From the Fund Manager’s Desk

By Harini Dedhia

Dear Investor,

In the hoopla of geo-political tensions (both physical and tariff wars), a shift in the stance of the central government goes relatively “un-discussed” creating an opportunity for us.

The first of the changes came up in February 2025 when the finance minister tabled the budget proposal with the following, ‘The rebate u/s 87A for taxpayers filing tax returns under the New Tax Regime was increased to from Rs. 25,000 to Rs. 60,000. Now the taxpayer can enjoy a tax-free income of up to Rs. 12 Lakhs.’

This was then followed up by a 100bps of rate cut by the RBI. We now have the 8th pay commission going into effect in January 2026. The central government salaries and pensions are expected to rise by 15% y-o-y. A similar rise is anticipated in the state government salaries and pensions (though implementation will lag in the case of state governments). With the 15% hike, a INR 3.7 trillion increase in expenditure (a.k.a 1% of GDP is expected to take shape).

These three indicate a regime looking at demand generation with the baton for capital creation now passed on to private players. With the increase in discretionary income in the hands of consumers, we decided to build ourselves a framework to work with in short listing ideas in the space.

As a structural play on rising income levels in India, we do have a play on luxury consumption and a consumption ancillary (packaging) in our portfolios. Luxury brands transcend competition from challengers. For them it's a fight against themselves to maintain relevance; affording them a far greater control of their destiny. Packaging companies must deliver consistent quality without any delays while being priced in line with peers; again, a problem statement that they can be more in control of than the brands they serve.

Looking at consumer brands at large- below the luxury paradigm- we felt the need to define the game a bit more. One major heuristic we came up with in shortlisting companies in this space is- we will always choose the market share gainers over the sticklers for profitability.

The market share vs. profitability debate

Consumer brands today see a barrage of challengers coming through. Raising capital to build from 0 to 1 is possible for most. This has resulted in legacy brands struggling for volume growth as most challengers adopt a mentality of Mr. Bezos, “Your margin is my opportunity” without the tenacity, long term vision or simply the ability to raise capital like Mr. Bezos. Nevertheless, volume growth while maintaining historical margin levels has become challenging for legacy brands.

Companies that are stubborn on their high margins, inevitably pave a way for the competition to eat their lunch and then some more. The new management team of a prominent white goods MNC announced in 2019 their intention to maintain and enhance profitability at all costs. This resulted in significant market share losses to Korean counterparts in the following years. Not only did the co. underperform the market on sales, the margins of FY19 never returned.

Finally, in Diwali of 2023, a new team came at helm. Among the first actions they implemented was to reverse the price hikes taken to enhance margins. What ensued was triple digit basis points gain in market share followed by improvements in margins.

A consumer co. chasing market share over profitability in a growing market eventually results in economies of scale that deter the competition from even attempting an entry. The successful consumer tech platforms we use today- Amazon Prime, YouTube, Spotify, etc. are all testament to the same. Expanding and ring fencing your market share today, ensures the ability to ring fence profits in the future.

Perhaps the best example of this lies in what is happening with all of our Amazon Prime accounts today. Now that we are addicted to our Prime membership and there is no parallel, Amazon has placed an additional charge over and above the membership should one want to view their offerings ad free. From the delivery fee imposed by Eternal to cola companies engaging in price wars- this has been the universal truth for consumer companies- defend and grow market share above all else.

Caveating the debate

Perhaps a more nuanced approach to the debate would be to look at consumer companies that combine both. The classic razor and blade model. Don’t make money on the machinery (razor/ printer) is akin to doing a land grab of consumers. Make money on consumables (blade/ ink) is akin to profitability following later on.

This framework is seen in multiple industries. Take car dealerships for example- as a locality and its population evolves, the dealer that engages in gerrymandering and therefore land grab the best (and has the balance sheet to back them) wins. It is a bad look on the OE brand to change the dealer out- implies a lack of continuity in service. Once the land grab is done, margins come through via service revenues.

See a coffee store at enough locations, you are bound to give in and try them while waiting for your flight at the airport. No one bats an eyelid if the largest cinema operator is the one opening at a mall near you. Grabbing market share gives you preferences in terms of trade (in the latter case with better rentals), better costing with suppliers and eventually pricing power with customers. Margins follow as a result.

However, the framework while simple may yield an answer that simply doesn’t align with one’s time frame as an investor. Stock prices are slave to earnings not market share gains. The journey from market share gains to margins can be long. So, in applying this framework one must ask themselves honestly- are you ready to wait for the duration of this journey?

For Mr. Bezos it took 9 years.

We are perhaps not ready for that. We need to catch companies midway through the journey. That is our current Endeavor.

As always, we thank you for your continued support and faith in letting us be your partners in your wealth creation journey.

Best,
Harini Dedhia