Acumen – Quality Matters

Equity – An Asset Class

• Equities, while being volatile over short periods of time, tend

to be a prudent investment over longer time horizons

• Over the long run equity returns tend to track underlying

fundamentals and are determined by the following factors:

– Long term growth of the economy

– Growth in corporate earnings

– Stable financial & regulatory framework

• These components explain nearly all of the stock market

returns over extended holding periods

7.1

8.3

9.3

15.6

0 5 10 15 20

Average Inflation

Bank FD

Gold

Equity

Equity Has Been A Long Term Wealth Creator

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Source: Bloomberg, SBI, Axis AMC Research.

CAGR Returns from 1st April 1979 to March 31st 2018. Equity performance represented by performance of the S&P BSE Sensex. Gold

rate for this illustration refers to the dollar rate per ounce converted to Indian rupees as on each financial year end date. Bank FD &

inflation rates are average yearly rates since 1979. Past performance may or may not be sustained in the future.

Long Term Drivers of Equity Markets

3

Company FundamentalsMacro Economic Factors

In the long run equity markets are driven by two main factors

Source: Bloomberg, Axis AMC Research.

Data as of March 31st 2018. Past performance may or may not be sustained in the future. The stocks mentioned are not recommendations

by Axis Asset Management Company or Axis Mutual Fund.

0

500

1,000

1,500

2,000

2,500

3,000

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5,000

10,000

15,000

20,000

25,000

30,000

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India GDP (US$ Billion) S&P BSE Sensex

0

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Fundamental Growth leads to Growth in Stock Value

Operating Profit Stock Price (Asian Paints)

Identifying Quality Companies

Qualitative Factors

Strong management pedigreeTransparency of operations for investors and key stakeholders

Credible oversight committees & strong internal controls

Sustainable long term business model

Quantitative Factors

Strong Return Metrics Stable Cash FlowHigh profitability, low debt-to-equity and

earnings consistency

4

While there is no single definition, in our opinion, quality typically connotes a combination of 2 sets of factors

• Quantitative Factors

• Qualitative Factors

Quality Stocks are Consistent Outperformers

5

Source: Asia Index Private Limited. Data as on 31st March 2018. Past performance may or may not be sustained in the future. All

returns are calculated on a compound annual growth rate basis and on total return values which incorporate effects of corporate

actions in the underlying constituents. All values normalized to 100

-

100.00

200.00

300.00

400.00

500.00

600.00

Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18

Quality Beats The Broader Market

S&P BSE Sensex (TR) S&P BSE 100 (TR) S&P BSE 500 (TR) S&P BSE Quality Index (TR)

S&P BSE Quality (TR)

19.21%

S&P BSE 500 (TR)

10.21%

S&P BSE 100 (TR)

9.76%

S&P BSE Sensex (TR)

9.33%

Illustration – Quality Pays

High ROE Company Performance

Company ROE % 5 Yr CAGR

V Guard Industries 25.08 47.23

Page Industries 54.58 44.45

Maruti Suzuki 15.03 44.35

Bajaj Finance 17.80 42.97

Motherson Sumi Systems 28.06 41.22

Shree Cement 18.57 31.33

HDFC Bank 19.82 23.73

Asian Paints 31.40 20.03

TCS 37.77 16.21

Low ROE Company Performance

Company ROE % 5 Yr CAGR

DLF 1.60 -1.08

Tata Power Co. 1.98 -1.18

Bharti Airtel 6.29 7.96

Bank of Baroda 6.36 3.23

BHEL 7.68 -5.73

NHPC Ltd 7.98 11.74

State Bank Of India 8.85 5.24

Cipla 12.75 7.81

Oil & Natural Gas Corporation 14.56 0.72

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Source: Bloomberg, Axis AMC Internal Research. Data for the period 31st March 2013 to 31st March 2018. Past performance may or

may not be sustained in the future. Stocks mentioned may or may not be part of schemes of Axis Mutual Funds. Refer disclaimers at

the end of the document. The stocks mentioned should not be construed as recommendations by Axis Asset Management Company or

Axis Mutual Fund. The data provided above is solely for illustration purposes only

Illustration – Quality Pays Contd..

7

32

45

37 3540

61

48

35

27 25

0

20

40

60

80

Eicher Motors Page Industries Britannia Marico Asian Paints

Quality Companies Over The Past Decade

10 Year Average PE 10 Year CAGR Returns (%)

Source: Bloomberg, Axis AMC Internal Research. Data for the period 31st March 2013 to 31st March 2018. Past performance may or

may not be sustained in the future. Stocks mentioned may or may not be part of schemes of Axis Mutual Funds. Refer disclaimers at

the end of the document. The stocks mentioned should not be construed as recommendations by Axis Asset Management Company or

Axis Mutual Fund. The data provided above is solely for illustration purposes only

Recent Events – Commodity Bust!

• Commodities are a cyclical business that work on the demand appetite of the

global market. Economic growth is an indicator for commodity demand. In 2013-16

the price of key commodities dropped by up to 60% causing havoc in the

commodities market.

• The fall in commodities worked positively for India which is a net importer of

commodities. However, select industries like Crude oil, steel and Wheat bore the

brunt of this fall there by witnessing a deterioration of their respective corporate

balance sheets and destroying significant market wealth.

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Business performance

Correlated with economic

activity

High Operating Leverage

Attributes of Cyclical

Businesses?

Commodity Fall In Global

Prices

Aluminum (US$/tonne) 11%

Wheat (US$/tonne) 40%

Steel (HRC US$/Roll) 40%

Bloomberg Commodity Index 40%

WTI Brent (US$/bbl) 66%

Source: Bloomberg, Axis AMC Internal Research.

Individual commodity prices referenced to the Bloomberg commodity Index denominated in US Dollars normalized to US$ 100 per constituent

contract. Generic prices of individual commodities based on 1-month future delivery contracts collated by Bloomberg used for calculating absolute

percentage change of prices from 1st December 2013 to 28th February 2016

Recent Events – NPA Cycle

Public sector banks have seen significant decay in asset quality since 2015. As the NPA cycle grew worse, the provisioning norms ate

into corporate profits and assets values saw significant erosion leading to a fall in the banks share prices. Large private banks also saw

significant NPA`s in their corporate loan books.

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Source: Bloomberg, Axis AMC Internal Research.

Data for the period 1st January 2015 to 31st March 2018. Index values normalized to 100 for this analysis. Past performance may or may

not be sustained in the future.

30

50

70

90

110

130

150

170

PSU Banks Underperformed Private Banks

NIFTY Bank (TR) NIFTY PSU Bank (TR) NIFTY Private Bank (TR)

NIFTY Private Bank (TR)

45%

NIFTY Bank (TR)

33%

NIFTY PSU Bank (TR)

-31%

Quality – An Axis Experience

• As Axis, we primarily follow bottom-up stock selection approach with a minimum 2-3-year view on stocks. Bias towards high quality

and growth with strong fundamentals are the key look outs for our fund managers to select companies for their portfolios.

• There are four principles that the investment philosophy at Axis is driven by. These are:

– Strong corporate governance/Strong promoter pedigree,

– Secular growth rate of the sector, which is anywhere around 1.5 to 2x of GDP;

– Strong business model, which demonstrates its pricing power in the product category and the business it is in, and ultimately

– Good ROE’s and cash flows

• About 80% to 90% of our portfolio is based on this philosophy and have been continuing with it since our inception in 2009.

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Investment strategy is subject to change depending on the fund manager`s view of the market. Past performance may or may not be

sustained in the future.

Disclaimers & Risk Factors

Past performance may or may not be sustained in the future. Sector(s) / Stock(s) / Issuer(s) mentioned above are for the purpose of

disclosure of the portfolio of the Scheme(s) and should not be construed as recommendation. The fund manager(s) may or may not

choose to hold the stock mentioned, from time to time. Investors are requested to consult their financial, tax and other advisors before

taking any investment decision(s).

Statutory Details: Axis Mutual Fund has been established as a Trust under the Indian Trusts Act, 1882, sponsored by Axis Bank Ltd.

(liability restricted to Rs. 1 Lakh).

Trustee: Axis Mutual Fund Trustee Ltd.

Investment Manager: Axis Asset Management Co. Ltd. (the AMC)

Risk Factors: Axis Bank Limited is not liable or responsible for any loss or shortfall resulting from the operation of the scheme. This

document represents the views of Axis Asset Management Co. Ltd. and must not be taken as the basis for an investment decision.

Neither Axis Mutual Fund, Axis Mutual Fund Trustee Limited nor Axis Asset Management Company Limited, its Directors or associates

shall be liable for any damages including lost revenue or lost profits that may arise from the use of the information contained herein. No

representation or warranty is made as to the accuracy, completeness or fairness of the information and opinions contained herein. The

AMC reserves the right to make modifications and alterations to this statement as may be required from time to time.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.

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