Wizard of Dalal Street 2015 - Govind Parikh

http://www.moneycontrol.com/news/market-outlook/wizarddalal-street-govind-parikhs-investment-mantra_3144141.html

"I like to buy things in a bad market. Additionally, don't look current cash flow, concentrate on future cash flows — that is what I look at," says Govind Parikh of Govind Parikh Securities. He advises investors to buy good quality stocks when the market crashes.

While sharing his investment philosophy with ace investor Ramesh Damani, on the Wizards of Dalal Street, Parikh says management integrity is very important when deciding which stock to bet on. He tells investors not to buy stocks impulsively.

According to him, selling right is more important than correct buying. He says it is necessary to keep a lot of cash. "We keep an average 10 percent cash in our portfolio," he says.

He also does not think the bull market is ever going to get over in India in the next 15-20 years.

Below is the verbatim transcript of the interview on CNBC-TV18

Damani: Let me just start with a quote from a great film, in the 1970's The Graduate - Dustin Hoffman was told by his uncle get into plastics. What advice were you given when you graduated.

Parikh: Even before I graduated, while I was in my engineering third year my uncles - Naresh Khanwala and Kisan Ratilal Choksey, both BSE brokers, they recommended me to invest some money in shares. So, even before completing my graduation, I was more interested in looking at the fluctuations every day.

Damani: You still went for an interview in a chemical firm, didn't you?

Parikh: Yes I did and I failed very miserably there. Secretly, I was very happy to fail in the interview. So, I decided that I will go into the stock market and joined the Madras Stock Exchange as a stock broker.

Damani: Tell me about early days. 1980's Chennai, Madras then, was still a backwaters for the capital markets wasn’t it?

Parikh: Yes it was. Most of the companies here were very conservative and we had a unique system of settlement in two days whereas in Mumbai the settlement used to take place in about 2-4 weeks time. So, a lot of guys used to be happy to sell the shares in Madras at a discount. So, most of the brokers were looking to buying shares in Madras and selling it in Mumbai and doing an arbitrage. However, I was more keen on seeing how the stock prices fluctuated. So, I started taking interest in — apart from investing my clients money, I started investing my own money.

Damani: You had a very interesting thought process on how you came about your MNC ideas, share that with us.

Parikh: We had subscribed for the Financial Times London newspaper and once there was an offer of getting six international reports free of cost. In those days there was no internet and there was no other way to find out about how the parent company was doing. So, we wrote to them and we got the six balance sheets.

Damani: Which ones were they?

Parikh: I got the balance sheets where all the subsidiaries were listed in India. - it was Birla 3M, Bosch, SKF Bearing, Nestle and Colgate.

Damani: They became the ideal set that you looked at?

Parikh: Yes. I was reading the 3M balance sheet and I found that they had some 60000 products and one third of the products were invented in the last three years. It was a highly technological company and it was darling of US stock markets.

I was looking at Indian companies which was about Rs 200 - Birla 3M. They had very few products so I went on buying these shares and till now I have not sold any share of 3M because I still feel that it has got too much potential to go ahead.

Damani: That is staggering, now it is up almost 60X since you bought it.

Parikh: It is about Rs 10000 around. I don't see the rate daily but that company is a great company. I think now specially with India coming out with so many other things, new cities, smart cities and infrastructure and all that, I think it is great company

Damani: Talking about great company, what is the great company that you kept that allowed you to become a wise investor, what were your early influences in your career?

Parikh: Madras Cements and Lakshmi Machine Works were the two stocks that I bought. Lakshmi Machine Works was a company which I first bought. That influenced me to go into the market more deeper. I went in the factory, I saw that they had some 10 percent holding in a company which was the world number one company and they had some 5-7 year waiting list period. It was available at less than one multiple or one multiple. So, I bought the stock at Rs 180 and saw the price go to Rs 7500 after one for one bonus. Of course I did not keep it for that long. We made good money in that as well as in Madras Cements.

Damani: Was it still Mumbai oriented trade that brokers from Mumbai would come you take them and as a by-product you find these companies?

Parikh: That is right. The idea was that he company was very good and the company had to be popularised also. So, lot of people in Mumbai they did not know about Madras Cement or they did not know about Lakshmi Machine Works. So, once they came to Madras and they visited the management and they realised that these are all gold mines without even a scratch on them. So, Madras Cement and ACC - ACC used to be double of Madras Cement. Madras Cement had 4.5 lakh tonnes capacity which is now about 15 million capacity. They have never asked for any money from the shareholders, never diluted, no right issue, nothing and you see where the price of Madras Cement is and where the ACC price has gone.

Damani: What was the dividing point in your career when you decided that Govind Parikh as an independent investor has arrived as opposed to following the Mumbai leads?

Parikh: That was when I invested in Dr Reddy's Lab. There was a conference of Dr Reddy's first public issue in Chennai. After the meeting a merchant banker friend of mine said we are going to have a dinner, why don't you stay back. I was very excited to listen to Dr Reddy because in his speech he talked about so many things which I can't imagine. Nobody imagined at that time that such things could happen- he used to make a product which no one was making and make some profit and seeing him everybody will come there and he will switch over to the new product. So, thereby there was lot of money made in Dr Reddy's Lab.

Damani: So, you got the management right, you got the company right and Govind Parikh had become an independent investor?

Parikh: Yes. Every year I used to visit the company and the first time I bought the shares at Rs 11 and I sold at Rs 19. However with the money made I thought I will take a flight ticket otherwise I used to go by train. So, I took a flight ticket and went to Hyderabad and I was there for two days. I was so impressed with their factory and the way they work and all that. So, I have seen all their factories including their research centre later. It has been a great story.

Damani: Peter Lynch, one of the very famous fund managers of the world said invest in what you know but you are investing in where you stay. You have picked a lot of these stable south companies which have grew around the Chennai area.

Parikh: It is because most of the companies in Madras they were very conservative first of all and they were technologically very sound. Some of them were like Indian leaders or even global leaders. So, this Sundaram TVS Group and Ramco Group and Murugappa Group, all these companies they are very conservative but there is lot of value in these companies. Technologically they are very sound. So, I invested in TVS group of companies, Sundaram Fasteners, Sundaram Clayton and even Sundaram Finance. They have rewarded shareholders quite a lot.

Damani: But at that time you were more comfortable being in this area. You knew the people, you met the management. So, there was a comfort, that is why you were here?

Parikh: First of all it was easy to attend the AGMs and after the AGMs I always used to spend half an hour and most of the managements they speak about the company's future and all that, all the directors would be there. So, we like to stick around there for half an hour and try to understand more about the companies. In fact once one chairman told one of his directors that he has got more confidence in his company than our own self.

You take for example Sundaram Clayton, there was a brokers conference in Chennai and those days that was the first conference it was a TVS Motors and Sundaram Clayton together and the time allotted for Sundaram Clayton was just 15 minutes. TVS Motor was for about one and half hours. That was the focus and everybody from Bombay was only interested in TVS Motors. But I looked at Sundaram Clayton and this company was making air braking systems for the entire heavy commercial vehicles and the collaboration was WAPCO, which is a global leader. It was a combined company actually. So, this company in the bad times they made sure they were cutting down the cost and reducing the interest cost and all that and trying to be prepared for the good times.

So, I invested in Sundaram Clayton in a big way and subsequently they have been very fair to the shareholders also. They gave shareholders equally what the promoters got, say minority shareholders also got the shares of WABCO. And the stock which was about Rs 100-150, even it was Rs 300 about five to six years. Today it has become Rs 7,000 is WABCO and Rs 1,800 is Sundaram Clayton. So, enormous amount of money has been made.

Damani: But that is where you are comfortable. You know the management, you are can visit them, you can see the companies, so you are sticking to, you are knitting in a matter in a manner of speaking has helped you.

Parikh: Exactly. If you take Sundaram Finance. Now anybody will trust two companies in India more than Government of India. One is Sundaram Finance and one is HDFC. These two companies people will just blindly buy. And this is a gold standard. Accounting has been so conservative you can't go wrong.

Damani: You have a diluted equity too despite being a finance company.

Parikh: Absolutely. So, even if you buy at any wrong price also you are not going to lose ultimately, you are going to make money.

Damani: You talked about gold standard. Gold standard management is Aditya Puri of HDFC Bank and he made a statement which influenced you and he said 'what I did not do contributed a lot to my success'. What do you mean by that?

Parikh: I tried to follow that from my earlier days. I did not invest in any other asset other than the stocks. I didn't buy any real estate, I didn't buy any gold.

Damani: Why not?

Parikh: Because I always thought that in this kind of inflation any financial asset is going to do much better than real estate and gold, more importantly I didn't know anything about real estate and it was a hassle to manage it. So, I decided to stick to what I know. People have even made more money in real estate, I don't deny that. That was their strength. My strength was to invest in stocks. So, I stayed invested in stocks and in stocks also I stayed only in the companies that I knew and even the investors which I knew. I didn't buy any technology stocks, I missed the entire technology bus, but it is okay, no regrets.

Damani: You have enough ten baggers and fifty baggers in your portfolio.

Parikh: By god's grace.

Damani: So, Govind Parikh has now evolved, he started as a broker in Madras, took Bombayites to visit companies. Now is an independent idea generator, figures out himself. What is the Govind Parikh template for a stock, how do you know a stock is good today. How do you judge?

Parikh: Basically I look at the margin of safety. That is very important. Perhaps we may not make too much money but I don't like to lose money in the stock market. So, at the time of buying I am very careful, I don't impulsively react to people and buy.

Damani: But what happens if the stock price falls even after that, which it does?

Parikh: When the price falls what I do is first try to find out whether I have gone wrong somewhere in my first assessment and if I feel that I have been okay I do more research on the company and I try to increase my exposure.

Damani: What else do you look for?

Parikh: Management integrity is very important.

Damani: How do you gauge the difference?

Parikh: See if you can see a plant, what you learn in the factories, you don't learn in the balance sheet. There are lots of hidden assets which you can understand when you got to the company. The faces behind the numbers and also the integrity of the management is also more known by the employees. How much they speak about their employees. Not that they are scared or something but generally they say. If you go to TVS companies, Sundaram Fasteners for example the management doesn't decide the increment of the employees. Chairman just comes and sits. It has been decided by some group of people and they say it is okay. There has not been a single strike in the last 30-40 years in this company from 1966. So, I admire the company quite a lot.

Damani: That is management integrity. What about valuation parameters like PE ratio, dividend yield, cash flow. What is important to you?

Parikh: I like to buy things in a bad market. So, it's basically PE, GE you should see and also you should also see what is going to be the future cash flow, not the present cash flow. So, as time goes you understand that in the next two-four years what is going to happen and you always get opportunities to buy. If you had sold the shares at a right price and you have kept some cash with you it always helps you in getting into the stocks at much lower level. And at that time there is so much blood on the street then you buy them, it really helps you to invest in these companies because company you have already studied, you have in your radar. You buy the stock, don't buy it impulsively, you can't buy at any price, anything.

Damani: Don't look at the screen and buy.

Parikh: Never look at the screen and buy.

Damani: If you buy things you don't need very soon you will have to sell things you do need, that was said by Warren Buffett. Selling is as important as correct buying, isn’t it?

Parikh: In my opinion selling is even more important than correct buying. Correct selling and after selling keeping the cash is more important than even correct buying.

Damani: Cash burns a hole in peoples pocket, right. They want to invest it right away?

Parikh: Buying is easy, people buy the stocks and once it comes to selling people get a little possessive because price goes up more than the expected levels and then they keep over expecting. They give wrong valuations to themselves.

Everybody likes the stock which they have bought, when the price goes up they get even more happy but they don't think that you have to be fearful as the price overshoots your level. What people don't realise is, they create a very powerful asset by selling a stock called bear market buying power. So, what we have decided like my son and I in last few years, we keep a lot of cash, we have had about average 10 percent of cash in our portfolio in the last one year which I have started deploying about 30-40 percent in the last few days or so.

Damani: Would 20 PE force you to sell or market cap force you to sell or do you think the end of a bull market forces you to sell? What is the selling decision?

Parikh: I look at the company first. If the company is extremely good and timewise overpriced, not moneywise, there is some waiting period, may be in next 2-3 years nothing is going to happen but it is a top class company like Bosch I would sell partly I don't sell all of my shares.

Damani: Just going up is no reason to sell, right? Just because stock has gone up 5X or 10X is no reason to sell?

Parikh: I ask myself, if I have that much money to buy a share, will I buy the same share? Suppose the answer is no then why stick to the share. I can go to something else which is available still cheaper which can again appreciate.

Damani: Stocks in a bull market can go to ridiculous levels, we know that from experience and market could be absorbing something that is not relevant right now but would happen in the future. So, in that case don't you second guess yourself?

Parikh: I do that. Sometimes we go wrong also by selling. There have been some mistakes like that, we have sold some shares and it has gone up subsequently.

Damani: No regrets?

Parikh: You can't regret in a market which has given so much to you. You can't have all things, some things can go wrong also. However a lot of money in the market is made not in the bull market, when the market has crashed, when there is blood on the street virtually, people say stock market is a bad world, bad place to be in, you buy stocks- good quality company which you have done good research on that, you buy those stocks and you keep them and have lot of patience to wait. Certainly it will come back and you will make a lot of money. Everybody knows if a stock falls from Rs 100 to Rs 10 the fall is 90 percent but from Rs 10 if it goes up to Rs 100 back it is 900 percent.

Damani: What else have been your learnings in terms of selling. Do you feel that once you think a bull market is over, do you judge a bull market and then want to get into 60-70 percent cash?

Parikh: I don't think bull market is ever going to get over in India in the next 15-20 years.

Damani: But the markets will correct. You know that 40-50 percent some times. If you feel such a correction is coming say, in 2008, how would you handle your portfolio?

Parikh: In 2008 it was a really bad scene. Whatever little cash we had we deployed everything. After that also market fell down. So, I took a holiday, I just was not looking at the market. But sometimes it happens, the market can fall in much more than what you think about.

Damani: As Buffett said, market can remain irrational.

Parikh: Irrational for a very long period of time.

Damani: Longer than you can remain solvent.

Parikh: Exactly.

Damani: You have a young son, what have you taught him about the market?

Parikh: I tell my son and everybody else that you should have discipline and patience. You should have a discipline to keep cash and you should have lot of patience, if you hold the share and if it comes down, don't panic.

Damani: Rome wasn't built in a day and neither are shares.

Parikh: Yes. As you rightly said that this too shall pass. So, we are waiting for very good times to come. I am waiting for very good times to come. I am very bullish. I would like to buy and regret, rather than not buy and regret at this time.

Wizard of Dalal Street 2015 - Kalpraj Dharamshi

http://www.moneycontrol.com/news/market-outlook/wizarddalal-street-kalpraj-dharamshis-market-journey_3021241.html

In the latest part of CNBC-TV18 interview series, Wizards of Dalal Street, renowned value investor Ramesh Damani caught up with Kalpraj Dharamshi, founder and owner of Dharamshi Securities, to trace his multi-decade journey in the Indian stock markets.

Starting his career in the late 80s, Dharamshi came in contact with big bulls Rakesh Jhunjhunwala, from whom, he says, he picked up a lot of cues on investing as well as trading.

After transitioning from being a broker to a trader and, then, an investor, Dharamshi grew by -- as he puts it -- "reading, observing and committing mistakes" (he suffered a loss of Rs 1 crore following the September 11-triggered market crash).

But the journey was good to bring him into his own. 

In this interview, he discussed his career, his learnings as well as his outlook on markets and stocks going forward.

Below is the transcript the interview on CNBC-TV18.

Q: Let me take youback in your life. In 2001, twin towers were falling in New York; your portfolio had a personal 9/11. Take me through that month in your life.

A: In September, 2001, we had been in a bear market for almost 16-17 months.

Q: The tech bubble had burst.

A: The NASDAQ tech bubble had burst and along with it, the entire globe, all the equity markets were falling. And I remember, you and me, we were at the Rotunda and somebody from my office called me and said there is an incident in New York and they are showing it live on TV – on CNBC. And we ran to Rakeshji’s office at Vithaldas Chambers.

Q: Rakesh Jhunjhunwala’s

A: Yes. We knew that something had happened which was going to change the world. And next day, I had Rs 1 crore of loss on my trading position and till that time, it was probably my largest loss. But, I had been through enough markets to know that it was also going to cause a capitulation. 

The US markets were closed for three to four days. I knew, whenever they opened, bottom will be formed quickly. So, I had that knowledge or I had that premonition and I could visualise, I went all in into the market. I also leveraged, which I rarely do. 

Q: Markets can remain irrational long than we can remain solvent. So, in 2001, with the market in such bad shape, the old economy crumbling, what gave you the confidence to be bullish?

A: You had stocks available 8-10 percent yield. I knew valuation wise, I could not go wrong. It was only a question of timing and thankfully, I got it right.

Q: How did you figure out Dalal Street?

A: My dad was in the markets prior to me joining him. I used to do the back office work for him while I was doing my articles and I was very keen on joining the markets. I knew chartered accountancy was not for me. I wanted it as a qualification, so that I could marry a decent girl.

Q: So, take us through your early career? What would you do? Were you a trader? Did you do brokerage? In the early years of Dalal Street, describe the flavour and what was your role in that?

A: I joined the markets late 80s and in those days, there were no investors - there were only brokers and traders, speculators. Unfortunately, we had a set-back in broking – a client of ours defaulted – and so for four or five years, I had blinkers on till the Harshad Mehta bull market, it was all broking, broking, broking. 

So, my career was broking, trading and then evolving into an investor. Of course, the trading has not stopped, but the investing part is now much bigger.

Q: What were the early influences in your life? 

A: In the mid 90s, I met Mr Warren Buffet -- through books of course -- and that opened up my eyes. I decided broking had to be done properly. I asked my friend Arvind Joshi to join me. 

We started Value Quest Research in those days and as we started researching the market properly, in the next two, three years and in my course of becoming a broker I was visiting all the high net-worth individuals (HNI) and I came across Rakesh Jhunjhunwala.

Q: An early influence in your life?

A: Absolutely, and a tremendous influence. Rakeshji is totally transparent. He shares everything with everyone. So, it was a tremendous learning experience for me to see how it is done. 

Reading about it is one thing, but to see it being practiced on a large scale, your horizons broaden, your risk taking ability goes up, you are able to scale up your trades, you are able to scale up your investments, you are able to size up opportunities better and to apply that theoretical knowledge, that is what helped. So, in the early years, I would say, it was Arvind’s research and Rakeshji’s influence. 

Also, he made me or through him, I met a lot of the smartest people in the market. I met you, I met Radhakishanji, I met a whole bunch of people. 

Q: And you all contributed to each other’s lives?

A: Absolutely, we are all ‘market ka keeda’.

Q: But, you said that the early influences were Rakesh, but give me one or two things that helped you figure out your own thought processes as an investor.

A: One thing Rakeshji and Radhakishanji, I remember, we were having a drink in the Harbour Bar and I always keep asking Radhakishanji about his style - what he was doing.

Q: That is of course, Radhakishan Damani.

A: RK Damani. And without asking at least five times, he would not come out. And one day he said, “Trading may be only paise 5-10 of my wealth as of now, but without that 5-10 paise, the other 90 paise would not come.” So, that kind of clicked. So, you earn and then you deploy it as investment and that is how you grow rich. And these were the smartest.

So, what we did - me and Arvind - was study how the richest people had made money through the market - how they did it, their methods.

Q: You really did that? You actually went through a list of 10 people and how they became rich?

A: Absolutely, the three ways of learning are reading, observing and committing mistakes yourself. So, I have had my fair share of mistakes. I also read and I also observed and observing firsthand at that close quarters, I was privy to Rakeshji’s thinking, I was privy to Radhakishanji’s thinking.

Q: How did you become friends with them? I mean you were a Kalpraj Dharamshi, a new entity broker. Rakesh was already a larger than life figure. How did you strike up a friendship?

A: I do not know, it was friendship at first sight and he is a large hearted man and he took a liking to me. I do not know, you can ask him probably. 

Q: What were your first initial ideas where you actually bet your money and how did that work out?

A: Coming from my background in broking and the setbacks I had early on and surviving the 90s - 90s was a very bad period in the market and in the 90s you had a lot of fly by night operators - all kind of shenanigans in the market, SEBI had just been formed in 1993 and till the regulation was in place a lot of things happened in the market where people burned their fingers badly. 

So, having survived that, I had that conservative gene in me. It was all MNC investing till that point in time, till I saw people making big money in other kinds of stocks also. So, in the earlier years it was all Cadbury, Colgate, Castrol, digital equipments.

Q: One of the finds that if I am distinguishing about you, is that you keep a trading portfolio and keep an investing portfolio. Keeping those two are different, it is trying to lick your elbow, it is almost impossible. How do you do that?

A: It is difficult and sometimes you end up making mistakes, which turnout to be costly. The thing to do is separate them mentally in your mind as well as physically to keep to separate accounts, so that the revenue department also does not have any issue with it. 

You keep your trading separate and you keep your investment separate. And never trade in the stock in which you have invested. So, if you have invested in Infosys, do not trade Infosys for whatever percent. You might think at some point in time Infosys is going to react 10-30 percent. Just hold on to Infosys, if you want to hedge, do it in the F&O and do not mix the two. That is the way I found that you are able to segregate the two.

Q: But you buy whether a trading position or an investment position because you think it is going up. So, how do you segregate them?

A: There is a lot more fundamental analysis behind an investment. Whereas trading is largely price based, there is of course at the back of your mind a vague understanding or an understanding of the stock you are buying or selling at that point in time. You know whether it is overvalued or undervalued but price.

Q: Let me take you back to investment style. From the 90s you evolved, by 2000s you have become a successful investor. What were you looking for in great stocks, what were the characteristics of great stocks that you found?

A: What I learned from Rakeshji and then I sort of internalise is you go for stocks or companies which are addressing large opportunities.

Q: For example?

A: Titan is addressing jewellery market, it was not. It was addressing the watch market. There also it was a two player market. So, you find companies in niches which are addressing large markets and do not have too much competition. Amara Raja in batteries.

Q: So, first big opportunity, that is what you look for. Big external opportunities?

A: Big external opportunity, you stay away from the one which have a bad balance sheet. Most of the investors what they do is they start investing with P&L. Profits, earnings, EPS, PE. 

The first thing to do is check the balance sheet, whether there is a hole in the balance sheet or not. What are their accounting standards, are they investor friendly, does the management have a reputation for integrity.

Q: Does it pay taxes.

A: Does it pay taxes, does it pay dividend.

Q: What is the debt, what is the gearing?

A: That is the first. I never invest in a company which is leveraged.

Q: How important is to address quality of management for you?

A: It is really important, because finally it is the efforts of the management which will get you a three bagger or a ten bagger. This is the different between Mastek and Infosys. They were both in the same business, both pioneers and in the early 90s or mid 80s is when both the companies started. See the difference, it was just people. You had Narayana Murthy and you had Mastek. See the difference in the market cap of both. So, it is finally people who will make you money. 

Q: Even when you started in your career obviously you found some great businesses as you said. Are there still great businesses available that investors can find value in or are the opportunities behind us?

A: It is never like that. Greed and fear always gives you an opportunity - uncertainty, doubt, fear, panic, despondency. So, a market without any of these characteristics is not a market in which you should be investing. Right now, we are probably somewhere between fear and panic. 

These are the markets where you know the froth has been taken care of. Stocks may be expensive or cheap based on their individual capacity and you can have a look at them, but a market where there is froth, where there is euphoria, where there is optimism - those are not the markets where you want to buy in.

Q: So, you are telling me that in every crisis you spot opportunity?

A: Every crisis, yes. But is this a crisis or is this a garden variety correction is what you need to figure out.

Q: That is different but I am saying generally over the last 25 years crisis investing has helped you?

A: Absolutely, if there is crisis it is an opportunity.

Q: People should step in?

A: It is an opportunity to buy if there is a crisis, there is an opportunity to buy.

Q: In both our careers the index has gone from 800 to 28,000 at the peak. So, a lot of people, a lot of kids tell me that the best is behind us and that everything is well discovered. What would you say to them?

A: I don't think so, there are as many opportunities in the future. What these kids are probably telling you is that they did not or were not able to participate in the 100 or 200 winners that have happened so far in the last 25 years.

Q: They were new; they are new to the market.

A: Exactly. So, they did not get an opportunity but then they are looking in the rear view mirror. As we speak there are probably 100 ten baggers and ten 100 baggers sitting right there. You do not know, you need to figure that out.

Q: You figure that out in the future.

A: Absolutely.

Q: Take me through some of your best investment and what propelled you to that investment and when you bought that trade did you know that this is going to make me money?

A: In some cases it is very apparent, say, for example I missed out on the IT boom, I had no clue. So, I went on a crash course trying to learn and we had the bear market post the NASDAQ bubble. So, in that you came up with the IT, Business Process Outsourcing (BPO), ITES segment and it sort of appealed to me and we were all searching for companies. So, if you remember we had gone and met the CEO of a company e-Serve, which later became e-Serve but at that time it was Citicorp Securities.

Q: And later merged with TCS.

A: Absolutely. So, it was doing BPO work for Citibank in-house transaction processing and it was available for a market cap of Rs 120 crore and it was addressing probably USD 10 billion worth of market.

Q: With obvious opportunities.

A: And in-house and it was listed and we came down from that meeting, I remember on the footpath we were standing and discussing why is this company listed. We finally came to the conclusion that this was probably because god wanted us to be rich.

Q: Failures teach us a lot. Very good investor has had his number of failures. What are some of the things that still rankle you?

A: I invested in a company in my earlier years, say, early 90’s in a company called Shree Vallabh Glass - went to zero. I still have the physical certificates of that company with me. And then in mid 90’s or late 90’s, I had bought into a company called Swojas Energy which was taken.

Q: Parmalat?

A: Parmalat, yes. Parmalat was an Italian company, which itself went bankrupt and lost 100 percent of my money on both those investments. 

Q: Who do you blame for this loss?

A: Myself. Nobody else. It was definitely me.

Q: Is that a characteristic of investors that they take responsibility for the decision thought the management, analysts?

A: All decisions you are responsible, and if you do not own up to that, some point in time, you will get into a psyche where you start blaming others. You are headed for trouble.

Q: At what point do you question the validity of the hypothesis after it is down 10 percent, 20 percent; the earnings don’t come in. When do you question how the stock has been?

A: What I found is that within the first six months, I have a fair idea whether an investment is going to work or not. Till the time you invest your money in it, you have an idea of a stock which is entirely different. It changes as soon as you put your money into it. Then you start digging more, you spent sleepless night.

Q: Surely, you don’t invest before you investigate?

A: Even after investigating, once you invest the motivation; your intellect does ten times the work it is supposed to do or prior to investing. So, what I find is within a first six months I probably have a decent idea of whether something is going to work or not. Say for example a recent investment of mine, Delta Corp. 

We bought this four years back. It is a gaming company out of Goa. They have a property in Daman where they are awaiting regulatory licenses for starting their casino. I had high hopes for this company and I still do, I own it, I haven’t sold a single share.

Q: Not recommending it but just discussing it.

A: Absolutely, recommendations, I am not recommending anything. 

Q: Just to be sure about it.

A: Yes, the regulators take a very different view.

Q: The odds are against that.

A: Absolutely. So, I am not clear in mind whether it will work or not. They need to become asset light, they need to dispose of their assets. They need to bring down their debt and they need to get a license over which they have no control.

Q: The environment has to change.

A: So, once that happens - it is a 40-45 percent gross margin kind of a business. Most of what they will have if they get rid-off their debt is a small balance sheet Rs 500-600 crore and they do Rs 300 crore topline out of Goa. They can probably do any other Rs 300 out of Daman. They are a pioneer, they have no competition. It is a unique company and if they do manage their Daman license and they lighten their balance sheet I see a bright future for them.

Q: Let us go from Delta to Alpha. What is the Kalpraj Dharamshi template after 25 years of evolution. How do you pick stocks, what are the characteristics of a good investor that you think are important?

A: Temperament and discipline - I find are more important than intellect or curiosity, that is important. Intellect is required but you need to figure things out in your own sweet time, but you need to be ahead in terms of deciding – if you can decide fast, when you see an opportunity. 

What I have found is that of all the successful investors, 10 stand out. That means, they have an omission of 190, 290, 390 stocks which went on to become 1,00,000 baggers and they did not invest in.

Q: It does not matter. 

A: It does not matter. You need to get your 10 stocks right. Bet big on those 10 stocks and then wait it out. Back up the truck. I am yet to back up the truck, but now, my mini station wagon I am able to back up.

Q: But that is always to key, right? To find a great idea and back up the truck?

A: Absolutely, bet big.

Q: Temperament is that. What is the discipline part that investors need to learn? 

A: Well, you do not need to listen to everybody’s opinion on your stock. If they have an opinion and listen to it and form your opinion, hold your conviction. First get yourself convinced, once you have conviction, hold on to it. 

If you feel that there is actually a reason – there may be the best of investors out there telling you that your investment is wrong. It happens to us because we all move around in a circle where the next guy is as smart as you or probably smarter than you. And his opinion, you have to give weightage to. But you need to stick to your own conviction also and that is what I meant by discipline.

Q: Conviction - that will surprise me about interviewing so many wizards, that everyone has found their own stocks to riches. It is not that a common stock, everyone bought a Tide Turner, everyone bought an Infosys, and everyone bought an MRF. All the people in stocks find their own stocks because that is their passion.

A: In the early days, say, the early 2000s. I invested in a lot of stocks with Rakeshji, with you and it was quite okay with me. Now, not so much, I am seeing my portfolio maybe has 10 percent commonality with Rakeshji’s.

Q: It is your own ideas.

A: Absolutely. And you have more conviction for those. And only if you have conviction you can hold large positions through periods like this.

Q: Absolutely, it is the most important thing. You are in still the late summer of your career, you have done very well for yourself, does money still drive you or is there other things driving you right now?

A: It cannot be money. At a point in time, you decide you have enough and you are not – I mean, I come from a middle class background, I do not want a private jet, I do not travel business class, no yachts for me, I am fine living the way I am. Once in a while, I need a expensive holiday, but that is about it. 

I do not need expensive scotches, I do not drink scotch. So, my lifestyle I can probably maintain with what I have. That is not what drives me. Finally, an investor who has crossed the threshold is what I believe in.

Q: I agree. Money is a way of keeping score, nothing else. Just to wind up this show, I have a rapid fire round for you. So, let us have some fun with that. The first thing, a CA education is?

A: Gives you an idea or a fairly detailed knowledge of accounting which is essential for you to be able to read a balance sheet which is required for investing.

Q: Sensex, 50,000, buy?

A: I do not know. I have no clue.

Q: The investor you admire the most in India?

A: Mr Radhakishan Damani, Mr Nemish Shah and Mr Rakesh Jhunjhunwala, not in that order but only three qualify in my mind.

Q: Next item on your bucket list.

A: I have a whole list of place, which I need to visit and I have been neglecting that.

Q: So, travel?

A: Travel, absolutely.

Q: Now, say the first thing that comes to your mind when I say the following: Maldives?

A: Paradise.

Q: Youth or money?

A: Youth.

Q: Philanthropy?

A: Big responsibility and my dad started me off, I have got big shoes to fill.

Q: Poulomi?

A: Poulomi is my daughter and she is my life. 

Q: Singing?

A: it is my passion.

Wizards of Dalal Street 2015 - Ashish Dhawan

http://www.moneycontrol.com/news/market-outlook/mkt-not-over-pricedpharma-fmcg-are-ashish-dhawan_2887321.html

How Ashish Dhawan juggles profit with philanthropy

In the latest part of his CNBC-TV18 interview series Wizards of Dalal Street, renowned value investor Ramesh Damani caught up Ashish Dhawan.

Dhawan is one of India's earliest and well-known private equity investors, starting ChrysCapital before he turned 30.

His early focus on tech -- he started in 1999 -- gave way to an evolved framework of equity investing that balanced growth and value.

Having grown into his role as one the country's top investors, Dhawan then also took to something that he had always been passionate about, philanthropy and teaching, and started Central Square Foundation and co-founded Ashoka University in Haryana.

Damani travelled to Ashoka University to speak to Ashish and his brother Akhil, also an investor.

Below is the transcript of the interview on CNBC-TV18.

Damani: One of the first things I read about you was that when you wanted to raise a fund, someone told you, life is too short to invest in India. How did you react to that?

Ashish Dhawan: It wasn’t just someone, it was actually David Bonderman who sent me a fax back on a letter I had written to him. It actually gave me additional confidence because I said if people are so bearish on India, it means that-obviously India hadn’t delivered returns for 10 years and that only meant that there was an opportunity going forward. So it strengthened my resolve in a sense as opposed to getting me to be depressed.

Damani: But you were still young, you had not been tested, you had no experience and still that gave you confidence rather than shattered your confidence?

Ashish Dhawan: I had been around markets, I had invested in Latin America and the US when I was working at Goldman Sachs and other places…(interrupted)

Damani: But prop money, not your money?

Ashish Dhawan: That is correct but at least it gave me some perspective about markets, cycles, things like that, ability to think for myself, have some confidence in myself. I knew it was going to be much harder raising capital when I got that message but it was a signal to me that it was worth poking around at that point in time because people were frustrated with India.

Damani: Just for the record, you were one of the first persons to be able to raise those kind of funds to invest in private equity in India, right?

Ashish Dhawan: Yes, but it was very hard. We had a 98 percent rejection rate at that point in time, this was late 1998, early 1999. The first question people would ask is how far away is Delhi from the Pakistan border because both countries had had nuclear…(interrupted)

Damani: Kargil war and nuclear…(interrupted)

Ashish Dhawan: Nuclear tests and all of that, so nobody was in love with India. New York Times called India-Pakistan the most dangerous place on earth. So it was very difficult to raise capital. I was a young kid, I was 30 years old but as an entrepreneur you just have to persistent, you have to be a bulldog, you have to never give up and we had that attitude.

Damani: So, I know that you raised a fund and 2000 got the internet wave in India but by 2001 you had learnt a very painful lesson, what was the lesson that you learnt?

Ashish Dhawan: The lesson was to just not get caught up in the momentum. The shop I had worked in was very much of a more value oriented shop and somehow because of the hype around the internet in the western world, as I came back, we made one or two internet investments early on and had this success as it were-the first deal that we did was Baazi.com which went from a USD 2 million valuation to a USD 60 million valuation in six months, we were geniuses. 

So somehow we felt that we had the formula, didn’t take a dime out though and effectively ended up destroying capital for investors. So, it was a harsh wakeup call during a first fund but a very important lesson because it allowed me to pivot, really reflect and figure out what I was good at, where I wanted to be long term.

Damani: But it wasn’t all of a disaster, you got some good investments into your first fund too. Tell me some of them.

Ashish Dhawan: Our most successful investment was a company called Spectramind, Raman Roy’s company, and actually we had backed three different business process outsourcing (BPO) companies at startup phase. Interestingly, UTI Bank which people often don’t remember we invested in at Rs 38 a share back then, we couldn’t hold it all the way because it was a first fund, I had to show some exits because I had such disastrous returns but we ended up with a 25 percent internal rate of return (IRR) on an internet vintage fund and that really put us into business.

Damani: So then you went ahead and started a second fund, you raised a second fund but by then you had matured, you had worked in Western markets, you had worked in Indian markets, how was your philosophy different the second time around?

Ashish Dhawan: The onus was very different because the first time we now had institutional capital, no longer friends and family. Harvard and Stanford both committed capital in our second fund, it was serious now and so it was a point in time where we just said let’s stick to our knitting. 

I had earlier been more of a value investor as I had told you. I figured that growth capital investing was going to be the right strategy for India for the next 10 years, so that is the only thing we will do. Everybody said buyouts, ventures, we said we are not going to do any of that, we will just narrow the focus as much as possible and be really good at doing one thing.

Damani: Where did you find growth in India? In 2002-03 we were on the cusp of a bull market. What did you sense that was happening in this country?

Ashish Dhawan: I was very bullish on financials because clearly it was the leverage play on the economy. You could see the economy coming out of a very rough investment cycle and low penetration, low market share for private banks but a big one was non-banking financial companies (NBFCs), which had been obliterated through the late 90s and we look to the people who left standing - Shriram Transport Finance Corporation, Mahindra & Mahindra Financial Services, Bajaj Finance, we ended up investing in all of them. It was a sector trade. 

So as I said there are just a few, maybe 10 odds that are left standing that really can build good businesses and now you had a favourable wind behind your back, the RBI was looking upon these more favourably. So, financials was the first big place where we put capital to work.

We did a couple of things right, one is we looked at the big picture. So, we did a lot of top down and got some sectors right early on. The second thing we did right is we actually exited. So, people tend to fall in love with their investments in the emerging world. They are never going to get out and we actually sold - 2007 was the year when we sold the most we ever had.

Damani: You got to the top of the bull market cycle?

Ashish Dhawan: It wasn't that we knew it was the top. It was just we made investments in 2004 and 2005 which had quadrupled and quintupled and it made no sense to us. We thought we would get those returns in a 7-8 years period of time.

Damani: One of the things associated with you - your admirers say -- is that you always get the inflexion point right. Tell me about that, how do you manage to sense that we had an inflexion point in 2003, another inflexion point in 2008, financial services with inflexion point. What goes into that matrix?

Ashish Dhawan: It is a few things. One is I tend to look outside India as well. So, I have always looked at markets abroad and studied cycle. Two is, I am a student of history. So having seen what has happened in the past, instinctively I am value conscious, everything from investments to things I buy in the real world and so when something doesn't feel like it is worth buying my instinct is not to just be active. 

One of the things I learnt early on from my first experience, my first fund was sometimes it is just to say I am going to sit on the beach and you are much better rewarded for doing that. Activity is not a sign of progress in the investing business.

Damani: When you do inflexion investing the first thing you look for is perhaps bombed out sectors because you find value there. Is that what you started doing?

Ashish Dhawan: Primarily, yes. Much of a contrarian approach. So we looked at pharmaceuticals and particularly domestic pharma when everybody was not excited about this back in 2005-06, NBFCs in 2003. So one sector we got right and wrong was the construction sector where we invested in 2003-04, exited very quickly and like idiots went back and invested again when valuations crashed in 2008, so we got that wrong, that inflexion point. But largely it was around bombed out sectors.

Damani: All great investors are defined by one or two great picks they have made. Jim Rogers by commodity, Soros by currency bets, Buffett by his bet on Coke. What have been your fondest investment bets?

Ashish Dhawan: My fondest ones have been Shriram Transport which was actually four different companies when we invested and the promoter agreed to merge it. Murky sector, lots of hair on it and it completely transformed under our watch, all thanks to the promoter. 

The second one would be UTI Bank currently known as Axis Bank, which Dr. Nayak had just taken over and was a massive transformation that was under way. We could see it early on and we stayed with it once but then came back into it again.

Damani: What did you see in them? Was it the management ability to grasp the marketplace, what did you see in those two investment opportunities?

Ashish Dhawan: In the case of Shriram Transport, very earthy people, very focused on return on equity, no frills kind of business and a long runway ahead of them because very under penetrated market.

In the case of UTI Bank which later became Axis Bank, a huge difference between them and ICICI or HDFC Bank at that point in time even though on some dynamics in terms of brand, the ability to gather deposits, they very much had the same credibility, it is just that they needed new management and Dr Nayak brought that.

Damani: One of your controversial pick for which you are quite well-known in the market was HCL. You bought that when it bombed out in 2007 maybe at Rs 1,000 crore-1,200 crore marketcap, did phenomenally well over the next few years. Take me through that?

Ashish Dhawan: What we saw was the promoter Shiv Nadar had at that point decided -- not just then when we invested but for a few years prior to step away -- to bring in professionals - really professionalise and Vineet Nayar junior, who was the CEO at that point in time was a phenomenal leader. He had the ability to energise. It was sales machinery.

However, what we saw is he had something special which was infrastructure management, very low penetration service out of India and HCL was best positioned, as well positioned if not better than Wipro and the market was even larger than application development and so we said this is going to be the future of this company and Vineet used that to acquire Fortune 500 companies and sell other services to the company as well.

Damani: Investors and analysts are also judged by the mistakes they made and in our career we have all had lots of mistakes. What are some of the mistakes that hurt you today, that rankle you still?

Ashish Dhawan: My worst one is I got extra bullish on this construction sector which I always knew was a horrible sector in terms of governance, in terms of return on capital, we just got caught up. We had caught the cycle right and then after the global meltdown, it appeared that valuations were cheap but of course we looked over the fact that these companies just had broken balance sheets, they had diversified away into assets where they really didn’t know these businesses at all.

Damani: Asset heavy?

Ashish Dhawan: They were asset heavy and they frankly didn’t understand a lot of those businesses and the interest meter was just ticking whilst there was no cash flow coming out in the other side and so I was just foolishly optimistic. In that case it hurt me because we thought we were on to something all over again, that we would catch the momentum and maybe-I always knew it was a momentum play but it made me more wary of the momentum after we failed in that attempt.

Damani: What is the Ashish Dhawan template today? Been through two decades of investing, Wall Street, Dalal Street, seen the world, ups, down, bull bear, what is the Ashish Dhawan template for investing?

Ashish Dhawan: My template is think long-term, India is going to do well over the next 20 years, forget about the next five years. So, stay invested, that is the most important. Two is look topdown, don’t just look bottoms up.

Three is bet on people who have that fire in the belly and are really going to be committed to their business for the next 10-15, 20 years. So, I would rather bet on people in their 40s as opposed to people in their 60s and sell or raise cash levels when the market feels a little bit frothy.

Today I don’t think the overall market is frothy, there are certain sectors. Fast-moving consumer goods (FMCG) and pharmaceuticals feel ridiculously overvalued right now. There are some midcap spaces where there has just been too sharp a run up and the fundamental is just not there.

In the capital goods sector for instance some companies have run up even though the business really hasn’t changed that much fundamentally or the real estate sector is in the toilet and at the same time things that are derivative of the real estate sector like building materials seem to be doing very well. So, those don’t make sense to me, there is a dichotomy there.

Damani: Your brother Ashish Dhawan was told when he started his fund that life is too short to invest in India, were you given the same advice?

Akhil Dhawan: Little bit.

Damani: What brought you back? 

Akhil Dhawan: I think the draw was more personal to some degree as well as a belief that India could sort of take off.

Damani: What do you manage in India now? 2008 what did you come to manage in India?

Akhil Dhawan: I moved back and started a small fund for a group of outside investors largely in the US and Europe in the form a public markets fund here called Locus where we sort of focused on kind of long term investing, 2-5 year type investing with a value mindset. We have kind of broadened that a little bit in the last few years to now manage some proprietary family capital as well. So, now it is a combination of proprietary as well as outside capital all focused on Indian public markets.

Damani: Ashish had a inflection point investing, getting ahead of a sector, finding management with hunger in their belly, what is your investment style?

Akhil Dhawan: We would love to do that if we could find those types of opportunities. I started life I would say as a blueblood sort of value investor, really looking for things that were cheap -- optically textbook cheap, mispriced. 

I have over the years having gained more experience in the market gravitated a little more to appreciate quality. As we have spent time following, companies have begun to understand the nuances of what makes good companies great and not so good companies remain sort of mediocre.

Damani: Are there any sectors that look attractive to you for the last five years and for the next five years? Are there any long term secular plays in India?

Akhil Dhawan: Given where we are in our evolution as an economy our belief is that clearly the sectors that are levered to domestic consumption serve as great proxies for what India should become. The transition is sort of moving from a poor economy to some degree relative to the rest of the world and that being more maybe favouring more staple type consumption versus us getting to kind of a middle income economy where discretionary consumption becomes a much more important theme.

Damani: Ashish, you want a second career in your life, don't you? You have handed over the reins to your team at ChrysCapital and your brother talked about going from a third world country to a first world country, that doesn't happen with our education, does it?

Ashish Dhawan: As I have said before, I don't think you can have first world country with third world education which India has. We are second last in the world in education and yet we say that we are an emerging superpower. 

So, it is great that we are focusing on skilling but let us not forget that skilling is the repair business and education is a prepare business. So, whilst I think it is important to focus on skilling because it will give quick wins, we really need to invest in core education - both primary education and secondary and higher education as well.

Damani: Tell me a little bit about your dream and this beautiful university that I am in - Ashoka University, how did you start it and what is the ambition for this?

Ashish Dhawan: Few of us came together as friends and we were really disturbed by the fact that there was no Indian university in the top 200 in the world. We also could see that Indian hirers are moving towards more cookie cutter professional education. Almost everyone we were hiring were very uni-dimensional. 

They were smart but did not know how to write, never read a book, never really loved learning, just focused on memorisation and mastering a specific body of knowledge. So, we felt that something had to change and India is historically if you go back into antiquity had a great tradition of liberal education. Nalanda and Takshashila and so the idea was to bring that back to our civilisation and that is what Asoka is attempting to do.

Damani: What would you do if I ask you another question. A lot of people ask me that how would I become a second Ashish Dhawan, how do you become a second Ashish Dhawan?

Ashish Dhawan: By being a liberal arts person because if you are a renaissance person and you have multiple interests in life you can then pursue multiple careers, you are not afraid of saying, I had one phase of my life, I did reasonably well or I did okay, I can move on to trying something new because it is always the fear that holds us back. All of us are blessed in a sense. We are in that top 0.1 percent. So, we aren't going to take risk and not just risk with our capital but risk with our time and our careers and what we do in terms of impact in our lives then who will?

Damani: And liberal arts will give you that platform?

Ashish Dhawan: I believe so. The seed was sown a long time back I could see in college when I went to Yale undergrad, the highest aspiration was to serve the country and serve the world. My best and brightest friends did not go to Wall Street. 

They actually went to work for Supreme Court Judges and went to work for Senators and went and started Non-Government Organisations (NGOs) and that was a wakeup call for me and some of the wealthiest people John D. Rockefeller lived in my dorm, took the train back home to DC.

Damani: Really, Rockefeller?

Ashish Dhawan: Yes. So, that left a deep impact in terms of the way you live your life, the way you handle money, what you want to do with your life, the fact that I read Benjamin Franklin when I was quite young and said, this guy can do seven things in his life, at least I can try to do two.

Damani: Let me go through seven names in your life and tell me what you think about them, first thoughts? John Mason?

Ashish Dhawan: Inspiring teacher.

Damani: Where?

Ashish Dhawan: In school.

Damani: Benjamin Franklin?

Ashish Dhawan: Liberal arts person. Renaissance man.

Damani: George McCowan?

Ashish Dhawan: Humanitarian and investor.

Damani: Raj Kondur?

Ashish Dhawan: Good friend and risk taker.

Damani: Shiv Nadar?

Ashish Dhawan: Philosophical man.

Damani: Cheeko.com

Ashish Dhawan: Disaster.

Damani: Central Square Foundation?

Ashish Dhawan: My passion.

Damani: India in 2030, what happens to it?

Akhil Dhawan: Hopefully a first world country.

Damani: 15 years?

Akhil Dhawan: Close to it. At least by social standards hopefully we get significantly better. By income standards, if measured by income standards, we get up there too.

Damani: Are you both optimistic about India? When you started career in 98 you were optimistic, you came back to India in 2007 you were optimistic. 20 years and 10 years later are you still optimistic?

Ashish Dhawan: I am super optimistic. It is not looking at industries and looking at numbers and stuff like that. It is when you come to Ashoka and you meet young people you realise the potential of India. It is amazing what this generation is doing. It is very different from the generation that I grew up in. So, that gives me hope that India is going to be a different place in 20 or 30 years.

Damani: Is the political establishment awake to this problem?

Ashish Dhawan: The current government is and the market is frustrated but some of the changes and reforms that have been put in place are quite fundamental. The Black Money Bill is fantastic or just putting everything out to auction is fantastic. Crony capitalism has been a huge problem for the 15 years I have been here as an investor.

Damani: In all emerging markets too?

Ashish Dhawan: And India it hasn't improved one bit.

Damani: How about you? You share his optimism?

Akhil Dhawan: Yes, I tend to share all of that.