Big opportunity for India in specialty chemicals: Amansa Cap
In a CNBC-TV18 special series Wizards of Dalal Street — A Fresh Breeze, Ramesh Damani caught up with Narender Nagpal, Partner, Amansa Capital who shared his views on India’s specialty chemicals industry.
Nagpal said the specialty chemical outsourcing industry is today where the pharma industry was 15-20 years ago. Customers in the US and Europe do not want to manufacture chemicals anymore in their respective home country and are outsourcing to the East.
China scaling back on chemical manufacturing because of environmental reasons which opens up the space for India, Nagpal said.
Below is the verbatim transcript of Narender Nagpal’s interview to Ramesh Damani on CNBC-TV18.
Q: 1992, freshmen CA, market headlines all about the stock market boom, what caught your particular interest?
A: It was 1991 when it started. I was doing my final year of CA internship. I had no family background in stocks, no academic background in stocks, I was doing my CA and then the big bull frenzy happened in 1991 if you remember.
Q: Of course, the stock market doubled.
A: The stock market doubled and a lot of people got sucked into the markets. I was one of those naive people who started investing in market in 1991 and when I passed out of my CA course in 1992 there were two options; one, to go into accounting and second, to go into market. I chose to join ANZ Grindlays because they gave me the option to actually be in part of their equities team. So, that is how the beginning happened.
Q: The contrarian streak started with you pretty early in life. The next 10 years, I know, very exciting period in your life. There were a lot of highs and lows in the market and in your career. What were some of the highs and lows you still remember?
A: It was an exciting phase. So, in hindsight it was right place, right time. I started my career at ANZ as I said and ANZ lost a lot of money in '92-93 unfortunately because of the scam and they decided to shut the business. And I lost the job, and pretty much one year after I began my career. After some time I joined Barclays Bank which was the first foreign broker to come into India. I was there for four years, once again a great time. India did 40 global depository receipts (GDRs) in 1994 in 52 weeks. We had a great team, we built a good business. I had the opportunity to run the research team myself in mid 90s. It all ended in 1998 again, after the Russian crisis when Barclays decided to shut the business globally.
Q: Few years into your career you are zero for two.
A: That is right.
Q: But I know you got a good job at Deutsche Bank, it was almost like a dream job if you will. Employee number one, but still your heart was not contended, was it?
A: Yes, it changed over a period of time. It was very exciting in 2002 when we started the business. We pretty much built it from scratch. As you mentioned it was great to be employee number one but we built a large and successful business over five years. What also happened during that period was that I started to move away from stocks. So, in the beginning I used to look at stocks, I used to write on stocks, I used to write on market but over a period of time I had to move more and more into management since I was running research and equities business as a whole and towards the end I realised that I was spending no time meeting companies, looking at stocks and it was clear to me at that point in time that that is where my passion lied.
Q: I know towards that time also you met the man who was going to be your partner in Amansa, Akash Prakash. Tell me how that happened and what did you both think at that time when you entered into a partnership?
A: I met Akash and I got to know him well during the time I was at Deutsche Bank. He was in GIC, one of the largest investors in Asia. He used to look at India among other markets and we used to talk regularly on different stocks and sectors. He would also come down to India pretty often and we would travel together to different cities, to meet companies, do an ecosystem check, meet the dealers, meet the suppliers and we realised over a period of time that we looked at stocks in a similar manner and that was the common ground for us in Amansa later on.
Q: When you founded Amansa Capital two different people coming together in a partnership there has to be a philosophy that ties it together. This is how we look at market; this is how we look at stocks, this is how we look at managements. What was that philosophy that bought both of you together?
A: The fundamental philosophy was that we wanted to run the fund the way we would run our personal money. The way we would run our personal money is to look at businesses from a bottom up perspective. So, it is not too much about macro, we look at businesses in a very individual fashion. We try to understand what the management team is trying to do we try to visualise where this business would be in the next five to ten years. If it makes sense to us from a valuation perspective and we think this could be a big business, a profitable business in the next five years then it is an opportunity for us.
Q: You often talk to me and in public about aligning interest, you find that is very important that the promoters and the stakeholders, the interests are aligned. Where do you find this alignment missing?
A: If you look at certain segments of the market for example multinational companies which come in all shades. Some of them run their businesses in a manner which takes care of minority shareholders in India. However, there are certain multinational companies who obviously do not care much about local minority shareholders. So, there is a big difference in the way they treat minorities in India and the way the parent would treat them overseas. The parent would have quarterly calls, they would meet investors, they will have capital market day. You won’t have anything of that in India.
Q: That is a warning sign.
A: That is warning sign. The next sign is a lot of management teams for the multinationals they would have employee stock ownership plan (ESOP) in the parent company but not in the domestic company. It is a clear case of misalignment and it is a sign for us to then be careful and stay away from these companies.
Q: On the domestic side how do you find out that Indian promoters are not friendly towards minority shareholders? Is there a checklist you go through?
A: It is a checklist and it all relates to the past. We look at the last 10-15 year history and the big area for us in terms of focus is capital allocation. The single biggest decision an entrepreneur makes or a promoter makes is where does he chose to allocate capital and that pretty much tells you what he wants to build, in fact a good quality business will compound on its own for a long period of time and look at all the successful stories like Asian Paints and multiple sectors, they have compounded on their own.
Q: When the technology boom happened a lot of it was seared because it was the first time we saw dazzling global boom playing out in our stocks markets and you went through one great investment and one mediocre investment. Let us start with the mediocre one. What did that teach you?
A: I think we are discussing Rediff.
Q: Yes, of course.
A: This is back in 2007 if I remember correctly and if you went back to 2007 if there was one trend you would blindly bet on it will be that internet will take off in India. Young population, English speaking, westernised, falling mobile prices, falling broadband prices, it is a pattern which was repeated all over the world and you knew India had only 30 million users of internet.
Q: Nothing but place to go up.
A: Nothing but place to go up and Rediff was the leader at that point in time. It already had USD 20 million in revenue. It had a huge consumer base, brand name.
Q: And yet the stock went down from USD 40 to today USD 0.20.
A: That is right.
Q: What went wrong?
A: What went wrong was the company couldn't keep up with change in technology and the consumer preferences. They missed the turn on mobile, they missed the turn on social media, they had to morph from being a portal or horizontal into a specialised vertical. They missed all the big turns unfortunately.
Q: A management team that you found that did this job, executed perfectly, Lawrence Bossidy at Honeywell used to say execution, execution, execution. You found that in Info Edge, didn't you?
A: That is right.
Q: What was the greatness of Info Edge?
A: Over the last 15 years Naukri has pretty much marginalised all those competitors. They have 70 percent plus market share in terms of traffic. They dominate this space today. Anyone who is looking to hire people has to use Naukri, it has immense pricing power and market position which they have achieved over the last 15 years.
Q: And the opportunity said is just the beginning?
A: It is just beginning. We all say that 1 million young Indians join the workforce every month for the next ten years. There is no better way to play that than Naukri.com.
Q: You are spotting a disruption in the chemical industry globally. Take me through that hypothesis and how do you express that hypothesis in terms of actionable ideas?
A: The speciality chemical outsourcing industry is today where the pharma industry was 15-20 years ago.
Q: Meaning strong skill sets, strong India focus?
A: Right, the strong skill sets the chemical engineering skill set, India is very strong in that. It has a large base of chemical manufacturing. The customer set in the US or in the Europe, they do not want to manufacture chemicals anymore in their home place. They are outsourcing to the east. Their natural location is China, but China is scaling back on chemical manufacturing because of environmental reasons. They have been far more lax than India. So, they are pulling back. And it opens up the space for India. When a customer comes to India for a certain set of molecules the company which we like is SRF Limited.
Q: That is the way you express it. That is the work in progress, the example of a company transforming itself?
A: That is true and it is in the stage of transformation and it is in the stage of transformation and it stands out in terms of their expertise in certain molecules. They have a long history of chemical engineering. They have been producing chemicals for different application for the last few decades and what they are doing very smartly now is they are taking the cash from existing business, some of them are cash cows, they are not growing, they also had a windfall from carbon credits five years ago and the management team has smartly taken that and redeployed that cash in high technology business.
Q: Moving up the value chain?
A: Yes.
Q: Long term thinking?
A: Yes, and it is a 10-20 year journey. They have started the journey 10 years ago and the management is clearly committed. This is the path they want to go down to. They will not do commoditised business and they are using all the capital once again to reinvest in that business.
Q: How did you check the alignment of interest that is so important to you with SRF and its minority shareholders is on the same page?
A: It is once again going back into history. So, if you look at the company 5-6 years ago when the stock was not doing well the company did two things, one they used cash to buy back shares, which a lot of companies didn't do unfortunately in that era. Secondly the entrepreneur family, the founder family, they bought stocks themselves to increase the stake in the company and they own more than 50 percent of the company today. It clearly tell us they are fully aligned with minority shareholders.
Q: That is the check. You have spent 20 years in the market. You have seen a lot of exciting times. The Sensex has gone - as you said doubled in 4,500, from then it is a 5x or 6x today. Are you more excited today than you were as a kid CA in 1992 about stock picking and the stock market in India?
A: I am definitely more excited today because as you know the world is not looking great, India stands out. India on its own is doing some great things and the next 10 years would be a great opportunity for Indian investors and it is a great place to be. I would not be anywhere else rather than be in India.
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