Exit note on Team Lease

Our context

  • Allocators of capital in the best 20 opportunities we see over the next 5 -10 years
  • Practice “good churn”: when we are wrong, when valuations are euphoric, when we can reallocate for better returns elsewhere

Team Lease – entered portfolio as Clear Leader

  • Contract staffing – a mega trend
  • Great business as results in “win win” outcomes for customers, Govt and companies as it encourages formalization
  • Industry consolidation should happen as is happening in other industries in India and will lead to margin expansion
  • Team Lease, the best run company in the sector with excellent governance/promoters
  • Low margin business, but capital light due to low Working Capital, so can be 25% ROE
  • Possible to get 15%+ top line growth plus some margin expansion over time. Margin expansion over low base will be a meaningful driver of bottom-line growth.
  • 15-18%+ decadal compounding possible

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Performance measurement – the difference between TWRR and XIRR

Performance reporting in the PMS industry had no standardized reporting till SEBI mandated managers to only report TWRR.  (Time Weighted Rate of Return).

TWRR measures skill of a fund manager – TWRR does not care about quantum of money invested, only the return earned over the time period money was invested.  It is calculated by multiplying returns over each time period money is invested and dividing it by the total time period. Alternatively, one can calculate this by assuming units are being issued at prevailing prices and calculating how the NAV of each units has evolved (MF method).

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INVESTMENT THESIS ON STAR HEALTH LIFE INSURANCE

Star Health is a Health Insurance company primarily 1 focused on the retail segment. This is a business we would like to own for long periods of time.

  • It offers a product which has a tangible value proposition – Health insurance is something we think everyone should own.
  • Dominant leadership position in a large and growing market with a long runway for growth.
  • Attractive business fundamentals supported by high repeat purchase, agent stickiness and ability to correct pricing errors through product repricing.

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What I learned from Rakesh Jhunjhunwala

Rakesh Jhunjhunwala, India’s favourite investor, passed away yesterday at the young age of 62.  The world knows him for his wealth, his passion for investing and for his wit. I am privileged to share a side of him not many knew by virtue of my association at his family office “RARE” between 2006 to 2014 and the mentoring I benefited from till his last days.

Rakesh “Bhaiya,” as he was affectionately referred to, was perhaps the strongest believer in the India growth story that I have known.  His reasoning was India’s democratic roots and consensus-based approach meant growth would be more long lasting and gain momentum with reforms.

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INVESTMENT THESIS ON MAYUR UNIQUOTERS

The lack of Earnings growth for Mayur in the last few years coupled with no immediate triggers has resulted in a reasonable valuation today.
We continue to own Mayur despite a few years of no operating earnings growth because its poor financial performance can be principally explained by the environment. The business is evolving well on operating metrics and its valuations are attractive. We also have a variance perception on key person risk.  While Mr Poddar is the visionary and face of the firm, the business growth and resilience are not as dependent on the promoter as the market believes.

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The stock market is not being irrational

In our last communication on 5 May, we had shared that we need to be realistic in return expectations as monetary policy is reversing which will have an impact on multiples.  We are seeing this play out as the market reprices risk.  There is a higher probability vs the last few months that inflation will stay elevated and that developed world Central Banks will need to raise rates aggressively and that could push their economies into recession.

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Need for realism in return expectations

Conversations with partners over the past few days suggest some partners are not appreciating the change in monetary policy underway and what that means for future returns.

Hence, some points we have made earlier merit repetition.

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