refineries/Marketing 0.7%

BAJAJ FINANCE NBFC 1.3% IOC Refineries/Marketing 0.5%

JSW STEEL Steel 0.5%

TATA STEEL Steel 0.6%

BHARTI INFRATEL Telecom Equipment 0.5%

55.8% 32.3%

RELIANCE INDUSTRIES Refineries/Marketing 11.9%

Consensus Everything Else??

INDEX SECTOR WEIGHTS OVER YEARS

14Source - Bloomberg

S e ctor Curre nt Ave rag e 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Automobiles 6% 7% 4% 2% 4% 5% 9% 6% 8% 7% 3% 4% 5% 8% 9% 8% 9% 9% 10% 11% 10% 6%

Banks 29% 17% 9% 8% 8% 10% 11% 10% 14% 15% 14% 14% 18% 20% 19% 20% 21% 23% 23% 26% 27% 29%

Cement 2% 3% 2% 2% 2% 2% 3% 3% 4% 4% 3% 3% 2% 2% 2% 3% 3% 3% 3% 3% 1% 2%

Cons truction 4% 4% 2% 2% 1% 1% 0% 1% 4% 5% 6% 4% 7% 6% 5% 5% 5% 5% 4% 5% 5% 4%

Cons umer goods 10% 12% 22% 25% 23% 19% 11% 7% 11% 7% 6% 9% 6% 7% 10% 13% 12% 10% 10% 10% 9% 10%

Engineering 2% 1% 1% 1% 2% 3% 2% 3% 4% 5% 4% 4% 2% 2% 1% 1% 1% 0%

Finance 11% 5% 1% 2% 2% 3% 3% 2% 4% 4% 5% 5% 6% 7% 7% 8% 7% 8% 6% 8% 10% 10%

IT S ervices 14% 16% 25% 20% 21% 21% 13% 21% 17% 18% 10% 11% 13% 14% 14% 15% 15% 17% 18% 13% 12% 14%

Media 0% 1% 1% 2% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1%

Metals 3% 5% 3% 3% 3% 3% 8% 8% 6% 4% 7% 4% 9% 8% 7% 4% 5% 4% 3% 3% 4% 4%

Oil & Gas 12% 16% 19% 23% 20% 19% 21% 26% 15% 15% 19% 22% 16% 15% 13% 12% 12% 8% 9% 11% 12% 13%

Others 2% 1% 0% 0% 0% 1% 1% 0% 0% 0% 1% 2%

Pharmaceuticals 2% 5% 8% 7% 9% 9% 7% 5% 5% 4% 3% 3% 3% 4% 4% 5% 6% 7% 7% 6% 4% 2%

Real Es tate 1% 4% 1% 1% 1% 0% 0% 0%

S hipping

Telecoms 2% 4% 4% 2% 3% 3% 7% 5% 5% 9% 8% 8% 4% 3% 3% 2% 2% 3% 2% 2% 2% 2%

Textiles

Utilities 2% 3% 1% 1% 1% 2% 3% 2% 2% 3% 6% 6% 5% 4% 4% 3% 3% 3% 3% 3% 2% 2%

Nifty Inde x 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

RISKS

15

Concentration Risk

▪ Few stocks per portfolio– Even this can be diversified

Why the need to concentrate returns

Diversification Risk

▪ Large Portfolios▪ Beat the benchmarks with stocks outside the indices

Both are correlations to the measure of performance

Annexures

BSE 500 EX FINANCIALS

Balance sheet stabilizing, Debt equity moderating RoEs are stickyCapital employed growth was in single digits

Year Net Sales Net Profit Total Assets Total DebtTotal Debt/

EquityEBIDTA Margin Asset Turnover ROE 10 Yr. Gsec Yield Spread

1999 3,475 236 4,612 1,533 0.76 18.4% 0.75 11.7% 11.7%

2000 4,270 262 5,029 1,572 0.69 17.1% 0.85 11.6% 10.8% 0.8%

2001 5,186 334 5,549 1,680 0.67 16.5% 0.93 13.2% 10.2% 3.1%

2002 5,697 354 6,799 2,110 0.75 17.1% 0.84 12.5% 7.4% 5.1%

2003 6,636 520 7,709 2,238 0.71 18.6% 0.86 16.4% 6.2% 10.3%

2004 7,606 735 8,885 2,397 0.63 20.6% 0.86 19.3% 5.2% 14.1%

2005 9,607 1,024 10,629 2,657 0.57 20.5% 0.90 22.0% 6.7% 15.3%

2006 12,031 1,193 13,295 3,309 0.56 18.9% 0.90 20.2% 7.5% 12.7%

2007 15,653 1,707 17,526 4,701 0.63 20.1% 0.89 22.9% 8.0% 14.9%

2008 20,440 2,263 24,328 6,758 0.65 19.8% 0.84 21.9% 8.0% 13.9%

2009 24,854 1,862 30,801 9,347 0.79 16.4% 0.81 15.7% 7.0% 8.7%

2010 25,816 2,509 35,531 9,777 0.69 19.6% 0.73 17.8% 7.8% 9.9%

2011 31,692 2,928 42,744 11,891 0.70 17.8% 0.74 17.3% 8.0% 9.3%

2012 39,631 2,833 49,151 14,934 0.79 15.9% 0.81 15.0% 8.5% 6.5%

2013 44,045 2,814 53,461 17,354 0.85 15.1% 0.82 13.7% 8.0% 5.8%

2014 49,322 3,265 62,406 20,794 0.89 15.7% 0.79 13.9% 8.8% 5.1%

2015 50,592 2,990 67,125 22,202 0.91 16.1% 0.75 12.2% 7.7% 4.5%

2016 48,750 3,295 71,619 22,735 0.83 17.8% 0.68 12.0% 7.5% 4.5%

2017 54,328 4,020 77,925 24,207 0.82 17.8% 0.70 13.6% 6.7% 6.9%

2018 59,746 4,386 85,905 25,381 0.77 14.8% 0.70 13.3% 7.4% 5.9%

2019 70,222 4,295 95,361 29,540 0.83 14.5% 0.74 12.0% 7.4% 4.7%

Figures in INR bn.

Source: ACE Equity

(1)(2)(3)

(1), (2), (3) all values at their extreme gave corporate India space to expand Balance Sheet

(1)

(2)

(3)

8

Capacity utilization continues to rise

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18

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