Monthly Newsletter Consistent Compounders March 2024

Rich rewards from investing in quality during the toughest phase

Long periods of outperformance by quality firms are often characterized by intermittent periods of severe
underperformance – something that has been unavoidable by even the likes of Warren Buffet. Such
underperformance was especially prominent during three instances (first half of 1970s, Mar’99-Aug’00 &
Nov’04-Apr’06) wherein Berkshire Hathaway’s underperformance was in high double digits even as over a
10-year period encompassing the aforementioned instances, Berkshire’s shares beat S&P500 quite
handsomely. Most such short-term pain periods are driven by market ‘narratives’ that may lead to
investors’ dumping tried and tested method of fundamentals backed investing, leading to correction in
share prices even as fundamentals continue to compound at a heathy rate. In this newsletter, we showcase
how investors would’ve been better off doubling down during these periods – something that would’ve led
to rich rewards over the ensuing 3-5 year period. Our Consistent Compounders portfolio went through a
major pain period during FY23 but a recovery in market prices in line with portfolio earnings has led to 23.7%
returns since lowest point in Mar’23. With the divergence between CCP’s valuation premium & RoE
premium (vis-a-vis Nifty50) at a decadal high, it is as good as time as any to invest in quality franchises.

Performance update – as on 29th February, 2024

Exhibit 1: Marcellus’ Consistent Compounders PMS performance as on 29th Feb'24 (INR denominated
returns)

45% Marcellus' Consistent Compounders PMS (INR) Nifty Total Returns Index (INR)

35%
28.49%
25%
19.56% 15.21%
14.57% 16.16% 15.69%
15% 9.38% 8.23%
4.21%
5% 0.37% 1.32%
-5% -1.54%
-15%

-25%
1 month 3 months 6 months 1 year 3 years Since inception
(Dec 01, '18)

Source: Marcellus; Performance data shown is net of fixed fees and expenses charged till 31st Dec,2023 and is net of
annual performance fees charged for client accounts whose account anniversary/performance calculation date falls upto
the last date of this performance period; Since inception & 3 years returns are annualised; Other time period returns are
absolute

*For relative performance of particular Investment Approach to other Portfolio Managers within the selected strategy, please refer
[Link] Under PMS Provider Name please select
Marcellus Investment Managers Private Limited and select your Investment Approach Name for viewing the stated disclosure

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Exhibit 2: Long term fundamentals of CCP Portfolio companies continue to significantly outperform Nifty50

FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 Avg.

Consistent Compounders [all figures are on a weighted average basis*]
ROCE (pre-tax) 32% 30% 28% 30% 29% 28% 32% 31% 30%
ROE (post-tax) 28% 26% 24% 25% 24% 24% 27% 27% 26%
5-year FCFF CAGR 32% 29% 27% 31% 19% 23% 15% 8% 23%
5-year PAT CAGR 24% 20% 19% 19% 18% 17% 18% 17% 19%

Nifty50
ROCE (pre-tax) 15% 16% 16% 14% 12% 14% 15% 19% 15%
ROE (post-tax) 19% 18% 19% 17% 15% 14% 17% 14% 17%
5-year PAT CAGR 11% 9% 10% 9% 9% 8% 13% 11% 10%
Source: Marcellus Investment Managers; Ace Equity; Note: All numbers are basis current weights; PAT CAGR for Nifty50 is median of all 50 stocks since
CAGR cannot be calculated for many stocks with negative PAT; 3-year avg. FCFF is considered to compute 5-year FCFF CAGR to reduce lumpiness in FCFF
due to capex; For BFSI stocks & Trent 3-yr average PAT is considered instead of 3-yr avg. FCFF. There are 13 instances out of 120 datapoints where 3-yr
, 4-yr or 6-yr FCFF CAGR is used instead as 5-yr FCFF CAGR was incomputable; There are 8 instances out of 120 datapoints where 3-yr , 4-yr or 6-yr PAT
CAGR is used instead as 5-yr PAT CAGR was incomputable FCFF for Nifty50 index is not computed due to a very high number of negative instances

“The influence of what we call analytical factors over the market price is both partial and indirect – partial
because it frequently competes with purely speculative factors which influence the price in the opposite
direction; and indirect, because it acts through the intermediary of people’s sentiments and decisions. In other
words, the market is not a weighing machine, on which the value of each issue is recorded by an exact and
impersonal mechanism, in accordance with its specific qualities. Rather we should say that the market is a
voting machine, whereon countless individuals register choices which are the product partly of reason and
partly of emotion. Hence the prices of common stocks are not carefully thought-out computations, but the
resultants of a welter of human reactions.”- Ben Graham & David Dodd, Security Analysis, 1934 (emphasis
added by us)

Temporary periods of underperformance are a feature of quality investing – example of Berkshire Hathaway

If there’s one investor who has been repeatedly written off by new, adrenaline filled young upstarts it’s
probably the Oracle of Omaha - Warren Buffett. Almost every decade features a phase where his investing
philosophy is termed as – conservative, passe and archaic among other things. However, that hasn’t stopped
the man from sticking to what he knows best and choosing to invest only in the kind of companies that
showcase the triple virtues of corporate governance, competitive advantages and capital allocation – virtues
that are central to Marcellus’ investment philosophy as well.

Most of the flak Warren Buffett has received over the years has come during periods of underperformance –
which increase in number, the shorter the time duration being considered (read our Sep’22 newsletter which
discusses this). Such periods of underperformance are not limited to certain decades but are spread out over
time ever since Buffett started publishing returns in 1965/66.

What’s interesting to note is that even when Buffett was beating the S&P500 index handsomely over a 10-
year time frame, there were 1-3 year periods when Berkshire Hathaway didn’t just underperform the S&P500
but even gave negative absolute returns at times. To be specific, there are 3 major periods of extended
underperformance in Berkshire Hathaway’s shares:

• Over 1969-1979, Berkshire’s market value increased by 22.2% CAGR vs. 5.8% CAGR for S&P 500 index.
However, within this period, Berkshire underperformed S&P500 in 1970 (by -9%), 1972 (by -11%),
1974 (by -22%) and 1975 (by -35%). The underperformance was significant enough to pull down
relative performance vs. S&P500 even on a 3 year and 5-year basis (At the end of 1975, Berkshire’s 5-
year CAGR was 0% vs. 3.2% for S&P500 i.e. underperformance by -3.2%)
• Over Dec’93-Dec’03, Berkshire’s class A shares beat the S&P500 by ~9% p.a. (17.8% vs. S&P500 CAGR
of 9.1%). Within, this period, there was an 18-month stretch (Mar’99 – Aug’00) when Berkshire’s stock
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 price underperformed S&P500 (on 1 year return basis) quite significantly (from -9% underperformance
as of month ending Apr’99 to -48% underperformance as of month ending Feb’00). Much like in the
1970s, the 3 year and 5-year relative performance also suffered (At the peak of underperformance,
Berkshire’s class A shares were underperforming S&P500 by -8.5% on a 5- year CAGR basis)
• Over Dec’04- Dec’14, Berkshire’s class A shares beat the S&P500 by ~4.5% p.a. (9.9% vs. S&P500 CAGR
of 5.4%). Within this, for 17 months (Nov’04- Apr’06) Berkshire’s class A shares underperformed
S&P500 (on 1 year return basis, from -2% underperformance as of month ending Dec’05 to -16%
underperformance as of month ending Sep’05). (At the peak of underperformance, Berkshire’s class
A shares were underperforming S&P500 by -11.1% on a 3- year CAGR basis)

To understand the dynamics of what would happen during such a period of underperformance by the most
famous investor in the world, we will focus on one such period – March 1999 to August 2000.

As it happens, this extended period (18 months) of sustained underperformance came in the midst of a ten-
year period ending December 2003 in which Berkshire’s class A shares beat the S&P500 by 9% p.a. (17.8% vs.
S&P500 CAGR of 9.1%).

Exhibit 3: Berkshire Hathaway stock underperformed S&P500 substantially over Mar’99- Aug’00

As of month Berkshire Hathaway Class A share S&P500 index return Outperformance vs. S&P500
ending price returns (1 year return) (1 year return) index
Mar-99 6% 17% -11%
Apr-99 11% 20% -9%
May-99 2% 19% -18%
Jun-99 -12% 21% -33%
Jul-99 -3% 19% -22%
Aug-99 6% 38% -32%
Sep-99 -8% 26% -34%
Oct-99 -1% 24% -25%
Nov-99 -16% 19% -35%
Dec-99 -20% 20% -39%
Jan-00 -21% 9% -30%
Feb-00 -38% 10% -48%
Mar-00 -20% 16% -36%
Apr-00 -22% 9% -31%
May-00 -19% 9% -28%
Jun-00 -22% 6% -28%
Jul-00 -19% 8% -26%
Aug-00 -10% 15% -25%
Source: Marcellus Investment Managers, Bloomberg, Berkshire Hathaway; Returns are calculated basis month end prices

As is well known, the period shown in the table above was the height of the dot com boom. Amidst the mania
of investing in the ‘tech and internet’ sector, there was no dearth of pieces predicting the demise of Buffet’s
investing style.

“To be blunt, Buffett, who turns 70 in 2000, is viewed by an increasing number of investors as too conservative,
even passe. Buffett, Berkshire’s chairman and chief executive, may be the world’s greatest investor, but he
hasn’t anticipated or capitalized on the boom in technology stocks in the past few years.” – Barrons’s article
‘What’s Wrong, Warren’, Dec 27, 1999

Over the 10-year period under consideration (i.e. 31st Dec’93 – 31st Dec’03) the fundamental performance of
Berkshire Hathaway (as measured by Book Value per share or BVPS) compounded at an impressive 19%. Even
so, within that period - especially during the late 1990s as tech mania took over the investing ecosystem,
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Berkshire Hathaway’s stock witnessed sharp P/B multiple compression, even though BVPS kept rising at an
impressive rate [thus laying the groundwork for massive catch-up in years ahead].

Exhibit 4: Berkshire’s stock multiples contracted during the late 1990s (i.e. prices didn’t move in proportion
to book value) even as Book Value compounded at healthy rate

2.8
2.53 2.56 BVPS CAGR (FY1995-
2.6
Price to Book (avg over the year)

2.33 2000): 22.9%

2.4
2.20
2.2
2.0
1.8
1.57
1.6 1.51

1.4
1.2
1.0
FY 1995 FY 1996 FY 1997 FY 1998 FY 1999 FY 2000

Source: Marcellus Investment Managers, Bloomberg, Berkshire Hathaway

What happened next is the stuff of legend. As the tech bubble burst and the S&P500 crashed, Mr. Buffett
quietly notched up the kind of outperformance that made him famous in the first place. If an investor ignored
the prevailing narratives around demise of Warren Buffet’s investing philosophy and stayed put (or even
better deployed fresh monies) at the peak of such underperformance, the subsequent 5-year returns would’ve
more than made up for the temporary period of pain.

Exhibit 5: Investing during Berkshire’s tough 1999-00 phase would’ve yielded significant outperformance

As of month Berkshire Hathaway Class A share S&P500 index return (5 Outperformance vs.
ending price returns (5 year returns CAGR) year returns CAGR) S&P500 index
Mar-04 5% -3% 8%
Apr-04 4% -4% 8%
May-04 4% -3% 7%
Jun-04 5% -4% 9%
Jul-04 5% -4% 9%
Aug-04 6% -4% 10%
Sep-04 10% -3% 12%
Oct-04 6% -4% 9%
Nov-04 8% -3% 11%
Dec-04 9% -4% 13%
Jan-05 12% -3% 15%
Feb-05 15% -3% 18%
Mar-05 9% -5% 13%
Apr-05 7% -4% 12%
May-05 7% -3% 11%
Jun-05 9% -4% 13%
Jul-05 9% -3% 12%
Aug-05 8% -4% 12%
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Source: Marcellus Investment Managers, Bloomberg, Berkshire Hathaway; Returns are calculated basis month end prices

To be precise, an investor who purchased Berkshire Hathaway A shares on 1st March 1999 would have lived
through the following returns (these returns are cumulative NOT CAGR):

• 1st March 2000: absolute returns -38%, underperformance relative to the S&P500 -49%;
• 1st March 2001: absolute returns -3%, underperformance relative to the S&P500 -3%;
• 1st March 2002: absolute returns 2%, outperformance relative to the S&P500 10%;
• 1st March 2003: absolute returns -12%, outperformance relative to the S&P500 21%;
• 1st March 2004: absolute returns 31%, outperformance relative to the S&P500 37%;
• 1st March 2005: absolute returns 26%, outperformance relative to the S&P500 29%;

The same holds true for investors who invested in Berkshire Hathaway A shares right at the beginning of the
other extended periods of underperformance by these shares.

Let’s take the case of Nov’04- Apr’06 period of underperformance mentioned earlier.

Exhibit 6: Berkshire Hathaway stock underperformed S&P500 substantially over Nov’04- Apr’06

As of month Berkshire Hathaway Class A share S&P500 index return (1 Outperformance vs.
ending price returns (1 year return) year return) S&P500 index
Nov-04 0% 11% -11%
Dec-04 4% 9% -5%
Jan-05 0% 4% -4%
Feb-05 -5% 5% -10%
Mar-05 -7% 5% -12%
Apr-05 -10% 4% -14%
May-05 -6% 6% -12%
Jun-05 -6% 4% -11%
Jul-05 -4% 12% -16%
Aug-05 -4% 11% -15%
Sep-05 -5% 10% -16%
Oct-05 2% 7% -5%
Nov-05 7% 6% 0%
Dec-05 1% 3% -2%
Jan-06 0% 8% -9%
Feb-06 -4% 6% -10%
Mar-06 4% 10% -6%
Apr-06 6% 13% -8%
Source: Marcellus Investment Managers, Bloomberg, Berkshire Hathaway; Returns are calculated basis month end prices

An investor who purchased Berkshire Hathaway A shares on 1st November 2004 would have lived through the
following returns (these returns are cumulative NOT CAGR):

• 1st November 2005: absolute returns 2% underperformance relative to the S&P500 -4%;
• 1st November 2006: absolute returns 24%, outperformance relative to the S&P500 3%;
• 1st November 2007: absolute returns 55%, outperformance relative to the S&P500 22%;
• 1st November 2008: absolute returns 39%, outperformance relative to the S&P500 54%;
• 1st November 2009: absolute returns 17%, outperformance relative to the S&P500 25%;
• 1st November 2010: absolute returns 42%, outperformance relative to the S&P500 37%;

So why does this happen?

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Why is it that even if an investor’s first couple of years as a Berkshire Hathaway shareholder yields
disappointing results, by the fifth anniversary of his ownership of Berkshire Hathaway shares, the investor is
almost always beating the S&P500?

This is because the underlying compounding in Berkshire’s fundamentals – its Book Value to be precise – is so
strong that over periods of longer duration they emerge more powerful than the damage inflicted by P/B
compression (we discussed this point by using examples from Indian ecosystem in one of our earliest
webinars).

As can be seen in the chart below, Berkshire’s returns (19.8% CAGR over 1964-2023) are driven by book value
growth (18.3% CAGR over 1964-2023) – which has grown steadily, even as the P/B multiple (shown since the
time its available on Bloomberg i.e. 1987) has gyrated up and down.

Exhibit 7: Berkshire’s Book Value has grown at an impressive pace – negating the impact of price multiples

Berkshire Hathaway Book value CAGR (1964 - 2023): 18.3%

2500 3
Berkshire Hathaway Market value CAGR (1964-2023): 19.8%

Price to Book Multiple (x) - average over

Berkshire Hathaway Book Value rebased

2000 2.5
to 100 in 1964 (in USD 000s)

2
1500

the year
1.5
1000
1
500 0.5

0 0
1979

2012
1964
1967
1970
1973
1976

1982
1985
1988
1991
1994
1997
2000
2003
2006
2009

2015
2018
2021
Berkshire Book Value Price To Book (x)

Source: Marcellus Investment Managers, Bloomberg, Berkshire Hathaway; the price to book multiples are shown since the time data is available on
Bloomberg (i.e. since 1987)

How is the preceding exercise relevant for Marcellus’ Consistent Compounder Portfolio?

As we saw in the case of Berkshire Hathway, during just about every instance of a ‘narrative’ driven market
rally, the tried and tested model of investing in high quality franchises takes a back seat. People often become
enamoured with the sharp increase in share prices of erstwhile beaten down stocks which are then taken to
dizzying heights – often to massive detriment of people entering late into the buying cycle.

In India, we appear to be in the midst of a narrative driven market rally as a recent article from Bloomberg
highlighted:

“In 2023, Indian investors traded 85 billion options contracts, more than anywhere else in the world. The
country has topped the charts since 2019, when it first overtook the US in the volume of annual trades. (The
US still buys and sells the most by dollar value.)”

- Bloomberg piece ‘Retail traders are losing billions in India’s booming options market’, Feb, 2024

CCP’s major period of underperformance (mostly FY23) was a combination of both retail inflows backed
strength of Nifty50 index as well as correction in our own investee companies (we discussed reasons for the

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same in our Feb’24 webinar). Since reaching the trough in the end of FY23 (14 Mar’23 to be precise), CCP
NAV has recovered quite impressively to provide returns of 23.7% until February 2024 end.

Exhibit 8: CCP returns have recovered smartly after a major period of pain during FY23

35%
30% 27.05% 28.08%
25% 21.44%
20% 17.72%
15%
10%
5% 1.15%
0%
-5%
-10%
-15%
-20% -14.12%
Phase 1 (37 months) Phase 2 (15 months) Phase 3 (10 months)

(01 Dec’18- 31 Dec’21) (31 Dec’21 – 31 Mar’23) (31 Mar’23 – 29 Feb’24)

Nifty TRI CCP

Source: Marcellus Investment Managers, Bloomberg

As can be seen in the table below, these returns have come on the back of healthy earnings that our investee
companies have churned out over the 9MFY24 period.

Exhibit 9: The returns since Mar’23 have come on the back of earnings growth

FY19-22 CAGR FY23 YoY 9MFY24 YoY

Stock Name
Revenue PAT FCF ROCE Revenue PAT ROCE Revenue PAT
Asian Paints 15% 8% 37% 34% 19% 51% 35% 4% 47%
Astral 21% 35% 75% 26% 17% -6% 24% 10% 40%
Bajaj Finance 22% 21% 21% 17% 32% 64% 23% 33% 27%
Divis Laboratories 22% 30% 15% 30% -13% -38% 19% -5% -29%
Dr. Lal Pathlabs 20% 21% NM 33% -3% -32% 20% 10% 50%
HDFC Bank 16% 21% 21% 17% 16% 19% 17% 57% 38%
HDFC Life Insurance 16% 13% 13% 20% 37% 47% 20% 4% 14%
ICICI Lombard 12% 7% 7% 19% 15% 36% 18% 17% 8%
Kotak M. Bank 13% 21% 21% 13% 25% 28% 14% 38% 30%
Nestle 9% 10% 4% 119% 15% 11% 148% 11% 23%
Page Industries 11% 11% 15% 65% 23% 6% 59% -5% -6%
Pidilite Industries 12% 9% NM 30% 19% 7% 24% 4% 44%
TCS 9% 7% 15% 50% 18% 10% 60% 8% 9%
Titan 13% 14% NM 32% 41% 45% 40% 28% 7%
Trent 20% -19% NM 12% 83% 450% 24% 50% 151%
Weighted Avg. 16% 18% 17% 30% 24% 19% 31% 21% 34%
Source: Marcellus Investment Managers; Ace Equity; Note: (a) In case of ILOM, Net Written Premium (NWP) is considered as revenue, (b) In case of
HDFC Life, APE is considered as revenue and EVOP is considered as PAT, (c) In case of lenders; Total Income (Interest Income+ Other income) is considered
as revenue. PAT has been used for Financial companies instead of FCF as FCF is not a relevant metric for financial companies.*W Avg calculation for PAT
growth in FY 19-23 & FY23 excludes Trent to remove the impact of a skewed number.

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In light of CCP’s heathy portfolio earnings and the prevailing market conditions, we’d urge our investors to
remember the lessons from Berkshire Hathaway and how investing during the toughest phase was a much
better strategy than believing the prevailing narratives around death of conservative, high quality
fundamentals backed investing.

Rather than betting on market psyche and which way the investors’ fancy might swing, our focus has remained
on ascertaining the profitable growth potential of our investee companies and as the chart below clearly
showcases, the current disparity between our portfolio fundamentals (as measured by RoE) and valuations
vis-à-vis the Nifty 50 index is as wide as it’s been over the preceding decade.

Such scenarios are few and far between in a quality investor’s journey and more often than not form the
foundation for outsized returns in the years to come.

Exhibit 10: Whilst RoE premium of CCP firms (vs. Nifty50) remains steady, the PE premium is now close to
decadal low

Source: Marcellus Investment Managers; Ace Equity; Note: All numbers are basis current weights of current portfolio; Nifty ROE & ROCE are computed
basis FY23’s Nifty weights;

We close this newsletter by highlighting the following excerpt from Berkshire’s 1994 shareholder letter –
something we believe holds true for Marcellus’ investing philosophy as well:

"Stock prices will continue to fluctuate - sometimes sharply - and the economy will have its ups and down.
Over time, however, we believe it highly probable that the sort of businesses we own will continue to increase
in value at a satisfactory rate." – Berkshire Shareholder letter, 1994

Regards,

Team Marcellus

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