INVESTMENT PHILOSOPHY
Our investment philosophy is to buy quality growth companies at a reasonable valuation. This philosophy rests on 2 pillars, Growth and Risk
Investment Philosophy
QUALITY
Margin of safety not only lies in the price, but also in the quality of business and management.
Quality Business
- Profitable
- Free cash flow generation
- Incremental return on capital
- Opportunity & market size
- Sustainable moat
- Environment & socially conscious
Quality Management
- Integrity
- Passionate & driven
- Efficient capital allocator
- Skin in the game
- Strong risk management culture
- Strong governance
We strongly focus on sustainability & governance of the company.
GROWTH
Investing for acceleration in growth yet to be factored in by market, leads to superior returns.
We are primarily growth investors. We look growth into two baskets
Magic (Accelerated Growth)
Aims at capturing earnings growth & valuation re-rating
- Management/CEO change
- Industry structure change
- New growth catalyst
- Product innovation
- Completion of capex phase
Compounder (Stable Growth)
Aims at capturing stable earnings growth
- Large & growing opportunity size
- Sustainable moat
- Robust free cash flow generation
FORENSIC ANALYSIS - CLEAR & CONNECT
No matter what your investing style is, forensic analysis can help avoid some of the pitfalls inherent in human misjudgment.
Our CLEAR framework is designed to deep dive/analyze the annual reports, financials, and numerous public documents of companies, which help improve our vision beyond the reported numbers that helps us reduce the probability of Type A risk in the portfolio.
Cash flow analysis
- Earnings conversion; reported vs stable cash flows
Liability analysis
- True debt vs reported debt, contingent liability & likely impact on future earnings; payables vs acceptances
Earnings quality analysis
- True economic profit vs reported profit, discretionary vs non-discretionary profit, expense capitalization policy
Asset quality analysis
- Core vs non-core assets; intangible creation policy
Related party & governance issues
- Related party transaction, complex structures (JVs/subs), off BS arrangement – connecting the dots
CONNECT Framework
In involves connecting information collected through channel checks (vendors, distributors etc), peer/industry circle feedback (competitors, experts, etc), factory visits, management/employee meets/ex-employee checks, quality of boards, stature/quality of auditors, gender diversity, CSR practices, Environmental policies/practices etc. Analysing cultural aspects of an organisation is also vital part of our research.
VALUATION
Value of an asset cannot, over the long term, grow faster than its earnings
Multi-Faceted Valuation Approach
- P/E multiple
- P/B
- EV/EBITDA
- DCF
Identify companies with reasonable valuations in relation to growth prospects
Pay a reasonable price, avoid overvalued companies
RISK
Risk is an essential part of our business. We have two fundamental beliefs about risk. First, we take risks only when the risk–reward is favourable. Second, risk can be managed provided one know the source of risk.
From this perspective, we classify risks into three categories
Type A - Capital Loss risk
Risk of permanent loss of capital or Total loss risk: risk of losing ~70-100% of capital
- Inferior quality of management
- Disruption prone businesses
Type B - Volatility risk
Volatility Risk (MTM loss Risk): risk of an investment temporarily going below the investment price
- Temporary market dislocation
- Macro factors
- Geo-political/political issues
- Liquidity
Type C - Opportunity cost risk
It is risk of opportunity loss, meaning you should have invested into sector A stock A but invested in sector B or stock B thereby generating suboptimal returns.
- Lack of knowledge
- Human biases