Interview of Ramesh Damani & Hiren Ved

https://in.finance.yahoo.com/news/domestic-liquidity-real-stay-agree-081233554.html

Domestic flows have kept markets buoyant for the last few months as money coming in from foreign portfolio investors ebbed. This domestic liquidity is real and will drive the stock market going forward, well-known investor Ramesh Damani and Hiren Ved of Alchemy Capital, one of the country’s largest portfolio managers, said on BloombergQuint’s special show Saal Mubarak.

Here are edited excerpts from the interview,

What’s the underlying tone of the economy?

Ramesh Damani: The undertone of the economy is one of hope and optimism. Since the Modi bull market began three years ago, it has been hope, it clearly hasn’t been on earnings. But I think as Peter Drucker taught us once, culture eats strategy for breakfast. I think what we are learning is that liquidity will always trump valuations. Liquidity is the mother’s milk of a bull market. You can’t fight the feed as the old saying goes. The money that is pouring in from domestic investors has been igniting a rally. Now we are coming to a critical juncture in this market. We are going to see the base effect of demonetisation within the next two quarters or so. If earnings don’t come through, the market could be in a spell of trouble. But so far, the market is driven by liquidity and hope that things are going to get better. There are things that are getting better, not in every respect, but in some respect. There are long-term gains to have from demonetisation and the Goods and Services Tax.

Can The Rally Sustain?

For the broader economy, there are two views. An equal number of people saying things are looking ominous and an equal number are saying things are looking rosy.

Hiren Ved: As stock market investors, we are blessed that we get to see the more organised sector, which is listed. Demonetisation, GST and the crackdown on black money has given a body blow to businesses essentially run by the cash economy, evading taxes. Those businesses are being impacted. People get confused when they look at stock market valuations.

Having said that, all recoveries are usually uneven and never broad based. It is typically one or two things that drive the economy. It’s not that all the four engines are firing together. For example, it’s consumption and government expenditure in our case, and not private spending. When these one or two things pick up and gather momentum, the rest of the economy hums together. We could have argued that part of the price-to-equity re-rating in the market was because the cost of capital fell by 200-250 basis points. When Modi came in 2014, the 10-year bond yield was 8.8 percent which is down to 6.6 percent. So you could argue that there is some lift to the PE. But the rest is liquidity and optimism that growth will come back.

If for the second half, earnings doesn’t come through (hopefully they will) then people will question the rally.

One of the reasons we are seeing the selling by foreign portfolio investors in the last few months is because they have options. India had a massive premium; people were overweight by 750 basis points on Indian equities versus the benchmark which is down by 300 basis points. FPIs say that we will go elsewhere where the risk-reward is better. But the Indian retail investor is discovering the joys of investing in SIPs and in stock markets, the joy of equities.

We are lucky that we have come thus far without any earnings growth. But we can’t count on that for too long.

Key Risks For India

What worries you the most about India in the global backdrop? What are the key risks that will haunt us for the next 12 months?

Ramesh Damani: Global markets are making new highs and there is a sense of fear in the marketplace among commentators. And that’s a good sign. As the market climbs the wall of worry, it is good. I don’t see people complacent anywhere. The biggest risk is that the market is complacent about geopolitical risks.  What happens in North Korea, we can’t quantify. We can quantify other markets in terms of how GDP is growing or how inflation is rising. But what is happening in North Korea, we can’t quantify. Fed has already indicated it will raise rates further. The markets has discounted that.

But the thing that will keep me awake in 2017-2018 and beyond that are geopolitical risks. There is a man who is particularly unstable in America and one doesn’t know what will be launched there. If you ask me what keeps me up at night, it’s that.

And dealing with an equally unstable man in North Korea as well.

Both of them were probably twin brothers at some point in life. It’s not good for financial markets. What’s surprised me is that market has ignored this. It has totally ignored North Korea. Even the Korean market is making fresh highs as we speak. It seems that the market is sleepwalking into that crisis. If something triggers for the worse, that could not be a happy situation.

Is there a chance that global flows come back to India?

Hiren Ved: Global flows came into the debt market in India as yields were very high. In the equity market, India has been always been an overweight in many FPI portfolios. Foreigners were very worried about demonetisation. They thought this will dent earnings. Post demonetisation, markets have just taken off. They took a call that we are overweight, the earnings story is not coming through, so let’s reduce our overweight stance in India for a bit.

Simultaneously, we have seen a massive rally in commodities. Countries like Brazil, Russia rose to new highs after a long time. In some of these countries, valuations were cheap and people thought there were opportunities. They [foreign investors] said we like the long-term India story but we will wait; make money elsewhere and come back at some point. India will remain a favoured market but it is just one of the places where you will stay overweight. The Modi trade started three years ago and people have been waiting. When the money will come back, I don’t know. But we are beginning to see that selling is ebbing a little bit. Whether foreigners will come back with a gusto or wait for a real correction is anybody’s call. But no one is complaining because locals have stepped in with gusto.

Ramesh Damani: There is nothing global emerging market guys are more scared of than being under invested in rising markets. So this will continue. Trust me they will be back and that will lead to a bubble some time down the road. The domestic liquidity is not a flash in the pan event. This time it is for real.

There is reason to believe that domestic liquidity will be able to support this market and the IPO market for some time to come.

The Emerging Themes

What do you think the story is for next 12 months? Do the expensive names continue be sought after or do you see markets start bargain hunting in pockets which so far have not delivered in a big way?

Hiren Ved: One of the reasons FMCG gave returns in the mid 80s and 90s was because HUL was compounding profits at 25-30 percent. Markets love growth with good RoCE (return on capital employed). So, if you have sectors and companies delivering constant growth, in the short to medium term at least, market overlooks valuations. People argue that HDFC Bank was always expensive, but the fact is it kept compounding at 25 percent a year.

There are very few companies with such stable compounding over a long period. So they will get a premium. What that premium is depends on interest rates and liquidity. We used to think that 4 times price-to-book is expensive. Today the dynamic has changed. Probably, 6 times price to book is the norm for high quality financials. So who is to decide? It’s the broad wisdom of the market which together decides.

On whether money will go down, there is already smart money which is going down and bargain hunting in reasonable valuations and trying to bet on turnarounds that are happening, because the economy will heal over time. Typically, what happens is that the quality [stocks] will either under perform or move sideways for a while and money will go to other end of the spectrum, what we call as the have-nots. Within the have-nots, you have to differentiate between companies which have broken balance sheets and companies which have good balance sheets. The first order will where the balance sheets are good and there was no misallocation of capital but there was no revenue momentum. But now, because of either external opportunities or because the companies themselves are doing something, you will see the revenue growth coming in and that’s where the big money is going to be made. The fact that the small and mid-cap indices continues to outperform the large-cap index, some of that could be fluff, but it’s been happening for a long time.

Small and mid-cap indices have been outperforming since 2014. We are in the fourth year of the bull market in small and mid-cap stocks.

Portfolio Approach

Would you be chasing companies which are expensive but show promise of growth, or companies which are not showing earnings growth but could show promise?

Ramesh Damani: The biggest threat to global market is the onslaught of technology, what is happening with automation, internet, robotic intelligence. India as a consumer doesn’t understand that. Because I am a domestic focused investor, I want to make a portfolio that is somewhat insulated against technology taking jobs away from manufacturing and other businesses. The four areas I came up with:

Real Estate: Property has some immunity from technological threat

Airlines: I don’t think the hype will take off so soon

Food and liquor businesses, quick service restaurants will do well

Gaming and entertainment

People come to India for its 1 billion consumers, and not for the infrastructure or steel play. They come for the consumers. That’s the centerpiece of the portfolio I am suggesting to you. I think they are insulated technologically. And I could use the Warren Buffet test for this. If I buy a basket of these stocks and go away for ten years, I am confident it will be better as opposed to buying a steel company or an oil marketing company. I am constructing a portfolio that tries to mitigate the risk of technology over-running these businesses.

Are you looking at things that are doing well internationally and therefore could have an impact in India?

Ramesh Damani: Let’s talk about the gaming sector. Across Asia - if you look at Japan, Singapore, Malaysia, Cambodia, Philippines - gaming is big because international tourists want that industry out there. India has so far been resisting. But we are at the cusp of change. It might happen in six months or a couple of years. But the casino business will change over time in India. It’s a hugely lucrative business.

The odds always favour the house and the PE multiples are always the sexiest in the market. While I can’t time this, I am sure that over the next 5-10 years, if India wants to be an international destination, spirits and gaming sectors will do well.

Let’s look at the urban theme. We have young consumers going to work. We have women working for the first time. Cleanliness standards required, AC comfort required. Look at the quick service restaurants. These guys are selling burgers for 30 bucks or fries for 20 bucks, it's so cheap.

As inflation comes in and the purchasing power kicks in and as people want to eat more outside the home, quick service restaurants will do well.

I can’t tell whether these themes will do well this quarter or the next. But over 5-10 years, the compounding effect will be huge. I am suggesting that if you are young and starting a portfolio, these are the stocks you could look at. Of course, you look at the FMCG and technology businesses but part of that portfolio could be done in those kinds of businesses.

Clean Energy Push

India has said that by 2050 we want to be a combustion-free country. Can you initiate investments based on that right now?

Hiren Ved: With electric vehicles, I call it version 1.0 investing. When retail in India was new, you could buy any retail stock and you would make money. Today, if you are selling EVs or supplying one small part to an EV, your stock will be up 20 percent. You can’t deny the fact that the auto industry is under pressure but it will adapt itself differently.

You still have to build out infrastructure which will take time. There are a lot of other issues. If you look at roads in India, there is hardly any discipline. So you will not have the self-driving cars. It’s something that you can’t wish away but it is several years before it becomes a reality. You can’t say what happens in California will happen in the streets of Mumbai. It is very difficult to translate that. PEs of auto companies could get compressed for a while because this fear is on top of the mind of investors. Some of these companies will adapt to the new situation.

We own an auto ancillary company which is already supplying tool parts to Tesla. Going by Tesla’s volumes today, it’s not that it will be a big money spinner; it’s more about the mindset. We are positioned such that if this opportunity were to become big, we are there to hitch that ride.

Ramesh Damani: I am on the other side of the fence from Hiren regarding this. We don’t understand the kind of changes that autonomous vehicles will bring. They will change the entire dynamic and that’s the technology threat I mentioned earlier. In the last 30 years, we have seen the incumbent always loses. If you look at BSE and NSE, NSE got market share. 

Look at Polaroid and Kodak which owned the instant photography market. Today they don’t even exist as listed companies. Look where Sony was 20 years ago and what Apple did to them. Typically, incumbents have their heads in the sand to protect their profit pool and are not looking ahead of these markets. I am seeing the same thing. Auto companies margins are so thin, they are not investing. Just as Tesla got market cap bigger than all the auto companies combined in America, the same will happen to Indian businesses. Incumbency rarely win the race. That is what history has told us. If anybody can do it, I salute them because that’s the example of a great management that we should bet on.

Betting On Insurance

Do you think insurance is the space which could be a money spinner for the next 5-6 years?

Hiren Ved: Yes, insurance will be a big sector. I have looked at the numbers and I don’t think that insurance penetration in India is as low as people think. The ticket sizes could increase. For health insurance, we are way behind global standards. Earlier, the way insurance was sold to people was just pushing it down their throats. With digital channels coming into insurance, you will have younger people buying insurance digitally. You could see early adoption as opposed to people buying insurance in mid 40s and 50s. Insurance will be the big sector in India.

We are just seeing the onset of financialisation. Demonetisation had a big role to play because all the deposits that went into the bank allowed the relationship manager to sell some insurance product to his customer because that was a heightened 60-day period where we had a lot of interaction with the bank branch. That will carry on for a long time. A day will come when LIC will get listed and given its size and stature, it will have to be part of the Nifty and same is the case with a few other companies as well.

Near-term valuations are expensive but in the long-term, it [insurance] will be a major sector that will be part of the stock market.

Ramesh Damani: The trick in insurance companies is to find the companies with the float and who can deploy the float successfully ahead of the payoffs. That’s what I would be looking for as an analyst. Insurance will be big, without a doubt. The guys who capture the maximum float and keep investing wisely...that’s the secret of Warren Buffet’s wealth. He can invest his float wisely in stock markets with compounding returns. I think the winner will be there. So, it will be a big sector.

Big Investment Ideas

One theme that each of you believe is not necessarily new but has spent some time in the formative stage and is now ready for takeoff.

Ramesh Damani: Airlines and housing, they will be important sectors. The airline industry is just about bursting through its crackers right now. There are misinterpretations on Dalal Street about what airlines do. They are very competitive businesses. It’s a very profitable business. Given the scare of how many airlines are going bankrupt, I don’t think people will come and spoil the party. For the next 2-5 years, airline traffic will do well. And they have started to do well.

And then there is housing. The first thing we want when we graduate and start a job is a house. Housing is a nice stable sector. The market has a lot of respect for real estate. But some of the listed companies are ways to play that.

Hiren Ved: Logistics will be the one sector with GST out of the way. That sector was young and it always showed promise. Now GST has provided a trigger. If e-commerce has to succeed, you will need to have a strong logistics sector in India. Recently, a large FMCG company went in to the huddle after the BJP came in power in UP discussed its UP strategy. It’s a country by itself, how you get to every nook and corner, how do you distribute your product there. Logistics is where value can be added. The enabler is there, the size and scale is there. The mixing and matching of technologies with the logistics sector, the kind of efficiency that you can unlock this sector is just mind boggling.

Investment Mantra

What is the one key learning of yours that you’d like to leave us with?

Hiren Ved: Never say ‘no’. Stick to the basic principle but have high adaptability and learnability.

Ramesh Damani: Liquidity will triumph valuations. I learned how liquidity is important in the market. But that’s the passing lesson.

But the more enduring lesson is the value of compounding, which liberates, and makes you financially free. If your money doubles every three-four years, after 30 years you will be fairly rich. Understand compounding and the magic of compounding and that’s the greatest advice I will give.

And one tip for all the investors

Hiren Ved: It’s an intellectually stimulating and humbling exercise. Go out and explore the world. But be disciplined. Don’t get carried away. Have rational expectations of returns and think long-term.

TGIF with Hiren Ved - BloombergQuint

http://www.bloombergquint.com/markets/2016/10/28/investors-may-give-tata-group-the-benefit-of-the-doubt-hiren-ved

 by Agam Vakil

Shraddha Babla

October 28, 2016, 8:19 pm

This week on Thank God It’s Friday, we spoke to Hiren Ved, director and chief investment officer of Alchemy Capital on how he has seen the equity market evolve over the last two decades, the stocks and sectors that he is bullish on, and how he sees the current Tata Group versus Cyrus Mistry spat to play out.

Q: You have been tracking the Indian markets for the last 25-26 years. Just wanted to understand how have things changed over the past two decades in terms of corporate governance and investment opportunities. Was it easier to make money back then?

A: Yes. When markets are imperfect, there is more opportunity to make money. Over time, access to information has improved substantially. You have the concept of quarterly results, you have conference calls, you have analyst meets. You did not have any of those in the early days. In those days you had to go to the stock exchanges to put half yearly results up on the notice board and take them down later. And then probably come back and analyse them in the office. And to get access to companies we had to go and attend shareholder’s meetings of these companies because that was the only time that we got facetime with the management and you could ask relevant questions, try and make friends so that you can reach out to them later. So I think the speed of information and the access to quality information has gone up by leaps and bounds. Obviously, as the market gets more perfect, and the number of players increases dramatically, it becomes tougher and tougher to make money. But I still feel despite that, India is a great land of opportunities. 5,000 listed companies, our economy is still evolving, and for a curious mind, and a person who wants to work hard, there is still money to look at.

Q: Which phase is the Indian economy is in?  Are we still in the recovery phase, are we in the trough or are we climbing the path towards an economic recovery? Has the expansion phase already begun? And is there any scope for further PE re-rating from here on, like the kind we saw in February?

A: I would say that we are in the early phase of the recovery. Clearly, there are parts of the economy that have begun to show some growth, and there are parts of the economy which are still lagging. We all know that private investment is still lagging substantially. There are areas in consumption that have done well and government spending is picking up. So if you look at what drives growth, I think consumption and government capex are driving growth. Private capex and trade or exports is still very slow. India may still take market share in certain areas on exports but, on the whole trade, growth has been very slow. So I think it’s like of the four engines you are running on two and the other two are yet to fire off. So I think you are in the early stages of recovery. And that is probably also reflected to some extent in the market valuations because what happens is that when you are going from trough profitability, usually the PE of the market goes off first and then earnings follow. Earnings is always a lagging indicator. PE is a leading indicator. Similarly, in 2008 when the market started to correct, and you would ask a company or management, they would say, ‘no my business is going fine but I don’t know why the stock price is falling’. But the market is smart. In 2008, the PE contracted first and the earnings fell later on. You only realised it in March 2009 when earnings de-grew. Expectations were very high in 2008 that earnings would keep growing and growing at 20-25 percent plus. So I think we are in a reverse situation right now where margins are at 15-year-low, capacity utilisation in many sectors is very low, so you are not on your normalised profit growth. But at the same time, there are a few things which have started to turn around. And obviously, the easy liquidity that we have seen around the world, and the fact that cost of capital in India is falling, means that we have got a lift-off in PE first. And hopefully the earnings will follow.

Q: I am sure you are following the ongoing issue with respect to the Tata Group and the ouster of its chairman. And this is going to be in the run of speculation because we do not know what is going to happen but if the Shapoorji Group were to move out of the Tata Group with respect to shareholding, would you have any guesses what could happen? And secondly if there is a correction right now, we have seen some correction in all the Tata Group stocks, would you buy some of these companies?

A: First of all, we have to understand that the Tata Group is a group which has been around for many years. So it is not the last 10-year or 20-year phenomenon. It is a last 100-year phenomenon. When you have such deep rooted history...a group will never crumble just because something happens. Now obviously the group has become fairly large and complex. And it is going through its usual metamorphosis. So typically groups that survive have to change. Sometimes that change leads to friction. It causes things to unsettle for a while. But then things will get back in shape. If you ask me, will it dent the reputation of the Tatas as we see it? Probably a little bit of the sheen has worn off. People are a little surprised at the manner in which things have been done. But having said that, I think that it is a large institution. And now things will sort themselves out over a period of time. As to whether I would buy on a correction, we have to realise that some of the things which have come out in the open are not necessarily new revelations. I think the market was very smart. And if they believe that Tata Steel Europe was a bad decision than the market discounted it in that manner. It is not something new. The fact that the overseas properties of Indian Hotels are not making money, or are RoCE dilutive, the market is much smarter, it discounts this much quicker. From here on I think what investors would want to see is that now that many of these issues are out in the open, how some of these capital allocation decisions that were taken in the past. You can always in hindsight question some of the decisions. But it is not about the history, it is about the future and what the managements of each of these companies decide to do in order to improve the profitability of their businesses is to my mind more relevant from a future stock price perspective. These shocks can keep coming and you will see a downgraft and then obviously you will see things coming back to normalcy. The longer-term trajectory of the valuations of these companies will solely depend on the fundamentals and the future action that managements take to grow these businesses’ profitably. So if you ask me, I would still say that they would have a stellar reputation despite what has happened. Investors are likely to give them the benefit of the doubt and some more time.

Q: Do you think there is a case for reshuffling as far as the senior managements of some private banks are concerned? You’ve already seen some of that happening in PSU banks which have seen a big pile up of bad debt. Should managements really be made liable for some of this?

A: In India, the equity market adjusts to the new reality very quickly. So if a company is highly indebted, and it is not able to service its debt, you see a massive drawdown on equity value. In the enterprise value what remains is dead. Equity value becomes a very small part of the enterprise value. So the market in its own wisdom penalises. But our structure was not amenable to fast change, as in banks could not easily take out a management and take in a new management. And therefore there was a flaw in the laws and regulations governing change of management. The Bankruptcy Law is a seminal regulation that has been passed in India. Obviously you still have to iron out and see how this is implemented. But I think that just like any other developed market, companies should be free to be bankrupt. Lenders should be free to sell their assets and recover their money and if required, even change managements. Have we reached there in India? I think we are far from there. Have we taken the first few steps towards that? I think so. And I think that today more than at any point of time in the past, I think investors are looking at governance as a very very important pivot around taking investment decisions. So whether the law does it or not, the investors will penalise you if they believe that your governance structure is not right. And I think it is going to be increasingly difficult for some of these companies to go and raise future capital for growth. So the market mechanism is taking of care of a few things, but I think for sustainable growth and to attract foreign capital, we definitely need the ability to change managements if required, to sell assets if required more freely, and not have these judicial interventions all the time which take years and years to be resolved. I think some managements have taken advantage of the fact that they could block any of these things because of where the regulations are today and the judicial system is not geared to take such decisions.

Q: Bajaj Finance has been a multi-bagger for you. It has been one of the best performing stocks in your portfolio. Just wanted to understand what your stand on the stock is? What have you done with your allocation and secondly which is your next bet as far as the NBFC space is concerned?

A: I think we have had a very good experience as investors in Bajaj Finance. They were there at the right time, at the right place with an excellent, cutting edge management team. And I think they have been able to exploit the opportunity to the full. I still believe that from a long-term perspective, there is a lot of growth ahead. All said and done, it is still a Rs 50,000-60,000 crore balancesheet. The balancesheets of most of the large banks are almost 10 times that of Bajaj Finance. So I think that the market is growing. Financial services in India is fairly underpenetrated. So if you ask me, long-term growth is still there. Obviously because of the stellar performance that was shown in the last 4 years, the market has rewarded them with a very high price to book ratio, high PE ratio. It is hard to argue that there is further upside as far as valuations are concerned. So I think as investors now you will probably get the earnings compounding. Possibly if you bought this 3-4 years ago you have got a combination of earnings growth and multiple growth. You can’t argue for a multiple growth from here onward. Will the multiples remain high? I think the multiples will remain high because of the sheer quality and growth opportunity that is ahead of it. On the whole, I think I am still bullish on NBFCs in general. We are in the unique situation where the economy has to grow and therefore financials is a great way to play the growth in the economy in several sectors, whether it is through corporate landing, whether it is through retail landing, whether it is through selling or distributing financial products. I think the biggest opportunity in financial service is, the way I see it today, is at the bottom of the pyramid. The fact that this government has rolled out the UID program, the previous government and then carried forward by this government, and the whole DBT framework, I think they have laid the basic infrastructure on top of which many financial services will lie. What was supposed to be the mandate of the public sector, which is to go into the hinterland where the private sector is not going to go and deliver banking services, to some extent they have been able to fulfill. To a large extent because of the structure of PSU banks they were not able to fully exploit that opportunity. That is today being done by some smarter private banks, largely by the NBFCs, and even more importantly by the microfinance companies. So I think that is where I see a future opportunity for growth.

Q: What trends are you picking up with respect to consumption, specifically in the discretionary space? 

A: As I said, discretionary consumption is a big driver of growth in India. But it’s been a winner-takes-all strategy. If you look at four-wheelers, for an instance, I think that other car companies are not growing as well as Maruti. This despite the fact that Maruti has capacity constraints. But that tells you that, yes, there is demand, but it’s not a secular demand for everybody. So you will see differential growth rates within sectors. If your product is good, if your pricing is good, if your distribution and reach is there, then you have a better chance of attacking the consumer’s wallet. We have to keep in mind that while consumption is growing in India and will continue to grow, the big challenge I see is creation of new jobs to get consumption growing. Some of the consumption growth that we’ve seen in India has been driven by consumer debt. Right now, it is not alarming as consumer debt in India is much low. But we cannot take our eye off the ball. We have to keep at the back of our mind that the more sustainable consumption is one where you create more jobs and income and not take on more debt. That is a big challenge in front of the government, which they do realise. The problem is that 10-15 years ago, a lot of tech companies offered high-paying jobs and that created a consumption boom due to high salaries and employee stock options. You now need either manufacturing or high-quality service jobs to maintain that consumption. The tech industry is itself going through a metamorphosis. They are focusing on growing employee productivity than just growing the number of employees. They are not hiring as many software engineers as they were 10 years ago. Therefore that’s a challenge. The investment cycle needs to kick in for creating high-value jobs. For example, the construction sector, one of the largest employers of unskilled labour, is lagging. A lot of those things need to start to kick in if we want to sustain consumption. The good thing is the monsoon was very good this year after two consecutive bad monsoons. That’s likely to give a boost to rural consumption this year. But what about the next year and the year after and so on? Yes, consumption is a bright spot driving the economy but we need to start creating jobs to make it sustain.

Q: Are you seeing any contrarian bets in underperforming sectors like industrials or commodities which have run up?

A: I think the time to bet on commodities was earlier this year in January and February. Commodities have rallied, oil prices have rallied $25-26 to almost $60 plus per barrel. Commodity prices were so battered down that we had to see a rebound, and we’re seeing that now. In some sectors we see oversupply in China and that’s why we see coking coal and iron ore prices go up. Is it a secular rebound? I don’t think so. I think global growth is still very challenged. The people I speak to in shipping and logistics tell me they’ve never seen days as worse as these in international trade. It’s more about supply being managed in the short run which is leading to a run-up in prices. It’s not about demand growing at a very heavy clip. I wouldn’t bet on commodity companies in general. I don’t think this is an area where you’ll bet and say ‘I think commodity prices will keep going up’, although I could be wrong there. On a contrarian basis, I think money can be made in some of the stressed sectors. Some of the large PSU banks can be a contrarian play. Or maybe some infrastructure companies which are able to deleverage their balancesheet. We know there is business happening in areas like roads and so on. So there could be some pockets of good EPC companies that might do well. There will be pockets in manufacturing, infrastructure and some of these beaten-down sectors where there could be a turnaround if the company is able to resolve some of their balancesheet issues.

Q: What is your stock selection criteria and what style of investment do you relate to the most?

A: At Alchemy, we are growth investors. The market is willing to give good valuations to sustainable and high quality growth because there is underpenetration in many areas in India. Does value investing make sense in India? Yes, but money has been made in India by investing in growth, whether it is HDFC Bank or ITC or the generics pharma industry or the private banks. In absolute terms, the big money, the big market caps have been made because these companies have compounded at 20-25 percent growth for several years. At Alchemy, our framework is that we look for a large external opportunity which is expanding. We look at companies with competitive advantage. If the opportunity is large then everyone can take a shot, but why is one company performing better than the other. You need to have competitive advantage to exploit the opportunity better than your rival, and that differs from industry to industry. In a consumer business it could be brand and distribution. In a manufacturing business like cement it can be your cost leadership and logistics capabilities. You have to look at every industry to see what is the competitive advantage. The other factor is scalability. Can a company have the same or better profitability with a Rs 5,000 crore turnover than what it has with a Rs 500 crore turnover? Scalability is important. Niche businesses are exciting. But if it can’t grow it’s not going to create absolute market capitalisation and therefore wealth. Then you need a good management team. Subjects like governance and so on are equally important. And lastly, all of these should come at reasonable valuations. So I think our framework is – large external opportunity, a competitive advantage, scalability and operating leverage in the business, good quality management and all of these at a reasonable price. If we find an opportunity that falls in this broad criteria then it becomes a potent universe for us to invest in.

Q: How often do you come across potential opportunities which fulfill these critieria?

A: As I said, if you look at domestic consumption stories, India has had large opportunities in many categories. You have to look at companies which have that competitive advantage and who exploit the opportunity. Take Maruti for example. There’s so much of opportunity for four-wheelers in India because we have one of the lowest cars per 1,000 people. But the opportunity is so big that every other car company from the U.S., Japan, Europe have come into India. Yet Maruti still has the No.1 position. I remember when there was a lot of competition people said, “oh you should sell your Maruti because they are going to lose so much market share due to competition.” But why has Maruti after losing market share regained it? Because of its competitive advantage. The other guys came but they don’t have the volumes. They don’t have the dealership and distribution network. Maruti had a natural advantage of being in India for so many years. They’ve built a massive network. That was its competitive edge. The opportunity in India is big. In India, across the consumer markets, the number one player has an outsized market share and the others are way below. So take liqour, United Spirits has over 50 percent market share. Take beer and United Breweries has 51-52 percent market share while the next guy is at 15-16 percent. So when you have a lead that is so big, especially in a complex country like India where the consumer in the north thinks differently from the consumer in the south, it takes time for a new person to come in and establish themselves. Obviously the advent of e-commerce and the internet is going to make things difficult for incumbents. Today if you’re a third party seller you could go on Amazon and sell your product. But not every product will be amenable to that. I think that this is an interesting juncture in India where in some cases the strong will become stronger while in others the strong will be challenged due to new business models that come in with e-commerce. But there’s still lot of opportunities.

Q: Tell us about three of your favourite books?

A: The book I’d read early in my investment career was Peter Lynch’s book. The other book which I liked was Edwin Lefevre’s Reminiscences of a Stock Operator. On a very different take, I like to read books on Indian philosophy, Bhagavad Gita being one. But over time I’ve read several books on the Vedic philosophy which I find very interesting. It’s amazing to see such sophisticated thoughts almost 5,000-6,000 years ago.

BloombergQuint

Wizards of Dalal Street - The New Breeze - Hiren Ved

Src: http://www.moneycontrol.com/news/market-outlook/great-cosdifficult-times-can-bebest-bets-hiren-ved_7641741.html

Oct 24, 2016, 04.15 PM | Source: CNBC-TV18 

Great cos in difficult times can be the best bets: Hiren Ved

Asserting that over a period of time investors look for scale, sustainability and maturity in companies, Hiren Ved of Alchemy Capital Management said that great companies going through difficult times can be the best bets.

On Ramesh Damani's signature show "Wizards of Dalal Street", Ved explained that Bajaj Finance came up trumps after the global financial crisis by tapping into domestic growth and consumption story. 

The company, an early entrant then in the consumer finance business, capitalised on the business opportunity by placing in stores executives who would instantly assess and check customers' eligibility for loans, Ved said. Its peers went for scale and cut interest rates instead, he added.

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

Q: I said in my introduction that your passion has become your profession. How did your passion start?

A: It started quite early. I used to go along with my father to attend the annual shareholders meeting of several companies and I was over-awed watching Rahul Bajaj or Deepak Parekh and Dhirubhai Ambani stand up and speak about the vision of their companies and then we used to get those colourful annual reports at home, I used to flip through them.

Q: Not understanding much.

A: Yes, but over time, developed a keen interest to try and understand what makes companies move, why they grow, why do the stock prices go up and down. Then being a commerce student, I ran a small stock market game with my accounting professor. So, got indoctrinated.

Q: But what is your first job on Dalal Street?

A: I started my career with a firm called KRChoksey and Company, worked with Kisan bhai and Deven bhai there. So, I learned my basics there, going and visiting every annual general meeting, every initial public offer (IPO) meeting, marking out the papers, cutting them, making files on companies, writing copious notes.

Q: It is hard to believe 20 years ago, there was not internet.

A: Exactly, you had to go to the stock exchange and physically write down the results because after three days they would take it off. So, those were the fun days, but I got my grounding in research when I worked at KRChoksey. Then subsequently, in 1994, I joined Prime Securities where I was part of the investment team, which was supposed to pick stocks so that the prop book could invest in those companies.

Q: How did you get to Alchemy?

A: After working nine years in the markets, I thought it was time to strike out on your own and do something on your own. So I thought I would start a portfolio management company. When you take these career defining decisions, you sit with your best friends. So, Lashit Sanghvi and Ashwin Kedia -- whom I had known since 1991 -- we sat together one evening.

Q: And your co-founders now.

A: Exactly. I told them that I was planning to quit and start something on my own and one thing led to the other and we decided that why do we not all get together and start an asset management company and that is how Alchemy Capital came into being.

Q: But how do you generate an idea today?

A: We look for a large external opportunity. We look for a competitive advantage that a business has got to exploit their opportunity, we look for scalability, good quality management and valuations and today, with the advent of technology, we are using some algorithms to refine the process and make it more scientific as we go along.

Q: Give me an example of this formula, process driven system that you employ now of an idea that it has generated.

A: We were looking at the consumer businesses. We are back in, after the global financial crisis because we were not sure whether the global economy will grow, what will happen? There was a lot of uncertainty. But one thing we were very certain about was that the domestic market was likely to grow. We picked several consumption stocks which came up at that time. So, sales were growing at a healthy clip, margins were expanding and that came through in our filter process and then came Bajaj Finance and we thought this was a great way to play indirectly the India consumption story.

Q: Second level thinking?

A: Exactly. While we bought the stocks like Bata and the TTK Prestige of the world, this was a great way to play the credit consumption boom in India. People were buying cell phones, refrigerators, washing machines and you could not buy an LG or a Samsung.

Q: They are not listed right?

A: Yes, so the best way to do was to play the consumption theme through Bajaj Finance. There was great under-penetration of credit in India and they had a unique business model to attack this opportunity.

Q: Explain that to me. What was unique about their business model?

A: It is not new. There were other players who saw the opportunity in retail consumer credit markets. What they did was that they went after topline growth. So, they appointed third party agents to go and source business for them.

What Bajaj did was that they had their own person sitting in a consumer electronics store. They had their CIBIL database, they had their own algorithms, so they could figure out -- if a customer approached them -- in 20 minutes whether you were eligible for a loan or not, which means that they acquired their own customers. They did not leave it to somebody else to do that. So, their process, their systems, their credit.

Q: So, you went to Vijay Sales to check this out?

A: Yes, we did. We have done all our desk work and then I hopped across to the closest Vijay Sales, I went there on a weekend and I saw the person out there from Bajaj Finance sitting there, and I was there for about two hours and it was great to see customers walking by, interacting with them and walking out with a product.

Q: It also helped that Bajaj had some of the best management in the business?

A: Absolutely. All the 3-4 people at the top were great. Sanjiv Bajaj with a big picture thinking, he mapped out the opportunity. Nanoo Pamnani, obviously, being a veteran in the financial services businesses.

Q: Ex-Citi banker, good in processes, systems.

A: Absolutely. Cutting-edge processes and systems. And the obviously Rajiv Jain who executed the business plan. Every time we would go and meet them, we were surprised. We came away surprised and wowed. They were always two steps ahead. While they liked the growth and they were aggressive in pursuing their growth, they never took their eye off the risks in the business, whether it was providing ahead of the curve or whether it was using technology or whether it was using the best processes.

Q: I know one of your partners at Alchemy is probably India’s best investor, Rakesh Jhunjhunwala. What have you learned from ‘Bhaiya’ as you call him?

A: Many things. It has been a great learning experience.

Q When did you first meet him?

A: I met him when we were supposed to start out Alchemy and Lashit and Ashwin took me to him and I was obviously over-awed.

Q: He was already a legend by them.

A: Absolutely. Learned a lot. But the three most important things I have learned from him is humility, risk-reward and the conviction to play big.

Q: Humility? He is not known for humility.

A: I think people mistake it. He speaks his mind, so he is not a ‘yes’ man and it is not very easy to convince him.

Q: You talked about his conviction and he is known for having brains of steel almost if you will. You have an example of that?

A: As one of the big learnings in the stock market is what George Soros said. When you are convinced, you should go for the jugular. It is not about you going right, but it is about how much money you make when you go right. As far as Bhaiya is concerned, A] he bets big when he is fully convinced. But more importantly, he bets big at the right price.

So, the risk reward has to be in your favour. If the risk reward is in your favour, you can afford to be a long-term investor. If you buy at the wrong price, then you will always make a mistake somewhere along the way. Those are important learnings that we have tried to imbibe from him.

Q: Interest rates are negative and USD 13 trillion worth of bonds. So how does investment principles work in this kind of an environment that we have learned for 30 years, that you say for 30 years.

A: I agree with you that we are in uncharted waters today. I have never seen this kind of a scenario where there is unlimited quantitative easing (QE), negative interest rates, but what the investment grades has taught you is that stick to the principles. I do not think that the basic principles of a successful business change. So, cash flows still matter, sustainable growth still matters, return on capital employed (ROCE) still matters and those basic principles do not need to be violated. It is like the Bhagavad Gita. The basic principles do not change, times change, the context changes, but the principles remain the same. That is what we have got to do. Stock to the basics and you will be fine.

Q: That is great because if they could change, they were not principles.

A: Exactly.

The art of small cap investing - Hiren Ved

https://www.youtube.com/watch?v=WFFq84s3Esc

Hiren Ved is CIO and Co-Founder of Alchemy Capital

Rakesh Jhunjhunwala is also a Co-founder of Alchemy Capital 

Hiren talks about the upcoming budget and the short term triggers for the market.

He is bullish on the Housing finance companies. Hiren is confident about Bajaj Finance. Bullish on mid cap IT companies.

20:25 to 24:05 Hiren talks about understanding small cap companies

a) The area in which the company operates should present an opportunity which is significantly big. Don't look for niches, look for large opportunities

b) Look for very good management. Very important in a small cap. Clean governance standards.

c) Give time to your investments. Don't buy in one shot. Buy in staggered manner. As your hypothesis works, keep adding.

Value Hunting In 2015: Hiren Ved and Atul Suri

https://www.youtube.com/watch?v=WAKYvVF_tYQ

Atul Suri feels the Pvt banks are on a multi year bull run. He thinks PSU banks may surprise on a positive note in 2015. Pharma trend is secular. Auto ancillaries from a price chart looks good. Infra can be avoided.

Hiren feels IT will still be a good bet going forward. He thinks Pharma will run for some more years. Investors can find value and growth in 

Auto ancillaries.

P.S Atul Suri is the neighbour of Shah Rukh Khan. So traders do make big money