Perspectives

Is it different this time?

Like most valuation-conscious investors at present, we too are grappling to deploy capital at acceptable valuations. In many new accounts opened since January 2023, we continue to hold 20%+ uninvested cash. While we are not accepting capital from new partners at present, if we did, we would be able to deploy only ~40% in Week 1, most of it in Large Caps.

Our uninvested cash prompted a partner to ask us recently whether we are missing “something”. Sentiment for India is very positive. There is a wall of FII money waiting to enter India. SIP flows continue to be strong. Hence can’t valuation multiples continue to climb higher? Is it different this time?
It is not different this time, just the behavioural cycle at play in Small caps and select sectors.

Our perspectives on valuation euphoria in Small and Micro Caps at present

We have put together a brief note to explain our perspective on valuation in Small & Micro Caps

Looking for Asymmetric outcomes

The enclosed blog discusses the power of Asymmetric outcomes, where to look for such returns, what it takes to achieve them, and how we think about what share of the portfolio we allocate to such ideas. 

Manufacturing: what explains our optimism when they are lower ROE vs Consumer companies and hardly generate any Free Cash Flow

The 3 key variables that matter in value creation are longevity of profit growth, sustainability of ROE above Cost of Equity (12% in India) and entry prices paid.   Traditional wisdom to buy only high ROE and high Free Cash Flow generating businesses ignore 3 key variables

The shadow of Private Equity ownership on our buying decisions

The purpose of our letters and occasional blogs is to provide transparency in how we are thinking with the goal of creating stronger alignment with partners who want to think and act long-term.

Two companies in our portfolio – STAR Health Insurance and Restaurants Brands Asia – have existing Private Equity (PE) shareholders looking to exit.   Everstone is looking for a buyer for its stake in RBA.  Similarly, there are a few PE investors in STAR who are looking to sell their stake. 

PE funds have a finite life and need to return capital.  The shadow of these exits often results in a weakness in stock prices till the exit is complete.  For example, one of the PE investors in STAR sold a large stake via a block deal last Friday at a discount to the prevailing market price which resulted in a 8% drop in price.

Why do we never go down the risk curve in Financials to chase cheap valuations

Silicon Valley Bank in the US has collapsed.  SVB imploded as 3 risks collided

1. Side effects of excessive money printing came to the fore –> steep increase in the US yield curve as long term interest rates rose from 1.5% to >5% in about 15 months
2. Highly concentrated depositor base which withdrew large sums quickly
3. Huge Asset Liability mismatch –> short term deposits were parked in long term Assets (akin to what happened with our Real Estate NBFCs).  Hence, SKB was forced to sell long term assets and book losses when faced with withdrawals at the wrong time, which eroded its Capital base and created momentum for a run on deposits (vicious cycle).

An article that explained what happened is enclosed.