Motilal Oswal Asset Management Company Ltd. (MOAMC) is a public limited company incorporated under the Companies Act, 1956 on November 14, 2008, having its Registered Office at 10th Floor, Motilal Oswal Tower, Rahimtullah Sayani Road, Opposite Parel ST Depot, Prabhadevi, Mumbai - 400025.
Motilal Oswal Asset Management Company Ltd. has been appointed as the Investment Manager to Motilal Oswal Mutual Fund by the Trustee vide Investment Management Agreement (IMA) dated May 21, 2009, executed between Motilal Oswal Trustee Company Ltd. and Motilal Oswal Asset Management Company Ltd.

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Mr. Taher Badshah - Fund Manager, MF

Mr. Taher Badshah

Investment Opportunities in the Connected World

The first decade of the twenty first century belonged to the mobile telephony revolution, which brought about exciting exponential growth opportunities for companies in the mobile service provider industry. Besides, these wireless networks increasingly made the Internet much more accessible to the public at large. This unprecedented penetration of digital devices and higher internet bandwidth is now leading to a new revolution that is quietly creeping upon us – the era of connected devices. Known also as the ‘Internet of Things’ (IOT), it is a concept that aims to extend the benefits of the regular Internet - constant connectivity, remote control ability, data sharing etc - to goods in the physical world. Automobiles, electronic appliances, consumer durables, set-top boxes: All would be tied to local and global networks through embedded sensors that are "always on." In order for objects to interface with the existing Internet, they must have some means to connect. This is being done largely via radio-frequency identification (RFID) chips, although other means are also being used, including old-fashioned barcodes, and wireless connection systems like Bluetooth and Wi-Fi.

Proponents argue that the technology will provide great efficiencies across many industries. Stores wont have to worry about running out of products, because an automated inventory-control system will know how many packs of gum or boxes of diapers are on hand at any given moment. Consumers will be able to their fridge to order new groceries for delivery when the eggs run out or the milk expires. Forget to turn off the oven? No problem, turn a dial on your smartphone from anywhere in the world. No need to turn off the lights: Your rooms will know when you enter or leave, setting all systems just the way you like them, since they will be able to detect when the phone in your pocket is near. High-end cars today come equipped with the intelligent electronics that provide the best infotainment and driver-assistance features for a safe and relaxing driving experience. It is estimated that by 2020E the number of connected devices globally, would increase to 50b (2.5b in 2010) (Source - CISCO).

Within our umbrella investment matrix of QGLP (Quality-Growth-Longevity–Price), one of the frameworks we use to identify new ideas is to 1) look for emerging structural trends and 2) try and identify potential beneficiaries that meet QGLP. In this regard, a recent article in HBS (Harvard Business Review) titled ‘How smart, connected products are transforming Competition’. The article focused on how information technology is revolutionizing products. The article states that “twice before over the past 50 years, information technology radically reshaped competition and strategy; we now stand at the brink of third transformation (Internet of Things)”. Now in the third wave IT is becoming an integral part of product itself. Embedded sensors, processors, software and connectivity in products, coupled with product cloud in which product data is stored, analyzed and run, are driving dramatic improvement in product functionality and performance. This prompted us to screen for possible proxies to this large structural and global opportunity. Our screen list was not very exhaustive given absence of pure technology and hardware plays in the Indian listed space. Furthermore, only a few names survived our three filter test – a) Industry test – is sustainable value creation possible, b) Value chain analysis to identify where the sweet spot lies and 3) ability of the target firm to have the right offerings in the appropriate part of the value chain.. To understand this subject further, let’s take the case of the automotive industry (a key vertical for players in the embedded software business): Global R&D spends by auto companies stands at USD120b annually. Of this, 90% is undertaken captively by auto OEMs, with outsourcing proportion being just 10% and offshoring to India being just ~0.4%, providing immense growth potential for these players. Software, which comprised 2% of total value of a vehicle in 2000, now comprises 15% of the total value and is expected to reach 20% by 2020 (Gartner, Inc Research). By 2020, there will be a quarter billion connected vehicles on the road, enabling new in-vehicle services and automated driving capabilities, according to Gartner. Since new-age electronics and software development involving multimedia, connectivity, and consumer technologies have traditionally not been a focus area for car OEMs, they are increasingly finding it favorable to outsource to specialized players. Global paucity of engineering and software talent for embedded systems, along with cost advantages (estimated cost savings of 40-50% adjusted for productivity differences), strongly favors offshoring. Key areas for growth in the automotive vertical include Infotainment, Powertrain and Hybrids, and Safety and Security segments.

Another area that lends itself to the ecosystem of connected devices is the broadcast and consumer electronics space. Next generation cloud computing technologies and Internet bandwidth efficiency are driving the availability and consumption of content anywhere and everywhere. The Internet of Things (IoT) is allowing additional services on the same medium (such as cable set-top boxes and mobile devices) to enable services such as home automation, home surveillance and collaboration for the connected home. We expect strong growth from the rapid adoption of connected devices in the broadcast and consumer segments led by investments by operators in developing newer services and features that allow them differentiation from competition.

The above examples essentially are to illustrate the point that growth opportunities in a connected world could arise in multiple industries and can be exponential in nature. Signing off, one cannot overemphasize that when quality businesses meet exponential growth opportunities, the value creation could be explosive.

The sector mentioned above is used to explain the concept and for illustration purpose only. It should not be used for development or implementation of an investment strategy. It should not be construed as investment advice to any party. Past performance may or may not be sustained in future. The statements contained herein may include statements of future expectations and other forward-looking statements that are based on our current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements.

Mutual fund investments are subject to market risks, read all scheme related documents carefully.

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