Marathon, not a sprint

At the outset, let me welcome you to the East Lane Capital family. I thank you for reposing your faith in me. This is the first investment letter that I am writing and hence it would be appropriate to share with you the investment philosophy on which East Lane Capital is founded. 

East Lane begins its journey with a firm belief that successful investing is all about having the right process and then constantly working to learn and improve to generate long-term returns. We will mainly look to capitalize on the growth opportunities in emerging market like India by identifying the right management teams who have potential to scale, are good allocators of capital and pay a fair price for such businesses. True value of a business emerges over the long-term, in line with the profits generated by the business.

In the global volatility, India stands in a unique position. It has been going through a deleveraging cycle since 2012/13 and corporate balance sheets have been mostly cleaned up. Given the pandemic, there was a fear on governments fiscal situation turning very adverse and the retail credit cycle turning negative. The recent budget alleys a lot of these fears. The government’s fiscal response seems prudent. It is allowing a higher fiscal deficit but investing increased borrowing in asset creation. It is also trying to build the fiscal gap over the medium term through asset monetization rather than increasing taxes. Household balance sheets have held up better than expected so far. There is increasing probability of start of a new investment cycle driven by government capex followed by private sector. As always government execution needs to be closely watched. It can always get delayed vs what the market is discounting. The barrage of liquidity created in the developed world creates both opportunities in the near to mid-term and big challenges in the long-term.
There is a fear of bubbles developing in asset price. Will the bubble burst soon, or this liquidity can also find home in emerging market like India? How much of positivity is already in the price?

While we keep the macro framework in mind our focus remains bottom-up stock picking.
We started investing from mid-January and are 35% invested. We will be deploying rest of the capital using volatility in the right ideas.

Some of the key initial investments we have done:

ICICI Bank (Market Cap US$58.3bn): The new management team has brought few structural shifts at the bank which is very different from the past. Rather than market share profit and returns have become the key focus and the entire organization is in sync with the new strategy. The bank has an excellent deposit franchise, strong capital position and a good technology platform. Change in culture is a long-term structural positive and improving growth prospects in the economy provides the cyclical upside. Valuations are attractive.

Laurus Labs (Market Cap US$2.5bn): A technocrat led pharmaceutical company which has come up in the last 10 years. Key focus is HIV drugs which has become a cash cow for the company. Laurus has become the lowest cost producer of HIV drugs in the world which can continue to grow at 5—7% in the medium term. It is developing a similar position in some of the other therapy area like diabetes and oncology for generic medicine. Given the strong chemistry skills the company has developed a good pipeline of high margin synthesis and contract manufacturing business. Recent acquisition of Richcore gives company a head start in recombinant protein synthesis as a contract manufacturer. The company has developed multiple avenues for growth. We are confident of the execution capabilities of this management and will keep a close watch in potential competitive risks to HIV business. We believe that profits can compound at 25% plus over the next 3-4 years and valuations are reasonable. 

Apollo Tricoat (Market Cap US$.382m): This company is a subsidiary of steel pipe manufacturing company APL Apollo pipes (Market cap. US$1.6bn). Apollo Tricoat is a business which is moving B to C unlike mainly a B to B business of the parent. Tricoat will be focused on three area’s 1) steel door frame solutions, 2) steel roofing solutions and 3) steel electrical conduit pipes. The company currently has a capacity of 350,000 tons and earns a EBITDA of Rs6000-6500/ tons. The company has a clear road map for growth and potential increase in profitability by providing value added solutions. We have seen the management execute over the last decade being investors in APL Apollo pipe the parent company. They have been able to grow the parent company’s business from 0.2m tons to 2.6m tons and could further scale to 4m tons over the next 3-4 years. The group already has become a buyer of almost 3-4% of HRC steel produced in the country giving it a scale advantage. We like the opportunity in the consumer business, management ability to scale, distribution moat and focus on cash generation through keeping the working capital under check.

We will look for long-term growth companies across the market cap spectrum. Our understanding of the business model, developing an insight into the capabilities and honesty of management teams and the right valuation framework will be the bedrock of our investment process. Long-term thinking will be essential to navigate the short-term noise in the market. Reasonable diversification (a portfolio of 15-25 stocks) and liquidity profile (not boxed in any market cap criteria or sector) and being true to our investment process will be essential for risk management. We are excited about the new beginning and the journey forward.