So, circle of competence, that is what investors define it, that understand what you know and then pretty much hunt or fish in that circle of competence. How would you define your circle of competence?
Sumeet Nagar: So, our circle of competence is, as I think segment-wise, it is in the small and midcap where our ability to identify these companies early, to do our own sort of on-the-ground proprietary research. We are not dependent on any research house. We would pound the pavement. We will go and visit these companies, visit distributors, dealers, factory floors, what have you. And through that process, we are trying to establish whether this company has the right intrinsic economics that can allow them to deliver that growth without external capital and then what is the quality of the management team, not just for the size of business today, but when this business becomes 5 times or 10 times the size and so that is the part that we specialise in, that is where we focus on.
We also try to engage with the companies and try to help them along the way in terms of building up their governance standards, the board structure, in terms of transparency to the market, communication to the market and this is a long-term journey.
It plays out over three, five, seven, ten years. But through that process, if the company creates a lot of value, the shareholders and our investors in turn benefit from that.
Again, in the declared portfolio, you have shied away from the so-called fintech and consumer tech names. No Zomato, no Policybazaar. At least it is not visible in the data I have. What is your view there on consumer and fintech space?
Sumeet Nagar: I think it is a good space, but you have to always separate from the excitement, the euphoria to sort of the underlying hard economics. So, in the places where you see the ability to deliver that, I think those are good places to be. So, say Policybazaar does not show up, but we have owned that, but we did not own, we did not buy it at the time of the IPO because we thought it was too expensive. But then in 2022, when the markets were down, having the stock got beaten up as there was an overhang of exiting investors, we went in and bought that because we think it is a good franchise, it is a good long-term value creator and so we invested in that.
Let us say a company like Go Digit, which has just recently gone public, it is not a fintech, but it is a financial or insurer who uses technology very effectively and they use it in order to deliver better results to their customers and that shows up in their economics.
So, companies like that, we would be happy to invest in. Or say a company like Ixigo, which is a consumer travel portal and we know that OTA is a great business model.
It has worked worldwide. It will work in India as well. And Ixigo, despite being a late entrant, has become the market leader in trains. It is a number two player in buses and slowly over time it is sort of increasing its presence in flights and eventually hotels.
It is the fastest growing OTA, second largest OTA. From a market cap perspective, it is still like a billion plus. There is a long runway ahead and there is a good management team at the helm.
The promise they always had, but they have actually shown over the last few years that promise resulting into profitability. So, in opportunities like that, we are more than happy to invest. In cases where the promise results in a very high valuation, we will usually shy away from.
Let us talk about Go Digit. Now it is a manufacturer. It is manufacturing insurance. I am just bringing it for our viewers, but it is selling that product digitally, that is the difference. But insurance is a brutally competitive space. And if I look at, let us say, the general insurance space, I understand a bit, there are about 20 players and only top five players are making money. How can a small player, which is only selling insurance online can actually make money?
Sumeet Nagar: So, the Go Digit name may be somewhat misleading. So, while they are using technology very well and their internal backbone is all on new tech, it is very-very digital.
The selling of insurance in India, if you want to be mainstream, has to be done through agents. But again, technology can allow you to do that a lot more effectively.
So, from that perspective, they are like any other traditional player, but just technology is allowing them to do everything far more effectively.
So, their ability to come up with new policies, new designs, that is better than everybody else because of the technology benefit, their ability to provide flexibility to agents on pricing, for example, is far better than other insurance companies and because the company was built during this new tech stack, it is far more efficient compared to the others and that is why despite the size, they have been profitable for quite some time.
And I think there, the important thing is to look at the IFRS accounting because the gap accounting actually does not do a good justice to insurance companies where you are investing or getting customers for many years, but you expense that upfront.
So, it sort of depresses your profitability. They have been the fastest growing insurance company. Insurance is a business that is still very under-penetrated in India, has a long runway for growth. It has a huge TAM and within that, you have one of the fastest growing players. So, we think this is a great compounding story for the next 5, 10, 15 years and that is the reason why I had invested while the company was private. We added more into the IPO and then post that.
Aptus Value Housing Finance, something which you have been invested in for almost four-five years now and you still like to own it. Now, my follow-up question on this one is that the home finance space or the housing finance space is brutally competitive and suddenly the big daddies like SBI and PNB they also have become in a sense very-very ruthless about what kind of rate they have to offer. How does a company like Aptus fit in when the big daddies are out there and they have been disruptive?
Sumeet Nagar: Yes, I think it is a great question. So, when you are investing in small and midcap you are going to be always worried about a larger competitor who can come and eat your lunch. And historically, what we found is that while you invest in small and midcap, you have to find companies that are operating in spaces whether it is sectors or sub-sectors, where you do not see that competition.
So, while we invest in smaller companies, most of these companies would be leaders in the space in which they are operating. And so is the case with Aptus, that in affordable housing finance area, especially in southern part of the country, they are the biggest player.
So, the likes of SBI, PNB, they are generally not operating in affordable housing finance area because it is a very tough underwriting. The ticket size of the loan is 8, 9, 10 lakhs.
You have to go and sit at the guy’s shop to look at their cash flows, understand that, evaluate that. This is not the forte of the banks. Banks have generally stayed away from this because it is too tough to do for a very small ticket size. So, you do not face that competition. Their biggest competition actually comes from money lenders who are lending at a much-much higher rate and that is the reason why Aptus has continued to grow more than 20% every single year going back a decade.
And I mean, if you look at today, if you look at the loan book level, it has been growing north of 25% year-on-year and there is ample room. This is a very under-penetrated area and that is where the opportunity lies. You have the strongest player in one region of the country. They can potentially expand contiguously sort of beyond there.
Long runway for growth. There is competition, but they are by far the most efficient player in that market and it reflects in their financials. Like if you look at their ROA, they are best in class.
Nobody comes even close, so that is the opportunity. Having said that, it was true a year ago. It was true two years ago as well. The markets have not appreciated that and it has not done well, but it does not mean the value is not accruing.
They have continued to grow their earnings at a pretty rapid rate. The book continues to grow. ROA keeps improving and eventually at some point market will take notice.
