Select Company Perspectives

investment thesis on racl geartech

Manufacturing from India for the world promises to be a decadal theme. We favour categories that are strategic to customers supply chains and which are more immune to dumping from China.

Rising geopolitical tensions between the West and China have prompted MNCs to strategically reevaluate their high dependence on China and seek alternative supply chains for derisking.
European manufacturing faces structural challenges (low-cost competitiveness, long lead times for environmental clearances). Current macro challenges are driving higher outsourcing to players in low-cost destinations like India.
Manufacturing may not offer as high ROCEs as IT Services/Consumer. However, they offer 15-20% growth with longevity at 18-20% ROCE. When growth slows down, their ROCEs could further expand as useful life of plants is greater than life over which they are depreciated.

Investment thesis on Delhivery

We took an initial position of 3% in Delhivery, a logistics firm.

Logistics is an industry with decadal tail winds. We believe the sector will grow 12%+ and leaders can grow at 15%+ for long periods of time.
Delhivery has a competitive edge and is investing to enhance the same.
It can be 20% ROE business at scale.
We are aligned with the thought process of the promoter / management team.
We are paying a price that is broadly reasonable.

What does Delhivery do?

Delhivery is India’s largest fully integrated third party logistics services provider with a nationwide network covering over 18,600 pin codes. The company provides a wide range of logistics services

Investment thesis on Yasho Industries

In an earlier blog, read here, we discussed the importance of seeking Asymmetric outcomes.

What are conditions under which one could find Asymmetric outcomes? One needs:

Large and growing market opportunity that creates opportunity for rapid profit growth at acceptable ROEs (18%+)
A promoter that will continue to invest for growth but not be imprudent with risk taking. Is enhancing organization’s capabilities.
Broadly acceptable entry valuations.
Patience – you need time to allow compounding to work and progress is seldom linear.

We believe Yasho Industries fulfils all these conditions at present.

Investment thesis on IndiaMART InterMESH

A key attribute of our firm’s culture is the focus on writing a detailed investment thesis on every position of interest. Writing clears the cobwebs in our minds and allows us to get more specific feedback from peers we respect. It also reduces the chances of errors.

IndiaMART is a company we have owned since 2020. We enclose a more detailed thesis that explains why we believe this company can provide Asymmetric outcomes this decade and why the trailing PE ratio, often used as a valuation proxy, provides an erroneous representation of IndiaMARTs true value.

Rationale for trimming position size in Life Insurance to 15%

We had an overweight position in Life Insurance (upto ~20% allocations in some accounts). We find this to be a very attractive industry and found valuations strongly in favor when it was hard to find value elsewhere. However, the industry has seen two regulatory actions in the last 24 months on tax saving products.

Investment thesis on Restaurant Brands Asia

We published our investment hypothesis on RBA which operates Burger King India (BK India) and Burger King and Popeyes franchises in Indonesia on Pg 7 of our Q1FY23 Letter.

Over the last few months, we received some relevant questions on Quick Service Restaurants (QSRs) as well as RBA from partners and other colleagues in the Investment industry. This note attempts to answer these questions. Please read the thesis above before reading further.

Why have we continued to buy Star Health

The price of Star Health corrected significantly from our first purchase price. We have continued to buy on the way down and are now at an 8% position weight.

Original investment thesis

The industry provides a rare combination of “win-win-win” business with growth longevity, a strong moat and healthy ROEs.

Consumers: It’s a must have product for consumers as Health issues can bankrupt families and should have priority in the Consumer wallet.
Regulator: Wants more insurance coverage and hence should not grudge the industry a ~15% accounting ROE. There isn’t enough history in India for companies to model claim ratios over time (unlike Life Insurance where LIC has mortality tables). So the regulator permits price increases when product claim ratios becomes adverse. Star just announced an average 25% price increase in its flagship product.
Company: Can grow premium at 15-18% CAGR for a decade (1.5%% natural increase in population growth, enhanced retail health insurance penetration (currently 4%), 6-7% medical inflation and 5-10% increase in covers with rise in Incomes) at 16-18% accounting ROEs.

Investment thesis on Kama Holdings

Kama Holdings is the Holding company of SRF. Please read this important disclosure. ¹

Summary thesis:

SRF will grow profits at 15%+ over the next decade riding market opportunity and leveraging its strong competitive position. However, we expect valuation multiples for SRF to correct over time as mean reversion takes place and when growth slows down.
The Holding company discount for Kama has expanded over the last 5 years. This should narrow over-time as the mispricing vs peers gets corrected.
Hence, buying Kama is akin to buying SRF at a margin of safety. If the discount on Kama does not narrow, we should earn similar returns as one would earn on owning SRF. However, if we are right, we should earn a substantial kicker above returns earned by owning SRF.

Investment thesis on MAN Industries

We invest primarily with an “ownership mindset” (~90-95% of portfolio).

Businesses that have a long runway for growth as they are benefitting from secular tail winds.
A strong competitive edge reflected in industry leadership positions.
Are run by disciplined management teams aligned with interests of minority shareholders.

However, ~5-10% allocation is kept for “Special Situations”.

Companies that currently don’t fit our core approach but offer highly asymmetric risk/rewards.
The underlying price is at a significant discount to the fair value of the business, which we don’t think is justified.
A trigger for re-rating is visible.

Perspective on Life Insurance companies post-budget

Share price of Life Insurance companies have fallen 8-16% in last 2 days.

Life Insurance companies get almost 25-30% share of their total premiums from long duration savings products which enjoy tax benefits under Section 10 (10D) which make them superior products vs Debt instruments when measured on a post-tax basis.

The budget had 2 announcements with implications for Life Insurance companies:

Modifications in Section 10 (10D) for premiums over 5 Lacs/year – if the premium paid on Savings policies (excluding ULIPs) exceed INR 5L in a year, then the income earned from those policies will now be taxable (except in case of death benefit).
The FM signalled intent to nudge individuals to migrate to the new tax regime under which there will be higher exemption limits, but Section 80C tax benefits will be withdrawn.