Valcreate Philosophy and Performance

Stock picking backed by strong in-house GRO process

Valcreate follows the in-house GRO process with a focus on 4 pillars of investing- Growth, Return on Investment, and Ownership in the context of Valuations. This has been the hallmark of investing and helps identify companies with earnings trails as well as high-quality business at acceptable valuations. Through this process, we have been able to identify many ideas.

Inhouse customized portfolio approach

Portfolio formation is divided into 3 parts

  1. Core portfolio – high-quality growth businesses that would provide the foundation for the portfolio for the investor.
  2. Satellite portfolio – new ideas which would provide extra alpha/returns and if they do well, they also become part of the core over time.
  3. Customized composition – This approach builds on the investor’s objectives, risks, and preferences to give a customized portfolio for return maximization.

Valcreate processes do not depend on macroeconomy factors

Whether the economy is slowing or growing at a healthy rate, Valcreate’s focus on the company’s earnings growth, quality of business, and size of the opportunity in the industry helps in identifying winners across cycles. These winners are backed by strong fundamentals. Valcreate’s core belief is that companies with a healthy business (backed by the above 4 pillars of investing) will deliver and create wealth for investors.

The in-house approach has helped focus on Pharma and chemicals at the right time

Valcreate invests in companies with earnings trails. The last 2 year’s call of investing in Life Sciences, Speciality Chemicals, and Agrochemicals segments has been driven by the in-house GRO approach and resulted in going counter-cyclical in an economy that was slowing down. The sector has been backed by a strong export opportunity as well as import replacement tailwinds. Thus, Valcreate has been able to beat the market as well as its peers.

Of the 2 strategies Valcreate runs for its investors, the Life Sciences strategy has given 55% returns over 1 year and the Growing India strategy has given 36% over 1 year as of the end of Aug 2020. For Aug 2020, Valcreate Life Sciences was no. 2 and Valcreate Growing India was no. 6. For the month of May, June, and July, Valcreate’s Life Sciences strategy was consistently ranked between no.1 and no.3, and Growing India strategy was in the top quartile for the 1-year period within a list of 181 strategies in India as compiled by PMS Bazaar. Please see below: –

Playing to the strength

The approach at Valcreate is to invest in companies where the Fund Manager has a strong comfort in understanding and knowing the companies’ business. This goes a long way in terms of minimizing the risk of investing. Avoiding mistakes is the foundation of investing. This process helps focus on the merit of the investment and keeps the fund manager away from emotions of greed and fear.

Some multi-baggers which have benefited our performance

Some of them are multi-baggers over the last 2 years as seen below: –

Example of our best stock pick evaluated in the context of our pillars of investing

GMM Pfaudler is a leading supplier of engineered equipment and systems for critical applications in the global chemical and pharmaceutical India with around 60% share. It is an MNC held by a private equity fund in Europe and there have been markets. The company is a leader in Glass Line Equipment in India with around 60% share. It is an MNC held by a private equity fund in Europe and there has been a recent decision to restructure ownership which is under evaluation by Valcreate.

Evaluating GMM from the 4 pillars: –

  • Growth – With the strong opportunities in pharma, specialty chemicals, and agrochemicals in India and globally, the company stands to gain from capacity additions by these companies especially in the context of many intermediates and key starting materials being manufactured in India as import substations from China. Overall, this business is growing upwards of 20% in volume terms and the company is expanding to keep pace with the growing demand.
  • ROI – The core business of the company gives a return of 30% on capital employed due to the high quality of the business and ability to make reasonable margins v/s competition. Its leadership position in the industry backed by strong technology benefits keeps it ahead of the competition.
  • Ownership – The parent company is a European private equity fund that has given all functional freedom to Mr. Ashok Patel (first-generation entrepreneur) and Mr. Tarak Patel (son). This has helped them tap growth opportunities. The company is cash rich and therefore there is no concern about leverage. The ownership structure is now changing and is under evaluation by Valcreate.
  • Valuations- Valuations need to be seen in the context of growth. Thus, we look at P/E to growth multiple which is reasonable. Given that the company is high quality, has no leverage, and in a strong growth path for the next 5-10 years, some premium valuations are justified.