Wizards of Dalal Street - A Fresh Breeze - Narendra Nagpal

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

Big opportunity for India in specialty chemicals: Amansa Cap

In a CNBC-TV18 special series Wizards of Dalal Street — A Fresh Breeze, Ramesh Damani caught up with Narender Nagpal, Partner, Amansa Capital who shared his views on India’s specialty chemicals industry.

Nagpal said the specialty chemical outsourcing industry is today where the pharma industry was 15-20 years ago. Customers in the US and Europe do not want to manufacture chemicals anymore in their respective home country and are outsourcing to the East.

China scaling back on chemical manufacturing because of environmental reasons which opens up the space for India, Nagpal said.

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

Q: 1992, freshmen CA, market headlines all about the stock market boom, what caught your particular interest?

A: It was 1991 when it started. I was doing my final year of CA internship. I had no family background in stocks, no academic background in stocks, I was doing my CA and then the big bull frenzy happened in 1991 if you remember.

Q: Of course, the stock market doubled.

A: The stock market doubled and a lot of people got sucked into the markets. I was one of those naive people who started investing in market in 1991 and when I passed out of my CA course in 1992 there were two options; one, to go into accounting and second, to go into market. I chose to join ANZ Grindlays because they gave me the option to actually be in part of their equities team. So, that is how the beginning happened.

Q: The contrarian streak started with you pretty early in life. The next 10 years, I know, very exciting period in your life. There were a lot of highs and lows in the market and in your career. What were some of the highs and lows you still remember?

A: It was an exciting phase. So, in hindsight it was right place, right time. I started my career at ANZ as I said and ANZ lost a lot of money in '92-93 unfortunately because of the scam and they decided to shut the business. And I lost the job, and pretty much one year after I began my career. After some time I joined Barclays Bank which was the first foreign broker to come into India. I was there for four years, once again a great time. India did 40 global depository receipts (GDRs) in 1994 in 52 weeks. We had a great team, we built a good business. I had the opportunity to run the research team myself in mid 90s. It all ended in 1998 again, after the Russian crisis when Barclays decided to shut the business globally.

Q: Few years into your career you are zero for two.

A: That is right.

Q: But I know you got a good job at Deutsche Bank, it was almost like a dream job if you will. Employee number one, but still your heart was not contended, was it?

A: Yes, it changed over a period of time. It was very exciting in 2002 when we started the business. We pretty much built it from scratch. As you mentioned it was great to be employee number one but we built a large and successful business over five years. What also happened during that period was that I started to move away from stocks. So, in the beginning I used to look at stocks, I used to write on stocks, I used to write on market but over a period of time I had to move more and more into management since I was running research and equities business as a whole and towards the end I realised that I was spending no time meeting companies, looking at stocks and it was clear to me at that point in time that that is where my passion lied.

Q: I know towards that time also you met the man who was going to be your partner in Amansa, Akash Prakash. Tell me how that happened and what did you both think at that time when you entered into a partnership?

A: I met Akash and I got to know him well during the time I was at Deutsche Bank. He was in GIC, one of the largest investors in Asia. He used to look at India among other markets and we used to talk regularly on different stocks and sectors. He would also come down to India pretty often and we would travel together to different cities, to meet companies, do an ecosystem check, meet the dealers, meet the suppliers and we realised over a period of time that we looked at stocks in a similar manner and that was the common ground for us in Amansa later on.

Q: When you founded Amansa Capital two different people coming together in a partnership there has to be a philosophy that ties it together. This is how we look at market; this is how we look at stocks, this is how we look at managements. What was that philosophy that bought both of you together?

A: The fundamental philosophy was that we wanted to run the fund the way we would run our personal money. The way we would run our personal money is to look at businesses from a bottom up perspective. So, it is not too much about macro, we look at businesses in a very individual fashion. We try to understand what the management team is trying to do we try to visualise where this business would be in the next five to ten years. If it makes sense to us from a valuation perspective and we think this could be a big business, a profitable business in the next five years then it is an opportunity for us.

Q: You often talk to me and in public about aligning interest, you find that is very important that the promoters and the stakeholders, the interests are aligned. Where do you find this alignment missing?

A: If you look at certain segments of the market for example multinational companies which come in all shades. Some of them run their businesses in a manner which takes care of minority shareholders in India. However, there are certain multinational companies who obviously do not care much about local minority shareholders. So, there is a big difference in the way they treat minorities in India and the way the parent would treat them overseas. The parent would have quarterly calls, they would meet investors, they will have capital market day. You won’t have anything of that in India.

Q: That is a warning sign.

A: That is warning sign. The next sign is a lot of management teams for the multinationals they would have employee stock ownership plan (ESOP) in the parent company but not in the domestic company. It is a clear case of misalignment and it is a sign for us to then be careful and stay away from these companies.

Q: On the domestic side how do you find out that Indian promoters are not friendly towards minority shareholders? Is there a checklist you go through?

A: It is a checklist and it all relates to the past. We look at the last 10-15 year history and the big area for us in terms of focus is capital allocation. The single biggest decision an entrepreneur makes or a promoter makes is where does he chose to allocate capital and that pretty much tells you what he wants to build, in fact a good quality business will compound on its own for a long period of time and look at all the successful stories like Asian Paints and multiple sectors, they have compounded on their own.

Q: When the technology boom happened a lot of it was seared because it was the first time we saw dazzling global boom playing out in our stocks markets and you went through one great investment and one mediocre investment. Let us start with the mediocre one. What did that teach you?

A: I think we are discussing Rediff.

Q: Yes, of course.

A: This is back in 2007 if I remember correctly and if you went back to 2007 if there was one trend you would blindly bet on it will be that internet will take off in India. Young population, English speaking, westernised, falling mobile prices, falling broadband prices, it is a pattern which was repeated all over the world and you knew India had only 30 million users of internet.

Q: Nothing but place to go up.

A: Nothing but place to go up and Rediff was the leader at that point in time. It already had USD 20 million in revenue. It had a huge consumer base, brand name.

Q: And yet the stock went down from USD 40 to today USD 0.20.

A: That is right.

Q: What went wrong?

A: What went wrong was the company couldn't keep up with change in technology and the consumer preferences. They missed the turn on mobile, they missed the turn on social media, they had to morph from being a portal or horizontal into a specialised vertical. They missed all the big turns unfortunately.

Q: A management team that you found that did this job, executed perfectly, Lawrence Bossidy at Honeywell used to say execution, execution, execution. You found that in Info Edge, didn't you?

A: That is right.

Q: What was the greatness of Info Edge?

A: Over the last 15 years Naukri has pretty much marginalised all those competitors. They have 70 percent plus market share in terms of traffic. They dominate this space today. Anyone who is looking to hire people has to use Naukri, it has immense pricing power and market position which they have achieved over the last 15 years.

Q: And the opportunity said is just the beginning?

A: It is just beginning. We all say that 1 million young Indians join the workforce every month for the next ten years. There is no better way to play that than Naukri.com.

Q: You are spotting a disruption in the chemical industry globally. Take me through that hypothesis and how do you express that hypothesis in terms of actionable ideas?

A: The speciality chemical outsourcing industry is today where the pharma industry was 15-20 years ago.

Q: Meaning strong skill sets, strong India focus?

A: Right, the strong skill sets the chemical engineering skill set, India is very strong in that. It has a large base of chemical manufacturing. The customer set in the US or in the Europe, they do not want to manufacture chemicals anymore in their home place. They are outsourcing to the east. Their natural location is China, but China is scaling back on chemical manufacturing because of environmental reasons. They have been far more lax than India. So, they are pulling back. And it opens up the space for India. When a customer comes to India for a certain set of molecules the company which we like is SRF Limited.

Q: That is the way you express it. That is the work in progress, the example of a company transforming itself?

A: That is true and it is in the stage of transformation and it is in the stage of transformation and it stands out in terms of their expertise in certain molecules. They have a long history of chemical engineering. They have been producing chemicals for different application for the last few decades and what they are doing very smartly now is they are taking the cash from existing business, some of them are cash cows, they are not growing, they also had a windfall from carbon credits five years ago and the management team has smartly taken that and redeployed that cash in high technology business.

Q: Moving up the value chain?

A: Yes.

Q: Long term thinking?

A: Yes, and it is a 10-20 year journey. They have started the journey 10 years ago and the management is clearly committed. This is the path they want to go down to. They will not do commoditised business and they are using all the capital once again to reinvest in that business.

Q: How did you check the alignment of interest that is so important to you with SRF and its minority shareholders is on the same page?

A: It is once again going back into history. So, if you look at the company 5-6 years ago when the stock was not doing well the company did two things, one they used cash to buy back shares, which a lot of companies didn't do unfortunately in that era. Secondly the entrepreneur family, the founder family, they bought stocks themselves to increase the stake in the company and they own more than 50 percent of the company today. It clearly tell us they are fully aligned with minority shareholders.

Q: That is the check. You have spent 20 years in the market. You have seen a lot of exciting times. The Sensex has gone - as you said doubled in 4,500, from then it is a 5x or 6x today. Are you more excited today than you were as a kid CA in 1992 about stock picking and the stock market in India?

A: I am definitely more excited today because as you know the world is not looking great, India stands out. India on its own is doing some great things and the next 10 years would be a great opportunity for Indian investors and it is a great place to be. I would not be anywhere else rather than be in India.

Wizards of Dalal Street - A Fresh Breeze - Sumeet Nagar

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

In the latest edition of Wizards of Dalal Street on CNBC-TV18 Sumeet Nagar, Managing Director of Malabar Investments talks about his stock market journey.

Below is the verbatim transcript of Sumeet Nagar's interview to Ramesh Damani.

Q: The objective refraction when you were young was a slide ruler.

A: Yes, you never know in life where inspiration comes from and in my case it was a slide ruler. My dad was an engineer and he had this slide ruler and I was fascinated by this, how this simple ruler could do this complex calculations and I thought while maybe I studied hard I could become an engineer and I could get to used this, but thankfully for me they invented calculator, so my shortcomings were never found out.

Q: I know you went to study engineering. How did your engineering education help you in equity markets?

A: I think it was very useful, the engineering profession is wonderful. It is very logical, it is very rational, it forces you think about how something works and I think you can take that concept and take it to business and investing.

Q: I think Munger would be smiling in Omaha. He has been trying to teach investors for many generations lollapalooza or the mixing of mental sciences and you figure that out.

A: While this was one part of it I still have lot more to run.

Q: You said markets rational and logical and they anything but rational and logical. When did you figure out that markets are irrational?

A: First of all I didn’t even have the basic skills of understanding businesses. I went to a business school. I went to Wharton. I learned a lot about not just sort of investing and finance and like all things, but also about marketing and pricing and advertising and operations and these were all very useful skills to have to build those mental moral, but it still it wasn’t enough. There was still this sort of people aspect and how do they think and how do they interact. That was very useful and luckily enough for me I had an opportunity to join McKinsey & Co, right after business school and I ended up learning lot of those things over there.

Q: And yet your assignment at McKinsey left you a bit frustrated, why was that?

A: It was because I had the opportunity to work with some of the best investor on the planet and many of those investors, when they look at opportunities in India, would say find us the best ideas in XYZ sectors and when we did that, some of the best ideas were these small companies that were nimble, they were growing faster, that had good fundamentals and yet they traded at discount, but those investors felt that these were too small to move the needle for them.

Q: That must have been frustrating do all their work and find no one was biting.

A: While that was frustrating, in many ways it showed me that opportunity this sort of wide space and that eventually form the genesis for Malabar.

Q: Malabar was started in 2008 and I am sure you are good engineer, but your sense of timing the markets sucked.

A: I think it is terrible. You have to probably go back 80 years to find a worst time to start an investment firm - and that’s what we tell our client, we are actually not good market timers, but what we did have right, which was this concept of finding great businesses run by capable and trustworthy entrepreneurs and investing in them with a long-term perspective is evergreen, it works in any environment.

Q: In fact, they thrive in a bad environment when the bad companies really fold down.

A: Exactly and so these companies actually went through the 2008-2009 with flying colours.

Q: Tell me some of the opportunities that you spotted and became great stock for you in that, the first ideas that you put into Malabar?

A: In the first we invested in companies like Info Edge India, Hawkins Cooker, Page Industries.

Q: Tell me about Hawkins?

A: It was a great product that everyone in India knows about and yet when we look at it back in 2008, this was a company that was growing at more than 20 percent year-on-year (YoY) for the prior 6 or 7 years, every single year they improve their gross margin, their operating margin, their net margin and as a business it was trading at 8 times trailing PE.

Q: And yet the 2008 crisis actually helped them because prices of their key inputs came down.

A: Yes, their key raw material is aluminium and aluminium crashed by about 50 percent plus and when we checked in the market these companies were holding their prices - - that’s phenomenal pricing power when your key raw material falls by 50 percent and you can still hold your prices to consumers and we could see that their earnings are going to expand and that was a great trigger to invest in this wonderful company.

Q: A lot of the analysts were looking for technology companies that catered to the west, billion dollars and yet you looked at domestic opportunity. Tell me about Naukri.com?

A: Naukri was the biggest and the most profitable internet company in India back then. In fact, I think even today it is most profitable internet company in India and as you know in the internet businesses the company that has 40 percent traffic share, has about 60 percent revenue share and about 100 percent profit share winner take all and that exactly was Naukri was doing.

Q: What was the business model that was differentiating? They had a good business; they had a dominant market share in Naukri, what do they do with that cash flow?

A: They essentially created the exchange between 20 million job seekers and the people who wanted to look for those resumes and once you have that it is very difficult to replace that.

Q: You can't replace the market.

A: You can't replace it.

Q: Crawford Market is Crawford Market.

A: And it generates a lot of cash flow and what Info Edge was doing very successfully was actually deploying that cash and growing other businesses. So, one such business was 99acres.com a real estate business and that they ceded and eventually it has sort of grown to a much larger size today and if you took all the losses from that then the business was actually very reasonably priced and actually became even more compelling because many of the FIIs were indiscriminately selling in the market and that is what brought the price down. So, we were able to buy this great business at a very good valuation and it has done great for us.

Q: Tell me how do you distinguish management, give me an example of where management you have been able to find a good management and they have been able to deliver for you?

A: One of the examples we talked about Hawkins, later on we also ended up investing in TTK Prestige which does the same thing.

Q: Yes, they are competitor and dominant in the south in the pressure cooker business?

 A: Yes, and then overtime they expanded their product range beyond pressure cooker to kitchenware and kitchen appliances and so forth and very successful at that. So, we had a chance to get to know Mr Jagannathan who is the founder and chairman of the company and for over the last decades he has been running this company but even today he spends several days every month cooking in his own kitchen because that is how he figures out how to innovate and make new products. That is the kind of passion that we are looking for in management.

Q: You are actually talking about a CEO who eats his own cooking literally?

A: Absolutely.

Q: Markets are humbling place, you know that. We get things right, we get things wrong. Tell me about something that you got wrong and what did you learn from that experience?

A: We made our share of mistakes. One of the examples was we invested in a company called Voltamp Transformers Limited back in 2011 end and at that point in time we saw that all were capital goods companies were beaten down and this was a great company. In our view that was the best transformer company in India and we invested in it back in 2011. But what we found through 2012 was this company had a lot of exposure to currency because many of their raw materials were linked to international prices even if they were sourcing them locally and when the demand environment is soft there is no way that you are going to be able to pass on that cost increase which shows that you have a limited pricing power. So, in that case we realised that that was a mistake and we ended up getting out of that and thankfully by not making a big loss, but yes, it was a mistake.

Q: Your value investing skills came from your mentor Sash Spencer, right?

A: Yes, Sash was a wonderful guy.

Q: Tell me briefly about him?

A: Sash was an ex-Mckinsey partner who went on to form a very successful private equity firm in the US. He was also instrumental in forming probably the best value investing firm in Asia called as Value Partners.

Q: And you trained under him?

A: Yes, he was very gracious enough to take me under his wing and gave me the opportunity to start Malabar.

Q: You have taught us about compounding which is great but I know you are someone who also counts the many blessings in his life, don't you?

A: Yes, we are successful in this business only because there are some external stakeholders that allow us to be successful. First of all it is our investors. They put enormous amount of faith and give us their hard earned money for us to invest it prudent.

Q: Back you up.

A: To back us up and we have seen that over the last 6 or 7 years maybe three times the markets actually fell quite a bit and our investors came back and gave us more money at that point in time because it was very good time to invest in.

Q: A vote of confidence.

A: And that is priceless. So, we couldn't do this without the support of our investors, so that is number one. Number two; it is amazing people who run the companies that we invest in. They are very passionate about their businesses, they work really hard and that allows us to benefit from their hard work through our investments.

Q: The magic of seeing great companies grow.

A: Yes, and benefit from that. So, we are very thankful to them.

Q: We talked about shooting for the moon in terms of compounding. Someone who actually helped the Apollo program said all it took to get to the moon was a Fortran compiler, a slide ruler and some brain power. You are using two out of three and that is not bad.

A: I will try to run Fortran and maybe all of the tri-factor.

Wizards of Dalal Street - A Fresh Breeze - Manish Bhandari

http://www.moneycontrol.com/news/business/no-buyers-at-inflated-prices-stay-waryreal-estate-bhandari_7901501.html

No buyers at inflated prices, stay wary of real estate: Bhandari

In the latest episode of Ramesh Damani's Wizards of Dalal Street on CNBC-TV18, Manish Bhandari of Vallum Capital listed his views on the performance of real estate sector and whether investment in the sector is a good option.

Giving investment advice, Bhandari cautions against putting money in real estate companies. 

He says inventories are piling up after foreign direct investment (FDI) was approved in real estate in 2005, which indicates that there are no buyers at exaggerated prices.

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

Q: I know a hypothesis very dear to you, it is that ‘Disruptions Create Opportunity’; explain that to me. 

A: Disruption creates opportunity and one of the – as an observant I looked at the rise of Airbnb which is a challenger to the hotel industry. I have used Airbnb and during my observation and while stay at Airbnb, I figured out that there is an opportunity to make money through the bed linen companies because we can’t own Airbnb directly. There was a bed linen industry in India which was grow up to a size and we have got a few good market players in the bed linen industry and that is how we played a bed linen industry in this. 

Q: How did the room nights go for Airbnb to give you that kind of confidence?

A: You will be surprised to know that from 10-15 million odd room nights exactly some five years back, they would be doing some close to 130 million room nights across the world. What is very different about Airbnb versus the hotel industry is that you use printed bedsheets, not the institutional side of the bedsheets and where India has got some kind of edge versus the others. We invested in one company which was among the market leaders in the bed linen industry. 

Q: So while staying at Airbnb thought this is the way to play it and then you came back and did your research on this? 

A: Yes, exactly. After an observation, you need to go through and look at the competitive advantage of the industry versus the market players, their strength and weaknesses and where there is value for you as an investor and finally you figure it out. 

Q: Which year did you make that call? 

A: It was in 2013.

Q: How is the bed linen industry panned out after that in India or globally? 

A: In India you have an advantage of cheap cotton which is the sourcing advantage that India has and today India has close to 47 percent market share in the US bed linen industry and they have gained market share over a period of time and so the companies have become very valuable. 

Q: In 2013 you had another hypothesis which you called ‘Indian Real Estate, The Crumbling Castles’. How did you come across with that hypothesis?

A: I would say it was a bubble of magnitude which we have not seen over a period of time. 

Q: This is just after 2008, the global real estate market crashed; now you are seeing in 2013 the Indian market was pin-pricked?

A: If you look at the data, the Indian market, the real estate market, the land prices or the housing prices, would have at least quadrupled between 2008 to 2013-2014. The way I reached to this hypothesis is that my business takes me to a lot of small cities and whenever I used to visit the small cities and I used to get an idea about the bubble in the housing prices or the land prices, it set me thinking that there is something wrong. When I came back and desegregated the whole chain, there were few key reasons why this whole bubble came to such a magnitude of this order. 

Q: And they were?

A: One was that there was a Lax monetary policy by the Reserve Bank of India (RBI), the loose fiscal policy by the government as well as the Lax monetary policy which released lot of liquidity in the system and that liquidity flew into real estate. Second thing was also that in 2005 we allowed foreign direct investment (FDI) in real estate and FDI was suppose to create affordable housing. 

Rather than creating affordable housing, it created inventory hoarding up and the rise in the price of the inventory which created another set of problem for the real estate. The third thing is that over a period of time, in the span of 2008 till 2012 or so, we had a negative real interest rate for the savers. So finally that inadvertently alludes you to get invested in the physical assets versus the financial assets.

Q: How does a second level thinker like you come across with winning hypothesis from that hypothesis? 

A: When you go back on your drawing table and you see what all you could avoid, one of the things was that you could avoid the direct real estate companies and you have not taken an exposure in the real estate companies where underlying value of the business could diminish or the derivatives of the real estate industry which could be very expensive, high-end housing finance companies also where there would be a asset prices growth but not the volume growth. 

The second thing was also my hypothesis on the real estate gave me a good idea not to look at investing in the banking sector. There is an exposure of the banking sector in the real estate, they are close USD 150-180 billion out of the USD 900 billion book which set me thinking that apart from the mortgage business, also real estate has found its collateral in the banking sector. So, there would be a problem in the banking sector because of this. So, I avoided being invested in the banking sector. 

Q: You talked about real estate as a falling asset class but you also like to catch falling knives. It is a fairly dangerous way to live in markets. 

A: I would say when the knives fallen, the dust is settled, we have enough time to do the cherry picking of the businesses what we would like to invest in. 

Q: How do you cherry pick and is there a method to your madness of cherry picking? 

A: There is a time value correction which a business or a stock price would undergo through.

Q: Explain that to me in Lehman terms.

A: That would mean that -- the hypothesis is that people overpay for the growth. The market as an aggregate overpay for the growth, market as an aggregate doesn’t like to be invested in loss making businesses. Market needs confirmation, they need conformity of the earnings so when the businesses go through their cycle, there is enough time for you to do the business due diligence, run a screen, get those stocks in place, do the further business due diligences, segregate the companies what you like and be invested in those companies. 

Q: So, the first parameter of that is you check that market cap is not grown proportionate to book value? 

A: We run various screens and one of the screens would be where the market cap growth, the business value growth is much lower than the book value growth and you can use any time series based on your comfort and finally you will figure out something which will be a list, which would be of some comfort to you and then you could go further. This gives you a very good strength on margin of safety. So, you have very low downside when you do this kind of investing.

Q: You also do a lot of scuttlebutt investing in the sense you go visit AGMs, company conferences, how does that help you? 

A: Getting to annual general meetings of the companies, asking the right questions to the management and in those 15-30 minutes you could get much more meatier information about those business strategies of the companies. 

Q: There is actually symmetry of information so now you are loading it in your favour by going to those sources.

A: Exactly, so me and my team would do some 70-80 AGMs in a year across India. 

Q: So it is a tough way to make a living?

A: Yes, it is a way to make a living but money making is not easy.

Q: Markets are made of demand and supply curves and the curve that you paid a lot of attention to is the supply side of the business, not necessarily the demand side of the business, why do you do that?

A: Less attention was paid on the supply structures of the businesses, how the new entrants are coming, for example, we were lucky enough to make few good investments based on this. 2012 we looked at the microfinance industry after the knives had fallen, the dust has settled. If you look at the industry structure at that point of time, out of 10 players 70 percent would have been into the corporate debt restructuring (CDR). 

A very few of them survived. During that survival phase the industry shrunk, the demand shrunk and everything shrunk. No one would have looked at that industry where the demand is shrinking and you have some kind of regulatory structure overhang.

Q: You have more market share now?

A: Exactly and that is what our shareholders would love - to see a profitable business which could survive those downturns.

Q: Is the airline industry going through the same consolidation?

A: A part of it is yes but I would have a different view. There is a consolidation which has happened but the ability to start a new business there is a very small regulatory change what you require and that is you can take a licence and you can start. If the industry becomes profitable lot more people with lot better capital can come and be a part of airlines industry.

So, I don't think that, that would merit in my scheme of things.

Q: Which industry according to you is ripe for consolidation right now? 

A: I can talk to you about a industry where we have made an investment. It is the domestic branded fabric industry. Market is too obsessed with the readymade garments. Market has overlooked the fabric industry which is the tier II, tier III, tier IV of India.

Maybe a decade back there used to be a close to 10 brands and today exactly a decade of a long term trend would give you an idea and 2016 hardly two of them sit in the pole position.

Q: You can almost predict them from the ones you know - Raymond and Siyaram perhaps?

A: Exactly, I am referring to them. That pole position gives you a very good advantage, whenever the industry revival happens then you have an opportunity to gain the market share, to capture the pricing shares and host of things together.

Q: Another hypothesis that we are very fond of is the one that dog that did not bark from Sherlock Holmes. How is that helpful in investing?

A: A dog is supposed to bark. I can give you an example, just look at the banking sector. You need to be a bank which should have not grown somewhere in 2009-10-11 or so and you are safe home today. So, every bank was growing double digits and one fine day we would have a bank which is growing very significantly. The whole industry was growing and that was a time to be cautious.

Q: And they all got marooned with NPA problems.

A: Exactly. I can give you another example. I have been on the buy side for some time and in 2008 before the crash happened you need to be a fund manager who was underperforming because you need to sell your winners, protect your assets, be in underperforming stocks and then just wait for that crisis to happen and to play it over. That was a time maybe lot of investors would have questioned you that you are not growing in the way the industry or the markets are growing, the returns are very different, divergent? Answer is yes. That divergent needs to be looked at very much more carefully and that is where the proof of pudding lies.  

Wizards Of Dalal Street - The New Breeze - Mrinal Singh

http://www.moneycontrol.com/news/mf-interview/investednatco-atright-price-icici-pru_8020641.html

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."