Quarter 2, 2015

The harmless looking selloff – MSCI India US is down 3.61% for the quarter, is hiding a far more interesting dispersion. Several companies, and some entire sectors, have suffered massive sell-offs. Valuations, after a long time, have started making sense in some cases. We are looking through the rubble with substantial deployable cash on hand. The returns from these investments will take a few months to show up but they’ll be substantial.

Our portfolio has remained volatile through the quarter. In order to generate long term returns through a concentrated portfolio strategy, we, at times, suffer more than our fair share of short term fluctuations. As always, we are OK with that trade-off and we have a terrific set of partners who share our philosophy. We thank you, our partners, for that.
      
Two situations have resulted in most of our losses for the quarter. We describe them in detail here.
 
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On China and Greece
 
There’s always something scary going on in the world of macro events, the latest boogeymen being Greece and China. As always, we are watching closely but acting indifferently. In order to sensibly incorporate a macro view into our investing strategy we need to good handle on three things: the outcomes, their likelihood and their effect on our portfolio.
Take Greece for example; what exactly will the Drachma II world look like? We don’t know. No one does. Greece is at best a $100bn problem that’s been lingering for more than five years now. At this point, we see little possibility of this problem manifesting itself into a global contagion. If Greek loans been sufficiently ring-fenced by now, which we suspect is the case, then a Greek exit will happen sooner rather than later. Eventually, a monetary union without political and fiscal union is bound to unravel. Greece will be the first step. However, how long that takes and what effect it has on our portfolio is far from clear.
 
As we mentioned in our previous letter, foreign portfolio investors hold large amounts of free float of the Indian market. A global “margin call” can certainly lead to some ugly consequences for Indian stock prices and the Rupee. The last time we experienced this was two years ago. However, India is in far better shape now than it was in 2013. Our current account deficit has halved, so has the price of oil which is India’s biggest import, and our foreign exchange reserves are the highest ever. Our political leadership couldn’t be better.
 
Finally, what effect will a Grexit have on the earnings of Shriram Transport, CARE ratings, Piramal Enterprises or any of our portfolio companies? In the long run … not much. These companies don’t need to repeatedly access the capital markets in order to thrive. Ultimately, that’s what we care about.
 
New investment <private>
 
In closing, as much as we would like our portfolio value to increase 10 basis points every trading day, leading to a healthy 30% return for the year, we know of no legal way to do so. Our formula is simply to buy great and/or buy cheap. Then wait. India is one of the best countries to practice our style of investing and we look to its future with excitement.  
 
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.