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.

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Interview with Mr Anurag Surana- a domain expert on Specialty Chemicals for his decadal views on the industry

Mr Manish Gupta was delighted to speak with a mentor of Solidarity, Mr Anurag Surana who is a deep domain expert in Specialty Chemicals. With over 35 years experience and a part of the core team that built PI Industries.  He is also the Chairman of 2 Specialty Chemical companies in India.

The conversation with him covered many topics

  1. How Indian Specialty Chemicals companies have evolved over the last 20 years and expected trajectory
  2. Why most Indian companies should not be severely impacted by US tariffs
  3. Variables to look out for and questions to ask management teams when gauging whether companies are becoming better Assets
  4. Mistakes made by long term investors when they obsess over metrics like ROCE without making adjustments for the long gestation investments management teams are making. 

Watch the full interview  here

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Investment implications for Indian investors in a Trumpian world

“There are decades where nothing happens; and there are weeks where decades happen”-Vladimir Lenin

This is a new Trumpian world.   Within 8 weeks of being sworn in, Trump has voted alongside Russia at the UN against historical allies, threatened to annex Greenland, to cut defence aid to Ukraine, to exit NATO, pulled the US out of the Paris climate change agreement, defied the US judiciary ….

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Moving forward with strategy, not with emotion – our view on investing in Small and Mid Caps at present

Last week, S Naren, CIO of ICICI Pru MF and a market veteran we respect immensely, warned investors about exuberance in Small and Mid-Caps. His statement “we think it is a clear time to take out lock, stock, and barrel from small and midcap” created quite a stir on social media.  “With great power comes great responsibility” and we endorse the general warning that Naren is dispensing to the price agnostic retail investor. 

However, our views on investing in Small and Mid-Caps today are more nuanced, and we share our specific stance on this subject below.

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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.

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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.

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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. 

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