Sunil Singhania's investing approach: Believe in numbers
A hawk-like focus on the balance sheet along with a conservative nature tuned to avoid irrational risks -- that is what makes Sunil Singhania ticks.
In an interaction with noted value investor Ramesh Damani for his CNBC-TV18 show Wizards of Dalal Street, Singhania, chief investment officer at one of the country's largest mutual fund shop Reliance, said he was a "strong believer in the balance sheet" and said he often uses numbers on companies' financial statements to get a true sense of the business.
"If the company has been diluting too much equity or if there is lack of cash flow [it shows up]," he said, adding that his team at Reliance MF also evaluates smaller numbers such as sundry debtors or inventory build-up to get a sense of the larger business.
Singhania also spoke about another unique aspect of his investing approach: looking at a whole host of global companies.
And there is an instance of how looking a larger picture helped him make an investment decision: "We passively track 2,600 companies in 20 countries," he said. "We found out that in each of the countries, the market capitalization of cigarette companies was significantly lower than the spirits company in each country."
In India, though, United Spirits was trading at USD 1.5 billion to ITC's USD 40 billion valuation -- the former, however, being troubled with issues. "We thought if the company solved its problems, we would double our money. USL had 50 percent market share in India, which has 15 percent market share in the world. So you had 7.5 percent market share of the world!"
Singhania also spoke about his noted partnership with Madhu Kela, former fund manager who was earlier with Reliance and who later moved to a larger role at the fund house's parent company.
"He was the instinctive guy. I was the numbers person," he said, adding that while Kela pushed on aggressively taking intelligent risks and closing deals, he focused on drilling down on the risks.
Below is the transcript of Sunil Singhania’s interview with Ramesh Damani on CNBC-TV18.
Q: I have heard a lot of investing styles in the wizards of many years, buy low, sell high, high PE, largecap investing, but you bought a total new phrase to the world of investing. A zebra in lion country, pray tell me what that is.
A: Four or five years I was in Chicago and I visited this fund called Columbia Wanger and this book is written by Ralph Wanger and it is basically based in the period, in the late 80’s and early 90’s where there was a lot of risk aversion in the US. And when you mirrored it in the period between 2011 and 2013 where there was massive apprehensions about investing in India stocks, that is where how you relate it.
So, the concept is very simple. Zebras always move in herds and most of the zebras want to be in the centre of the herds.
Q: Because of perceived safety?
A: Perceived safety. So, the lion attacks, there is this perception that I am at the centre and I will be saved, as a result of which there is very little grass for the zebras to eat, so there is very little return in companies which are very obvious choices.
Q: And well-known to investors.
A: Well-known and where the perceived risk is much lower. And the Zebras at the side are the zebras which eat the best grass, where the perception is that they are more at risk, but when the time comes, they are the fastest to run.
Q: But can you give me an example of how you are zebra in lion country by example of a couple of stocks that you picked?
A: I will give you an example. In 2012-2013, there was this offer for sale (OFS) which was mandated by SEBI. All companies which had promoter holding over 75 percent had to perforce sell it.
So, there were a lot of good quality multinational companies which had to perforce sell their shares and that was the last opportunity which any large investor could buy in a meaningful way.
And that was sort of a zebras at the side where no one wanted to buy those companies because the near-term fundamentals were not looking as rosy, but these were companies with good technology, good business model, established multi-year track record companies overseas. And that was one thing which we just lapped it in a big way.
Q: Can you give me an example of something you got right in that period?
A: I cannot name stocks.
Q: Not recommend them, name them.
A: I basically said, multinational companies, obviously we were able to buy. Companies like Honeywell, Alstom, Styrolution and Bluedart - we missed out.
Q: All of them did their OFS.
A: Yes. So, that was a great opportunity.
Q: Opportunity, in 2003, when Reliance Funds started, very low size, very low equity cult in India. Describe the early years to me.
A: It was fun. Madhu had joined.
Q: Your predecessor Madhu Kela?
A: Yes, Madhu Kela, one year before I joined he had brought it up to a scale of Rs 100 crore. Then I joined. That time my friend used to tell me that Reliance is so small, why do you want to join Reliance?
But, Reliance had that energy and working with Madhu was the best thing to happen. It is full of energy and full of passion. It was a great learning and good thing about the period that time was no one wanted to invest in these smaller companies and we went ahead, we invested in them and it worked out.
Now, obviously everyone wants to invest in smaller companies, but that time it was a rarity.
Q: But, you were the zebra even then? You were looking for the outside opportunities?
A: As I said, there is so much opportunity in India and even in smaller companies have such good balance sheets, such good promoters – not all of them, but quite a lot of them. And that is an opportunity because that I where you can create a difference. Largecaps in India also have great opportunity but they are well researched. We can only allocate money to them. You cannot create significant alpha by doing so. So, you have to have a mix of both.
Q: Ralph in his book said that when you invest in a smallcap, you meet the owners, you invest in a largecap, you meet the executives, there is a difference there, is there not?
A: There is a difference. The other thing is that in a smaller company as you rightly said, there is a passion to grow. In a larger company, obviously, there is stability, but there is a limitation of how much risk or how much growth they can basically undertake. So, there are good largecap opportunities also, but if you have to create significant alpha in a growing economy like India, it has to be mid and smallcaps.
Q: But also the trends that have engulfed our world, telecom revolution, bringing down calling rates, digitisation. That is spawning a new generation of entrepreneurs, is it now?
A: 100 percent, and again, it is very right that all these new sectors, perforce have to start small. Take the example of technology or even Infosys, it started a USD 20 million company. Now the market cap is USD 30-40 billion. The sector was zero. Now, it is almost 10 percent of our market cap. Same is the case with telecom. I am very sure, same is the case with digitisation or e-commerce and so on and so forth.
So, any new sector which comes up, has to perforce start small. Media, where you are also very bullish. Most of the companies with a companies have a market cap of USD 50-100 million. Now, some of them are going to be multi-billion dollar market cap companies, but you have to research them right now, you have to invest in them and hopefully, you will be right.
Q: I know now that you have fund of large size, over Rs 50,000 crore of assets under management. You have a more rigorous research process. Can you just step us through that?
A: The challenge being a mutual fund manager is to manage consistency and as well as expectation. That is where you have to marry returns with risk and that is where process becomes very important. We always focus on where we went right. We never focus on where we went wrong. And that is where you have to be very clear.
Q: So, how do you focus that? How do you decide what is your benchmark risk in a portfolio.
A: It is an evolving process and we believe that we do not have a 200-year history of fund management which is good because you are not fixated with laid down processes which might be outdated. We have grown up on dalal street, we have learned a lot on dalal street apart from what we have learned in classrooms and we try to marry whatever we learn every day.
So, in the processes, very clearly, one is we have a large team, we have the flexibility of not having a headcount like a lot of multinational companies would have, we have complete liberty so we are a very strong large team because of the inherent style of working, people are sticking, they are happy.
Equity investment is all about happy people. You cannot invest in a very profitable manner if you are not happy.
Q: We talked about your research methodology. When you meet management what are you probing for them and is there a different between probing a large cap company and a small cap company?
A: In a large cap company as I said the business model is established. The size of opportunity is established. The management team is very focussed, clear and stable. In the midcap and the small cap it is exactly the opposite. You have to probe the passion and the honesty of the management.
You have to probe the scale of opportunity because most of these companies would be in businesses which are sort of niche or which are in early stage and ultimately it all boils down to whether the passion is matching the ability of the company and the scale of opportunity to grow.
One thing which recently we have started to do is probe the new generation because what is happening is a lot of Indian companies have come to a particular scale based on the promoters, founders who had their thought process but the second generation or the third generation guys are foreign educated or well educated, they have a different thought process in terms of value creation, in terms of growth and lot of companies where we have found the second and third generation is good the companies have gone through a different orbit.
Q: You said you probe the honesty of management. How do you probe that?
A: One thing is I am a balance sheet believer and in balance sheet 80-90 percent you get an indication.
Q: Numbers don't lie?
A: Numbers don't lie whether the company has been raising capital very frequently or not. Then cash flow - you can show as much profit as you want but if there is no cash flow there is no use of profit. So, that becomes a key indicator.
Sometimes sundry debtors, inventory, working capital cycle, unnecessarily bloating off gross block these are all signs where you sort of make out and if the pay out is very minimal if the company does not require it for growth you hear the bells ringing somewhere.
Q: You also look at global companies. Why do you do that?
A: We invested in the largest liquor company in India, the United Spirits and it turned out very well and it was a very simple analysis which we did. So, we track around 2,600 companies across 20 countries on a passive basis.
In one of the presentations we found out that the market cap of cigarette companies globally was significantly lower than the spirit companies in each of the markets. In India the largest cigarette companies used to trade at a market cap of USD 40 billion and the largest alcohol company used to trade at a market of USD 1.5 billion for obvious problems.
Our thought was it that if the problems got sorted we would double our money, but if it would not then we would quadruple our money. And if you actually see 15 percent of the world population, 50 percent market share - technically you have 7.5 percent of the world's market share in the fastest growing alcohol market and it was not a very simple fundamental sort of drive but it was a good way of at least having a thought and it worked out well.
Q: Somewhere I read that Jindal Steel, you guys were so excited you couldn't wait to visit the plant. Got a small cap company into a major company. What trickled you into that investment?
A: There was a big tailwind for commodities at that point of time. So, we were lucky in the sense that between 2003 to 2008 you had a super bull cycle for commodities. And you had the start of it, the valuations were so low. We had the second generation guys, as I mentioned earlier, come into business, each were managing their own parts of the business.
There was massive investment which they had planned and they had the raw materials or the backward integration to back. So, it worked out well. So, from a very small company it became a large size company and with that the PE multiple also expands.
Q: But what gave you the confidence that in commodity business with unknown entrepreneurs in a manner of speaking that you would get it right?
A: So, that is where the personal visit comes into place. So, when you visit the facility and you see the infrastructure which has been created, you are very sure that this infrastructure is capable of managing maybe 5-10 times more capacity than what they already have. And somewhere down the line you have to take a call.
Q: They say in cricket that fast bowlers hunt in pairs. Are Madhu and you like that, I mean, you go visit companies, the one two punch, the big picture, the numbers guy. Was it like that?
A: It worked out well. So, Madhu is a very passionate guy, believes in instinct and a very number focussed guy. So, it works out well and I would say very clearly I am a very cautious buyer and somewhere down the line even if you find stocks if you are not able to buy it does not work.
That is where Madhu's strength comes in. He is able to close the deal, be a little bit pushy, and from my side wherever I feel that the numbers are not matching the broad picture one thing we have to remember is that it also makes sense to avoid making mistakes. So, we all talk about how we pick stocks. We never talk about how we avoid stocks.
Q: Rule number one - don't lose money?
A: Yes, that is the biggest thing, otherwise you won't have money to invest.
Q: Another stock that has been well associated with your house has been Divi's Lab. The pharmaceutical space, even today a lot of excitement. What was the story behind that?
A: Again, this is a company which has never raised equity at all. In fact the Intial Public Offering (IPO) was also offer for sale (OFS) because of a very early stage dilution they had done to a private equity guy. After that the company has never ever diluted money.
If you see the amount of dividends they have paid they have paid almost Rs 1,000 crore of dividend since start of their life. Even now they are continuously growing at 2-25 percent. Very high ROE, very high quality management, very high quality company.
Q: When you walked into the company did you know this was a special company for you?
A: As we started meeting them more and more regularly the confidence levels improved dramatically and that is where investing is one thing, maintaining your investment is another thing.
You can buy something and sell at twice the price you might be happy but the same company might be 50 times your prices or 100 times your price, which is what happens. So, buying is one part of it, maintaining it and ensuring that you don't sell early is also another part of it.
Q: You are an India bull, what is the India opportunity that you see?
A: There have been only 15 economies in the world who have reach USD one trillion in economy size, of which nine have graduated to the USD two trillion size - of which India is one. So, we are one among the only nine countries. And only three have been able to graduate to the USD four trillion size - US, China and Japan.
Our belief is that India would be the fourth or the maximum the fifth economy if Germany keeps on growing to reach the USD four trillion of size. That makes us really unique in the terms of opportunity.
It took us 67 years to be a USD two trillion economy, maybe in the next seven to eight years, we would be USD four trillion. In fact, there was an article by economists intelligence unit - they had researched it, which talked about India reaching a size of USD 63 trillion by 2050.
Q: You mean you are saying from USD two trillion to USD 63 trillion?
A: That is the economist intelligence unit forecast.
Q: We will be toasting on Dalal Street if that happens.
A: Our belief is that we have just tasted the tip of the iceberg as far as wealth creation is concerned. There is a long way to go.
Q: You buy stocks that you hold for a decade, a lifetime, or do you try and ride the cycle up and down? How does Reliance Growth Fund position itself?
A: Most of the strategies especially in the midcap segment is buy and hold. Having said that, there is always an opportunity in the market of making use of inefficiencies both on the buy side as well as on the sell side.
But one thing we have learned is that do not restrict your upside. There have been so many businesses, our own business – 10 years back we did not think we would managing Rs 3 lakh crore put together.
Q: You are now 20 years old?
A: Yes. On October 8, we completed 20 years as far as the Reliance Growth and Reliance Vision is concerned.
Q: So, would you say Sunil Singhania from the one in 2000, when he joined Reliance Fun, 2008 and 2015, were three different investing styles during this period?
A: I think the core is the same. But obviously, the learnings have ensured the number of mistakes you tend to do have reduced quite dramatically.
Q: But the smart money always tells me and I want your opinion on that that what they teach you is bunk. Low risk low return, high risk high return, it should be basically low risk high return. Do you not feel that is a better strategy for the midcaps?
A: It can be a better strategy, but it is not always possible. So, maybe 2012-2013 was an opportunity where the risk was low and the returns were very high. So, it will basically depend on the time. It will also depend on your continuous research.
So, even now we believe when we read balance sheet that there are a lot of companies which would fall into that category where the risk is low and the returns can be significantly higher. There are some companies where there is an option value which we do not take into account, but which can suddenly play. We do not know whether it will play in the next six months or two years or three years.
So, we own stocks in a commodity exchange company. Right now the markets maybe discounting the current opportunity. But we do not know. Suddenly the opportunity can really play out.
Q: India is a huge commodity market - huge commodity trading market anyway. Fund management is a high pressure business. You watch the NAV daily.
A: It used to get to you in the past, but now you have learned to live with it. And our investors also have known us for such a long time that it might be possible that in two to three months, things might not work out.
If Titan does not work for one year, it does not mean that Rakesh Bhai is not a great investor. The investors have learned that. When we communicate with them they also know what you are playing for. But as I said, if you are 80 times in 20 years, I do not think you could have done better.
Q: I have been told that no offence, but you are so focused on balance sheets that you are almost boring, you do not have a personal life.
A: I do not think that is true.
Q: I want to have some fun with you. I am going to take you through a rapid fire round. An Indian investor that you admire the most.
A: There are many, but I would say Madhu because I have worked very closely with him.
Q: A global investor that you admire the most.
A: I think Jeremy Grantham.
Q: If you had a choice of dinner with Peter Lynch at Fidelity or Ralph Wanger of Acorn, who would you choose?
A: Ralph Wagner.
Q: Are you a morning person or a night owl?
A: Not a night owl definitely.
Q: Your favourite financial ratio?
A: I would say cash flows.
Q: The Sensex becomes 50,000 by?
A: Not later than three years.
Q: The best MD or CEO of an Indian company that you have met?
A: There have been many, but I admire Jai Shroff for the effort and the energy he puts in his business.
Q: United Phosphorous?
A: Yes.
Q: The stock pick that you are personally the most proud of?
A: I would say Bajaj Finance because it was at a time when people had just written them off, but it is one of the stocks where we sold early.
Q: Conversely, a stock pick you are disappointed in yourself with.
A: Sugar companies, five or six years back. Disaster.
Q: Your favourite travel destination.
A: I like Manhattan, but scenic-wise, I like London and Switzerland.
Q: A CA or a CFA education?
A: I think both. CA teaches you the basics of accounts. CFA makes you more aware of how to apply them.
Q: Spending a night with a balance sheet or going to a Bollywood movie?
A: Bollywood movie.
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