Value Investing Decoded

Here are some videos to help you learn the investment strategies of top fund managers.

1) Sanjoy Bhattacharya – The Master Investor
Decode the process of picking winners in the stock markets for the average investor with Sanjoy Bhattacharya. Watch video: [NDTV]

2) Raamdeo Agarwal – Promoter of Motilal Oswal
Decode the process of picking winners in the stock markets for the average investor with Raamdeo Agrawal. Watch video: [NDTV]

3) Prashant Jain – CIO, HDFC MF
Decode the process of picking winners in the stock markets for the average investor with Prashant Jain. Watch video: [NDTV]

4) Sankar Naren – CIO, ICICI MF
Decode the process of picking winners in the stock markets for the average investor with S Naren. Watch video: [NDTV]

5) Kenneth Andrade – The Mid-Cap Mogul
Decode the process of picking winners in the stock markets for the average investor with Kenneth Andrade. Watch video: [NDTV]

6) Chandresh Nigam – CEO, Axis MF
Chandresh Nigam is a veteran investor in Indian stocks. He is also highly regarded as someone who has the right processes in the business of investing. Watch video: [NDTV]

7) Madhu Kela – Chief Investment Strategist, Reliance Capital
Madhu Kela is known for picking winners in the stock market. He is also known to identify opportunities early and fast. Watch video: [NDTV]

8) Nikhil Vora – CEO, Sixth Sense
What is interesting is that his focus is the ‘challenger’ companies rather than the leaders in various segments. Watch video: [NDTV]

Sunil Singhania – Believe in numbers

Sunil Singhania, CIO of Reliance Mutual Fund

Sunil is a numbers person. He often uses numbers to get a true sense of the business.
If the company has been diluting too much equity or if there is a lack of cash flow, then it is a warning bell.
Reliance MF always focus on where they went right. They never focused on where they went wrong.

A Zebra in Lion Country:
The concept is very simple. Zebras always move in herds and most of them want to be in the centre to protect from the lion attacks. But there is a little grass at the centre for the zebras to eat.
Zebras at the side are the ones which eat the best grass. When the time comes, they are the fastest to run.
There is very little return in companies which are very obvious choices.

Large Companies:
– Business model is established
– Opportunity size is established
– Management is very focussed, clear and stable

Small Companies:
– It is exactly the opposite to large companies
– You need to identify the passion and the honesty of the management
– You need to identify the scale of the opportunity
– Scale of the opportunity is very important as most of these companies are sort of niche
– You need to identify that the passion is matching with the scale of opportunity to grow
– The second/third generation of the management are foreign educated or well educated. They have taken the companies to next level
– Sunil is a believer of balance sheet which can give 80-90% indication of honesty of the management
– If the company has been raising capital very frequently, then it is a warning bell
– Companies can show as much profit as they want, but if there is no cash flow there is no use of profit. Cash flow is the key indicator
There is an opportunity in smaller companies with good balance sheets and good promoters – not all of them. Smaller companies have the passion to grow.
Large caps in India have great opportunity but they are all well researched. In a larger company, there is stability, but there is a limitation of how much risk they can undertake.

Jindal Steel – Investment Thesis:
– The valuations were so low
– The second generation of the management come into business. Each were managing their own parts of the business
– The management planned massive investment and they had raw materials or backward integration
– It worked out well

Divi’s Labs – Investment Thesis:
– After the IPO, Divi’s has never raised equity at all
– They have paid almost Rs 1000 crore dividend since the IPO
– Continuously growing at 20-25%
– Very high ROE
– Very high quality management
– Very high quality company

United Spirits – Investment Thesis:
Reliance MF invested in United Spirits and it turned out very well. It was a simple analysis.
Reliance MF tracks 2600 companies across 20 countries. Globally the market cap of cigarette companies was significantly lower than the spirit companies.
In India, ITC was trading at a market cap of $40 billion whereas United Spirits was trading at $1.5 billion.
– India has 15% of the world population
– USL had 50% of market share in India
– 7.5% of world’s market share
– India is the fastest growing alcohol market
– This thought worked well

MCX India:
Reliance MF own MCX India which is a commodity exchange company. The market may be discounting the current opportunity. India is a huge commodity market. The opportunity can really play out.

Media:
Infosys started as a USD 20 million company, now the market cap is USD 30 billion.
The IT sector was zero. Now it is almost 10% of our market cap. Same is the case with telecom.
Sunil is very sure, same is the case with digitalisation or e-commerce.
Sunil is very bullish on Media. Most of the media companies have a market cap of USD 50 – 100 million. Some of them are going to be multi-billion dollar companies. But you have to research and invest in them now.

His Investing Strategy:
– Don’t lose money – is the biggest thing, otherwise you won’t have money to invest
– Avoid making mistakes
– Buying is one part of it, holding it and not selling early is another part it
– India is expected to reach USD 4 trillion in the next eight years from USD 2 trillion economy
– Follow buy and hold strategy for midcaps
– Do not restrict your upside – This is one of the biggest mistakes
– Make use of market inefficiencies
– Low risk high return is the better strategy for midcaps – it is not always possible

Rapid Fire Round:
Most admired investor in India – Madhu Kela
Most admired investor globally – Jeremy Granthum
Best MD or CEO – Jai Shroff, CEO, UPL
Favourite financial ratio – Cash flow
Best stock pick – Bajaj Finance
Worst stock pick – Sugar companies

Source: CNBC-TV18

Kenneth’s Investment Strategy

How to identify a good business?
– Largest in the business
– Look for market leadership
– Continues to gain market share
– Challenging the leaders
– Look for a great product
– Dominant franchise or a product
– Pricing power
– Low cost producer
– Lead industry with cost
– Look for capital efficiency
– Paying back you money
– Go with largest player during downturn
– Performs well during cyclical downturn

How to identify potential investments?
– Look at market leadership available at dirt cheap valuations
– Companies which are going through an economic downturn in their specific industry
– Companies that are extremely profitable or extremely large putting pressure on the competition
– Buy debt free company at cycle bottom

Example # 1: Asian Paints
– It has 55% market share
– 3 times cash flow of entire business

Example # 2: Ashok Leyland
– Lesser capital to grow market share
– Gaining market share, but not the leader
– Balance sheet shrinking
– Higher market share using lesser amount of capital
– It has lot characteristic of a company operating in a challenging environment

Example # 3: Blue Dart
– Ability to add more capacity without increasing the balance sheet/adding more capital
– Scalable business
– It has best infrastructure on ground
– Only profit making company in the industry

Example # 4: VA Tech Wabug
– Trading 3 times cash on book
– Strong cash flow
– Operating in a very tough industry

Kenneth’s Mantra:
– Pick financially sound companies, preferably debt free
– Choose companies that respect capital
– Try to stay with leaders in the sector
– Monopolistic companies make all the money
– Size of the opportunity larger and growing
– Cash flow is the single most important financial parameter to look for
– Avoid companies which try to expand its balance sheet
– Avoid companies which continues to put more money to work

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.