This is a financial promotion for The First Sentier India Strategy. This information is for professional clients only in the UK and Switzerland and elsewhere where lawful. Investing involves certain risks including:
- The value of investments and any income from them may go down as well as up and are not guaranteed. Investors may get back significantly less than the original amount invested.
- Currency risk: the Fund invests in assets which are denominated in other currencies; changes in exchange rates will affect the value of the Fund and could create losses. Currency control decisions made by governments could affect the value of the Fund's investments and could cause the Fund to defer or suspend redemptions of its shares.
- Indian subcontinent risk: although India has seen rapid economic and structural development, investing there may still involve increased risks of political and governmental intervention, potentially limitations on the allocation of the Fund's capital, and legal, regulatory, economic and other risks including greater liquidity risk, restrictions on investment or transfer of assets, failed/delayed settlement and difficulties valuing securities.
- Single country / specific region risk: investing in a single country or specific region may be riskier than investing in a number of different countries or regions. Investing in a larger number of countries or regions helps spread risk.
- Smaller companies risk: Investments in smaller companies may be riskier and more difficult to buy and sell than investments in larger companies.
For details of the firms issuing this information and any funds referred to, please see Terms and Conditions and Important Information.
For a full description of the terms of investment and the risks please see the Prospectus and Key Investor Information Document for each Fund.
If you are in any doubt as to the suitability of our funds for your investment needs, please seek investment advice.
Mistakes of Omission
50x P/E!1 70x P/E! 100x P/E! Valuations that were outrageous just a few years ago are commonly bandied about by most of the investment community these days. But, ask any respected business owner and they would shake their head in disbelief. The difference in perspective is critical. The entrepreneur is looking at the free cash flows the business could generate over the long term, and how long it would take to recoup his or her investment if they were to buy a business in its entirety. At 80x P/E, which is not uncommon in India these days, it would take a full 19 years to recover the purchase cost, even if the business’ underlying cash flows (or earnings) compound at 15% annually, and there is no re-investment to achieve this growth. Business owners whom we rate highly would not allocate capital to such opportunities. Yet, we have seen many listed companies in India witness a significant re-rating of valuations in recent years, on the back of which they have delivered exceptional shareholder returns. Our decision to not invest, or sell out of such businesses on valuation grounds have been our mistakes of omission. Yet, when we analyse these errors, as we always do, we believe that these decisions were in keeping with our disciplined investment process, which has withstood the test of time. We discuss a few below.
We were long-term shareholders of Pidilite until we sold our shares in 2015. The Parekh family have been excellent stewards of the business and introduced top-quality professional management, including CEO Bharat Puri, whom we had known since his days heading Cadbury India. We admired Pidilite’s ability to build and nurture strong brands that command a price premium in categories that are otherwise commoditised, such as Fevicol in adhesives. The management is also pursuing opportunities in categories like waterproofing, which can become big businesses in the coming years. With healthy Returns on Capital Employed (ROCE) (5-year average ROCE during the 2010-2015 period was 25%) and decent growth rates (sales growing at roughly
17% compound annual growth rates (CAGR) in that period), it was a core holding of ours. Given the high quality, it was not “cheap”, trading at around 22x P/E during the 2012-2014 period. Subsequently though, valuations kept rising and by 2015 they had gone past 40x P/E — a level that was higher even than fast-moving consumer goods (FMCG) peers Hindustan Unilever and Nestle India at the time! At this point, we reluctantly sold our shares, confident that we would get the chance to buy them back at more sensible valuations. Unfortunately, since then, we have seen its valuation multiple double to over 80x today. While we admire the business, its people and the opportunity ahead of it, we simply cannot fathom paying such multiples.
Instead, Colgate-Palmolive (India) and Godrej Consumer Products are today still among our largest holdings. Colgate’s brand in oral care is unrivalled. It had lost some market share in recent years, as the herbal segment grew rapidly in India. Under new CEO Ram Raghavan, it has stepped up its investments in brand building and launched innovative products, which has begun to yield results in the form of market share gains. Over the medium term, it also has the opportunity to launch other leading brands from its parent’s portfolio. Godrej Consumer Products has faced some challenges across its geographies (notably Africa) in recent years. In response, its board has appointed several strong professionals, including Sudhir Sitapati, who has spent over two decades at Unilever, as its CEO. Mr Sitapati recently laid out his plans to accelerate Godrej Consumer’s growth and improve its profitability over the medium term. We expect the company’s performance to improve under his leadership.
When we view the performance of our holdings against Pidilite, we note that Colgate has grown its earnings per share substantially faster over the last five years. It generates exceptionally high ROCE as well. Despite the challenges across Godrej Consumer’s businesses, earnings have also grown faster than at Pidilite over this period and its ROCE is only slightly lower. Yet, valuations of both Colgate-Palmolive India and Godrej Consumer are at approximately half of Pidilite’s levels (though admittedly, still high in absolute terms). Based on the strength of their franchises and the improvement we expect under their current management teams, we find the risk-reward with these companies to be much more attractive.
Source: FactSet, as at 31 December 2021
We were anchor investors in the Initial Public Offering (IPO) of Avenue Supermarts in 2017. After its valuations more than doubled after listing to over 50x forward P/E, we felt compelled to sell our holding. It is currently valued at 7x forward Enterprise Value (EV)/Sales and 115x forward P/E, compared to industry leaders such as Tesco, Sun Art and Dairy Farm which are valued below 0.5x EV/Sales and at 12x to 20x forward P/E. In fact, Avenue Supermart’s market capitalisation of USD 40bn is 35% higher than that of Tesco, while its sales are 1/23rd and profits are 1/18th of Tesco. Similarly, we find it difficult to pay 9x forward Price to Book (P/B) for India’s largest non-banking finance company valued at USD 63bn, when ICICI Bank, with a leading deposit franchise, has a market capitalisation only 20% higher and forward P/B of 3x. In some instances, our mistakes of omission have been for reasons other than valuations. We have not owned one of India’s largest conglomerates, due to our concerns around its governance practices and culture. The company is known for using its connections in the government to change policies and regulations in order to benefit itself or exert pressure on its competitors. We simply do not view this as a sustainable competitive advantage. Irrespective of how attractive its prospects or valuations become, we would not own such a business.
Fundamentally, our investment philosophy is focused on capital preservation and absolute returns and as such, we accept these mistakes of omission as an outcome of our adherence to it.
The FSSA Indian Subcontinent Fund rose in December. The key contributors to performance were Infosys and Godrej Industries.
Infosys gained following the announcement of strong quarterly earnings and an upward revision of earnings guidance by one of its leading global peers. This indicated that customer demand for information technology (IT) services outsourcing remains strong.
Godrej Industries rose following an increase in the share price of Godrej Consumer Products, after its new CEO, Sudhir Sitapati announced the medium-term ambitions and strategy for the business. Its stake in Godrej Consumer.
Products accounts for 45% of the net asset value of Godrej Industries.
The key detractors were Solara Active Pharma and Kotak Mahindra Bank.
Solara Active Pharma declined due to concerns about inflation in prices of its key raw materials. Our discussions with the management reassured us that the long-term prospects are still bright. The management has an ambition to grow revenues nearly four-fold over the next five years.
Kotak Mahindra Bank declined due to concerns related to the emergence of a new variant of Covid-19, which could lead to disruptions in economic activity. The bank has built a strong track record of withstanding such disruptions while maintaining strong asset quality. We expect this to continue.
Composite Performance (to 31 December 2021)
These figures refer to the past. Past performance is not a reliable indicator of future results. For investors based in countries with currencies other than USD, the return may increase or decrease as a result of currency fluctuations.
The strategy performance figures is the weighted average performance of FSSA IM’s funds that contribute to the strategy in question, is based on monthly performances and are net of a default annual management fee of 0.85%. The strategy was launched 7 February 1994.
Source: Lipper IM / First Sentier Investors (UK) Funds Limited.
1 Price to earnings
*Company data retrieved from company annual reports or other such investor reports. Financial metrics and valuations are from FactSet and Bloomberg. As at 31 December 2021 or otherwise noted
This material is for general information purposes only. It does not constitute investment or financial advice and does not take into account any specific investment objectives, financial situation or needs. This is not an offer to provide asset management services, is not a recommendation or an offer or solicitation to buy, hold or sell any security or to execute any agreement for portfolio management or investment advisory services and this material has not been prepared in connection with any such offer. Before making any investment decision you should conduct your own due diligence and consider your individual investment needs, objectives and financial situation and read the relevant offering documents for details including the risk factors disclosure. Any person who acts upon, or changes their investment position in reliance on, the information contained in these materials does so entirely at their own risk.
We have taken reasonable care to ensure that this material is accurate, current, and complete and fit for its intended purpose and audience as at the date of publication but the information contained in the material may be subject to change thereafter without notice. No assurance is given or liability accepted regarding the accuracy, validity or completeness of this material .
To the extent this material contains any expression of opinion or forward-looking statements, such opinions and statements are based on assumptions, matters and sources believed to be true and reliable at the time of publication only. This material reflects the views of the individual writers only. Those views may change, may not prove to be valid and may not reflect the views of everyone at First Sentier Investors.
Past performance is not indicative of future performance. All investment involves risks and the value of investments and the income from them may go down as well as up and you may not get back your original investment. Actual outcomes or results may differ materially from those discussed. Readers must not place undue reliance on forward-looking statements as there is no certainty that conditions current at the time of publication will continue.
References to specific securities (if any) are included for the purpose of illustration only and should not be construed as a recommendation to buy or sell the same. Any securities referenced may or may not form part of the holdings of First Sentier Investors' portfolios at a certain point in time, and the holdings may change over time.
References to comparative benchmarks or indices (if any) are for illustrative and comparison purposes only, may not be available for direct investment, are unmanaged, assume reinvestment of income, and have limitations when used for comparison or other purposes because they may have volatility, credit, or other material characteristics (such as number and types of securities) that are different from the funds managed by First Sentier Investors.
Not all First Sentier Investors products are available in all jurisdictions.
This material is neither directed at nor intended to be accessed by persons resident in, or citizens of any country, or types or categories of individual where to allow such access would be unlawful or where it would require any registration, filing, application for any licence or approval or other steps to be taken by First Sentier Investors in order to comply with local laws or regulatory requirements in such country.
This material is intended for ‘professional clients’ (as defined by the UK Financial Conduct Authority, or under MiFID II), ‘wholesale clients’ (as defined under the Corporations Act 2001 (Cth) or Financial Markets Conduct Act 2013 (New Zealand) and ‘professional’ and ‘institutional’ investors as may be defined in the jurisdiction in which the material is received, including Hong Kong, Singapore and the United States, and should not be relied upon by or be passed to other persons.
The First Sentier Investors funds referenced in these materials are not registered for sale in the United States and this document is not an offer for sale of funds to US persons (as such term is used in Regulation S promulgated under the 1933 Act). Fund-specific information has been provided to illustrate First Sentier Investors’ expertise in the strategy. Differences between fund-specific constraints or fees and those of a similarly managed mandate would affect performance results.
About First Sentier Investors
References to ‘we’, ‘us’ or ‘our’ are references to First Sentier Investors, a global asset management business which is ultimately owned by Mitsubishi UFJ Financial Group (MUFG). Certain of our investment teams operate under the trading names FSSA Investment Managers, Stewart Investors and Realindex Investments, all of which are part of the First Sentier Investors group.
This material may not be copied or reproduced in whole or in part, and in any form or by any means circulated without the prior written consent of First Sentier Investors.
We communicate and conduct business through different legal entities in different locations. This material is communicated in:
• Australia and New Zealand by First Sentier Investors (Australia) IM Limited, authorised and regulated in Australia by the Australian Securities and Investments Commission (AFSL 289017; ABN 89 114 194311)
• European Economic Area by First Sentier Investors (Ireland) Limited, authorised and regulated in Ireland by the Central Bank of Ireland (CBI reg no. C182306; reg office 70 Sir John Rogerson’s Quay, Dublin 2, Ireland; reg company no. 629188)
• Hong Kong by First Sentier Investors (Hong Kong) Limited and has not been reviewed by the Securities & Futures Commission in Hong Kong
• Singapore by First Sentier Investors (Singapore) (reg company no. 196900420D) and has not been reviewed by the Monetary Authority of Singapore. First Sentier Investors (registration number 53236800B) is a business division of First Sentier Investors (Singapore).
• Japan by First Sentier Investors (Japan) Limited, authorised and regulated by the Financial Service Agency (Director of Kanto Local Finance Bureau (Registered Financial Institutions) No.2611)
• United Kingdom by First Sentier Investors (UK) Funds Limited, authorised and regulated by the Financial Conduct Authority (reg. no. 2294743; reg office Finsbury Circus House, 15 Finsbury Circus, London EC2M 7EB)
• United States by First Sentier Investors (US) LLC, authorised and regulated by the Securities Exchange Commission (RIA 801-93167).
• Other jurisdictions, where this document may lawfully be issued, by First Sentier Investors International IM Limited, authorised and regulated in the UK by the Financial Conduct Authority (registration number 122512; registered office 23 St. Andrew Square, Edinburgh, EH2 1BB number SC079063).
To the extent permitted by law, MUFG and its subsidiaries are not liable for any loss or damage as a result of reliance on any statement or information contained in this document. Neither MUFG nor any of its subsidiaries guarantee the performance of any investment products referred to in this document or the repayment of capital. Any investments referred to are not deposits or other liabilities of MUFG or its subsidiaries, and are subject to investment risk, including loss of income and capital invested.
© First Sentier Investors Group
 If the materials will be made available in other locations, seek advice from Regulatory Compliance.