"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.
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