Sumeet Nagar, MD, Malabar Investments has discussed his favourite investments

Sumeet Nagar, MD, Malabar Investments has discussed his favourite investments in his latest interview to ETNow.

Mantra of the Fund

Sumeet Nagar pointed out that the mantra of the Fund always had been to find companies that are profitable and cash flow generating. "I want to highlight is that our mantra always had been to find companies that are profitable, cash flow generating. In terms of opportunities in India, we look for things that are high quality but where the valuations are reasonable, things where prices have become more attuned to fundamentals," he said.

Vaibhav Global is fundamentally a sound business

Sumeet explained the reasons why Vaibhav Global has been severely punished by the stock market and its stock price plunged from Rs 1000 to Rs 300/ He pointed out that though Vaibhav did extremely well during the pandemic and had supreme outperformance in terms of their earnings and as a result market performance, the price got a little bit ahead of itself. Also, they decided to expand into the German market at the time the E-commerce slowed down after the pandemic. The expansion costs had to be written off and this affected the P&L Account.

“We own it and we want to add more to it because it is fundamentally a sound business,” he confirmed.

Very excited about Aptus Value Housing Finance

Sumeet revealed that Aptus Value Housing Finance is one of Malabar Fund’s biggest investment from the financial sector. “It has been both one of the most profitable financial companies in India and the fastest growing from a profits perspective,” he said.

He also pointed out that Aptus has a RoA of 8.8% which is the highest ROA of any financial company in India. They have continued to increase it because it is a business that has limited competition in the south.

There is limited competition but the differentiation is in terms of their supreme asset quality, he added. “This company since its inception over a decade ago has had hardly any write offs or loss, given default that is supreme underwriting. So if your credit costs are low, your spreads are fairly wide and your operation cost as you keep growing continues to come down. When we invested, their opex to AUM was north of 4%; today it is about 2.5% and continues to fall,” he added.

Also, Aptus has better ROAs and better growth than what Gruh Finance had 10 years ago, he said.

He also explained that Aptus’ moat or the USP is that it does not compete head on with the large banks SBI or HDFC Bank. It finances self-employed affordable housing where the average loan value is Rs 9 lakh. At that price point, no bank can lend profitably.

This is better than microfinance home finance company because it is completely secure. There is a real value in these housing and in most cases, they lend at about 50% loan to value.

"Aptus is today is at 30 times trailing basis if from this year’s numbers, probably 25 times earnings and it is the fastest growing company in that sector and as their leverage increases and given their ROA, they have the ability to generate 25% plus ROE over the long term, Very few financials in the world have the ability to do that and once they do, they actually get rewarded very well by the financial markets,” he said.

Affle is a 20x bagger

Sumeet Nagar has publicly recommended Affle to us at the time of its IPO. He had described it as a "Phenomenal Company Run By Great Management". (see link).

“Affle has been a great investment and it was only about four years ago but it is the quality of the company that continues to always outperform the expectations they have set. When we first invested in Affle, Anuj would say I can commit to delivering a 25% year-on-year growth to you both in terms of revenue and profitability,” he said.

“It is a great business, a company we still believe in,” he confirmed.

New investments of the Malabar Investment Fund

Sumeet revealed that he likes technology businesses which are profitable, cash flow generating and dominant players. His latest investment includes True Caller, a company listed in Sweden, which is highly profitable and highly cash flow generating business.

His Fund has also invested in Gupshup, the largest enterprise communications business in India. Every time you do a transaction and get an SMS on your phone, it is through one of the enterprise communication companies, he said.

“We look for things that are high quality but where the valuations are reasonable, things where prices have become more attuned to fundamentals. We own VABO. More recently, we have added in companies where you find very strong tailwinds like Syrma,” he added.

As regards Syrma SGS Technology, whose IPO was a few days ago, Sumeet opined that it has a solid business, very strong tailwind, and will benefit from the electronics manufacturing moving to India. “They are seeing huge demand coming in for local manufacturing here. They are seeing also very strong demand coming in from their export customers who are looking for this China plus one opportunity. It is a high margin company,” he said.

There is still value migration and very strong tailwind for specialty chemical companies

Sumeet revealed that the Malabar Investment Fund has exposure to specialty chemicals. “We have made significant investments during 2020 and those seem to have worked very well but it is also about looking for opportunities that may be a step away from second order opportunities”.

He explained that the Fund is investing in specialty chemicals equipment manufacturers like Glascoat and GMM Pfaulder. Both companies have benefited very strongly.

Xpro will benefit from electronics manufacturing taking place in India. Component sourcing will also become big

Sumeet pointed out that in the case of capacitors, Xpro is the only one company that produces dielectric films. The company is expanding its capacity to meet this increasing demand.