Wizards Of Dalal Street - The New Breeze - Mrinal Singh

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Wizards Of Dalal Street - The New Breeze - Mrinal Singh

Invested in Natco at the right price: ICICI Pru

In the special series Wizards Of Dalal Street, Ramesh Damani caught up with Mrinal Singh, Deputy CIO at ICICI Prudential AMC where he spoke about how he spotted Natco Pharma.

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

Q: Let me take you a decade back, 2007, you were married, you had engineered, you were working in London and yet your wife tells you 'go, follow your dreams', what were the dreams?

A: The thing was I used to get up early in the morning, 4o'clock and my wife would ask, what is it that you keep looking on the screen. I told her, the markets are opened in India and I am seeing how the markets are doing. She kept on seeing that and it was very obvious for her, she said, if you want to do that in your life, why don’t you pursue that. It gave me the push which I needed.

Q: They say wherever there is a fire, there is smoke. At what point you think you have the bug of equities?

A: Even as a child -- in those days, even the leading daily used to have those price quotes in the back page and the business page. So I would look at them and I was always intrigued about what is it, the prices keep changing, the numbers keep changing and I ask the elders and they said, this is the share price. It is a part ownership of a business, you are entitled to some bit of profit because you are part-owner. They changes every day because the market decides the price every day.

That was interesting and it always was on the back of my mind that I want to pursue something in this. It attracted me.

Q: 2008, your dream of getting into stocks almost became a nightmare, thanks to Lehman. Tell me how you handled that period, your experiences of that time?

A: The professional investing started for me in 2008 starting. In those days, there were murmurs of something called subprime happening in the West and there were always these talks that yes, we keep talking about these things but nothing happens.

Then clearly, for a bottom-up fundamental guy, I could see that things were not in lace. Fundamentally, we are not able to justify a lot of things that are happening in the markets and it was troubling. Then even approaching Lehman incident, by October the market has started drifting down and then Lehman happened and then there was sheer pain. But as an investor, particularly a bottom-up investor, clearly there was hunting ground, there were a lot of opportunities, prices were appealing. So yes, baptism by fire they say.

Q: In retrospect, it is fine, the markets rebounded, everything is fine. Did you ever feel going back to engineering as the Sensex went below 10,000?

A: No, in fact, everything I wanted to -- in the jigsaw of understanding of the markets -- feel and understand was there. It was so obvious that this had to happen. You need to have a temperament to see through it.

Q: So you felt that that crisis gave you an opportunity, right? Because you were pushed into a sector that no one was looking at that time, technology?

A: Yes, besides other sectors at that juncture, post Lehman, everything to do with West was uninteresting. Particularly to do with the US and technology in India is very much US facing. So we were like okay, we will look at it.

Although it might have not been the most interesting things in those days, to me it looked like a very good opportunity. There were hoards of things happening, a lot of action, a lot of price movement and a lot of potential great investment opportunities.

Q: In real estate they say, location, location, location. In investing, in finding great stocks, the first thing you say is marketcap, marketcap, marketcap. How does marketcap help you make better investment decisions?

A: Because I look at potential investments as trying to buy a part of the business.

Q: What you learnt early on?

A: Yes and that is very important that I look at it in terms of what the market is ascribing to it as a value and that is marketcap and even a target marketcap. So I typically work in terms of marketcaps. The businesses may be evaluated better on price to earnings, price to book but those are ratios.

Q: How do you assess management, how do you look or spot the indifferent management from the great management?

A: We at ICICI, go to a very great extent trying to get that assessment right and that is very important particularly if businesses are small. We tend to do a huge amount of work around -- if they have a vested history, we see how they have dealt with minority shareholders in the past good and bad times, lenders, stakeholders like vendors and customers and things like those -- we also like to evaluate if -- as minority shareholders, investors are aligned with the promoters, how have their accounts been, how have they dealt with the balance sheet.

Q: What are the red flags that you spot?

A: Very often we have seen there are businesses, which tend to use capital markets to wash their sins in capital allocation and when they do have great times, they tend to have accounts in a way, which are not trying to share profits with minority shareholders and that is a very important parameter that we look for. We want to see how they have done in their bad times, we want to see how they have done things in the good times.

Q: Let us put it all together, you figure out marketcap, you figure out management, you figure out the opportunity size and you put it all together in a stock called Natco pharma. Tell me how and why you spotted that and why did it turn out to be such a winner for you?

A: We don’t comment stock specific but as an illustration, I will talk about it. So during our primary research in the healthcare sector and this is one of the sectors which has a lot of third party NGOs and the likes, it impacts everybody a lot of data also is available. So we notice that there is one part of that therapy, Cancer, which is getting missed because it is not getting captured because the pharmacists typically don’t dispense the cancer medicines.

Q: It is sold in the hospital directly.

A: Yes. So it is in the very nature of how cancer is treated in India and interestingly if you notice even today 56 percent of Indians are below 30 years and that is a very young society. So they are young, they have aspirations but then after ten years, these same people would be 40 years and at that juncture they will start knocking in terms of lifestyle diseases maybe a combination of diabetes, healthcare and the likes. So it is a big potential market for lifestyle diseases, chronic as they are called and cancer was being missed because the data wasn’t getting captured. So we did a huge amount of work trying to capture the data on cancer, went to leading practitioners, hospitals, opinion makers, NGOs, third party bodies.

Q: The prices also were generically far lower than they compare it as?

A: Yes. Besides the obvious names, there were couple of names which particularly from leading practitioners came across, we did work around it, meeting the management -- not the most important thing but obviously is -- do work around their vendours, competitors and competitors are a very good source to talk about.

Q: One of the competitors -- if I am right -- bought the shares after you did?

A: Yes. So that is a validation. So we made the investments at what we believe was the right price and we were happy because we knew we were ahead of the street. We were the first institutional investors and then clearly competitors bought at later juncture. We were happy that the stock has done well for us.

Q: Your philosophy comes together, you found a cheap marketcap, you found a great opportunity, target marketcap, good management, absolute return possibility, boom, Natco Pharma is a great pick?

A: Ticks all the boxes.

Q: Yes. Another pick -- PI Industries, what did you spot in this pick?

A: Not being stock specific, if you look in the value chain of the entire agriculture space and agriculture is a very big part of the economy, there are seats, which are partly regulated then there are these fertilisers heavily regulated, crop prices very heavily regulated. So the only part of the value chain is the agrochem which is not regulated -- a bit free market economy, we have been always more interested in that space and we have been invested in that space. So I would track this set of companies, not invested and then I saw this company was increasing its revenue and profitability without increasing volumes and that doesn’t regularly happen in chemical companies.

Q: They are moving up the value chain, higher maring products perhaps?

A: And in the free market, you cannot raise prices so easily and then we did a lot of work, we realised their products were very well accepted, the yields were improving, they were doing very well, in fact there was shortage and these guys were refusing business. They had an export business also and they were doing very well over there also. So, we clearly saw that a business having surplus demand, lack of capacity and to our surprise, they were in the midst of capex. So we knew we had a winner at hand, did all the bottom-up evaluation, financial analysis and all, we did for the price, bought it again the market wasn’t looking at that direction, we were happy, all the tick boxes margin of safety is there.

Q: You manage a lot of money, how much do you manage for the record?

A: Upwards of USD 2 billion.

Q: How do you deal with that kind of money?

A: Being in the market itself is very joyful and money being small and big, responsibility is equivalent. Obviously the money goes up and down based on the market is moving everyday but then that is not something that I keep thinking about or I keep bothered about, the whole key is to keep finding something which will do good to our investors, our unit holders, our investments, keep finding something which is cheap and keep doing that work, keep maintaining what we have and keep evaluating and that is a very happy journey itself. So I obviously try to unwind post office, don't try to think too much about office after office, spend time with family, children, pick up a sport, pick up a hobby, things like that.

Q: A decade ago -- we are at the 'Good Wife' restaurant -- your good wife said, "Go, follow your dreams", are you living your dreams?

A: Yes. I am quite happy about it and my wife has a big contribution in that.

Q: You enjoy to go to work every morning?

A: Yes. It is very joyful.

Hidden gems! Quality unlisted stocks can spin money in no time, but they are risky

http://economictimes.indiatimes.com/markets/stocks/news/hidden-gems-quality-unlisted-stocks-can-spin-money-in-no-time-but-they-are-risky/articleshow/55742024.cms

Hidden gems! Quality unlisted stocks can spin money in no time, but they are risky

By Rahul Oberoi, ETMarkets.com | Dec 02, 2016, 09.36 AM IST

Sometimes betting on unlisted shares can also give you lucrative returns over time. 

For instance, an investment of Rs 10,000 (face value Rs 10) made in the unlisted shares of Lux Industries in 2010 would have become nearly Rs 4,00,000 today, according to a dealer of unlisted shares. 

Hosiery maker Lux Industries shares got listed on the National Stock Exchange in December 2015 at Rs 3,342. The company split equity shares of face value of Rs 10 each into five shares in June 2016 with a view to making them more affordable and increase liquidity. 

On November 30, Lux Industries shares of Rs 2 face value were quoting at Rs 772. 

Similarly, shares of the recently-listed ICICI Prudential Life Insurance are now trading at Rs 305. According to a dealer, they were trading at Rs 125 in 2013 before listing. 

The figures show the potential to make money in unlisted stocks. However, these securities are less liquid in nature with wider spreads between bid and ask prices. 

Sandip Ginodia, Promoter of Abhishek Securities, which specialises in delisted and unlisted shares, called unlisted securities hidden gems that carry a lot of value. 

"Over the past 12 years, I have seen average portfolio returns of unlisted securities averaging at around 26 per cent compared with around 16 per cent given by listed securities," he claimed. 

One can buy unlisted stocks though internal contacts in a company or from specific dealers who deal in such stocks. 

Market veterans say a novice or first-time investor would do well to stay away from this segment as it is fraught with many risks. These stocks come with liquidity risks and sometimes a stock may never get listed on the bourses, they point out. Sometimes people also acquire shares of unlisted companies in the form of employee stock options (ESOPs). 

"If you buy unlisted shares, you should be able to hold them for a minimum period of two years to reap the benefits," Ginodia said. 

Market watchers say ICICI Lombard, Tata Technologies, Catholic Syrian Bank and Tamilnad Mercantile Bank are among the companies that may list their shares on the bourses in the coming quarters. 

Stock exchanges NSE and BSE are also planning to list their shares next year. Unlisted shares of BSE are quoting at Rs 395 with a face value of Re 1, while those of NSE are available at Rs 4,700 with a face value of Rs 10, according to the website of Sarffin Financial Advisors, a dealer for delisted, unquoted, pre-IPO, unlisted and rare Indian shares. 

But investors eyeing this segment of the market need to adopt a lot of caution. Says Sanjiv Bhasin, EVP for Markets at IIFL, "Before investing in an unlisted company, one should take precaution and compare the company with peer group firms. Debt, unlocking of valuation, how fast the cycle changes, regulatory hurdles and, most importantly, return on capital employed (RoCE) should be checked before one decides to put money in an unlisted company." 

G Chokkalingam, Founder of Equinomics Research and Advisory, said: "One should always stay cautious before investing in new themes in the unlisted market. It is a free market. You should always compare financial ratios of unlisted companies with their listed peers, if available." 

Black swans—a value investor’s close friend

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Black swans—a value investor’s close friend

The question to ask about each stock that one is looking at is whether the future cash flows are going to be affected? And if yes, then to what extent?

Vikas Gupta

Black swans, or other news-making external events are, are typically immediately followed by a strong market reaction. After such an event, the market usually reacts irrationally in the classical fight or flight situation and chooses flight. The market predictors have a field day explaining the causes of the market reaction and providing the sophist reasoning behind them.

The value investor, however, chooses to ‘fight’. The value investors get busy analysing stocks and seeing which have become available at a discount to their intrinsic values.

Of course, sometimes the intrinsic values of some stocks could also change and the value investor accounts for that. It pays to remember that the intrinsic value is the present value (based on an appropriate discount rate) of the future cash flows in perpetuity.

The question to ask oneself about each stock that one is looking at is: will the future cash flows be affected? And if yes, then to what 

extent? What is the maximum extent to which they could be negatively affected?

Further, is the long-run discount rate impacted? Why? If none of these factors are impacted, then those stocks’ intrinsic value is intact.

But if there is an impact, then there is a new conservative estimate of their intrinsic values.

Are they available below their intrinsic value? If they are available at a significant discount to their intrinsic values, say 30% or more, then it is definitely worth thinking about starting to buy them.

Of course, the sophisticated value investors had already got a huge watch list ready with their estimates of intrinsic values and as soon as there is a black swan event or any other event that causes a huge dislocation in the markets, they are ready quickly, asking the above questions, answering them and then acting on the “buy” list.

The value investor expects the black swans or pseudo-black swans—events that look like black swans at the time but turn out to be not that impactful as perceived—to take place quite frequently and does the homework beforehand. She has studied a lot of stocks and zeroed in on a fairly large list of stocks which, if available significantly below their intrinsic values, she would like to buy.

During calmer times, she starts with the ‘A’s—as Warren Buffett would put it—and starts rejecting fundamentally weak companies and putting the fundamentally strong companies on her watch list. Further, for each of the companies she has an understanding of the major strategic factors that could have an impact on their cash flows.

Based on that, the appropriate discount rates and hence their intrinsic values are kept ready. Most investors, however, would not keep that precise a tab on the intrinsic value of some of the stocks they prefer but can quickly assess that they are available at a significant discount as they are already aware of the major factors defining that company during an earlier study.

Another process that professional value investors follow is that they have ready models with all the companies in the market available and just feed in the current market prices during or after a black swan event and are thus able to identify a set of companies that seem to be the most discounted.

Then they double check through a stress test to see what factors could be so negative as to impact the cash flows and intrinsic values below the current market price and what is the likelihood of those factors playing out.

This is a reverse way to test the robustness of the value and determine how strong the margin of safety is. Stocks that pass through this stress test on margin of safety can be looked at favourably and probably a quick buy order can be placed.

Speed, however, is not that great a virtue and in case of any doubt, it is important to satisfy oneself that one is doing the right thing rather than try to be agile.

However, one must remember that there will always be some information that is not available or not clear fully. The value investor’s job is not to expect to know every single piece of information.

She should attempt to make sure that the main factors defining the value are handy and assessed properly, including a stress test (remember the 80/20 Pareto principle, that 80% of the effect is caused by 20% of the factors). The lesser known factors and obscure pieces of information of marginal impact can be left for the future and that risk is to be covered by not allocating a large percentage of the investible sum to one single stock.

During such times, a large number of good-quality stocks are available at a discount to intrinsic value and hence a diversified portfolio of such stocks should be bought. This mitigates the potential risk manifestation due to the marginal factors.

Value investors welcome friendly black swans.

Vikas Gupta is executive vice-president and chief investment officer, ArthVeda Capital

NBFCs loan share could go up 300 bps in the next three financial years, says Crisil

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NBFCs loan share could go up 300 bps in the next three financial years, says Crisil

MUMBAI, NOV 23:

Non-banking finance companies (NBFC) share of overall loans in the financial sector is seen rising 300 basis points (bps) to 17.6 per cent in the next three fiscals through 2019, even as the spoils contract for banks, according to credit rating agency Crisil.

That builds on a growth of 300 bps seen in the last five years. One basis point is equivalent to one-hundredth of a percentage point.

Crisil observed that NBFCs are back in the limelight by achieving significant scale and carving out a larger share of systemic credit for themselves.

The agency noted that NBFCs, including housing finance companies, achieved high growth in the past by leveraging innovation, origination and customer connect, and by diversifying their funding profile. They could grow even faster as public sector banks, facing asset quality challenges, remain circumspect on lending.

Gurpreet Chhatwal, Business Head, Large Corporates, Crisil Ratings, said: “Domestic NBFCs have leveraged their unique strengths and some of them have scaled up to become world-class institutions. NBFCs with assets of over Rs. 40,000 crore more than trebled to 10 from 3 in the last four fiscals.”

Innovative product launches have resulted in robust diversification that, in turn, strengthened business profiles, he added.

Products that constituted just 16 per cent of NBFC advances in fiscal 2012 will constitute 40 per cent by fiscal 2019. Much of the growth has emanated from mortgages and MSME financing.

Crisil expects NBFCs to steadily grow their higher- yielding unsecured MSME financing book. Managing operational complexities and higher credit costs would be the key to scalability here.

As for other segments, housing finance remains an outperformer. However, large NBFCs in this space have ceded market share to medium-sized rivals. Yet, overall sector-wide portfolio growth is seen steady.

"Going forward, we also see vehicle loans growth picking up and gold loans growing moderately after a lull.

"The real estate lending space has seen the entry of several new players. Growth, however, is expected to be lower going ahead given the emerging risks," the agency said.

It also sees risks building in the loan against property category (LAP) with the segment experiencing stronger

headwinds than envisaged earlier, with competition from private banks leading to sharper and sooner-than-expected yield compression.

And soft property prices could reduce the collateral cushion available in LAP portfolios, thus increasing risks if borrower cash flows are insufficient for loan servicing. As a result, growth in this segment is expected to be lower than estimated.

Krishnan Sitaraman, Senior Director, Crisil Ratings said, “NBFCs have strengthened their funding profile well over time, which has helped them scale up. They have attracted significant investor interest, too -- in terms of equity funding, and also debt funding through diversified sources. In the past five years, they have raised Rs. 26,000 crore equity."

Crisil said a material pick-up in securitisation and new avenues such as masala bonds will further strengthen their resource profile.

Further, for NBFCs, the borrowing cost differential with banks has narrowed by about 50 bps over the past four years.

"But a key challenge for NBFCs will be to manage competition from private banks and simultaneously balance risk and profitability. It’s here that proactive investments in technology and operational innovations would help, in terms of enhancing competitiveness," said Crisil.

As for demonetisation, Crisil foresees the short-term impact to be manageable for the NBFCs it rates because

of access to undrawn lines of credit from banks and liquid assets. The Reserve Bank of India’s move to temporarily relax NPA recognition norms will also provide some near-term respite.

The agency felt that the long-term implications are, however, evolving. If the disruption faced by NBFCs in cash-intensive businesses prolongs beyond two months, asset quality pressures could manifest.

(This article was published on November 23, 2016)

Baby bank, big steps: Rajiv Lall's game plan for IDFC

http://www.forbesindia.com/article/boardroom/baby-bank-big-steps-rajiv-lalls-game-plan-for-idfc/44711/1

Baby bank, big steps: Rajiv Lall's game plan for IDFC

By Salil Panchal| Nov 9, 2016

India's youngest lender IDFC Bank has chosen the acquisition route to gain a foothold in rural India while building a digital network to expand in urban areas. It cannot afford to slip up as the battle to reach the unbanked gets fiercer

Once a fortnight, the senior management of IDFC Bank, 35 in number, gather for what they call the ‘Safe Space’ meeting at its headquarters in Mumbai’s Bandra-Kurla Complex. It is here that Rajiv Lall, the bank’s founder MD and CEO, outlines the areas of concern for India’s youngest bank.

There are debates, discussions and the odd slanging matches too. The meeting, says Lall, “helps to break communication barriers and enables the individuals, who are empowered at different levels, to problem-solve, instead of following top-down instructions from the boss”. Sessions like these—typical of many modern private lenders in the country—reflect the keenness and agility to resolve issues before they blow out of proportion and are a far cry from banks’ traditional mode of functioning—in silos, where teams build and run products and service lines, often disjointed.

For IDFC Bank, these sessions have proved useful in untangling knotty problems. For instance, it was in a Safe Space session in January this year that the bank discussed the differing interpretations of compliance requirements to set up bank accounts electronically and arrived at a consensus. A directive from the top management ensured that all the departments of the bank were on the same page and did not come up with conflicting analyses of the norms. 

Debates have also helped to outline the scope of IDFC Bank’s products such as micro-ATMs that the bank installs in shops to facilitate everything from opening an account to accepting deposits.

And when it comes to resolving issues and steaming ahead, Lall, 59, is proactive. His bank’s legacy parent Infrastructure Development Finance Company (IDFC), incorporated in 1997, has earned a name for itself as an infrastructure lender. But IDFC Bank, which completed a year of operations on October 1 this year, remains largely obscure to individual households. This compounds the biggest challenge the young bank faces—customer acquisition.

“Our strategy is to become a mass retail bank,” Lall tells Forbes India. For this, IDFC Bank has set the ball rolling through the acquisition route. In January this year, it picked up a nearly 10 percent stake in ASA International India Microfinance, the Indian arm of Dhaka-based ASA International, for around Rs 8.5 crore, giving it access to India’s northeast and eastern regions, including Assam, Tripura, West Bengal and Bihar.

Down south, in July this year, IDFC Bank announced a 100 percent acquisition of Tamil Nadu-based Grama Vidiyal Microfinance for an undisclosed amount. This deal will provide the company access to the microfinance institution’s (MFI) large customer base—currently, 1.2 million across seven states and 321 branches. With its own 100,000 clients, IDFC Bank’s current customer base stands at 1.3 million.

Lall aims to take this number to 6 million by 2020. As a first step, IDFC Bank’s target is 1.5 million customers by March 31, 2017. The bank currently adds 20,000 customers every month.

Customer acquisitions apart, IDFC Bank has also recorded impressive top- and bottomlines. For the first quarter of the current financial year, the bank reported a 60 percent sequential jump in net profit to Rs 264.8 crore, on total income of Rs 2,188.28 crore. The bank’s assets stood at Rs 101,694 crore for the June-ended quarter, while deposits grew by 59 percent sequentially to Rs 13,029 crore. Current and savings accounts (CASA) stood at Rs 869 crore and term deposits were at Rs 12,160 crore.

Asset quality too has improved from initial levels. Gross non-performing loans (NPLs) as on June 30, 2016, were at Rs 3,030 crore, or 6.1 percent of gross advances, compared with Rs 3,058 crore, or 6.16 percent of gross advances, as on March 31, 2016. 

Until the RBI’s recent move to make banking licences ‘on-tap’, acquiring a banking permit was rare and challenging. Prior to IDFC Bank and Kolkata-based former micro-lender Bandhan Bank, which was granted a licence along with IDFC Bank in April 2014, Kotak Mahindra Bank and Yes Bank were the only new private banks established in the previous decade.

Bandhan Bank started operations in August 2015, a few weeks prior to IDFC Bank. The two have ventured into the sector during a period when most state-owned banks are crippled with stressed balance sheets, and lending and recoveries of loans have become difficult. Consequently, public sector lenders have been reluctant to expand operations into remote parts of the country.

As a group, IDFC has taken to full-fledged banking at a time when the Narendra Modi-led government has renewed its thrust on infrastructure lending. So, why did the organisation move beyond its core specialisation?

Much before veering towards full-fledged banking, a ‘push factor’ had started to build up since 2010-11 for IDFC to look further than infrastructure financing. In the infrastructure sector, the boom was turning into a bust and the listed company found itself focussed on a sector going through prolonged stress. “It became almost a fiduciary responsibility to shareholders… to find a strategic response to a changing macro [economic] landscape,” says Lall, recounting the genesis of his bank.

At the time, the RBI also felt that big non-banking financial companies (NBFCs) were posing a systemic threat due to the high proportion of risky borrowers on their books. They were hence being encouraged to build a depository franchise and convert themselves into banks.

What emerged alongside for Lall and his team was the fact that there was, and still is, a vast portion of India that remains unbanked. India’s financial system is dominated by nationalised banks that command close to 70 percent of banking assets. Close to half of all banking credit (45 percent) is only to 300 corporates, according to RBI data. “This means there are large chunks of the economy that do not have access to formal credit, which is a tremendous opportunity,” explains Lall, who was educated at Oxford University and has an economics degree from Columbia University in New York.

Further, nearly 60 percent of household savings are not intermediated through formal financial institutions but through moneylenders and chit funds, data from IDFC Bank’s internal investor presentation shows. These were all compelling factors for Lall. “There are at least 200 to 300 million people in the country who need banking services,” he adds.

Against this backdrop, the plan to set up IDFC Bank as an arm of IDFC took shape. As of June 30, 2016, IDFC holds a 52.9 percent stake in IDFC Bank through IDFC Financial Holding Company Ltd. The government of India has a 7.7 percent stake, overseas investors 23.4 percent, retail investors 9.2 percent with mutual funds, corporate bodies, financial institutions and insurance companies holding the rest.

IDFC Bank has recognised the importance of catering to all segments of society. Therefore, in retail banking, it has created two segments: Bharat Plus comprising the affluent (self-employed professionals and businesses with an annual turnover of less than Rs 75 crore) and ‘mass affluent’ (the salaried class). The second segment is Bharat, which caters to servicing the micro-, small- and medium enterprises (MSMEs), microfinance customers and self-employed women.

At a time when almost every universal bank is trying to sell personal loans, financial investment products or insurance policies to the urban class, IDFC Bank, too, is introducing a range of technologies and strategies to woo urban customers. For debit card holders, the bank offers unlimited free ATM transactions, for instance. The bank has also introduced the ‘Truly One’ account, which offers the convenience of integrated current and savings accounts records, for viewing on one screen. Funds can also be transferred automatically from the personal to business account. This segment also gets the facility of doorstep banking.

An IDFC Bank official assists a customer at its Bankhedi branch in Madhya Pradesh. The bank wants to become a mass retail bank in the country

Courtesy: IDFC Bank

For the lower-income classes in rural India, IDFC Bank has adopted a business correspondent-based strategy, mapping customers by segment and not product, the aim being to offer multiple solutions. Dedicated relationship managers (RMs) and business correspondents (BCs), who are solely working for IDFC Bank, provide the last mile connectivity here.

Lall hopes that about 15 percent of his proposed customer base of six million will be the affluent class.

But as it seeks to acquire a wider customer base, IDFC Bank will need to cover large portions of the country. In the past one year, it has built a total of 894 ‘points of presence’ across 14 states, which includes 74 branches and 820 micro-ATMs and dedicated BCs.

In parallel, IDFC Bank is expanding its urban presence organically; 18 of its 74 branches are in urban centres that cater to the affluent and mass-affluent segments of customers, largely in western and central India. The points of presence have the look and feel of a regular IDFC Bank branch, where eKYC, withdrawal and deposit of money, all government/utility payments, remittances and ATM transactions can be carried out.

BCs will also become dedicated points of presence, who will be trained by the bank to use its technology and distribute its products. By March 2017, Lall forecasts the number of points of presence to rise to over 1,400, including Grama Vidiyal’s network.  

Tapping into India’s unbanked population is a given for almost every financial institution. It is a crowded space in which several NBFCs, public and private banks, MFIs, corporate BCs and small finance banks are trying to make their presence felt.

In semi-urban and some rural areas, there has been an overlap in services and products among lenders such as Axis Bank, HDFC Bank, L&T Finance and IndusInd Bank. Even in the microfinance lending space, the end products are similar. “MFIs and NBFCs will need to evolve new strategies for growth,” says Bindu Ananth, chairperson of IFMR Trust, a private trust which aims to bring inclusion.

In some pockets of India, households with an income of Rs 1-3 lakh per annum have multiple sources of borrowing funds. In that scenario, though opportunities are several, IDFC Bank must continue to differentiate—either by service or technology—to maintain a sustained presence for their Bharat banking.

Dharmesh Kant, head of retail research at Motilal Oswal Securities, believes the pie is big enough to operate and grow in. “[But] the real game for them will be how they build CASA and get more people to park deposits with them,” he says. 

With a focus towards the salaried segment, IDFC Bank hopes that it can convert salary accounts into CASA, something that HDFC Bank and ICICI Bank have done successfully.

“The entire financial inclusion move [for IDFC Bank] sounds good. The biggest concerns [for new banks] will be managing the asset side of the balance sheet. IDFC Bank is being driven by the flow… but it is trying to build a bank on an Excel sheet,” says a senior analyst at a foreign brokerage, on condition of anonymity.

The analyst is also concerned with the rush to tap rural areas. “The need for credit has always been there, but we may see overleveraging in the rural markets, where supply will outstrip demand… this is a positive element in the ecommerce industry but not in rural lending,” he tells Forbes India.

But Lall does not agree. “The country does not have enough of them [sources of capital]. People get excited when they talk about [the MFI] Ujjivan Financial Services and Equitas Holdings [which was recently given the nod to start a small finance bank]. Investors are not worried about the opportunities for growth in their case. Why be concerned about my bank’s ability to grow. What is the difference?”

One year on, Lall says he is “happy” with the way the bank has pursued customer acquisitions and delivered to its customers with a mass employee base (2,700 at present) and branches. In the next two years, IDFC Bank hopes to have nearly 200 branches and at least six strategic BC relationships. 

The bank has also attracted some well-known names on its board, including Google’s vice president for Southeast Asia and India Rajan Anandan, veteran banker and advisor Ajay Sondhi and trade and structured finance expert Veena Mankar, all as independent directors.

But there is much more that needs to be done. “We want to be growing faster than other banks. The speed of execution is good, relative to the industry. But the speed of execution relative to our own ambitions is not there, and I am not happy with that,” Lall says. This is where more Safe Space sessions would help.

He said the bank needs extreme agility in terms of execution, whether it is in decision-making, responding to customers, partnership opportunities, developing products or integration with partners.

In its first year, IDFC Bank has taken more than baby steps. Its moves have been firm and well-calculated, which, if executed well, can bear results in the coming years. But as it expands, the battle for retail banking will only get more competitive. Add to this, the fact that the number of banks in India will increase given that licences can be acquired ‘on-tap’. IDFC Bank, in the coming years, will also face the need to raise fresh capital, to meet regulatory norms and bring in more investors.

But Lall appears unflinching in his vision and approach for the bank. “Why should one be scared of more banks? A small country like Sri Lanka has several,” he says with confidence. Evidently, competition does not unnerve him.

100-bagger stocks versus 100-bagger portfolios - LiveMint

http://www.livemint.com/Money/P4BsUDiOvQ6doCUKSjmXmM/100bagger-stocks-versus-100bagger-portfolios.html

Last Modified: Sun, Nov 06 2016. 11 59 PM IST

100-bagger stocks versus 100-bagger portfolios

In India, there are 5,000-plus stocks listed on the exchanges, with numerous companies going out of business every year. So, only on 4-5% of the total trading days could one have bought these 100 bagger stocks

Investors are getting excited about hunting, chasing and capturing the 100-bagger stock. The allure of this new fad is not hard to see. The allure is similar to what typical angel investors and venture capitalists chase, i.e., finding the next Google or Facebook. It provides bragging rights to the discoverer. It is just one catch, but it takes 20-30 years, or more, for the typical 100 bagger to deliver. Most braggarts would be much older by then and the excitement of bragging would be much mellowed.

Everyone is keen on learning and playing the new game in town. No one seems to be questioning whether the game can be played at all. The inspiration for all this is a book—100 to 1 in the Stock Market, by Thomas W. Phelps, first published in 1972. You may not have heard of this book but it is famous now, thanks to the fad.

The interesting part is that over a 40-year period, till 1971 in the US, there were only 365 stocks that turned 100 baggers. Another study of 50 years or so also revealed 365 names (also in the US market). Another Indian study revealed 47 stocks over 20 years. That tells you how rare these opportunities are.

In India, there are 5,000-plus stocks listed on the exchanges, with numerous companies going out of business every year. So, only on 4-5% of the total trading days could one have bought these 100 bagger stocks, selecting the ‘One’ from the 5,000-plus stocks trading on that day. And then—and this is critical—the stock had to be held for the next few decades before it turns into a 100 bagger.

Some of the markers of a 100-bagger are:

• The market for the products or services of that company should be scalable, so that volumes and sales can grow manifold

• The margins should be growing, so that the earnings can accelerate

• The valuations or price-to-earnings (P-E) multiples should be low, so that multiples expansion can happen.

A typical example would be a stock whose sales have grown by 10 times; margins have doubled, i.e., the earnings are up 20 times; and the valuation multiples has gone from a P-E of 5 to 25. This would be a 100 bagger. Of course, all of this assumes that there were no issuances of stocks during the growth phase.

A typical 100 bagger takes 26 years. That translates to an annual return of 19-20%. This is not that difficult to achieve, especially in the Indian markets. Of course, you would lose buying power as well in the Indian markets, thanks to the high inflation. In fact, the whole Indian market itself could be a 100 bagger over that period. So an Indian investor probably wants to achieve that in half the time, i.e., 13 years. But that would mean an annual return of 42.5%, which is highly unlikely.

Another issue is that this whole process supposedly goes together with what George Baker, the 19th century American banker, said, “The vision to see them, the courage to buy them and the patience to hold them.” To which he added, “The rarest is patience.” Apart from these, vision too is a quality that is rare. Most people, whether investors or not, think that they have vision. In fact, except for venture capital investing, where it is an occupational hazard, vision is not a great thing for investors in listed securities. It becomes difficult to differentiate vision from delusion.

In hindsight, it is easy to see why Apple was always going to be a great company. Similarly, Nokia, Motorola and Blackberry were great companies and would have become even greater; except that they didn’t. Of course, everyone has an explanation on how that could have been identified at the peak of their stock prices. Similarly, a well-known fast food franchisee in India and a logistics company riding on e-commerce were investors’ darlings and the great visionaries could see where they were going. Except, now they are not the darlings they were.

An alternate approach to a 100-bagger portfolio would be to not chase a stock with our own visions or delusions projected on them, but invest in a basket, or portfolio of companies, that could provide that 20-25%-plus annual return. This would be achieved by focusing on companies that have stable business models, safe balance sheets, value-creating track records and are available significantly below their intrinsic value.

A basket of such investment-grade equities would turn out to be, not a 100-bagger stock, but a 100-bagger portfolio. The chances of succeeding in identifying a portfolio that could yield 25% with this methodology is much higher. And it would be much safer as well.

Vikas Gupta is executive vice-president—traded markets and investment research, ArthVeda Fund Management Pvt. Ltd.

Wizards of Dalal Street - The New Breeze - Manish Sonthalia

http://www.moneycontrol.com/news/mf-analysis/free-cash-flowscos-drives-investment-decisions-for-sonthalia_7859821.html

Oct 31, 2016, 01.21 PM | Source: CNBC-TV18 

Free cash flows of cos drives investment decisions for Sonthalia Deep-dive into the free-cash-flow generation capability of a company over at least the following 5-10 years is a must for Manish Sonthalia, CIO & Director at Motilal Oswal PMS to consider investing in it. "Ultimately, numbers don’t lie," he says.

In a candid chat with BSE and NSE Member Ramesh Damani in a special series Wizards of Dalal Street on CNBC-TV18, Sonthalia shares Motilal's principles and methodologies of investing.

The fund house follows an in-house formula called QGLP for picking up stocks, he says, adding, it is nothing but a margin of safety where 'Q' is for the quality of business and management, 'G' stands for the growth prospects, 'L' for longevity of growth and whether competitive advantages are structural or cyclical and 'P' is  the price.

He notes these factors are critical as cost of capital in India is pretty high which results in nearly 65-70 percent businesses barely managing to earn even the cost of capital which ideally suggests they should be trading at nothing over 1 times on price to book value.

Sonthalia also shares insights on some of his early-bird picks like Page Industries and Eicher Motors which gave blockbuster returns.

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

Q: There is a very popular book ‘All I Really Need to Know I Learned in Kindergarten’. You learnt investing from watching your dad’s portfolio? 

A: Yes, the story began some 25 years ago after I passed out of class 12 and I was a science student obviously inquisitive about the how and why of things. My dad is a practicing chartered accountant so had some stocks in the portfolio which always did well. 

He used to get good dividends and good dividends increased every year and at the same there were some stocks like Tata Iron and Steel, very cyclical, they went up but they came down, dividends were erratic or not there. That made me wonder as to what made stocks move. 

Q: Let me take you to 2004, the Motilal Oswal of Motilal Oswal called you for a job? 

A: That is correct. One fine morning sometime in July or August of 2004 I got a call from him asking me whether I was keen to join them. 

Q: Did you think it was a crank call? 

A: No, I didn’t. The serious voice that spoke on the other side convinced me. He wanted me to come over to Mumbai and face an interview with Raamdeo Agrawal and himself and if I could have cleared that, obviously he was willing to hire me. So, I came, I gave the interview, got selected and now I am here. 

Q: The early part that shaped your investment philosophy was where is the cash. How did that shape the first years of your investment business? 

A: I must say that whatever I am today so far is all been due to the learning’s of this organisation. Motilal Oswal, that has created the foundation. Ultimately numbers don’t lie and what matters the most is the free cash flows of companies, not the P&L account, profit balance; that is the determinant to the free cash flows and if you are able to gauge how much cash flow the business is going to earn over lifetime or maybe next 5-15 years, it is nothing but the present value of the future cash flow. 

So, that is what we focused on and of course Rammdeo Agrawal, he is a great teacher, how he creates, how he goes about explaining how businesses are and what matters and what doesn’t matter and that created the foundation, made me perfectly believe that if you got to get stock prices right, you better get a handle on the cash that the company is going to make over long period of time. 

Q: As you progressed in your job, I have heard a lot of abbreviations in my time, SOS, IOU, GOI, PMO but you guys believe in a different abbreviation, tell me about it.

A: The term is called QGLP. This is nothing but the margin of safety. QGL is the value piece, P is the price, difference between value and price is the margin of safety. The value component has been broken down into three that is Q, G, L where Q is the quality as measured through quality of business and quality of management, G is the growth part -- we want to buy growth businesses so we are following a growth at a reasonable price (GARP) method of investing and longevity of growth is understanding whether the moat or the competitive advantage of businesses are structural or cyclical.

Q: Give me a couple of qualitative and quantitative factors that are very important to you? 

A: Quality, we have two components, one is the quality of business as measured through return on capital employed and free cash flow. At the same time, the quality of the management is quite important. A good business run by a bad management or a bad business run by a good management, answer is a not for you. Only if a good business is run by a good management we will have a winner. 

So, understanding and gauging the quality of the management is equally important and that requires a lot of experience and whole lot of methodology and we have evolved and developed few of the forensics that we use quantitatively to gauge whether the management is of high quality. 

Q: You don’t think it is beating the return on capital right, the cost of capital? 

A: In India the cost of capital is pretty high. We have very few businesses -- 65-70 percent of the businesses in India don’t even earn cost of capital, just about meets cost of capital. They should be trading at maybe one time price to book. 

Q: And don’t deserve a place in your portfolio according to you? 

A: You won’t be beating the markets. 

Q: In certain stocks you have not only doubled but you made 40 times your money. One of them is Page Industries. Tell me how did you chance upon that stock?

A: I had some understanding about the hosiery businesses. Coming from Kolkata you have some of the old names – and if you went through the Draft Red Herring Prospectus (DRHP), we bought into the stock just about after the IPO came. So, if you have gone through the DRHP, you understood how the businesses actually were very successfully managed by them in the Philippines. If you did some internal research, desktop research for yourself, you would have been able to figure out what they were intending to do. 

Then it was all about going to be factories in Bangalore and understanding what they are wanting to do and obviously it was an aspirational brand; you knew it because American brand (Jockey) -- 100-year-old product -- here they were positioning the product at a very reasonable price point so they were offering value for money. Market was expanding, they were doubling every five years, he was present in the mid-premium and the super-premium category which was growing faster than the market. 

Q: What was his moat?

A: His moat is his distribution according to me. This distribution advantage, which he has will be there even today for the next 10 years. 

Q: Despite the stock doubling and doubling and then doubling some more what gives you the confidence to stay on? Is it the sheer numbers that come every quarter? 

A: Long-term is made up of many short-terms and if the short-term, the numbers do come, you just got to figure out what should be the terminal value and terminal value to determine you understand the nuts and bolts of what will make that much. As long as you are confident about these numbers coming, then it is just extrapolating what is the price to earnings multiple that should be for that business. 

Q: Another stock that has been very successful for you, let us go to their strategy. Eicher Motors has been a fabulous stock, one of the great winners of the 2007 bull market. You spotted it young, tell me the exciting story behind Eicher. 

A: Eicher had been a fascinating story but we looked into Eicher initially for their trucking business, when they tied up with Volvo. They opened the joint venture (JV) but it was not doing that well. They were going about it but slow and steady. Then I happened to read an interview of Siddhartha Lal and he was also equally optimistic about the Royal Enfield business. However, it was doing meager numbers those days, 50,000 units. 

In a category of motorcycles, where numbers were big even those days, the entire category was growing, doubling every seven years. So, growth rates were 10-11 percent in volume terms. Here we were talking about company which was setting 50,000 units but it was an aspirational product owned by the British Navy Royal Enfield and the Bullet and the Classic 350 which is the best selling bike just kept on ramping numbers and margins kept on increasing. 

Q: He is in a sweet spot in terms of segmentation you say? 

A: Absolutely. He has created the segment for himself. He does not compete with scooters, he does not compete with commuting motorcycles, he does not compete with ultimately ultimate leisure biking.

Q: He owns this segment?

A: He owns the segment and even today there is no major competition that is coming through. If he has priced its product very sweetly between Rs 1,00,000 to Rs 1,50,000, that range, he will continue to be a winner. There is of course competition trying to position their own products within that segment but he is miles ahead of them and to get latent demand in the system for these sort of bikes is roughly around 2 million units. Today he is at 60,0,000 units. 

Q: Lot of headroom?

A: Lot of headroom to go and the market hopefully should be growing at about the motorcycle category growth rate for long period of time. 

Q: When you first buy a stock, Page, Eicher, anything else, is there bit of heart pounding goes on, are you unsure, do you know that is going to be a winner, is there something that your bloodstream tells you? 

A: Mentally I try to figure out the P&L account model at least for the next three years. Looking beyond that is difficult to take a call on but based on my understanding about the business, what would make money for those businesses, just try to figure out how much money this business is going to make in the next three to five years. 

Q: So it comes down again to numbers and cash flow? 

A: 100 percent, nothing else works. According to me, value investing is understanding growth investing as far as India is concerned. Benjamin Graham’s definition of value, the strictest definition of the term would not apply to India because bulk of the businesses are earning less than cost of capital, how does low P/E stocks would make or create wealth for you. It is about growth, understanding growth and how much cash flow these businesses are going to make. 

Q: The way India is shaping up, there are and there will be a lot of structural stories coming through with good quality management. So, investors, I have missed Page and Eicher, can either buy Page, Eicher again or some other stocks, do you feel that opportunity is still there?

A: Today bulk of the value is getting captured in the private equity space. However, at the same time we will have umpteen numbers of opportunities even in the listed equity space. So, one thing which I look forward to also, is to understand how much the profit pool is going to grow and how many players this profit pool is going to get shared with. So, if you have consolidated sectors, I as a fund manager try to figure out whether company A is going to do well or company B is going to do well or company C, if they all fit into the QGLP framework. My job is easier if there is a growing profit pool and a consolidated space.