Surge’s Investment Process
Earnings Growth is the key ingredient that forms and sustain any Fundamental Trend
Monitoring Price Trends provides signals for ongoing shift in Fundamental Trends, either for good or bad
Price & Sentiment Trend
We have a clear Framework of which Companies & Businesses we are interested in, represented by our 6 Key Focus Areas.
Extreme Levels of Sentiments around a stock like being the market favorite or most talked about on one side and being hated or least talked about on other side, can be very good signals for supplementing Buy & Sell decisions
We focus on six key attributes which we believe are primary drivers of long-term Earnings Growth.
A combination of multiple of these drivers provides for very strong platform for a business to grow.
In choosing stocks, we look for atleast one or more of these six attributes in a stock
Surge’s Key Focus Areas-
This Defined Framework allows us to cut out Noise as we only focus on opportunities that are suitable for our framework of investing.
So we are not spending our valuable time on tracking if some X commodity price is going up in the short run and who is going to benefit out of it, because such short term fundamental changes does not creates trends.
Strong Business Models
There are some very unique, niche, differentiated, and valued add businesses wherein the business model is so good that the growth is given in the business, there is a long run-way for growth, the profitability is secured and there’s strong return on Capital. Such businesses typically capture the most profitable areas of a sector’s value chain and are the best wealth creators according to us.
Gold Finance in the Lending space, Innovator CRAMS in Pharma value chain and Power Exchange in Power Sector are examples for such Strong Business Models.
Innovation & Pivot
Companies that regularly innovate & pivot their business create some of the longest fundamental trends. By the very virtue of innovating & pivoting, these companies are not only able to grow existing business, but are also able to open more business opportunities and thus keep the growth engine running.
Astral Pipes is a very good example here, not only the company has innovated in its core piping business to maintain its lead, it has pivoted to additional business lines starting from Adhesives in 2014, to Water Tanks in 2020 and now into Sanitaryware. And this is the very reason why Astral has grow its revenues at more than 20% CAGR and continues to guide for healthy growth rates.
Change & External Trend
An internal change in a company can act as a key catalyst that can create a good earnings trend. Like a change from a not so good management to an aggressive management; or divestment of some business unit. Sometimes, an external trend is what allows a company to grow at high rates year-after-year for long durations.
It happened in case of Avanti Feeds wherein an industry which was not growing at all till 2009, suddenly started growing at 20% when Government allowed cultivation of L.Vannamei Shrimps, providing an opportunity for Avanti to grow at nearly 40% rates. Similar thing happened with Kaveri Seeds as adoption of Hybrid Cotton Seeds expanded. PLI schemes is another such external trend.
This is the prime focus area at Surge. Optionalities are relative subtle or hidden initiatives of a company which are currently not being discounted by the market. When such initiatives does materialize, it can accelerate earnings trend into a non-linear one, resulting in a Surge in earnings and thus major value creation for us in a short period of time. Optionalities basically super charges an existing earnings trend. Optionalities can include seeding of new business, new products, expansion into newer geographies, some major M&A etc.
Reliance’s seeding of JIO from 2010 to 2016 is a classic example of how optionalities can accelerate growth; from nothing in 2016, Jio now generates ~20,000 crores in profits which is nearly 1/3rd of Reliance’s overall profits
Leadership & Edge
Big getting Bigger & Better is a real Trend. A leader in a particular industry enjoys an advantageous position which it can use to further cement and grow its leadership and thus grow ahead of its peers. At the same time, some companies have some form of an edge, which allows them to grow stronger and more successful than others and eventually achieve the Leadership. If we are able to identify an industry that offers a good growth opportunity, then identifying and betting on the leader or a company that has an edge will allow us to get the most out of such industry’s growth journey. Leadership & Edge could stem from various factors like the sheer size of business, ability to offer goods/services at lowest cost, brand leadership, network effects etc.
We saw this play out in case of CDSL, wherein CDSL had an edge over NSDL as CDSL was the partner of choice for all new age discount brokers given a superior tech stack. Ultimately, hypergrowth in discount brokers led to CDSL achieving market leadership over NSDL in 2020.
Stellar Management Execution
There do exists some very sharp & astute entrepreneurs who are able to create tremendous wealth even from not so great businesses. No one could have imagined that a commodity cement business can compound investors wealth at 30% consistently without major drawdowns for more than 10 years, but it was Hari Mohan Bangur’s sheer execution & brilliance that allowed Shree Cement to do so.
We have also witnessed how Mr. Deepak Mehta’s strategy of focusing on import substitution has allowed Deepak Nitrite to grow and also take a quantum leap on the back of a textbook style execution of its Phenol project; size of which at the time of its announcement of Rs1200 crores was double company’s entire market cap.
So sometimes even though we might not like underlying dynamics of a business, but the sheer brilliance of the management’s execution, vision & strategy does gives us confidence to invest in some companies.