Year-end, 2014.

In all likelihood, our 2014 performance was atypical. We hope that 2013 was atypical as well. Together, the two years resulted in satisfactory returns. Our goal is to significantly outperform the Indian market in USD terms over the long run. Two years is hardly long run, but we are pleased to get off to a good start. These returns have, and will in future, come with considerable volatility. The Indian markets and our investing style all but ensure that. We are contrarian investors. We want the market to present us with deep discounts, and we want these discounts to disappear as the market rallies. In that sense, an inefficient and volatile market is far more preferable than a stable one. ​

For folks who haven’t paid attention, the big event of the year in India was, of course, the election. According to the popular claim, BJP’s decisive victory marked a watershed. We hope that’s true. However, having lived all our lives in large democracies, we fall squarely in the “believe it when we see it” camp.
 
To its credit, the Modi government has, so far, made all the right noises. The government is much smaller, at least at the top levels. It’s much quicker - judging by the pace of bills tabled so far. It’s also more decisive – it has the luxury of an absolute majority. Even so, it will take time before anything of significance really happens. Opposition parties, while individually meaningless, collectively still have enough clout to stall if not block. This is especially true in the upper house, where the ruling party does not have absolute majority. In the latest parliament session, the upper house worked for approximately 60% of its scheduled time, while the lower house worked for a record 98%. In democracy, where there’s a will there’s a way – to get nothing done. The government is now trying to push through reform using ordinances - blunt instruments, akin to executive orders in the US, only much blunter. We welcome the aggression.
 
If the government delivers on its promises, and we’re optimistic that it will, sectors such as infrastructure, mining and capital goods will perform very well. We are actively looking for opportunities in these sectors. However, our first preference will always be businesses that will do well despite the government. Betting on policy outcomes doesn’t come easy to us, especially under current market conditions.   
 
Right now, companies with strong franchises are doing well and are fully valued. On the other hand, commodity type, capital intensive businesses are still paying for the sins of their past. The “growth debt” of yesteryears continues to haunt them as their order books, or their customers’ order books, remain mired in red tape. Take, for example, the road builder who was promised 20% ROI by the government but, after several years, can’t get the right of way to start. It’s now selling off the contracts to pay off debt. Or consider the steel company that owns four (highly underutilized) captive iron ore mines, but has to import iron ore to make its steel. Or the airline industry, that has seen one major player fold and another at the verge of doing so. Over time, and with good governance, this too shall pass. Meanwhile, investors are left with but two choices, expensive and mediocre.
 
Under current conditions, you will see your portfolio lean a bit more towards situations with hair on them. Specifically, we’ll be looking for fire-sales involving companies with localized, fixable problems. We described MCX as being one such investment in our Q3 investor letter. Our most recent position in Jammu and Kashmir Bank (described below) is cut from the same cloth.
 
Current Positions <private>
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All in all, this year was a big deal for India. What she makes out of it, only time will tell. We have high hopes. We wish you and your families a happy and prosperous 2015. If you have questions regarding this letter or your portfolio, please do not hesitate to ask. As usual, you will receive your statements from NAV Consulting Inc.