One of the most frequent questions that potential and existing investors ask us is about our high cash position in the portfolio. Currently, the cash allocation is ~19% of the portfolio value. This is clearly a high level. Most other funds do not have even 5% of their assets in cash.

Our high cash holding is not intentional due to our desire or belief in ability to time the markets. The cash holding is entirely an outcome of our investment process and capital allocation process – (1) finding an investment idea that meets our return objectives and (2) deciding the stock idea’s allocation in the portfolio. (1) and (2) are not disconnected. Very attractive ideas will invariably have a higher portfolio allocation.

Continue reading The Value of Cash →

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Building strong consumer brands is hard. Building them at scale is even harder. Especially in the food and beverages market, building a new brand can be exceptionally difficult. A new player must garner market share from incumbents that have (1) a high brand loyalty amongst consumers, (2) a large distribution footprint built over decades, and (3) benefits of scale due to a portfolio of brands (distribution, advertising, overheads etc.). This explains the resilience of brands like Maggi and Coca Cola which survived the lead and pesticide controversy respectively. Over the last 10 years, the number of new brands built in the food and beverages segment are quite low.

Continue reading The Curious Case of Manpasand Beverages →

The last 3 years have been exceptionally good for small cap investors in India. The BSE Small Cap index has more than doubled, driven by an increase in P/E multiples and also fairly good earnings growth. There are several companies in the small cap universe which have delivered astronomical returns of over 10-50x in a short period of time. Small cap investing is the latest get-rich-quick scheme. As history has shown, this kind of euphoria rarely ends well.

Continue reading The Curious Case of Kitex Garments →

“The reason why it is so difficult for existing firms to capitalize on disruptive innovations is that their processes and their business model that make them good at the existing business actually make them bad at competing for the disruption.”  

– Clayton Christensen, The Innovator’s Dilemma

Over the last few months, it has become clear that the funding frenzy that led to the rapid growth and emergence of hundreds of tech start-ups is beginning to lose steam. The talking points have changed from “large market size” and “growth at any cost” to “profitable unit economics”. Drying up of easy capital has led to several companies scaling back their expansion plans and focusing on profitability. Despite the funding slowdown, India is now home to several tech unicorns (fancy word for a company valued a billion $s or more) which have raised humongous amounts of venture capital funding. However, as the underlying businesses of these unicorns are far from profitable, a weaker funding environment will probably lead to several unicorns being forced into consolidation or risk becoming unicorpses (fancy word for dead/bankrupt unicorns). Continue reading India’s First Unicorpse? →

“A magician creates magic and mesmerizes the audience. But it is a pantomime, and the audience knows that it’s a ruse. It’s in the name: a “magic trick”. They play along when the magician tugs his sleeves to show there is nothing hidden within them, or that the top hat is empty of a rabbit, or eggs, or flowers. Beneath the façade there is only sleight of hand, wires and contraptions, misdirection at a key moment.” – Laura Lam, Shadowplay
Continue reading Let’s Talk About Amazon’s Cash Flows →

In his 1971 paper[i], Martin Shubik described the Dollar Auction game to present a paradox in non-cooperative behaviour and escalation. The rules of the dollar auction game were simple.

1. The highest bidder pays his bid amount and wins a 20 $ bill[ii].
2. The second-highest bidder also has to pay the amount he bid but gets nothing in return. (Yes. It sucks to be the second-highest bidder)

Technically, a bidder can win the dollar bill by bidding just 1 dollar but that rarely happens. Here’s what typically happens when this game is played in large groups. The bidding starts off with Continue reading Shubik’s Dollar Auction & Cash Burn in Consumer Internet →