Exceptional companies generate disproportionate returns
India has been a breeding ground for remarkable managers who have created enormous wealth for themselves and their shareholders by capturing large white spaces in the country. For instance, over the past 20 years, there have been 164 listed companies that have delivered more than 100X returns under exemplary leadership. Our strategy is to identify and back such exceptional companies early when their potential has not been fully comprehended by market participants.
In this newsletter, we show how returns generated by exceptional companies have been disproportionately higher than average listed ompanies and discuss our approach to investing in such companies.
Portfolio performance update
Post fee, our portfolio delivered 16.8% absolute returns over the Jul-Sep’21 quarter compared to 12.7%, 12.1% and 11.3% for BSE SENSEX, BSE Mid cap, and BSE Small cap indices respectively. Since inception on Mar 23, 2021, our portfolio is up 36.9%.
Performance Snapshot
Notes:
• Portfolio inception date is Mar 23, 2021
• Sharpe and Sortino Ratios are since inception
• *Absolute returns till Oct 21st 2021 since inception
Exceptional companies generated 33% CAGR over the past twenty years
The table below shows a summary of listed companies’ returns over the past 20 years.
164 out of 1,143 listed companies generated more than 100X returns over the last twenty years. These 164 companies as a group generated 33% compounded returns over the period as compared to 19% returns for the market as a whole and 16% for BSE SENSEX. To put these numbers into context, the ‘>100X’ group delivered returns that were 6X of all the listed companies combined and 10X returns generated by BSE
SENSEX.
As per our detailed assessment, these 164 companies have several common characteristics including – (1.) exceptional managements, (2.) large addressable markets relative to current size, (3.) sustainable competitive advantage and (4.) strong inherent unit economics. These characteristics are also the key pillars of our investment strategy
Moreover, investing in such companies at an ‘early’ stage when the market has not fully understood the opportunity results in disproportionate returns. The table showcases the point using the large-cap/midcap/small-cap classification which acts as a reasonable proxy for the degree of ‘discovery’ by the market.
Almost all the ‘>100X’ companies were either ‘small-caps’ or ‘mid-caps’ (basis current SEBI classification).
Our approach to investing
At Burman Capital Management, we run concentrated portfolios focused on backing exceptional companies early, largely in the Indian small and mid-cap space. We follow a rigorous qualitative and quantitative diligence process for analyzing companies that provides us with differentiated insights and a unique perspective on the long-term fundamental drivers of businesses. We illustrate our approach to investing through an example of one of our portfolio companies.
The top contributor to our returns since inception has been an exceptional company focusing on providing embedded software services to the global automotive industry. The company was one of the first players in its industry to recognize and prepare for the global automotive pivot to four core areas – Connected, Autonomous driving, Shared Mobility and Electric. Driven by its early-mover advantage, it today boasts of one of the largest teams in the world in terms of auto embedded-software service capabilities.
During our interactions with their competitors, industry experts and analysts, we realized that the company had a commanding position in the industry and it fit all our investment criteria – (1.) the company sits at the center of four auto mega trends, all of which are expected to drive exponential growth in the company’s target segments over the next decade, (2.) it enjoys a sustainable competitive advantage driven by its deep client connect, experience and capabilities, (3.) it has strong unit economics with robust free cash generation, (4.) backed by exceptional visionary and ethical management and (5.) was largely unknown to the investor community with hardly any analyst coverage thereby it was trading at a steep discount to peers. Since our investment, the company’s story has become more mainstream with multiple analyst initiations which has led to a steep re-rating. Even with the sharp price appreciation (>2x our investment price), we believe the company has a substantial runway for growth and we remain constructive about our investment