In the latest edition of Wizards of Dalal Street on CNBC-TV18 Sumeet Nagar, Managing Director of Malabar Investments talks about his stock market journey.
Below is the verbatim transcript of Sumeet Nagar's interview to Ramesh Damani.
Q: The objective refraction when you were young was a slide ruler.
A: Yes, you never know in life where inspiration comes from and in my case it was a slide ruler. My dad was an engineer and he had this slide ruler and I was fascinated by this, how this simple ruler could do this complex calculations and I thought while maybe I studied hard I could become an engineer and I could get to used this, but thankfully for me they invented calculator, so my shortcomings were never found out.
Q: I know you went to study engineering. How did your engineering education help you in equity markets?
A: I think it was very useful, the engineering profession is wonderful. It is very logical, it is very rational, it forces you think about how something works and I think you can take that concept and take it to business and investing.
Q: I think Munger would be smiling in Omaha. He has been trying to teach investors for many generations lollapalooza or the mixing of mental sciences and you figure that out.
A: While this was one part of it I still have lot more to run.
Q: You said markets rational and logical and they anything but rational and logical. When did you figure out that markets are irrational?
A: First of all I didn’t even have the basic skills of understanding businesses. I went to a business school. I went to Wharton. I learned a lot about not just sort of investing and finance and like all things, but also about marketing and pricing and advertising and operations and these were all very useful skills to have to build those mental moral, but it still it wasn’t enough. There was still this sort of people aspect and how do they think and how do they interact. That was very useful and luckily enough for me I had an opportunity to join McKinsey & Co, right after business school and I ended up learning lot of those things over there.
Q: And yet your assignment at McKinsey left you a bit frustrated, why was that?
A: It was because I had the opportunity to work with some of the best investor on the planet and many of those investors, when they look at opportunities in India, would say find us the best ideas in XYZ sectors and when we did that, some of the best ideas were these small companies that were nimble, they were growing faster, that had good fundamentals and yet they traded at discount, but those investors felt that these were too small to move the needle for them.
Q: That must have been frustrating do all their work and find no one was biting.
A: While that was frustrating, in many ways it showed me that opportunity this sort of wide space and that eventually form the genesis for Malabar.
Q: Malabar was started in 2008 and I am sure you are good engineer, but your sense of timing the markets sucked.
A: I think it is terrible. You have to probably go back 80 years to find a worst time to start an investment firm - and that’s what we tell our client, we are actually not good market timers, but what we did have right, which was this concept of finding great businesses run by capable and trustworthy entrepreneurs and investing in them with a long-term perspective is evergreen, it works in any environment.
Q: In fact, they thrive in a bad environment when the bad companies really fold down.
A: Exactly and so these companies actually went through the 2008-2009 with flying colours.
Q: Tell me some of the opportunities that you spotted and became great stock for you in that, the first ideas that you put into Malabar?
A: In the first we invested in companies like Info Edge India, Hawkins Cooker, Page Industries.
Q: Tell me about Hawkins?
A: It was a great product that everyone in India knows about and yet when we look at it back in 2008, this was a company that was growing at more than 20 percent year-on-year (YoY) for the prior 6 or 7 years, every single year they improve their gross margin, their operating margin, their net margin and as a business it was trading at 8 times trailing PE.
Q: And yet the 2008 crisis actually helped them because prices of their key inputs came down.
A: Yes, their key raw material is aluminium and aluminium crashed by about 50 percent plus and when we checked in the market these companies were holding their prices - - that’s phenomenal pricing power when your key raw material falls by 50 percent and you can still hold your prices to consumers and we could see that their earnings are going to expand and that was a great trigger to invest in this wonderful company.
Q: A lot of the analysts were looking for technology companies that catered to the west, billion dollars and yet you looked at domestic opportunity. Tell me about Naukri.com?
A: Naukri was the biggest and the most profitable internet company in India back then. In fact, I think even today it is most profitable internet company in India and as you know in the internet businesses the company that has 40 percent traffic share, has about 60 percent revenue share and about 100 percent profit share winner take all and that exactly was Naukri was doing.
Q: What was the business model that was differentiating? They had a good business; they had a dominant market share in Naukri, what do they do with that cash flow?
A: They essentially created the exchange between 20 million job seekers and the people who wanted to look for those resumes and once you have that it is very difficult to replace that.
Q: You can't replace the market.
A: You can't replace it.
Q: Crawford Market is Crawford Market.
A: And it generates a lot of cash flow and what Info Edge was doing very successfully was actually deploying that cash and growing other businesses. So, one such business was 99acres.com a real estate business and that they ceded and eventually it has sort of grown to a much larger size today and if you took all the losses from that then the business was actually very reasonably priced and actually became even more compelling because many of the FIIs were indiscriminately selling in the market and that is what brought the price down. So, we were able to buy this great business at a very good valuation and it has done great for us.
Q: Tell me how do you distinguish management, give me an example of where management you have been able to find a good management and they have been able to deliver for you?
A: One of the examples we talked about Hawkins, later on we also ended up investing in TTK Prestige which does the same thing.
Q: Yes, they are competitor and dominant in the south in the pressure cooker business?
A: Yes, and then overtime they expanded their product range beyond pressure cooker to kitchenware and kitchen appliances and so forth and very successful at that. So, we had a chance to get to know Mr Jagannathan who is the founder and chairman of the company and for over the last decades he has been running this company but even today he spends several days every month cooking in his own kitchen because that is how he figures out how to innovate and make new products. That is the kind of passion that we are looking for in management.
Q: You are actually talking about a CEO who eats his own cooking literally?
A: Absolutely.
Q: Markets are humbling place, you know that. We get things right, we get things wrong. Tell me about something that you got wrong and what did you learn from that experience?
A: We made our share of mistakes. One of the examples was we invested in a company called Voltamp Transformers Limited back in 2011 end and at that point in time we saw that all were capital goods companies were beaten down and this was a great company. In our view that was the best transformer company in India and we invested in it back in 2011. But what we found through 2012 was this company had a lot of exposure to currency because many of their raw materials were linked to international prices even if they were sourcing them locally and when the demand environment is soft there is no way that you are going to be able to pass on that cost increase which shows that you have a limited pricing power. So, in that case we realised that that was a mistake and we ended up getting out of that and thankfully by not making a big loss, but yes, it was a mistake.
Q: Your value investing skills came from your mentor Sash Spencer, right?
A: Yes, Sash was a wonderful guy.
Q: Tell me briefly about him?
A: Sash was an ex-Mckinsey partner who went on to form a very successful private equity firm in the US. He was also instrumental in forming probably the best value investing firm in Asia called as Value Partners.
Q: And you trained under him?
A: Yes, he was very gracious enough to take me under his wing and gave me the opportunity to start Malabar.
Q: You have taught us about compounding which is great but I know you are someone who also counts the many blessings in his life, don't you?
A: Yes, we are successful in this business only because there are some external stakeholders that allow us to be successful. First of all it is our investors. They put enormous amount of faith and give us their hard earned money for us to invest it prudent.
Q: Back you up.
A: To back us up and we have seen that over the last 6 or 7 years maybe three times the markets actually fell quite a bit and our investors came back and gave us more money at that point in time because it was very good time to invest in.
Q: A vote of confidence.
A: And that is priceless. So, we couldn't do this without the support of our investors, so that is number one. Number two; it is amazing people who run the companies that we invest in. They are very passionate about their businesses, they work really hard and that allows us to benefit from their hard work through our investments.
Q: The magic of seeing great companies grow.
A: Yes, and benefit from that. So, we are very thankful to them.
Q: We talked about shooting for the moon in terms of compounding. Someone who actually helped the Apollo program said all it took to get to the moon was a Fortran compiler, a slide ruler and some brain power. You are using two out of three and that is not bad.
A: I will try to run Fortran and maybe all of the tri-factor.
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