birla sun life pure value fund (a 3-year closed-end equity scheme with an automatic conversion into...

Birla Sun Life

Pure Value Fund (A 3-year Closed-end Equity Scheme with an Automatic Conversion into an Open-Ended Scheme upon Maturity)

Value investing• A timeless principal

• Focused on the fundamentals

• Low volatility & stable returns

• The value investors believes that markets are inefficient and looks to turn

this to their advantage

• A disciplined value focus allows you to invest wisely, avoiding the

excesses and profiting from collapses

Investing in Ignored Ideas & Opportunities Investing in Ignored Ideas & Opportunities

Value vs. Glamour

Value Growth*

Value Investing Growth Investing

Focuses on past performance of the

company & the current fundamentals

Investing in stocks with high future

growth potential

Value investors look for “bargains”, or

stocks that are trading at a discount to

their usual valuation

Growth investors believe in buying

stocks with above-average earnings

growth, no matter what the price

In the business world, the rearview mirror is always clearer than the windshield - Warren Buffet

In the business world, the rearview mirror is always clearer than the windshield - Warren Buffet

* Growth style of investing has been perceived as glamour investing

Few quotes…

We simply attempt to be fearful when others are greedy and to be greedy when others are fearful.

Price is what you pay, value is what you get.By Warren Buffet

I am more concerned about the return of my money than the return on my money.By Will Rogers

Value Investing is solely concerned with getting the most profit at the lowest cost. Anonymous

Why value gets created

&

How value gets rewarded

Creation of value• Markets can be short-sighted

• May ignore long term value creation

• Otherwise, How do you explain sharp movements in prices based on quarterly results

• External issues negatively influencing may be considered permanent

• Fertilizer policy if unchanged for 5 years, makes us believe it will not change ever

• RBI does not cut rate, markets react as if it will never cut rate

• Internal negatives may get overly highlighted

• A shutdown for 5 days will have a reaction which is meaningless considered the long life cycle of an organization

• Company could be in a matured stage, leading to nominal growth

• Some stocks are just ignored without any reason whatsoever

You don’t need to wait for eternity

• Value picks may get rewarded much sooner than you expect

• You don’t have to wait for substantial surprises

• Stocks available at bargain prices, just need a positive “Nudge”

• Changes in the external environment

• Disappearance of internal issues

• Business plans of the companies to chart a higher growth path

• Diversification in business activities

• There are innumerable instance in the past that should give confidence on

the investment style

When value got rewarded

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Reliance Energy

• For most part 2006 & 2007 stock under performed the market

• Stock was a strong Value pick as cash on book was to the

extent of 50 to 60% of market cap

• Huge cash helped the company bid for infra & power projects

leading to significant re-rating

Source – Bloomberg; BSLMF Internal Research; Stocks referred above are illustrative and are not recommended by Birla Sun Life Mutual Fund / Birla Sun Life Asset Management Company Ltd. The Fund may or may not have any present or future positions in these stocks.

Neyveli Lignite

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• As most of the power stocks Neyveli Lignite also under performed the

market for most part of 2006 - 2007

• Stock was a strong Value pick as was trading close to its book value

• Once the sector got re-rated in later part of 2007, Neyveli was among

the top performers


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SAIL

• During steel’s down cycle of 2005 & 06, SAIL was a strong Value buy

on account of captive iron ore mines & coal facilities

• Once up cycle for the sector started, stock was among the top

performers


Chennai Petroleum

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• Chennai Petro is fundamentally among the most attractive oil refining

companies

• During large part of 2006-07, with PE of 4-5 stock was trading at significant

discount to peers & market

• Due to rising crude oil prices Gross Refinery Margins saw a significant

upturn leading to significant re-rating of the stock


Investment process for identifying value

Would be a blend of…

Stocks available at discount to intrinsic value

Attractive Price to Book Value Ratio

Lower PE Multiple but with a reasonable growth track record

Lower market cap than the Replacement Cost

Companies having high level of Cash & Liquid Investments compared to

market cap

Companies that reward investors with high & regular dividends

Sectors & Companies

With Substantial VALUE

currently

Fertilizer SectorCurrent Scenario

• ZERO domestic capacity addition since last one decade

• Demand supply imbalance leading to increasing imports

• Spiraling prices leading to higher subsidy burden

• High replacement cost

• 1 Million ton of Greenfield fertilizer capacity costs more than USD 1 billion

• Stable cash flow aiding diversification into other sectors leading to

earnings stability

• Chemicals for vertical & horizontal integration

• Other growing sectors like shipping, real estate etc.

Source – Bloomberg; BSLMF Internal Research

Valuations of Fertilizer Companies

Company Market CapReplacement

CostDiscount

Tata Chemical 6,988 10,190 -31%

Coromandel 1,492 6,000 -75%

RCF 5,850 10,000 -42%

GNFC 2,936 5,650 -48%

Chambal 1,953 7,680 -75%

Significant Discount to Replacement Cost

Company PE P / B

GNFC 9.20 1.86

GSFC 7.30 1.39

Stocks Available at Attractive Price Multiples

Source – Bloomberg; BSLMF Internal Research; The stocks indicated above are illustrative & may or may not form part of portfolio.


Why sector may unlock value …

• Positive Changes in the Fertilizer Policy have improved profitability of the

companies in the sector over last 9 months.

• Improved Gas Availability scenario may reduce the dependence on high

cost imported feedstock.

• Policy for Fertilizers under cabinet consideration to decide :

• Policy for Greenfield/Brownfield Expansion

• Pricing Policy refinements

• Further Issuance of Fertilizer Bonds


Oil & Gas (Oil Marketing Companies)Current Scenario

• Oil marketing companies are loosing money due price regulations by

government.

• Refineries are enjoying healthy Gross Refining Margins (GRM) on the

back of rising crude oil prices

• Global refining capacity is growing inline with global demand and is

expected to do so for next five years

• Capacity addition in Asia Pacific to account for 37% of the global

capacity addition

• India’s capacity addition would be the highest and would account for nearly 29% of the capacity in Asia Pacific region


Valuations of oil marketing companies


* CDU represents Crude Distillate Unit I.e. refining capacities

Company EV / CDU*Replacement

CostDiscount

BPCL 6,444 15,000 -57%

HPCL 7,733 15,000 -48%

IOC 14,654 15,000 -2%

Indian refineries are trading at a discount to their replacement cost on account of their losses in marketing activities.



• Capacity addition in Asia Pacific to account for 37% of the global capacity

addition

• India’s capacity addition would be the highest and would account for nearly 29% of the capacity in Asia Pacific region

• With mounting marketing losses, we expect the government to take corrective

actions in order to reduce these losses

• Indian oil marketing companies have a good mix of refining & marketing

assets and they are aggressively expanding refining capacities

• On back of rising crude oil prices & rising GRMs this would act as the main trigger for value unlocking


Paper SectorCurrent Scenario

• Low per capita consumption of paper = Tremendous growth opportunity

• Rising literacy levels will further push the demand up

• India imports around 0.70 million tons of paper per year

• Provides tremendous growth opportunity for domestic companies

• High replacement cost

• 1 Million ton of Greenfield integrated paper capacity costs more than USD 900 million

• Stable earnings growth & margin due to:

• Capacity improvements

• Process improvement leading to cost efficienciesSource – Bloomberg; BSLMF Internal Research

Valuations of Paper CompaniesSignificant Discount to Global Peers Despite

Higher Margins & Returns RatiosPAT Margins ROCE PE

BILT 11.60% 12.00% 9.30%

TNPL 9.00% 15.00% 9.17%

OJI 2.00% 4.00% 35.20%

Stora 3.00% 4.00% 19.60%

International Paper 2.00% 3.00% 15.75%

UPM-KYMM 4.00% 4.00% 25.14%

Indian Companies

Global Companies

Company Market CapReplacement

CostDiscount

BILT 2,613 6,360 -59%

TNPL 753 1,900 -60%





• Paper sector growth in a new trajectory given the projected GDP growth of

above 10% for Indian Economy.

• Paper being proxy to GDP growth rates.

• Huge Capex finally paying off as evident in financial results.

• Industry looking for international acquisition and exposure.

• Valuation Discount against global peers quite significant now.

• New deals like BILT PE deal may change the valuations for the sector.


Shipping SectorCurrent Scenario

• Huge potential for trade growth

• Asia accounts for 59% dry bulk imports with India being among the major consumer

• Demand for oil, gas & coal for energy requirements will drive the shipping logistics in the Indian market

• Industry is on a capacity addition spree

• Freight rates have corrected sharply & may start moving upwards in near

future

• Asset prices of the ships have improved or remained firm despite the

weak freight rates displaying buoyant long term outlook


Company NAV Price Discount

GESCO 540 414 -23%

SCI 378 250 -34%

Mercator Lines 208 120 -42%

Valuations of Shipping CompaniesSignificant Discount to NAV per Share

Why sector may unlock value now…• Indian Shipping Sector in process of being re-rated along the line of global peers.

• India and China have increased their dominance on the international trade as

against developed countries.

• Recent downturn in shipping cycle beckons another upswing in the shipping

cycle leading to increase in stock prices.



Cement SectorCurrent Scenario

• Significant slow down in growth of cement consumption

• Currently the growth rate is below the 3 Month Moving Average

• High base has caught up with cement demand growth

• Profitability hit due to rising fuel costs despite high cement prices

• International coal prices have increased from USD 40 per ton in Jan 06 to over USD 100 per ton in Jan 08, an increase of over 150%

• During the same period cement prices have moved from Rs. 165 per bag to Rs.

225 per bag, an increase of 36%


FY07 FY08E FY09E FY07 FY08E FY09E

1 ACC 798 12.1 10.1 9.9 182 162 144

2 Birla Corporation Ltd 218 5.1 3.5 4.0 70 53 39

3 Grasim Indus 2,961 13.8 10.0 8.4 185 158 96

4 Gujarat Ambuja 115 11.4 12.1 11.3 257 224 166

5 India Cements 205 10.5 7.5 7.7 173 179 145

6 Madras Cements 4,000 15.7 10.0 7.8 232 217 143

7 Mangalam Cement 128 4.3 3.3 3.2 51 49 33

8 Prism Cements 51 24.6 7.9 6.1 136 150 142

9 Shree Cement 1,307 11.1 9.6 8.1 233 221 149

10 Ultratech Cements Ltd. 898 14.3 9.6 9.2 165 157 142

11 Kesoram Industies Ltd 465 8.0 7.4 6.9 118 130 109

12 J K Lakshmi Cement 135 4.2 3.0 3.6 92 71 55

SNP/E EV/T

CMPCompany

Valuations of Cement Companies

Anticipated supply has resulted in stocks being quoted below current Replacement Cost



• USD 500 billion worth of infrastructure spending envisaged in XIth five

year plan could spur cement demand growth beyond supply increase.

• Captive power plants / tie up of coal sources can protect margins

• Low valuations could trigger consolidation and M&A drive within the

industry particularly when large MNCs looking to enter the 2nd largest

(India) cement market in the world.

• Sustained profitability could result in significant free cash flow generation.


Sugar SectorCurrent Scenario

• Sugar exports were banned by the Government for nearly six months from

July’07, due to which supply in the domestic markets increased

• As a result, sugar prices fell from the high of nearly Rs.18/kg to Rs.14/kg and below during the same period.

• Companies especially in U.P. suffered more on account of higher sugarcane prices.

• Major sugar companies are trading almost at par with their replacement cost,

thus providing attractive valuation opportunities

CompanyEnterprise

Value (EV)

Replacement

CostEV / RC

Bajaj Hidustan 6,116 5,233 1.17

Balrampur Chini 3,262 2,922 1.12

Triveni Engineering 3,885 3,413 1.14




• Sugar cycle expected to turn profitable, as the cane supplies for the sugar

season of Oct-08 to Mar-09 is expected to decline.

• With the exports ban being removed we expect higher exports in Financial Year

08-09, thus an improvement in domestic sugar prices.

• Any reduction in sugar cane prices for Uttar Pradesh based companies would

drive their profitability.

• Diversification into ethanol and power would help in improving the overall

performance of the companies.


MNC Pharma Companies

• More than 20% of market cap is represented by cash / liquid investments

• Consistent dividend payouts

• Attractive valuations of around 10x FY08 Vs Market PE of around 20x

FY08E earnings

• Introduction of patented products to be key stock driver

CompanyEPS Mar08 /

Dec07

P/E Mar08 /

Dec07

P/E Mar09 /

Dec08

Dividend

Yield (%)

Cash / Mkt

Cap (%)

Glaxo 49.10 17.31 15.26 3.76 23.37

Aventis 66.71 13.64 11.95 3.52 22.99

Pfizer 114.12 5.70 13.83 2.31 35.19

Novartis 29.34 11.11 10.40 3.07 13.71

Wyeth 43.49 10.14 9.26 6.80 23.58



Even simple stats tell the same story

• A simulation was carried out on BSE 200 index.

• Fundamental criteria’s considered:

•Price to Book Value (P/BV) and

•Price to Earnings (P/E).

• We evaluated stocks based on various parameters:

•One with low P/E stocks,

•Second with Low P/BV Stocks &

•Stocks with low P/E & low P/BV.

• Investment portfolio consists of top 30 stocks.

• Costs have not been taken into consideration.

Source – Cline; BSLMF Internal Research.

Rear View Glimpse

Value portfolio outperforms the Benchmark Index.Value portfolio outperforms the Benchmark Index.

Source – Cline; BSLMF Internal Research.

Performance (%)P/E P/BV 2007

Low P/E 6.15 132Low P/BV 1.17 101Low P/E & Low P/BV 7.74 1.31 110

BSE 200 Index 56

PortfolioFundamental Traits

Model Portfolio

• We have created a model portfolio of 30 stocks.

• Not more than 7% to be allocated to each stock.

• Fundamental Traits:

• An Return on capital employed (ROCE) of 16.

• Return on Equity (ROE) of 24.

• Price to Equity (P/E) of 10.

• Price to Book Value (P/BV) of 1.50.

• EV/EBIDTA of 9.70

Source – Bloomberg; BSLMF Internal Research.

Value for an investor….

A dose of “Value” can ensure health• If your pre-dominantly high growth portfolio has an average PE of 18 - 20

• Even a 20% allocation to value portfolio (assuming avg. PE of 10) can reduce the overall PE substantially

• Will help you compliment your existing portfolio

• Portfolio with strong fundamentals

• Can act as a shock absorber in your high growth portfolio

• Portfolio with low volatility

Value has to get unlocked in good quality companies

The only question is when? Leave that to us

Fund Benchmark Fund Benchmark Fund Benchmark Fund Benchmark

Birla SunLife Equity Fund (Inception Date - 27th Aug 1998)

Rs. 253.93 35.89 31.86 47.25 36.93 59.10 42.23 40.89 23.24

Birla SunLife Frontline Equity Fund (Inception Date - 30th Aug 2002)

Rs. 68.12 31.53 31.86 42.42 36.93 46.51 42.23 42.43 38.73

Birla Mid Cap Fund (Inception Date - 3rd Oct 2002)

Rs. 95.34 42.72 38.42 45.75 36.63 55.48 49.39 52.64 48.13

Birla Sunlife Tax Relief 96 (Inception Date - 29th Mar 1996)

Rs. 136.15 43.92 31.86 43.56 36.93 49.67 42.23 40.87 17.05

Performance (%) (As on 31st Jan 2008)

1 Year

Fund Facts

3 Year 5 Year Since InceptionScheme Name NAV

(31st Jan 2008)

Proof of our investment expertise

Performance has been calculated on NAV of growth plans. The returns for less than a year are in absolute terms & for more than a year its CAGR. Past performance is no guarantee of future performance. Sales load not considered for computation of returns.

Benchmark – BSE 200



Benchmark – CNX Midcap

Scheme features

* Refer to the offer document for further details

Type of SchemeA 3-year Closed-end Equity Scheme with an Automatic Conversion into an Open-Ended Scheme upon Maturity

Investment ObjectiveBirla Sun Life Pure Value Fund seeks to generate consistent long-term capital appreciation by investing predominantly in equity and equity related securities by following value investing strategy.

Asset Allocation*:

Equity & Equity Related Instruments 85% to 100%

Fixed Income Secuties (including money market instruments)

0% to 15%

New Fund Offer Price Rs. 10 per unitDate of opening of NFO 17th January 2008Date of closing of NFO 1st March 2008Plans / Options Available Dividend & Growth; Dividend plan will offer Payout & Reinvestment facility

Subscriptions Rs.5,000/- and in multiple of Re. 1 thereafter per application under each plan (during the NFO period)

Load Structure (including SIP):

Exit Load

Nil** (for all redemptions/switch outs made during the specified redemption period until the scheme remains closed-end).**Investors offering units for repurchase/ switch out during the specified redemption periods before maturity of the scheme/conversion of scheme into open ended scheme will be charged balance proportionate unamortized issue expenses on the applicable NAV.

Benchmark Index BSE 200Fund Manager Ajay Argal

Entry LoadAs per SEBI circular dated April 4, 2006 ref SEBI/IMD/Cir No. 1/64057/06, close end schemes are not permitted to charge entry load. Hence the scheme being close ended, no entry load is charged during the new fund offer period.

Statutory Details & DisclaimersStatutory Details: Constitution: Birla Sun Life Mutual Fund has been set up as a Trust under the Indian Trust Act, 1882. Sponsors: Aditya Birla Nuvo Limited & Sun Life (India) AMC Investments Inc [liability restricted to seed corpus of Rs. 1 Lac]. Trustee: Birla Sun Life Trustee Company Pvt. Ltd. Investment Manager: Birla Sun Life Asset Management Company Ltd.

Objective: To generate consistent long-term capital appreciation by investing predominantly in equity and equity related securities by following value investing strategy. Asset Allocation Pattern: Equity and Equity linked Instruments: 85%-100% and Fixed Income Securities (Including money market instruments): 0%-15%. Terms of issue: Rs. 10 per unit during the NFO period. Liquidity: The scheme will offer for redemption/switch-out of units at Monthly Intervals only during the specified redemption period i.e. first five business days of each month after the date of allotment at NAV based prices. The NAVs of the scheme will be announced on a weekly basis and on all business days during the specified redemption period. Entry Load: N.A.. Exit Load: Nil (all redemptions/switch-outs made during the specified redemption period until the scheme remains closed-end will be charged balance proportionate unamortized issue expenses on the applicable NAV.) Risk Factors: Mutual Funds & securities investments are subject to market risks & there can be no assurance or guarantee that the objectives of the Scheme will be achieved. As with any investment in securities, the NAV of the Units issued under the Scheme may go up or down depending on the various factors & forces affecting capital markets & money markets. Past performance of the Sponsor / Investment Manager / Mutual Fund does not indicate the future performance of the Scheme & may not necessarily provide a basis of comparison with other investments. Birla Sun Life Pure Value Fund is only the name of the Scheme & does not, in any manner, indicate either the quality of the Scheme or its future prospects or returns. Scheme Specific Risk Factors: The Scheme should have a minimum of 20 investors & no single investor should account for more than 25% of its corpus at the time of allotment as per SEBI guidelines. The Scheme is subject to market risks, investment style risk, risks due to changes in political and economic environment. For further Scheme Specific Risk Factors & other details please read the Offer Document carefully before investing.

This document is meant for private circulation only and should not at any point of time be construed to be an invitation to the public for subscribing to the units of Birla Sun Life Mutual Fund. Birla Sun Life Mutual Fund does not solicit any action based on the information contained in the document and does not recommend any action based on the same. The information/graphs/charts contained in this document are based on certain assumptions and have been compiled from sources, which Birla Sun Life Asset Management Company Limited (BSLAMC) believes to be reliable, but cannot guarantee its accuracy or completeness. Opinions expressed and facts referred to in this document are subject to change without notice and BSLAMC is under no obligation to update the same. Please read the offer document carefully for scheme specific risk factors and other details before investing.

Other schemes detailsBirla Sun Life Equity FundInvestment Objective: An open-end growth scheme with the objective of long term growth of capital, through a portfolio with a target allocation of 90% equity and 10% debt and money market securities.

Load Structure (Incl. for SIP):Entry Load* : < Rs. 5 crores - 2.25%

>= Rs. 5 crores - NilExit Load : < Rs. 5 crores - 0.50% if redeemed / switched out within 6 months

>= Rs. 5 crores – Nil

* Nil for direct investments

Birla Sun Life Frontline Equity FundInvestment Objective: An open-end growth scheme with the objective of long term growth of capital, through a portfolio with a target allocation of 100% equity by aiming at being as diversified across various industries and or sectors as its chosen benchmark index, BSE 200.



>= Rs. 5 crores – Nil* Nil for direct investments

Birla MidCap FundInvestment Objective: An Open-ended growth scheme with the objective to achieve long-term growth of capital at controlled level of risk by primarily investing in midcap stocks.



>= Rs. 5 crores – Nil


Birla Sun Life Tax Relief '96An Open-ended Equity Linked Savings Scheme (ELSS) with a lock-in of 3 yearsInvestment Objective: An open-end equity linked savings scheme (ELSS) with the objective of long term growth of capital through a portfolio with a target allocation of 80% equity, 20% debt and money market securities Load Structure (Incl. for SIP):Entry Load* : < Rs. 5 crores - 2.25%

>= Rs. 5 crores - NilExit Load : NIL


Thank You

birla sun life pure value fund (a 3-year closed-end equity scheme with an automatic conversion into...

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