TVS Shriram Growth Fund 1A June 30, 2014 Update For The Quarter Ended June 30, 2014 We thank you for investing in TVS Shriram Growth Fund 1A and are pleased to present you an update on the developments at the fund and the performance of your portfolio for the quarter ended June 30 2014. In the last two years, amid the downturn in the business cycle and a non-conducive macro environment, we focussed our attention on aggressively managing our core portfolio companies. Leveraging the capability capital of the TVS group to the fullest, significant management time was devoted to improving operational efficiency, streamlining and restructuring operations, reducing costs and improving the financial health of businesses such as Dusters, TexMex, MedPlus and MedFort. This yielded results in the form of a strong improvement in efficiency and profitability in some of these businesses, which should result in significant value unlocking as we look at exits commencing next year. Summary of the portfolio is indicated below: Investee Company Time of Investment Investment (Rs Cr) % Stake TVS Logistics* Mar-08 5 1.20% Nine Dot Nine Oct-08 16 20.00% Dusters Hospitality Oct-08 50 51.20% Landmark* Nov-09 65 24.90% Medfort Hospitals Nov-10 60 35.00% Om Pizza Dec-10 55 8.80% TexMex Cuisine Dec-10 / Jan-13 19 98.82% Indian Cookery Feb-11 5 5.00% RBL Bank Feb-11 30 2.00% MedPlus Health Services Mar-11 74 11.00% Dunar Foods Feb-12 50 13.00% DCB Mar-12 30 2.84% Regen Powertech May-12 37 1.95% Total 496 Note: * indicates exited investments Meanwhile, with the recent elections throwing up a strong verdict and the new government pushing ahead with reforms, investor confidence has made a strong comeback. There has been a surge in foreign portfolio flows into the Indian markets and a rebound in M&A activity, both of which should create very favourable exit conditions for our fund. Macroeconomic Scenario Three recent macro developments deserve specific mention because they have a bearing on your fund. Valuation re-rating With the recent conclusion of the Lok Sabha elections, a single party with an absolute majority has ascended to power in India after a thirty-year hiatus. This is expected to be an enabler to quick decision-making, clearing up the policy logjams that had been holding up private sector investments, helping to restart the capex cycle. The new government has already displayed a brisk sense of purpose in its initial weeks, setting in motion measures to deregulate diesel prices, restructure Railway finances and delineate a clear roadmap for fiscal consolidation in its maiden budget. Political as well as currency stability in India amidst rising geopolitical risks in other emerging markets have led to re-allocation by foreign portfolio investors in favour of India. With the result, the first seven months of 2014 have seen $26 billion in FPI flows into Indian equities and bonds, compared to $12 billion for the whole of 2013. With FPIs rapidly running out of headroom in the index heavyweights, they have been increasing their exposures to mid and small-sized listed companies. This has led to a sharp re-rating of valuations of the listed stocks in the mid and small-cap universe, particularly those playing on domestic themes. In the one year to 29 July 2014, while the CNX Nifty is up 33 per cent, the CNX Small-cap Index is up 83 per cent. What is more, the price-book value of the CNX Small-cap has been re-rated from 0.9 times book to over 1.5 times. Improving multiples for smaller companies should lead to better valuations at exit for companies in our portfolio. M&A revives Returning portfolio flows have also been accompanied by a resurgence in Foreign Direct Investments (FDI) and higher acquisitions activity. FDI flows into India in the first five months of 2014, at $13 billion were 40 per cent higher than in the same period last year. It is a heartening trend that FDI flows into India from non-tax advantaged destinations is on the rise. In the last two years, direct FDI flows from UK and Japan have accounted for nearly $10 billion of inbound FDI, indicating investment interest of a long-term nature. Global deals tracker MergerMarkets notes that Indian M&A in the first six months of 2014, at $17.1 billion was 47 per cent higher than in the same time last year. Institutional fund-raising via the Qualified Institutional Placement route has made a dramatic comeback with the sums raised through QIPs (Rs 12,500 Cr) recording a tenfold jump in April-June 2014, compared to last year. The over-subscriptions to recent QIPs is indicative of returning risk appetite from domestic and foreign investors. The new issue market remains is also expected to pick up. This is already having a positive spill-over effect on the private equity industry. Exits from older investments picked up with 43 such exits in the latest quarter, against 37 last year. The returning appetite for domestic issuances should facilitate easier exits from portfolio companies, than a year ago. Consumption receives a fillip Meanwhile, recent macro developments are expected to deliver a fillip to consumer spending and further bolster the performance of our portfolio companies. For one, the increase in personal tax exemption and investment limits in the budget are expected to stimulate spending. A pickup in consumer confidence is already evident from the improvement in automobile and consumer appliance sales readings in recent months. Automobile sales have expanded by 11 per cent in the quarter ended June 2014, after shrinking for two consecutive fiscal years. The consumer goods segments of the Index of Industrial Production has likewise returned to growth after contracting throughout last year. This should aid portfolio companies which play mainly on domestic retail spending for their revenues and profits. Two, inflation, a key reason for curtailed discretionary spending by Indian consumers in the last two years, has also moderated in recent months, with the headline Consumer Price Index declining from a peak of 11.2 per cent in November 2013 to 7.3 per cent in the latest June reading. Finally, the recent uptick in economic activity is expected to improve credit off-take and deliver better 2 growth for the banking sector, which makes up a medium and small enterprises typically grow much substantial portion of our portfolio. Credit off-take in faster than overall industry. the Indian economy at 14 per cent has remained Factoids healthy in 2013-14 despite GDP growth slowing to • Credit expansion is usually at 3x of sub-5 per cent levels. The RBI’s latest Survey of real GDP growth Professional Forecasters shows that economists • Indian consumer companies attracted $ 4 billion expect domestic real GDP growth to accelerate from in M&A and accounted for a fourth of all 4.9 per cent in Q4 of 2013-14 to 5.9 per cent by Q4 of domestic deals in the first six months of 2014 2014-15. Much of this delta is likely to emerge from • Consumer sentiment may be down, but incomes industry (1 to 3.9 per cent) and services are not. The wage bills of top 500 listed (6.2 to 7.4 per cent). This is likely to translate into a companies grew at 15 per cent per annum for multiplier effect on loan book growth for banks. This the last 3 years despite the downturn. augurs well for mid-market banks in our portfolio, as Executive Summary of Fund 1A A summary of Fund 1A as on June 30, 2014 is shown below: Investments (Rs Cr) Invested Amount Core Food & Beverages Om Pizza & Eats Texmex SK Restaurants (Indian Cookery) 55 19 Business Services Dusters & Total Solutions 9.9 Mediaworx 50 Retail Landmark* Medplus Health Services Banking & Financial Services RBL Bank DCB Bank 5 16 50 16 65 74 65 74 37 5 30 30 37 5 60 60 50 184 37% Total 55 19 5 30 Food Processing Dunar Foods Total % of Total Classic Listed 30 Infrastructure Services RegenPowertech TVS Logistics* Healthcare Services Medfort Hospitals Classic Unlisted 282 57% 50 30 6% 496 100% Note: * indicates exited investments 3 Portfolio Company Updates Dusters Total Solutions Services With expanding office and commercial spaces requiring high-end maintenance, there is a rising trend of large corporates, hospitals and hospitality companies outsourcing their housekeeping, pantry and lawn management services to third parties. Dusters is one of the top three facilities management firms in India with marquee clients such as the Taj Hotels, Hyatt, Oberoi, Marriot, ITC, Four Seasons, Leela, and retail chains such as Hard Rock Café, Mainland China, Barista, Lifestyle and Pantaloons in its roster. As Dusters is one of our most promising core portfolio companies, the operating partner from our fund has been devoting 30-40 per cent of his time in the last one year to driving new initiatives, improving processes and reduce fixed costs. The firm’s operating margins have been sharply improved through a shift into service-level agreements and better working capital management has reduced the debtor cycle to 60 days by year-end. This has yielded results in the form of a threefold improvement in PAT over 2013-14, with EBIDTA margins improving from 3.3 per cent to 4.5 per cent. The company is expected to close 2014-15 with a topline of Rs 310 Cr. In the first quarter of 2014-15, Dusters reported EBITDA of Rs 4 Cr on revenues of Rs 65.8 Cr. Rs Cr FY 13 FY 14 Q1 FY 15 Actuals Actuals Actuals Revenue 239 259 66 EBITDA 7 12 4 With operational improvements paying off well, the fund will look to create a liquidity event in this company in the next 12-15 months. RBL Bank The Ratnakar Bank is a mid-sized bank managed by a very capable senior management team with prior experience in international banks. The bank which caters to business and retail lending as well as the advisory needs of clients, earning a good mix of fee and margin income. The bank’s financials have held up quite well during the downturn, with strong advances growth and high deposit accretion accompanied by low slippages. Originally focussed on the business hub of Maharashtra, the bank has expanded substantially beyond the state and by March 2014 had a presence across 12 Indian states with 175 branches and 350 ATMs. The bank’s growth has been scorching with a 54 per cent CAGR in advances since FY10, post a change in management. In FY14, RBL’s advances grew 55 per cent to Rs 9,835 Cr from Rs 6,376 Cr. Amid much slower accretion to deposits in the banking system, the bank managed to expand its deposits by 40 per cent to Rs 11,600 Cr. Capital adequacy at 14.6% is quite comfortable. Net Non-Performing assets at 0.31 per cent are well below levels for the peer group. Rs Cr FY 13 FY 14 Actuals Actuals Branches 125 175 Advances 6,376 9,835 Total Income 384 603 Operating Profit 157 241 PAT 92 134 4 DCB Bank DCB is a listed scheduled commercial bank run by a strong management team with previous multinational experience, which has also driven the bank’s turnaround. As on 31 March 2014, the bank had 130 branches with 238 ATMs across 16 states. Its deposit growth has been healthy at 23 per cent (from Rs 8,364 Cr to Rs 10,325 Cr) in 2013-14. This kept pace with the growth in the loan book at 24 per cent, from Rs 6,586 Cr to Rs 8140 Cr. The capital adequacy ratio was comfortable at 13.7 per cent. At a time when much of the banking sector saw a slippage in asset quality, DCB managed a significant improvement with Gross Non-performing Assets declining to 1.69 per cent by March 31 2014 from 3.18 per cent the previous 2.0 1.8 1.6 fiscal-end. The stock price has appreciated from Rs 48.3 to Rs 82.4 (as on July 31, 2014) in the last one year. The stock has delivered an annualised return of 28 per cent to the fund. Rs Cr Stock Price Performance Since investment compared to BANKEX and SENSEX (from 26-Mar-12 to 31-Jul-14) FY 13 FY 14 Q1 FY 15 Actuals Actuals Actuals Branches 94 130 134 Advances 6,586 8,140 8,291 Total Income 401 507 387 Operating Profit 126 188 81 PAT 102 151 45 DCB : 1.8X BANKEX : 1.5X SENSEX : 1.5X BANKEX SENSEX DCB 1.4 1.2 1.0 0.8 23-Mar-12 23-Sep-12 23-Mar-13 23-Sep-13 23-Mar-14 Om Pizza and Eats Rising disposable incomes and an aspirational middle class are leading to burgeoning mid-tier dining options in Indian cities. Om Pizza, a restaurant company holding franchises for Papa John’s Pizza, Chili’s Grill & Bar and The Great Kabab Factory was an investment playing on this trend. However, it was soon evident that the pizza business had very different profit drivers from the casual dining business, which was more lucrative. In January 2013 we initiated a restructuring of this business under which Chili's was carved out from Om Pizza. The new business is now under a new entity called Texmex Cuisine India Pvt Ltd, to drive better focus on this profitable franchise. Om Pizza continues to operate the residual businesses of Papa John’s and The Kabab Factory. This business faced a cash crunch with the long gestation periods for stores to break even, impacting cash flows. Efforts have been made to rationalise loss-making outlets and to open outlets in more lucrative catchment areas. Meanwhile, there are plans to raise external funds to supplement the capital in Om Pizza, with the Mittal Group coming in as an additional investor with a commitment of Rs 25 Cr. This may help fuel store expansion and the next level of growth. As of March 31 2014, Om Pizza operated 20 Papa John’s outlets with annualized revenue of Rs 26 Cr. Improved monthly sales and footfalls would be required for a turnaround at the firm level. We are planning to exit our investment in Om Pizza in the next 18 - 24 months. 5 TexMex Cuisine International cuisines such as Mexican, Lebanese, Thai and Chinese are easily adaptable to the Indian palate and Texmex, the franchisee for the US-based chain of Chili’s restaurants for South and West India, has been able to capitalise on the growing popularity of its restaurant in the big cities. The response from customers for the Chilis brand, owned by Brinker International, a reputed player in the US, has been highly encouraging. Efforts from our management team contributed to a turnaround in its profitability this fiscal. Texmex currently owns and operates 5 restaurants across Mumbai, Bangalore, Pune and Hyderabad. A sixth outlet is planned in Bangalore this fiscal. Revenues at Texmex have shown strong traction in 2013-14 growing by 39 per cent, with same-store sales growth of 39 per cent well above the peer group. The flagship restaurant at Powai, Mumbai continues to perform well. Riding on impressive sales growth, the store level EBITDA has grown by 79 per cent. We have consciously invested in a high quality management team during the current year. The company is now focusing on scaling up by adding new restaurants. Texmex has ambitious plans to grow the business at a CAGR of over 40 per cent in the next 2-3 years, driven by increasing efficiency in existing restaurants and opening of new ones across key metros in South India. Plans are afoot to open over 6-7 new restaurants in the next 18 – 24 months, to be funded through a mix of internal accruals, bank finance and additional infusion of equity capital. The plan is to grow the business on a stronger platform and create value for an exit over the next two years. Rs Cr FY 13 FY 14 Q1 FY 15 Actuals Actuals Actuals 5 5 5 Revenue 20 27 8 Store EBITDA 2 3 1.5 Stores Medfort Hospitals Medfort is one of the leading eye care facilities in India, operating under the brand of Maxivision Super Specialty Eye Hospitals, which is well-recognised particularly in Andhra Pradesh. The business has delivered moderate growth and is yet to turn around. The management expects better growth in Andhra Pradesh in the months ahead with the easing of the political situation in the state. In order to drive better profitability at this chain, we recently mooted new strategic initiatives. As part of this restructuring, the optical segment of the chain was outsourced to Ben Franklin, with a minimum guarantee of income. This is expected to bolster profitability. Similarly, we are exploring the idea of a strategic alliance for the pharmacy and diagnostics segments, so that greater focus can be brought to bear on the core areas. The organic centres are yet to deliver satisfactory results and are taking more than expected time to become profitable. The company is considering further raising for growth and as part of this process, we will explore liquidity options in due course. Rs Cr FY 13 FY 14 Q1 FY 15 Actuals Actuals Actuals Stores 13 15 15 Revenue 74 67 18 EBITDA 13 1 2 6 Medplus Health Services Distribution of pharmaceutical products is one of the store level this year. This delivered an improvement in more lucrative distribution opportunities in India and corporate EBIDTA margins to 2.4 per cent, with EBIDTA Medplus is one of the fastest growing healthcare improving from Rs 20 Cr to Rs 26 Cr during 2013-14. retail chains in India. With over 1,141 stores spread With consolidation on track, the next year will see a across the country, Medplus is the largest fresh spurt in store openings. The three existing independent pharmacy chain in the country. investors in Medplus are Mount Kellett, IVA and our With active strategic inputs from our end, the fund, and we will consider appointing an investment company has increased its store count at a moderate banker to evaluate potential exit in FY 2015-16. pace from 1,073 at the end of March 2013 to 1,141 by the end of March 14 with 68 new stores opened Rs Cr FY 13 FY 14 Q1 FY 15 Actuals Actuals Actuals Stores 1,073 1,141 1,167 Revenue 884 1,066 302 EBITDA 16 20 7 during 2013-14. The pace of new store openings was consciously slowed this fiscal compared to the previous year, as the company focused on improving the profitability of existing stores. This paid off with 93 per cent of the outlets turning profitable at the Dunar Foods Dunar Foods is one of the largest Basmati rice an amount of Rs 650 Cr to National Spot Exchange processing companies in India with a processing with Dunar Foods’ featuring as one of the defaulters capacity of 50 tonnes/hour. After substantially with an amount of Rs 51.5 Cr due to NSEL (included in scaling up its revenues from 2001 to 2012, mainly the above amount). from exports and bulk sales of basmati rice, the We believe that, given the uncertainty surrounding business suffered an unexpected and severe setback last fiscal as some of the promoter group companies PD Agro, Dulisons Cereals and Dulisons Foods - were embroiled in the payment crisis at the National Spot Exchange. The NSEL was offering contracts on rice, castor and other agri-commodities when a regulatory crackdown on its forward contracts, citing regulatory violations, brought the exchange’s operations to a standstill. This has precipitated a settlements crisis for firms which traded on the exchange. Promoter companies in the Dunar Foods group reportedly owe the NSEL issue, it is good to secure the capital invested at the earliest, instead of continuing for four more years as per original investment thesis. We are in discussion with the promoter to sell the investments of this fund and we are also pursuing legal action through the Court and the Company Law Board to investigate these events and recover the money invested. In addition we also have the right of exercising a put option against the promoter, which can help salvage some value. 7 9.9 Mediaworx Nine dot Nine Mediaworks is a professionally managed, niche media company offering magazines, online communities and research to business, professional and consumer clients. It also offers research and training. The fund invested Rs 13.8 Cr in the business in 2008 and followed it up with an additional Rs 2 Cr in 2011, taking the revised stake to 20 per cent. The company has delivered a sharp improvement in EBIDTA margins in 2013-14. We have been pursuing various options for a strategic exit from this investment and discussions are on with the promoters for a buy back. Performance Update: Rs Cr FY 13 FY 14 Q1 FY 15 Actuals Actuals Actuals Revenue 46 52 10 EBITDA 3 4 (2) RegenPowertech Regen Powertech is one of the leading companies in the wind energy sector and one of the top wind turbine manufacturers in India. The company is co-promoted by Mr. Madhu Khemka and Mr. R Sundaresh, who have experience of more than twenty years in the wind power industry. The company’s performance last fiscal was impacted by a slowdown in order execution which led to lower cash flows, and paucity of cash for operations after servicing debt. A turnaround process is currently under implementation to resolve the situation. Attempts are on to improve liquidity through quicker collections, invoice discounting and fixed cost reduction. Meanwhile, the recent budget reinstatedaccelerated depreciation benefits for wind power projects should sharply revive interest in such projects and drive FY15 at Rs 68 Cr. Rs Cr FY 13 FY 14 Q1 FY 15 Actuals Actuals Actuals 287 151 85 Revenue 2309 1353 664 EBITDA 193 -46 68 Turbines sold (Nos.) SK Restaurants Private Limited (formerly known as Indian CookeryPrivate Limited) SK Restaurants Private Limited (SKRPL) is a restaurant chain by celebrity chef Sanjeev Kapoor under brands The Yellow Chilli, Khazana, Signature, Hong Kong, Sura Vie, Grain Of Salt, Gold Leaf Banquets, Jimmy Hu and Options. There are 41 restaurants in all, with 32 in India and 9 in international locations. The company follows a model of combination of company owned restaurants and franchisee owned restaurants. The company is on a high growth trajectory and looking to raise another round of funding. 25 locations are in different stages of setups. The company plans to have another 25-30 new locations by the end of FY15.