Ashmayu Quarterly Newsletter- Anomalies

Dear Investor,

At Tamohara, we have long maintained that ‘we invest in businesses and not stocks’. In the course of our investing journey here we have come across some anomalies that most, including ourselves would have found counterintuitive and yet hold true in practicality. Three in particular were worth discussing.

Good enough product > good enough price point

Good enough product at a great price point trumps a great product at a good enough price point. The two categories of consumer businesses we have found to be far more predictable (and therefore not a fad) are decent products at a price point that cannot be ignored and luxury products. Betting on the success of the ones that fall in between these two extremes of the spectrum is akin to throwing a dart in the dark.

RyanAir and India’s largest domestic airline both provide uncomfortable seats and absolutely zero hospitality when aboard their aircrafts. Ryan Air takes it a step further by responding snarkily to customer grievances on social media. Yet these two are arguably the most financially healthy airline carriers in the world. They have distilled down the purpose of short distance air travel to being able to reach on time above all else, i.e. a good enough product. The price points they offer this service at is too good to ignore at most times. If one can deliver this consistently, there is no reason to assume why the brand would not work.

The same is true for India’s largest carmaker. They have distilled down selling cars in India to selling the most fuel efficient vehicle possible at the lowest price point. If they can do so profitably, there is no call required to be taken on whether the brand works or is it a fad, etc. Delivering a superior quality product but in an intermediate price range- that can neither be classified as mass or luxury, it becomes very difficult for the company itself let alone us investors to predict a successful outcome. Reliable consumer investments for us must be based on a good enough product with a price point that is difficult to ignore or luxury. Nothing in between.

Technology companies endure better under promoters than professionals

The second anomaly sounds like a misnomer especially in light of the startup boom that we see where founders build for 5-7 years and then move on to their next venture leaving the current business built for institutional investors to govern and be professionally run. When we talk of businesses enduring we are referring to resilience over decades. In industries such as heavy engineering (or capital goods), pharmaceuticals and biotechnology, chemical manufacturers, etc., which are constantly prone to disruptions, a promoter owned and governed entity has a higher chance of excelling over the longer term.

A Siemens (or even a Thermax!) in engineering, a Ferrari in Automobile or even a Dolby in sound tech are all examples of companies that have been at the top of their fields for decades despite the varied challengers and disruptors in their field. The one thing common in all of these businesses is that even if professionally managed, the board is governed by the promoters that have skin in the game. These promoter families have an ability to talk in terms of generational endurance and not get bogged down by maintaining near term market share when faced with a challenger. They are almost always able to take a view to invest for the ‘long term’. A long term that we can only aspire to have a vision for.

Would a TSMC be doing such extraordinary capex (over a $100bn ongoing) if not driven by a promoter? Under a professional CEO and fragmented institutional ownership, the focus would have been far greater on buybacks and dividends and not a major capex.

Nepotism works

The third anomaly we have come to realize is an uncomfortable one to admit. Though someone put it extremely well, “To become a great F-1 driver, you cannot practice by driving an Ola cab around the city. To be a great F-1 racer, you have to practice on an F-1 race car.”

Working across all departments at the ground level, job shadowing are essential but with a view to learn what questions to ask and then be given a small P&L to manage. Being relegated to solely doing operations and being asked to step up one day out of the blue after a decade, doesn’t help. Being confined to a role for a long duration takes away from one’s ability to look at the broader picture. More importantly as time goes by, the ability to take risks if not honed in on, diminishes. This greatly hampers one’s ability to lead the next phase of growth for the company, to race the F-1 car.

In advocating “nepotism” we absolutely do not mean the next generation should not work hard. We simply believe that the best leverage is achieved when they work hard on the existing platform that they have been blessed with and build on it, rather than attempting to build it from scratch again.

As we look at more businesses with every passing year, we are sure to stumble into many more such anomalies that challenge our commonly held beliefs. Perhaps it is warranted for us to keep revisiting this topic every year and see what new principles/ mind-benders have been made a part of our “Investment Gita”.

As always, we thank you for your continued support and faith in us.

Happy Investing!

Best,
Harini Dedhia
Head of Research and Portfolio Manager