Short-term getting volatile, keep the focus on long-term.

Indian markets are up 5% YTD, underperforming the region and the developed markets but holding up relatively well despite a devastating second wave of covid infections. The markets seem to be pricing in a significant pick-up vaccination, localized lock downs and
curtailment of the economic impact to a quarter or two. The global markets have been up 12% YTD, pricing in a strong recovery in 2021.

How will this pandemic playout? Let’s look at the facts and put a framework around various scenarios.

Healthcare infrastructure overwhelmed with 350,000 cases per day.
With almost 350,000 cases being reported per day the health care infrastructure has been overwhelmed. The cases are likely to rise but likely to settle down as the localized lockdowns break the chain (early signs of this are visible in Maharashtra). India should be able to make good on the shortages of oxygen and essential medicines over the next 2-3 weeks. However, to get to normalcy significant increase in vaccination is the only solution.

939m people above the age of 18 = 1700m doses required 

India has announced vaccination for all above 18 years of age starting May 1st. The total population above 18 years is about 939m, to vaccinate 90% of the people almost 1700m doses are required. Out of the 939m people, 330m reside in urban area’s i.e., 600m doses required to cover 90% of this population.

Vaccine capacity likely to ramp-up

Currently, there are 2 vaccines available in India:

1) Covishield produced by Serum Institute with a production of 60m/ month and

2) Covaxin produced by Bahart Biotech with a production capacity of 20m/month.

The capacity for Covishield is being expanded to 100m doses a month and Covaxin to 70m a month. Even assuming 20% exports for both the producers, almost 130-135m doses/month will be available from June end. Further Dr. Reddy’s lab would be supplying 500m doses of Sputnik per annum from June onwards. Other Indian manufacturers like Cadila Healthcare and imports can add another 100-150m doses per annum in next 3-6 months.

If executed well possible to vaccinate majority in 12-14 months, Urban India much faster

At present India has given 1.4m doses and is administering 2.6m doses per day. If we can ramp-up vaccination to 5m doses per day in urban area’s herd immunity can be achieved by September. At 5m doses per day means, 90% coverage can be achieved in 12-14 months for the entire nation.

Worst case possible but low probability, keep close watch on ramp up in vaccination 

However, if we are not able to execute on the vaccination and the number of cases continue to go up, the economic and social consequences for India can be devastating. There is always a key man risk during such pandemic for both for political as well as business leaders.
We will need to closely monitor pace of vaccination to make sure that the worst case does not play out.

Vaccination per day and rising covid cases

April 2021

Our focus remains on long-term 

Keeping this backdrop in mind and the implications for near-term stock price volatilities, our focus remains on the long-term. We believe long-term compounding can be achieved by understanding business fundamentals and putting a valuation framework around their growth and return generation potential. 

In the long-term value of a business mirrors the profits it generates.
We are 60% invested in equities, some of the names added recently in the portfolio are:

Praj Industries (Market Cap US$575m): Praj Industries is an engineering and technology company, focuses on bio energy with extraction of ethanol through, sugar, starch and cellulosic routes. The company has also developed capabilities in downstream technologies to make chemicals, plastics, different fuels like aviation and diesel from ethanol. The company has engineering capabilities to manufacture critical process equipment and plants including for ethanol, breweries, bio reactors and wastewater treatment. With leadership position in sustainable technologies the company is seeing a huge surge in order inflows. Government of India has an ambitious plan for conversion of excess sugar, food grains into ethanol. Government is also promoting biomass generated post harvesting of rice and wheat into compressed biogas (CBG). The total opportunity size over the next 3-5 years could be as large as Rs500 to Rs700bn. With improving opportunity set, company can see a 5-7-fold increase in profits over the next 3 -5 years. Technologies like conversion of ethanol from cellulosic material and downstream conversion of ethanol to other sustainable chemicals can drive the next leg of growth. 

Team Lease Services (Market Cap US$700m): TeamLease is the leading temporary staffing solutions company in India. The company has a huge runway for growth as the economy formalizes. Recent changes in labor laws will further strengthen the process of formalization. Demand potential is huge; however, scalability of the business depends on cost effective sourcing of labor. Use of technology to solve for this problem and increase in its adoption recently provides a distinct competitive advantage to the company. Investments in School Guru (e-learning platform for university students, where the company has a tie up with 30 universities) and Avantis (digital compliance platform) could provide interesting option value. The company has a very competent management, huge runway for growth and can grow profits at 30% plus over the next five years.

Kirloskar Brothers (Market Cap US$250m): The largest pump manufacturer in the country with a global footprint. Last decade has seen massive misallocation of capital from being an engineering product company to add projects where they have had to take big write-offs. The company also made international acquisitions which did not work out as per expectations. Despite the mistakes, the core business remained cash generative and the balance sheet remained debt free. Company continued to invest in R&D and branding despite the problems over the decade. The younger generation from the promoter family accepts the mistakes and is focused on cash and return generation going forward. The management has cleaned the losses in international divisions which will stop being drag going forward. They invested in technology and upgrading the distribution in domestic markets. The company has a strong small pumps business which sells enjoys strong brand equity and sells on cash basis. The opportunity for water related projects is big and the company will focus on participating in it on a profitable basis. KBL can grow profits 2-3x, ROIC likely to improve to 20% plus with strong cash generation. The current multiples do not capture the growth and turnaround potential.