Sanjoy’s Investment Strategy

Sanjoy says, investing is 85% psychology

Look at customers
– How customers benefit from this product or service? That is why they are in business.

Look at suppliers
– They can have integrated suppliers. For example, Japanese auto industry where ever they went they took their suppliers with them. The cost of production is greatly influenced by having their own suppliers.

Look at employees
– Watch how employees are treated?

How to identify a good business?
1. Low cost producer – do this for a long period of time (sustainable)
2. Differentiated Product – consumer must be willing to pay more
3. Proprietary Advantage

Example # 1: BKT
– Low cost tyre maker
– It sells off the road tyres
– It has done this successfully for the last 10 years
– Sustainable for the long haul
– Competes globally and doesn’t compete in India

Cost Advantage:
– It manufactures in India and sells in Europe
– Huge cost advantage in terms of the employee cost
– Employee cost are significant proposition of the total cost of manufacturing
– It’s marketing and selling expenses are also lower
– 9% global market share in farm tyres
– It competes with Michelin, Bridgestone

Low Cost Risk:
Low cost producer is vulnerable someone else will come and erode the cost advantage

Example # 2 – Nestle
– Company with pricing power
– Maggie Noodles, Cerelac, Coffee – Millions of other people also competing in this category
– In the mind of the mother, buying a product for her child nothing comes close. She is willing to pay more
– This over time can also give you huge advantage

Example # 3: Container Corp
– Had a great advantage
– Access to wagon is a great advantage

Example # 4: Cement Industry
– Access to raw materials

Example # 5: Regulated Business
– Longer licensing period

Example # 6: IT Services
– It is a very linear model
– The way they treat employees more as numbers
– They don’t realise there is a huge challenge in having 400,000 employees. That is the biggest single way forward in terms of achieving growth given the model of IT services industry
– This is not about consulting, design of systems, architecting – we are not there
– We are still doing Application, Development and Maintenance (ADM)
– Quality of employees you have, the extent to which you motivate them and how they deliver is key

Example # 7: Asset Management
– It is a wonderful business. Whether you are running 10 billion or 20 billion or 100 billion, the need to scale up the employees you have doesn’t grow.

Don’t trust people claiming they see the future
– That’s what gets you into trouble.

Don’t buy businesses which changes very fast
– For example, drug discovery
– You want to buy businesses that are reasonably stable and you can understand

The price you pay is very important.

All great businesses not equal to great investments.

Infosys
– It had the best of the best.
– In year 2000, it was trading at 100 – 120x P/E multiple, if you hold it till 2008 the return was less than 4% including dividends.

Hero Honda
– Don’t expect to buy it at PE multiple of 12 or 14.

He is willing to buy companies with RoE anything above 15 – 18%
He will pay very different prices, if he buys a company with 18% RoE and another company with 45% RoE.

Capital Efficiency
– RoE, RoCE and working capital management

Capital Allocation:
– What to do with the money that you earn?
– When to raise debt? At what rate you raise debt?
– Is it cheaper to raise debt or equity to fund growth?
– If you have surplus money, how much of it should be given back to shareholders.
– If your deployment is your biggest challenge earning the same return on capital, then you should give the money back to shareholders.
– If a company buys back its own shares when it is really cheap that is very good use of capital.

Indian accountants are devilishly intelligent. They know how to manipulate the data.

Cash flow only item that cannot be fudged
– Focus on cash flow not reported earnings
– Stable operating cash flow must

Bloomberg
– will continue to sell terminals regardless of how the economy will do.

Sanjoy’s Mantra:
1. Capital Efficiency
2. Capital Allocation
3. Growth
4. Quality of Management
5. Pays to be a patient investor

When to sell?
1. Get ego out of the way and sell when you make a mistake
2. Sell when stock does better than imagination
3. Sell to buy the truly better opportunity

Get it right and sit tight.

The recommended filters, and the order in which you implement them, are listed below:
– Compounded annual EPS growth in excess of 15% over the past decade
– Current PE ratio not in excess of normalised PE trading band for the last 5 years
– Debt to equity ratio less than 0.5
– Consistent growth in revenues during the last 5 years
– Five-year average return on equity in excess of 18%

A portfolio of 15 carefully chosen stocks should prove adequate in trimming market risk.

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