Indian Subcontinent Sustainability

GMM Pfaudler is a leading provider of glass-lined equipment used in chemical and pharmaceutical manufacturing. Stewarded by the second generation of the founding Patel family, GMM’s ambitions are clear in their recent move to acquire their parent company – a rare instance of an Indian subsidiary acquiring a multinational parent. The domestic Indian business has been run far better than its German equivalent, shown by overseas sales accounting for roughly 75% of total revenues and operating profits from the Indian business accounting for a roughly similar proportion of total operating profits¹. The opportunity ahead for GMM Pfaudler continues to lie in the combination of competent stewards improving sales growth and driving profitability in the combined business, with a franchise built on trusted relationships with customers.

BRAC Bank (Bangladesh: Financials) was sold due to rising regulatory headwinds for the banking sector in Bangladesh.

The quiet quarter in terms of new positions and exits in the strategy isn’t reflective of a lack of action. Over the course of the last six months, we have organised two investment trips to Mumbai and Bangalore, and continue to spend time meeting new companies and building conviction in our existing holdings.

These meetings have helped reiterate conviction in the likes of HDFC Bank (India: Financials) and Kotak Mahindra Bank (India: Financials), where we have increased position sizes in the strategy. These are some of the highest-quality financial institutions globally, conservatively managed and run with an eye on the long term – they remain well positioned to continue growing and taking market share from lower-quality competitors in the decades ahead.

As ever, we continue to believe that bottom-up analysis, with a focus on fundamental quality and sustainable growth tailwinds, is the best route to tapping into the opportunities and protecting against the risks of investing in the Indian Subcontinent.

1 GMM Pfaulder, 2022 Annual Report 

The first holding we exited was Infosys (India: Information Technology) – a leading IT services company in India. While Infosys remains one of the largest IT services companies in the country, focused on steady execution, we felt there were better opportunities available at more reasonable valuations.

As such, we initiated a position in Cyient (India: Information Technology), a smaller IT services provider. Over the past few years, Cyient has gone through a process of professionalisation, with the founding family handing over management responsibilities to a newer team. The family remains involved at the Board level, helping embed long-termism through the organisation and leaving operational execution to the management team. Cyient continues to focus on developing expertise in a few key industries, to help provide niche solutions for their end clients. The ability for Cyient to continue growing sales and improving margins at appealing valuations led us to start a position here.

We also initiated a position in Mahindra and Mahindra Financial Services (India: Financials). Mahindra Finance is a rural non-banking finance company, majority owned by the Mahindra Group. The business provides financing predominantly for tractors and other automotive vehicles in rural areas across India. Mahindra Finance has gone through a number of changes in the past year, primary amongst those is hiring a new management team that are looking to bring more focus on the quality of credit assessment and profitability of the business going forward. These changes, alongside the continued long growth runway they have in vehicle financing and other adjacent areas, led us to initiate a position in the company.

The other holding we exited from was Pidilite Industries (India: Materials). We first purchased shares in Pidilite in the Indian Subcontinent strategy in 2010 and have watched the company grow leaps and bounds in the ensuing 13 years. Pidilite remains an exceptional business, with long-term stewards who have continued to strengthen the core adhesives franchise, create one of the most recognisable brands in the country, and build out a wide-ranging distribution network across India. Our decision to exit the holding is based solely on valuation discipline – at close to 75x P/E, it became increasingly difficult to see a path to solid long-term returns for clients. We continue to watch the evolution of the business closely and hope to own shares in this unique company again one day. 

This was Mahindra Logistics (India: Industrials), a third-party logistics services provider in India. Mahindra Logistics was slowly establishing a growing presence outside of their key customer, the Mahindra Group, and stood to benefit from consistently consolidating a large and inefficient logistics market in the country. However, through this journey, they remained diversified across a number of different logistics services and we struggled to build further conviction in the focus and evolution of the franchise.

Through this quarter, we did not initiate any new positions in the strategy. Rather, we chose to continue adding to some of our high-conviction holdings in the portfolio at more reasonable valuations.

Some examples of these additions were Blue Dart Express (India: Industrials), HDFC (India: Financials) and Kotak Mahindra Bank (India: Financials). Similar to Mahindra Logistics, Blue Dart Express – an express logistics provider – stands to benefit from the structural growth tailwinds of formalised logistics and infrastructure across India. The company continues to be stewarded by a very long-tenured management team that maintain an unwavering focus on express logistics, where quality and timeliness of delivery allow for greater pricing power.

HDFC and Kotak Mahindra Bank continue to demonstrate their risk-aware cultures, with stewards building the businesses for the long term. Both financial services groups continue to be well positioned to enjoy the structural and sustainable tailwinds of growth from increasing access to financial services across the country.

In a scenario of rising geopolitical tensions and macroeconomic uncertainty, we continue to believe that bottom-up analysis, with a focus on fundamental quality and sustainable growth tailwinds, is the best route to tapping into the opportunities and protecting against the risks of investing in the Indian subcontinent.

During the quarter, we initiated a position in Tata Chemicals (India: Materials). Tata Chemicals is one of the world’s leading producers of soda ash. Soda ash is used in a wide variety of end applications, including laundry, glass manufacturing, pharmaceuticals and increasingly the renewables supply chain. Soda ash capacity remains tightly balanced and any spurt in demand should help leading incumbents, such as Tata Chemicals. Tata Chemicals is also investing in increasing its capacity. Over the last decade, the company has slowly evolved into a focused, sustainable chemistry business by diversifying away from fertilisers and salt. The company is also improving the health of its balance sheet under the stewardship of its parent. We believe it is attractively valued given the tailwinds and the improving quality of financials.

We have also added to Aavas Financiers (India: Financials) as valuations have become more reasonable. Aavas is a leading provider of mortgages in rural India with a reputation for a conservative credit culture and affordable rates. It is perhaps the only way to build a resilient lending business long term. Aavas helps improve financial inclusion and the quality of housing infrastructure in rural India, while fostering gender equality through increased participation of women in home ownership. Aavas has been patiently investing in technology and leadership today to be able to grow sustainably for many years to come. We believe Aavas to be one of the best-managed small businesses globally.

We also increased our holdings in Dr. Lal PathLabs (India: Health Care) and Computer Age Management Services (India: Information Technology) as valuations became a bit more reasonable. Dr. Lals is well positioned to continue delivering affordable, quality diagnostic services to a broad section of Indian society. Rising scale ensures they can continue delivering the best quality at an affordable price while maintaining profitability. Computer Age Management Services (CAMS) is a technology provider to the financial services industry. CAMS has built a solid reputation of trust, serving the mutual fund industry through their registrar services. There are similar opportunities emerging within data privacy in financial services and insurance. These are long gestation opportunities best served by companies with long-term horizons and exceptional customer-focused cultures who can patiently build a reputation of trust. Trust is perhaps the best barrier to entry as it takes decades to build yet has to be earned every day.