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.

Wizards of Dalal Street - A Fresh Breeze - Narendra Nagpal

http://www.moneycontrol.com/news/market-outlook/big-opportunity-for-indiaspecialty-chemicals-amansa-cap_8008621.html

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.

Wizards of Dalal Street - A Fresh Breeze - Sumeet Nagar

http://www.moneycontrol.com/news/market-outlook/wizardsdalal-streetmalabar-investments-chief_7965781.html

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.