2eea L&T Financial Services Case Study

8/6/2019 2eea L&T Financial Services Case Study

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L&T Financial Services Case StudyL&TFINANCIAL SERVICES

2010

Increasing the market

share profitablyStrategy & Finance Case Study

L & T M U T U A L F U N D B U I L T O N S T R O N G F O U N D A T I O N S


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L&T Financial Services Case Study

Contents

Introduction .................................................................................................................................................. 3

About L&T Investment Management Limited .............................................................................................. 4

Mutual Fund Segment .............................................................................................................................. 4

Portfolio Management Services Segment ................................................................................................ 6

AUM, Revenues and Fees ......................................................................................................................... 7

Sales and Distribution of products ............................................................................................................ 8

Investment philosophy, research and disciplines ..................................................................................... 9

Financial summary of L&TIM .................................................................................................................... 9

Targets & Deliverables ................................................................................................................................ 10

Growth targets ........................................................................................................................................ 10

Profitability targets ................................................................................................................................. 10

Deliverables............................................................................................................................................. 10

Format & Other details ........................................................................................................................... 11

Annexure A .................................................................................................................................................. 12


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Introduction

Date: September 9, 2010

Venue: Corporate Office, L&T Investment Management Limited.

It was the time of the year when the board meeting had just concluded. A review of the

operations was undertaken, and the management had unanimously decided on a 5 year goals tobe achieved by December 2015/March 2016.

The CEO was sitting in his room, giving the performance of the company a lot of thought. Hehad some specific ideas on where he would like to see the company in the next 5 years.

Admittedly, the current industry scenario was a little volatile, but given the figures of the

company in the last 3 years, and his vision on where to take them, he believed that the time hadcome to come up with a realistic strategy on how those could be achieved.


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About L&T Investment Management Limited

On January 20, 2010, L&T Finance Ltd. acquired DBS Cholamandalam Asset Management

Limited (which was renamed as "L&T Investment Management Limited (L&TIM) on February

15, 2010) and DBS Cholamandalam Trustee Limited (which was renamed as "L&T Mutual FundTrustee Limited" on February 11, 2010) along with DBS Chola Mutual Fund (which was

renames as L&T Mutual Fund). L&TIM is a wholly-owned subsidiary of L&T Finance Ltd.

The holding structure of L&TIM is as follows:

The investment management business conducted by L&TIM currently consists of two business

segments: the Mutual Fund Segment, which is comprised of the management, administration anddistribution of L&T Mutual Fund; and the Portfolio Management Services Segment, which is

comprised of portfolio management and sub-advisory services.

Mutual Fund Segment

L&T Mutual Fund is a SEBI-registered mutual fund with 25 individual schemes as at August

31st, 2010. Of these 25 schemes, eleven are equity schemes, thirteen are fixed income schemes

(including liquid funds and fixed maturity plans) and one is a hybrid equity/fixed incomescheme. L&T Mutual Fund is established as a trust under the Indian Trust Act, 1882, with L&T


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Finance acting as the sponsor/settler, L&T Mutual Fund Trustee Limited acting as the TrusteeCompany and L&TIM acting as the investment manager to the various schemes.

The funds and portfolio management services of L&TIM are available to both Indian and non-resident Indian retail customers, as well as Indian and foreign institutional customers. The

objective is to establish L&TIM as a leader in the Indian asset management business. L&TIM

endeavors to accomplish this by providing the customers with favorable investment returns and

superior customer service. Evaluation of opportunities to develop further services and productsto better serve the investing needs of the customers is an ongoing process. For example, the

company recently launched a daily investment plan which will allow its customers to more easily

take advantage of rupee-cost averaging.

The equity schemes include:

1. L&T Opportunities Fund,2. L&T Growth Fund,3. L&T Midcap Fund,4. L&T Multi-Cap Fund,5. L&T Global Advantage Fund,6. L&T Tax Saver Fund,7. L&T Contra Fund,8. L&T Hedge Equity Fund,9. L&T Infrastructure Fund,10.L&T Small Cap Fund,11.L&T Tax Advantage Fund Series-I.

The three largest equity funds are L&T Opportunities Fund, L&T Midcap Fund and L&T

Infrastructure Fund, which have AUMs of Rs. 762.80 million, Rs. 453.00 million and Rs. 361.90million, respectively, as at August 31, 2010. Of these three funds, L&T Opportunities Fund is

rated 4-star by Value Research1 and L&T Midcap Fund is rated 3-star by Value Research as at

August 31, 2010. L&T Opportunities Fund and L&T Midcap Fund are also rated "Gold" by the

1

Value Research Fund Ratings are a composite measure of historical risk-adjusted returns. In the case of equity andhybrid funds this rating is based on the weighted average monthly returns for the last 3 and 5-year periods. These

ratings do not take into consideration any entry or exit load. 5-stars indicate that a fund is in the top 10% of its

category, next 22.50% indicates 4 star, middle 35% receive 3 star rated fund in terms of historical risk-adjusted

returns. Under Equity Diversified category L&T Opportunities Fund is a 4-star fund. Under Hybrid: Monthly

Income category L&T Monthly Income Plan is a 5-star fund. These Fund Ratings are as on June 2010. The Value

Research Ratings are published in Monthly Mutual Fund Performance Report and Mutual Fund Insight. The Ratings

are subject to change every month. The Rating is based on primary data provided by respective funds; Value

Research does not guarantee the accuracy.


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Economic Times Intelligence Group2

as at August 31, 2010. The balance equity funds are eitherunrated or rated below "Gold".

The fixed income schemes include:

1. L&T Triple Ace Fund2. L&T Freedom Income - Short Term Fund3. L&T Gilt Fund4. L&T Liquid Fund5. L&T Short Term Floating Rate Fund6. L&T Select Income Fund - Flexi Debt Plan and7. Seven fixed maturity plans as at August 31, 2010.

The three largest fixed income funds are L&T Freedom Income - Short Term Fund, L&T SelectIncome Fund, and L&T Liquid Fund, which have AUMs of Rs. 10,218.50 million, Rs. 6,480.10million and Rs. 11,959.70 million, respectively, as at August 31, 2010. Of these three funds,

L&T Freedom Income Short Term Fund is rated 4-star by Value Research and L&T Liquid

Fund are rated 3-star by Value Research as at August 31, 2010, and L&T Select Income Fund

Flexi Debt is not rated. The balance fixed income funds are rated below 3-stars or are unrated.

There is also one hybrid income scheme, L&T Monthly Income Plan. L&T Monthly Income

Plan has AUM of Rs. 1,234.00 million as at August 31, 2010, and is rated 5-star by ValueResearch as at August 31, 2010. L&T Monthly Income Plan is also "Platinum" rated by the

Economic Times Intelligence Group as at August 31, 2010.

The funds are sold both directly by L&TIM to retail and institutional customers, as well as

through other intermediaries.

Portfolio Management Services Segment

L&TIM obtained a SEBI license for conducting portfolio management services on May 31,

2010. Within the portfolio management services segment, the company has the capability and

flexibility to customize and personalize portfolios in order to achieve individual customer'sdesired investment objective. The company may pursue portfolio management services mandates

with both institutional customers and high net worth individuals. With respect to institutional

customers, the company may pursue sub-advisory mandates with third-party investment funds.

2The Economic Times Intelligence Group list Mutual Fund schemes on the basis of their risk adjusted performance.

The period under consideration is three years. The return score is arrived by allotting 60% weight to the past 3 year's

absolute return and 40% weight to the past 1 year return. These weighted returns are compared vis-a-vis the average

return for the category under consideration to arrive at the return score for each scheme. The top 10% funds in each

category are then classified as "Platinum" funds; the next 20% are graded "Gold" while the next 40% are classified

as "Silver". The quarter under consideration is April 2010 to June 2010.


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AUM, Revenues and Fees

L&TIM earns revenues by charging fees for managing the investment assets of customers. The

company generally calculates investment advisory fees as a percentage of the value of AUM,

with such fees varying by type of asset class, investment service, size of account, and total

amount of assets managed under the mutual fund segment and the portfolio management servicessegment. Accordingly, fee income generally increases or decreases as AUM increase or

decrease. Increases in AUM generally result from market appreciation, positive investment

performance for customers, or net asset inflows from new or existing customers. Similarly,

decreases in AUM generally result from market depreciation, negative investment performancefor customers, or net asset outflows due to customer redemptions, account terminations, or asset

withdrawals.

Fees paid by the funds to L&TIM are reflected in the applicable investment managementagreement entered into between L&TIM and L&T Mutual Fund Trustee Limited. The investment

management agreement between L&T Mutual Fund Trustee Limited and L&TIM provides for

termination by L&TIM on 180 days' written notice to L&T Mutual Fund Trustee. L&T MutualFund may terminate the agreement in accordance with relevant SEBI rules and regulations, and

with the prior approval of SEBI.

Fees paid by the portfolio management customers to L&TIM will be reflected in the applicable

investment management agreement. Investment management agreements for portfolio

management services, including sub-advisory services, are typically terminable by the customer

at will. With respect to the portfolio management services, the company may also charge a

performance-based fee in addition to or in lieu of a base fee. Performance-based fees arecalculated as either a percentage of absolute investment results or a percentage of investment

results in excess of a stated benchmark over a specified period of time, and they are recorded asrevenue at the end of the measurement period. Accordingly, if performance-based fees were to

become an important part of our business, the seasonality and volatility of revenues and earnings

may become more significant.

The company sometimes experiences periods when the number of new accounts or the amount of

AUM increases significantly, as well as periods when the number of customer accounts or the

amount of AUM decreases significantly. These shifts result from wide-ranging factors, includingconditions of financial markets, the investment performance for customers, and changes in the

investment preferences of our customers.

The tables below summarize the AUM and revenues by category of investment. As the companyhas obtained the license for portfolio management services on May 31, 2010, and is still in the

process of establishing this business segment, none of the AUM or revenues (as at the dates

indicated) is attributable to portfolio management services.


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Investment philosophy, research and disciplines

The company believes in utilizing research-based stock selection and active portfolio

management to provide long-term gains for its customers. The company has established the

infrastructure required to conduct fundamental research backed by effective analysis, as

evidenced by our research teams and portfolio managers with experience in their respectivedisciplines. The research teams apply fundamental research, quantitative research, and micro-

and macro-economic research models normally using a top-down approach and application of

both growth and value models in the research and selection of securities. The investment

disciplines are generally focused on market capitalization (e.g., large-, mid-, and small-capequities) and term (for example, long-, intermediate-, and short-duration debt securities)

Financial summary of L&TIM

For the financial year ending March 31st 2010, the revenues for L&TIM have taken a dip by 12%

to Rs.4.4 crores. The company made net loss after tax of Rs.27.2 crores for the financial year

ending March 31st

2010.

The excerpts from the balance sheet and income statement are mentioned below:


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Targets & Deliverables

Growth targets

As of August 2010, there were 44 individual registered mutual fund providers, with a total

average AUM, for the month of August, excluding funds of funds, of Rs. 6.9 lakh crores. As ofAugust 2010, the company ranks 25th out of 44 registered AMCs in terms of average AUM. The

market share in the average AUM stands at a mere 0.6%. (Refer Annexure A for details.)

Assuming that the industry size would reach Rs.14.4 lakh crores in AUM by December 2015, thecompany aims to be among the top five by AUM size till then.

Profitability targets

In addition to above, the focus should also be on returning to profitability. As mentioned in the

tables above, for the financial year ended March 31st

2010, the company reported a net loss after

tax of Rs. 27.2 crores. It was discussed by the management that the loss is a function of 4 factors:

1. Increase in establishment costs, a direct function of new branches opened up in differentcities across the country

2. Increase in the salary costs of management staff3. Reduction in fee income because of SEBI clamping down on entry fees4. Higher costs incurred towards distribution of products

In light of the above, the company aims to achieve profitable growth in the market share in

the medium term.

Deliverables

The CEO has to come up with a turnaround plan for the company, using precise financial and

marketing strategies. Specifically, it should address the following:

1. Fund/AUM mix: In order to achieve profitable growth in AUM as targeted above,including a plan for breakeven and rapid growth in profitability thereafter

2. Distribution strategy: Recommend the deployment of innovative mechanism fordistribution of mutual fund products

In addition to the above, strategy can also cover the following, among other things:

1. New Product strategy2. Marketing strategy3. Risks anticipated in the near future, and ways to mitigate them


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Please ensure that your financial plan is consistent with the strategies you plan to suggest. Alsoquantify any/every qualitative suggestion/strategy and incorporate the same in the financial plan.

Format & Other details

1. Submission should include a PowerPoint presentation for strategic plan (not more than10-15 slides) and an Excel for financial plan.

2. Please submit a detailed excel for the financial plan, with a separate sheet capturing theassumptions used in building the model. Please add 1-2 slides presenting snapshot of themodel, and capturing the key assumptions used in building the model.

3. Wherever data sources are referred to (for company or industry data), clearly indicate thesource of data.

4. Additional data requests, if any, should be routed to the company through the eventorganizing committee. The company shall apply its discretion, while responding to any

such requests.

5. For more details related to financials, refer to FY2010 annual report. (sent alongwith thecase study).

6. For more information about the company, visit the websites ofwww.ltfinance.comandwww.lntmf.com

7. For more details about the industry, visitwww.amfiindia.com.
http://www.ltfinance.com/http://www.ltfinance.com/http://www.ltfinance.com/http://www.lntmf.com/http://www.lntmf.com/http://www.lntmf.com/http://www.amfiindia.com/http://www.amfiindia.com/http://www.amfiindia.com/http://www.amfiindia.com/http://www.lntmf.com/http://www.ltfinance.com/


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Annexure A

2eea L&T Financial Services Case Study

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