Blogs

A perspective on poor sentiment for the QSR Sector and why we retain faith in RBA

Summary

Leading players in the QSR industry have all the key attributes of a good business we would like to own long term: growth longevity, 18%+ ROIC and low disruption risk.
The sector is currently out of favour due to muted profit growth in recent years (weak consumer sentiment, Delivery Apps margin challenge, increased competitive intensity). But the long-term profitable growth story remains intact. The prevailing pessimism is creating reasonable to attractive entry points in many QSR names, especially in a market where value is hard to find. This is good for long-term investors.

RBA continues to execute well in India. This is despite a tough environment and significant distraction of a promoter exit. There was a Capital allocation error into Indonesia. We believe the management will take a rational call to exit Indonesia if cash losses there continue. It is a very attractively priced Asset, and hence we have continued to add to our position.

Solidarity Partners Meet- interview with promoters of RACL GearTech & Neogen Chemicals

We had the privilege of hosting the Promoters of Neogen Chemicals Ltd., RACL Geartech Ltd, at our Partners Meet in Mumbai. It was truly insightful to learn about the key drivers behind their success.

Watch the full interview with them here

Stillness, backing a mission oriented promoter and the rewards of good Karma – Rakesh Jhunjhunwala’s incredible 340x returns in Inventurus

Inventurus Knowledge Solutions, a company promoted by Sachin Gupta and the late Rakesh Jhunjhunwala in 2006, is expected to list in the next 2 weeks. The grape vine has the IPO valuation of the company pegged at between 20000-25000 Cr. If we take the mid-point of that range, the original investment has compounded ~ 340x for the Jhunjhunwala family in the last 17 years, an IRR of 41%. This adds to the long list of 100 bagger returns generated by him.

Why can’t more of us be like him? Other than the ability to see the future with more clarity, what attitude is needed to earn such returns?

Stillness by deliberate choice. Read More

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.

Consequences of Putin’s war in Ukraine

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”.

Investing during a crisis

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.

Signal vs noise – what game are we playing?

“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.

The futility of taking Cash Calls

If one gets both legs of market timing—selling and re-entry—perfectly right, the net impact on incremental IRR versus staying invested is not significant, especially considering the probability of perfect timing is practically zero.¹

We enclose calculations below:

Perfect Right Timing: Cash call of 30% at peak and re-entering at 25% market drawdown –> incremental IRR over 5 years vis-a-vis staying invested is 1.6%.
Partially Right Timing: Cash call of 30% just before peak and re-entering at 20% market drawdown –> incremental IRR over 5 years vis-a-vis staying invested is 0.8%.
Wrong Timing: Cash call of 30% assuming a peak, but the market rallied instead and thus re-entering at 25% higher levels–> IRR drag over 5 years vis-a-vis staying invested is -1.8%.

Why is it that market timing seldom works?

An over-heated market can rise much further before it corrects. No one rings a bell at the top or at the bottom. Hence, typically one sells too early.
Re-entry is difficult at the bottom. At moments when re-entry should happen, our minds are seized with fear as the drawdown reflects near term stress in the environment.
The protective instincts of the brains kick in overriding rational judgement (“prices factor in the uncertainty”) and one looks to protect remaining capital.
And if this seems theoretical, we only need to take a minute to reflect how we behaved during Covid-19 fall.

Then why do people continue to be tempted by cash calls?

Some people genuinely believe they can over optimize short and long term. Such genius is very rare. But then, overestimating one’s competence is a human trait.
The mathematics is not intuitive. These lessons have been learned painfully because yours truly engaged in this futile activity for many years.
During times of stress, time horizons compress. We forget the game we are playing. And some of this is biological based on how our brains are wired.
We take advice from people playing a different game with different incentives. Business news channels need your eyeballs. Your broker needs you to churn.

So how to protect against drawdowns?

We cannot. The reason historically Equities have been far more rewarding than Bonds is because the “risk premium” is the reward for the pain of enduring market volatility.
One can only minimize drawdowns by not buying junk. The extent of drawdown and pace of recovery is a good benchmark of the quality of the portfolio.
The only other protection is to hold some Assets in cash equivalents so one has the comfort of a cushion and not over-invest in Equities beyond tolerance for drawdowns.
A deeper question though is if one believes one can compound at 15%, why does it matter if there is a drawdown along the way?

At Solidarity, we firmly believe that trading and investing don’t mix as one has to train the brain to think long term during moments of stress and not freeze.

Hence, not only our investment processes but everything we do is designed to think long term.
Specifically, derivatives trading is banned at our firm so one can still the mind and not confuse oneself at times of maximum opportunity.

Please click here if you would like to download the PDF version of this blog

Disclaimer: Originally published on Feb 28, 2021; updated on Jul 16, 2025, for revised LTCG rules. ↩︎

Why we are reluctant to take cash calls at present

We have had a few conversations with partners on why we are reluctant to take a 20% cash call at present despite the current uncertainty to re-enter when prices are more favourable. I thought it may be appropriate to share our thought process with all our partners.

I want to separate the question into 2 parts

a) The cash call on “Asset Allocation” – which is for partners to make

b) The cash call on “portfolio construct”- which is for Solidarity to make

Dear Prime Minister, give us a message of hope, courage and equanimity

Will the lockdown in India end on 17 May or will we as a country go deeper into “economic hara-kiri” ? (Anand Mahindra)

The first lockdown was perhaps right. In the fog of war, you have to act decisively till you figure out a course of action. However, post mid-April, we seem to acting more out of fear, than with “systems thinking”.