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2020 Annual Letter

All our portfolio companies were flat to up this quarter. As usual, annual commentary on our major positions starts at the end of this letter.

(Post Script - we have written our fair share of ridiculously stupid things in the past, though none as stupid and as unfortunate as the next few lines.)

We have opened our last three letters with COVID. This will be the last time we do so, simply because by the next quarter we won’t need to.

The daily case count has now gone below 15,000. Active cases hover around 200k, down from 700k the last time we wrote to you. Fatality rate is now decidedly below 1.5%. Despite its limited resources, poor administrative capacity, and chaotic cities crammed with millions of non-compliant citizens, India has done well so far.

It’s the next phase - the mass vaccination, where India will clearly shine. It produces 60% of world’s vaccines. It administers some of largest vaccination programs in the world. It has decades of experience dealing with infectious diseases. The government plans to vaccinate 300M by July. Even with delays priced in this will be a terrific achievement.

Meanwhile, NIFTY has rallied 75% from its lows and is now trading at all time highs. Sixty percent of the BSE500 companies trade higher than they did at the end of 2019. Many of them are doing so despite little prospect of recovery until 2022. For some, the multiple on normalized earnings is now higher than it was pre-pandemic. Is this a bubble? Or has the pandemic somehow made the companies better than they were?

We don’t think it’s a bubble (which is exactly how one would think if one were in a bubble).

Frankly, India doesn’t even have many bubble worthy public companies - perpetual loss makers somehow deserving of their magnificent valuations: SaaS companies with trillions in TAM, or gene therapy pioneers that will end disease once and for all, or EV trailblazers that will entirely reverse climate change. This is still mostly a US phenomenon.

Now, if the American stock market darlings plummet, they might take the Indian market down with them (NIFTY dropped 50% during the dotcom bust). But to our minds that will be a superb buying opportunity.

So instead of opining too much about the market movement (we’ve already gone over our limit), let’s explore whether the pandemic has somehow improved the long-term prospects for certain businesses? It is an important question, given that both Aniket and Rahul have a deep-seated bias that long lasting business trends only happen over long durations; stuff that happens over short periods mean reverts, it can be ignored, and in some cases should actively be bet against.

Where does COVID fall on that spectrum?

Clearly, it is not a long duration event, especially when you consider the lockdowns which only lasted a few weeks. But is it a long-lasting event? Could its effects on businesses persist far into the future? Should we model the long-term profitability for, say, a retailer, or a TV studio, or a home appliance maker, any differently than we would have in 2019? We think so.

And here we’re not referring to the temporary mismatches in demand/supply. For instance, there were zero motorcycles sold in April; and there were 100,000 extra (compared to 2019) motorcycles sold each month in September, October, and November. These were both anomalies, and one would not have been possible without the other. The growth rate will eventually revert back to normal.

Instead, we are talking about lasting changes in intrinsic value. Coming back to our original question, here’s why some companies are more valuable now than they were pre-pandemic:

a. New behaviors involuntarily adopted

Zooming, online grocery shopping, remote working, virtual learning - ask yourself how many new things have you had to try last year because you were forced to? Then ask yourself how many of these you wish you had tried before?

We too conducted dozens of video meetings last year with portfolio companies, service providers, partners, and fellow investors – meetings that would otherwise involve air travel, suit and tie, liters of chai, awful traffic, and crappy conference rooms. Except the chai we miss none of it. Neither do our counterparts. Every other meeting someone utters “why weren’t we doing this before?”

The data confirms our shared experience as well. India became the biggest market for Zoom in Q2 2020 with 68 million downloads. [2] Mobile payments have doubled over the last year.[3] Online video subscriptions have grown 50-60%, in a market where TV is growing at 3%.[4] How much of this is going to revert back? Not much.

Satya Nadella recently said, “we’ve seen two years of digital transformation in two months”. Shouldn’t companies on the right side of it, especially companies supplying picks and shovels that make all this possible, be valued higher?

b. Dead adversaries

The top 5 steel makers produce 90% of all steel in India, up from 63% in 2010. The top 2 movie theater companies collect 28% of all gross box office receipts, up from 6% in 2010. There are 3 telecom operators in India, down from a dozen in 2010.[5] We can keep going but you get the picture – as the economy formalizes, the big get bigger.

The long-term trend of formalization and consolidation in India still has a long way to go. As Manish Sabharwal of Teamlease[6], India’s largest staffing company, recently reminded us in an interview: India has 63M individual companies, twice as many as the US, which has an economy 9x the size of India. The current crisis, by forcing inefficient and capital starved businesses to exit, will accelerate consolidation.

Shouldn’t survivors who find themselves facing fewer competitors be valued higher?

c. Invisible scaffoldings revealed

When construction activity ground to a halt and migrant labor started moving back to villages, Sunteck decided to provide for their workers onsite. It wasn’t easy but as things opened it helped them quickly re-start construction, and collect construction linked receivables. The wherewithal to make such decisions doesn’t usually show up in financial statements.

In quarter ended May 2020, when large parts of the country were closed for weeks, Hero generated $130M in cashflow (same as it did in 2019) on 1/3rd the usual sales. It did so by pulling a lever it seldom pulls – power over its distributers and suppliers. The power is there but it’s seldom used, and certainly never abused. It comes from years of goodwill. That power and goodwill don’t show up in financial statements.

In the midst of lockdowns when it was impossible to do site visits, Godrej sold 500 apartments sight unseen through its website. Buyers wanted to avail tantalizing discounts. They wanted to lock in low rates and moratoriums. And yet, they only wanted to transact with a party they trusted to deliver a quality product. That trust that Godrej has garnered over decades doesn’t show up in financial statements.

When we buy a business, we don’t just value the numbers plainly on display in the financials. We also assess hidden intangibles - good judgment, leverage over partners, trust, etc. Think of these intangibles as scaffoldings that companies use very sparingly - so much so that we can only hope they exist.

But amid a crisis, when a company brings all its resources to bear, it becomes obvious whether the company possesses the scaffolding or not. Buffett once said that only when the tide recedes will we know who’s swimming naked. True, but we’ll also know who’s wearing the swimsuit with the most secure waistband. Once the market knows that a company has what it takes to weather the next crisis, shouldn’t it value the company higher?

Our point in writing all this is as much to caution ourselves as to tell you what’s on our minds. As the world opens and businesses start operating at their full potential, we need to keep reminding ourselves that the long-term effects of this pandemic are still unfolding. Acknowledging that this-time-is-different is just the first step. We must also keep our periscopes raised to fully appreciate these effects. But we must not be too eager to anticipate the future. There’s a thin line between forecasting and speculating. We don’t want to cross it.

We wish you a happy new year. We hope you’re as excited about 2021 as we are. Speaking of excitement – we’ve never been more excited about what the future holds for India. Before you know it, India will be completely open for business and travel. We can’t wait to freely travel back and forth to see our friends and family. We are making our travel arrangements now, before it gets too expensive. We suggest you do too!

As usual, if you have any questions regarding this letter or your portfolio, please do not hesitate to ask. By now, you would have received your reports from NAV Consulting.


Rahul Bhatia Aniket Khera

[1] Inception date: 1-Jan-2013 [2] Source: [3] Source: National Payments Corporation of India [4] Source: BCG & CII report on Media and Entertainment, Dec 2020 [5] Source: Spark Research [6]

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