C2Q26 Strategy Update
We are sharing summary of our C2Q26 investor letter:
Dear Investors:
Known patterns can often dangerously create cognitive shortcuts. Humans and human-created algos have the propensity to often connect present with previously known events and outcomes. The underlying premise of stability and repetitiveness within environments can and should be questioned at this time. Investors can often ignore this because they are subconsciously anchored. Strangely enough, larger pattern libraries of professional investors can often mislead them even more at such times. It’s critical to also appreciate that in marketplaces such as India, which preclude ‘shorting’, such forced pattern connections can often serve to confirm already elevated entitlement, and therefore likely to create larger asset bubbles. A quick glance over Indian sell-side literature in March would show that nearly every piece cited the ‘Russia-Ukraine’ conflict (and its subsequent insignificant impact on the ticker tape) to create feel-good parallels.
You could super-impose India’s VIX movement this time around with its movement as Russia-Ukraine conflict began 4 years ago. This is despite the fact that it’s harder to find supply workarounds in the current conflict, or that India had already lost 10x as many jobs last month than it did back in March 2022, or much deeper vulnerabilities overall. Yet, for all the street chatter, headline India (read ‘Nifty50’, ex-financials) began F2027E (Mar) at levels that largely mimic it’s post-pandemic fiscal year beginning averages[1]. Complacency galore!
In C1Q26, Minerva India Under-served strategy was down -10.0% (net; in INR), vs. -16.1% decline (gross; in INR) in BSE Smallcap, and -14.1% decline (gross; in INR) in BSE 500. Minerva India Under-served Fund (Tattva series USD), which tracks our onshore strategy, was down -10.6% (net; in USD). Effectively, performance fee accrual release in our offshore fund largely offset the -5.0% quarterly decline in INR. Please note that, unlike our pre-tax onshore INR returns, reported performance of Minerva India Under-served Fund (Tattva series USD) is net of not only taxes paid on realized gains, but also net of tax accruals on unrealized gains. Headline numbers are therefore not comparable between structures. Over the past year, Minerva India Under-served strategy was up +2.7% (net; in INR terms), vs. -7.3% and -4.2% declines (gross; in INR terms) in BSE Smallcap and BSE 500 respectively. Over the last 5-years, Minerva India Under-served strategy was up +22% annualized (net; in INR terms), vs. +16% and +10% annualized gains (gross; in INR terms) in BSE Smallcap and BSE 500 respectively.
C1Q26 was our heaviest net buying quarter in nearly a decade (previous high was C2Q16). Consequently, our liquidity declined from 29% at the beginning of the calendar to 23% by March-end. Let this not be a reflection of any change in our view on headline India, which remains as bearish as it was at the beginning of the year. We initiated 5 new positions during the quarter, some of which, subject to our value sensitivity, would continue to be scaled in this quarter. All of our legacy positions declined during the quarter, even as each of our top-5 holdings managed to outpace BSE Smallcap. Our book began this fiscal at 6.7x F2027E (Mar) EBITDA. Adjusted for our internal cuts to estimates[2], book was effectively priced at 7.4x, or still about 20% discount vs. it’s pre-pandemic average. For contrast, this compares against 18.1x for Nifty50 (ex-financials) on surreal (i.e. already elevated pre-conflict estimates + so far immaterial impact of conflict) expectations.
Gas prices aren’t resetting lower in the near-term, but massive additions over the next few years significantly offset the current shock. While access to Strait of Hormuz (one of only 3 trade choke points without an alternative route) is desperately needed for a highly energy-dependent market, this does nothing to offset the ongoing impact of temporarily (83%) and permanently (17%) idled LNG facilities. By end of March, 2 of the 14 liquefaction trains at QatarEnergy’s Ras Laffan export hub had been damaged, effectively taking out 17-19 bcm/yr (~3 bcfpd) for next 3-5 years. That extended repair timeline results from backlogs at the 3 large OEMs[3] globally that supply gas turbines used in LNG refrigeration compressors. While theoretically Russia has production capacity[4] to ramp up on gas to offset this loss, severed ties with Korea (in 2014) and booked out shipbuilding capacity in China effectively render this capacity unusable for LNG shipping. Likewise, at the time of invasion, United States, world’s biggest LNG supplier, had almost no spare capacity to expand production either. Accordingly, there is no near-term solution to offset the now lost Qatari supply. As things stand, about a fifth of global LNG capacity has been idled, and 3-4% is certainly not coming back online for 3-5 years. While US export capacity of LNG is expected to rise sharply between 10-12%[5] in this calendar, that nonetheless barely accounts for a fifth of Ras Laffan’s currently idled capacity. Even adjusted for demand reduction (affordability-driven cuts in South Asia + pull-back in China + Renewables and alternative fuel substitution in Europe), there is a base case[6] shortfall of 6-7 bcm this year. Current situation is therefore a sizeable global muddle for energy (power source), industrial processes, and inputs (chemical feedstock) alike!. That being said, the 2025-2030 period nonetheless represents the largest LNG capacity expansion in history, with United States’ liquefaction capacities accounting for about half of all additions, with biggest additions however not coming online until 2028 and 2029. Also, given phased launches and existing commitments, no more than 40% of the Ras Laffan’s two train loss can be made up by new capacity coming online within the next year.
As we entered this conflict, India’s ability to fiscally support this shock appeared largely similar to what it was in April 2020. No one stands to lose more than India’s hitherto gas-dependent small businesses. CMIE’s non-farm employment contracted by nearly 11 mil[7] in March alone. By our estimate, 25-30% of this could be attributed to just 4 industries that are among the most impacted by the energy crisis [Synthetic textiles (polyester), F&B services, Ceramics, and Chemicals]. This however is still a fraction of the 120-mil contraction noticed during March and April 2020 (though 90% of this was recovered within a year). Further, as we write this quarterly update, nearly a million Indian workers had returned from GCC countries. The impact on consumer spends cannot be overstated here - By our estimate, lower remittances alone can account for about $2.5 bil in annualized impact on domestic consumer spending. Collectively, known job losses (domestic + GCC) can shave close to 50 bps off of growth. While the peak shock of the Iran-conflict induced crisis is optically benign, we are now working with the hypothesis of lingering impact of higher energy prices for at least this calendar.
Elsewhere, by our estimate, expansion in fertilizer subsidies would likely also pull away 15-20 bps from growth. Meanwhile, if gas prices stay at April-beginning levels until the end of this calendar, that by itself could pull away another 20 bps[8].
We struggle to reconcile with anything more than 10% earnings growth for Nifty50 (ex-financials) for F2027E (Mar). Even assuming that the damage is contained within F1Q27 (Jun), we are nonetheless unable to reconcile with double-digit earnings expectations for F2027E (Mar). Short of Dalal street pulling off the sorcery of bringing material and freight costs back to February levels within the next two months, we would place insignificant odds on Nifty50 (ex-financials) delivering anything better than high single-digit earnings growth in this fiscal.
The read-through from median listed name in India to headline India is poor. It’s foolhardy to spray-paint attractiveness (or lack of it). While we remain far off from the camp that places headline India in the ‘reasonably-valued’ bucket, our view on broader India (and that’s quite literally an extremely ‘broad’ term, with >3,000 traded names) is disconnected from this observation. While India’s median component doesn’t appear stretched, we would be remiss to not note that, in contrast to headline India[9], the median listed component doesn’t get picked in nearly any majorly followed Indian benchmark. Incidentally, this is often the space we scout in. Consider this - The 1,000th name in India today is around $320 mil, which places about 40% of our March-end book[10] even beyond this threshold. Also, it’s critical to highlight that 4 of the 5 new positions added by us in the last quarter fell outside top-1,000 names.
To access the entire letter, please click here.
[1] Nifty50 (ex-fin) began this fiscal at 18.1x F2027E (Mar) EBITDA, about in line with its 18.3x average beginning in the prior 4 fiscals
[2] About 10% cut on EBITDA, driven by elevated material and freight costs, FX shifts, and potentially higher minimum wages
[3] GE Vernova, Siemens Energy, and Mitsubishi Heavy Industries
[4] Most of Russia’s gas exports are through pipelines and not in LNG form
[5] Largely from 3 facilities, including the first year of the Golden Pass project in Texas (JV between QatarEnergy and ExxonMobil)
[6] This worsens if QatarEnergy’s Ras Laffan facility isn’t back (adjusted for 2 inactive trains) by June end.
[7] CMIE estimate
[8] Based on under-recovery of around INR 400/cylinder until December 2026, and ~INR 200/cylinder between December and March 2027
[9] Assuming BSE 500 (ex-financials) were the proxy for headline India, the median component began the year trading at 5.3x, more than twice where the median Indian listed component began the year, and well ahead of our book’s median of 2.1x.
[10] By weight of long-book. Includes our #1 holding.