The Rangoli India Fund

We position Rangoli to be highly exposed to the underlying drivers of India’s growth:

As is widely reported and understood, India’s demographics (age, education, mobility, etc.) have positioned its providers of goods and services for a historic growth in aggregate demand. Despite the narrative’s popularity, India’s story is not only about demography but especially about productivity.

The true sustainer of India’s high growth is the silent gain in its productivity. GDP/Capita doubled in the last 12 years. It is not that India has accomplished a pathbreaking feat; instead, India’s base of labor productivity is still so low that it leaves room for substantial improvement by simply plucking low-hanging fruit.

Over the coming decade, the pivotal driver of sustainable growth will be utilizing public policy actively to unlock productivity. This will transpire through the 4 broad verticals of national infrastructure- Social, Physical, Digital & Governance- and will lead to per capita incomes doubling again in 7 years by 2030 (5 years quicker than the previous doubling). Furthermore, India’s development is at the nascent stage where Capital Deepening can, in many sectors, enhance corporate efficiency substantially. Earnings growth driven, not by leverage, but by this productivity growth, has led to corporates maintaining high capital efficiencies; and consequently, for an Indian business to gain recognition in the stock market in such an environment, it must perform on 3 fronts: growth, capital efficiency & low leverage. Simply put, India’s winners are those companies that can do more with less.

Living in India, we observe many corollaries of rapid national development. Two of particular interest to us as investors are: the ‘Formalization’ of the informal sector and the emergence of National Core Competencies. The formal sector steadily takes market share due to rising incomes and its advantages of size. Separately, specific sectors have sources of competitive advantage that perfectly match India’s core competencies. As India develops, these core competencies are being unleashed, significantly boosting the competitive position of Indian players in those sectors. They then rise to not only dominate domestically but also become prominent players globally, as demonstrated by India’s IT Services, KPO and Pharmaceutical manufacturing sectors. Capturing India’s rising international champions in the portfolio will be enormously rewarding.

Our objective is to identify and expose the fund to companies that are first in line to capture the cash flows arising from rising disposable incomes (generated by demographics and productivity growth) or structural tailwinds (that emerge as corollaries to national development).

Rangoli’s is the classic story of finding quality businesses- but at fair valuations- across enough sectors to achieve responsible diversification. This is the core of what the strategy offers, and the sole strive of the investment team.

Unifi invests in people, not just businesses. We believe the most interesting opportunities are characterized by exceptional entrepreneurs who- first and foremost- are of steadfast integrity, and second, possess industry-leading business acumen. Unifi only invests in business models that are non-speculative and, when executed well, inherently capital efficient. This entails that prospective investments demonstrate high and sustained growth primarily funded by internally generated capital. Filters that Unifi finds consistently powerful in opening doors to discovering strong investment candidates include: tracking insider activity, formalization, improving ESG metrics, leading indicators of cycles/trends (especially in commodity and credit) and social trends (such as rural migration, stickiness in education etc.). Our investment approach is to look at businesses that are beneficiaries of India’s structural drivers; alongside, we seek to capitalize on the mispricing arising out of idiosyncratic niches which arise from time to time such as:

• Misunderstanding or just plain lack of understanding certain small sectors. Large buy-side analysts focus on large firms that can absorb capital in scale, while sell-side analysts focus on liquid counters on which they can earn a brokerage commission.
• Overreaction to a short-term negative event. Markets can be myopic; a weak quarterly result often shrinks the valuation temporarily in an otherwise structural growth business.
• Corporate restructurings, such as spinoffs.
• A cyclical sector that is currently depressed, with net cash and trading below its book value.
• A business that is amidst a turnaround (demands extra caution and validation).
• The institutional imperative of benchmarking that causes fund managers to exit businesses that are attractive but aren’t above a specific market cap.
• Widespread market dislocation driven by a geo-political/economic shock.

In this way, Unifi identifies prospects with strong fundamentals

However, in our final decision, we always view price and quality as equally critical factors. We are cognizant that the wrong price can turn a fantastic business into a terrible investment. It is this strict discipline of having to satisfy both criteria- quality and price- equally that makes Unifi’s process so much more demanding on ourselves. Our GARP principles (our approach to pricing a prospective investment) centers on sensitizing our estimated forward PE multiple to 4 metrics that are critical to minority investors: governance, sustainability of earnings growth, capital efficiency, and debt burden. It is these four that drive our thinking, often in that order, although sometimes the weights vary. We judge the sustainability of earnings growth on 2 levels: (a) the long-term stickiness of a business to its direct stakeholders and society using a top-down approach; and (b) the near-term prospects of a business using a bottom-up framework. In terms of capital efficiency, we demand a return on shareholder funds (ROE) that provides a healthy margin over the business’s cost of capital. The higher the margin, the better the potential cash flow to shareholders. Debt amplifies a business’s sensitivity to economic and market cycles. This inherent volatility increases risk and constrains good valuations. Finally, the PE:G ratio we pay is a direct function of the business’s growth, capital efficiency and leverage.