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.
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