As 2024 draws to a close, we reflect on a year defined by a) careful sector concentrated positioning b) contrarianism and c) a commitment to long-term value creation. Our learning continued in newer domains we prioritised for 2024, including export-oriented pharmaceutical formulation companies, leveraging the transformative tariff adjustments in telecom, addressing the challenges and extreme valuation mismatch in export agrochemical players, focusing on quality-driven players in high-growth credit areas, and broadening our horizons through international diversification, particularly in the Chinese markets.
2024 Reflections:
- Strength in Pharmaceuticals:
- The pharmaceutical sector presented a compelling combination of resilience and growth. We were delighted to be a part of stories such as Piramal Pharma, Natco Pharma, and Glenmark Pharma which demonstrated robust performance in 2024, supported by reduced API prices, strong ANDA pipelines, and easing competitive pressures. While valuations for these now appear more exuberant, we continue to remain optimistic about other long-term opportunities in our portfolio in biologicals and biotech. Biocon and Jubilant Pharmova, continue to align with the forward trajectory of healthcare innovation and we were happy to find attractive valuations in early 2024.
- Structural change in Telecom:
- The ongoing tariff increase cycle in India’s telecom sector has solidified its position in the sectors we like. Our investee companies like Bharti Airtel, with their digital-first approach, affluent consumer base, and disciplined financial strategies, embody the structural growth themes reshaping this industry. Bharti’s transformative balance sheet progress and focus on sustained value creation reinforce its significance in this narrative which continues strong.
- Short term opportunities in Agrochemicals:
- The early months of 2024 brought cautious optimism to the agrochemical sector as destocking trends appeared to stabilize. Pricing recovery and recalibrated valuations highlighted opportunities among businesses with robust fundamentals. Nevertheless our optimism here has now moderated, considering valuations now seem to have normalised and the sector continues to contend with longer than expected global competition, particularly from Chinese players
- In 2024, the Chinese markets presented a compelling confluence of value and opportunity. At one point, the Chinese Index and Hang Seng Tech Index were trading at valuation multiples less than half their historical medians whilst Indian valuations seemed exuberant. We were happy to look companies such as BYD, Tencent, Xiaomi, and Baidu, with strong ROCEs, negligible debt, and promising long-term growth trajectories, were available at single-digit or mid-teens price-to-earnings multiples based on a low profit base. These figures reflect the compelling case for contrarian investments, balancing prudent risk management with the recognition of enduring structural potential.
5. Broader Themes:
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- Beyond sectoral priorities, geospatial technology, represented by companies such as Ceinsys, selective interest in REITs and continued support for SAAS growth stories like Iris Business Services have emerged as promising avenues. These themes resonate with our focus on uncovering nuanced and structural growth trends.
Investment Outlook 2025: Navigating a challenging landscape
As we embark on the year 2025, we believe the investment landscape presents some challenges considering the earnings performance for the broader market in Q2 2025 results as well as weaning sentiment. Our stance though as investors continues to maintain an active management perspective for companies with strong earnings visibility. Our investment strategy prioritizes a rigorous selection process, emphasizing quality and fundamental strength along with the usual focus on value. This approach is paramount in an environment characterized by elevated valuations and persistent global uncertainties.
Core Investment Principles:
- Quality at a reasonable price: Our focus remains on identifying companies with enduring competitive advantages, robust financials, and sustainable growth trajectories especially in a more guarded environment that we anticipate. We believe that investing in high-quality businesses with strong fundamentals provides a more resilient foundation for long-term returns.
- Diversification for Resilience: We advocate for a diversified portfolio approach to mitigate risk and enhance returns including asset and market diversification. This includes exploring opportunities beyond traditional equity investments, such as:
- Real Estate Investment Trusts (REITs): Offering exposure to the real estate market with attractive dividend yields in a potentially reducing interest rate environment. Brookfield REIT continues to offer dividend yields higher than G Secs along with potential price appreciation.
- Safe Haven Commodities: Expect them to play a greater role providing a potential hedge against a rising dollar and geopolitical uncertainties.
- Newer Markets: Capitalizing on the long-term growth potential of strong economies with continued attractive valuations, particularly in regions like China.
- Identifying and Capitalizing on Emerging Themes for the year: We actively seek to identify and capitalize on compelling investment themes, such as:
- Movement down the pharmaceutical value chain : Even though formulation companies now seem well valued, opportunities seem to exist in quality API players which suffered due to Chinese competition and are now recovering. The likes of Fermenta Biotech, Solara, Akums etc are all companies with high potential for long term growth and continued attractive valuations
- Continued focus on strength in earnings : Companies defined in areas like Telecom, SAAS, high quality financials, chemicals still seem to offer an attractive risk reward or longetivity of growth
- Continued growth in the high quality financial ecosystem should eventually be rewarded. We are optimistic on players in the secured lending space and are keenly monitoring the interest rate scenario to ascertain triggers here apart from valuations.
- Opportunities in the Agricultural and Commodities Sector: Certain niche areas in agricultural, polyfilm and other commodities are coming from a history of regulatory burdens, hyper competition and and long term neglect. Our view here is to build on these as triggers materialise especially regulatory product price triggers and like anti-dumping duty or export bans lifting.
Furthermore, we will continue to explore contrarian investment opportunities, recognizing that periods of market distress can present unique opportunities for discerning investors. Our commitment to thorough research, disciplined risk management, and a long-term perspective will guide our investment decisions throughout 2025 and beyond.
Closing Thoughts:
As we bid farewell to 2024, we do so with gratitude for the lessons learned and achievements realized. The year ahead holds both challenges and opportunities, and we remain steadfast in our resolve to navigate them with resilience, purpose, and curiosity. To our friends and family, our partners and the broader investment community, we extend our heartfelt wishes for a prosperous and fulfilling 2025. Happy New Year!
