Author : Aequitas

Monthly Newsletter September 2022

Fund Update – Our Fund strategy of investing in companies which qualify on the 3 parameters of –
• Growth
• Value
• Contrarian approach

*PMS performance is an aggregate of all bespoke PMSes that we have. Individual portfolio returns may vary.

Our Fund Strategy has held us in good stead through these difficult times, where our portfolio companies have performed well, both from results perspective and outpacing the benchmarks.

Our portfolio is based on the philosophy of buying businesses rather than stocks – the difference being that when you buy the business you buy the intrinsic value and are willing to stay the course and see the business grow – thereby generating wealth. Of course, the underlying business has to be a market leader in its segment, one which has seen at least one business cycle in public markets, where there is a valuation disconnect and most importantly, we see a catalyst that will cause a change in the margins as well as the P/E (perception Multiple) during our holding period. When we buy businesses, we buy for a very long period – upwards of 4-5 years. When you buy a business for this long a period it is obvious that a lot of research goes into it before you finally buy. We are fortunate to have a set of 6 very bright analysts who do all our in-house research (who are CAs and CFAs) – amongst whom Subham, Pratiksha and Nishith have just been promoted as Co-Fund managers.

On the other hand, when you buy the “Stock” – you buy the price which you can trade out at any time.

Buying businesses give a lot of satisfaction as you can over time see a few of the best brains working to increase market share/profits. With our longer holding periods we do get the benefit of speaking to some amazing professionals who are steering companies ahead and as in any conversation we also get certain nuggets to learn from them.

With the quarterly results gone – we were able to analyse our portfolio results. While the Nifty results are available for all to see on any website, our Q1 results compilation is as under –

1. The average market cap of our portfolio is Rs 3950 Cr.
2. The highest market cap of our portfolio is approx. Rs 11000 Cr – here we have 3 companies Lowest market cap stock is approx. Rs 900 Cr.
3. Net sales TTM is an average of Rs 5400 Cr for the portfolio.
4. P/E for portfolio remains <10. (Our portfolio companies showed good growth in Sales/PAT, while the portfolio performed well, stocks in our portfolio are reasonably valued)
5. YoY Sales Growth is 36%
6. PAT growth for the portfolio is 48%.
7. All portfolio companies are market leaders in their respective segments – either by Market share or by Efficiency (therefore have maximum margins within the Sector)

These data points are post considering the latest Quarterly results (Q1 FY’23)

An Ode to Rakesh Jhunjhunwala and Anshu Jain

While both were Indian stalwarts in the financial sector – except for their towering achievements where they both reached the pinnacle of success, they could not have been further apart – Rakesh swayed the masses with his witty One-liners and made it easier for retail investors to believe in the India Story. A self-made man who has the rare gift of being able to take a long-term view of investments which created humongous wealth for him (Titan, Lupin and CRISIL were his biggest wealth creators) as well as trade as sharply as one can. He lived the retail investor’s dream of creating wealth by investing in the markets and whenever the chips were down, an interview with him where “Picture abhi baaki hai” made investors’ belief grow stronger in the markets.

Anshu, on the other hand, Co-Headed Deutsche Bank, mostly based out of the financial capital, London, where his trading desk made a lot of money for Deutsche. A big believer in India, he too is said to have used every opportunity to play up the India story with the FIIs.

Our country is poorer having lost these two stalwarts within the same month.

With the onset of the 75th Year of Independence, looking beyond the Jackson Hole conference through India-tinted eyes

A lot of investors globally were looking at the Jackson Hole meeting as the Fed decides the fate of US monetary policy and global growth. The Fed disappointed the market participants by focusing only on getting inflation back to its long-term target of 2%. The 8-minute speech essentially focused on the Fed saying, “Significant large rate hikes will have to be done which may cause the economy to slow down”.

The news was not welcome, and the Global markets reacted accordingly. So far, the narrative has been Fed has been way behind the curve (real interest rate of -6% and runaway inflation show that) – and that the balance sheet is tapering at a pace much lesser than the $45 Billion a month, but the narrative seems to be changing – A report from Zoltan Poscar of Credit Suisse notes that there is a tectonic shift that is happening across the globe which is defined by 3 poles –

1. Wage inflation– Due to the lack of immigration in the US (Courtesy of anti-immigration law passed during the Trump administration) there is a sustained increase in wages – which on one hand is making the unemployment statistics look good as a lot of immigrant inflow ensured low wages in the US. With the immigrants not coming as they were wage inflation is here to stay.
2. Deglobalisation– With China and the US not on the best of terms (Due to the trade wars between China and the US earlier, the strict COVID protocols by China disrupting supply chains followed by the Chinese stance towards Russia), China is no longer supplying cheap goods to US and rest of the world. This means that goods are going to be expensive in the years to come. The world which had over 20 years created very efficient supply chain systems is moving from “just in time” to “just in case” – where the focus has shifted from procuring goods at the cheapest price to getting control of the supply chain, which comes at an additional expense.

3. Energy crisis— Russia weaponizing gas for European countries has exposed that “The emperor has no clothes” – Germany which has been the growth engine for Europe, with cheap gas supplies from Russia and the ability to sell expensive manufactured goods is held hostage by Russia with no cheap gas available. The situation is as bad as the rationing of electricity, and the re-opening of mothballed Nuclear and Thermal plants to generate electricity. If the rationing/price of energy remains as high manufacturing equations could change.If the above are here to stay, we are looking at a reversal of what we saw in the years since 2008. i.e goodbye to low inflation and low-interest rates and say hello to tighter monetary policies to tackle inflation.

But unlike economics where it’s always “Ceteris Paribus” real life is full of surprises. So, we will also keep on looking for data that surprises us. And few things that caught our attention were —

1. The US is past peak inflation with housing, auto, retail spending, and a lot of other data points pointing to a very fast slowdown if not an outright recession, and with the markets already priced in a lot of the above including hikes to talking to 3.75% till 2023.
2. China despite its domestic issues of a cracking real estate sector has registered a trade surplus of $100 billion in July. Its alliance with Russia where it is supplying tech-based products and importing energy and commodities has created a trade block of sorts.
3. Euro Zone floundering with record high inflation rates, electricity issues (courtesy of their ESG drive where they moved away from Thermal & Nuclear energy to focus only on renewables and Gas from Russia)

While there are lots of moving parts in the above equation one thing that has been seen historically is – India has mostly been a part of the collateral damage. But this time it is different, we are not a part of any fragile economies but are emerging strongly across a lot of parameters:

1. We are not suffering from an energy crisis – While Oil is still hovering at $100 – it is not impacting the economy as much. Coal Iindia Lltd on the other hand has stepped up Coal dispatches significantly which is ensuring that electricity is not a challenge or both industry as well as households
2. At around 6.7% we are not suffering from inordinately high inflation – In fact historically our sweet spot of the higher GDP growth rate of 7% or higher has been when we have had inflation between 5-6%.
3. Our fiscal deficit at 6.4% this year is high but not in an untenable position – as it is due to government spending to de-bottleneck the economy.
4. The rupee despite the DXY being at 110 is relatively stable at sub-80 levels.
5. Our engineering exports are breaking new grounds – The latest iPhone 14 being manufactured and shipped from India speaks volumes of the closing of the Tech gap between India and China. While the gap is significant and will surely take time to bridge – Indian manufacturing surely is stepping up- Eg The chemical sector alone is looking at Rs 40K Cr ($5Bn approx.) of Capex in 2 years (mind you till around 10 years ago the entire sector market cap was sub Rs 40K Cr ($5 Bn approx.).
6. Despite the global headwinds we are seeing credit growth pick up – from 8% to 13%.
7. With Aggregate Capacity utilization at a high of over 75%, we are seeing a lot of Capex happening- order books of all Capex-oriented companies including Siemens, ABB, L&T amongst others are swelling.
8. A slow China means commodity prices will be benign thus aiding in Capex plans.
9. A lot of economic reforms done over the past few years are now showing their true weight – GST, where collections are crossing Rs 18 lac Cr ($225 Bn approx., on an ARR basis).
10. Lastly despite the FIIs having taken out a record Rs 2 lac Cr ($25 Bn approx.) in the past 10 months the markets have hardly dipped by 14% (conversely in 2008 FIIs took out approx. Rs 50,000 Cr ($6 Bn approx.) and markets dipped by nearly 50%).

We are not saying that India is decoupled from the rest of the global markets, but a lot of Micro is going very well for India. It is the Global macros that we are worried about and are watching data points very carefully.

Lenin famously said, “there are decades when nothing happens, and there are weeks when decades happen.” Hoping that we are all able to capitalise on the sweet spot that India today is in.

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