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Q3 2019 Letter

​Last year’s sell-off, which paused briefly around the election months, resumed in the earnest starting July. Everyday there is some new bad news. Promoters are going to jail. Companies with long histories are winding up. Everyone has been asking the same two questions - when will India turn around? Will it ever?

Let's look this from a few different angles.


First, some market history. Just plain numbers.

Here is a historical account of Sensex returns for all 5, 10, and 15 year rolling periods since inception. These returns are denominated in US Dollars.

Over a total of 31 ten-year rolling periods, India has lost money exactly once. And over a total 26 fifteen-year periods, not even once. Again, this is after adjusting for substantial currency depreciation.

But maybe this time is different?

Yes, it is. This time, in fact, is materially better.

The period in that table above includes over a hundred major terrorist attacks. It includes five collapsed governments - one of which lasted just 13 days. About a dozen serious financial crises. Years of double-digit inflation. Property bubbles. Currency debacles. Stock market scams, and a whole lot more.

The India of today is orders of magnitude stronger than the India of those years. It's not in some place of eternal damnation from where there is no return. It's merely going through a downturn in business cycle. The rapid deleveraging, frequent revelations of fraud, shutdown of uncompetitive businesses, slowdown in CapEx spends … these things happen in every downcycle, in every country.

So, what will turn this around? That's hard to say. Mostly, these things just correct themselves over time. The government can help. If it has the means to do so, and the political will to do so. This government has both. And it is starting to help.


It lowered the corporate tax rate from 30% to 22%. Then followed this by its decision to privatize a handful of government owned entities. It will likely lower personal and long-term capital gains taxes as well. It probably won't stop at this and might end up overcorrecting.

Our view on corporate tax break, which took effect retroactively starting April 2019, is as follows; corporate taxes are like any other (variable) expense, not a whole lot different from say raw material expenses. In hyper competitive industries the entire tax break, much like a raw material price cut, will eventually be passed onto the customers.

Only in a few situations, where a company has true pricing power, will the company retain this tax break for itself. It will either let this extra money accrue to its earnings, hence increasing its return on capital. Or it will use the money on higher R&D, brand-building, customer service, and such like, which will widen its moat. The strong will become stronger.

At Willow, our policy is to not depend on government policy. The probability of a government, any government, doing something smart is the same as the probability of it doing something stupid. We would love for this government to properly enforce its current policies - like RERA, GST, and Bankruptcy code (all great, by the way), and leave the rest to the business. It seems to be moving in that direction.


That takes us to the issue of timing. Is this a good time to buy? Yes, finally, after a long time.

It's good time to buy because, first of all, very few people think it's a good time to buy. Instead most think that it's a good time to sell. And secondly, prices have come down to a point where valuations make sense.

This is not readily obvious if one just looks at the NIFTY 50. Like most other indices, NIFTY is market cap weighted. Largest companies have the largest weights. If it was, hypothetically, equal-weighed then every stock would have a weight of 2%. Top 10 stocks would be weighted 20%. In real NIFTY, the top 3 stocks, HDFC Bank, Reliance, and HDFC, respectively make up 11.25%, 9.68%, and 7.23% of the index. Top 10 stocks make up 62% of the index.

All this sounds normal until one starts looking at the performance of these stocks. HDFC Bank is up 23% for the year. Reliance is up 34%. And HFDC 26%. The top 10 stocks together are up 13.6% for the year. And so is the index. Which means that 80% of index stocks are essentially in a coma. As one goes down in size this dispersion gets starker. Valuations too show a similar dispersion. Consumer package goods trade at all time high valuations whereas autos and healthcare trade at 10-year lows. Maybe Indians will keep gorging on biscuits forever, but they will no longer buy cars, or get sick. We don’t think so. Similarly, smaller stocks now trade at decade low valuations relative to NIFTY. And so on.

All of this simply means that there is plenty to choose from.

But why not just wait for it all to play out? And then buy.

That's not how investing works. At least, not the kind we practice. Ours is a simple model. We spend our time looking for assets we want to buy. And then we spend time waiting for the price to make sense. Once the price does make sense, we buy. And that’s where we are now.

As usual, we will write stock specific commentary in our annual letter. Meanwhile, our current areas of focus are leaders in beaten down sectors that we understand well. The long-term India story remains intact. And, we have zero doubt that this cycle, like every cycle, will also turn. Quality assets purchased today will make a lot of money tomorrow. We are out bidding for them.

If you have any questions regarding this letter or your portfolio, please do not hesitate to ask.


Rahul Bhatia Aniket Khera


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