Monthly Snapshot_May

All returns are post fees & net of expenses(TWRR). The returns are as on 21^st May,2021. 

IS IT THE RIGHT TIME TO INVEST?

Given the situation in the country, there is palpable fear amongst investors primarily about their and their families’ physical health but also about their financial health of their portfolios. Many investors are asking whether it is a good time to invest in the market and if the answer is “YES”, then should we invest in CCP or KCP portfolio? We believe it is the right time to invest in either or both the portfolios for the following reasons:

WHY CCP?

1. In the wake of every deep crisis, great companies in the affected industries gain massive market shares from competitors who get crippled by the crisis. This is exactly how it has played out so far. Till quarter ending December 2020, reported fundamentals of our CCP portfolio companies we exceptionally strong both at the revenue level (20% YoY growth) as well at the profit level (30% YoY growth).
2. The trend of market share gains has accelerated further in the March 2021 quarter for the companies that have reported results so far – More than 25% annualised growth in loan book for the lenders and more than 30% YoY growth in revenues for the non-lenders in the portfolio.
3. Over the next 2-3 years, we expect earnings growth momentum to be stronger than what it had been over the 3-5 years prior to Covid-19 as: a) lenders massively benefit from weak capital adequacy ratios, weak provisioning and high NPAs of their competitors; and b) non-lenders continue to gain market share from both organised as well as organised competitors.
4. There have been substantially disruptive initiatives kick-started by our CCP portfolio companies over the past 12 months which are likely to massively help transform the business models of our portfolio companies beyond the next 2-3 years further strengthening their competitive advantages and adding to the longevity and stability of these franchises.

WHY KCP?

1. Provision coverage ratios of Kings of Capital (KCP) lenders are on a median basis more than 50% higher than pre-Covid levels and despite the higher provision coverage ratios, the Tier-1 capital of KCP lenders is higher than pre-Covid levels. Tier-1 capital of KCP lenders is 21% vs 18% pre-Covid.
2.  In Q4FY21, the QoQ growth for KCP lenders was higher than pre-Covid growth. The quarterly trends translate to more than 20% annualized loan book growth for KCP lenders. Adequate capital and liquidity will enable KCP lenders to gain market share as the economy opens up.
3.  The non-lending financial companies in KCP include insurers, brokers and asset managers. Insurance companies are on a strong footing due to industry tailwinds and are focused on profitable growth with consistent return on equity. Asset management business continues to be one of the largest AMCs and brokerage business is doing well due to industry tailwinds and working towards further fortifying business model.
4. At a sector level itself, Bank Nifty has outperformed the Nifty by a massive 9% per annum over the past twenty years and Risk adjusted returns of the Bank Nifty are over 60% higher than the Nifty. Investors can therefore benefit by investing in high quality financial companies during times of macro uncertainty as investors get the benefit of consolidation of market share by stronger players, financialization of savings and normalization of P/E multiples as normalcy returns.

Please find below links to our latest newsletters and presentations: