At FiSC Capital, our approach to investments is rooted in value orientation. We seek companies that are fundamentally undervalued, with steady intrinsic worth and clear potential for growth. Unlike speculative strategies, we focus on businesses that demonstrate strong financial health and core profitability. Over the years, this careful approach has limited our judgment errors, thanks to rigorous due diligence, constant tracking, and a conservative selection strategy.
However, like any investment team, we occasionally encounter missteps. One such experience involved our investment in Netlink Solutions—a decision that, while initially promising, ultimately highlighted the importance of sticking to our core investment principles.
Why We Initially Chose Netlink Solutions
In May 2024, our team identified Netlink Solutions as a potential value opportunity. After extensive research, we believed the company’s intrinsic value was greater than its market price, even before factoring in its recent growth. On top of this, Netlink had demonstrated impressive sales growth, achieving a 220% compound annual growth rate (CAGR) over three years and an 84% increase in profits. These metrics pointed to robust performance, particularly in the March quarter, which further bolstered our valuation models and supported our recommendation.
Another key factor in our decision was Netlink’s diversified portfolio. The company operated in corporate gift shows, exhibitions, and IT services, with the IT segment showing signs of potential expansion. In the past, we’ve seen young IT firms evolve into major players once they’ve stabilized their models, and we hoped Netlink could follow this path. While we don’t typically weigh “all-time high” or “all-time low” prices in our buy recommendations (we rely instead on fundamentals), Netlink’s recent performance warranted a buy recommendation at the time, and we began accumulating shares in the ₹210 to ₹190 range.
Emerging Red Flags and a Shift in Perspective
Following the June quarter, however, some inconsistencies emerged. The company’s core business reported disappointing results, and further investigation revealed that Netlink was cutting back on its corporate gifting segment, even terminating major contracts with established international institutions. Since FY21, the primary driver of Netlink’s revenue was no longer its core business, but rather its IT subsidiary—which still accounted for just 10-20% of total revenue. Surprisingly, the majority of Netlink’s profit was coming from treasury operations: the buying and selling of investments rather than from operational activities.
As value-oriented investors, we pay close attention to a company’s core profitability. While these treasury operations may satisfy a technical analyst, they fall outside our primary focus, which is on solid, fundamentally driven businesses. Our clients, who engage FiSC Capital for premium research and guidance, rely on us to offer insights into companies that can deliver long-term value, not ones dependent on non-core profits.
Managing Our Position and Protecting Client Interests
Throughout August and October, Netlink’s stock price fluctuated between ₹130 and ₹170. By this point, we had decided to strategically exit our position. To manage client costs and mitigate potential losses, we recommended averaging down for some, even though we did not see Netlink as a long-term holding. In our view, the stock remained undervalued and could still yield short-term returns. However, with limited confidence in its 5-10 year growth potential, our goal became clear: reduce average costs where possible and hold until an opportune exit.
Exiting Amid Mixed Performance Results
In October 2024, Netlink’s September quarter results reported a 400% year-over-year increase in net profits, leading to a rapid stock price rise from ₹170 to ₹220. While this profit increase was attractive at first glance, our analysis uncovered that the gains stemmed primarily from treasury income rather than operational success. Netlink’s operating profit margin (OPM) was -267%, reflecting losses in its core business.
Given these results, we acted on the available opportunity to exit with profits ranging up to 60% for some clients, while keeping losses under 5% for others. Although the stock may still see speculative growth, we remain committed to recommending companies that can deliver reliable value from core operations.
Key Takeaways for Value-Oriented Investors
- Market Volatility Offers Opportunities to Manage Risks Netlink serves as a reminder that temporary market sentiment often presents windows to correct or optimize positions. For investors guided by fundamentals, such moments can help manage risk, capitalize on short-term opportunities, or rectify investments that fall short of initial expectations.
- Prioritize Core Revenue for Long-Term Investments Netlink Solutions is not a failing company—its profit profile is stable, and it has shown overall consistency. However, given its heavy reliance on non-core treasury income and a lack of strong growth in its primary business, it does not align with FiSC Capital’s long-term investment criteria.
- Clarity and Consistency Are Essential to Sound Investments Netlink may still become a profitable speculative play. However, at FiSC Capital, we prioritize clarity, consistency, and core value over speculative upside. Even if some investors find value in Netlink’s recent gains, our commitment remains to companies with dependable revenue and realistic growth.
Conclusion
As FiSC Capital says goodbye to Netlink Solutions, we reaffirm our commitment to our investment principles: selecting companies with robust, reliable business models and strong long-term fundamentals. Every investment provides lessons, and in this case, our experience reinforces the importance of sticking to fundamentals, even when faced with enticing, short-term potential gains.
We encourage readers to share their perspectives in the comments below. Value investing is both a science and an art, and we always appreciate the insights that fellow investors bring to the conversation.
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