The end of a year is always an opportunity to measure how much we have grown as individuals or as organisations. At Marcellus, one of the more important metrics of progress we measure is on the learning front. Every year, or for that matter, every day, we hope to learn something new or learn something more about things that we thought we knew well enough already. The five newsletters we share here are the result of our learning journey over the past 12 months. And for this journey we have many people to thank. First of all, we wish to thank all our investors as well as distribution partners, whose piercing questions keep us on our toes and drive us to think ever more thoroughly about our investing philosophy as well as our portfolio stocks. A big thank you to our investee companies, from whom we have learnt invaluable lessons in building and sustaining competitive advantages, and in making smart capital allocation decisions. And finally, a thank you to our readers who regularly share feedback on our newsletters, blogs, and books, helping us think deeper and better. Wish you all a very healthy and happy 2022!
- SIP vs Market Timers – Who Wins the Consistent Compounding Race? – CCP, January 2021
Over the past 25 months, investors who waited for a market correction before deploying top-ups from their recurring income into Marcellus’ CCP PMS would have experienced a significant drag (of at least 3-5% on annualized returns, if not more) vs SIP based investments. This is due to a combination of three factors: a) low correlation between CCP with Nifty50 during periods of weakness in the broader market; b) difficulty of predicting short term share price movements based on the expected outcome of a looming uncertainty; and c) the various psychological challenges around investing at a level higher than that of previous top-ups (e.g. investing at 52-week high share prices, high P/E multiples, boring aspect of investing in the same set of stocks repeatedly etc). An SIP in CCP addresses these three challenges by taking away the ability of an investor to make judgement-based calls around market timing. Gains on monthly top-ups of an SIP investor in Marcellus’ CCP (since inception) would have been ~11% higher than those of an investor who waits for a market crash before deploying incremental monthly top-ups.
- Simplifying Life Insurance and why we hold HDFC Life – KCP, April 2021
Life Insurance works on the concept of pooling of risk where policyholders come together and pool small amounts of money (premium) to cover those who might need the money in the event of a death or a debilitating disease. This premium paid by policyholders is invested to pay for claims which might arise in the future. The investment income and premiums collected should exceed the eventual claims and operating expenses for a life insurer to generate profitability. While life insurance in India has been synonymous with LIC, private companies have made rapid progress since the sector was opened up in 2000. HDFC Life was the first private life insurer to launch operations in India. Its differentiated strategy of maintaining a balanced product mix and distribution mix along with a focus on technology and product innovation has delivered consistent market share gains (private life insurance market share of HDFC Life has increased from 8.7% in FY10 to 21.5% in FY20). We explain now how life insurance works and why we hold HDFC Life.
- Bajaj Finance: The Enigma Is Set for Another Transformation – KCP, July 2021
Over the past decade (FY11-21) Bajaj Finance (BAF) has grown its loan book at a CAGR of 35% and PAT at a CAGR of 33% with an average RoE of 20%. During this period credit growth in the Indian banking sector has been only 10% p.a. BAF has transformed itself from being largely a captive vehicle financier to India’s most diversified NBFC which now offers over 40 lending products and has established housing finance and broking subsidiaries. BAF’s success has been underpinned not just by its unique use of technology but also by access to low cost of funding courtesy its Bajaj group parentage. While business transformation 1.0 over the past decade has resulted in BAF building a customer franchise of ~50 million customers, in this newsletter we discuss how BAF’s business transformation 2.0 is likely to be one of the most radical transformations for an Indian listed company. Transformation 2.0 will enable BAF to not only double its existing customer base but also mine the wallet share of its existing customers in a cost-effective manner.
- The Path to Consistent Compounding is Paved with Free Cashflow – CCP, November 2021
There are four key drivers of free cashflow in a business – revenue growth, profit margins, working capital efficiency, and asset turnover. The order of importance across these four drivers differs across businesses. As Marcellus’ CCP companies invest in technology to improve operational efficiencies, those companies that sell day-to-day essentials to their customers whilst avoiding price hikes, consistently focus on compressing working capital cycles and expanding their asset turnover. For such companies, growth in free cashflows can remain higher than growth in profits sustainably over long time periods. Hence, investment in such companies purely by building expectations around their profit growth is an incomplete exercise.
- Exit the “Lala” Company, Enter the Little Champ – LCP, November 2021
The degree to which a firm institutionalizes it’s systems & processes is one of the biggest sources of differentiation between a high quality versus a mediocre franchise. Hence in Marcellus’ Longevity Framework, our research on “succession planning” focuses on softer aspects such as the institutionalization of the business, the quality of the independent Board Directors and clarity on the next generation family successors’ roles. Most Little Champs portfolio companies have made rapid strides in succession planning in recent years thanks to a well thought through succession roadmap, the proliferation of professionals in key roles, the democratisation of company ownership through stock options and through high-quality independent director appointments.
Happy reading, happy investing, and a very happy new year!