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Indian Subcontinent All Cap Strategy: Update
Analyst and Senior Portfolio Manager Sashi Reddy provides an update on the Indian Subcontinent All Cap Strategy.
The Indian market has fallen 18% from its peak in September 2024 to the end of February 20251. India has experienced similar steep market falls in 2008, 2010, 2013, 2020 and 2022. All these were driven by strong external factors. This correction can be attributed to expensive valuations and a rotation of capital out of India. Such rotation of capital is not new. This correction is an opportunity to add to quality companies at more reasonable valuations.
Short term absolute and relative performance
We think about returns in absolute terms and at least over 3-5 year time periods. We aim to preserve capital. We are patient investors. All these aspects remain at the core of our investment approach. But sometimes we fall short. Most recently it has been capital preservation.
In all previous market corrections, the Indian Subcontinent All Cap strategy has out performed the MSCI India Index (the Index). But not this time. What could we have done differently? We could have sold more of our expensive holdings and invested more in defensive businesses. We did a bit of both, but not enough of each.
The strategy has historically had significant investments in consumer businesses. These companies not only preserved capital but also delivered attractive absolute returns. Luckily, we did not have to trade absolute returns for capital preservation in the past. We have not been so fortunate this time. Our favourite consumer companies are now quite expensive with slowing growth rates. We have gone from holding more than 30% in consumer companies in 2014 to less than 8% today. This has been the right decision so far but the consumer companies we own have now fallen between 17% - 38% in the recent market correction.
Financial services have held up well. Consequently, our holdings in Cholamandalam Financial Holdings, Aavas Financiers and HDFC Bank have preserved capital in the last six months. Around 20% of the strategy is invested in financial services, which is closer to the upper bounds of our comfort levels. They are good quality, but control their destiny is a little less than we would like.
We sold significant positions in many expensive companies such as CG Power, Tata Consumer Products, Indian Hotels and Dr. Lal PathLabs. We exited Bosch India completely. Could we have been a bit more aggressive? Yes. The main reason not to is that we still believe that significant opportunities lie ahead for these businesses.
Larger holdings such as Tube Investments and Triveni Turbines have corrected meaningfully. We have met with managers of these companies in the last few months. They remain calm, excited and continue to invest for the long term. A gentle reminder that fickle share prices are not the primary driver of long-term business decisions. If successful, these companies could be multiples the size they are today. We are backing competent managers who introspect ruthlessly and allocate capital sensibly. We have been selectively adding to some of these companies in the last month.
Consumer companies such as Marico, Godrej Consumer Products and Dabur have contributed significantly to strategy performance since inception in November 2006. Such returns were only possible as we remained patiently invested through market volatility. If we had traded in and out based on near term valuations, we would have been less lucky with performance. Many of our industrial companies such Elgi Equipment, Triveni Turbines and Tube Investments are similarly positioned to grow into large end markets. We need to be patient with these businesses to enjoy strong long-term returns. They have been amongst the strongest contributors to returns over the last 3-5 years.
The investment team has made three visits to India in the last four months. Market falls are a particularly attractive time to meet with management. Our broad conclusions remain the same – the underlying economy provides a compelling opportunity for long-term business builders. Such visits help us remain sober and not get despondent when markets fall.
New investments
We made some new investments namely Bajaj Holdings & Investment, Bajaj Auto, Sundaram Finance, ICICI Lombard and Narayana Health. All these are excellent businesses led by quality stewards with the potential to become larger holdings over time.
Bajaj Holdings is the holding company of siblings Rajiv and Sanjiv Bajaj. Both these gentlemen have demonstrated an exemplary track record of delivering returns for shareholders in autos and financial services respectively. This entity is the family’s main investment vehicle and is currently trading at a steep discount to its investments in the two main listed entities Bajaj Auto and Bajaj Finserv2. A strong balance sheet allows them to buy back shares at opportune moments.
Bajaj Auto has a leading market share in three-wheeler vehicles in India3. These vehicles are crucial for last mile mobility4 in India. Under the stewardship of Rajiv Bajaj, the company has transformed itself to focus on international markets and technology. They are seeing significant growth in two-wheeler motorcycle exports in many African and Latin American markets5 and are investing significantly in the transformation to electric vehicles with positive results. Bajaj Auto’s shares have fallen roughly 40% from the top in September 2024, giving us an attractive entry point6.
Sundaram Finance is a high-quality financial services institution stewarded by the Sundaram Group. The group has not raised external capital to grow over the last five decades7 – a testament to their conservative approach. The company has been led by Rajiv Lochan since 2021. Rajiv is their first external CEO, and recognition by the family that the group needs fresh thinking to evolve and succeed as a broader financial services group in the 21st century.
ICICI Lombard is India’s leading general insurance provider with the best underwriting track record in the industry. The insurance market in India remains extremely underpenetrated with a long runway for growth. We believe ICICI Lombard is best positioned to capture this opportunity and consolidate the market, as demonstrated by their acquisition of Bharti AXA in 2020.
Narayana Health is a leading private hospital group, founded by Dr. Devi Shetty. Narayana has demonstrated an ability to balance profits and service by focusing on affordable healthcare. India’s public healthcare system is all but broken. A quality private sector operator with a focus on affordability can grow for decades given the size and scale of the opportunity. Although, they will be constrained by the availability of land, doctors and nurses.
Future is bright for Indian equities.
India remains a strong investment destination for long-term investors. The region is home to quality entrepreneurs as well as globally competitive IT and healthcare businesses. A few industrial businesses such as Elgi Equipment, Triveni Turbines and CG Power are following a similar path. A large domestic market allows dominant local businesses to become globally competitive. Access to early stage capital has fostered innovation and risk-taking particularly in fintech and e-commerce. India has also led the world in terms of initial public offering (IPO)s in 2024. A testament to a thriving business eco-system.
Number of IPOs in 2024
We consider the country’s banking system in fine shape and ready to support growth. Strong additions to renewable energy capacity and transition to electric mobility reduces India’s dependence on fossils fuels and energy imports long term. This mitigates a key risk in the country’s developmental path. We could go on and on…but share prices and newspaper headlines have a way of artificially clouding the investment skies.
Geopolitics has become less predictable. Global trade in goods and services has become trickier under the current US administration. IT services and healthcare companies exporting to the US might come under more scrutiny. Surprise announcements on Truth Social or X (formerly Twitter) will quickly reflect in share prices of these companies. Any artificial barriers in these industries should hurt the US economy as the alternatives are quite expensive for American businesses and consumers. Indian IT companies have reduced their dependence on visas significantly over the last decade. A relentless focus on providing customer value should hold these businesses in good stead. The Fund has had a strong domestic bias in the last few years but any meaningful correction in these businesses is a good opportunity to revisit them.
There is a reasonable chance that America’s new approach to global trade pushes other economies to rethink their relations with each other. India should be the third largest economy in a few years after the US and China. This should be enough incentive for the rest of the world and India to transact more freely with each other and improve relations. India’s main challenges are its borders and the sustainable development challenges within – such as access to clean water, air and affordable healthcare. These issues can be solved by government policy innovation and private investment.
Our favourite Indian companies have been built through significant socio economic and political challenges in the last five decades. We remain confident that they will continue to adapt and emerge stronger under fast evolving macro and geopolitical realities. Such market corrections have usually been followed by strong returns in subsequent years. It is not the first time and we don’t think it will be the last.
We remain excited.
Sashi Reddy
March 2025
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