Navigating the minefield of bad businesses in unprecedented times
May 25th, 2020
Let’s begin by introducing our audience to Bay Capital. Could you tell us about your firm, your focus areas and the funds you manage?
Bay Capital Partners is an India-focused investment firm that has been investing in publicly traded companies for about 13 years. Our present portfolio companies include Bajaj Finserv, HDFC and Naukri.com parent Info Edge. In the past, we have also invested in Sterling Holiday Resorts, Westlife Development, Religare Enterprises, Samco Securities and Vini Cosmetics.
Bay Capital, which was founded in 2006, manages several funds and special purpose vehicles. We raise money mostly from North American institutional investors that include endowments, foundations, family offices and corporate pension funds.
We are a focused investment fund. Our predominant focus is on public investments in India. We are based across Mumbai, Singapore and London. We manage money for both European and North American institutional investors.
Our public market fund is open-ended and we have a couple of private vehicles that we used in the past for our legacy private deals. Ninety percent of our investments are in India.
Much is being said and debated on the current market dynamic. What is your take on it?
Our current investment perspective and context are being framed around three broad cues: the pandemic and the science around it, the economy and the implications for it, and finally, how the impact is seeping into the financial markets and also its impact on individual businesses.
On the science part of it, we observe that India has been by far the most proactive among the larger nations in its response to the pandemic as compared to some of the larger nations that we’ve seen. We’ve also observed that the response curves of some of the developing nations in Asia have been far superior to those of a few developed nations as well.
As far as the economics go, India was witnessing a slowdown over the last three to four quarters before the pandemic. So the whole macro setup wasn’t exactly the most conducive anyway. The pandemic, of course, came as a double shock.
When it comes to navigating it, we have to be guided by what is put out there. The vaccine may be several months away, and in the interim period, I believe we will see the economy opening up in phases.
Given the current dynamic, what according to you are the opportunities within India’s ecosystem and what are the potential areas for growth in the future?
Today, of course, the one question that seems to be on everyone’s mind is, “When will things get back to normal?” However, I think the question that we should really be asking is, “How do we change or alter behaviours to navigate to the new normal? Because the virus is not going to vanish overnight.”
I believe the obvious advantage for India is that unlike a lot of other countries, we are not export-oriented. Our demographic dividend and internal consumption dynamics are on our side. The Indian consumer’s ability to consume is a structural opportunity. Therefore, any business that caters to domestic consumption needs has an opportunity to capitalise on it.
The consumption opportunity will also go beyond consumer staples and even include categories like jewellery, banking, insurance, and mobility among others. The structural opportunity has not gone away. While there might be a dislocation for the near term, over the next 10 or 15 years, businesses which cater to domestic demand within India will always be winners.
What is your perspective on the global capital markets outage? What in your opinion, are the reasons that underscored the outage? What do you believe will be the way forward?
What we’re seeing in the market today is a reflection of the economic shutdown. I would even argue that the markets have still not fully captured the depth of the economic carnage, especially through the lens of job losses, business closures, furloughs and the like. Will things get worse before they get better? I think they will — at least in the next two or three quarters.
There is a case to be made for greater money flowing into the emerging markets, particularly in Asia. This, of course, will be in relation to how these countries have handled the pandemic and how they handle the resultant damage to the economy. We just need to compare the responses and the way things have panned out here relative to the West. It’s hard to predict these things, but I foresee a situation with greater money flows coming into these places away from the US particularly.
COVID-19 came as a surprise out of nowhere and continues to impact Indian equities and global markets. How do you see this play out?
The fact that a pandemic would come and affect the world was something that was spoken about and articulated by scientists and public health professionals. The fact that we didn’t pay attention and were unable to understand its devastating effects is a different matter altogether. Nevertheless, based on our understanding from experts in the field, I think it is here for the long haul. We also can’t remain shut down perpetually, so we will need to find ways of living through this. While the initial effect on the economy may be devastating, in India, we’re already seeing signs of some aspects of the economy come to life, and it’s only a matter of time before the main economic activity will start to inch back up. I foresee a sense of normalcy coming back in 12-14 months.
How are the Indian markets looking in terms of earnings for the end of FY20? What kind of investment outlay are you looking at this year?
The way I see it, the negative effects happened only after the second week of March. So, to that extent, the financial year (FY) 2020 won’t be too badly impacted. And while it’s impossible to make any kind of forecast or estimate, FY21 will most likely be a washout, and our best-case scenario is that by FY22, we will make up some part of what we lost in FY21.
What are your long-term views on India as an investment destination?
If one were to take a five or seven-year view, I think the opportunity is phenomenal as there are several factors that could work to India’s advantage. One is obviously the fact that India is largely a domestic demand centred economy. The whole globalisation narrative that existed out there will get defeated to some extent, and that works to India’s advantage.
The second factor is that we are already seeing signs of companies and countries that want to diversify out of China, and if India plays its cards right, it could become a big pillar of foreign direct investment.
Thirdly, there are also a whole bunch of phenomenally well-run listed businesses that will come out stronger from this, particularly in the next five to seven years. I also believe there is a case to be made for portfolio money to flow out of the US particularly and come into markets like India. I believe that over the next five to seven years, the opportunity is potentially better than probably what it was two or three years ago.
You just mentioned ‘well-run listed businesses.’ Taking off from there, what factors attract you towards a company?
As investors, our focus is really on businesses which display the following characteristics: Firstly, a track record of efficient and judicious allocation of capital. Secondly, lack of financial leverage (or in the case of the financial businesses that we own – prudent leverage), which as you can imagine, is particularly debilitating in the current environment. Third is a great track record of good corporate behaviour and governance standards. Fourth would be a significant competitive advantage, and the fifth is longevity, particularly with the belief that this is not their first crisis, and certainly not their last.
How much capital do you manage? What is the average holding period and turnover?
We manage about half a billion dollars across our various funds. The Bay Capital India Fund is the primary investment vehicle which follows a buy-and-hold philosophy. Therefore, the average turnover in the fund’s portfolio is less than 10% since inception. The holding period is eight to ten years.
What kind of investments are you looking at, this year?
We look for the same traits in businesses day in and day out. We have a team in Mumbai that is focused on identifying great businesses for our portfolio. We have a very concentrated portfolio approach and will not hold more than 20 companies in our public markets portfolio.
Every investor has their own definition of quality. What is yours?
We look at quality through the lens of leadership in senior management, integrity, prudence, culture, and its engagement with the external ecosystem including channel partners and distributors.
What advice would you give founders and promoters on building a business for the long term?
Dynamics like these challenge leaders to truly walk the talk. Those who do, are certain to pull ahead of their competitors. My advice on building a business for the long term is a constant: focus on people, be extremely prudent with your spending, make the business leaner, and lastly take a step back and assess opportunities or aspects to the business that you should be thinking about differently.
Excerpts from the article by Siddharth Mehta have been covered here :-
Posted by Siddharth Mehta, Founder & CIO