Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by Ashoka India Equity. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
The seemingly endless turmoil the world has seen over the past few years has made it very hard not to engage in macroeconomic predictions. Two years ago it was what the impact of Covid lockdowns would be. Today investors are more focused on inflation and how far central banks will go in hiking interest rates.
It is easy to understand why investors like to partake in this sort of behaviour. Take interest rate hikes as an example. Leaving aside how they are used as an input for valuing assets, rate hikes may lead to an economic slowdown, which would in turn lead to many companies performing poorly.
However, attempting to make macroeconomic calls like this is extremely difficult and you can end up a bit like the inhabitants of Laputa from Gulliver’s Travels, engaging in an activity that seems deeply logical but is ultimately closer to pseudoscience.
This is part of the reason that the analysts and managers of Ashoka India Equity (AIE) avoid making such calls. The managers views on doing so are captured succinctly by a letter they wrote to shareholders in 2021, where they noted that “decisions that are bereft of bottom-up fundamental analysis and are instead driven by macro considerations, are fraught with high risk of substantial absolute and relative losses.”
It is worth noting that this does not mean macroeconomics is irrelevant. That something is hard to predict is not the same as saying it has no impact. But to try and make precise predictions to the detriment of actually analysing the companies you’re investing in is not likely to end well. Perhaps more importantly, doing proper due diligence on the companies you’re investing in can often negate the negative impact a future event you’re concerned about may have.
AIE’s portfolio arguably illustrates this. The managers have developed an in-house cash flow analysis system and also spend a significant amount of time undertaking due diligence efforts on prospective investments. They also avoid companies whose success is more driven by cyclical factors, as well as those that are more at risk of being beholden to a small group of stakeholders, like a family owner.
It is still early days and we may indeed see more of an impact if we do head into an economic downturn. However, even after a period of inflation, rate hikes and perpetual uncertainty, we can see that companies in the AIE portfolio continue to perform well.
For example, Titan Co is one of the trust’s largest holdings. The company sells watches, jewellery, eyewear and clothing, via its own brands and third-party companies. Although it has begun expanding abroad, the bulk of the company’s revenue is derived from India.
In its most recent financial results, the company saw a 50% uplift in its year-on-year profit numbers during the last quarter. Significantly, the firm saw growth across the segments it operates in, although more than three-quarters of revenue comes from its jewellery business.
It’s plausible that this was driven by a desire for ‘real’ assets as inflation rises. However, Titan has seen its revenue rise every year, bar one, for the past two decades, with a compound annual growth rate of close to 20%. The most recent quarterly growth may be more pronounced but it fits with the broader trend we’ve seen drive the company’s success, namely a growing demand for discretionary consumer goods in India, where the average annual salary is now close to $5,000.
Avalon Technologies, another AIE top 10 holding, represents a similar growth story but with a different customer base. The company was founded in 1999 and manufactures components for a variety of industries, including the clean energy and communications sectors.
The company held its IPO in April and saw a 30% uplift to revenue in its most recent results but a near doubling in operating income, as the increase in sales was not offset by a commensurate increase in costs.
Unlike Titan, which is benefitting more from the growing wealth of Indians, Avalon’s success seems more driven by the move away from manufacturing in China. For example, Apple want to shift 25% of global iPhone production to India by 2025. Samsung also announced in February that it will invest over $200m to build a new refrigeration manufacturing facility in India, adding to the mobile phone facilities it already has in the country.
Is it plausible something will derail these trends and harm Avalon’s prospects? Perhaps. But for now the company, along with other AIE holdings, is still producing strong cash flows and earnings growth.
And the trust’s decision to invest in the firm was based on those types of factors, as opposed to what external forces may or may not impact it. Given that AIE delivered annualised share price total returns of over 14%, in GBP terms, since its IPO in July 2018 through to the end of May 2023, it’s probably fair to say that – at least so far – it’s a strategy that’s held up well.
As is probably clear from this article, predicting whether or not that will continue isn’t easy to do. But as the spectre of an economic downturn looms in the distance, it seems wiser to focus on finding good companies that can perform well in a downturn, rather than trying to determine exactly when that downturn might hit.
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