Indian Subcontinent Sustainability

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.

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