The team at Nalanda has had a long and successful track record of investing in India out the office based in Singapore. Some of their multibagger picks from last decade have been:
Cera Sanitaryware, Info Edge, Vaibhav Global, Page Industries etc. The founder of Nalanda Capital Mr. Pulak Prasad is a reclusive man and by his stunning track record of managing about $4 Billion today, his actions definitely speaks louder than his words.
The most fascinating thing about them I feel is the long term view and so little activity. The team is filled with quality professionals majorly from IIM’s and IIT’s. The Nalanda Guys have never given a public appearance. One of the team member Mr. Anand Sridharan is active on twitter and writes on his blog.
Below is the investing framework they deploy while investing into any business taken from their official website.
Long term fundamental investing
The “long term fundamental investing” approach demands deep diligence, fundamental research, and an independent analysis of the investment opportunities irrespective of the general prevailing opinions or state of the markets.
One of the ways to describe this approach is to discuss what it is not. It is not about investing based on recommendations of analysts, or investing based on a one-hour meeting with the management team in a sell-side conference. It also does not entail seeking protection from extreme diversification. Instead, this approach envisages employing a lot of time and effort to understand the industry, management, company, competition, and demands that the investor puts its eggs in very few baskets, and then watches the baskets carefully.
Proprietary idea generation
This is an “ideas” business. At its core, good investing is about generating good ideas. Ideas that are popular or are followed by every investor cannot remain good for too long. Over time, it is only by following up on ideas that are proprietary (and potentially unpopular) that any investment team can create value.
Nalanda focuses on generating and implementing its own ideas, and shies away from ideas that are already popular or have been made popular by bankers or analysts. This idea generation broadly has two sources – proprietary analysis, and friends of Nalanda.
Proprietary Analysis – This involves reading annual reports, analyzing industry reports, generating deal screens, reading and analyzing the business press, deep diving into stocks that are out of favor or have sell recommendations, and attending seminars and conferences, especially those that are focused on an industry or on small and mid-cap companies.
Friends of the Fund – Over time, the team at Nalanda Capital has built many relationships in India with intermediaries, accountants, lawyers, entrepreneurs, and senior professionals. These relationships have been a very good source of ideas in the past, and will continue to be mined in a focused manner in the future.
To date, almost all the Nalanda investments have been through the “proprietary analysis” route.
Passively active style of investing
Nalanda invests primarily in those situations where it can be an active partner with the management team. Nalanda needs to be convinced before making the investment that the management team of the portfolio company is open minded and values and appreciates discussion and debate. The style of Nalanda’s interaction with the portfolio company management teams is not “activist”, but “active”. We call it a “passively active” style of investing.
Nalanda’s focus is not to make a third rate company a first rate one (it does not have the skills to do so), but to help a great company become even better. And this is possible not because the professionals at Nalanda Capital are “smarter” than the entrepreneurs (they aren’t), but because they bring a different perspective to the table. The Nalanda Capital team has observed many Indian companies across a wide range of industries deal with many fundamental issues over a long period of time. They seek to bring this perspective into their discussions with the management teams of the portfolio companies. The experience of the investment management team has shown that Indian entrepreneurs value feedback and criticism if it is done in a constructive and collegial manner.
Nalanda does not seek to interfere with the management teams of the portfolio companies, but simply seeks to intervene selectively. The approach aims to add value in a few areas every year, and does not involve giving daily or weekly advice to the management team. The interaction is programmed (e.g. once every few weeks), and is not event-based.
Nalanda has added value in the following areas: strategy (whether a portfolio company should trim the number of its brands, whether the portfolio company should launch a new business), mergers and acquisitions (whether a portfolio company should be acquiring overseas companies, whether a portfolio company should sell or shut down its non-performing business), corporate structure (should the company demerge its disparate businesses or create a subsidiary), financial structure (whether a portfolio company should be raising debt instead of equity) and organization (whether the portfolio company needs a Chief Operating Officer, or whether its Chief Financial Officer is serving the function of a Chief Accountant) – i.e. in all the areas that could help the management team of a portfolio company create greater value.
Overall, Nalanda does not invest unless it is convinced that the management team is clean, outstanding, and is open to external ideas, and discussion and debate.
Companies need to qualify a rigorous screening process
Nalanda adopts a rigorous screening process to select potential portfolio companies. The four screens are: high return on capital, attractive industry, clean and outstanding entrepreneur, and an asymmetric risk-reward trade-off.
High return on capital – Nalanda invests in only those companies that have, or have had a consistently high return on capital. This includes companies that may have had a temporary decline of returns. Being a long term (and not momentum) investor, Nalanda’s approach is to invest only in high quality businesses, and return on capital is a very good indicator of the quality of the management team and the competitive advantage of the business of the portfolio companies.
Attractive industry – Nalanda analyzes the industry structure, conduct of industry participants and performance of key companies in the industry to assess if the industry is attractive from the point of view of long term value creation. Industry analysis in India is made quite difficult by the high growth rates of companies and changing dynamics of the competitive environment. Also, many Indian industries are not likely to follow the path of industries in the west (e.g. information technology services), and so, a bottoms up analysis and independent thinking is required to develop a point of view.
Clean and outstanding entrepreneur – Nalanda’s focus has been and will be to back entrepreneurs who are clean and transparent, and have an outstanding track record. This assessment involves doing a lot of reference checks on the entrepreneur and the management team. Nalanda needs to be convinced that the company is a “leader”. It need not be a leader in market share or volume, but the management team needs to demonstrate its leadership in some area(s) that could potentially create significant value in the future. For example, the company may be a leader in profitability, it may be a leader in a fast growing and potentially large niche segment of the market, it may be a leader on cost structure, or in creating and spotting opportunities that competitors have not been able to match.
Asymmetric risk-reward trade-off – Ultimately, Nalanda will perform well only if it ends up getting disproportionately rewarded for the level of risk it assumes. In other words, it seeks situations where there is an asymmetry in the risk and reward. This involves assessing the probability and quantum of various outcomes through a rigorous financial modeling process, and a thoughtful qualitative analysis of the industry and the management team.
(Published on 21st October 2021)