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Investing in growth in the public markets

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Owner's Manual

Owner's Manual

We are a fiduciary of your capital. Your understanding of what we do and how we will approach it is a critical element in enabling us to attain our goal. The Owners Manual helps achieve this....

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Please find below the transcript for our snippet video:

Welcome to our Video Snippet Series. Through this, we aim to open up the fund, philosophy, and process to our current & potential investors and partners. In this episode of the Snippet series we take you through:

Why do we look at cash flow-driven growth in our portfolio?

While analysts focus on earnings growth, we focus on cash flow growth. The difference being, focussing on the latter means the management can translate earnings into cash on the Balance sheet – implies this reduces the chance of manipulating numbers.

We are looking for two key traits in the management of the companies in our portfolio – every business wants to grow, however, it’s important to see how this growth is getting funded. When the business generates cash, it ensures that the growth of the business is funded through internal accruals (rather than relying on debt or worse, equity to fund future expansions)

Second, as the cash gets reinvested, it’s important to look at the incremental returns on the capital that the business generates. If this exceeds 20%, we have the potential of a business which can compound over long periods of time and generate shareholder return.

To explain this concept – let’s look at a portfolio company we have owned since 2017 and we continue to own – Syngene. Syngene, over the last 4 years has been continuously reinvesting cash flows (~10% of its market cap) into capacity expansion for building its manufacturing. Looking at its earnings, effectively means you are looking at depressed earnings as this capacity takes time to go live. However, the cash flow growth has continued to be robust and the incremental return on capital continues to be at 23%. This gives an example of why cash flow continues to be the core driver of our portfolio process at Itus.