---
title: "A Feeling Of Déjà Vu: India On The Cusp Of A Multi-Year Rebound | Quarterly Newsletter - March 2021 / Q4 FY21"
period: "Q4 FY21"
published: 2021-04-30
modified: 2021-04-30
url: https://equitreecapital.com/insights/newsletters/april-2021
markdown: https://equitreecapital.com/insights/newsletters/april-2021.md
authors: ["Pawan Bharaddia", "Ssuneet Kabra"]
publisher: "Equitree Capital Advisors Private Limited"
language: en-IN
---

# A Feeling Of Déjà Vu: India On The Cusp Of A Multi-Year Rebound

Quarterly Newsletter, March 2021 / Q4 FY21. Published 30 April 2021 by Equitree Capital. About 12 minutes to read. Web version: https://equitreecapital.com/insights/newsletters/april-2021

> Quarterly Newsletter published 30 April 2021. Figures are as of the dates stated in the letter and are not updated after publication.
> Performance data has not been verified by SEBI. Past performance is not indicative of future returns.
> Current performance, with its as-of date and benchmark: https://equitreecapital.com/pms
> Performance relative to other portfolio managers in the same strategy: APMI, https://www.apmiindia.org/apmi/IaInsight.htm?IAID=407
> Not investment advice, an offer or a solicitation.

> The most contrarian thing of all is not to oppose the crowd but to think for yourself.
>
> Peter Thiel

Dear Investors,

The numbers below capture the journey from the March 2020 trough to the recovery — and the dispersion across benchmarks is, if anything, more interesting than our own outperformance.

## Our Performance

| Returns | 1 Month | 3 Months | 6 Months | 1 Year |
| --- | :---: | :---: | :---: | :---: |
| Equitree Capital | -1.70 | 24.00 | 60.00 | 131.00 |
| Nifty Small Cap 100 | -1.30 | 13.00 | 38.00 | 129.00 |
| Nifty 50 | -0.50 | 5.00 | 29.00 | 78.00 |

As on 31st March 2021. Returns over one year are annualised. *Returns may differ for individual investors based on their time of investment.  
Source: Equitree Capital internal performance records[1].

## 01. 2021: A Feeling Of Déjà Vu — Will It Extend To The Markets Too?

The covid second wave is here, and the human cost — the oxygen and medical-facility crisis through April — is heart-breaking. **The markets, however, have responded with more resilience than they did during the first wave.** Three reasons:

### 1A. Last Year’s Experience Is Still Fresh

Both businesses and investors have already lived through one full cycle of fear, lockdown, and recovery. **The expectation now is that the wave subsides sooner and the businesses catch up with full vigour** rather than re-living a panic from scratch.

### 1B. Vaccines And Better Medical Information

**Multiple vaccines are in market and the rush to vaccinate has begun.** The BMC Commissioner has said that he is hoping to get all of Mumbai vaccinated by **end of July 2021**[4]. Early medication regimens are reducing deaths. The denominator of cases will go up; the case-fatality rate is trending the other way.

### 1C. Manufacturing And Construction Stay Open

**Manufacturing, infrastructure, and construction have been allowed to remain operational under safety norms.** Direct impact is concentrated on travel, leisure, entertainment, and a few consumer-discretionary segments. **The recent statement by RBI also echoed that the impact of lockdowns is far lesser on construction activities** — which we wrote about in our [September 2020 update](https://equitreecapital.com/insights/newsletters/september-2020).

> **Takeaway:** Despite the macro tailwinds — **PLI Scheme, Make in India, infrastructure spending, China + 1** — we will see bouts of uncertainty as sentiment yo-yos between covid emotional drain and improving business prospects. **We strongly recommend using such downward opportunities to build up the portfolio and participate in the wealth creation as India emerges as one of the fastest-growing economies in the world.**

## What We Look At

> No wise pilot, no matter how great his talent and experience, fails to use his checklist.
>
> Charlie Munger

## 02. What Do We Look At While Investing?

A deep-rooted process narrows the universe of **5,000+ listed Indian companies** down to a working set we can size with conviction. **Seven core checklist parameters apply across every business**:

• **Strong Cash Flows & Moats** — simple, easy-to-understand business models. Profits must convert to cash, not paper profit.  
• **Earnings Growth & Macro Visibility** — large addressable market for consistent compounding.  
• **Reasonable Debt** — generally **D/E < 0.5×**. Lower leverage means more profit accrues to equity holders and the business survives downturns.  
• **Strong Return Ratios** — consistent ROE, ROCE, asset turnover. **India’s average cost of capital is 8–12%; companies that earn ROCEs north of 15% are lucrative**.  
• **Reliable Promoters & Managements** — average business with great execution beats complex business with mediocre management. Read related-party transactions, remuneration, attend con-calls, meet over long periods.  
• **Capital Allocation** — what management does with cash matters more than just generating it. Watch for long-term loans plugging short-term liabilities, oversized other-income share of PAT, idle cash.  
• **Valuations** — companies trading at a discount to their **15-year average valuations**, or with re-rating potential.

> **In Focus:** Every candidate below is graded **on three Roman numerals — III being the highest tick** — across the six measurable parameters above. Capital allocation and management read are folded into "Reliable Management".

## What We Are Looking At

> It is far better to buy a wonderful company at a fair price, than to buy a fair company at a wonderful price.
>
> Warren Buffett

## 03. What Are We Currently Looking At?

Five candidates currently sit on our active watch-list. We share each one’s pitch and its grading against the checklist. **Roman numerals: III = highest, II = strong, I = weak, NA = not applicable.**

### 3A. Candidate 1 — Innerwear & Apparel Leader

A strong player in inner-wear with **14–15% market share**. **55% of sales come from the mid-premium segment, 15% from premium**. Pan-India distribution: **>1,200 dealers and >1.25 lakh retail touchpoints**. The company is now extending into athleisure, women, and kids — adjacent categories where its distribution is the moat.

| Strong Cash Flows | Earnings Growth & PEG | Sturdy Balance Sheet | Reliable Management | Market Leadership & Moats | Return Ratios |
| :---: | :---: | :---: | :---: | :---: | :---: |
| III | III | II | II | II | II |

Checklist scoring — innerwear company.  
Source: Equitree Capital research[2].

### 3B. Candidate 2 — Ethanol Technology / Bio-Engineering

A bio-based engineering and HiPurity-solutions company with **~70% global market share in ethanol technology**. **Debt-free**. The Government of India has **advanced its 20% Ethanol Blending target from 2030 to 2025**, opening a visible **₹10,000–15,000 crore opportunity over the next four to five years**.

| Strong Cash Flows | Earnings Growth & PEG | Sturdy Balance Sheet | Reliable Management | Market Leadership & Moats | Return Ratios |
| :---: | :---: | :---: | :---: | :---: | :---: |
| III | III | III | III | III | II |

Checklist scoring — ethanol technology firm.  
Source: Equitree Capital research[2].

### 3C. Candidate 3 — Housing Finance NBFC

Housing and mortgage loans to salaried and non-salaried individuals. **Q3 FY21 collection efficiency at 97%**. **Pro-forma GNPA at 4.3% (including 0.3% restructured)**. Trading at **P/BV of 1×**.

| Strong Cash Flows | Earnings Growth & PEG | Sturdy Balance Sheet | Reliable Management | Market Leadership & Moats | Return Ratios |
| :---: | :---: | :---: | :---: | :---: | :---: |
| NA | II | II | II | II | III |

Checklist scoring — housing-finance NBFC. Cash-flow tick is N/A for a financial.  
Source: Equitree Capital research[2].

### 3D. Candidate 4 — Branded Basmati & FMCG Aspirant

A branded basmati exporter with **27% market share in India, 50%+ in the USA, 10% in the Middle East**, and an expanding footprint in Europe. The company is widening into adjacent FMCG categories and **working actively to improve its working-capital cycle and cash flows**.

| Strong Cash Flows | Earnings Growth & PEG | Sturdy Balance Sheet | Reliable Management | Market Leadership & Moats | Return Ratios |
| :---: | :---: | :---: | :---: | :---: | :---: |
| III | III | II | II | III | III |

Checklist scoring — branded basmati exporter.  
Source: Equitree Capital research[2].

### 3E. Candidate 5 — North-East Cement Leader

A regional cement leader with a **strong hold in the North-East and an expansion footprint into Eastern India**. **Trading well below replacement cost** with **near-zero debt**. Capacity additions are coming through, and the premiumisation push is starting to lift realisations.

| Strong Cash Flows | Earnings Growth & PEG | Sturdy Balance Sheet | Reliable Management | Market Leadership & Moats | Return Ratios |
| :---: | :---: | :---: | :---: | :---: | :---: |
| III | III | III | II | II | III |

Checklist scoring — North-East cement company.  
Source: Equitree Capital research[2].

## Portfolio Performance

> Although it’s easy to forget sometimes, a share is not a lottery ticket — it’s part-ownership of a business.
>
> Peter Lynch

## 04. Financial Performance Of Our Portfolio & Valuations

Despite a weak first half, **most of our companies are looking at either a flat FY21 or slight growth, with a strong FY22 ahead**. As we discussed in our [March 2020 update](https://equitreecapital.com/insights/newsletters/march-2020), **most of our companies are 20–30-year-old brands, are well-known, and have dependable managements**. **Our portfolio is currently valued at a PE of 26× (TTM) and 11× on FY22E numbers.**

|  | 9M FY21<br>Growth (YoY) | FY21E<br>Growth (YoY) | FY22E<br>Growth (YoY) | Avg PE<br>(TTM) | Avg D:E<br>(FY20) |
| --- | ---: | ---: | ---: | ---: | ---: |
| Equitree Emerging Opps* | -7% | -2% | 42% | 26x | 0.30x |
| Nifty 50* | -5% | 3%** | 30%** | 46x | 0.44x |
| NSE Small Cap 100* | -40% | NA | NA | 38x | 0.47x |

Portfolio earnings growth and valuations vs benchmarks. *Excluding BFSI companies. **Based on consensus figures.  
Source: Capitaline; consensus brokerage estimates; Equitree Capital research[3].

> **In Focus:** **Our portfolio compounds at 42% expected FY22E earnings growth at a forward PE of 11×.** The earnings runway, more than the multiple, is what we are getting paid to wait for.

## Is The Market Rational?

> Markets can remain irrational longer than you can remain solvent.
>
> John Maynard Keynes

## 05. Is The Market As Rational As The Intelligent Investor?

Markets are irrational and emotional. **March 2020 saw irrational bouts of bearish behaviour; the subsequent rally was a stretch of irrational bullish behaviour as the pandemic eased.** The intelligent investor stands between the bears and the bulls — anchored to the business, not to the tape.

> **Takeaway:** **Our investment strategy and the kind of businesses we get excited by did not change during the bear phase of March 2020, was the same when the markets were touching all-time highs, and remains the same as covid makes the markets volatile again.**

Volatility and activity excite the markets — **but understanding businesses, coupled with long stretches of inactivity, is what generates wealth**. We will keep doing the unsexy thing.

## 06. In Closing

As always, please feel free to [reach out to us](https://equitreecapital.com/contact) with your comments, suggestions, and queries. **We wish for everyone’s good health and safe being.**

Warm regards,

Team Equitree

- Pawan Bharaddia, Co-Founder & CIO (pawan.b@equitreecapital.com)
- Ssuneet Kabra, Co-Founder & CEO (skabra@equitreecapital.com)

## Sources

1. Equitree Capital internal performance records as of 31st March 2021. Returns over one year are annualised; returns may differ for individual investors based on their time of investment.
2. Equitree Capital research — bottom-up business reviews and checklist scoring for the five active watch-list candidates. Roman-numeral grading: III highest, II strong, I weak, NA not applicable.
3. Capitaline; consensus brokerage estimates; Equitree Capital research — portfolio earnings growth and valuations vs Nifty 50 and NSE Small Cap 100 benchmarks (excluding BFSI).
4. Brihanmumbai Municipal Corporation (BMC) — Mumbai vaccination target communicated by the BMC Commissioner, April 2021. Reserve Bank of India — Monetary Policy Committee statement on the limited construction-activity impact of localised lockdowns.

## Disclaimer

This newsletter is prepared by Equitree Capital for informational purposes only and is directed at existing investors of its Portfolio Management Services. It does not constitute investment advice, an offer, or a solicitation to buy or sell any securities.

Past performance is not indicative of future results. Returns are computed on a TWRR basis, net of fees and expenses, and are not verified by any regulatory authority. Individual portfolio performances may vary. Forward-looking statements are subject to risks and assumptions that may not materialise. The five watch-list candidates discussed are illustrative of our research process and are not a recommendation to buy or sell any specific security.

Investments in small- and micro-cap equities carry higher volatility, liquidity, and business-specific risks, including the possible loss of principal. Equitree Capital is a SEBI-registered Portfolio Manager. Recipients should consult their independent financial, legal, and tax advisors before making any investment decisions.

This document is private and confidential. It may not be reproduced, redistributed, or published, in whole or in part, without the prior written consent of Equitree Capital.