Dear Investor,

Trust you are well.

Market Update

FY24 was a year of strong performance for the stock markets in India and globally with several reaching their all-time high levels. Indian markets experienced a broad-based rally especially with some of the ‘forgotten’ sectors like PSU, capital goods and the more cyclical sections of the market posting a very strong performance.

FY 24 – Portfolio Reflections*

What Worked:

The Phoenix Mills Limited – With an >100% appreciation in its share prices, Phoenix was the best performing stock in the portfolio for FY24. This stellar performance was driven by the culmination of multi-year investments, resulting in the opening of new malls in key cities like Indore, Ahmedabad, Pune, and Bangalore. Phoenix demonstrated exceptional execution capabilities, leading to increased trading occupancy and rental incomes across both new and existing locations. With a robust pipeline of new malls (Surat, Kolkata, Thane) and 5mn sqft. of commercial assets addition over the next 3-5 years, Phoenix looks poised for continued earnings growth. While valuations are a tad rich now, Phoenix remains a solid bet on the upgrading lifestyles of the Indian consumer.

ICICI Lombard General Insurance – After a tough year in FY23 with a 19% decline in its share price, ICICI Lombard bounced back with a ~60% gain in its share price. The concerns of the previous year like heightened competition in motor insurance business and ongoing investments in health insurance segment reversed to become the reason for the share price gains. The stock also benefitted from ICICI Bank increasing its stake via market purchase. We continue to like ICICIGI for its strategic investments in expanding distribution channels and presence in multiple lines of business, coupled with a strong balance sheet and industry-leading return on equity (RoE).

Gabriel India – Through FY24, Gabriel India’s share price appreciated by ~140% and we were able to capture an > 100% out of those gains. Gabriel benefitted from the cyclical recovery in margins with softer raw material prices and the management’s continuous focus on cost reduction. New product launches for EV vehicles and underlying auto sales growth helped to drive sales growth. The share price also benefitted significantly as Gabriel entered into a new business with the formation of a JV with Inalfa Roof Systems for the manufacture of sun-roofs in India – a largely imported component. This is Gabriel’s first new product introduction having erstwhile remained a suspension manufacturer. However, valuations at > 35x PE had become rich and hence we booked gains there.

Tata Consumer – Tata Consumer’s share price appreciated by ~55% during FY24 as the company continued to execute on its organic as well as inorganic growth path. We like Tata Consumer’s differentiated growth strategy with a blend of aggressive acquisitions as well as new launches. The company continued to gain share in legacy salt business as well as making inroads into new products and categories. With demonstrated execution capabilities, the company has been able to undertake larger acquisitions like Capital Foods & Organic India which give it a strong presence in large and fast-growing categories. However, these large transactions have increased financial leverage with the company now looking to raise equity via a rights issue. We will be keeping a close eye on integration and scale up of the acquired assets.

What Didn’t Work (and Looking Attractive):

Kotak Mahindra Bank – Kotak Mahindra Bank’s share prices performance was tepid at +5% for FY24. The Bank had a significant change with the retirement of its Promoter Mr. Uday Kotak from the board at the end of his term. The Bank has chosen to hire Mr. Ashok Vaswani from Barclays as its new MD. Kotak Bank, which remains a conservative lender has significantly increased its product offerings with push into credit card and micro finance businesses over the last couple of years. The Bank has increased its overall loan book by 42% over the last 3 years and earnings by 76%. However, the stock has seen a derating of ~50% during the same period to now trade at ~20x PE and ~3x PB multiples. While we will be watchful for any meaningful changes in the direction and trajectory of the bank’s growth, we remain believers that their long-stated strategy of risk-adjusted pricing and loan underwriting should hold them in good stead going ahead.

Linc Ltd – Linc has been on a road to recovery in the last several quarters since the very successful and innovative launch of the ‘Pentonic’ pen. With a substantially higher margin profile compared to its legacy product portfolio and a robust pipeline of higher-priced launches, Linc was poised to continue its growth in the domestic market and expand its exports aggressively. Unfortunately, the company faced setbacks as two of its largest export markets were affected by political instability, causing the company to miss its sales guidance. However, we remain believers for now given the company has multiple growth drivers ahead namely exports to the large USA markets, ongoing product launches from the ‘Deli’ portfolio, JV with Taiwan’s ‘Morris Co.’ and its manufacturing JV in Kenya. The stock remains reasonably priced and if the management team executes on their stated objective, there could be a significant upside available.

Looking Ahead

India’s big picture growth story remains on a strong footing. With expectations of a normal monsoon this season, we will likely see the rural economy bounce back too after a couple of very difficult years.

Looking ahead to the upcoming central government elections, markets seem to be pricing in a continuity of the BJP regime and the expectation is for the ongoing reform and economic agenda to gather pace after June 2024. With Govt. capital expenditure as a percentage of GDP reaching an 18 year high, promising signs are emerging of an upswing in private sector capital expenditure, essential for maintaining the growth momentum.

The banking system balance sheet is carrying decade low NPAs providing enough risk capital for India to continue its path forward. Our priority remains identifying businesses that have demonstrated growth and profitability, irrespective of the ruling party.

Historically, India’s growth story has encountered setbacks primarily due to external shocks spotlighting our supply-side constraints. With various infrastructural investments made over the last decade and some adept foreign policy actions, we have remained relatively insulated from global disruptions of the last 18-24 months. Nevertheless, given the current lofty valuations, a significant supply disruption in crude oil could pose short term challenges.

As highlighted in our previous communication, there appears to be a sense of complacency among market participants, leaving room for sharp corrections, particularly in response to external shocks and events. One of the key drivers of global stock markets was the assumption that USA interest rates (and hence global interest rates) have peaked and will come down sooner rather than later. However, persistent inflation and escalating geopolitical concerns have prompted a reassessment of this assumption. Should global interest rates continue to remain elevated, the RBI is likely to maintain its cautious stance, especially considering India’s current resilience to external shocks (for now). As always, we continue to be on the lookout for opportunities with suitable risk-adjusted returns. As you are aware, our investment approach has always been market-cap and benchmark agnostic.

Thank you for trusting us with your investments. As always, please feel free to reach out to us in case of any queries.

Best regards,

Saurabh

Note: The LLP has received approval for change in control of the LLP from SEBI vide letter dated 11th May 2023. Subsequently a re-registration application was filed with SEBI. SEBI vide email dated 26th February 2024 confirmed the same and granted the SEBI PMS registration certificate dated 27th February, 2024.

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