EXECUTIVE SUMMARY
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Dear Fellow Investors,
Controlling Risk through ‘One Durable Variable Businesses (1DVB)’
Our preferred way to manage investment and portfolio risk is to buy and hold businesses that are:
- Easier to value with reasonable confidence,
- Trading at or below their intrinsic worth, and
- Diversified across different drivers (i.e., low mutual correlation)
Today, we focus on the first and the enabling element: estimating the intrinsic worth of a business. If this is done well, the next two steps—buying at a discount and diversifying intelligently—become much more manageable.
What is Intrinsic Worth?
At its core, the intrinsic value of a business is the present value of all future free cash flows it will generate over its life (free cashflow means cash profits less business investments). While this definition is conceptually simple, its practical application is difficult—because it involves predicting the future. And the future, by nature, is uncertain and unknowable. So, how can we reliably estimate the future of a business?
The Idea of 1DVB
This is where, what we call, the concept of One Durable Variable Businesses (1DVB) becomes relevant. We define a 1DVB as a business where a single, durable variable is the primary driver of long-term free cash flows.
One Variable
The litmus test of business-understanding is whether we can identify the key variables that drive its free cash flows. Examples of such variables include auto volumes, credit growth, new home construction, AUM (assets under management) etc. The fewer the number of variables, the lower the complexity, and the easier it becomes to build a mental model of the business. An ideal case is a business driven largely by a single dominant variable.
Durability
Singularity of driving variable is essential, but incomplete in itself. The second essential requirement is durability – ability to survive and thrive for long period of time. For it to be useful for forecasting, the key driver must be durable—meaning it should withstand disruption, competition, or regulatory shocks; and be well governed. Durability stems from three main sources:
- Competitive advantage: Ability to fend off competitors and disruptions sustainably.
- Stakeholder benefit: A business that benefits stakeholders is less likely to attract regulatory ire.
- Governance: Efficient and shareholder-aligned management ensures the business steers clear of self-inflicted damage.
Examples of 1DVBs
| Business Type | Primary Variable | Durability Source (for some companies) |
| Stock exchanges | Transaction value | Network effects (more users → more liquidity) |
| Mutual funds | Assets under management | Trust, distribution, low costs |
| Auto ancillaries | Auto volume | Switching costs, engine agnosticity, quality |
| Lenders | Credit growth | Underwriting culture, cost of funds, distribution |
| Capital goods | Capex cycle | Installed base, technological edge |
| Credit ratings | Value of debt rated | Regulatory license, track record, reputation |
1DVBs as perpetual bonds
When a business has a single, durable cash flow driver, and we understand both the driver and its source of durability, the range of future outcomes narrows. The business becomes somewhat similar to a debt instrument —a predictable stream of cash flows, subject to less variability and disruption risk. This makes it possible to assign a more credible and stable estimate of intrinsic worth, reducing the chance of major valuation errors.
Factoring growth and cyclicality
While many businesses can share the 1DVB trait, their growth trajectories and cyclicality may differ.
- Some will enjoy steady, structural growth (e.g., stock exchanges).
- Others may be cyclical (e.g., capital goods, auto ancillaries), where demand ebbs and flows with macroeconomic cycles.
It’s important to distinguish cyclical upswings from sustainable growth. Mistaking the former for the latter is a common pitfall. Also, growth without durability is dangerous—it tempts overvaluation and underestimates risk.
Controlling risk with 1DVBs
In test cricket parlance, only when a batsman knows where his off stump is, can he decide whether to play or leave a swinging ball. In investing, that off stump is the intrinsic value of a business. 1DVBs allows for knowing where exactly the investing off stump (intrinsic value) is so that overpriced stocks can be left and only reasonably priced stocks are played. This lowers individual stock risk.
Secondly, by building a portfolio of such well bought 1DVBs driven by different underlying variables we can ensure that they don’t all falter or flourish at the same time, lowering portfolio risk.
A thoughtful portfolio of uncorrelated 1DVBs, bought at sensible prices, provides a strong foundation for long-term compounding with risk control. And till we find such constituents, it is okay to wait.
A. PERFORMANCE
A1. Statutory PMS Performance Disclosure
| Year Ended | CED Long Term Focused Value (PMS) | BSE 500 TRI (Benchmark) | Difference | ||
| Return | Avg. Cash Eq. Bal. | Return | Trailing P/E | ||
| YTD FY26 | 14.8% | 20.3% | 10.8% | 25.7x | +4.0% |
| FY 2025 | 10.3% | 21.0% | 6.0% | 23.4x | +4.3% |
| FY 2024 | 29.2% | 26.1% | 40.2% | 26.2x | -11.0% |
| FY 2023 | -4.3% | 30.0% | -0.9% | 22.3x | -3.4% |
| FY 2022 | 14.9% | 38.5% | 22.3% | 25.0x | -7.4% |
| FY 2021 | 48.5% | 29.0% | 78.6% | 38.0x | -30.1% |
| FY 2020* | -9.5% | 23.0% | -23.4% | 18.3x | +13.9% |
| Since Inception(6Y) | 16.0% | 27.9% | 18.4% | -2.4% | |
| *From Jul 24, 2019; Since inception performance is annualised; Note: As required by SEBI, the returns are calculated on time weighted average (NAV) basis. The returns are NET OF ALL EXPENSES AND FEES. The returns pertain to ENTIRE portfolio of our one and only strategy. Individual investor returns may vary from above owing to different investment dates. Annual returns are audited but not verified by SEBI. | |||||
Kindness of strangers
Typically, it takes five or more years for skill to show through in investing. But the past five have been unusual. Median valuations haven’t just stayed high—they’ve risen further, largely due to a surge in retail investor flows. Investing in such a market has felt like relying on the kindness of strangers—expecting ever-rising liquidity to drive prices higher, regardless of fundamentals.
We’ve preferred to anchor ourselves to what holds true over decades: valuation discipline. While liquidity trends are new and fickle, valuation mean reversion has stood the test of time. That belief led us to maintain an average 28% cash-equivalent reserve (liquid/ arbitrage funds) over the last five years, waiting for rightly priced opportunities.
This caution helped during the Sep’24–Feb’25 correction, when our portfolio held up well. It marked the first meaningful test in years—and we were prepared. We believe the next phase will reward discipline. As valuations revert toward long-term averages, we’re positioned not just for resilience, but to act decisively when true value emerges.
A2. Underlying business performance
| Past Twelve Months | Earnings per unit (EPU)2 | FY 2025 EPU (expected) |
| Mar 2025 | 9.31 | 10.0-10.83 |
| (guidance was –>) | (8.5 – 9.5) | |
| Dec 2024 (Previous Quarter) | 9.2 | |
| Mar 2025 (Previous Year) | 8.6 | |
| Annual Change | 13.4% | |
| CAGR since inception (Jun 2019) | 14.8% | |
| 1 Last four quarters ending Mar 2025. Results of June quarter are declared by Aug only. 2 EPU = Total normalised earnings accruing to the aggregate portfolio divided by units outstanding. 3 Please note: the forward earnings per unit (EPU) are conservative estimates of our expectation of future earnings of underlying companies. In past we have been wrong – often by wide margin – in our estimates and there is a risk that we are wrong about the forward EPU reported to you above. | ||
Trailing Earnings: Earnings per unit for FY2025 came in at Rs 9.3 per share, within the range that we had expected at the start of the year (Rs 8.5-9.5 per share). This represents a growth 13.4% over last year. Since inception, earnings per unit, an indicator of earnings power of our underlying companies, has grown at 14.8%, marginally lower than our aspiration for 15%+ growth.
1-Yr Forward Earnings: We introduce FY26 forward earnings per unit guidance at Rs 10.0-10.8, an expected growth of 10%-16% over FY25.
A3. Underlying portfolio parameters
| June 2025 | Trailing P/E | Forward P/E | Portfolio RoIC | Portfolio Turnover1 |
| CED LTFV (PMS) | 26.0x | 22.4x-24.2x | 34.0%3 | 11.2% |
| BSE 500 | 25.7x2 | – | 16.5%2 | – |
| 1 ‘sale of equity shares’ divided by ‘average portfolio value’ during the year to date period. 2Source: Asia Index. 3Portfolio Return on Invested Capital (RoIC) is on core equity positions. For BSE 500 index we share the RoE (Return on Equity) | ||||
B. DETAILS ON PERFORMANCE
B1. MISTAKES AND LEARNINGS
In our older portfolios, we exited the equity leg of an experimental arbitrage position in Music Broadcast Ltd. (aka Radio City) at a loss of 0.50% of AUM. While small in quantum, this position consumed time and mindshare disproportionate to its potential, and in hindsight, we classify it as a mistake.
We had initiated this arbitrage setup three years ago. The idea was to buy equity shares and receive bonus preference shares (issued only to non-promoter shareholders) — effectively a special dividend with better tax treatment. At the time, the implied dividend yield was 30% of market cap, but 40–48% for eligible non-promoter shareholders, offering a theoretical arbitrage of 10–18%.
Our plan was to exit the equity shares after the ex-date. However, instead of correcting ~30%, the stock price fell over 50%. We made the classic mistake of waiting for a recovery rather than cutting the position. Though we managed to exit a small part at higher levels, the stock declined further and remained depressed. As better opportunities emerged, we finally exited the remaining equity last quarter, incurring the loss.
The reason the stock fell far more than expected remains unclear. Normally, stocks adjust by the dividend amount post ex-date. In this case, the price correction was significantly steeper. The only plausible explanation seems to be the structural challenges of the underlying radio business, which may be facing long-term decline.
We continue to hold the preference shares — the other leg of the arbitrage — which cost us nothing and currently trade at ₹113, with a redemption value of ₹120 expected in eight months (an annualised return of 9.2%).
While the position was designed as a low-risk special situation, the outcome reminds us that arbitrage strategies in low-quality businesses can be value traps.
B2. MAJOR PORTFOLIO CHANGES
Bought: We added further to three of our existing positions.
Sold: As mentioned in the earlier section, we have completely exited from Music Broadcast equity shares.
B4. FLOWS AND SENTIMENTS
Tariff announcements from the US continued to influence global and local markets. While the steep and irrational tariffs imposed by the US on its trading partners have been paused, the average tariffs are still much higher than modern history. Globalisation led to comparative advantage efficiencies, productivity and prosperity. Reversal of the same should lead to some side effects and pain. How countries will counter-respond to and how supply chains will adapt is complicated to forecast and therefore continues to remain the key source of global and Indian demand uncertainty.
Back home, pause in tariffs and ceasefire at border soothed Indian markets. After falling between 12-20% between September 2024 and February 2025, market indices recovered most of the losses. Defence stocks came back in limelight and despite poor earnings results moved up 50-70% indicating return of investor euphoria.
Retail investors, via mutual funds and IPOs, continue to provide mouthwatering exits to promoters and private equity investors (insiders). Mutual funds inflows remain positive though lesser than peak. Gross SIP flows crossed past peak to go past 26,000cr mark. IPO pipelines, a bull market sign, are full again.
Earnings performance has been weak with BSE 500 companies reporting a 5% and 7% rise in revenue and earnings. Yet the stock prices continued to build in much higher earnings growth indicating buoyant mood and expensive valuations.
Overall, the sentiments and flows are back to their past highs, requiring caution and restraint.
C. OTHER THOUGHTS
Investing – An Inexact Science
All generalisations, including this one, are false
-Mark Twain
We learn mainly through imitation and experience. We observe others, draw lessons from past events, and use pattern recognition to establish cause-and-effect relationships that guide our future actions.
- A child learns to speak by mimicking their parents.
- Early humans learned which berries were poisonous by watching others suffer—or die—after eating them.
Our minds try to extract rules from what we see and experience. This doesn’t stop at language or survival. It influences how we approach investing as well.
Most investors – us included – have at some point looked for a magic formula. Something neat and repeatable that can lead to assured success. After a strong bull run, investors often try to reverse-engineer success, identifying what worked and assuming it will work again. But markets are rarely that obliging.
Unlike natural sciences, investing is not an exact discipline. In physics or chemistry, repeating the same actions under the same conditions yields predictable outcomes. Investing, on the other hand, operates in a dynamic system driven by human psychology, collective behaviour, and ever-changing context. The same action, under seemingly similar circumstances, can lead to vastly different results.
For instance, investors have long believed that equities and gold move in opposite directions. Yet, in recent years, both asset classes have hit all-time highs simultaneously. Similarly, conventional wisdom holds that rising interest rates strengthen a currency, yet the US dollar has depreciated even as US interest rates have climbed. Past relationships, while useful, are not eternal truths. They can—and do—break.
Worse still, in markets, a successful idea often contains the seeds of its own undoing. Once a particular style or strategy proves effective, it attracts followers. As more participants crowd into the trade, the opportunity erodes. This is the paradox of popularity: the more widely something is followed, the less effective it becomes.
Take the oft-repeated advice: avoid low-quality businesses or overpriced stocks. Sensible advice, yet in the last few years, precisely these stocks have delivered stellar returns—defying expectations and frustrating fundamental investors. Why? Because markets are reflexive. They are shaped not just by fundamentals but by what people believe about fundamentals. If enough people believe an average business is a great one, and act on that belief, they can drive the stock price up—at least temporarily—validating the belief, even if the underlying reality hasn’t changed.
This is what makes investing uniquely hard: the absence of reliable guideposts. The past is an imperfect teacher. Relationships that held true in 90% of the past might fail precisely when you bet your house on them.
The only dependable math/ magic formula is that the value of business is the present value of its future free cash flows. While this gets violated from time to time, over longer term this has hold steadfast.
The imprecise nature of investing requires acting with conviction while also preparing for the possibility that the world may behave differently this time. This paradox—balancing belief with flexibility—is the true art of investing.
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As always, gratitude for your trust and patience. Kindly do share your thoughts, if any. Your feedback helps us improve our services to you!
Kind regards
Sumit Sarda
Partner and Portfolio Manager
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Disclaimer: Compound Everyday Capital Management LLP is SEBI registered Portfolio Manager with registration number INP 000006633. Past performance is not necessarily indicative of future results. All information provided herein is for informational purposes only and should not be deemed as a recommendation to buy or sell securities. This transmission is confidential and may not be redistributed without the express written consent of Compound Everyday Capital Management LLP and does not constitute an offer to sell or the solicitation of an offer to purchase any security or investment product. Reference to an index does not imply that the firm will achieve returns, volatility, or other results similar to the index.