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Covid Update

Updated: Oct 9, 2022

Dear Readers,

Greetings from Team Carnelian!!

We are also happy to report this month, we are migrating Nippon Asset Management, one of our portfolio companies from Magic Basket to Compounder Basket. We bought this stock with the hypothesis that it will become 3x in 5 years’ time, aided both by earnings growth and valuation re-rating. Fortunately, large part of the valuation re-rating has got captured in the first six months. We believe this will become a compounder story going forward. Having said that, nothing can rule out further upward re-rating of the stock but we can’t have that as a working hypothesis. We believe asset management is a great compounding business wherein internal compounding (akin to same store sales growth) of ~12-15% CAGR coupled with incremental flows will make it a ~18-20% compounding story. Business does not require incremental capital to deliver this growth. Moreover, we expect business to pay back large portion of earnings in the form of dividends/share buybacks which will further add to the shareholders returns. We continue to love this business and the management team. Our hunt for similar stories is continuously on.

Our thoughts on the markets and the latest developments:

We know that there is a wide spread panic as markets both domestically and globally are grappling with uncertainty with regards to the gravity and impact of Corona Virus. We believe that the extent of damage will largely depend on how fast it is contained. One theory believes that the virus cannot survive the high temperatures of summer, thereby it should begin to recede from the month of March or April, but we have no firm answer on that.

Meanwhile worries, rumors, news and fear are likely to remain escalated. Markets might remain spooked on every news flow related to this. When the risk perception changes very quickly, flight to safety is a common phenomenon.

While we all know that Corona virus is a temporary issue, it should not last for long. However, the worry of short-term damage and its recovery will remain. We are monitoring the events closely and keeping our eyes wide open to ascertain the impact on global trade, liquidity and risk. Though we cannot predict the longevity and severity of the impact, it is not going to be permanent. In fact, as far the Indian economy is concerned, it stands to benefit at the margin from the current issues. Every global business will now seek to diversify their base of sourcing. Indian businesses will also focus more on local manufacturing. This is all good in the long term. Current export businesses will also gain momentum.

As highlighted in our January newsletter, any dislocation on account of this will be considered to build our long-term portfolio. In fact, we anticipate that as the epidemic recedes, all major economies including China will do a growth stimulus which is good for the overall markets.

We are well positioned to take advantage of any knee jerk reactions in the markets based on our MCO framework and will be willing buyers when most investors are selling because of short term panic. We think it will create more Magic moment opportunities and get us Compounders at attractive valuations thereby increasing the ERR.

Last week the Indian GDP growth came out at 4.6%. As we have been saying, one of the most important factors to watch out for is the credit growth. RBI is taking various measures to boost credit flow in the economy. (It exempted banks from maintaining CRR on incremental credit disbursed to auto, MSME’s & real estate; It has reduced risk weights on retail loans to incentivize the flow of credit and few more). However, credit flow remains subdued. We feel it will still take time and the Corona issue will impact risk appetite further. We believe that central banks across the globe will continue to accelerate the thrust to keep markets flush with abundant liquidity (please refer December Investor Update), which eventually should lead to a recovery.

To conclude, we believe, next 3-6 month can be a difficult period and must be navigated carefully. There have been many events/situations like this in the past, which have created dislocations. Those dislocations have always created opportunities. We remain quite constructive on the prospects of Indian markets and it’s potential. In times like this, the only advice we can give to our investors -

Stay Calm & stay invested with Carnelian !!

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