By Nimesh Shah. Originally published on CNBC TV18
Solitude Capital Management on Tuesday said significant appreciation of rupee this year is frustrating and a headwind for investments in India.
Speaking from the sidelines of the 14th Annual Motilal Oswal Global Investor Conference, Joel Werner, chief information officer, said Solitude Capital Management’s strategy is to invest in companies that have a market capitalisation between $500 million and $5 billion.
Werner said Solitude Capital Management’s large investment in IIFL did very well for the company.
Q: I was looking at the brief profile of your company and it suggests that your major investments are in India and China. First of all on India, where the market is up at record highs, but currency has depreciated 10 percent. So net-net, for a FII, it’s not much that you have made in dollar terms. What is your view on India at this point of time?
A: The rupee has certainly been headwind for investments in India. The one thing that causes us to be calm and forward-looking is that our expectation. Generally speaking, in some of the emerging market currencies, we find weakness, if I can use that term, versus the dollar. We are dollar denominated fund.
So when we make an investments, we look for very high return on our investments. So when we enter with right investment, we are looking for two-three times our money in one-two years, which makes a very special investment and they are hard to find. So we tend to have 15 investments at any given point and ten of those investments tend to make up 80 percent of our capital.
We are looking for very specific matrix and qualities of those businesses and managers, but the weakness in the rupee has been a pain. It has been, I would say, a little frustrating. Two things driving that and I think it would be the rebound in oil and “tariff war” because it summarises a lot of things that are happening and have happened and might be ongoing in discussion. But we are looking for companies that are compounded at such high rates of return on their capital employed. Weakness in currency again, we expect somewhere between four percent and five percent depreciation in the rupee versus the dollar as we underwrite our investments. It has been a little bit heavier this year, but not necessarily out of step with other currencies, where we are invested. So while our fund is effectively flat year-to-date, our compounding returns since inception is about 12.8 percent and that’s how we track our performance with our investors.
Q: How are you looking at the midcaps and smallcaps and after the correction do you think there is enough opportunity which is emerging in the midcaps and smallcaps in India?
A: Our strategy is to invest in companies that have a market capitalisation between $500 million and $5 billion to start and that would fall into small and midcap universe. So that is our hunting ground. There are number of investors who will pick and roll and move up into largercaps – that’s not really our mandate for looking for great investments. It becomes just a question of the large numbers, where looking for something that can grow by 3x and by the nature of something that grow 3x, it can probably grow by 10x over much longer period. If you buy a very large marketcap companies, it’s very hard to do that. So it’s a bit of an indirect question to you and you need to follow-up.
Q: I was looking at some data and suggest me that your past exposure in India has been larger in the financials, banks, financial services and insurance (BFSI) space. I do not want to name individual stocks, but largely in the financial space. Is that something which still excites you and apart from financials, where do you think there is an investment opportunity right now as far as India is concerned?
A: That is historically true. We are journalist by nature and I am a journalist by training. For better for worse, I do think it’s the best way to invest. We had large investment in IIFL and that did very well for us, especially, the first half of 2016 we pushed to a large investor in that company for our fund. I think there is great opportunity as that business separated in the three separately listed operating companies, but our exposure for financials is really a byproduct that looking for asset management companies. So IIFL has one of the world’s best asset management companies.
We have similar investment in China, which is effectively a similar business without non-banking financial companies (NBFC), but has a terrific asset manager behind it. Asset manager businesses tend not to do same balance sheet implications as traditional financials do.
One of the things that Solitude Capital Management looks is very clean balance sheet. It’s one of the things I have learned over investing in my lifetime, where our fund, we are called a hedge fund or special purpose investment vehicle, but we do not use leverage at our fund level and we generally are looking for companies that have net cash or very conservative balance sheets on their own company level.
Q: Given that you look at net cash and clean balance sheet companies, does Indian IT midcap stocks or information technology (IT) stocks fit into your bill. Do you have any exposure to any of the Indian IT names?
A: We do not have any exposure to the Indian IT names. It has been a very challenging space for quite some time and we have been staying away from the fray. Myself and my investment team, we are looking for niche businesses run by extremely talented managers that are highly ethical, driven to create wealth and not only inherited wealth, but created their wealth by themselves and creating wealth is the share price appreciation. So the IT sector is exciting, but most of that excitement in my opinion is in private investment world, where we do not any investing.
Q: I believe you also have a bit of an exposure into Indian consumer space, the consumer staple and consumer discretionary. There has been a lot of argument about valuations being quite rich for those sectors in India. Do you think there is still money to be made in the consumption stocks in India?
A: Absolutely. I think to look at things like companies, where they have a lot of operating leverage and where the companies can grow, again its very early days. A lot of people make the comparison that India looks a lot like China as it did in 2004. I went to China in 2004, I can see the comparison. Obviously, very different countries, but you do get a number of consumer discretionary stocks. I do not want to name them because do not want to offend anyone, but they traded like 70-100 times earnings and will go up and we do not own them and that can be challenging from that perspective. So we do tend to be disciplined buyers, at most will pay every one time’s growth on profit after tax or on EBIT basis on multiple and we are looking for that to go to two times growth.
Q: The other big market where you have a large exposure is China. What are you making of the Chinese data of late and from a point of view of Indian commodity stocks or for the Indian metal market? How are you positioned there and what is your broad view on China per se?
A: I have lived in Hong Kong for more than six years. I have worked with my Chinese colleagues and approaching seven years now. Making broad statements about China and their data is very difficult. We tend to avoid investing in any commodity sector in general. That being said, you cannot ignore, because it will drive the valuation of the currency, it will drive trade flow. So what we would like to see is an end to. I am a believer in global trade, world trade, open borders and value creation and nations interacting together.