Why do we not own commodities
We have put together a brief note explaining why we don’t own commodities.
Read MoreWe have put together a brief note explaining why we don’t own commodities.
Read MoreWe are investors in the Life Insurance space with ~20% allocation. These names have seen a steep price correction over the last 6 months with some leading large caps down over 25%.
We take this opportunity to explain
Dear Partners:
In order that we can share our thinking on the current situation in Ukraine with all partners, we have put together a brief note that summarizes trends we see, their implications, and how we intend to act. I hope you find it useful.
A caveat. The situation is evolving and we typically see first order effects at present, but there will be second and third order effects which only become clearer with time. Hence, this note is “work in process”.
It is now clear that a macro risk (Russia/Ukraine) has become a known event. Not surprisingly the markets are selling off as new information is factored into prices.
No one knows how this will end or its short term implications. If anyone tells you they do, it tells you more about them than their forecasting abilities.
Read MoreSolara has a strong Pharma API 1 and an emerging CRAMS 2business. It has recently announced a merger with Aurore, a privately owned company in the API/CRAMS space. Pharma API is a USD 180B industry globally of which India has ~ USD 4B share. The developed world has been outsourcing manufacturing and India now has the additional tail wind of the developed world wanting to de risk from China (USD 35B).
Read MoreWe believe Axis is amongst the 4 private Banks in India that has the right to win long term. It offers opportunity for long term compounding but where entry valuations are significantly in favour in a richly valued market.
Partners are aware that we already own ICICI Bank, HDFC Bank and Kotak Bank as our core Banking positions.
Why add a 4th Bank? Banking is not a winner takes all business. The RBI ban on issuing of additional credit cards (now lifted) and repeated technology outages at HDFC Bank is a reminder that one never knows where risk lurks. If there is opportunity for multiple players to do well, one should spread the risk.
We believe Axis is amongst the 4 private Banks in India that has the right to win long term. It offers opportunity for long term compounding but where entry valuations are significantly in favour in a richly valued market.
The principal value of any Bank lies in its deposit franchise. A bank’s Cost of Funds (COF) determines its right to win long term because it can choose the risk it wants to underwrite. If COF is not in the top decile, you are doomed to a vicious cycle of pursuing higher risk segments which eliminates resilience during a crisis. And it takes time to build a superior COF position. Low valuations accompanied by high COF is a high probability value trap. As one can see from the chart below, Axis’s deposit franchise is amongst the best in the business, even as it has ceded some ground to its peers in the last few years.
Source: Spark Capital
Financial institutions are like icebergs as the true risks in their Balance sheets are not well disclosed. Hence, a conservative mindset in credit and credibility on reported NPAs is key. Under new leadership, Axis Bank is undergoing a transformation to a fundamental culture of conservativeness with a more prudent provisioning policy, more granular loan book being built and prioritizing credit discipline over growth. 1
Why is the stock trading at close to 1 std deviation below mean valuations in a raging bull market?
Source: Bloomberg
Despite the above, we believe Axis Bank at present provides a compelling opportunity as this pessimism is being reflected in valuations (one std dev below mean) while growth is looking up. Hence, Axis offers a rare combination of both growth and valuation re rating.
In our optimistic scenario, we assume Axis valuations re rate over time to one standard deviation higher than mean. In this scenario, the returns could be closer to what one has seen in ICICI Bank over last 3 years. When sentiment changes, multiple expansion happens swiftly (see chart below). However, markets tend to wait for certainty. Therein lies the opportunity as you can get superior outcomes by ignoring the herd if you are willing to bear short term pain and not play momentum. It was only 3 years ago that ICICI Bank was derided for having a fundamentally flawed culture and now ICICI Bank seems to be the consensus pick for the Banking stock of the next decade.
Source: Bloomberg
In our pessimistic scenario, Axis Bank’s transformation remains incomplete, and its deposit franchise weakens. Or it is unable to gain market share on Assets. This could happen if the Axis senior leadership team is not stable. In this case while returns in Axis Bank will be poor, the beneficiaries of its challenges will be the other three private Banks (ICICI, HDFC, Kotak). Hence, as a portfolio play, we will do fine as we are also participating in the others quite meaningfully and they would then generate significantly better returns than our base case estimates.
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Technology buzzwords – “ML. AI. Blockchain. Platforms” are fueling investor delusions. We share 2 articles and also explain why we don’t own any “FinTech” as of now.
Technology buzzwords are fueling investor delusions
Read More“In life, the challenge is not so much to figure out how best to play the game; the challenge is to figure out what game you’re playing.” (Kwame Anthony Appiah http://appiah.net/)
CLSA is a reputed broking house. It published a report 2 days ago recommending investors book profit in India.
We agree with CLSAs that valuations in India, on aggregate, are stretched. In our last letter we mentioned, we were “cautious, but not bearish” and that because we have borrowed returns from the future, we could be in for a period of muted returns.
Read MoreWhile our core approach to investing is to buy “disciplined compounding stories at a fair price”, it is equally true that “at the right price, all assets are AAA” (except where one suspects governance issues). We will buy companies in “Special Situations” when they trade at a meaningful discount to fair value. ITC meets our Special Situations criteria.
ITC has multiple business lines.
Read MoreWe have put together a brief note explaining how we take exit decisions.
Read More