By Nimesh Shah, CNBC TV18. Originally published on Livemint
IIFL did very well for us especially the first half of ’16 … I think there is great opportunity as it separates in the three separately listed operating companies.
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 the sidelines of the 14th Annual Motilal Oswal Global Investor Conference, Joel Werner, the chief information officer of Solitude Capital Management, told CNBC-TV18 that there are opportunities in the Indian consumption space. Edited excerpts.
I was looking at the brief profile of your company and it suggests that your major investments are in India and China. The Indian market is up at record highs, but the currency has depreciated 10%. So net-net, as an foreign institutional investor (FII), it is not much that you have made in dollar terms. What is your view on India at this point in time?
The rupee has certainly been a headwind for investments in India. We find weakness in some of the emerging market currencies, if I can use that term, versus the dollar. We are a dollar-denominated fund. So, when we make an investment, we look for very high returns on our investments. When we enter in the 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 10 of those investments tend to make up 80% of our capital. We are looking for very specific matrix and qualities of those businesses and of those managers, but the weakness in the rupee has been a pain. It has been, I would say, a little frustrating. Two things driving that would be the rebound in oil prices and the tariff war because it summarizes a lot of things that are happening. However, we are looking for companies that are compounded at high rates of return on their capital employed. Weakness in currency again, we expect somewhere between 4% and 5% 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% and that’s how we track our performance with our investors.
How are you looking at the mid- and small-caps? After the correction, do you think there is enough opportunity which is emerging in the mid- and small-cap space in India?
Our strategy is to invest in companies that have a market capitalization between $500 million and $5 billion to start, as underwriting the investment— that would fall into the small and mid-cap universe. That is our hunting ground. There are a number of investors who will pick and roll and move up into large-caps— 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 3 times and, by the nature of something that grow 3 times, it can probably grow by 10 times over much longer periods. If you buy very large market cap companies, it’s very hard to do that. So it’s a bit of an indirect question to you and you need to fol-
I was looking at some data and that suggests that your past exposure in India has been larger in 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? Apart from financials, where do you think there is an investment opportunity right now as far as India is concerned?
That is historically true. We are journalists by nature and I am a journalist by training. For better or for worse, I do think it’s the best way to invest. We had large investments in IIFL Holdings Ltd, which did very well for us, especially in the first half of 2016, and we pushed to a large investor in that company for our fund. I think there is great opportunity as that business separates in the three separately listed operating companies, but our exposure for financials is really a by-product that looks for asset management companies. IIFL is one of the world’s best asset management companies.
We have similar investments 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 have the same balance sheet implications as traditional financials do.
One of the things that we look for as Solitude Capital Management is we are looking for very clean balance sheets. It’s one of the things I have learned on 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.
Given that you look at net cash and clean balance sheet companies, does Indian IT mid-cap stocks or IT stocks fit your bill? Do you have any exposure to any of the Indian IT names?
We do not have any exposure to Indian IT. It has been a very challenging space for quite some time and we have been staying away from it. That said, 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 create 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 invest.
I believe you also have some exposure to the 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?
Absolutely. Companies have a lot of operating leverage and, where the companies can grow, again its very early days, but 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 I do not want to offend anyone, but they traded like 70-100 times earnings, and will go up. We do not own them and that can be challenging from that perspective. 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.
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? How are you positioned there and what is your broad view on China per se?
I have lived in Hong Kong for about six-and-a-half years. I have worked with my Chinese colleagues and approaching seven years now. Making broad statements about China and Chinese data is very difficult. We tend to avoid investing in any commodity sector in general. That being said, you cannot ignore it, 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 the tariff war. I am a believer in global trade, world trade, open borders and value creation and nations interacting together.