Tap into the world’s fastest-growing markets by investing into high quality companies driving sustainable growth outcomes.

 

"Our focus is on identifying strong business franchises run by honest and competent managers, in under-penetrated industries."

Vinay Agarwal

Meet the manager

A short insight into how Vinay Agarwal, Director, thinks about life and investing.

About the strategy

A behind-the-scenes look at the investment philosophy for the India Subcontinent investment strategy.

How we invest

 

Bottom-up and absolute return* mindset

The region offers a broad and attractive investment universe for bottom-up stock selection. The strategy is focused on capital preservation and generating absolute returns while being benchmark agnostic.

High conviction investments

A focused portfolio of 30 to 40 companies ensures that only the highest conviction investment ideas are included.

Integrated ESG analysis

ESG analysis, shareholder engagement and proxy voting is fully integrated into the investment process.

Investment themes

 

FSSA’s Indian Subcontinent equity portfolios are built company by company from the bottom up, with little regard for index positioning.  We are focused on growth in an absolute return sense and construct portfolios of high quality companies with effective management teams, long-term, sustainable growth drivers and strong financials. With low penetration rates for goods and services, and barriers to entry which protect profits and cash flow, the leading companies in the region have a good track record of compounding earnings and creating long-term value for stakeholders.

Aspirational consumer base

Favourable demographics and under-penetrated categories, lead to well-positioned consumer franchises generating high Returns on Capital Employed (ROCE). Dominant franchises will keep gaining market share as the markets formalise as well as premiumise over time.

Financial inclusion

We believe well-managed private banks should continue to benefit from greater penetration of financial services across India. They should continue gaining market share at the expense of poorly run and under-capitalised state-owned banks.

Infrastructure improvement

With greater need for better quality infrastructure as the country develops, we believe that suppliers, such as paints and cement companies, will benefit. Well-run companies in these industries typically generate high returns and have low debt compared to infrastructure asset owners.

Undiscounted change

We pay close attention to changes in management and ownership, in inherently attractive businesses undergoing temporary periods of difficulty. This can often lead to meaningful transformations, generating significant value for shareholders.

^ Active share is a measure of the percentage of stock holdings in a portfolio that differs from the benchmark
* Absolute return is the return that an asset achieves over a specified period

Case studies

 

Colgate has been present in India since 1937. A relentless focus on brand building and a strong distribution advantage, has cemented Colgate’s dominant position of more than 50% market share over two decades – roughly 3x that of its nearest competitor.

We have been shareholders for many years and as a dominant consumer franchise, we believe Colgate India should benefit from India’s long-term growth trends especially with the low penetration rate of oral care products in India. The average Indian spends just US$1 on oral care products each year, compared to US$4 in China and US$11 in Brazil.

In addition, there is potential to capture consumption in other personal care categories, such as skincare, from which the parent Colgate-Palmolive Co. derives more than 20% of its sales. These products contribute to less than 2% of Colgate India’s revenues currently.

The senior management team at Colgate India is well-experienced across various markets. The current CEO, Ram Raghavan, has been with Colgate since 1997 and has previously run Colgate’s businesses in China and Brazil. The combination of his local and global experience is highly regarded.

Oral care market is highly under-penetrated in India

Steady market share and attractive returns over 15 years

Source: Company presentation, FSSA Investment Managers, as at May 2021. Disclaimer: Reference to specific securities (if any) is included for the purpose of illustration only and should not be construed as a recommendation to buy or sell the same. All securities mentioned herein may or may not form part of the holdings of FSSA Investment Managers’ portfolios at a certain point in time, and the holdings may change over time.

We have been shareholders of HDFC Bank, India’s largest private sector bank for close to two decades. It has consistently gained market share at the expense of state-owned banks, which are plagued by asset quality and capital adequacy issues.

State-owned banks continue to make up almost 70% of the Indian banking system. This, along with a large under-banked population in India, provides a long-term growth opportunity for HDFC Bank - an example of how high quality private banks should benefit from financial inclusion in India.

It has delivered industry-leading returns over the last two decades, while consistently focusing on risk management. Their earnings per share (EPS) has compounded at 23% CAGR over this period. The true test of this has been amidst the pandemic, which HDFC Bank sailed through smoothly, with asset quality relatively well maintained.

The management team is highly experienced, and the recent transition to new CEO Sashidhar Jagdishan has been quite seamless. The strength of their organisation and processes shows in the total shareholder returns in the order of 22% CAGR over twenty years in US$ terms.

Steadily increasing market share and earnings per share

Robust returns for over 20 years while significantly growing loans

Source: HDFC Bank Annual Reports, Indian Banks Association, Bloomberg, as at May 2021. Disclaimer: Reference to specific securities (if any) is included for the purpose of illustration only and should not be construed as a recommendation to buy or sell the same. All securities mentioned herein may or may not form part of the holdings of FSSA Investment Managers’ portfolios at a certain point in time, and the holdings may change over time.

Diagnostics services in India are highly under-penetrated, with only 17% of doctor prescriptions in the country carrying diagnostic tests. This is a sharp contrast with other emerging markets such as Brazil at close to 40%. We believe the number of tests should rise, driven by more health awareness and increased preventive and wellness testing.

This industry in India is highly fragmented, and has historically been dominated by small standalone centres, most of which are not accredited to the quality standards outlined by regulatory bodies. Less than 15% of laboratories in India are part of organized chains. One such leading Indian diagnostic chain is Metropolis Healthcare, of which we have been shareholders since its IPO in early 2019.

The preference for organised and high-quality laboratories is rapidly growing as increasingly aspirational consumers demand higher accuracy of results and better service standards. Amidst this shift, Metropolis is gaining market share and leading consolidation of the industry.  

It is managed by an extremely capable team, with Ameera Shah at the helm, who is from the second generation of the promoter family. Under her leadership, Metropolis has transformed from a small regional player to a leading, pan-India diagnostics company over the last fifteen years.

Low penetration of diagnostic tests in India

Steady revenue growth while maintaining attractive ROCE

Source: Bloomberg, Annual Reports, FSSA Investment Managers, May 2021. Disclaimer: Reference to specific securities (if any) is included for the purpose of illustration only and should not be construed as a recommendation to buy or sell the same. All securities mentioned herein may or may not form part of the holdings of FSSA Investment Managers' portfolios at a certain point in time, and the holdings may change over time.

Insights

 

Read the latest investment insights on our strategies and ESG related investment issues from our specialist teams.