Investment Thesis: Goodricke Group Ltd. - A High-Conviction Bet on the Indian Tea Sector Turnaround

Investment Rationale

The Indian tea sector is at an inflection point after a decade-long downturn. Government interventions, supply constraints, and rising domestic demand indicate that the cycle is turning. Goodricke Group Ltd., backed by the multinational Camellia Plc, stands out as one of the few well-managed, high-quality tea producers in India. With a strong balance sheet, premium tea gardens, and high promoter holding (74%), Goodricke presents a compelling investment case for significant capital appreciation.

Hinduja Group's Ashok Leyland Share Pledge - A strategic move?

The Hinduja Group has pledged around 30 crore shares of Ashok Leyland (mkt cap ~ 60k crores), the group's flagship company in India. The pledge was created through Hinduja Automotive, a UK-based holding company and a key part of the Hinduja Group, which serves as the primary vehicle through which the Hinduja family holds its stake in Ashok Leyland.

As of 31 December 2024, promoters held 51.10% stake in Ashok Leyland. Hinduja Automotive held 34.72%.

Uncertainty Vs. Risk

Investing is often seen as a game of numbers, but it is just as much a game of psychology. One of the biggest lessons that long-term investors learn is that 

markets tend to overreact to uncertainty rather than to actual risk. This distinction is critical because uncertainty creates opportunities for those who can see beyond short-term noise and focus on long-term value.

Understanding the Difference Between Risk and Uncertainty

• Risk is measurable; it can be quantified and hedged against. For example, if a company operates in a cyclical industry, investors can analyze past cycles to gauge the extent of earnings volatility.

• Uncertainty, on the other hand, is when there isn’t enough information to make a precise assessment. It causes markets to react with fear, often leading to excessive pessimism.

Investors who can differentiate between the two and take advantage of overreactions to uncertainty often unlock massive wealth creation opportunities.

What made IndusInd bank a great franchise? Is that franchise lost?

IndusInd Bank has historically been admired in the banking industry for several reasons, making it one of the standout franchises in Indian banking. Here’s why it earned that reputation:

1. Strong Leadership & Execution:

• The bank was transformed under Romesh Sobti’s leadership (2008-2020), who built a high-growth, high-profitability banking model.
• Sobti and his team (ex-ABN AMRO executives) focused on risk-adjusted lending, superior underwriting, and niche market dominance.

Divi’s Lab (2017) vs. IndusInd Bank (2024): Similar Setback-Recovery Pattern?

1. Big Shock Event:

   • Divi’s Lab → USFDA import alert (key revenue source hit) → Stock crashed 20%+ in a day
   • IndusInd Bank → Derivative loss + market panic → Stock fell 30%+ in a few days

2. Underlying Business Strength:

   • Divi’s had a strong API business, industry leadership, and good financials, despite the short-term issue.
   • IndusInd has high CASA, strong retail franchise, and well-managed asset quality (unlike Yes Bank/RBL Bank).

Business Turnaround vs Sentiment Turnaround

One strategy that many investors deploy is betting on turnarounds including myself and I am always on the lookout for a turnaround as that creates maximum wealth in the shortest period of time. 

Now what I have experienced is that there are two types of turnarounds:

1. Business Turnaround

2. Sentiment Turnaround

Has Jane street gone away? Lets find out

 Let’s dive into how large institutions with deep pockets—like hedge funds, proprietary trading firms, or FPIs—exploited the earlier, looser position limit rules for index derivatives in India to generate profits or influence intraday volatility, and why the new maximum position limits (effective 2025) deter such strategies.

How Institutions Took Advantage Under Earlier Rules (Pre-November 2024)

Is Indian Tea Industry Dynamics changing for good?

 In 2012, large tea estates were the primary producers of tea in India, contributing approximately 75% of the total tea production, while small tea growers (STGs) accounted for about 25%. It is 45% now and 55% is ontributed by STG as on 2023 production data.

the growing dominance of small tea growers (STGs) over large estates is a major reason for the dire state of the Indian tea industry. Here’s why:

What is the capital adequacy or equivalent of US banks. Are they lower than Indian banks?

 Yes, large U.S. banks generally have lower Capital Adequacy Ratios (CAR) compared to Indian banks. Let’s break it down:

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1. Capital Adequacy Ratio (CAR) - India vs. U.S. Banks

Why RBL Bank Valuation derated in 2019

 RBL Bank's stock collapsed massively between July 2019 and September 2019 due to a combination of corporate governance concerns, asset quality fears, and broader market panic. Here’s a detailed breakdown of what triggered the sharp fall:

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1. Rising Concerns Over Corporate Governance

• July 2019: There were rumors of governance issues, but the bank denied them.
• August 2019: Vishwavir Ahuja (CEO) sold a significant portion of his RBL Bank shares, raising investor concerns.
  • He later clarified that the sale was to cover tax liabilities, but the damage was done.
  • The market interpreted this as a lack of confidence in the bank's future.
• This came right after Yes Bank’s crisis, making investors more nervous about mid-sized private banks.

👉 Impact: The stock began correcting as governance fears emerged.

Why Turkey is weaker than Indian inspite of higher GDP per capita

 As of 2023, Turkey's Gross Domestic Product (GDP) per capita is approximately $14,713.57 in current U.S. dollars.

Over the past decade, Turkey's GDP per capita has experienced fluctuations due to various economic factors. Here's a summary of the recent trends:

• 2020: $8,639
• 2021: $9,743 (12.79% increase)
• 2022: $10,675 (9.56% increase)
• 2023: $12,986 (21.65% increase)

What Happens in the First 30 Days After a Scandal or Crisis?

 When a major crisis breaks out for a bank or financial institution, the stock tends to follow a typical pattern in the first 30 days. Below is a summary based on historical cases:

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📉 1. Immediate Crash (Days 1-5)

• Stock falls sharply (typically 10-30% in the first few days).
• Investors panic due to uncertainty and liquidity rushes out of the stock.
• Negative news headlines dominate media coverage, amplifying fear.
• Short sellers take aggressive positions.

✅ Example:

• Wells Fargo (2016): Fell ~10% in 3 days after the fake accounts scandal.
• IndusInd Bank (2024): Already fell ~15-20% in a few days after the derivative issue came out.

Past Banking Crisis and recovery time

 1. For a 40% move from the bottom:

Based on historical banking scandals and recoveries, the average time required for a 40% rise from the low is approximately 235 days (~8 months).

Breakdown of Recovery Times:

• Wells Fargo (2016): ~180 days (~6 months)
• American Express (1963): ~365 days (~1 year)
• JP Morgan (2012): ~150 days (~5 months)
• Axis Bank (2017): ~210 days (~7 months)
• ICICI Bank (2018, Chanda Kochhar Issue): ~270 days (~9 months)

London Whale trading scandal at JPMorgan Chase in 2012

 What Happened?

• A trader named Bruno Iksil, based in JPMorgan’s London office, was part of the bank’s Chief Investment Office (CIO).
• The CIO was supposed to hedge the bank’s risks but ended up making huge speculative bets on credit default swaps (CDS).
• Iksil took such large positions in the derivatives market that other traders began calling him the "London Whale" due to the sheer size of his trades.
• These trades backfired, leading to $6.2 billion in losses for JPMorgan.

The 2016 Wells Fargo Scandal – Fake Accounts Controversy

 In 2016, Wells Fargo (WFC) faced one of the biggest banking scandals in U.S. history, leading to a 20% stock price decline and severe reputational damage.

🔎 What Happened?

• Fraudulent Accounts Scandal: Employees opened millions of fake bank and credit card accounts without customer consent to meet aggressive sales targets.
• Unrealistic Cross-Selling Goals: The bank pushed employees to sell multiple products per customer (e.g., savings, credit cards, loans). This led to unethical practices where employees created unauthorized accounts.
• Pressure from Top Management: Employees were threatened with job loss if they failed to meet high sales quotas.

Warren Buffett’s Investment in Commonwealth Trust Company - Analysis

Warren Buffett’s investment in Commonwealth Trust Company is one of his lesser-known but highly profitable early deals. It showcases his deep value investing approach—buying a strong but undervalued business at a time when others ignored it.

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1. Background of the Investment

• Commonwealth Trust Company was a small bank based in Pennsylvania.
• It was a highly conservative, well-run bank with strong assets and a history of stable performance.
• The bank had no major problems, but it was being overlooked by the market at the time.

What went wrong in axis bank in 2017

 In 2017, Axis Bank faced multiple challenges that affected its performance and reputation. Here are some key issues that emerged during that period:

1. Rising Non-Performing Assets (NPAs):

• The bank reported a sharp increase in NPAs, leading to concerns over asset quality.
• Gross NPAs surged from 5.22% in March 2017 to 5.99% in September 2017, reflecting stress in corporate loans.
• The bank had significant exposure to large stressed corporate accounts that turned bad.

what kind of frauds were detected in Yes bank from 2017 - 2020?

Between 2017 and 2020, Yes Bank was embroiled in several fraudulent activities and governance lapses that significantly impacted its financial health. Key issues identified during this period include:

1. Underreporting of Non-Performing Assets (NPAs): The Reserve Bank of India (RBI) discovered that Yes Bank had significantly underreported its NPAs. In 2017, the bank's actual bad loans were found to be five times higher than what was disclosed to the government.

Why Indusind Bank commanded high valuation before 2018 but low now?

Before 2018, IndusInd Bank consistently traded at a premium valuation compared to most other banking stocks in India. Here’s why investors assigned a higher Price-to-Book (P/B) and Price-to-Earnings (P/E) multiple to the bank:

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1. Strong Loan Growth & Superior Profitability

• Loan book growth: IndusInd Bank delivered industry-leading loan growth (~25-30% CAGR) in the years leading up to 2018, much faster than peers like ICICI Bank and Axis Bank.
• Higher ROE & ROA:
  • Return on Equity (ROE): Consistently around 15-18%, significantly higher than many PSU and even some private banks.
  • Return on Assets (ROA): Above 1.5%, a benchmark of high profitability in banking.

How Arbitrage funds manage sudden restrictions on derivative trading in a stock

 If derivative positions are restricted for a month in a stock, arbitrage funds that depend on taking counter positions in the cash and derivatives market will face significant challenges. Here’s what could happen:

1. Arbitrage Opportunities Vanish

• Arbitrage funds rely on price differences between the cash market (spot price) and the futures market.
• If derivatives trading is restricted, there will be no futures market to hedge positions, making it impossible for arbitrage funds to execute their usual strategies.

Charlie Munger's Wells Fargo Investment in 2008 crisis

 During the 2008 financial crisis, Wells Fargo's stock price experienced significant fluctuations:

• 52-Week High: Approximately $38.90 per share.
• 52-Week Low: Approximately $7.80 per share.

Charlie Munger, serving as chairman of the Daily Journal Corporation, made a strategic investment in Wells Fargo during this tumultuous period:

• Investment Amount: Approximately $20 million, sourced from Treasury bonds.
• Acquisition Price: Shares were purchased at around $7 per share, totaling just under 1.6 million shares.

The Salad Oil Crisis & American Express (1963)

 The Salad Oil Crisis was a major financial scandal that hit American Express (AmEx) in 1963. It was caused by Anthony "Tino" De Angelis, a commodities trader who ran Allied Crude Vegetable Oil Company. He took massive loans using falsified collateral—tanks supposedly filled with soybean oil that actually contained mostly water.

Since American Express was heavily involved in warehousing and certifying collateral for loans, they were directly implicated when the fraud was uncovered. The company faced huge liabilities and its reputation was severely damaged.

ICICI Bank faced similar crisis during 2015 to 2017 period

 ICICI Bank faced several controversies and adverse news reports between 2015 and 2017. Here are some of the biggest issues:

1. Videocon Loan Controversy (2016-2018)

• One of the most significant scandals that surfaced was related to a conflict of interest in loans extended to the Videocon Group.
• It was alleged that ICICI Bank, under then-CEO Chanda Kochhar, sanctioned ₹3,250 crore in loans to Videocon Group.
• Later, a company linked to her husband, Deepak Kochhar’s NuPower Renewables, received investments from Videocon’s chairman Venugopal Dhoot.
• This raised allegations of quid pro quo, misuse of power, and lack of transparency.
• Eventually, this controversy led to Chanda Kochhar stepping down in 2018.

How RBI’s Ban on Internal Trades Affects Indian Banks

How RBI’s Ban on Internal Trades Affects Indian vs. Foreign Banks (Like HSBC)

RBI’s September 2023 directive prevents banks in India from using internal trades for currency and interest rate risk management. Instead, they must use external market instruments for hedging. However, this rule impacts Indian banks and foreign banks (like HSBC) operating in India differently.

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🔵 Impact on Indian Banks (SBI, HDFC, ICICI, etc.)

Longevity diet plan

 🔹 Updated Longevity Diet Plan (with Morbon XT & Vitamin C included)