Royce International Smaller-Companies Fund, run by portfolio manager David Nadel, has investments in 7 top quality mid-cap companies. In an article, What Columbus Missed: Royce Rediscovers India (pdf), David Nadel has set out the great advantages of investing in Indian stocks. He has also provided a brief snapshot of why he has invested in the said seven stocks. Also, in an interview to wealthtrack.com, David Nadel pointed out that India cannot be ignored because stocks of well managed companies in the small cap space were trading at extremely cheap valuations. He also said that because of the surging middle class population, with high disposable income, the scale of opportunity is huge. He also talked at length about the great prospects of Thomas Cook & the other stocks in the portfolio.
|Portfolio Of Indian Stocks Of Royce International Smaller-Companies Fund As Of 31.12.2013|
|FAG Bearings India||11,800||308,301|
|Shriram Transport Finance||25,000||270,835|
|Thomas Cook (India)||195,000||265,128|
|Total (Cost $2,022,176)||1,940,413|
AIA Engineering is the global number two manufacturer of chromium grinding balls used by the mining and cement industries. AIA has averaged revenue growth of 30% and ROE 20%+ for more than a decade, reflecting the benefits that accrue to companies whose product sports a low cost of ownership (inconsequential percentage of customers’ costs) but a high cost of failure (customers don’t want to risk a costly plant shutdown by using cheaper grinding alternatives).
Bajaj Auto exports 1.6 million motorcycles and three-wheelers a year, mostly to the MENA (Middle East and North Africa) region. One company riding Bajaj Auto’s coattails as a supplier is FAG Bearings, India’s number two manufacturer of ball bearings and a long-held investment in Royce International Smaller-Companies Fund. Founded in 1962, FAG Bearings has generated 30%+ pre-tax ROE and has compounded revenue growth at 20% over the past decade without the benefit of acquisitions.
Graphite India runs a tight ship manufacturing graphite electrodes, a global oligopoly market serving the electric arc furnace production of steel. It is a high-quality, export-driven manufacturer.
Another export-oriented holding is Ipca Laboratories, which has compounded revenue growth of 20%+ for the last five years – with 20%+ ROIC – by selling anti-malarial medications to Africa and cardiovascular drugs to Europe.
Shriram Transport Finance:
Non-performing loans are actually lower in India, as is public debt as a portion of GDP at 66% for India. Fewer than 20% of rural Indians have loans at all. Shriram Transport Finance, founded in 1979, is India’s number one lender to the used truck market, with a 25% national share. Royce International Smaller-Companies Fund currently holds shares, as we are attracted to its under-banked market, its fragmented customer base of more than one million serviced by loan officers embedded in the local communities, its conservative balance sheet (Tier 1 capital is 30% above the requirement), and its high returns (pre-tax ROE has averaged 30%+ over the last 10 years).
Demand for discretionary services (such as travel) is likely to grow robustly. Barely 10 million Indians travel abroad annually (just 0.8% of the population), versus 70 million Chinese (5.2%) in 2011. Royce International Smaller-Companies Fund currently holds Thomas Cook India, whose CEO we met at their colonial-era headquarters in Mumbai. One of the most trusted brands in Asian travel, Thomas Cook India has operated in the country for more than 130 years and generates 20%+ pre-tax ROE, with scope for improvement. Indian-born uber-investor Prem Watsa, whose Fairfax Financial has compounded book value at 25% per year from 1985 through 2010 and which many regard as Canada’s answer to Warren Buffett’s Berkshire Hathaway, recently acquired the majority shareholding of TCI from its former U.K.-based parent company.
It is worth noting that in addition to the above stocks, some other top-quality Indian stocks like eClerx Services, Infotech Enterprises, McLeod Russel India, Solar Industries India & Unichem Laboratories are held by other funds like the Royce International Micro-Cap Fund. The Royce International Premier Fund holds Bajaj Finance.