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  • Call us: +91 9920992020
  • Mail US : techsupport@qrcia.com
  • ADD US : Dynamic Consulting
  • 4, Capri, 9 Manav Mandir Road
    Mumbai 400006, India

  • info@qrcia.in

Dear Investor,

We hope this letter finds you well. 

Market & Performance Update

January to March ‘23 was a tough period for the markets. The major developments in the Indian markets were the Hindenburg report on the Adani group and ensuing deep correction in the group’s stocks. Globally, the liquidity challenges on Silicon Valley and Signature Bank came to the fore with a run for deposits causing the US Federal Reserve and FDIC to step in to placate depositors and stabilize the banking system with large deposit guarantees. In Europe, the collapse of the century old Credit Suisse and merger with UBS grabbed headlines and raised concerns around the solvency and liquidity of other Banks. FIIs continue to remain sellers of Indian equities but it seems that pace of selling may be abating with March seeing net inflows post the big selling in January. Domestic investors continue to pour money into Indian markets with SIPs helping to minimize the blow from the FIIs.

The QRC Long Term Opportunities Portfolio (LTOP) finished down 2.3% for the quarter ended March 2023. This was against a fall of ~4% for Nifty and a fall of 5.9% for BSE 500.

FY 23 – Portfolio Reflections*

What Worked:

Aegis Logistics – With an 84% appreciation, Aegis was the best performing stock in the portfolio during FY23. Post the JV formation with Vopak (market was worried Aegis sold too cheap) and the unfortunate demise of one of the promoters in 2021, the stock sold off. However, accretive acquisitions in the liquid business and the completion of the Kandla gas terminal allowed Aegis to grow the significantly more profitable commercial and retail gas distribution business. With a 9MFY23 segment profits growth for the gas and liquid division of ~40% and ~30% respectively, the company remains on track to deliver 25%+ earnings growth over the next 3-4 years through better asset utilization and ongoing projects which should aid throughput gas volumes and profitability.

Cera Sanitaryware – Through FY23, Cera’s stock price rose by ~30%. Despite supply chain uncertainties and high freight rates negatively impacting its competitors, Cera managed to grow its market share without any stock outs by operating its plants at >100% capacity. In May 2022, Cera announced a plan to increase the capacity of its faucet ware and sanitaryware businesses with an internally funded investment of Rs200crs. This strategic move is expected to result in further growth and margin expansion over the next few years due to benefits of scale and a premium product mix. We admire Cera’s focus on its core business and its commitment to retail channel-led growth and expect margin expansion to continue and profits to grow at >20% for the next couple of years.

What Didn’t Work (and Looking Attractive):

ICICI Lombard General Insurance – ICICI Lombard had a tough year in FY23, with a 19% decline in its share price, which negatively impacted the portfolio performance. The company’s heavy reliance on the auto insurance sector, which represents 50% of its business, was impacted by heightened competition and aggressive pricing from digital/unlisted players. Despite being selective and vigilant, ICICI Lombard experienced rising underwriting losses in this segment, while rising strategic investments in health insurance also affected overall profitability. The company however achieved a 30% profit growth over FY22 and 17% over FY21 through prudent investment and treasury operations. Nevertheless, in the face of competitive pressures and higher regulatory changes, the stock has derated from 52x PE in April 22 to 30x presently. Competition is showing early signs of easing. ICICIGI’s strategic investments in expanding distribution channels and presence in other lines of business, coupled with a strong balance sheet and industry-leading RoEs, should yield long-term dividends.

IT Services Pack – Our holdings in TCS (-14%), Infosys (-25%) and L&T Tech Services (-34%) corrected sharply in FY23 in the wake of economic uncertainties amid rising interest rates and inflation. While these businesses continue to grow, there is a slowdown as their customers reassess IT spending needs and take stock of discretionary costs. With the funding crisis in the US banking system leading to a ‘bail out’ of Silicon Valley and other regional banks and Credit Suisse in Europe, the near-term outlook continues to remain challenging. These businesses, however, remain best in class on balance sheet strength and return ratios and should bounce back once normalcy returns. With an impending US slowdown, we continue to closely monitor developments here.  

Looking Ahead

The pessimist sees difficulty in every opportunity. The optimist sees the opportunity in every difficulty.

– Winston S. Churchill

India’s economic recovery post the Covid lockdowns appears to be K-shaped, with rural consumers yet to see a real upturn from the lows due to rising inflation and lackluster job growth, despite the government’s infrastructure efforts and the provision of free grains to over 80 crore citizens every month. As the table below shows, imports of high-end foreign goods in India have accelerated since covid. Companies like Phoenix Mills are experiencing a significant recovery in urban consumption, with sales up 20% from 2020 levels and real estate developers like DLF and Lodha recording high volumes of pre-bookings and sales. Hindustan Unilever, Marico, Tata Consumer and other FMCG companies’ management teams attribute the slight improvement in rural India’s numbers over the past few months to tapering inflation, and there seem to be some green shoots of recovery. Two-wheeler sales are also showing early signs of an uptick after nearly a decade.

The upcoming fiscal year appears to be geared towards the national elections in 2024. Despite losing three top allies in Shiv Sena, Shiromani Akali Dal, and the Telegu Desam Party, the BJP’s majority seems uncontested as of now. The government is expected to focus on rebalancing the economy by providing further support for rural India through higher MSPs and aid. This may lead to slightly persistent inflation, but it will boost income and encourage consumption, which is much needed for growth. Major policy changes are unlikely, and the government will likely prioritize completing significant infrastructure projects. However, the seasonal monsoons (La Nina/El Nino) could be a wildcard, but recent experiences suggest that will likely be takin in their stride by the markets. On the global front, it remains uncertain how deep a recession (if any) the USA will experience, and how far the Federal Reserve will go in pushing interest rates.

A rural economic recovery is expected to reaccelerate growth for portfolio companies such as Britannia, Marico, and Tata Consumer/Coffee, as well as auto ancillary suppliers to two-wheelers and other indirect rural businesses. The businesses that we own are financially healthy, with little to no debt and healthy balance sheets. Although some companies may face near-term growth challenges, continued strategic investments and growth initiatives are encouraging, such as Marico’s investment in three D2C brands and Suprajit’s acquisition of the lights cable division of Krongsberg in Europe.

This is becoming a stock pickers market and any significant market correction could provide an excellent opportunity to invest in equities.  We are getting constructive on our portfolio at this stage.

As always, we appreciate you entrusting us with your money. Do feel free to reach out to us with your questions or suggestions.