Intelli-bytes Episode: Serving Up Alpha in India’s “Underserved”

In response to LPs’ growing requests for sharing our virtual research meetings, we have launched Intelli-bytes!  With Intelli-bytes we bring to you video-recordings of our interactive dialogues with managers of interesting opportunities. Our live conversations with managers are not scripted but curated from a preliminary research perspective to help our sophisticated LP audiences learn about niche investment opportunities, strategies, relevant manager skills/experiences and personalities, just as they would if they were interviewing the managers themselves. These conversations are neither meant to be product pitches nor staged to allow a manager give canned presentations that they could perhaps on their own behind a camera or in podcasts behind the scene.

Intelli-bytes brings you raw, uncut, recordings of just how it happened- with our uhms, ahs, laughs, gaffes, interjections, objections, disagreements, distractions, bloopers and more!

This is as real and personal as it could get for you without you having to attend yet another zoom call or webinar or scan a dense pitchbook or take a manager meeting even when we (ever) get back to old days.

So, be it from your desk, car, shower, treadmill or just about anywhere, transport yourself into the scene, jot down (mental) takeaways (not notes!), make inferences, get a feel for the manager, but don’t draw conclusions just yet till you have vetted it yourself or engaged someone like us to do the due diligence on your behalf!

Intelli-byteslatest conversation is with Piyush Sharma, Portfolio Manager of Minerva India Underserved (IU), who for the past 11 years (since he returned from the US as a Sanford Bernstein research analyst among other such positions) has been focused on discovering “underserved” Indian companies from his digs near New Delhi, India.

Synopsis: Serving Up Alpha in India’s “Underserved”

Global equity investors have for long been fed big helpings of large, major Indian corporations (e.g. Reliance, Infosys, HDFC, Tata Consultancy, ICICI, Hindustan Lever, etc.) to satisfy their cravings for India’s growth potential, lured by the popular theme : “rise of the emerging middle-class”. Those bolder, have also perhaps indulged in relatively smaller companies (e.g. Zee Entertainment, Godrej, Tata Power, etc.) nonetheless popular like their bigger brethren in Foreign Portfolio Investments (FPIs), notorious for flitting in and out of Indian equities in sync with their ever-changing risk-taking appetites. Beyond these liquid “street darlings” that dominate the MSCI India Small Cap (USD) Index and often sport valuations north of $1 billion, our manager believes that India affords one of the broadest choices for small cap names in global equities. Among this wide variety of non-index small cap stocks, the manager focuses on the “underserved”-the lower end of the capitalization spectrum~ $600 million that lacks wide market following from both FPIs and other institutions like Indian insurers and banks. As a result, the underserved are” not beneficiaries of any liquidity largesse” which by the same token are also spared the drawdowns when liquidity gushes out.

By extension then, IU’s investment thesis does not necessarily ride on any multiple expansion or price discovery by either FPIs or domestic retail investors, which in recent times have become a major force to reckon with in India. IU’s exclusive focus is on discovering mispriced underserved companies where idiosyncratic reasons can potentially drive earnings growth (and consequently price improvement), which we surmise (subject to further due diligence) could fall in the realm of cost containment, better pricing power, bigger market share, new market penetration, changing consumer preferences, policy tailwinds, implementation of newer technologies or any other game-changing structural change. Therefore, even stocks with one or more such idiosyncrasies in out-of-favor sectors could potentially qualify for the portfolio.

But to make the grade, IU’s small team of forensic accountants focuses not just on sanitizing reported financials but pay special attention to governance, on issues like related-party transactions, subsidiaries bleeding cash, debt for equity swaps, independence of directors, etc. In IU’s quest to discover 2-3 high-conviction stocks a year for its 10-20 stock concentrated portfolio, it’s common to walk away from names after a couple months intensive work.  

The portfolio is top-heavy in the most mispriced names that have relatively better liquidity, a major constraint given both low free-float and a lack of broad market-following. According to Piyush, the entire portfolio is expected to be liquidated within a month’s time with “no impact”. While volatility is par for the course, IU’s risk mantra is “no permanent loss of capital”.  

Piyush describes this year’s (Sept 30 YTD) stellar 91% USD net return (almost twice the small cap index) as “atypical” which saw some picks “violently recoil”, and 2014/2017 India’s small cap markets as more typical where it caught 30-50% of the market’s upside. However, having suffered less painful drawdowns in its 11-year operating history, IU has compounded at 13% net in USD terms with a slightly less annualized volatility of 25% compared to its closest benchmark, S&P BSE Small Cap (that also includes some larger names with market caps $1 billion+), outperforming the index by ~550 bps. and the broader Nifty 50 market by a similar margin (Source: Manager).

With a broad investable universe of underserved names worth approximately $250 billion in market cap, and with impending policy push to increase free-floats, IU estimates a modest capacity of $300-400 million which it aspires to manage mostly through separately managed accounts as it does currently.

To understand the opportunity, its risks, rewards, and execution, and hear other soundbites on China +1 strategy, India’s unicorns, etc. listen to our recorded one-on-one conversation with Piyush Sharma, Portfolio Manager of Minerva India Under-served.

Patient investors driven to pursue alpha beyond just EM/India beta, in names that are underserved and probably escape those not on the ground or with a penchant for the most liquid names, could find it worth their while to conduct further due diligence on this opportunity and manager or engage with us to help them scope this out fully.

LPs are welcome to reach out to us at info@emaltsauditor.com with questions, comments, or requests for more information/due diligence.

Take a listen and stay tuned.

Happy Diwali!

Yours truly,

Kamal Suppal, CFA

Chief Investment Auditor

November 4, 2021

The above content including the recording of the video-call is for information purposes only and should not be used as a basis to make investment decisions. This content is intended for sophisticated audiences as in institutional investors or family offices to help qualify an opportunity for further due diligence. Any theme or idea discussed above is not an offer to buy or sell any investment. All opinions expressed in the video-recording are the managers’ and not of Emerging Markets Alternatives.