Equitree Emerging Opportunities
ADVANTAGE EQUITREE - How are we different!
FOUNDERS
- Pawan Bharaddia An astute investor with over 20 years of successful investing experience across private & public markets.
- He spearheads all investments at Equitree and has created a niche in identifying investment opportunities early on and taking long term bets
- Prior to co-founding Equitree, he has held senior positions in private equity firms like Nine Rivers Capital, Axis Holdings & Frontline Ventures
- In early part of his career, he has also worked with global organizations like Chase Manhattan Bank and ABN Amro Bank
- Pawan is a qualified Chartered Accountant and a Bachelor of Commerce from Mumbai University and is based in Mumbai
- Suneet Kabra
- Over 20 years of rich experience as a practicing Chartered Accountant and a hugely successful entrepreneur
- He lends the most uncommon “common sense” approach to investing at Equitree and helps in connecting dots and validating assumptions of diversified businesses across sectors
- His experience as hugely successful real estate investor also comes in handy in defining risks & execution challenges
- Prior to co-founding Equitree, he has been an in-house advisor to a number of small and mid-sized companies for their financial needs as well as tax matters
- Suneet is a qualified Chartered Accountant and Bachelor of Commerce from Ajmer University and is based in Mumbai
OUR TRACK RECORD
- At Equitree, we began investing in 2012, since then we have liquidated the entire portfolio twice since and have returned profits to our investors.
- Our conviction in the research and hard on-the-ground data helps us to remain confident and hold investments even in difficult market scenarios. Thus, even when the small and mid-caps saw ruthless corrections, we remained confident in the companies held by us.
- This conviction, which allows us to hold investments even when the markets aren’t rewarding, is what helps us achieve the returns we do.
How Do We Generate Our Returns
Understanding Private Equity Approach
- Early Identification We are normally amongst the first institutional investors in our companies. We believe in taking early and / or contrarian calls and investing in opportunities ahead of the market.
- Deep Drilled Research We do a 360 degrees analysis of the companies we invest into.
- Pro-Active Value Addition As investors we offer suggestions, our views and recommendations to the management with regards to value unlocking, business issues, investor communication and corporate governance in our quest for value unlocking
- Long Term Investors We ride the growth journey along with the companies and remain invested for 5-7 years
What To Expect From The Private Equity Approach
Small & Micro cap companies ranging in the market cap of Rs. 500-3000cr generally exhibit similar characteristics as that of unlisted private equity companies:
- Generally family owned businesses
- Established companies having achieved a sizeable critical mass
- At inflection point of high growth phase – due to expansion of capacities, new product introductions etc.
- On way to inducting professional management / sprucing up corporate governance and investor communications
- Change of guard / family restructuring leaving behind laggard legacy issues Generally a genre of investing which is catered to by Ultra High Networth Investors and / or Brokers in their individual capacities – no focused institutional presence in this segment leaving a big void for investors like us to leverage the opportunities
- Opportunity to earn a “discovery premium”
- Generally these companies are under researched / under invested by institutional investors
- Early identification of such opportunities enables opportunity to earn a “discovery premium” as the business scales up
- The only “supposed” disadvantage
- Being under invested, most of these companies have low liquidity which may result in erratic price movement till the market “discovery” happens
Small Caps perceived to be risky – Really?
An informed Private Equity Approach to Investing in this genre actually turns this most favourable from return perspective!
OUR INVESTMENT METRICS
OUR INVESTMENT STRATEGY
We are focused on macro themes firing the India growth story including: ̶ Infrastructure spending ̶ Domestic consumption ̶ Global outsourcing
Within these, our preference is towards businesses across: ̶ Engineering and manufacturing businesses across a diversified range of industries like railways, defense, oil & gas, auto etc. ̶ Businesses enhancing farm productivity ̶ Pharma, Speciality Chemicals ̶ Niche Consumer business
Valuation / Economy / Market risk ̶ Comparative 5-7 year valuations to build in the downside risk in a bear market ̶ Focus on Price Earnings Growth; to define what price are we paying for kind of projected growth Company / Management risk ̶ Maintain a close tab on pledges being created / released by the management ̶ Reference check on management background to get a sense of quality of numbers being reported ̶ Appraisal of Environmental, Technological and Litigation risk Liquidity risk ̶ Hard cap of 10% allocation in a single company and 25% in a single sector ̶ Investments are generally less than 1-2% of the Company's market cap. Rupee cost averaging & Portfolio Monitoring ̶ Timing the bottom is impossible hence we follow a staggered investment approach (not necessarily periodic) to reduce volatility instead of making a lump-sum investment that might be poorly timed. ̶ Despite the buy and hold strategy, we continuous monitor our portfolio stocks for any material developments and realignment with our investment philosophy. Biased towards downside risk profiling at the cost of leaving a potential upside!
STOCK SELECTION – KEY PARAMETERS
Key Parameters we take into account before investing:
̶ Leadership position. ̶ Strong operating and free cash flow generation over 5-10 years. ̶ Low leveraged companies (D:E < 0.5) ̶ Strong return ratios (ROCE ≥ 18% and ROE ≥ 15%) ̶ Low PEG ratio (preferably less than 1) ̶ Historical 10/5-Year Valuation ̶ 360 degree due diligence
SOME OF OUR SUCCESS STORIES
SERVICE PROVIDERS
TRENDS TO WATCH OUT FOR – India on the cusp of capex cycle
Indian companies have drawn up extensive capex plans as plants are running at near-full capacities and on the back of improving economic outlook.
- ONGC has earmarked a massive Rs 30,000 crs towards capex for FY22 to increase its crude oil output.
- Tata Steel unveiled plans to invest Rs 50,000-60,000 crs over the next five years to enhance capacities.
- The capex plan for Indian Oil is at Rs 28,500 crore this fiscal.
- Hindustan Petroleum expects to spend as much as Rs 15,000 crore annually, higher than the annual average of Rs 9,750 crore over FY17-21.
- Chemical maker Deepak Nitrite’s subsidiary Deepak Phenolics plans to invest Rs 700 crore in the downstream operations of phenol and acetone to make solvents in India.
- Specialty chemicals maker Aarti Drugs Ltd announced a capex of nearly Rs 600 crore
TRENDS TO WATCH OUT FOR – Government capex set to pick up pace
TRENDS TO WATCH OUT FOR – PLI Scheme
The government’s production linked incentives (PLI) – led capex is likely to see investments of over ~Rs 2 tn in the following sectors as announced by the government.
TRENDS TO WATCH OUT FOR – China +1 Strategy
- Low labour cost in India vs China and the world’s frustration with China is set to benefit countries like India, Vietnam and Thailand. Global companies are now looking at India as a manufacturing/sourcing hub post the outbreak of Covid-19 to reduce dependence on China. ̶ Itis noteworthy that India’s merchandise export reached an all-time quarterly high of $95billion in three months ended June contributed by non-rice cereals, iron ore, gems & jewellery, petroleum products, engineering goods and organic and inorganic chemicals.
