India amid manufacturing renaissance, renewables great future idea: Ravi Dharamshi, ValueQuest

This interview appeared in the ET Prime on 5th January, 2023 Link

India is the global back-office and world’s pharmacy, says Ravi Dharamshi, founder and CIO, ValueQuest, speaking about IT and pharma sectors – the two top themes of the last two decades.

In conversation with Ami Shah, he talks about the SCALE framework of investing, stock-market lessons learnt from Warren Buffett and late Rakesh Jhunjhunwala, and things that motivate him.

Are you a value or a growth investor? Why do you say that? We honestly do not wish to get stuck or typecast in the nomenclatures of growth or value. ValueQuest means itself the quest for value. Growth is inherent and an integral part of value realisation. Lot of value stems from the future growth. Our approach has been to find companies that are on the cusp of a growth phase and identify them before the market has baked the future expectations into the price.

Our goal is to identify ideas or themes that will do well in the foreseeable future of 3-5 years. Connecting the dots top-down, we set out to look for best companies which can capture the opportunity in this theme, and in the process change the SCALE of the company itself.

CALE framework: Scalable companies with sustainable Competitive advantage, Adaptive on a Long runway with superior Execution capabilities. We believe this is the phase wherein maximum wealth creation happens for a company and that is what we aspire to capture.

What are your learnings from a value investor like Warren Buffett? He also bought Apple at its peak and today it accounts for 40% of his portfolio. Warren Buffett is the fountainhead of investment learning and lessons and there is so much one can learn and imbibe. For a fund manager or even a normal investor to imbibe his thought process to whatever extent possible should be the first step in the journey of wealth creation.

His quotes and sayings are investment folklore and there are no qualms for us to say that we use his quotes wherever and whenever possible. There is so much wisdom packed into few words.

But from the above example or question, I think the biggest learning is that he is not afraid to change his mind and views and admit his mistakes. From not being too keen on technology companies for various reasons and not having any in his portfolio to having his largest holding in Apple, which has rewarded him well. His flip flops on the airline industry are also well known and his letters to shareholders are full of self-deprecating humour, which is refreshing and brings out a character of humility that is so critical in the investment world.

What according to you were the top 3-5 themes for the last decade? Two top themes in the last two decades have been IT and pharma. Both industries have gone through the cycle of discovery where cost efficiencies and technical edges were explored and exploited to the cycle of growth. They went through periods of consolidation and eventually innovation and only the best survived. Finally, they are closer to the mature stage in terms of growth and return on capital. These industries have proved themselves to the world and put India on the map with their scale and ability to seize the opportunity as and when they were presented, be it Y2K or Covid-19. These have also been rewarding investors, with IT giving a 17% CAGR over the past two decades. India has gone on to become the global back-office and the world’s pharmacy.

How important is ESG in your investment philosophy? What are the parameters you look at? Mark Twain, famously mentioned in his autobiography, “There is no such thing as a new idea. It is impossible. We simply take a lot of old ideas and put them into a sort of mental kaleidoscope. We give them a turn and they make new and curious combinations. We keep on turning and making new combinations indefinitely; but they are the same old pieces of coloured glass that have been in use through all the ages.”

ESG or Environmental, Social and Governance is one such old cocktail. It’s the latest buzzword in the investing world, even if it’s not really new, is one such old idea that is being put through a different lens, every few years.

It will be safe to assume that companies and decision makers, who have a fiduciary responsibility to maximise profit or shareholder value, are incentivised for better performance. However, its very tough to assume they to work solely with the higher goals of ESG in mind and not worry about shareholder satisfaction.

On the other side, societal expectations and requirements for a sustainable future are absolutely essential and need a lot of focused attention and questions asked. However, the definition of sustainability and its framework may differ from country to country and company to company. Further, ESG non-compliance will probably be a key factor going ahead in raising funds/investments and tapping other markets or avenues.

As an investor, having a feel-good factor that you are participating in the change, which is good for the future, may not be the most best investment for returns per se and one may have to walk a thin line between the high road and high returns.

So, it’s our endeavour to find such companies and themes that will benefit in the move towards ESG compliance — be it a transition to renewable energies and ancillary businesses around this.

Which are the new themes that you are exploring seriously? We have entered exciting times post-Covid-19. As I have mentioned in of our earlier posts, “This is the manufacturing renaissance for India”. There is a shift in the world order and there is a need across the globe to look for alternate suppliers or manufacturers to the products needed by the world. Days of China being the lowest cost and most reliable supplier to the world are incrementally over. Also, the world has realised how much it depends on China. So, the need to reduce dependence is clear and present. Be it in industries as diverse as chemicals or smartphones, the theme of China + 1 will not be a temporary one, but a paradigm shift is on the way. For example, India has replaced Vietnam as the world’s second-largest mobile phone manufacturer. Between 2016 and 2022, India is expected to attract investments worth INR44,265 crore in the smartphone manufacturing sector.

From just three mobile manufacturing units in 2014, India witnessed a jump to 268 smartphone and allied services manufacturing units until 2018.

This has also been massively aided by schemes and intent of the government in its endeavour for Atmanirbharta, be it in defence, textiles, electronics or capital goods. Schemes like PLI have further bolstered Indian companies to relook and enhance manufacturing and reclaim the market share lost to China and Vietnam.

Another theme, which has been very interesting in the last few years but has really come to the fore since the Russia-Ukraine war is the transition away from fossil fuels. Energy literally came under fire and while the push for reduction of dependence of imported fuel has been a long-standing push, the impetus towards renewables, be it solar, wind or even hydrogen, has been extremely high. This and its ancillary businesses could be a great idea for the future.