Appendix 5: Examples of strong positive and negative performance contributors

Positive Contributors

Muthoot Finance:

Muthoot Finance is the largest gold loan NBFC in India with a gold loan AUM of more than $7 billion and a strong network of 5461 branches. Gold finance business is unique in two aspects: (1) the collateral (i.e. family gold ornaments) has to be physically kept with the lender. So the borrowers need to have trust in the lender and the sector is highly regulated to safeguard the borrowers interests, essentially making it difficult for any new player to enter and scale up rapidly. (2) While there is negligible credit risk in gold loans, as the value of collateral is far higher than the value of the loan and it can be easily monetised, gold loan business is operationally intensive with the bulk of it being in relatively lower ticket buckets of < $5000, which makes it less attractive for banks with their higher cost structures. Muthoot finance has been in operation for more than a century and has a very strong mindshare in gold loans which it strengthens through its widespread marketing campaigns involving its brand ambassadors Amitabh Bachchan and CSK. This provides some sustainable competitive advantage to Muthoot Finance, which was not being fully appreciated by the market when we invested. The company generated RoA and RoE of 3% and 15.3% in FY16 and was still trading at ~2X P/BV. Over the past 5 years, the AUM has grown at a CAGR of 18.5%, while the profits have grown at 35.7% CAGR resulting in RoA and RoE improving to 6.2% and 27.8% in FY21. The business model has proved its resilience during this period going through demonetisation in FY17, post IL&FS NBFC crisis in India in FY19 and the pandemic induced lockdown in FY21. Through all this period, we kept investing in Muthoot even as the market largely ignored it. The market has finally started to recognise the strength of the franchise and has rerated it over time. Muthoot Finance currently traded at 3.78X FY21 BV and with the superior return ratios as well as huge opportunity in the gold finance business, we feel it has a long runway for growth and valuation remains attractive. 

HDFC Bank:

HDFC Bank is the largest private sector bank in India with a balance sheet size of ~Rs. 18 lakh crores, a formidable retail franchise and spectacular asset quality. The market also recognises this and so HDFC Bank has always traded at a significant premium to other large private sector banks such as ICICI Bank and Axis Bank. In FY17, when the rest of the banking industry was bearing the brunt of corporate NPAs, HDFC Bank remained unscathed since it had been very prudent with its corporate book and had very high focus on retail banking.Banking being underpenetrated in India, we see a very long period of industry growth at higher than nominal GDP growth. HDFC Bank was well positioned to capture the growth while other banks tended to their NPA mess and the guidance from the management indicated the same. Over the last 5 years advances and deposits grew by 19.5% and 19.6% respectively. The bank also benefited from economies of scale and leveraged technology to bring down cost as a result of which cost to income ratio decreased from 44.3% in FY16 to 36.32% in FY21. PPOP grew at 21.84% CAGR while PAT grew at 20.4% CAGR. In FY20 as the retail space started getting crowded with all PSU and private banks focusing on the space, HDFC Bank was nimble enough to shift focus to corporate banking where it could drive growth by cherry picking the best accounts. We sold our position a few months ago when the RBI imposed a ban on issuing new credit cards due to multiple outages for their on-line banking system. Our concern was a fix of the IT issues that caused the problem may take some time and could result in a reduction in the valuation premium the bank commands.

Interglobe Aviation

It continues to be pleasing to note the contribution Interglobe Aviation has made to our performance – one of our controversial stock holdings which led to more investor questions than any other companies in our portfolio. The Company continued to gain market share solidifying its leadership position further, despite industry facing one of the existential threats from the on-going Covid pandemic. It is worth noting that, nearterm continues to remain extremely challenging,  but management has put up efforts to contain costs and manage liquidity which will not only help them survive but strengthen its competitive position in the market. To give a background to our investment thesis, Indian aviation remains a highly underpenetrated market relative to other economies. The Government’s thrust towards making air travel more accessible to the masses under its UDAN scheme along with planned development of airport infrastructure in the country are the key enablers which will support industry growth.  In this context, Interglobe Aviation is in the best position to take advantage given its indisputable leadership position, strong balance sheet and liquidity position, and a low cost model will help them to come out stronger than before. And this is not new to Interglobe. Every time the industry faced a major airline failure in the country – be it Air Sahara, Kingfisher or Jet Airways – Interglobe emerged as a clear winner. We continue to remain positive on the company’s competitive edge which will drive outperformance as things normalize post Covid.


Another top contributor to our 5-yr performance is a company which we bought mid-period in early 2019. The Company, Polycab, is the largest Cables and Wires manufacturer and is one of the fastest growing fast moving electrical goods (FMEG) players in India. What attracted us towards Polycab is their deep rooted distributor loyalty which they have built over multiple decades, a strong manufacturing footprint and in-house capability to introduce newer and innovative products supported by a well structured and professionalized management team. Through our channel checks with dealers and our visit to the company’s plants, we got the first hand impression on the strength of the business. At the time, the Company has invested over Rs 1100cr in the preceding 5 years in augmenting and expanding its manufacturing capacities and has worked extensively in reinvigorating its retail and distribution network. With the foundation work in place, we concluded that business has the potential to generate higher return on capital than what it has delivered in the past. We felt that despite having had direct interactions with the top management of Polycab, the institutional investors had underestimated the strength of the W&C franchise and ignored potential scale up of the FMEG business. For us, this was a classic situation that fit our investment strategy.  True to our expectation, the Company delivered ~30% earnings CAGR and >800bps improvement in ROIC over the last three years, despite facing Covid induced challenges in the current year. We benefitted not only from strong financial performance but also re-rating. 

Deepak Nitrite:

Deepak Nitrite is a diversified chemical company. It started its operations in 1972 and from there the company has come a long way in its journey of last 50 yrs and presently has 4 business segments comprising i) Basic chemicals, ii) Fine & specialty chemicals, iii) Performance chemicals and iv) Phenol-Acetone & its derivatives. Deepak Nitrite has a history of bringing in new products and attaining market leadership in those. The company’s strategy over the last 50 years has been import substitution, cost optimisation and market leadership which has worked very well and it continues to focus on these 3 pillars for future growth as well. In 2014 the company announced a large Phenol-Acetone project to take care of entire domestic demand as more than 80% of Phenol-Acetone was being imported in India. This was a game changer project for the company and the plant which got operationalized in Nov-18 achieved 100% utilisation within 5 months. The execution shown by the management over the years has been excellent and they have achieved their targets before time. In Dec-20 the stock was trading at 19x ttm P/E and the implied ttm P/E based on our FY23 TP as per DCF was 14x which suggested we were getting value without any multiple rerating. The stock has done quite well since then and we continue to be positive on it going forward given their, 1) expansion plans in the new products in areas of a) value added intermediates which are import substitutes and find applications in Pharma and Agro Chemicals  b) downstream products of Phenol-Acetone where company will have a  competitive edge as they have the feedstock inhouse. 2) excellent execution track record by the management.

Negative contributors

BLS International:

BLS is the second largest visa service provider in the world. It operates in the G2C space and had recently won the global contract from Spain, which made it eligible for other such large contracts which were to come out by the end of FY18. BLS also had won a contract with Punjab government for their citizen service centres which had minimum revenue commitments from the government and this was very profitable with EBITDA margins upwards of 30%. This was a time when the smallcap stocks in India were trading at heady valuations. While BLS was available at the right price based on our framework with potential upside from any new contract win, we did not take into account the risk to its business from a change in political leadership in Punjab. We did not provide an adequate margin of safety for the underlying potential political risk. After the state elections, the new government in Punjab cancelled the contract and replaced it with a new contract with no revenue commitment and single digit EBITDA margins. The company also didn’t win any new Visa projects in the countries it had bid for. We decided to exit as our thesis was not playing out. At the same time, the market had corrected steeply on account of imposition of long term capital gains tax in India, which increased our losses. BLS fell a lot more post our exit. Later, we heard from grapevine that BLS stock had been pumped up by “stock market operators”, a common feature behind the relatively rapid rise of share prices in some cases in India. We have become more circumspect of this aspect and try to study the share price behavior and holdings a lot more rigorously to detect such patterns.

Bandhan Bank: 

Bandhan Bank is the largest microfinance lender in India with a very strong presence in the East and Northeast. It has an outstanding loan book of Rs. 87000 crores of which 2/3rd is from microfinance. The microfinance customers are very vulnerable to any sort of disruptions and having a disciplined approach to collections is the most important thing for any MFI. With the RBI announcing moratorium for 3 months, the credit discipline went for a toss and with lockdown related disruptions to the livelihood of the customer, as well as additional impact on account of cyclone in West Bengal and political meddling with the MFI borrowers in Assam, the probability of default had increased steeply. SInce MFI is all unsecured, the loss given default tends to be very high. So the market anticipated very high write-offs post moratorium and the  stock was hit hard. With the outlook uncertain, we also decided to exit the stock and reinvest in better opportunities.


Main Page: Review of Our Journey from Inception

Appendix 1: Update on the performance of our fund

Appendix 2: Structural factors and Economic Reforms driving Indian economy

Appendix 3: Investment philosophy and lessons learned

Appendix 4: Cash Calls and Portfolio mix across market cap buckets