UNIFI BCAD

Fund Snapshot

Investment Philosophy

UNIFI Business Consolidation After Disruptions (BCAD) fund focuses on sectoral benefits of migration of businesses from the unorganised to the organised sector.

Basically, the UNIFI BCAD fund aims to gain through business disruptions. These disruptions can occur due to the following reasons:

• Technology
• Urbanisation
• Demographics
• Regulatory Changes
• Consumer Behaviour and more.

This fund invests in businesses that have numerous fragmented players.

What would impact BC AD performance case if Government regulation changes on taxation, GST, etc.?

Despite the fact that The study effort, which finally resulted in this subject, started with the introduction of the GST, neither the GST nor government rules are the main emphasis of this theme. Demography, urbanization, technology, international environmental compliances, and other factors are highlighted as consolidation drivers on page 2. Government tax restrictions are one of the factors that contribute to sector-wide consolidation, but they are not the only ones.

In India, a number of companies have merged in the previous 20 to 30 years without reference to the GST or any other legislative reforms. Consequently, the value of this topic is unlikely to be affected by a change in the administration or policy. Based on a small sample size in this context, I can say that since liberalization in 1991, none of the new administrations have undone vitally essential previous government programs (like the GST), notwithstanding the concerns of the markets.

Investment Approach

Unorganized enterprises make up a large sector of India’s economy, accounting for around 35 percent of the country’s GDP. Over the next decade, as the economy increases from $ 2.6 trillion to $ 5 trillion, it will face social, technological, scale, legal, tax, and regulatory challenges. These developments are expected to put unorganized companies in certain industries’ present business strategies to the test. As a result, well-established organized firms in such areas would gain market share while boosting margins, potentially resulting in extremely high profits growth. The BC-AD fund was designed to profit from the impending transfer of market share from unorganized to organized players. The fund would put its money into well-known, well-organized players who would be gaining ground. Unorganized players have taken market share from organized players, resulting in a greater revenue growth rate than their sector. Over the next decade, their significant topline growth, combined with the benefits of operating leverage, could help them achieve a better profits trajectory.

Why Unifi?

Since its inception in 2001, Unifi has specialized in niche and boutique themes and sectors. This is where UNIFI Capital PMS stands out, leveraging contrarian ideas that have consistently delivered exceptional returns in absolute and relative terms.

At Unifi, we have a few unique strengths:

• The relatively smaller size helps us focus on niche areas of the market wherein ‘Institutional’ type of capital can’t be deployed,
• A strong research team that believes in primary research and doesn’t hesitate to initiate research into companies/sectors that lack analyst coverage and/or are prone to information asymmetry,
• The direct engagement with each of The investors at regular intervals enables us to pursue strategies that are not benchmarked with major stock indices,
• The alignment of the interest model of commercials brings clarity on absolute return targets as well as long-term outlook in returns measurement.

Objective

The investment focus is on growth-oriented enterprises in certain areas that are driving market share migration from unorganized to organized players. Several sectors are poised to alter substantially over the next decade as India’s economy increases in scope and complexity. A number of significant factors are causing a shift in the competitive advantage balance in favor of organized firms Business Consolidation After Disruption

What triggered our idea of BCAD in 2018?

• GST Implementation and its impact on unorganized businesses benefiting organized players in the same industry
• Post demonetization, small businesses that were handling cash faced many challenges.

Disruptions driving consolidation

• Regulatory Changes
• Demographics
• Urbanisation
• Consumer Behaviour
• Technology

Why revisit the theme now?

Changing consumption pattern

Spending pattern across middle class India is changing driven by factors like education, nuclearization of family, income growth, prelimination, access to credit and many more

Urbanization

The trend of urbanization continues to rise with migration from rural India to urban India along with improving rural productivity

Compliance and consolidation

The trigger set by demonetization, GST, and the pandemic has had a a stark impact on small scale industry players. This has led to the consolidation of the larger and formal operators

Financialization of savings

Household’s investment towards financial assets instead of physical assets has strong tailwinds and is a long-term trend

• The ‘Business Consolidations After Disruptions’ (“BCAD”) theme looks to benefit from the underlying consumerism and the imminent migration of market share and economic value from unorganized to organized players.
• The investment mandate will be directed towards companies where the underlying is consistency in volume growth, rate of growth > than the industry, operating leverage, and incrementally better capital efficiency profile.
• The drivers of each of these variables are a combination of consistency in execution at the marketplace, premiumization, product leadership and cost optimization.
• We run proprietary filters on governance to eliminate managements with a poor history of capital allocation and poor operations.
• We seek to make such investments at reasonable value to long term growth potential. We believe such companies have a long runway of growth ahead of them.
• The fund shall focus on a bottom-up approach for selection of securities. The securities would be identified on the basis of a fundamental and rigorous stock selection process backed by in-house research and supported by external validation.
• The fund shall follow a ‘buy and hold’ strategy but will not hesitate to sell in order to redeploy in a relatively better opportunity, or when the stock achieves a valuation higher than is warranted.
• The fund would identify stocks considering qualitative and quantitative analysis including earnings growth, capital efficiency, relative margin of safety to valuations and management integrity.

Sector Allocation

Market Capital Exposure