Oct 20, 2022
Crisis readiness of the Titans Portfolio.
The Indian markets did catch some cold last month but still ended up widely outperforming major global markets. The world environment is tense. We have a hawkish Fed that is trying too hard to undo the inflation mismanagement. We have an inconclusive war that’s been ongoing for more than six months now and we have a nation that’s holding an entire continent to ransom using its oil and gas trade.
The effects of these factors are weighing hard on the economies and the markets. There is a risk-off environment and capital is flying to safety in droves. It’s obvious for equities to become a less attractive asset class when the markets are gripped with such high levels of fear.
In equities, it’s always a futile exercise to time our investments based on our fear clock. It’s rather better to create a portfolio that lets you sleep well even when the markets are roiling. One must stress-test the portfolio periodically for major risks – like the current crisis. Here we discuss how the Titans portfolio is placed currently on the risk parameters specific to this crisis and other risks to which the portfolio is exposed to.
There are mainly two kinds of risks in portfolio management. The first is the systemic or market risk, which is led by factors impacting the general market like macroeconomics and geopolitics, and the second is the unsystematic risk, which is led by factors specific to the individual stocks or sectors the portfolio is exposed to.
We can’t avoid systemic risk unless we can time the market perfectly. Therefore, we must live with the systemic risk and accept the drawdowns that come with the general market fall. We can still minimize the portfolio damage in the market falls by choosing our stocks and sectors well and sizing them right.
Hype check
In every bull market, there are some sectors that create excesses. These hyped sectors perform well in euphoria but damage the portfolio a lot when the markets turn, as falling markets lead to significant erosion in their bubbly valuations. For example, in the bull market that lasted till the end of 2021, several sectors including new-age tech, IT, commodities and metals created excesses and went on to trade at very high valuations and hence, subsequently underperformed on the downside.
The Titans portfolio’s sector exposure was tilted towards not-so-hyped sectors including banking and financial services, industrials, consumer discretionary, autos, and capital goods. We also consciously kept the IT exposure underweight as we weren’t too comfortable with the valuations, which were significantly higher than the long-term averages.
All the hype from the previous run of 2021 has died down now as all the high-flying stocks have seen a significant derating in the current fall. The markets are consolidating now, and our current hype check indicates that there isn’t too much euphoria in any pocket of the market. Some laggard sectors like financials and autos are catching up but they are currently too far from being obscenely valued and hence are not worrisome.
Geographical Risk Check
Geographical risk is of utmost concern currently given that the world is in a mini turmoil. It’s essential to check the portfolio for outsized exposure to any one geography and the quantum of exposure to troubled geographies.
As shown in the picture below, the Titans portfolio companies have a weight-adjusted exposure of ~76% to India. The exposure to overseas markets is 19.4%. Europe, which is the most affected geography currently has an exposure of 2.4%.
Source: Sanctum Wealth
As India is placed relatively better on the macro front, a high revenue concentration in India helps contain the geographical risk for Titans’ portfolio.
Titans still has decent exposure to overseas markets mainly due to the portfolio’s exposure to large-cap IT and Reliance. Around 75% of the portfolio’s foreign revenue is contributed by six companies as shown in the chart above.
Around 38% of Titan’s weight-adjusted foreign revenue comes from IT, wherein we hold Infosys and TCS, which are large, stable names, providing quality exposure to the sector. Around 11% of the portfolio’s weight-adjusted foreign revenue is contributed by Reliance. The company gets over 35% of its revenue from exports and is benefitting from sanctions on Russia as it is a beneficiary of higher diesel cracks due to ongoing gas shortages.
We have consciously maintained an underweight stance on both Reliance and IT and we are comfortable with the current exposure to the company/sector.
Apart from IT and Reliance, some portfolio companies like Divis, Vinati, Aarti Industries, Nocil and Tata Consumer have high exposure to overseas markets. We continue to monitor these companies for any material change in fundamentals and take case-to-case basis portfolio decisions to curb the portfolio risk.
Source: Sanctum Wealth
The world may be down but it’s not out. When the dust settles on the global turmoil, exports will continue to be a major growth driver for Indian businesses. We believe Titans’ current exposure to foreign markets is decent enough to take part in that growth.
Capital and Leverage Check
Capital is the lifeline of any business. Businesses that are inadequately capitalized or are highly leveraged tend to have a tough time in risk-off environments. It’s also becoming tough and expensive for companies to service debt in a rising rate environment. Therefore, low debt and high capital cushion are essential parameters to assess the portfolio’s ability to withstand the crisis.
As can be seen in the table below, the Titans portfolio is comfortably leveraged and adequately capitalized with a total debt-to-equity ratio of 0.23x and debt-to-total assets ratio of 0.02x. The banks are also adequately capitalized with an average capital adequacy ratio of 20.8% vs the minimum required threshold of 9%.
Source: Sanctum Wealth
Governance Check
One of the most important aspects of risk management is keeping a regular check on how the portfolio companies are managed and run. A case in point is United Spirits, one of the best businesses to be in, which was grossly mismanaged that took the company down.
We perform governance checks periodically by assessing the historical capital allocation, current capital allocation strategy, management’s remuneration, auditors’ reports and comments, related party transactions, ESOP plans, movement in institutional ownership and succession planning. Apart from these data points, there are soft factors including the aggressive and sleepy nature of managers, the management tone in investor conversations and the frequency of media appearances.
This part is especially tough and cumbersome in mid and small cap companies because of the limited availability of data and information. To be sure of the promoter quality, we do third-party reference checks on the promoter pedigree and credibility in this space.
Apart from the risks discussed above, there are various other risks specific to individual companies or industries the companies operate in. To name a few, there are client concentration risks, regulatory risks, liquidity risks and compliance risks. These risks are assessed on a case-to-case basis and acted upon when necessary.
Our relentless focus on risk management has worked well for the Titans portfolio so far and we believe it will serve us in the future too. Here is how Titans and Olympians’ portfolios have performed in different time frames.
Portfolio Performance
* Since Inception Returns are from 18-Nov-16
* Since Inception Returns are from 16-Sep-16
Performance is calculated using Time Weighted Returns, net of fees and expenses. Returns over one year are compounded annually; returns forless than one year are absolute. Please note that SEBI does not verify the performance information provided above. Please note that past performance is not a guarantee of future performance.