With one of the largest populations in the world and increasing levels of urbanisation, India makes an attractive investment destination for long-term growth.
Aspirational consumer base
Favourable demographics and under-penetrated categories*, lead to well-positioned consumer franchises generating high Returns on Capital Employed (ROCE)**. We believe such dominant franchises will keep gaining market share as the markets formalise as well as premiumise over time.
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.
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.
We believe in paying 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.
*Under-penetrated categories mean categories or products and services that are still not widely used by consumers.
**Return on capital employed (ROCE) is a financial ratio that can be used in assessing a company's profitability and capital efficiency.
About the strategy
As one the oldest stock markets in the world, India offers attractive long-term growth opportunities as the economy continues to develop.
Vinay Agarwal, Director explains why India is an interesting investment destination for long-term growth.
Indian Subcontinent Strategy
Our investment philosophy
FSSA Investment Managers’ investment approach is centred on identifying quality companies, buying them at a sensible price and holding for the long term.
We look for founders and management teams that act with integrity and risk awareness; and dominant franchises that have the ability to deliver sustainable and predictable returns over the long term.
We are research-driven, bottom-up investors1, carrying out detailed fundamental analysis2 to identify high quality companies to invest in for the long term. We travel extensively to meet with companies to assess the quality of management and their track record of executing long-term strategies; and supplement this with a qualitative and quantitative analysis of the company’s ability to compound growth in excess of the cost of capital.
1. Bottom-up investing is an investment approach that focuses on the analysis of individual stocks and de-emphasizes the significance of macroeconomic cycles.
2. Fundamental analysis is a method of measuring a security's intrinsic value by examining related economic and financial factors.
Our approach to sustainability
Environmental, social and governance (ESG) analysis is fully integrated into our investment process.
Our approach to responsible investing has been shaped by an emphasis on stewardship and the belief that quality managers and good governance should ensure that environmental and social concerns are rightfully addressed.
To us, sustainability is not just a label, but a set of values by which we operate.
As a firm, we have been signatories to the Principles of Responsible Investment (PRI) since 2007 (we view it as a minimum standard) and are constantly striving to better understand how ESG and sustainability issues impact long-term investment performance.
Case study: Walking the talk
As owners of a number of large consumer goods companies, we often worry about the environmental impact of their operations and products. We therefore seek to invest in the companies that are industry-leading on both fronts. Hindustan Unilever, India’s largest fast-moving consumer goods (FMCG) company, which we have owned for many years, can be seen as a leader in this regard.
From an ESG perspective, we believe the management’s commitment to sustainability and the continual improvement on ESG disclosure are good examples of industry best practice. With the Unilever Sustainable Living Plan, the management aims to grow the business whilst reducing the company’s environmental footprint. Their mission is articulated in this refreshing statement:
“More than 9 out of 10 Indian households use our brands. With this reach comes responsibility and opportunity. That is why we have made it our purpose to make sustainable living commonplace. To help people live well within the limits of the planet. This is not just something we say – it steers our decisions and shapes our actions at every level of the business...we want all our brands to take a stand, and act, on the big social and environmental issues facing the world. We believe we will be a better and more successful business by following this path.”
Hindustan Unilever Annual Report 2019-20
Moreover, the company sets high standards and targets, and their numbers have consistently improved. For example, 71% of the energy used in manufacturing is now renewable; there is a new water conservation program that aims to save 1,200 billion litres of water; and they have committed to reducing plastic consumption by 100k tons by 2025.
We have high conviction in the strength of Hindustan Unilever’s franchise. In our view, the company exemplifies our definition of quality. Whilst the valuation is demanding, we are confident in the management’s ability to tackle future challenges (including environmental ones); and we remain comfortable holding on to the position despite the premium.
Source: Company data, FSSA Investment Managers, as at end December 2020.
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.
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