Sundaram Alternative Opportunities Fund – Atlas Sr II

The primary objective of the Fund will be to carry on the activity of a Category III AIF, as permissible under the AIF Regulations, to generate absolute total returns by adopting a bottom-up investment process. The portfolio will be a multi cap portfolio with investments in large, small and mid-cap stocks, as well as units of other Category III AIFs, with the objective of seeking long term capital appreciation. The Fund would have a concentrated target portfolio of about 20 (twenty) stocks which would typically range between 15 (fifteen) to 25 (twenty-five) stocks.

The number of Portfolio Entities in the portfolio is indicative and would be determined by the Investment Manager based on the opportunities, available funds for investment and market conditions. The Fund’s investments will focus predominantly on structural growth stories and a portion of allocation to cyclical turnaround stories to achieve the objective of the Fund. The Fund will invest across market caps and will be sector agnostic

• Concentrated portfolio with meaningful allocation to high conviction ideas
• Structural high growth stories tend to get underappreciated in short term mostly
• Low liquidity in mid & small cap space do offer large value opportunities during market down cycles
• Cyclical businesses provide excellent contra opportunities during weak industrial cycles

• With a track-record of over a decade, our Voyager portfolio has delivered an impressive alpha of ~6% since its inception.
• The portfolio has grown ~7.0x vs ~3.7x in the benchmark. Rs. One crore invested in 2011 has made Rs. 3.3 Cr more than the benchmark in this time.
• We are certain that the reasons for the consistent out-performance has been 1. Disciplined investment in to compounding and 2. Meaningful investment into mid and small cap opportunities in cyclical sectors.

The down-capture ratio of <100 is indicative of the overall out performance of the portfolio vs. the benchmark in down-market conditions

• The fund was launched in the month of May 2022
• The funds collected have been deployed into stocks of various sectors to the extent of 95.7% as at 28th of February 2023.
• The top sectors where the investment are made are Banking, chemicals & petrochemicals, Finance sector.

• Private Banks are preferred over public sector banks as they depict higher growth.
• High ROA, above 1.5% to handle down cycles
• ROE > 15%, capital to grow consistently
• Leverage Technology
• Private banks are spending ~0.25% of assets on technology
• Banking services and loan sourcing > 80% digital
• Branch addition to capture market share from NBFCs
• Lower ticket size to address larger opportunity

• Online sector has high growth potential
• Online companies entered capital markets with a bang, promise to deliver stupendous growth and at unprecedented valuations.
• Only a few companies have moat to grow at 30-40% and be profitable in next 3–5 years.
• Online beauty, fashion, food, logistics, insurance have potential to grow ahead of traditional business.
• Such high growth companies are now available at reasonable valuations vs. traditional companies.

• Formalization of economy
• Open architect databases – Aadhaar, E-Way bill, GST etc
• UPI revolution in India – Rs.8 trillion by value
• There are 30cr monthly UPI users in India (2021)
• 50% + customers do online search and buy offline
• 50% + customers do online search and buy offline

• Consumer discretionary spending is gaining share in total consumption, as per-capita GDP has crossed the important US$2,000 mark.
• Growth drivers in place
  • Urban consumption will see a sharp rebound in next 2 years | Affordability at a decade high – Increasing salary falling EMI
  • The Naukri Job Speak report – February sees 9% sequential growth in hiring trends amidst uncertainties
  • Target addressable market should be substantially higher
• Prefer companies with the best control on working capital, primarily inventory days
• Companies with best pricing power – better margins / working capital / inflation hedge

• After COVID-19, Footfalls across organized retail to theaters to shopping malls to restaurants have witnessed a sharp revival.
• Covid-19 induced changes in consumer behavior are likely to reverse like OTT vs. Cinemas, Online ordering Vs Dine out, WFH vs. Office
• Jewelry, Paints, Retail, QSR, multiplex have all accelerated store expansion in COVID-19 period – beneficiaries of unbranded to branded.
• The wealth effect is likely to drive HH to shift focus on discretionary spending like recreation, entertainment, transportation, healthcare, and luxury.
• Potential winners: D-Mart, Trent, Titan, PVR, Rainbow, Sapphire, Westlife

• Different categories of consumption see accelerated growth at different point of income levels in an economy
• Economies crossing $2500 p.a. per capita income see a shift in consumption pattern from staples to discretionary
• When China crossed $2500 per capita in 2008, it saw a significant boost to discretionary spending for a long period.
• With India at $2500 mark, some segments like organized retail, branded apparels, QSR, health and travel are poised to see robust growth.
• It is evident from the table that the growth potential is multifold in the majority of discretionary segments compared to staples
• Given the young population and high percentage of data connectivity in India, online penetration also looks a structural opportunity
• Current penetration levels in the majority of these segments are substantially lower

Bucket 1: Structural Equities – 20% growth models

In a growing country like India, every stage of economic development, provides investment opportunities. Identifying such opportunities, taking a deep dive into these businesses, the management, and execution capabilities helps us create value over the long term. In this process, it is crucial to maintain discipline and follow pre-defined quantitative and qualitative filters to isolate quality businesses out of the large universe to create long term value.

Quality of Business

• Scalability – How big is the opportunity?
• Self Sustaining business models – 3Q Financial framework
• Strong differentiating factor in business
  • What is the key competitive advantage to sustain the growth over the long term?
  • Is it cost competitiveness, a superior brand leading to higher pricing power or pure execution?

Quality of Financials

• Ability to double earnings in 4–5 years
• Growth = Reinvested Cash x RoIC
• Businesses with min. ROIC of 15%
• Higher cash generation leads to higher reinvestment: OCF/ EBITDA > 50%
• Debt to Equity: < 0.5x – low debt helps navigate business tough times

Quality of Management Focus on

• Past execution track record
• Vision of management
• Focus on high sustainable growth
• Record of identifying and investing in profitable opportunities
• Good corporate governance track record

Bucket 2: Opportunistic Equities

• The market in its inherent volatile nature provides pockets of cyclical / turnaround opportunities at attractive valuations
• Such pockets also provide lucrative risk reward opportunities at different facets
• Turnarounds are rare
• Clear Entry – Exit strategy
• Extremely attractive Risk – Reward
• Sufficient Margin of Safety

Investing in value opportunities includes

• Underappreciated business | Tata Consumer
• Niche businesses | GMM Paddler
• Management turnarounds | ICICI Bank
• M&A | Mindtree
• Spin-Offs / Split | Orient Electric
• Out-of-favour industries | Dixon Technologies