Please do provide some insights on my PPT improvements and for the content

1. Key Learnings from Solidarity
Letters

2. Chapter 1 : Key Learnings From Yearly
Solidarity letters
• In the letters their quarterly notes are intended to share the
opportunities and uncertainties they see in the environment and
explain their actions over the last quarter.
• Solidarity investment managers are active managers who try to do
better than the market by constructing portfolios in companies and
sectors where risk and return are more in their favour.
• For the Q1 FY22 they remain positive on sectors like Banks, Life
Insurance, CRAMS, Steel Pipes and Flexi Staffing. They are cautious as
well on sectors like Speciality Chemical, Digital and IT Services.

3. • Solidarity’s Approach at Present
• The team doesn’t predict trajectory of inflation or interest rates but they focus on different themes and individual companies. For
example, the team will not focus in predicting inflation but ensuring that the company they own are well positioned to handle the rise in
inflation through reasonable pricing power.
• Why does Solidarity believe that they are entering return of mediocre return in Equity and poor one in long term debt?
• Since Equity Markets have aided by Central Bank liquidity, since they are controlling interest rate, and Govt. fiscal stimulus has helped to
elevate valuation multiples. Over the last decade the developed world especially the US is following unorthodox economic policies,
which got a further force post Covid, Response to the 2008 crisis worsened inequality that is banks got saved but employees in the US
did not reach 2008 level, till 2017, At the same time Money printing did not result in inflation, So the policy makers were prioritizing for
employment creation which encouraged interest rate to keep lower for longer. Now this elevated valuations across the board and
lowered the cost of capital and created a tail risk for inflation down the road for inflation. Here US Fed explained that interest rate are
gradually set to rise and that the money will have some power and they cannot delay raising interest rate since inflation will get out of
control. Hence reversion of valuation multiples should start taking place.
• Why are they optimistic about Banks, Life Insurance, Steel Pipes and Flexi Staffing (some insights)?
What is Flexi Staffing?
A staffing agency enters into service level agreement with the client/customer (e.g. Samsung, TCS, Amazon, etc) to provide employees
(referred to as associates) on a temporary basis for a specific duration or a project and gets paid on a variable basis for the duration of the
engagement. The associates will be deployed at client’s locations and work under the supervision of the client, whereas the staffing agency
will be responsible for paying salaries and other mandatory obligations like Provident Fund etc.
Team Lease is India’s Second largest flexi staffing company.
The key drivers of growth are:
• Increasing preference for having workforce flexibility and have variable cost structures (i.e., ability to hire for short term requirements vs.
permanently) will result in the flexi staffing industry gaining share within the formal workforce.
• Reforms undertaken by the Government (GST, New Labour Code, Employee Provident Fund, ESIC, maternity benefits, etc ) and increasing per capita
GDP will lead to strong growth in formal jobs and their share in total workforce is expected to double over the next decade from ~21% currently.

4. • Risks
The Govt at present provides the sector Income tax benefits under section 80JJA of Income Tax Act. According to this section, if the
company employs more associates than in the previous year, it gets to claim a deduction of 30% of total employee salaries from its PBT
in that year as well as next 2 years. Given that employee expenses are >90% of revenues, 30% of this implies deduction is greater than
PBT and hence company pays zero tax. If this is withdrawn, TL’s earnings growth in the short run will be hit as we don’t believe it will be
able to increase prices to offset this impact. However the Solidarity team believes this is a low probablility scenario as the Government
aims to increase formal workforce in the overall pool. Governments stand to gain if the share of organised players goes up over time
and hence should continue to encourage formalisation of the sector.
• Steel Pipes
The Team expects Steel Pipes Industry to be a beneficiary of the decadal capital cycle underway in the Oil & Gas industry as India is
moving towards higher usage of Natural Gas and Oil for their energy sectors.
• The industry is well poised to grow from multiple tailwinds.
• India intends to increase share of natural gas in its energy mix from 6% to 15% by 2030. As India transitions towards a gas-
based economy, this should translate to stronger demand for steel pipes in City gas distribution, cross-country gas pipes and
LNG Terminals over the next decade. If oil price increases so producers will want to remove more oil, so more oil transportation,
So there will be more usage of Steel pipeline and so the user in the industry will increase.
• China is a meaningful player in steel pipes globally. However, with geo-political issues emerging between the west and China,
one can expect more active de-risking from China. Well run Indian players have scope to gain market share in exports.
• Access to clean water has become an important political priority, and with “Har Ghar Jal yojana” (Safe drinking water to all
rural households by 2024) we expect pick-up in demand for water related HSAW carbon steel pipes. However, this can be
delayed as State Govt’s transfer budgets towards health initiatives due to Covid. Helical submerged arc welded pipe used in low
pressure applications in oil & gas and water supply etc.

5. • So they are participating in this opportunity via investments in Ratnamani Metals & Tubes and MAN industries.
• Ratnamani Metals and Tubes (Clear Leader)
• Ratnamani has differentiated itself in a largely commodity industry by consistently focusing on value added products (for example
Stainless Steel (SS) pipes) which have limited competition. SS pipes are used for critical applications and getting customer
approvals is time consuming (can take up-to 3-5 years for a new entrant to get approval). Given higher gestation period and
higher capital intensity, SS pipes enjoys a more favourable industry structure.
• Ratnamani holds ~35-40% market share domestically in SS. ~55% of SS pipes consumed in India are still imported mainly from
Europe, Japan & China. This provides a significant import substitution opportunity.
• Unlike peers, Ratnamani has consistently invested in technology to enhance its edge. For example, it has recently developed
technology to manufacture SS pipes through the seamless hot extrusion route and is the only domestic player to do so. Hot
extrusion gives pipe better strength and longer life and will help Ratnamani substitute imports. Ratnamani has embarked on a
significant capex program, having expanded its SS Pipes capacity by 71% and carbon steel pipes (CS pipes) by 57%. Given the
global impetus to de risk supply chains from China, Ratnamani also could win more export orders as it already has approval with
leading majors.
• Risks
• Demand for Steel Pipes globally can be cyclical within a largely structural demand trend. Demand is linked to price of Oil and that
can create volatility in earnings. Demand for Steel pipes also gets impacted in a period of rising Steel prices as customers tend to
wait for prices to cool down.

6. • MAN Industries (Special Situations)
MAN industries has been in the Steel pipes industry for 25+ years now and is mainly present in the more commodity LSAW & HSAW Carbon steel
sector where it has ~ 15-20% domestic market share. A low ROE business, MAN would not quality under our core approach of buying well run
compounding stories. However, MAN could be considered as a turnaround story which promises significant upside if we are right, and limited
downside if we are wrong. It is therefore a “Special Situations” bet for us. Longitudinal submerged arc welded pipe used in high pressure
applications in oil & gas and water supply etc. When valuations in our core approach are not attractive, we should have the willingness to
experiment with small position sizes with new approaches. Hence, we keep 10% allocation in portfolios for “Special Situations”.
• Risks
MAN has lost a decade, primarily due to internal challenges. Inter promoter group disputes have now been resolved with one set of promoters
firmly in control post court rulings. Over last few years, MAN has reduced its debt and its Debt/EBITDA is now < 1. It is focusing on growth and has
entered ERW17 Carbon Steel pipes to cater to the City gas opportunity. Management is also considering entry into SS pipes in the future (higher
margin) and undertaking cost optimization initiatives at its plants. As promoter disputes are behind us, one should see more focus on growth and
value creation. Promoters have demonstrated confidence in the business by issuing warrants to themselves. Electric resistance welded pipe (small
diameter pipes) used mainly in city gas distribution and water supply.
While we believe a rights issue would have been better governance, promoters are demonstrating skin in the game at the same time as related
party transactions are reducing and promoter pledged shares have also reduced materially from 41% to ~5%.
• Isn’t Specialty Chemicals now in euphoria and time to exit?
De risking of supply chains from China is now a consensus bet. However, this sector is early on the growth cycle and offers significant longevity of
growth and opportunity for companies to transform into higher ROCE business models over time through both margin expansion and increase in
Asset- productivity. Tail winds for de-risking from China are getting stronger. What they convey was they need to balance staying invested keeping
in mind the longer-term prize with trimming positions for risk management. So they have trimmed positions in few shares in Privi Specialty
Chemicals and SRF because the former in many many portfolios was approaching 10% weight due to steep run up and they don’t want to take
concentrated risk in small cap where there are liquidity risk.

7. Chapter 2 : Key Learnings From Yearly
Solidarity letters
• In this letter there are some topics discussed here which will be Share
an update on performance, Provide rationale on why we are cautious
on incremental deployment at present, Provide answers to some
questions we have been asked recently including why we hold an
over-weight position in Bharti Airtel, Share rationale on exit decisions
taken recently.
• They increased our position size significantly in Bharti Airtel as the
sector is entering a period of stable competitive dynamics, tariff
increases and regulatory support.

8. • Significant optimism on future growth prospects of India and India based companies
• While India’s economic output is still lower than where it was pre-pandemic, there is significant optimism on future-
prospects. Indian companies serving export markets are seeing noticeable pick-up in demand and enquiries amidst
increasing US China rivalry. Companies have started generating Free Cash Flow in FY21 and also have reduced their debt.
Also Banks have shown good resilience to Covid Shocks. Chin’s Real estate seems falling and also there are fall in certain
industry in China so that is when we are able to see the investment flows diverting towards India
Risks of very high inflation are being overlooked
• Central Banks are keeping low interest rate and keeping the liquidity conditions high for boosting the Employment. Smart Minds
are deeply divided whether money printed . An increase in Inflation will lead to increase in interest rate which will negatively
affect Equities. Some central banks have already started raising interest rate in Norway, Brazil, South Korea. The US Fed has also
signalled that they may increase the interest rate sooner! Here in the letter it also explains that the Technology affects inflation
by increasing the productivity improvements by substituting the labour through Automation, so that means it will create lower
employment
(Source : Solidarity Letter Q2 FY22)

9. • Importance of Valuation Multiples for Well run companies with longevity of growth
• In this article the author explains that we cannot buy any company at any valuations. Also the letter gives an example that we
will not want to buy a house we want to live in at any price. So since if we are buying shares in a company we will take the
analogy of house again, and the letter specifies that why would we buy a stake at other’s house. So here in the letter it specifies
about Mean Reversion which is in the long term the P/E will reverse to what it was, so what this part talks about is when we are
buying the stock at a higher price, we may have lower returns, because if we are not evaluating a stock using valuation multiples,
then we may not get an idea whether we are buying at a right price! So Valuation plays an important role where if we are able to
predict that the stock will be able to grow or not, Valuation is Present Value of Future Price. If the stock is not growing at a good
rate over a long time period then we should let the stock go and stay away from it. So Valuation will grow when the stock will
grow.
• Model Portfolio Theory
• So the Solidarity Investment managers do not operate in Model Portfolio. So they don’t want to buy at any price in a customized
portfolio, just because the prices are available for the stocks to enter. They construct Multi Cap portfolio where Small Cap
Exposure are typically capped at 25% at Cost. If they don’t see an opportunity then they don’t need to invest in them.
• Overweight position in Bharti Airtel
• For this they believe that it is nit wrong in taking concentrated risks when odds are generally in their favour and they don’t have a
key player other than this to invest in. Bharti Airtel has built a toll road that Govt. uses and many establishments such as Zomato
and Amazon are using that road for their business. So Solidarity believed that there were no benefit that Bharti Airtel was
receiving but this will change, that is the conditions for the telecom sector will change since the last decade they were not
favourable conditions. So they believe that Bharti Airtel is a a value potential for its core business and will generate a new
revenue stream which is not visible today.

10. Chapter 3 : Key Learnings From Yearly
Solidarity letters
• In this letter we will learn about Euphoric sentiments in IPO and
Private Market.
• Understand the Chart presented by DSP Mutual Fund
• Solara Active Pharma as an Emerging Leader for Solidarity
Investments.

11. • Euphoric Sentiment in IPO and Private Market
• Venture Capital is a business where Start ups are funded, therefore Company can raise fund from Venture Capital, but as per the
situation many companies and start ups are acting like Venture Capitals, and are investing in other small companies. Many times
VC firms that have already invested in the companies where they see the success for the business is a question mark, they still go
ahead with investments because of Loss Aversion. So the Solidarity Investment Managers feel that “new age” companies have
entered the market at a very high valuation and but they do not have a way for profitability while more competitors are entering
the markets.
• Returns over the next 5 years
• The above table which is shared by DSP Mutual Fund for which they have analyzed data here, that for Forward Price/Book ratio
of 1x-2x Nifty will generate 59.2% in 1 year, 19.8% in 3 year and 15.5% in 5 year. And same for the rest of column, but during the
letter was released they were on 3.1 1 year Forward Price/Book So they hope to beat Nifty and focus on more concentrated bets
where they can generate good return.
(Source : Solidarity Letter Q3 FY22)

12. • Solara Active Pharma
• So Solara is an API and CRAMS business. API means Active Pharmaceutical Ingredient is a component of a drug product (tablet,
capsule, cream, etc.) and CRAMS is Contract Research and Manufacturing Service, where big companies give contract to manufacture
the medicine. The developed world has been outsourcing manufacturing and India now has the additional tail wind of the developed
world, since the developed world wants to shift its business from China.
• Barring Fermentation based products, India has a chance to capture a larger share of the global API market. We believe the API
industry should continue to do well and that Solara/Aurore could become the #2/#3 pureplay API and CRAMS company in India after
Divi’s Labs. Here Pure play means that produce 1 segment with 1 kind of product and not entering into different business.
• Solara has many advantages :
• Good Regulatory and ESG track record.
• Solara is not competing with other pharma businesses that are into formulation business, but has relationship with Big pharma
customers.
• So Solara has good customer credibility where it receives advance from customer where it blocks the money into capacity of its
products. .
• It has Wide product variety and it focuses on low cost production because it going towards automation of plant and focusing on
Backward Integration which will help in increasing Margin and also to maintain low cost production.
• Customers wants to work with large plants which is heavily regulated by the US FDA. Where Solara checks its customer’s checklist