December 2021 / Q3 FY22

01Where Do We Go From Here?

We do not look at our 77% return for calendar 2021 as a budget number to be repeated. The base effect of the FY21 covid trough flatters every comparison, and we would urge investors to anchor expectations on a longer horizon.

02India: Will We See A Repeat Of The 2003–2007 Dream Run?

We pulled apart the macro data and found an uncanny similarity between 2003 and now. The pre-conditions that set up the manufacturing-led, private-capex-driven bull run of 2003–2007 are visible again — only this time on a stronger balance sheet than India had two decades ago.

India today walks into the cycle with a stronger corporate balance sheet, lower banking NPAs, and a deeper domestic liquidity pool than 2003 ever had. The macro tailwind to private capex is rising inflation and the resulting rising-interest-rate regime — confirmed in November when the US Fed announced its taper of asset purchases[3].

03Fed Interest Rates: From The Floor, History Tends To Reward Equity

The last comparable cycle saw the US Fed Funds Rate climb from about 1.0% in mid-2003 to above 5% by mid-2007 — a 4 percentage-point lift over roughly four years. Each step up was greeted with hand-wringing about an end to the bull run; the bull run did not end until the Fed had finished.

3AReturns Of Nifty From 2003–2007

04The Capex Cycle: Endorsement From The Ground

We wrote about the capex cycle building up in India in our June 2021 newsletter. Three months on, our portfolio company promoters confirm the pivot: capacity expansions are being announced and, more tellingly, funded out of internal accruals rather than incremental bank credit. That, more than any sell-side note, is what made the 2003 cycle work — and it is what we are seeing again on the ground.

Textiles, chemicals, metals & mining, and utilities lead the higher-capex tally. These are the sectors most likely to see high growth over the next two to three years as the cycle builds momentum. Crucially, the SoE-vs-private split shows that private capex is now ahead of state capex — the textbook signature of a healthy investment cycle.

05Markets Are Yet To Give Value Investing Its Due Share

Paytm carries a market cap of about ₹58,000 crore and Zomato about ₹70,000 crore, both EBITDA-negative. Of the US$ 17.5 bn raised through Indian IPOs in 2021, new-age tech cornered roughly one-third[6]. Total start-up funding tripled to US$ 39 bn, and 40+ companies became unicorns in 2021 — more than the entire previous decade combined.

Meanwhile, cash-generating, profitable companies in our universe still trade at high single-digit / lower-double-digit earnings multiples. We find ourselves in the strange position where HNI and retail money is chasing unicorn aspirants while questioning the sustainability of cash flows in old-economy businesses.

Our portfolio is the opposite of the IPO froth: hugely cash-generating businesses with sturdy balance sheets and reasonable valuations.

06Things To Watch Out For Over The Next Quarter

6ABudget — More Likely A Non-Event

Tax revenues are up 65% YTD November; November excise alone +48% YoY. The fiscal math is comfortable enough that Budget 2022 is likely to be a continuation rather than a reset — incremental support for infrastructure, agriculture, and healthcare. The only thing to watch is the pace of government spending rather than fresh policy direction.

6BElection Season Returns

State elections in Goa, Manipur, Punjab, Uttarakhand and — most importantly — Uttar Pradesh will set the tone for the 2024 general election. A coalition outcome could undo the pro-business NDA environment that the markets have priced in.

6CRising Commodity Prices

Raw-material and commodity prices are squeezing margins. Volume growth in our portfolio is being offset by higher input costs, and early Q3 results are mixed. We expect this to be transitionary as supply chains normalise post-covid — but the next two quarters will need patient sequencing of price increases.

6DContinuous Selling By FIIs

FIIs have cumulatively sold ~₹1,38,000 crore since October 2021 — absorbed largely by DIIs and domestic retail. Despite the sell pressure, India is one of the best-performing emerging markets, with only a ~6% drawdown over the last three months and a sharp 6% correction in the last week of January.

As an example, the kids-apparel manufacturer we wrote about in our last newsletter is up about 43% since our investment over the last three months — even as the broader market has been on a downward slide. That is the asymmetry between owning a business you understand and owning the index.

07In Closing

As always, please feel free to reach out to us with your comments, suggestions, and queries. The macro setup, the corporate balance sheet, and the on-the-ground capex signals all point in the same direction — and we are positioned to participate in what we believe is the early innings of a multi-year cycle.

Sources

01

Equitree Capital internal performance records as of 31st December 2021 and portfolio balance-sheet analytics (excluding BFSI). Returns over one year are annualised; individual portfolio performance may differ. PMS ranking reference: PMS Bazaar industry data, December 2021.

02

RBI; CMIE; Bloomberg; Equitree Capital research — 2003 vs current macro snapshot (repo rate, banking net NPA, corporate leverage, tax rate, inflation, earnings growth).

03

US Federal Reserve (FRED series FEDFUNDS) — monthly effective Federal Funds Rate, 2001 to December 2021. November 2021 FOMC announcement of asset-purchase tapering.

04

NSE — Nifty 50 monthly closes, 2000 to December 2007. The +465% claim is computed from the April 2003 monthly trough (~934) to the March 2007 peak (~3,821).

05

Ambit Capital research; Equitree Capital — sector-wise capex guidance, 2021 (digitised from the source chart). SoE = State-Owned Enterprise.

06

Industry trade press; Equitree Capital — Indian IPO and start-up funding statistics for calendar 2021. Paytm and Zomato market caps as on the December 2021 quarter close.