Wizards of Dalal Street - A Fresh Breeze - Rajeev Thakkar

http://www.moneycontrol.com/news/market-outlook/d-st-wizthakkar-shares-learningparag-parikhdamani_8140341.html

In Ramesh Damani's special show Wizards of Dalal Street on CNBC-TV18, Rajeev Thakkar, CIO & Director at Parag Parikh Mutual Fund shares details of how the portfolio management services company came to be in the mutual funds business and his learnings from ace investor Parag Parikh.

Parikh, Thakkary says taught him the importance of psychology in valuing equities. An author on behavioural finance, Parikh lectured at various places and was well-read on everything research on behavioural finance, he says. 

Thakkar says the key reason for moving into MF is the RBI and Sebi regulations restricting provision to manage foreign equity investments. Under PMS, they could only send research to clients but were not allowed to execute any trades. Moving to MF helped overcome that challenge and also had simplicity in terms of accounting and taxation. In 2013 Parag Parikh moved to a fund structure. 

Below is the verbatim transcript of Rajeev Thakkar’s interview to Ramesh Damani on CNBC-TV18.

Q: Let me start you in 2003, you were in the fixed income side of things and you had this ‘AHA’ moment what was it about?

A: I started my career in financial markets in 1994 and 1994 to 2003 was something like a jack of all trades, investment banking, corporate finance, bonds various things. 2003 some colleagues of mine, myself and Parag Parikh we were sitting together and discussing stuff and the people in charge of client investments they said we have had a terrific run in bonds. We have made north of 20 percent on our bond funds. 10-year government bond yield had fallen from 14 percent to around 5 percent at that point in time. 

Q: Inflation had come down, interest rates have come down, so bonds value had risen dramatically at that time. 

A: I said good for you, it has been a great run but have you thought about what happens in the future. Like bond yields are already at 5 percent. Even if they stabilise here you will make 5 minus a fund management charge 1 percent, so 4 percent per annum. Whereas equities are yielding you 10 percent plus in some cases, Hero Honda Rs 180, Rs 18 dividend per share also growing, so why are you still in bonds. That was a collective AHA moment for the firm and we said that allocations need to change. 

Q: So, they put you into equities at that time?

A: They did. They said this is something interesting that you are saying, if you are so convinced come with us talk to clients and let us get money in equities to manage rather than bonds. 

Q: It was extremely rare for equities to yield more than bonds. Typically, the relationship has been the reverse. However, all this good fortune of high yielding got caught up in a bull market but by 2007 value had disappeared?

A: Value was still there in pockets, but that was not what was moving. 2007 was extremely difficult for us. The stocks that were moving were from commodity companies, they were from infrastructure companies and we had listings of DLF and you had Unitech in the run up and all the other real estate developers. We were not participating in either of the three sectors, we had a huge underperformances on hand and some of the newer clients were jittery in turn some of our RMs were jittery. So, that was the time when Parag Parikh stood behind us saying we will do what we understand, we will not get swayed by what is popular and if someone wants to redeem so be it. 

Q: You took the call if they want to redeem you let them redeem?

A: Yes, we let them redeemed. 

Q: It is very rare thinking in a mutual fund industry, but let me talk about your funders. I know there are two people who have had disproportionate influence on the way stocks are selected. Talk to me about these two people and how did they influence you and is there a continuing influence that you feel every day?

A: 2001 when I joined this company and 2003 when I moved to equities between that period we had good conversations with Chandrakant Sampat. He was the person who brought forth the merits of looking at quality, quality in terms of management, quality of the business in terms of entry barriers motes and also the capital efficiency part where the company needs to generate high and sustainable return on equities (ROE) rather than just go on creating fixed assets and earnings subpar returns. 

Q: Asset-light models?

A: Asset-light models was what he loved.

Q: He taught you that, what did Parag Parikh teach you? 

A: Parag Parikh is an author on behavioural finance. He has lectured various places, he has read probably everything that is there in terms of research on behavioural finance and he taught the importance of psychology in valuing equities. 

Q: However, in 2010 looking ahead you had another what is now become famous in your firm another ‘AHA’ moment what was that moment about?

A: The things that we had bought in 2007-2008-2009 things like FMCG stocks, pharma stocks some mighty companies they came into fancy. From undervalue to fairly value to what we thought at that times somewhat over valued of course they went up even after we sold a bit, so we started lightning up on those companies those sectors and we were left with cash. 

What was puzzling was that Indian companies were trading at very expensive valuations, what some would call nose-bleed valuations whereas the parent companies abroad were trading cheap. 

Q: Very modest.

A: So, for example in India was at triple digit price to earnings (PE) whereas the parent would trade at somewhere about 15-16 times earnings. So, that is when we started exploring investing in overseas stocks. 

Q: They say necessity is the mother of invention, so, here you have a PMS structure where it is hard to express yourself in foreign stocks. So, you decided to convert your PMS then into a mutual fund. Why did you do that? 

A: Under PMS, there is no provision to manage foreign equity investments under the RBI liberalised remittance scheme. RBI allows it but under Sebi, we can’t manage it. So, we were sending research to clients, they were executing the trades but we were not able to manage client investments. 

We would have been able to do that if we were having a mutual fund structure. So, that was one of the reasons to look at a fund structure. Also, on-boarding clients, accounting and taxation wise simplicity, various factors led us to apply for a mutual fund licence and 2013 is when we shifted to the fund structure. 

Q: So now an Indian investor can be truly diversified across countries also with this structure? 

A: True. What it does is, it opens up avenues and at the same time volatility comes down. So, for example, this demonetisation thing affects the Indian component, it doesn’t affect overseas. So, the portfolio volatility also comes down dramatically when this happens. 

Q: Let us talk about some of the stocks that you have pioneered, the foreign stocks, international stocks that you have pioneered. The one that caught your eye very early on was Google and now it is offshoot Alphabet. What got you interested in that stock?

A: It was 2011, I was at the Berkshire Meet and Charlie Munger was asked, what is the most significant thing that you read in the last year and he looked at the person asking the question and said probably I will never get to use it in my investing but it is amazing what these engineering cultures are doing in terms of changing the world and creating values and he was referring to the book ‘In The Plex’, the story of Google. 

Q: The story of Google and Google Plex is where they create all this magic? 

A: Yes, so, immediately after the meet got over, got on to the kindle, downloaded the book and went through it. It is actually amazing, the kind of things that they have done to create a mote and to have this kind of advantage. In so many products, they are the number one and the number two is a very distant player whether it is search engine, whether it is email, YouTube, maps, android. So, the kind of mote is amazing and all these products work together. 

Q: And yet it was cheap?

A: Yes, it was much cheaper than some of the FMCG, pharmaceutical names that we had sold. It was somewhere about 17 times earnings when we bought it net of cash. 

Q: However, give me an example of something domestically where you put all your learning’s together from your founders, from yourself and expressed it in the form of a stock?

A: We own Zydus Wellness for example. 

Q: Sugar Free guys?

A: Sugar Free guys, Everyuth face pack and things like that. So, these guys are into selling products which are substitutes. So, Sugar Free is a substitute for sugar and Nutralite is a substitute for butter. So, anyone who gets diagnosed with a sugar condition or a cholesterol problem becomes a customer more likely than not and then stays on as a customer for life.

So, sticky kind of business and again they have used market shares, in Sugar Free for example, their market share is north of 90 percent. So, it looks interesting and given that a lot of people have these conditions but are not diagnosed, so, as and when people start figuring out that they have health issues, you could see the customer base growing. 

Q: I know your life changed on May 3 2015, tell me what happened on that horrific day? 

A: We had gone for the Berkshire meeting, Parag Parikh, Geeta Parikh, myself and my colleague Ronak. The meeting was over on Saturday and this was Sunday morning, we were going to drop Parag and Geeta to the airport -- they were flying out to San Francisco and on the way we met with an accident. Parag passed away in that, Geeta was severely injured. 

Q: It was one of the darkest days of Dalal Street that I have seen because he was always a part of our lives, friend, acquaintance, colleague and passed away in an instant. However, how do you continue the legacy of Parag? Is there something that you have learnt from him that you imbibe in your new colleagues almost every day? 

A: Luckily for us the staff turnover has been extremely limited. People who have been with us, have been with us for decades; not just one or two years. So, I have been here 15 years now and a lot of other people have been around for long. Neil, his son has been there more than 10 years now. 

Q: DNA is already a part of that firm?

A: DNA is there and once he crossed 60, he had started transitioning. In the sense he was not hands on in a lot of areas, he was maintaining people, he was looking at his golf, travel, spiritual side and he was building an organisation where people can function on their own.

Wizards of Dalal Street - A Fresh Breeze - Jatin Khemani

http://www.moneycontrol.com/news/market-outlook/wizardsdalal-street-analyse-biz-vs-stocks-says-khemani_8075981.html

In a special series Wizards of Dalal Street - A Fresh Breeze, Ramesh Damani caught up with Jatin Khemani, Founder & MD of Stalwart Investment Advisors.

Below is the verbatim transcript of Jatin Khemani's interview to Ramesh Damani on CNBC-TV18.

Q: You write on your website that you don’t analyse stocks, you analyse businesses, what is the difference?

A: You analyse stocks when you are trading and you analyse businesses when you want to invest and you want to invest in them for long-term. So the ticker only tells you what price it is but what value it is is only after you understand what the business does, who runs it, what is the strategy, what it can be 5-10 years out. For that, all the analysis has to fall in place.

Q: Buffet put it well, he said price is what you pay but value is what you get. Let us move ahead and say, you have studied businesses, you studied the paint industry, you studied the footwear industry, many industries, are there any characteristics that you find that winning businesses have in common?

A: I think from an India standpoint today, a framework which has worked well for us is something I call Consolidation Wave. So these are industries which are large in size and you would find few organised players but a lot of unorganised players. Almost 60-70-80 percent of lot of industries is dominated by unorganised players who get away without paying taxes and organised counterparts do not have a level playing field. So you look back and look at companies like Asian Paints, Relaxo Footwears, Page Industries, these companies have expanded and grown their topline at 20-30 percent, some even 40 percent like Page Industries for a fairly long period of time. The industry has grown at 10-12 percent. The underlying principle, which was shaping up, was they were winning market share from their weaker counterparts.

Q: One of the techniques that you use to figure out, which companies to invest is called Scuttlebutt, what is Scuttlebutt and how exactly do you do it?

A: Scuttlebutt is getting information from the ground before they are reflected in numbers. Once it is in the numbers, it is for everybody to see. We don’t have any advantage. But if you are connected to the ground, if you are connected to what is happening to businesses, I think we have some edge. All this we write, there could be sampling error, first conclusion bias but in our experience the benefits of far outweighed those small misses here and there.

Q: Another way is called Kicking the Tyres, give me the example of how you use Scuttlebutt in one of your picks?

A: Relaxo Footwear back in 2012 -- if you had looked at profit and loss (P&L), it was pretty average P&L in terms of margins but the company was doing a lot on the ground through advertisements endorsing the best of Bollywood, hiring Accenture as consultant, increasing distribution.

Q: Katrina Kaif is brand ambassador.

A: Yes, Katrina Kaif, Salman Khan, Akshay Kumar -- so they were trying to do a lot of unconventional things, which didn’t happen in footwear earlier and the P&L was being -- we were suffering in the near-term for the longevity of the business. So if you were basing decisions on P&L, we might not like that business.

Q: Don't invest in the stock, invest in the business. That played out well.

A: Absolutely. The execution was being seen on the ground but the numbers were yet to come.

Q: The layman looks at the market, he often looks at tips, inside information, wanting to make a quick buck, fairly hazardous way to delve into the stock market, isn’t it?

A: There are two ways to participate in markets. One -- trade, follow tips and get poor quickly or invest in great businesses and get rich slowly. That is the time tested way and we see a lot of millionaires and billionaires who have created a lot of wealth like that but not the former.

Q: That is a great point you make, you said you can get poor quickly or rich slowly, the choice is yours.

A: Absolutely and unfortunately we spend a lot of time buying cell phones but not even few hours before buying a stock because there is a tip and this is the stock, which will make us rich, so we just invest Rs 5 lakhs in that stock and don’t even think.

Q: That is something that is human nature, to believe in a tip or to believe in what some superior being tells you but spending lot of amount of time in searching a washing machine or a cell phone as you said. You read a book called 'Retire Rich', which changed your life?

A: I always had decent understanding of businesses because my dad worked at a manufacturing site. I had been to the factory since childhood and being a commerce student, I understood how businesses operate. But I did not have a very good perception about markets because my dad tried his hands trading and like most, lost money. When your dad tells you that market is not where an individual investor has an edge, it affects your mindset. That completely changed in my MBA.

Q: Who changed that?

A: S. G. Raja Sekharan. He was a visiting faculty and my mentor in MBA. He was a very senior IT professional, left his job when he became financially independent and started following his passion of teaching and stocks contributed to that, investing in great businesses contributed to that. He invested in businesses like Asian Paints, HDFC Bank, Pidilite, way early and held on to them and that made all the difference.

Q: Buying not stocks but great businesses and holding them, businesses mature over decade sometime.

A: So that was the turning point and that was the first time I was looking at stock markets very differently. I was not looking at them as tickers but as businesses behind them and then he made me read Warren Buffet, Peter Lynch and Philip Fisher and that I believe was the turning point in my life.

Q: When you go to New York, they always say to you that you are taking a bite out of the big apple; you took a big gulp of a company called Tasty Bite. Tell me how your education, practical experience, philosophy came together in that stock pick?

A: We came across this company because we were studying the packaged food and we understood that in India it is very difficult to do that. We are still too early for that kind of a product.

Q: We are not mistaken ConAgra Foods said that India is not going to 'ready-to-eat' market because lots of fresh food available almost in every mohalla in Bombay.

A: Yes, so when we came across this company Tasty Bite eatables, the only differentiating point was that this was not selling to Indians. So it was making Indian food but exporting to US and not selling to NRIs but selling mostly to Americans, millionaires who wanted to try different cuisines.

Q: Creating a new niche almost.

A: Absolutely. We found an owner operated business, creating a niche out of nowhere following a blue ocean strategy with lot of skin in the game and it was still only Rs 150 crore topline and we saw huge size of the market opportunity and that is when we thought it could be a great opportunity.

Q: They were riding a wave, weren’t your millionaires wanted to try new food, organic food, healthy food, was that example of great management, showing fire in the belly?

A: Absolutely, so these are guys earlier working for HUL and Pepsi and they left their jobs and bought this company from HUL and from nowhere, Rs 4 crore turnover, they took it to this level. So when I met them, I could see that they are not just working for money, they are passionate about what they are doing and there was enough skin in the game visible.

Q: You talked about better earnings kicking in through operating leverage. I have often heard that, for my viewers, explain to me how operating leverage works and why it is important when you look at a stock?

A: It is a very important concept as investors, as analysts we should look at because when we think about earnings growing by default, we assume expenses will also grow but that is not always the case. There are some businesses where bulk of the cost is fixed and as their sales grow, most of it falls down to their bottomline. A beautiful example of that could be another company in which we have invested called Wonderla Holidays. Again it is not a recommendation, this is just for illustration purposes.

Q: How does operating leverage kick in to Wonderla -- first what does Wonderla do?

A: This company is the largest amusement park operator in our country. They operate three parks based out of Kochi, Bangalore and recently opened one in Hyderabad. So let us talk about the first two parks. These two parks on an average daily entertain 3,300 guests but they have a capacity to handle 12,000 guests.

Q: So as they come in, they start flowing straight to the bottomline?

A: Your cost does not grow in proportion to your topline. So your bottomline grows disproportionately.

Q: You have often talked about management having fire in their belly, what do you mean by that? Is it just a colourful expression or is it something that you can gauge in managements?

A: There are two parts to it. One we always -- whenever we like or study a business, we try to go behind and spend a lot of time on the management. Is it an owner-operated business or is it professionally run. We generally find owner-operated businesses have more skin in the game and especially if it is first generation entrepreneur, that is something that excites me because he started from scratch, growing it, it is his baby, chances are high that he is passionate about it. We can go wrong also but the probability is high that he is passionate about that.

Incentives are aligned and there were other ways to look for it -- skin in the game, what kind of promoter holding he has, is he drawing a lot of salaries before sharing the rewards with minority, are there entities in similar business outside the listed entity. So this is something you need to focus a lot on, related party transactions. That tells us about the skin in the game.

Q: When you run Stalwart, people come to you for advise, is there a lot of pressure for you because you are still fairly young, your nascent in your career, is there pressure for you?

A: So far it hasn’t been because we have tried to attract likeminded investors. We have been very vocal about our philosophy -- we have put a lot of information on website.

Q: You are pretty transparent, your website says a lot?

A: We have tried to be very vocal about what we are trying to do. We are not selling 'get rich quick' dreams. We are saying 'retire rich'. So it will take time, it will be a long-term thing but the probability will be higher that something beautiful could come out of it.

We are looking for great businesses and we are a partner of those managements. We are not looking for quick bucks.

Wizards of Dalal Street - A Fresh Breeze - GIRIK Capital

http://www.moneycontrol.com/news/market-outlook/wizardsdalal-street-journeygirik-capital_8049861.html

Dec 09, 2016, 03.38 PM  

In a special series Wizards of Dalal Street - A Fresh Breeze, Ramesh Damani caught up with the founders of GIRIK Capital -- Charandeep Singh, Managing Director at GIRIK Capital and Varun Daga, Founder & Fund Manager at GIRIK Capital.

Below is the transcript of Charandeep Singh and Varun Daga’s interview to Ramesh Damani on CNBC-TV18.

Q: Betting that stocks that are higher will go higher is a fairly counter-intuitive way to look. How did you stumble upon that trick?

Singh: It is still counter-intuitive. This is something that was introduced to me by Varun. I am grounded in fundamental analysis from my background in Lehman brothers. But when I met him, he talked about this book called ‘How to make money in stocks’ by William O’Neil and this system called CAN SLIM. It sounded like mumbo-jumbo at first, but when I read it, I said, wow, this is the way fund managers need to manage third party investor money. So, as counter-intuitive as it was, it has worked beautifully for us. Of course, we will get into the details through this interview, but that was the beginning of our CAN SLIM journey.

Q: CAN SLIM sounds like the new diet formula, but it as the core of how you pick stocks, is it not?

Daga: The most important thing about CAN SLIM , one can read the formula and the details of the formula.

Q: Yes, for reviewers, CAN SLIM is a book by Willian O’Neil. But what are the important constituents of it?

Daga: Some of the most important things about CAN SLIM was that it takes away the bias. You are looking at stocks which are making new highs. You are looking at stocks, which are delivering great numbers, so you do not miss anything, which goes up in price and delivering great numbers. So, that is one of the most important part of CAN SLIM. Also riding the winners. So you try to identify some of the stocks, which are having great numbers and moving up in price, but allocating well and riding them, that is what CAN SLIM teaches you.

Q: Looking at stocks that are making new highs is a way of looking at where smart money is flowing?

Daga: Yes, what happens in a correction or in a down market, the focus of a normal investor is on the 52-week lows or on stocks that have fallen 50 percent from the peak.

Q: It is like shopping. You want to buy what is cheap.

Daga: What is cheap, but nobody looks at the stocks that are making new highs and what is the amazing part is that those are the stocks, which are coming up with newer products which are coming out with great earnings, which are having fantastic management or change in management or buying out business.

Q: The ‘N’ in CAN SLIM?

Daga: Yes, new products, new management, new highs. So I feel that that is something which is where the screening is so important where everybody else is screening at stocks, which are low and they are trying to find value at 52-week lows, but you can find value at 52-week highs, because the stock could double, but the earnings could have grown 300-400 percent.

Q: The future is full of exciting possibilities. But that is just your entry into the door. The screen will throw up a dozen stocks early in a bull market, making new highs. Then the job begins, right? What do you do as Part-II?

Singh: So once Part-I is done -- and Part-I is done on a daily to weekly basis -- we shortlist stocks from the screener that have shown up and meet certain criteria. Then we go into fundamental due diligence. And I would say this centres around three main things, the promoter, you want to make sure there is a human being there that we trust who is all in as interests are fully aligned with ours.

Q: All in meaning, buying his own equity, creeping acquisitions or alignment of interests.

Singh: Could be buying and creeping, that is a great thing as long as the ownership is high enough. It is very important that they are focused on creating wealth through the equity route.

Q: Themselves and the minority?

Singh: Yes, and minority will naturally follow. The second aspect is cash flows. We do not look at profits as much as we focus on cash flows. The history of cash flows, and of course and less emphasis on the future of cash flows, but we look at lot at the stability of cash flows.

Q: By cash flow, you mean for our viewers, the earnings, not necessary the reported earnings?

Singh: Yes, how much business makes inherently and then the balance sheet and then the balance sheet. A smart entrepreneur knows how to use the balance sheet, does not get carried away at the wrong time, does not get carried away to borrow money and dilute their capital. They know exactly when to leverage their balance sheet to grow. So, making sure the balance sheet is well managed to the history of the company is something we are very focused on and that is where we spend bulk of our time doing due diligence.

Q: So, how do you both guys meet? How did you meet Charandeep to start your partnership at Girik?

Daga: I was a kid.

Q: You still are fairly young.

Daga: I am 31, but we started when I was 24. And I started investing when I was 18. So my family office and Charandeep’s dad’s office was on the same floor and I met.

Q: His dad, of course being Darshanjit Singh, owner of Bank of Punjab in yesteryears and a very well known investor in his own right.

Daga: Absolutely. So, he told me, why don’t you manage some money for me. So I was managing some, I was investing some money for him and that is when he made Charandeep meet me and the rest is history. I spoke to him about this whole system I was using, CAN SLIM and we clicked in the first meeting and we said, we have to start a fund and let us run it.

Q: Let us talk about using the CAN SLIM method early years tell me one stock that you are particularly proud of that you pick?

Singh: There is this midcap pharma company that we invested in 2013 called Ajanta Pharma. We first visited this company when it was a Rs 900 crore marketcap, we didn’t know much about it. It was coming on the back of a lot of earnings growth -- so we knocked on the management’s door, went and met them. The promoters didn’t meet us apparently they were too busy running their business, so we met the finance guys and the investor relations people who are also very helpful in helping us understand the business, but they didn’t guide too much growth and we said okay, these guys aren’t talking the kind of exciting stuff we are seeing in the numbers.

Q: What the excitement in the company?

Singh: We didn’t find any at that point, so we kept track of the company and we said the stock has doubled again, because the earnings have gone up 50-100 percent in the next two quarters.

Q: And CAN SLIM was keep throwing that up?

Singh: It kept throwing it up, it was right on top of our screen, it was unbelievable and we kept plugging away at the fundamentals and said let us get into the products now. We vaguely remember there were these two products, which were not a Rs 50 crore top line growing at 30-40 percent compound annual growth rate (CAGR).

Q: Not bad for a midcap pharma company?

Singh: For a small pharma -- these guys must be on to something, because they are growing their organic product base so quickly and they are doing out Rs 300-400 crore around of capex, which when you look back they did with their own money and not borrowing a single paisa at that point. I think we finally decided to pull the trigger at Rs 1,800 crore marketcap and the rest is history -- within 18 months we made almost 7 times our money.

Q: Take me through something that you almost pioneered CAN SLIM in your firm, perhaps even in the stock market in India that you found and take us through the back story of how the story evolved?

Daga: I will talk about recent stock which has almost gone up 10x in the last two years -- there is this company called Astec LifeSciences and from 2013 to 2014 the stock went up almost 3x from a Rs 40 crore marketcap to Rs 120 crore marketcap.

Q: So it shows up first on your CAN SLIM making new highs.

Daga: It showed up in the CAN SLIM also the earnings were growing, the earnings were just picking up.

Q: A in CAN SLIM is the accelerator in earnings.

Daga: The accelerated growth in earnings which make the stock prices move. Then the quick part that we did was we dug into the annual reports for the last 5 years and started doing the due diligence and the size of the opportunity looked very big, but more than that we have realised that the promoter had not diluted and did a huge capex of almost Rs 80 crore within two years and that capex was coming on stream, so they were almost sure of doing much higher earnings and the earnings were depressed because of high depreciation in interest.

Q: Normal fund would have gone and bought about 100,000-200,000 shares, but you gave a cheque, you took a fresh issue of equity from the promoters. What give you the courage to do that?

Daga: When we first met it was very hard to meet the promoter, we tried a lot and it was difficult and that is what we realised that promoters that don’t meet are one of the best promoters or best companies to back -- so the Oxford graduate, Ashok Hiremath, he had huge passion in the chemistry, in the products he was developing, he was talking about how his product has more purity than ExxonMobil and it was amazing to see that.

Q: And you had no angst to him and you gave him a cheque directly saying it was probably locked in at that time.

Daga: No, we didn’t we went through the plant, we saw that same passion in his people and that told us that okay we are convinced and we are happy to invest.

Q: A year later I know this that you have validated Godrej came and bought over Astec, so how do you guys celebrated -- all night?

Daga: It was a mixed feeling and initially we were very disappointed, because we generally backed the people and the management and now we thought this management, this person who we were backing and who we thought could create a great business is going out of the business and sold his own stake which we generally don’t like. We like managements to buy their own stake, skin in the game -- immediately the first thing is we called Mr Hiremath and he said that you have nothing to worry I still have 10 percent and I will work 3 times more for my 10 percent.

Q: So Girik is going to be run on this basic formula CAN SLIM, due diligence, extreme focus on a few stocks?

Singh: Yes, you said it. We continue to scream and we will work as hard to do the due diligence. We spend most of the time doing due diligence. The formula is simple it is not rocket science, it is just process.

A Bird in Hand is Worth More Than (Forecasted) Eggs in the Future - Amit Wadhwaney

http://latticework.com/amit-wadhwaney-essay/

A Bird in Hand is Worth More Than (Forecasted) Eggs in the Future

December 21, 2016 Amit Wadhwaney

At Moerus Capital Management, we employ a fundamental, bottom-up investment process, with the goal of investing in assets at prices which represent significant discounts to their estimated intrinsic value, all the while heavily emphasizing risk avoidance and mitigation. Importantly, the risk that we seek to mitigate is not short-term share price volatility (market risk), but rather the risk of a permanent loss of capital. In fact, we embrace market risk as a provider of periodic opportunities to invest in what we believe are high-quality assets or businesses at bargain prices. We believe that buying as cheaply as possible is critical both to risk mitigation as well as to the potential generation of attractive long-term returns.

In striving to buy as cheaply as possible, we estimate intrinsic value using very conservative estimates that weigh a company’s balance sheet and what is known today much more heavily than projections of future earnings and cash flow, which may or may not materialize. In other words, in general we try to buy shares of businesses at sizable discounts to what we think they would be worth if sold today, using conservative assumptions. The asset-based investment approach that we follow at Moerus stands in contrast to the approach of many in the investment community who tend to focus more heavily on earnings and cash flows.

We don’t heavily weigh forecasts of cash flows years into the future simply because we believe the future is notoriously and inherently difficult to predict. We are not willing to “pay up” for businesses at prices that would only be attractive under optimistic assumptions of continued prosperity. By contrast, we believe that a conservative, asset-based valuation methodology often yields a “bedrock” (lower-bound) valuation, and that buying at a steep discount to such a bedrock valuation provides a cushion that provides downside protection and offers meaningful upside potential when there are favorable future outcomes, which typically aren’t “priced in” to the stock at such beaten down levels.

Implications of the Asset-Based Approach

Our approach to investing has several noteworthy implications regarding the types of situations that tend to find their way into the portfolio, and why.

What’s the catch?

At Moerus, we search for high-quality, long-term investment opportunities which are available at attractive prices relative to what we believe their net assets are worth today, without attributing any value to optimistic forecasts of future earnings or cash flows. One implication of our approach is that such opportunities do not come easily or often – alas, there is usually “a catch,” or something “wrong” which drives pricing down to the unusually attractive levels which pique our interest. Common examples of what might be “wrong” include, among others, a challenging short-term outlook facing a company’s relevant industry or geography, or a company-specific misstep or hiccup that results in share price declines.

For traders and investors with very short time horizons, near-term uncertainty and turmoil might rule out any such investment. But our long-term focus allows us to look past temporary rough patches that render a company, industry or geographic market out of favor in the broader market as they often prove to be interesting sources of longer-term investment opportunities, provided that the turmoil is indeed temporary. Importantly, the underlying company must have the staying power and wherewithal to survive tumultuous times and thrive if, as and when the situation normalizes.

Unappreciated, Misunderstood, or Event-Driven

In addition to situations involving short-term (but temporary) turmoil, asset-based investing has also often led us in the direction of two other scenarios that sometimes lead to atypically attractive investment opportunities. First, companies that are underappreciated, underfollowed, complex and/or misunderstood occasionally provide interesting opportunities, in part because fewer eyes are examining and recognizing the value that may (or may not) be present within the business in question. Second, opportunity periodically can be found in situations in which hidden value could potentially be unlocked through event-driven scenarios; examples of these include liquidations, corporate reorganizations, mergers and acquisitions, and changes in industry or shareholder structure.

Deep Value and Emerging/Frontier Markets: Compatible… at Times

Another implication of our asset-based investment approach is that while opportunities to implement it in emerging and frontier markets are apt to be sporadic and infrequent, occasionally compelling balance sheet-based investments can and do become available at attractive prices. Traditionally these markets have not been considered a welcoming destination for deep value investors.

Notwithstanding the challenges currently facing many emerging and frontier markets, in general these markets have historically appealed to growth investors due to their attractive growth potential. Simply put, many investors have historically been willing to pay up for expected future growth in emerging and frontier markets, whereas at Moerus we look for bargains here and now, based on our estimates of net assets today. Partly as a result of this dichotomy, the predominance of investors who are willing to pay for projected future earnings growth in emerging markets has, in our view, generally translated into less frequent opportunities for the asset-based value investor such as Moerus. However, the very fact that these markets are heavily populated by growth investors provides us, from time to time, with intriguing investment opportunities that fit our approach – when events such as earnings disappointments, setbacks, or broader economic turmoil result in growth investors fleeing.

A final important point to make on this subject is that share price declines in emerging and frontier markets could be and often are exacerbated by the relative illiquidity of many of these markets. When investors flee illiquid markets, dramatic share price declines could result, potentially turning a stock that used to trade at a sky-high valuation a few years ago into a bargain today.

Patience

We think that it’s worth emphasizing that given the nature of these sources of opportunity, patience is a virtue when it comes to implementing this approach. Patience is needed to hold cash in the absence of attractive pricing and wait for quality investments to become available at truly modest prices. Once a promising long-term investment becomes available at a price that is cheap enough, patience is often required to hold (or add to) the investment, as the poor near-term conditions that contributed to the deep discount continue to run their course. Of course, patience must be backed by conviction – developed through research, analysis, and considerable reflection – that such a prospective investment has the staying power to navigate its way through temporary difficulties until the underlying value is ultimately realized.

Asset-Based Investing: An Example

Not for the Fashionable

The asset-based investment approach requires patience because investment opportunities available at the type of valuations we seek do not come available frequently, and when they do, it is usually at a point in time in which the assets in question are underappreciated or out of favor. Attractive value investments, particularly those at the deep discounts that we require, are not available whenever they are “in fashion.” In that sense, we often find ourselves looking for bargains in some of the most far-flung or “out-of-fashion” places, where many others in the investment community for various reasons are biased against venturing. Importantly, the “far-flung places” in which we often find ourselves are not always specific geographic locations, but also classes of companies that, for any of a host of possible reasons, fall under the radar of many analysts and investors who are more earnings-based.

One such class of companies is made up of those which, at some point, execute a sale of their principal operating business (and thus their principal source of earnings), thereby becoming cashed-up in the process, but often also falling off the radar of many earnings growth-oriented analysts and investors as a result of the sale. While infrequent and sporadic, in select cases “falling off the radar” could have such a dramatic effect on a company’s stock price that the business could become available at a meaningful discount to the current value of its primarily liquid net assets. This may (or may not) provide genuine opportunity, as we will discuss shortly. While the following investment is not (and was not) a Moerus investment, in hoping to better illustrate the risks and attractions that such an event-driven situation might periodically provide, we point to a historical example: Piramal Enterprises Ltd. (“Piramal”), an India-listed business development company, which sold its generics pharmaceutical business to Abbott Laboratories in 2010.

Noteworthy Features

In the case of Piramal, there were a number of noteworthy features that we have also seen in other asset-based investment opportunities over the years:

Piramal sold its principal business on very favorable terms, realizing significant cash proceeds in the process.This sale left the company with little to no forward earnings visibility, as well as no obvious earnings growth for analysts to point to, forecast, and model. Sell-side analysts who had been covering the company subsequently dropped research coverage after the transaction.

Further, the paucity of recurring earnings that remained resulted in a stratospheric P/E ratio (since there was no “E”) and in virtually no ROE (with no earnings to make up the numerator) – two basic statistics that are closely followed by many earnings-focused investors.

As a result, subsequent to the sale of its principal businesses, Piramal presumably “screened badly,” or did not rank highly on the quantitative screens of investors searching for, among other statistics, low P/Es and high ROEs.

Piramal was controlled by committed, competent ownership/management, with a long-term track record of growing shareholder value (through both operations and thoughtfully timed deal-making), and with significant skin in the game via equity ownership.

Piramal’s well-timed sale of its generics business – which was priced at a whopping 30 times EBITDA – left behind a very strong, liquid balance sheet.

Yet subsequent to the asset sale, an opportunity became available to invest in Piramal at a material discount to its reported book value, much of which, importantly, was attributable to cash and other liquid financial assets.

“Killing” the Messenger… Who Brought Great News

In sum, in our view Piramal’s asset sale was clearly a positive event for the company, given that it was completed on attractive terms, leaving the company with a massively liquid balance sheet in the hands of ownership with a proven record of creating value. However, somewhat paradoxically, this impressively value-realizing transaction seemed to be greeted by many analysts and investors with indifference and skepticism, if not outright negativity. 

Why?

Many sell-side research analysts dropped coverage; we suspect because Piramal no longer neatly fit into a specific industry and because the company no longer produced recurring earnings from which to forecast and model in a straight-forward manner.

Many earnings and growth-based investors – which we suspect make up the majority of players in most markets – also likely lost interest, given the absence of recurring and growing earnings.

The transaction essentially eliminated recurring earnings while raising cash. Our experience has shown that the value of the optionality that cash provides is often underappreciated by the market as compared to traditional earnings metrics.

Situations like this one – in which there is a clear discrepancy between an unambiguously positive event from the standpoint of economic reality on one hand, and the recognition and appreciation (or lack thereof) that the transaction receives in the public securities markets on the other hand – are often sources of great long-term opportunity. Unusual bargains can sometimes be found in corners where many market participants are biased against looking.

Subsequent Events

The results? After the sale of its generic pharmaceutical business, Piramal, in our view, reasonably and thoughtfully redeployed the sales proceeds into new investments in numerous areas, including pharmaceutical services, financial services, and real estate. In the process, the company built a stable of new businesses that today generate almost US$1 billion in sales annually.

Investors who took advantage of the opportunity to invest in Piramal common stock (PIEL IN) at the unusually modest prices that had prevailed in the market after the sale of its generics business have, in our opinion, been well rewarded as, over time, its share price has, in our view, come to reflect the substantial value creation at the corporate level that we believe has been generated by the reinvestment of the proceeds raised from the asset sale.

Caveats and Concerns

Again, Piramal is not, nor has it ever been a Moerus investment; we only bring up this case to show a specific type of special situation that can offer opportunity. An obvious point is that not all cases of companies that sell a significant chunk of their assets end well for shareholders. As in all industries, geographic markets, indices, and investment portfolios that bear risk, this “class” of companies – those which have sold their primary business(es) – has had its share of both glowing successes as well as catastrophic failures over the years.

A company that builds cash on its balance sheet by selling its main assets might offer an intriguing investment opportunity, but on the other hand such a transaction often raises a host of red flags that must be identified in order to avoid impending investment disappointment, if not disaster. And this specific class of companies, in general, brings with it a lot of baggage in the form of issues that must be thoroughly considered and vetted before investing. In our view there are a couple of very significant issues surrounding this specific group.

First, when a company sells its principal operating business, we cannot overstate the degree of uncertainty that such a transaction adds to a company which had previously compiled a history of operating results, a history which many investors use to anchor their future expectations. Uncertainty abounds regarding a number of issues, including the loss of recurring income, the use of sales proceeds, and the timing and nature of the potential payoff from the investment.

Additionally, investors in companies where much of the value is attributable to cash and liquid assets, are inherently heavily reliant upon the management team (or controlling shareholders) in order to generate a successful investment outcome. We cannot overemphasize the importance of a thorough assessment of management in situations in which a large pile of unencumbered, liquid capital sits at the discretion of a company’s decision-makers. A strong, liquid balance sheet can easily be squandered if the management/owners put their own interests ahead of those of other shareholders, or if they damage asset value through poor strategic decision-making.

Suffice to say, these are major concerns that must be carefully considered prior to an investment decision. In many cases, such issues cause us to pass on otherwise interesting investment propositions. But uncertainty often brings opportunity with it, and if we are able to gain comfort in our appraisal of management’s skill, ability to create value over time, and integrity, such situations can offer compelling investment propositions.

In Conclusion

We believe that buying at a substantial discount to a bedrock valuation, based on a highly conservative, asset-based methodology, provides downside risk mitigation while also offering attractive upside potential, since favorable scenarios typically are not priced in at such depressed levels. To find these opportunities, one needs to be willing to look where others aren’t. Unusual bargains can sometimes be found in corners where others are biased against looking.

Affordable housing is the flavour of the season

http://www.livemint.com/Opinion/mcYXQTTz8MWqsk08v4LOAN/Affordable-housing-is-the-flavour-of-the-season.html

Mon, Dec 19 2016. 08 22 AM IST

Affordable housing is the flavour of the season

The contribution of mortgages to the banking industry’s advances has grown from 1.5% to 10% in the past decade, as most bankers see opportunities in the market

What do Anshu Jain, Jaspal Bindra, Gunit Chadha and Pramod Bhasin have in common? They are all global bankers from India. Right? Yes, they have all been high-profile bankers and now they want to dabble in the affordable housing loans segment.

And, they are not alone. Essel Group’s Subhash Chandra; former managing director and CEO of Sriram Capital Ltd R. Sridhar; Shantanu Mitra, who had managed consumer banking and risk at Citibank and Standard Chartered Bank in the past; Rakhee Kapoor Tandon, daughter of Rana Kapoor of Yes Bank Ltd; and many more either already have one foot in this space or are knocking on the doors.

There are at least 17 new entrants in the affordable housing space even as 14 existing lenders are significantly expanding their portfolios of low-cost home loans by broadening their distribution channels through direct sales and community-based loans. The Indian home loan market consists of 76 housing finance companies and state-owned as well as private banks and all have started using technology to reach out to the lower end of the customer segment. There has also been a rate war to woo the customers.

Axis Bank Ltd, which has a little over Rs60,000 crore mortgage portfolio, disburses around Rs2,000 crore home loans every month; out of this, Rs150 crore flows into affordable housing through its Asha home loan product for first-time buyers. Similarly, Dewan Housing Finance Corp Ltd, with a portfolio of around Rs62,000 crore, disburses Rs1,700 crore every month , Rs300 crore of this goes for relatively low-cost housing. The story is similar with DCB Bank Ltd, Yes Bank, PNB Housing Finance Ltd, and most others who have been in the business of home loans.

A burgeoning middle class, rising disposable incomes and fiscal incentives on home loans have increased the affordability of homes in Asia’s third-largest and the world’s fastest growing major economy. The average age of a new home buyer in India is now 32 years, down from early 40s, a decade ago.

Even though the little over Rs10 trillion Indian mortgage market has been growing at around 18-19% every year, its size is too small in relation to the economy—around 8% of the GDP, less than half of what it is in China. Singapore’s mortgage market is 32% of its GDP, lower than Hong Kong’s 41%, and in the US and the UK, it is 81% and 88% of GDP, respectively. In Denmark, the southernmost and smallest of the Nordic countries, the mortgage market is 104% of GDP.

Most bankers are seeing opportunities in the market. This is reflected in the fact that the contribution of mortgages to the banking industry’s advances has grown from 1.5% to 10% in the past decade. At this rate, the mortgage to GDP ratio is expected to rise to 20% by 2020, according to an estimate by consulting firm BCG.

Many are betting big on this segment because the opportunities are enormous with a shortage of close to 19 million units in urban India and around 40 million in rural pockets. The housing finance companies are increasingly focussing on the middle class and aspiring lower middle class segments with average annual income of Rs1.5 lakh to Rs10 lakh. Within this segment, the emphasis is on small and medium entrepreneurs and self-employed individuals and professionals.

Most of the new entrants and the aspiring mortgage lenders are operating from Mumbai and Delhi and a few from Bengaluru and Haryana. From there, they are keeping a hawk eye on eight Indian states that have 80% share of the shortage of housing in urban pockets— Madhya Pradesh, Rajasthan, Bihar, Tamil Nadu, Andhra Pradesh, West Bengal, Maharashtra and Uttar Pradesh.

They are reaching out to the developers who have been constructing affordable smaller format (one room plus kitchen) dwellings, costing less than Rs6 lakh, as such units are sold faster than the larger formats (one/two bed-room plus kitchen and a hall). Gujarat, Maharashtra and Madhya Pradesh have been doing better than other states in selling such units even as the supply is limited in north India. The southern region is the least attractive market because of longer time taken for various approvals and the cultural resistance of people to move to flats in multistoried buildings. In eastern India, developers have been active in Kolkata and Bhubaneswar.

A look at Vastu Housing Finance Corp. Ltd, a new entrant, gives us a sense of the opportunities. The nine-month-old company, with focus on Maharashtra, Karnataka, Madya Pradesh, Gujarat and Rajasthan, has acquired 850 customers and built a loan book of Rs100 crore.

While the government push and the initiatives of the high-profile bankers are giving a leg up to the affordable housing segment, the recent clamp down on cash economy will force affordable housing financiers to take a relook at their business model. Many of their customers are not in the income tax bracket and they earn their salary and wages in cash. Till now, while assessing their repayment capacity, these firms were taking into account the customers’ official income as well as the surrogate income but now they would need to overall the risk assessment process since the surrogate income, in cash, may dwindle.

I understand that the so-called bounce rate in the low-cost housing market in December has risen following the demonetization move. The bounce rate refers to the incidence of post-dated cheques meant for paying monthly loan instalment bouncing or an instruction given for fund transfer electronically at a specified date not being honoured because of lack of funds. Many businesses across India such as diamonds and textiles in Surat, handicrafts and brass industries in Moradabad and gold jewellery manufacturing in Kerala have been fully or partially shut and the workers are not being paid. Naturally, they do not have funds to pay the monthly instalment for their home loans. 

The industry is confident that the pain is short term and in the longer run, the drive for a cashless economy will have a positive impact through transparency and correction in prices.

Body blow to LAP

Indeed, in the medium and long run, the opportunities will increase in this space but one casualty of the clamp down on cash will probably be a product called loan against property or LAP. While home loans are the safest bet for the bankers as they are backed by securities, LAP is the equivalent of home-equity loans internationally. For many large and established players, particularly the non-bank entities, it is a growth-driving profitable product. LAP could be more than 50% of the total mortgage book of a few.

LAP, a secured loan, takes a residential or a commercial property as collateral and typically, self-employed individuals and professionals are LAP customers. Such loans support business expansion and diversification and even meet working capital needs. They are also used for weddings, education, medical exigencies, repayment of previous loans and debt consolidation. Small and medium entrepreneurs are big buyers of LAP and as their transactions are mostly in cash, they are being hit the hardest. As a product, LAP will find it difficult to grow.

Tamal Bandyopadhyay, consulting editor at Mint, is adviser to Bandhan Bank. He is also the author of A Bank for the Buck, Sahara: The Untold Story,and Bandhan: The Making of a Bank.

His Twitter handle is @tamalbandyo