ETMarkets AIF Talk: Fund Manager with Rs 1,000 cr portfolio nearly doubles wealth in a year; holds 10% cash amid election uncertainty

First Water

First Water

Arun Chulani, Co-Founder of First Water Capital, discusses the fund’s impressive performance, achieving over 90% growth in the last year and 40% CAGR in 3 years. The fund has consistently ranked no.1 on BarclayHedge’s Top 10 equity funds. he says: “Our performance is a reflection of our core philosophy, which starts with value, concentration, and betting on a country with long-term tailwinds—that of India.”

“It has been a case of so far so good, looking at both the short-term and medium-term, where we are up around 90% over the last year and up around 40% CAGR over the last three years,” says Arun Chulani, Co-Founder, First Water Capital.

In an interview with ETMarkets, Chulani who manages more than Rs 1000 cr in AUM said: “We generally keep 5%, but given that there are elections, markets have gone up decently, and we have funds continually coming in, now we are closer to 10%,” Edited excerpts:

The First Water Capital Fund delivered over 10% return in April. Please take us through the performance of the fund. And, since inception, it has given over 40% CAGR in nearly 3-years. (PMS Bazaar data showed)

Arun Chulani: Fortunately for us, it has been a case of so far so good, looking at both the short-term and medium-term, where we are up around 90% over the last year and up around 40% CAGR over the last three years.

Our AIF Cat 3 has been one of the leading funds in India, and this is a reflection of our lead advisor Ricky Kirpalani’s own performance prior to starting the First Water Capital, where he achieved a CAGR of 33% and a multiple of 73 times over a 15-year period.

Our performance is a reflection of our core philosophy, which starts with value, concentration, and betting on a country with long-term tailwinds—that of India.

We simply don’t go about looking to pick cigar butts. We ideally need value coupled with a catalyst or inflection point that will unlock this value.

We also like to have a concentrated book because, firstly, it allows us to continue building our knowledge in a select number of stocks rather than being a jack of all trades. Then, if we like a stock, we want to take a decent swing at it, as position sizing is also key to creating alpha.

In the last one year, the fund has almost doubled investors’ wealth. What worked for you in the last 12 months?
Arun Chulani:
We have simply kept to our long-term processes and philosophy. Judging a fund by a year is far too short a time frame. Let’s face it, today nearly everybody is looking like a rockstar.

However, we all know that even in countries with strong tailwinds, nothing goes up in a straight line, and there will be turbulence in that journey.

It will be like what Warren Buffet famously said: “When the tide goes out, you find out who is swimming naked.” We can only hope that we remembered to put on our swimming trunks at that point.

First Water has consistently ranked no.1 on BarclayHedge’s Top 10 long-only equity funds on a 3-year rolling basis. How are institutional clients looking at Indian markets?
Arun Chulani:
There is a lot of interest from foreign investors in Indian markets. After all, how many major economies are experiencing broad based growth and are not just dependent on a select number of stocks?

A lot of smart foreign investors have already benefited from the dynamic wealth creation that India offers. Just 6 months ago, our market cap was USD 4 trillion, and now we stand at USD 5 trillion. USD 1 trillion has been created in a relatively short time period. In 2021, we were at USD 3 trillion.

While I reserve the right to be wrong, I believe that we are at a liquidity inflection point where we will benefit from twin engines.

Already, the domestic investor has come to the fore, creating a disciplined base, but with our market cap just topping USD 5 trillion, we are now one of the largest markets in the world, larger than the UK’s FTSE.

And hopefully, based on this size and growth potential, more foreign investors will carve out a single-country status for India.

What are the investment themes that First Water Capital is positive on?
Arun Chulani:
We continue to be positive on infra, a sector that we have had interest in since 2019 and that has further built our conviction over time.

Again, this is a long-term play, and it is exciting to be in Mumbai and see all the new flyovers and tunnels that have been completed.

In most cities around the world, roads and bridges might be seen as an eye-sore, but for me, they represent progress and excitement.

We also like the travel and hospitality theme. After years of stagnation, the pandemic years seem to have given a kick to this sector, and mentally, people want to explore.

There are a number of key cultural changes and dynamics that India is experiencing.

Firstly, we have a young, progressive population that, aided by social media exposure such as Instagram and other cultural changes, is encouraged to enjoy, explore, and post.

The government is also playing a strong part in developing tourism, having doubled the number of airports since coming into power in 2014. This has made more places accessible and enabled travel for new populations.

We like steel/metal related plays as well. For us, despite the price fluctuations in commodity prices, this is a structural play. In 2020, India’s steel production was around 100 MT per year.

By the end of 2030, it is estimated that India will have 210 MT capacity. So basically, in 10 years, India will more than double what has taken us around 73 years to develop, since the British left.

These are just some of the themes that we are interested in.

How do you pick stocks for investments?
Arun Chulani:
At our very heart, we are Indian. We like value and scouting around for bargains. So, we go through our investable universe and knock out the sectors that aren’t in our area of comfort.

The key here is to drill down to sectors that we know. Our sweet spot is very much the industrial, infrastructure, and manufacturing sectors. These are the very building blocks of our nation.

We wouldn’t touch these stocks in the developing world, but in India, it is economic growth that is the driver.

We also like businesses with hard balance sheets because it makes it easier for us to triangulate their metrics, given that their potential is governed by their asset base.

Plus, we appreciate simple businesses because we believe in doing what we know. Boring and basic are best!

We also do a lot of scouting; after all, you only need a handful of stocks. We try to find what is going to unlock this value. Buying into cigar butts and just whistling in the wind until the market recognises it is just not how we operate. There needs to be a spark that will hopefully hasten the process.

We look out for features such as: has there been a shift in government policy as there was in the infrastructure space? Are certain companies benefiting from the China trade wars?

Arun Chulani: Is China voluntarily reducing capacity in a select number of industries because we know that it is looking to transition from an Old Economy nation to one of a New Economy?

We keep scouting to find that catalyst, and once we have a handful of names, we dig deeper to see what we find exciting that has good potential upside.

Many MFs are sitting on a huge cash pile — have you also set aside some capital that could be deployed later?

Arun Chulani: We generally keep 5%, but given that there are elections, markets have gone up decently, and we have funds continually coming in, now we are closer to 10%.

However, we are also continually deploying as we are finding decent plays out there.

Where does the Indian market stand when it comes to valuations – do you see the Indian market breaching the overvalued territory compared to other Asian markets?

Arun Chulani: Sure, anyone looking at the world’s valuations from a helicopter may believe India’s valuations are high. If we take a look at mid-May 2024, India is at 24.5x, China is at 13.5x, Indonesia is at 12.3x, and Japan is 16.2x. Based on this high-level approach, anyone might say that India is expensive.

But our First Water’s AIF PE multiple at the end of April 2024 was 16.4x, and our price to book was 1.4x. How, despite our performance? That is because it’s our job to look beneath the surface and think second-level.

Even when India is enjoying an overall bull market, there are still sectors and companies that are experiencing their own bearish business cycles. It is here that we may choose to pick our next wave of stocks.

Why go to China, where we don’t have an edge and need to build up our knowledge from scratch about the various players, nuances, and dynamics? Why not try to find “China” within India?

Arun Chulani: Of course, it’s an art to balance between the stocks that are enjoying momentum and the laggards. If you redeploy too much, then you might be sitting on dead capital until they come into play.

If you redeploy too little, then you may miss the move and also be more vulnerable to any bear attacks that will inevitably come. Finding the correct balance is key.

The views expressed are the authors own. Please consult your financial advisor before making any investment decisions.


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