Review Of Our Journey From Inception (I.E. 1st April 2016)

COVID 19 pandemic was at an early stage when we wrote last. Our view that the significant injection of monetary and fiscal stimulus across most countries, combined with some early signs that the pandemic could be managed, led us to deploying cash, after a short period of reduced market exposure. Our fund performed extremely well for the fiscal year 2020-2021, with returns of 106.3%, outperforming our benchmark – CNX 500 TRI index by 28.7%. Incidentally, we also completed our five years at the end of March 2021. Despite holding average cash levels of 14.2%, our fund delivered CAGR returns after fees of 21.1% against 15.2% CAGR returns for our benchmark over the period of first five years.  Our fund has continued to do well in the current financial year as well with  21.2% returns on YTD basis (1st April 2021 to 22nd July 2021) versus the benchmark returns of 11%. From inception till date (22nd July 2021), our fund has delivered CAGR returns after fees of 23.9% against 16.6% CAGR returns for our benchmark notwithstanding average cash levels of 14% over the specified period. (More details of our performance in Appendix I)

Having completed five years of managing this fund, we take this opportunity to review our journey of the last five plus years in this letter. When we started in 2016, India was just putting behind the economic malaise of the UPA II period from 2009-2014. While there were many relatively easy fixes to the economy- reducing fiscal deficit and inflation, improving business confidence and ending large-scale corruption, the significant increase in bad assets at government-owned banks has been a headwind for the economy. In fact, even today, bank lending remains somewhat restrained and that is affecting the potential economic growth. We also saw more disruptions to the economy in this five year period than we had seen in much longer periods. This included (1) demonetization in 2016, which restrained growth for a period, but accelerated the digitalization of the economy (2) Patchy implementation of GST and (3) the COVID pandemic in 2020-2021.

Notwithstanding all the hiccups we have had in Indian economy, we have seen significant structural changes over the last seven years.  Enabled by the national identity scheme – Adhar and a national drive for financial inclusion by opening of bank accounts for every family, India has seen vast improvement in delivery of social welfare schemes such that benefits are reaching  directly to the indigent and the leakage through layers of corruption has come off sharply. This has made the economic changes more acceptable to large segments of the population and made it more likely that the reformist government may survive when national elections are held. We discuss the structural changes that have taken place over the last seven years more  in detail in Appendix 2.

Despite significant expected and unexpected setbacks, Indian economy is poised to do very well and grow at better than mid single digit growth rates over a fairly long period of 20-25 years because of multiple structural factors at play. Factors such as the demographic advantage of a large working age population and under-penetration of products and services in a vast number of segments are obvious. But what is far more exciting is the way India is becoming a start-up nation; India never had a dearth of entrepreneurs but not all did well due to the adverse business climate we have had. Many also chose to leave the country. The current government has set a lot of ambitious goals for boosting the start-up ecosystem and to make it easier to do business. While policy and execution mis-steps are still happening, we have a government that is acutely aware of implications of not delivering and hence we have seen very quick course corrections.  Indeed, India has seen a big improvement in ease of doing business rankings. Steps are also taken to attract foreign capital and the allure of the large market that India can become means that everyone wants to join the party. With data connectivity becoming very affordable, many young companies are able to scale up rapidly and hence justify big upfront investments.

India was not a bad place for an equity investor even before 2014. Despite having experience of analyzing global equities, we chose to focus on India because of the exciting bottom-up opportunities that India offered – Those entrepreneurs who were able to build and scale a business enjoyed supernormal returns because many others could not due to difficulty of doing business. Such companies became good places to invest.  For example, despite being a very difficult period for Indian economy, the period from 2010-2014 was a great period for bottom-up stock picking. However, the opportunity to generate healthy returns has only gotten bigger thanks to growth and action oriented government and the rapid evolution of the start-up ecosystem in India that have put the Indian economy is put on a high growth path and To borrow and paraphrase Warren Buffett and Charlie Munger this may be the time to “bet on India”.  

While we remain convinced about the investment opportunity for our strategy, we must remain cognizant of risks ahead. To start with, while most states north of Maharashtra are showing signs of an ending of the pandemic, caseload and positive rates remain quite high in some of the southern states including Kerala which was ironically hailed as the state that had the best governance for health infrastructure. 

Having said that, there appears to be a strong correlation between vaccination and drop in cases and India is on a rapid path to achieve required vaccinations across the country. Already, in the states with higher vaccination rates, active cases have dropped to a trickle and positive rates have dropped to near zero. 

More than the pandemic, we remain concerned about the high inflation that is now visible in India. The arguments to call this inflation transitory are weaker for Indian than they might be for say the United States. Our government needs to keep factions of society happy and the effort to reform sectors such as agriculture come up for huge resistance by vested interests and India’s Supreme Court seems to intervene in matters left for legislation in other places thus limiting the ability of the government to push ahead with reforms. Wrong crops get down because of misaligned incentives and as a result, India produces crops we don’t need and at a cost that is not competitive on a global basis. In order to support domestic industry, Indian government has imposed a wide range of tariffs and come up with many incentives. While this may support a rise in domestic manufacturing, import tariffs can be inflationary in nature both from first as well as second order effects. As a result, India runs a risk of getting into a high inflation period which would require eventual tightening of monetary policy and hence can be negative for the economy and the stock markets. Accommodative stance by the US Fed is creating an unprecedented breathing room for RBI here and hence we are yet to see any indications of a shift in their stance. 

More structurally, there are a number of factors that are likely to prevent India from delivering China like growth, with China like inflation. The most prominent in the list of these factors is that India is a democracy and a government, even with the reform and growth mindset, must keep an eye on the state and central elections in order to continue to retain power, and changes India needs can’t be done in five years. NDA government was thrown out in 2004 despite doing some phenomenal structural work. Other factors include the establishments of bureaucracy that may seem not motivated to get things done, arcane judicial system that no business can rely on, neighbors that can’t be trusted, an obsolete education system that comes in the way of training youth for the right jobs, very slow process of privatization and so on. We must remain cognizant of these factors and not get carried away in drawing parallels with say China. Having said that, fueled by huge inflow of capital, many of the sectors previously under the clutches of the public sector are seeing structural changes and that bodes well for India to not just develop but also eventually escape the mid-income trap that many other countries have not been able to get out of. 

Over the last five plus years, our investment process has been tested by a multitude of national and global crises. During this period, we have delivered strong absolute and relative returns for our investors using a disciplined and rigorous process. In Appendix 3, we discuss our investment philosophy and lessons learned from the experience of managing this strategy over the last five plus years. In November 2019, we published a study analyzing our past investment decisions. We intend to publish an updated version of the same in near future.  While we are bottom-up investors focusing on investing in specific companies that meet our criteria, we do keep an eye on macro developments and are not afraid of increasing cash levels in our portfolio if required. It is however like a nuclear weapon which we must use sparingly. While we are multi-cap investors with no specific target for weightage to large cap versus mid or small cap, we have seen the weights across market cap categories stay in a narrow band. In Appendix 4, we discuss the effectiveness of our strategy to modulate cash levels and varying weights for market cap categories.  Finally in Appendix 5, we go through the specific investment examples that contributed strongly to our performance and also discuss names that diluted our performance. 

We have built a skilled and experienced team and expect to work diligently for our investors over the next five years. A special thank you to the investors who have trusted us with managing their assets during this early period in Sameeksha Capital’s history. We hope they will agree that their trust in us has paid off handsomely so far. 

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

Appendix 5: Examples of strong positive and negative performance contributors

Among The Most Successful Professionals In Equities; Rated The #1 Technology Sector Analyst In Institutional Investors Polls For A Decade. Highly Respected Among Peers For His Path-Breaking Work And Thought Leadership. Rose From An Associate To Managing Director Within A Span Of Six Years In The Investment Banking Industry

Twenty Years Of Experience Building Top Research Franchises: Seven Years As Managing Director And The Global Head Of Technology At JP Morgan, Six Years As Director And Head Of Asia Pacific Technology At Credit Suisse And Five Years As Founder Of Equirus SecuritiesTrack Record Of Innovation And Excellence In Equity Research

Anchored The Rise Of Credit Suisse  From An Unknown Name In Asian Equities To A Number One Ranked Firm In Asian Equities; Head Of Asia Pacific Tech Research

Credited For Building Top Ranked Global As Well As Asian Tech Research Practice At JP Morgan As MD And Global Head Of Tech Research; Made Defining Contribution To Enable JPMorgan To Move From An Also-Ran Player To A Top Global Name In Equity Research

Built A Very Profitable And Award Winning Indian Equity Business At Equirus From Scratch On A Tiny Budget; Achieved Number Two Ranking In Asia For Idea Performance

Impeccable Track Record Of Identifying True Long Term Winners Ahead Of Others Including Samsung Electronics, TSMC, Infosys And TCS And Guiding Investors To Stay Clear Of Laggards Such As UMC And SMIC Years Ahead Of Consensus.

Mind Of An Engineer, Worked In A Team That Designed The World’s Fastest Microprocessor With A Manta “Paranoia Is The Safest Frame Of Mind”. Awarded Two US Patents.

Work Experience Of Designing The World’s Fastest Microprocessors Based On Cutting Edge Technology For Which He Jointly Holds Two US Patents

Best In Class Business Education From The World Renowned Business School: Double Major In Economics And Finance, Beta Gamma Sigma Cum Laude From The University Of Chicago Booth. Excelled In Studies Under World Renowned Faculty Such As Dr. Raghuram Rajan, Former Governor Of The Reserve Bank Of India