Indian Subcontinent All Cap

For us, India remains the same exciting investment destination that it has long been and for the same reasons too: a multitude of fantastic companies providing necessary goods and services to a rapidly developing population which leaves long-term and quality-focused investors like us spoilt for choice.

We bought ICICI Lombard (India: Financials), one of India’s largest private sector general insurance companies. ICICI Lombard is addressing the underinsurance gap in India by expanding access to insurance products to help individuals, businesses and families better manage risks. The company is well-managed and our confidence in the business has grown enough to purchase for the strategy.

In the quarter, we added to the position size of Cholamandalam Financial Holdings (India: Financials), Aavas Financiers (India: Financials), Blue Dart Express (India: Industrials), Tata Communications (India: Communication Services) and SKF India (India: Industrials) as we believe they are all reasonably valued for good, long-term returns. We partially funded these by reducing our positions in CG Power (India: Industrials), as valuations continued to creep up, and HDFC Bank (India: Financials). We also sold RBL Bank (India: Financials) and Kotak Mahindra Bank (India: Financials) to fund the additions.

We continue to assess all our investments on an individual company basis, trying to gauge the quality of the people and businesses that we are backing with your money. We also do our best not to overpay for these investments and aim to hold them for the long term. We continue to believe that this is the bedrock of long-term capital preservation and growth.

We received an email from a research broker the day before election results which listed companies that should benefit from a strong result for the BJP. We were particularly pleased to note that out of the 50 companies named, we held only one of them. Our investment approach is to invest in companies with enduring long-term qualities. Their only competitive advantage is to deliver value to their customers every day. And they maintain this advantage by focussing on a combination of quality, innovation and trust. These attributes can only be built patiently over decades. Any dependence on politics or favourable regulations is a risk and at best a short-lived advantage – not the high level of quality we seek in our businesses.

Rapid urbanisation and water stress represent key risks for many of our companies. We commissioned some external research understand more about water stress across our portfolio companies. We also engaged with company management on the risks of rapid urbanisation. We will continue to evolve our understanding of these topics and how they relate to our companies.

We used the cash from the above sales to fund purchases in some of our reasonably valued holdings such as Cyient (India: Information Technology), Triveni Turbines (India: Industrials), Blue Dart Express (India: Industrials), IndiaMART (India: Industrials) and Tarsons Products (India: Health Care). These companies are leaders in their fields with a significant opportunity to grow ahead of them.

As ever, we continue to believe that it is important to look at individual companies and their potential for sustainable growth, and that this is the best route to tapping into the opportunities and protecting against the risks of investing in the Indian Subcontinent.

RBL Bank is a private bank in the midst of a turnaround. The bank lost its way through aggressive growth leading to high non-performing loans (NPLs). As a measure of abundant caution India’s central bank stepped in to change management and solidify the foundations of the bank. We believe new management is putting in place the right systems to build a quality credit culture with a focus on lower risk assets funded mostly by deposits. A successful turnaround could yield attractive returns for shareholders.

We sold the holding in Dabur. We first bought Dabur in October 2007 and have held it continuously until December 2023. The company has compounded returns at an attractive rate during this period and well ahead of inflation and also index returns. Dabur has been a key contributor to the portfolio’s long-term returns while also protecting capital during market falls. We were attracted by Dabur’s family stewardship, professional management, dominant consumer brands and sound financial quality. These qualities remain but valuations are expensive.

We added to many existing companies in the portfolio. These additions were largely due to reasonable valuations and increased conviction in the growth potential of these companies. The additions included IndiaMART (India: Industrials), Triveni Turbines (India: Industrials), Cyient (India: Information Technology), Dr. Reddy’s (India: Health Care) and GMM Pfaudler (India: Industrials) amongst others.

We trimmed our holdings in CG Power (India: Industrials) and Tata Consultancy Services (India: Information Technology) due to expensive valuations. We continue to have high conviction in CG Power as it is favourably exposed to an industrial cycle in India while aspiring to become a quality global supplier of electric motors. The former is a medium-term tailwind while the latter expands the opportunity set for the company multifold over the long term. TCS is one of the highest-quality companies in our universe. TCS is a steady global franchise but growth is unlikely to be as good as their record in the last two decades. We have been reducing our holdings in TCS in favour of businesses at an earlier stage of their evolution with stronger growth prospects.

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.