Outlook Business - 4 March 2016

INDIA’S

BEST

FUND MANAGERS The first ever ranking of India’s fund managers EXCLUSIVE INTERVIEW 8 904150 800041

05

Prashant Jain, CIO, HDFC Mutual Fund

| EDITOR’S NOTE |

Litmus test If ignorance is bliss then investing in a mutual fund seems a cakewalk compared with investing directly in stocks. But truth be told, buying the right mutual fund is actually far more complicated than buying an individual stock. Trying to analyse a portfolio and creating models around how the portfolio will play out over time is tough because of the multitude of factors affecting each stock in a portfolio and their interplay. Now try doing this for a whole bunch of funds to figure out which one is better, and you’ll actually get nowhere. The only thing that makes sense, therefore, is to bet on the fund manager, and say that he or she has generally delivered a decent return in the past, and can be trusted to behave rationally. That’s why we thought it would be a good idea to track the performance of individual fund managers rather than inundate you with the plethora of fund schemes out there, which are usually launched for the marketing team to garner more assets than for their investment merit. An added reason for this individual ranking is that fund managers switch jobs, and when they do so, it’s difficult to take a call on whether you should stick to the scheme or move with the fund manager.

So here we are, with India’s fi rst-ever fund manager ranking done exclusively for Outlook Business by Value Research, India’s premier mutual fund tracking agency and the originator of mutual fund ratings in the country. We have profiled the top fund managers over the past five years, and also those at the top of the 10 -year table. I can’t thank enough the Value Research team, particularly Charul Sharma, for being super prompt in supporting us with whatever data we needed. You can’t afford to miss the interview with Prashant Jain, chief investment officer of HDFC Mutual Fund, whom investors have entrusted with #29,348 crore in funds that he manages directly. He is one of the three fund managers in India with a 20 -year performance history and his track record is outstanding. But he is going through testing times and we ask him, what is he thinking.

N MAHALAKSHMI

www.outlookbusiness.com | email: [email protected] Outlook BUSINESS / 4 March 2016

3

Contents

Volume 11, Issue 5, March 4, 2016 | Released on stands on February 19, 2016

INDIA’S

BEST

4

FUND

MANAGERS

A look at how India’s mutual fund managers have fared over the past 5- and 10-year time-frame

16 Detailed ranking of fund managers based on 10-year and 5-year return 22 Sunil Singhania of Reliance Mutual Fund on how betting on emerging trends has made all the difference 34 How Quantum Mutual Fund’s Atul Kumar is hittng paydirt with the fund house’s value investing framework 4 March 2016 / Outlook BUSINESS

44 India’s most successful fund manager Prashant Jain on why he is betting on corporate banks 56 Axis Mutual Fund’s Jinesh Gopani reveals what catapulted him right to the top 60 Mirae Asset’s Neelesh Surana has gotten it right by spotting the right stocks in growing sectors

www.outlookbusiness.com

66 His disciplined style has kept the momentum going for Vinit Sambre of DSP BlackRock 72 Sohini Andani of SBI MF has come a long way with her conservative style of investing

FEATURES Associate Editors: Kripa Mahalingam, Krishna Gopalan Chief Research Analyst: Jitendra Kumar Gupta Senior Correspondents: Himanshu Kakkar, Jash Kriplani Correspondents: Adit Mathai, Rajat Ubhaykar Trainee Correspondent: Avantika Seth

78 R Janakiraman’s patience has done him a world of good at Franklin Templeton MF

COPY DESK Chief Sub-Editor: Mahithi Pillay Senior Sub-Editor: Sadiya Upade Sub-Editors: Laveena Iyer, Shruti Karthikeyan

86 Religare Invesco’s Vinay Paharia on why he loves businesses that are capital-efficient 92 R Srinivasan of SBI MF on the highs and lows of straddling diverse investing philosophies 100 Kotak MF’s Pankaj Tibrewal on looking for companies with a competitive edge 6

Editor: N Mahalakshmi Deputy Editors: Rajesh Padmashali, V Keshavdev

106 Krishna Sanghavi of Canara Robeco on why betting on the macro story is rewarding 110 Buying quality at a reasonable price has helped HDFC MF’s Chirag Setalvad deliver 116 Mrinal Singh of ICICI Pru MF has got it right by tanking up on the right amount of risk 122 A look at aggregate money flows over the past five years into schemes managed by the 14 fund managers profiled in this issue

COVER DESIGN: MANISH MARWAH

4 March 2016 / Outlook BUSINESS

ART Design Editor: Manish Marwah Senior Designer: Kishore Das PHOTO Photo Editor: Soumik Kar Principal Photographer: RA Chandroo Senior Photographer: Vishal Koul Consultant: Rashmi Shinde BUSINESS OFFICE President: Indranil Roy Associate Publisher: Vidya Menon Senior General Manager: Uma Srinivasan (Chennai) Assistant General Managers: Anindya Banerjee (North), Prashanth Nair (West) Senior Managers: Ankush Madan (North), Krishnan Iyer (West), Vinay Kumar P.G. (Bangalore) Manager: Sachin Chitambaran (West) MARKETING Head-Brand and Marketing: Shrutika Dewan Deputy General Manager: Jyoti Ahuja CIRCULATION National Head: Anindya Banerjee (Circulation) Assistant General Managers: G Ramesh (South), Vinod Kumar (North) Zonal Sales Manager: Arun Kumar Jha (East) Manager: Vinod Joshi Deputy Manager: Shekhar Suvarna PRODUCTION Assistant General Manager: Shashank Dixit Senior Manager: Shekhar Pandey Manager: Sudha Sharma ACCOUNTS Senior Manager: Diwan Singh Bisht Company Secretary & Law Officer: Ankit Mangal HEAD OFFICE AB-10, Safdarjung Enclave, New Delhi 110029; Tel: (011) 33505500; Fax: (011) 26191420 Customer Care: (011) 33505562, 33505533, 33505607 Fax: (011) 26191420 Mumbai: (022) 33545000, Fax: (022) 33545100; Kolkata: (033) 33545400, Fax: (033) 24650145, Chennai: (044) 42615225, 42615224 Fax: (044) 42615095 Bengaluru: (080) 45236100, Fax: (080) 45236105; Printed and published by Indranil Roy on behalf of Outlook Publishing (India) Pvt. Ltd. Editor: N Mahalakshmi. Printed at Kalajyothi Process Pvt. Ltd., Plot No. W-17 & W-18, MIDC, Taloja, Navi Mumbai- 410208 and published from AB-10 Safdarjung Enclave, New Delhi 110029 Published for 20 February-4 March 2016 Total number of pages: 120 + cover

THE FIRSTRANKING FUND MAN 8

Even though the disclaimer on most performance is not an indicator of future to pick the right manager

SO, WHO IS N Mahalakshmi

4 March 2016 / Outlook BUSINESS

Outlook Business - Value Research Ranking

EVER OF INDIA'S AGERS

advertisements may scream, 'past results', consistent return is the best guide

THE MAN? Ask not why, but it is difficult to beat the market over long periods with mutual funds.Your fund manager has to get a whole bunch of things right to race ahead and make superior returns. First, he has to pick the right stocks at the right price which of course sounds so easy but is the most difficult thing to do. Depending on the fund size, getting the allocation right becomes critical. Simply spotting multi-baggers won’t do any good – you got to deploy enough cash in your conviction to move the needle. Then there are a whole bunch of restrictions fund managers have to adhereto based on the investment mandate of the scheme. Outlook BUSINESS / 4 March 2016

9

10

The fact that fund houses keep launching new schemes to cash in on prevailing trends and shore up assets without regard to the long-term potential of a trend also poses a serious challenge in maintaining performance. And then, there is the challenge of managing fund flows in the case of open-end funds. Ironically, in the stock market there is higher demand at high prices, which means mutual funds tend to attract maximum flows when the market is approaching a peak, and maximum redemptions in a falling market. And given the self-imposed, save-your-backside approach that mutual funds take of remaining invested at all times, there is no chance to escape deep dives in the market to preserve capital either, nor can you exercise a period of inaction when stocks prices are elevated. All this simply makes the odds of earning a high return from mutual funds highly improbable. Load on to this, the expense fee of 2.5% charged annually by the asset manager, and you are impoverished even further over time. To give you an idea of how this miniscule percentage difference can alter your overall return over a long period, here is the math. In 10 years, your #100,000 will grow into #259,000 compounding at the rate of 10% per year, but at the rate of 7.5% the amount would be #206,000. Essentially, you would earn #53,271 less, which is 50% of your principal amount. The difference grows enormously over long periods. At the end of 30 years, at 7.5% the same #100,000 will turn into #869,000 — that’s nearly half of what your amount would have grown into at the rate of 10% (#1,745,000). Against this backdrop, it’s quite commendable that there are fund managers in India who have generated a return in excess of what the indices have delivered over a long period. But we do not have too many managers with a long track record as several experienced hands have either quit the industry or moved to other fund houses. As it is, choosing the right fund or manager is anyway a complicated exercise. This is where the Outlook Business-Value Research Fund Manager Ranking will help. The ranking is based on the average risk-adjusted performance of all fund schemes managed by a manager and across fund house in case s/he has switched the fund house. We have present-

4 March 2016 / Outlook BUSINESS

ed rankings based on both 10-year and fiveyear, and profiled the top 10 managers based on the five year track record and the top two based on 10-year track record. Although a five-year history is too short to assess the abilities of a fund manager because the period does not make up for even one market/ business cycle, watching this record is important as most investors would expect that their funds deliver over a five-year period. Not just that, a five-year period is a reasonable time for you to wait and see if you have made the right choice. If you stay put for 10 years and found that the fund manager you handed your money did not do a good job, you have no hope of making good that damage. If you take a peak working life of 30 years, 10 years accounts for a third of your savings and you better not have made a wrong call for that long. So far, fund managers with a 10-year track record have done a tremendous job of beating the indices. Out of the 18 fund managers rated on 10-year performance, seven outdid the Nifty 100% of the time based on five-year rolling re-

WHO’S CONSISTENT OF THEM ALL Most fund managers have outperformed the Nifty over a five-year period

in %

1-Year

3-Year

5-Year

Atul Kumar

81.7

97.6

100.0

Sachin Padwal-Desai

57.8

94.1

100.0

Prashant Jain

62.4

90.6

100.0

Sailesh Raj Bhan

70.6

89.4

100.0

Anoop Bhaskar

69.7

89.4

100.0

Chetan Sehgal

68.8

89.4

100.0

Vinay Kulkarni

56.0

70.6

100.0

Ashwani Kumar

67.0

87.1

98.4

Sunil Singhania

67.0

84.7

98.4

Ajay Garg

67.0

75.3

98.4

Satyabrata Mohanty

52.3

84.7

96.7

Srinivas Rao Ravuri

58.7

63.5

96.7

Swati Anil Kulkarni

65.1

87.1

95.1

Jayesh Shroff

66.1

67.1

83.6

S Krishna Kumar

50.5

67.1

83.6

Venugopal Manghat

55.0

65.9

77.0

Mahesh Patil

67.9

76.5

75.4

Dipak Acharya

44.0

47.1

18.0

Source: Value Research

YOU STILL HAVE TIME TO SAVE TAX. Since you work so hard to earn your money, shouldn’t you be looking for a smart way to save tax? Which leads to one big question.

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12

turn — rolling returns were calculated monthwise (see: Who's Consistent of Them All). What this essentially means is that if you handed these managers your money for any 60 month (five-year) period after January 2011, it would have grown better than the Nifty. This spectacular performance has come on the back of superior stock selection in a market that has seen a burgeoning number of small and mid-cap companies. “Way back in the midnineties, fund managers used to by and large follow the same strategy. Our framework for evaluating them in the mid-nineties used to be how much was their exposure to consumer, pharma and technology when those sectors were doing well. That has seen a stark change since 2008,” says Dhirendra Kumar, founder, Value Research. Ever since the market surge of 2003, many small and mid companies have become a playing ground for fund managers. While the infra boom ensured that the market paid disproportionate attention to mid-caps in core sectors, in the aftermath of the crisis the other sectors came alive. “Especially after the 2008 fall, identifying the right stocks at the right time became the big driver of returns. Managers who identified the right stocks and backed them took rich rewards,” says Kumar. After all, in a market where business visibility and macro fundamentals have dilly dallied, stock selection has become the secret sauce to success. Over the past five years, mid-caps have outperformed large-caps and accordingly larger funds with large-cap focus have lagged behind. The five-year track record bears out this skew. But this party may not continue forever.

THIS DIFFERENCE IN APPROACH—A VALUE-FOCUSED, CONTRARIAN APPROACH VERSUS GROWTH-ORIENTED APPROACH IS VISIBLE MORE THAN EVER 4 March 2016 / Outlook BUSINESS

Markets move in cycles and trees don’t grow to the sky. This proposition, however, is not something everyone subscribes to. And this difference in approach — a value-focused, contrarian approach versus growth-oriented approach — is visible in the fund industry more than ever. There are managers like SBI Mutual’s R Srinivasan who are betting on growth and others like Prashant Jain who are sticking to value. This contradictory stance taken by managers will ultimately get reflected in their performance over time. Being with the right manager will therefore be more important. Another aspect that will make a difference across managers, more importantly across schemes, is the size of funds. Even though big funds say that size does not affect their performance, in relation to the liquidity in our market, their size will be a deterrent. Some managers like Jain argue that the size of funds is not an issue (see page 44). But it will be even more important for the bigger funds to get their big calls right. Kumar feels size will alter the game for a lot of managers. “Yesteryears funds are a victim of their own success. The trend is visible in the numbers. For example, Sunil Singhania’s bigger funds are struggling while the smaller ones are doing very well,” says Kumar. More than whether size is an impediment to outperformance or not, the context in which fund managers have outperformed all these years is important to note. By and large, ever since 1993 when mutual funds were opened to private players, most funds in India have succeeded with a bottom-up stock selection process. How else could you have made money when the indices went nowhere? The shallow nature of the market and huge inefficiencies gave more than ample room to beat the indices by picking the right stocks. That’s an approach managers have mastered. Now some of them will have to graduate from looking at large outperformance from tiny islands of opportunity to decent outperformance with large bets avoiding landmines on the way. That is both a challenge and an opportunity for the big fund managers. This being our first edition on mutual funds, we have confined it to giving you a flavour of their investment strategy. What finally counts is the rigour of your research and how much conviction you show in your own independent analysis. b

OUTLOOK BUSINESS-VALUE RESEARCH FUND MANAGER RANKING 14

Coverage

Performance record

Fund managers The study covers fund managers having a track record of managing at least one fund for the past 5- and 10-year periods ending December 31st, 2015, leading us to a universe of 54 fund managers.

 The study is based on the performance record of the past five years (January 2011-December 2015) and 10 years (January 2006-December 2015).  Only the relevant portion of a fund’s performance history, corresponding to a fund manager’s tenure at that fund, has been taken into account to rate that manager.  The performance of co-managed funds has been taken into consideration for each of the co-managers.

Funds  The study covers diversified equity funds across largecap, mid-cap, small-cap, multi-cap and tax planning categories as defined by Value Research. All sector funds, thematic funds and passively-managed funds (index, ETFs, quant) have been excluded.  This led us to a starting list of 169 equity schemes managing #230,607 crore for the five-year period and 81 equity schemes managing #121,714 crore for the 10-year period.

Period

Schemes managed currently

Total AUM (# Cr)

Schemes considered for study

No. of fund managers

5-Year

128

230,607

169

54

10-Year

45

121,714

81

18

As on December 31, 2015

4 March 2016 / Outlook BUSINESS

Evaluation methodology  We collated a simple average of the percentage return delivered by a fund manager in each of his covered funds. If the fund manager moved from one fund to another, the relevant track records were aggregated. This gave us the unified performance history of a fund manager. The same process was followed for both 5- and 10-year periods. Think of it like this: if a fund manager was managing only one fund in the past five years, this would be its performance record.  We deployed the Value Research fund rating methodology, which is based on risk-adjusted return, to arrive at the relative ranking of fund managers.  This is purely a quantitative study based on riskadjusted performance. No qualitative assessment has been performed.

OUTLOOK BUSINESS- VALUE RESEARCH

16

VALUE RESEARCH FUND MANAGER RETURN RATING

VALUE RESEARCH FUND MANAGER RISK RATING

VALUE RESEARCH FUND MANAGER PERFORMANCE RATING

High

Average



18.30

Average

Below Average



16.23

RANK

FUND MANAGER

FUND COUNT

AUM (# CR)

1

Sunil Singhania

3

9,809

2

Atul Kumar

2

502

3

Anoop Bhaskar

3

13,127

Above Average

Average



16.64

4

Ajay Garg

3

2,334

Above Average

Average



16.04

5

Sailesh Raj Bhan

2

13,697

Above Average

Average



16.22

6

Satyabrata Mohanty

3

2,057

Below Average

Low



14.17

7

Sachin Padwal-Desai

1

13

Below Average

Low



13.43

8

Jayesh Shroff #1

2

6,176

Average

Below Average



14.70

9

Prashant Jain

2

29,348

Average

Above Average



15.17

10

Ashwani Kumar

3

9,884

Average

Above Average



15.07

11

Chetan Sehgal

2

1,452

Average

Average



14.57

12

Mahesh Patil

4

13,015

Average

Average



14.10

13

S Krishna Kumar

3

5,951

Above Average

High



15.33

14

Vinay R Kulkarni #2

4

6,600

Average

Above Average



13.34

15

Srinivas Rao Ravuri

1

1,139

Below Average

Average



12.73

16

Venugopal Manghat #3

3

2,584

Low

Below Average



11.90

17

Swati Anil Kulkarni

3

6,597

Below Average

Below Average



12.15

18

Dipak Acharya

2

301

Low

Above Average



10.70

10-YEAR

S&P BSE Sensex Index

10.75

S&P BSE 100 Index

10.91

S&P BSE 200 Index

11.02

Nifty 50 Index

10.84

Nifty Midcap 100 Index

12.75

Source: Value Research; Data as on December 31, 2015 #1 - Switched from Baroda Pioneer to SBI in July 2006; #2 - Switched from Deutsche to Tata in Aug 2006 and then to HDFC in Nov 2006; #3 - Switched from Tata to L&T in March 2

4 March 2016 / Outlook BUSINESS

FUND MANAGER RANKING (10-YEAR) RETURN IN %

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

GROWTH OF # 100

9.91

77.43

4.07

40.54

-26.97

23.27

80.94

-51.30

63.04

45.66

536.90

2.97

39.51

9.03

31.29

-20.54

28.50

95.07

-46.99

45.78

42.25

449.86

0.44

57.57

8.33

32.82

-20.48

22.31

104.51

-55.22

61.24

42.64

466.11

8.54

54.13

8.82

36.49

-29.42

15.20

89.50

-51.20

58.59

49.52

442.70

0.83

57.17

4.38

44.14

-24.06

24.87

90.66

-52.60

45.51

51.28

449.41

2.77

46.87

5.16

24.58

-17.65

16.00

71.77

-37.41

41.44

31.09

376.26

3.39

38.91

3.54

26.22

-14.03

17.85

71.29

-40.03

36.82

31.98

352.45

7.08

48.71

8.78

33.35

-24.61

16.36

87.91

-56.03

56.24

50.85

394.29

-5.59

50.12

3.94

33.29

-25.51

27.13

100.02

-47.54

54.08

36.65

410.52

-1.33

65.78

2.53

38.90

-26.39

19.06

79.27

-50.78

53.45

47.35

407.00

-0.67

43.76

1.63

35.77

-23.66

24.13

104.22

-52.45

56.88

37.09

389.63

1.73

61.04

9.10

36.19

-24.57

16.28

80.54

-53.32

56.60

32.81

373.95

7.21

76.26

-1.08

37.66

-32.72

10.19

120.44

-57.62

81.12

29.08

416.33

-1.88

47.77

2.24

24.42

-22.94

24.43

94.14

-51.46

45.11

44.70

349.77

-0.37

40.86

-0.32

27.51

-22.03

24.84

76.79

-49.41

52.25

40.21

331.33

4.73

51.12

6.98

28.70

-22.37

14.46

79.77

-53.14

53.42

23.12

307.86

-1.71

42.09

4.86

24.27

-19.65

19.57

77.71

-50.62

56.97

30.76

314.74

-1.90

47.19

5.46

25.93

-29.34

14.63

88.53

-53.69

60.11

27.31

276.28

-5.03

29.89

8.98

25.70

17.43

17.43

81.03

-52.45

47.15

46.70

277.67

-3.25

32.28

5.87

29.96

15.66

15.66

85.04

-55.28

59.74

40.97

281.62

-1.48

35.47

4.38

30.98

16.22

16.22

88.51

-56.46

60.44

39.58

284.48

-4.06

31.39

6.76

27.70

17.95

17.95

75.76

-51.79

54.77

39.83

279.90

6.46

55.91

-5.10

39.16

19.16

19.16

98.97

-59.39

76.93

29.01

332.06

2012

Outlook BUSINESS / 4 March 2016

17

OUTLOOK BUSINESS- VALUE RESEARCH RANK

18

FUND MANAGER

FUND COUNT

AUM (# CR)

VALUE RESEARCH FUND MANAGER RETURN RATING

VALUE RESEARCH FUND MANAGER RISK RATING

VALUE RESEARCH FUND MANAGER PERFORMANCE RATING

1

Jinesh Gopani

1

6,867

High

Low



2

Neelesh Surana

3

2,699

High

Low



3

Vinit Sambre

3

6,861

High

Above Average



4

Sohini Andani

2

5,095

High

Below Average



5

R Janakiraman

6

20,282

Above Average

Below Average



6

Sunil Singhania

3

9,809

High

Average



7

Vinay Paharia

4

1,319

Above Average

Below Average



8

R Srinivasan

5

7,972

Above Average

Low



9

Pankaj Tibrewal

2

2,377

Above Average

Average



10

Samir Rachh

1

2,318

Above Average

Above Average



11

Krishna Sanghavi #1

2

1,746

Above Average

Average



12

Chirag Setalvad

4

14,066

Above Average

Below Average



13

Mrinal Singh

5

13,195

Above Average

Below Average



14

Mahesh Patil

4

13,015

Above Average

Average



15

Amit Gadgil

3

1,320

Above Average

Average



16

Anoop Bhaskar

3

13,127

Above Average

Average



17

Sailesh Raj Bhan

2

13,697

Above Average

Average



18

Pankaj Murarka

2

3,234

Average

Below Average



19

Jayesh Shroff

2

6,176

Average

Below Average



20

Ajay Garg

3

2,334

Average

Average



21

Harshad Patwardhan

5

1,425

Average

Average



22

Miten Lathia

1

1,035

Average

Average



23

Venugopal Manghat #2

3

2,584

Average

Below Average



24

Vetri Subramaniam

5

1,670

Average

Below Average



25

Anand Radhakrishnan

4

14,896

Average

Below Average



26

Pradeep Gokhale

3

2,369

Average

Low



27

Ravi Gopalakrishnan #3

2

1,668

Average

Above Average



28

S Krishna Kumar

3

5,951

Average

High



29

Ashwani Kumar

3

9,884

Average

Above Average



4 March 2016 / Outlook BUSINESS

FUND MANAGER RANKING (5-YEAR) RETURN IN % 5-YEAR

2015

2014

2013

2012

2011

GROWTH OF # 100

18.67

6.70

66.18

16.51

42.90

-16.65

245.95

18.14

7.38

59.25

9.26

38.20

-13.75

222.52

14.77

8.96

85.77

2.74

44.79

-27.16

223.09

16.10

11.45

59.55

10.73

42.85

-24.98

210.92

15.22

4.42

69.61

7.49

42.18

-22.56

209.53

15.78

9.91

77.43

4.07

40.54

-26.97

208.25

15.04

5.87

61.05

9.83

35.45

-19.33

204.61

14.70

7.03

63.89

0.72

38.94

-17.12

203.19

15.10

7.89

80.58

-0.15

41.00

-25.57

204.10

15.38

8.28

81.53

2.88

41.66

-28.61

204.44

16.15

6.83

66.87

5.14

31.76

-22.71

190.57

12.50

3.61

58.31

10.39

32.23

-21.80

187.16

11.75

0.80

60.29

5.54

35.89

-21.02

185.46

12.92

1.73

61.04

9.10

36.19

-24.57

183.56

12.67

3.63

60.17

6.13

35.47

-23.91

181.54

12.60

0.44

57.57

8.33

32.82

-20.48

181.04

12.60

0.83

57.17

4.38

44.14

-24.06

181.01

12.28

-0.15

57.94

7.46

39.34

-24.39

178.48

11.73

7.08

48.71

8.78

33.35

-24.61

174.09

11.88

8.54

54.13

8.82

36.49

-29.42

175.32

11.59

3.97

55.54

5.41

32.22

-23.21

173.03

11.70

4.61

51.95

10.37

29.11

-23.20

173.92

11.08

4.73

51.12

6.98

28.70

-22.37

169.10

11.17

4.77

44.74

10.98

27.90

-21.08

169.82

11.06

3.47

47.21

4.83

29.46

-18.25

168.93

10.72

5.56

44.38

9.89

27.22

-21.88

166.38

11.21

6.41

65.86

3.86

26.37

-26.54

170.10

11.60

7.21

76.26

-1.08

37.66

-32.72

173.09

11.38

-1.33

65.78

2.53

38.90

-26.39

171.41

Outlook BUSINESS / 4 March 2016

19 19

RANK

20

FUND MANAGER

FUND COUNT

AUM (# CR)

VALUE RESEARCH FUND MANAGER RETURN RATING

VALUE RESEARCH FUND MANAGER RISK RATING

VALUE RESEARCH FUND MANAGER PERFORMANCE RATING

30

P V K Mohan

2

628

Average

Above Average



31

Sachin Padwal-Desai

1

13

Below Average

Low



32

Pallab Roy

1

13

Below Average

Low



33

Aditya Khemani

1

174

Average

Average



34

Satyabrata Mohanty

3

2,057

Average

Below Average



35

Atul Kumar

2

502

Average

Average



36

Nilesh Shetty

1

464

Average

Average



37

Dhimant Shah #4

2

632

Average

Above Average



38

Anand Vasudevan

2

9,424

Below Average

Average



39

Neelotpal Sahai

3

1,260

Below Average

Average



40

Omprakash Kuckian

3

3,970

Below Average

Above Average



41

Dhiraj Sachdev

1

391

Average

High



42

Sadanand Shetty

5

343

Below Average

Above Average



43

Harsha Upadhyaya #6

3

5,134

Below Average

Above Average



44

David Pezarkar #7

1

78

Below Average

Average



45

Vineet Maloo

2

1,210

Low

Below Average



46

Chetan Sehgal

2

1,452

Below Average

Average



47

Swati Anil Kulkarni

3

6,597

Below Average

Average



48

Prashant Jain

2

29,348

Below Average

High



49

Vinay Kulkarni

4

6,600

Below Average

Above Average



50

Ankur Arora #8

4

907

Low

Average



51

Srinivas Rao Ravuri

1

1,139

Low

Above Average



52

Dipak Acharya

2

301

Low

Above Average



53

Sanjay Kumar Chhabaria

2

975

Low

High



54

Asit Bhandarkar

1

28

Low

High



#5

S&P BSE Sensex Index S&P BSE 100 Index S&P BSE 200 Index Nifty 50 Index Nifty Midcap 100 Index

Data as on December 31, 2015 #1 - Switched from Kotak Mahindra to Canara Robeco in September 2012; #2 - Switched from Tata to L&T in March 2012; #3 - Switched from Pramerica to Canara Robeco in Sept BOI AXA in August 2013; #8 - Switched from ING to IDFC in March 2012

4 March 2016 / Outlook BUSINESS

RETURN IN % 5-YEAR

2015

2014

2013

2012

2011

GROWTH OF # 100

11.00

2.73

49.40

8.43

46.26

-30.74

168.52

10.04

3.39

38.91

3.54

26.22

-14.03

161.31

10.04

3.39

38.91

3.54

26.22

-14.03

161.31

10.67

0.19

52.37

3.34

38.93

-24.24

165.99

10.24

2.77

46.87

5.16

24.58

-17.65

162.80

10.31

2.97

39.51

9.03

31.29

-20.54

163.35

10.17

3.49

38.98

9.16

31.21

-21.21

162.28

10.20

1.25

61.71

0.14

48.43

-33.19

162.55

9.68

1.99

46.30

5.59

29.12

-21.97

158.70

9.12

-1.66

38.52

6.54

36.61

-21.94

154.71

9.40

3.38

43.79

3.30

42.21

-28.21

156.73

10.08

10.40

90.03

-4.19

46.37

-45.03

161.67

8.75

2.95

43.00

-0.44

34.38

-22.75

152.13

8.69

2.42

53.87

6.65

21.23

-25.54

151.67

8.33

-2.32

41.11

8.42

31.91

-24.31

149.16

7.81

-1.94

40.45

4.89

23.58

-18.41

145.64

8.50

-0.67

43.76

1.63

35.77

-23.66

150.38

7.89

-1.71

42.09

4.86

24.27

-19.65

146.20

7.90

-5.59

50.12

3.94

33.29

-25.51

146.24

7.28

-1.88

47.77

2.24

24.42

-22.94

142.11

6.39

-1.22

30.44

0.87

33.39

-21.37

136.31

6.82

-0.37

40.86

-0.32

27.51

-22.03

139.06

6.26

-1.90

47.19

5.46

25.93

-29.34

135.48

5.79

-1.52

52.07

1.44

32.42

-34.11

132.52

3.51

-2.39

51.28

-0.98

46.66

-44.58

118.84

4.95

-5.03

29.89

8.98

25.70

-24.64

127.33

5.51

-3.25

32.28

5.87

29.96

-25.73

130.77

5.91

-1.48

35.47

4.38

30.98

-26.95

133.27

5.31

-4.06

31.39

6.76

27.70

-24.62

129.52

8.62

6.46

55.91

-5.10

39.16

-31.00

151.22

tember 2012; #4 - Switched from HSBC to Principal in June 2011; #5 - Switched from IDFC to HSBC in May 2013; #6 - Switched from DSPBR to Kotak in August 2012; #7 - Switched from SBI to

Outlook BUSINESS / 4 March 2016

21

SUNIL SINGHANIA/48 Reliance Mutual Fund

EDUCATION

B.Com, CA, CFA

YEARS AS FUND MANAGER

12

CAREER

Prior to joining Reliance Mutual Fund, he worked with Advani Share Brokers and Motisons Securities

AUM (# CR)

9,809 22

SCHEMES

Reliance Growth Reliance Mid & Small Cap Reliance Small Cap

WORST YEAR

BEST YEAR

2011: -27.40/ -28.61/-25.04

2014: 54.87/ 81.53/97.60

RETURN (IN %) 1-YEAR

9.91 3-YEAR

26.70 5-YEAR

15.78 10-YEAR

18.30 4 March 2016 / Outlook BUSINESS

LONG-TERM INDIA BULL Sunil Singhania is always on the lookout for the next big opportunity

23

SOUMIK KAR

Outlook BUSINESS / 4 March 2016

T

24

V Keshavdev

ricoloured balloons and flags adorn the walls and cubicles of Reliance Mutual Fund’s office in Lower Parel on the eve of India’s Republic Day celebration. But the mood on the Street is far from cheerful, with the market continuing to tumble thanks to poor earnings and a struggling economy. However, Sunil Singhania, the 47-year-old chief investment officer of the country’s third largest mutual fund house is not buying into the doomsday prophecies. “The first attribute that one needs in investing is to be optimistic. Why are we even talking of India’s growth story unravelling even before it has played out? Abhi humne dekha hi kya hai? If you believe India is going nowhere over the next five years, then you are getting into a defensive mode, and that is no fun,” he says. That sense of unbridled optimism is also one of the reasons why Singhania has topped the 10 -year return track record, even as his company leapfrogged from being an also-ran to emerge as India’s third largest fund house, managing #156,000 crore in assets. Singhania got hooked to investing in college, and that passion continued during his CA articleship. After completing his CA , Singhania began working with his uncle, himself a chartered accountant. Although Singhania made a tidy sum by partaking in IPOs back in college, it was only by poring over balance sheets of companies that he gained insights into businesses and their potential. “In the ’80s, you did not have too many annual reports. So, I used to analyse whichever balance sheets I could lay my hands on,” says Singhania, who joined a small broking outfit and later moved to Advani Share Brokers, which was among the very few institutional broking houses catering to FIIs back then. It was also around this time that Singhania completed his CFA . But it was hardly a cakewalk for Singhania, as back in 2001-2002, nobody was interested in buying anything other than tech stocks. “It was a frustrating time, as stocks of really good companies were available at multiples of 2 -3x. Though we believed that these companies had

4 March 2016 / Outlook BUSINESS

it in them to grow tenfold, no one was willing to buy,” recalls Singhania. Even if he did manage to sell some ideas, clients would give him an earful if they ended in the red. Although mutual funds were still trying to fi nd their feet back then, Singhania remembers Madhusudan Kela, the head of equities at Reliance Mutual Fund at the time, as being among the very few clients willing to listen to his ideas. So, when the opportunity arrived, he switched sides to join Kela. “My friends tried to dissuade me from joining Reliance MF, which back then had just #100 crore in AUM, by saying that it was a small player,” recalls Singhania. But Kela’s infectious energy and Singhania’s strong understanding of finance made for a potent combination, as the duo dared to venture into names that no one had backed before. “The good thing about that period was that no one wanted to invest in smaller companies, so we went ahead and invested in them. The only way for us to generate alpha was to pick names that were outside of the large-cap universe,” explains Singhania. Jindal Steel and Power, Torrent Power, Divis Labs, Lupin, Jindal Saw, Jain Irrigation and Kirloskar Brothers were some of the names that made their way into the fund’s portfolios. What made Singhania’s task easier was that a lot of these names were available at less than cash profit in 2003, a trend that was visible in 2013 as well, albeit in select pockets. “Our view was that if the sector was facing headwinds, due to which the company was available at a substantial discount, the cycle would turn where

KELA’S INFECTIOUS ENERGY AND SINGHANIA’S STRONG UNDERSTANDING OF FINANCE MADE FOR A POTENT COMBINATION

SUNIL SINGHANIA’S SCORECARD 1-Year

Return in %

3-Year

5-Year

10-Year

2015

2014

2013

2012

2011

2010

Reliance Growth

6.35

17.12

9.95

18.30

6.35

54.87

-2.47

37.82

-27.40

17.18

Reliance Mid & Small Cap

8.28

26.46

15.38

-

8.28

81.53

2.88

41.66

-28.61

25.98

Reliance Small Cap

15.11

36.53

22.02

-

15.11

97.60

11.89

41.89

-25.04

-

As on December 31, 2015

the stock would be significantly valued,” mentions Singhania. Putting this in context, he explains that the fund bought a tyre company three years back, when it was valued at 1/10th of sales and its market cap was two times its cash profit amid falling rubber prices. Ditto was the case with some textile stocks that were trading at 2 -3x as the market was not assigning them higher valuations despite the changing business models in these companies. As envisaged, the market ended up re-rating the stocks, thus vindicating Singhania’s stance.

EAGLE EYE

26

Singhania believes a lot of money can be made in picking trends early on and ensuring that one buys into a company that is better placed to make the most of the trend. It was around 1997 when Singhania got sold on a stock after buying three Hepatitis B injections, each worth #3,500, for his newborn son. “I also ended up buying 100 shares of GSK Pharma’s earlier avatar. Within a month, the share purchase helped me settle the entire hospital bill,” reveals Singhania, adding that trends can be visible in one’s own spending habits. Reading, too, helps a lot in honing one’s analytical mindset. Singhania refers to a chapter in the book Freakonomics by Steven

AVERAGE SECTORAL ALLOCATION (in %)

Communication 2 Automobile 3

Metals 2 Consumer durables 1

Energy 3 Textiles 4

Financials 18

Services 6 Diversified 6

Chemicals 12

FMCG 8

Engineering 10

Healthcare 8 Technology 8

Construction 9

As on December 31, 2015

4 March 2016 / Outlook BUSINESS

Levitt and Stephen Dubner that takes a look at the drastic drop in crime rate in the US during the ’90s. The general view around the time was that good administration was the reason why crimes had fallen, while some felt it was because the economy was doing well. Ultimately, the authorities traced the roots of the social change in their own decision to legalise abortion in the ’70s, which meant that the US had fewer unwanted kids in the ’70s and, as a result of that, in the ’90s, it had fewer ‘unwanted’ 20 -year-olds, resulting in fewer crimes. Using the same perspective in the Indian context, Singhania talks about how he bought into companies where a new generation was taking control of the empire and unleashing changes that would alter the course of the company’s growth. “In a lot of Indian companies, the second or the third generation is well educated and has a different thought process compared with the original founder-promoters in terms of value creation and growth. A lot of companies where the second and third generation is good have entered into a different orbit,” says Singhania. For example, when the fund bought into the RP Goenkaowned CEAT, it was not seen as being investorfriendly, but when Anant Goenka took over the reins six years back, he brought in a different perspective. “Goenka understood the importance of RoE and RoCE , and instead of focusing just on manufacturing, which was a low-PE business, the company started focusing on branding and outsourcing. Soon, the return ratios started trending higher and, as a result, the stock started trading at a higher multiple,” explains Singhania. In the current context, Singhania believes there are quite a few themes that will play out in the future. “I always believe that we are behind the world by 10 -15 years, and from an asset manager’s perspective, this makes life easier in the sense that trends that used to take 20 years to come to India are now taking maybe 20 months or 20 days to appear. So, it’s very easy to figure out what would be the next sunrise sec-

TOP HOLDINGS (% of net assets as on Dec 31, 2015)

Reliance Growth/Reliance Mid & Small Cap/ Reliance Small Cap

28

Aditya Birla Nuvo

5.49/2.99

HCL Technologies

4.84

Axis Bank

4.68

UPL

4.56

Divis Laboratories

4.48

United Spirits

3.26/4.16

Welspun India

3.21

Cipla

3.14

Indiabulls Housing Finance

3.13

Infosys

3.03

Abbott India

3.41

Sundaram Finance

3.33

Tube Investments Of India

3.32

HDFC Bank

3.16/2.51

Atul

2.71/2.61

Redington India

2.63

Alstom India

2.60

Credit Analysis & Research

2.53

Intellect Design Arena

4.81

Navin Fluorine International

4.45

Vindhya Telelinks

3.54

Kalpataru Power Transmission

2.72

Arvind

2.66

LG Balakrishnan & Bros

2.47

TVS Motor

2.44

GIC Housing Finance

2.36 Source: Value Research

tors.” Over the next 15 years, urban consumption, logistics and financial savings are the key themes that Singhania expects will see greater traction. Brand play is one theme that is already visible in the fund’s portfolio. “Look at something as basic as shirts; earlier, purchases were driven around festive occasions but now we shop throughout the year,” says Singhania. Not surprising, then, that his fund owns close to 10% of the Tata-owned Trent, which has a joint venture with Zara; Aditya Birla Nuvo, which owns Madura Garments and its brands Louis Philippe, Van Heusen, and Siyaram Silk Mills. While the potential of the logistics sector is humongous, Singhania believes financial savings will be a much bigger theme in the com-

4 March 2016 / Outlook BUSINESS

ing years. He cites the example of Capital International, one of the largest asset managers in the US, which took 100 years to reach a size of $2 billion assets under management. But over the next 30 years, it grew 1,000x to $2 trillion. “In India, the AUM business is at just $200 billion, and our view is that over the next 15 years, it could multiply manifold to $2 trillion, as we are a large country of savers,” says Singhania, adding that QSR , home delivery and building materials are some of the other parts of this urban consumption theme. Although Singhania is keeping a watch on changing consumer habits and trends, he is also clear that he shouldn’t have more than 20% of his exposure in urban consumption. “At the end of the day, I also need to have a portfolio that balances any underperformance.” What separates Singhania from the rest is his flexible approach to investing. “As a fund house, we are relatively young, with 14 -15 years of investing experience. We know what works in India and are willing to adopt changes and be flexible. India is a growth market — it is not a value market. If a company is available at 20 P/E, I am willing to endure a higher valuation, but in sync with its growth potential,” he explains. The fund tracks 450 stocks in-house, with an analyst for each sector, and soft-tracks 1,300 companies, having created its own knowledge management software that is a master cheat sheet for everything: financials, annual reports, broker research reports and global data sourced from Bloomberg. Every Monday morning, Singhania and his team take valuation sheets of Indian stocks to track what is moving and why. “If there isn’t any particular reason for the stock to trend higher, we ignore it, but if there is any merit, we dig deeper,” he says. Keeping a weekly tab also means that the fund can take advantage of sudden windows of opportunities that the market throws up. “Some stocks might move up and down irrationally. If I’m able to sell something today and buy it later at a much lower price, I would do it.” For example, in the last week of May, the MSCI Index re-balancing created some volatility in the market. “So many companies went up just because someone had to compulsorily buy and some went down because someone had to compulsorily sell. We will not miss such opportunities,” he points out. Besides tracking the domestic market and 2,800 global

30

companies across 20 markets, a four-member quant team also makes a weekly presentation on global fundamentals. “The idea is to know what is happening globally in terms of companies and sectors, as that can give you a lot of insights that can be applied in the Indian context,” says Singhania. It was during one such meeting around three years ago that Singhania noticed that in a sample size of 20 countries, the market cap of cigarette companies was half or lower than that of spirit companies. In India, it was the opposite, as the market cap of the country’s biggest tobacco company was 20x that of the country’s largest liquor company because of the problems that the management was facing. “Our call was that you were able to capture 55% of the market, and India being 15% of the world population, technically, you could own 8% of the world spirits market for $1.5 billion. If the liquor company’s problems got sorted, we could double our money [with Vijay Mallya continuing to be the owner]; if not, then we would quadruple our money [assuming that it would have finally been sold to a new owner],” reveals Singhania. The stock in question, of course, is none other than United Spirits, which is spread across 13 of Reliance’s schemes, adding up to 15.58 lakh shares, as on January 2016.

DISCERNING BUYER While RIL MF looks for bargains and new ideas, Singhania is clear that he cannot hold stocks that have leverage or cash flow issues. “Cash flow is a balance between growth and stability, and you have to be very careful about sizing up opportunities. Between 2004 and 2007, if one would have looked only at cash flows, then infra and power companies would have not made the cut. But post the crisis, one had to look at cash flows to deter-

SINGHANIA BELIEVES A LOT OF MONEY CAN BE MADE IN PICKING TRENDS EARLY ON AND BUYING INTO A COMPANY THAT IS BETTER PLACED 4 March 2016 / Outlook BUSINESS

RAPID FIRE  Biggest hits in five years One would be Divis, a strong API manufacturer with a good management. It has been growing consistently over 20% and counts the world’s top pharma majors as its clients. Then there is UPL, one of the top five agro chemical companies in the world. The company has been consistently generating RoE of 18-19%. The other stock would be TVS Motors which has grown in terms of revenue and margins with the introduction of new models from the time we bought it. Finally, there is Max, whose twin businesses of hospitals and life insurance have both scaled up

 Key success factors Stable team, strong in-house research, focus on fundamentals and our ability to take thematic calls

 Fund managers you admire: Madhu Kela: Very quick to grasp, street-smart and passionate. Prashant Jain: For his sheer long-standing track record in the market

 My returns are driven by... While we do have a view on sectors and also follow a bottom-up approach, it’s because of our focus on stocks that we make money

 Confidence in replicating past performance I cannot forecast the future but we are confident because it took India 60 years to become a $1-trillion economy, while the next trillon came in seven years. We believe that over the next four to five years we have the potential to become a $4-trillion economy

 Currently bullish on: Urban consumption, brand plays, private sector banks and sound capital goods companies mine if the companies would survive or not,” he explains. Similarly, if a company is investing in growth, which could have a short-term impact on its return ratios, Singhania is willing to back it. Managing challenges within the confines of the institution’s investing mandate is something that Singhania has mastered. For example, in its infra and power fund, RIL MF has avoided leveraged companies and has instead opted for quasi-infra plays through capital goods companies such as Thermax, KEC International, Texmaco Rail, Tata Power, Tor-

32

rent Power and other MNCs such as Alstom. “In a sector that is going through a bad patch, sound stocks will not perform but they will not go down the drain either. They might look expensive on an EV basis, but they have huge tech and operational leverage in play,” mentions Singhania. For example, in the case of Alstom, staff costs went up from 11% to 25% of sales as the company began investing in capacity, which unfortunately coincided with a slowdown. “If sales go up, staff costs will come down to 15%, which adds to your performance. So, what was 10% operating profit will suddenly become 20%, and no debt means all of it flows straight to the bottomline. So, we are willing to give a higher multiple for companies where there is operating leverage in play rather than financial leverage,” explains Singhania. The fund manager was a big buyer into the offers for sale during 2012 -2013 for most MNCs that had to comply with the 25% public shareholding norm. “There were a lot of good-quality multinational companies that had to perforce sell their shares. For large investors, it was the only window to buy bigger stakes in a meaningful way,” says Singhania. Of course, getting it right each time is just not possible, but there have been quite a few occasions when Singhania was quick to jump off the gravy train. At one point in time, the fund was holding close to 8% in Bajaj Finance, a stock that it had bought in 2009 when its market cap was around #400 crore. The fund started selling when the stock price hit #1,800 and completely exited when it touched #2,000 a share. Same was the case with Eicher Motors, in which the fund had bought a 10% stake at #200 a share in 2009 and sold off the stake between #1,500 and #2 ,000. Today, the stocks are trading at around #6,500 and #18,000, respectively. “We went wrong with assessing how much more growth was left and sold it thinking ‘Yeh stock 40 -50 P/E ho gaya’. What we did not fathom was that the company could grow at 40% for another three to four years. Had we stayed on for another four years, the return would have quadrupled,” Singhania says.

PERMA-BULL Though the Sensex has corrected more than 20% over the past five months, Singhania is not too worried. The reason: everytime there

4 March 2016 / Outlook BUSINESS

has been a sharp fall in the market, the subsequent two-year returns have been quite favourable. From a macro perspective, the CIO feels that between 2002 and 2008, corporate profitability tripled with a CAGR of 20% and the equity market went up six times. That was because driven by massive recession in 1999 2002, no company set up capacity. When the economy started to revive, companies were able to utilise idle capacity and operational leverage came into play. Also, interest rates fell very sharply in 2002 - 03. From 9%, the 10 -year yield came down to 5.5%. So, financial leverage also came in. “We are in the same kind of scenario today. In 2008 -14, India had capacity but no demand. Interest costs went up. So, operational leverage became a headwind and profit growth was hardly there. Right now you are slowly seeing operating leverage coming into play and with interest rates also falling, financial leverage too will play out. Though

MANAGING CHALLENGES WITHIN THE CONFINES OF THE INSTITUTION’S INVESTING MANDATE IS WHAT SINGHANIA HAS MASTERED the current earnings recovery will take another two to three quarters, our view is that by 2020, earnings will clock a CAGR of 17-18%,” opines Singhania. Against such a backdrop, Singhania fi nds it thrilling to run the small-cap fund, modelled to deliver pure alpha for investors. “In small and mid caps, the sense of achievement and satisfaction is much higher because the work you do is more proprietary. I wouldn’t be reckoned extraordinary if I invest in HDFC Bank and generate the same return that is common to just about every other investor,” says Singhania smilingly. That approach could well keep him on top of the pecking order in the times to come. b

STICKING TO THE SCRIPT ATUL KUMAR/39 Quantum Mutual Fund

EDUCATION

B.Com, PGDBM (Finance)

YEARS AS FUND MANAGER

10

CAREER

Prior to joining Quantum AMC he has worked with Sahara AMC, KR Choksey Shares & Securities and Astute Consulting

AUM (# CR)

502

34

SCHEMES

Quantum Long Term Equity Quantum Tax Saving

WORST YEAR

BEST YEAR

2011: -20.16/-20.92

2014: 38.98/40.03

RETURN (IN %) 1-YEAR

2.97 3-YEAR

16.13 5-YEAR

10.31 10-YEAR

16.23 4 March 2016 / Outlook BUSINESS

Atul Kumar has beaten the market by sticking to Quantum’s proprietary investing framework

35

SOUMIK KAR

Outlook BUSINESS / 4 March 2016

I

36

V Keshavdev

t doesn’t matter to me how many bags of cement are sold per month or how many tyres are sold. We at Quantum look at companies that have sustainable businesses, strong corporate governance and are worth their valuation.” Atul Kumar still remembers this comment by Ajit Dayal, who had then just received a licence to set up a mutual fund house and was putting a team in place. “By then, I had already heard that Quantum followed the value investing philosophy, but hearing this comment in person only reinforced the fact that I had come to the right place,” recollects Kumar, who has completed over a decade at the firm, managing close to #500 crore in assets under Quantum’s Long Term Equity Fund and Tax Saving Fund. With a CAGR of 13%, the 39 -year-old is today one of the top three fund managers in the country, with an exceptional track record in terms of return over the past decade. It was during his ICFAI days around 1999 that Kumar got hooked on to investing, especially after reading Roger Lowenstein’s book Buffett: The Making of an American Capitalist. “It was like an eye-opener about the magic of investing,” says Kumar, as he sips tea at Quantum’s head office in Mumbai’s Nariman Point business district. But Kumar had to bide his time working as a consultant for Deloitte for nearly two years before making the switch to the market, landing a job as an analyst with KR Choksey in 2003. It was under Jigar Shah — the-then head of research at KRC — that Kumar got his hands dirty by tracking stocks. Back then, Kumar used to track Thermax, and still recounts how conservative he was in his assumption of growth for the capital goods company. “I was assigning growth rates of 15 20%, whereas the sector was growing around 35 - 40%. Jigar was clearly not impressed with my target [a 7- 8% upside on the-then prevailing price of #46 (adjusted)] and wanted me to

4 March 2016 / Outlook BUSINESS

rework my estimates by revisiting the assumptions I had made.” The stock went up fourfold to touch a high of #196 in 2005, by when Kumar had moved to Quantum as a buy-side analyst. After working for a year, he moved up the ladder as a fund manager in 2006. The switch over to the buy-side proved to be yet another learning curve for Kumar. “On the sellside, it’s all about momentum and extremes. If a business is doing really well, you don’t mind extrapolating growth into the future and assigning higher multiples. Similarly, in a downturn, you’re ruthless when it comes to slashing multiples. You saw that happen with infra and real estate companies,” says Kumar. But at Quantum, it was all about valuations and finding good businesses at the right price. “By taking a long-term view, you can normalise growth rates both on the upside and downside,” he adds. To begin with, Quantum screens stocks by taking into account four key assumptions: first, India’s GDP will grow at a sustainable rate of 6.5% to 7%; second, inflation will hover in the range of 5.5 - 6%; third, the long-term G-Sec rate of 8%; and fourth, the currency will appreciate by 2% over a longer term. Putting this in perspective, Kumar says, “So, if we assume that the economy is going to grow at 6.5 -7%, you won’t go overboard in estimating the long-term growth of the cement or automobile sector, which tends to hap-

THE SWITCH OVER TO THE BUY-SIDE AT QUANTUM AMC TURNED OUT TO BE YET ANOTHER LEARNING CURVE FOR KUMAR

ATUL KUMAR’S SCORECARD 1-YEAR 3-YEAR 5-YEAR 10-YEAR

Return in %

2015

2014

2013

2012

2011

2010

Quantum Long Term Equity

3.49

16.23

10.46

14.90

3.49

38.98

9.16

31.21

-20.16

28.82

Quantum Tax Saving

2.45

16.03

10.16

-

2.45

40.03

8.89

31.36

-20.92

28.17

As on December 31, 2015

pen on the buy-side. And, more importantly, we assign a predetermined multiple to each sector, and if there is no distinct change in the fundamentals, we will buy/sell a stock if it hits the predetermined valuation band, irrespective of the market momentum.”

VALUE-CONSCIOUS

38

In other words, the fund buys a stock when it believes that a company’s valuation is cheap relative to its long-term earning potential and historical valuation and sells the stock when it believes the price is expensive based on the same metrics. The other trigger to sell stocks would be limited upside from the current level or an equally exciting alternative. This investing approach pretty much ensured that in the cycle right up to early 2008, Kumar did not buy any of the darlings on the Street, which was going overboard with the infrastructure story. “It was hard to justify the multiples that were being assigned to stocks such as BHEL and L&T. In the euphoria of global liquidity, the Street was oblivious of the fact that at the end of the day, these were cyclical stocks and not defensive ones,” says Kumar. So, while the market was buying momentum stocks, Kumar was tanking up on consumer, discretionary, pharma and oil stocks between 2006 and 2008. “It was a painful period of underperformance, as one such stock

AVERAGE SECTOR ALLOCATION (in %)

Communication 2 Metals 2

Consumer durables 2 Construction 1

Engineering 3

Energy 23

Services 4 Chemicals 4 Financials 13 Technology 14

As on December 31, 2015

4 March 2016 / Outlook BUSINESS

Automobile 20

that we had bought into was HUL , which hadn’t moved since 1999 right up to 2009.” It sure was, for when Quantum bought 63,000 shares of HUL in early 2007, it was trading at #200, and when the fund exited its position by October 2008, the stock was still trading at #208. Unlike other funds, which tend not to take cash calls, Quantum has no qualms in taking money off the table if it finds the going too hot to handle. In fact, Quantum chose to sit on a cash level of around 20% by January 2008, when the market had hit an all-time high. Eventually, as the euphoria gave way to mayhem by the end of the year, Kumar deployed the cash into buying capex and infra-related companies that were beaten down. “That was the only time we had a large number of stocks in our portfolio, numbering around 37. It was quite a diversified portfolio,” recalls Kumar. When the 2009 election results came in, Quantum outperformed the benchmark by a huge margin, even as its peers, which were sitting on cash, missed out on the rally. It happened yet again in 2014, when the fund raised its cash level to 30% by September, the highest ever in its history. Of course, Kumar had to pay the price, since his fund underperformed, even as the market took off on Modi mania. “We couldn’t figure out why these stocks were going up. It was more hype and less substance,” remarks Kumar. From early 2015 onwards, Kumar slowly started reducing his cash and as on date the cash accounts for just 7% of assets. What makes things easier for Kumar and team is the fact that the top management is willing to bear the price of underperformance. “All it means is stocks that we believed were originally expensive have turned even more expensive as they continue to rally, increasing downside risk,” he wrote in his latest market outlook. That’s but natural because the value investing philosophy itself means staying clear of market mania. While HDFC Bank, for example, is common across the portfolios of most mutual funds, Kumar sold the stock nearly two

TOP HOLDINGS (% of net assets as on Dec 31, 2015)

Quantum Long Term Equity/Quantum Tax Saving Bajaj Auto

7.9/7.59

Infosys

6.89/6.89

Hero MotoCorp

6.58/6.41

HDFC

6.46/6.45

Tata Consultancy Services

5.36/5.36

Petronet LNG

4.17/4.48

NTPC

4.08/3.63

Tata Chemicals

4.05/4.04

Indian Oil

3.76/3.66

Indian Hotels

3.73/3.83 Source: Value Research

years ago and his portfolio features names such as Kotak Mahindra Bank and SBI, instead, both of which account for over 6% of the fund’s assets. “In the case of HDFC Bank, while there is no doubt that it has been a good compounding machine, we did not see merit in owning the stock given its rich valuation commensurate the expected growth,” explains Kumar.

40

GOING AGAINST THE FLOW Then what explains a stock like Kotak Mahindra Bank, which, too, is not trading cheap? Pointing out that the position in Kotak Mahindra is by virtue of the fund’s holding in ING Vysya Bank, which was taken over by Kotak Mahindra earlier last year, he says, “When we bought into ING, it was trading at a P/B of not more than 1.2x, but after the takeover, we reassessed the prospects and were very comfortable about the bank’s future growth trajectory. Also, the RoA that ING made was substantially lower than Kotak Mahindra. Having said that, we are not holding Kotak because we view it as the next HDFC Bank; it’s just that the valuation is still reasonable.” As far as SBI is concerned, Kumar believes that even if one were to consider the downside of a substantial write-off, its relatively inexpensive valuation seems to go in its favour. Before taking a fi nal call on whether to junk a stock or hold on, Kumar and his team also make it a point to revalidate their own assumptions and estimates. When things haven’t gone his way, Kumar has chosen to exit rather than let the problem linger. It was in early 2006 that the fund picked up

4 March 2016 / Outlook BUSINESS

3i Infotech, which it found to be an interesting IT products company. But over the years, the company’s penchant for inorganic growth unnerved Kumar. “We made a mistake in judging the management’s capabilities,” says Kumar, who sold off the stock in 2011. Another instance was when the fund had to sell off Arvind in 2009 after having bought the stock in 2006. “We were expecting the whole denim story to play out. But leverage issues and the fact that we had begun looking at another textile stock — Raymond — prompted us to exit Arvind. Though we made money on Raymond when we sold it in 2011, we missed out on Arvind’s gravy train,” laments Kumar. The stock has since surged to #270. Exits are not driven by valuation consideration alone though. The fund also dumped shares of Ranbaxy after the Daiichi-Ranbaxy buyout ended up giving a raw deal to minority shareholders. While Malvinder Singh and his family got to sell all their shares at #737, all other shareholders got to sell only one out of three shares at that price. In fact, a peeved Ajit Dayal went public about the deal when he mentioned in a newspaper article that “The Ranbaxy saga is intriguing: it brings to light the “us” and “them” mentality of founder shareholders (what we call “Promoters”). The question to be asked is: how much of this negative news flow was coincidental “and how much was known or anticipated? If anticipated, was the sale by the founding family a case of reverse engineering “maximising the price to the founder shareholders in a future negative environment? Or are the minorities “like us — just plain unlucky to have taken all that risk and not received a fair share of return? Ranbaxy has reminded us that, for all the excit-

BEFORE TAKING A FINAL CALL ON WHETHER TO JUNK A STOCK OR HOLD ON, KUMAR MAKES IT A POINT TO REVALIDATE HIS ASSUMPTION

42

ing investment opportunities that exist in India, we swim naked much of the time.” Not surprising that the fund sold off its entire holding of 28,500 shares by mid-2008. Currently, banks, auto, IT, gas, financials and energy stocks dominate the company’s portfolio. While Kumar believes that Bajaj and Hero both have a strong theme going for them, one is a pure urban play while the other is rural-focused. “In the case of Bajaj, it has strong export potential and growing RoE and operating cash flows. More importantly, their valuations are still not expensive.” However, the fund has slowly started paring its stake in Maruti, as it believes the nearterm trigger of new launches and market share gain has already played out. In the case of the energy sector, where ONGC accounts for over 3% of the fund’s assets, Kumar feels that the PSU’s EV of $5 per barrel is cheap if one were to normalise crude prices to $55 - 60 per barrel. “While we believe a bounce-back in crude prices will happen six months or a year down the line, we will reassess our assumptions if things don’t play out as expected,” he adds. As things stand, Kumar’s fund is down 6% YTD compared to Quantum’s Sensex Total Return Index which is down 7%. His fund is ranked 51st by Value Research among the 200 funds that constitute the multi-cap category. However, Kumar is optimistic about Indian equities in the long run as the recent market correction has made the valuation of many stocks attractive on selling by foreign investors, who bought on hopes of big bang reforms post elections. They sold over #11,000 crore in January, the highest ever since 2008. The early third-quarter result season has begun and continues to show subdued topline growth, a clear indication that the economic recovery that has been

KUMAR BELIEVES INDIA IS UNLIKELY TO BE IMPACTED MUCH FROM THE UNFAVOURABLE SITUATION IN OTHER PARTS OF THE GLOBE 4 March 2016 / Outlook BUSINESS

RAPID FIRE  Biggest hit in five years HDFC, Tata Steel, Infosys and Indian Hotels

 Key success factors Adherence to the fund’s value investing philosophy even when the market is against you

 Fund managers you admire 1) Warren Buffett: The most respected value investor of our time; his performance speaks for him 2) Ajit Dayal: I admire his investment philosophy and conviction, which come from his vast experience of managing international funds

 My returns are driven by... Being bottom-up investors our portfolio construction begins with identifying stocks. We do not allocate based on sector or market cap

 Confidence in replicating past performance Given that the fund’s performance depends on market behaviour, predicting return would be tough

 Currently bullish on: Though we are sector-agnostic, our portfolio is overweight on consumer, discretionary and utilities talked for at least year-and-a-half, is still to pick up. Kumar believes India is unlikely to be impacted much from the unfavourable situation in other parts of the globe. “In fact, it has been a beneficiary of fall in commodity and energy prices. Investors can significantly add equities given the above reasons. We feel the risk-reward situation is attractive.” Though the fund takes a sector-agnostic approach, banking and engineering stocks such as Larsen & Toubro have entered the fund’s portfolio over the past few months, an indication that the fund is finding some of these names attractive, in terms of valuation. In these uncertain times when most fund managers are wary of sticking their neck out on which way the market is headed, Kumar too is no exception. On whether he will be able to repeat his 10 -year performance, Kumar chooses to play it safe: “I surely cannot thump the table and make a claim but I am 100% confident of the efficacy of our investing philosophy in helping us meet that goal,” sums up Kumar, as he heads back to his work station. b

44

PRASHANT JAIN VS MR. MARKET The fund manager with the best track record is facing the heat as he treads a contrarian path

4 March 2016 / Outlook BUSINESS

PRASHANT JAIN/47 HDFC Mutual Fund

EDUCATION

B. Tech, MBA, CFA

YEARS AS FUND MANAGER

22

CAREER Prior to joining HDFC AMC, he worked with Zurich AMC and SBI Mutual Fund

AUM (# CR)

29,348 RETURN IN % HDFC Equity HDFC Top 200

45

WORST YEAR 2008: -49.68/-45.35

BEST YEAR 2009: 105.57/94.46

RETURN IN % 1-YEAR

-5.59 3-YEAR

13.78 5-YEAR

7.90 10-YEAR

15.17 SOUMIK KAR

Outlook BUSINESS / 4 March 2016

Y N Mahalakshmi

46

ou are neither right nor wrong because the crowd disagrees with you, says Warren Buffett. Instead, he says, it is the thoroughness of the analysis that really counts. Unlike most modern finance folks, for the best money manager in the world, standard deviation is no measure of risk, nor can risk be eliminated by simply diversifying the portfolio. Risk, he says, comes from not knowing what you are doing. Prashant Jain must surely be reminded of the Sage of Omaha’s words and wisdom as he goes through testing times at a stage in his career when he has nothing left to prove. He has to his credit the best 20 -year performance track record among mutual funds not only in the country but also across the world. For instance, #10,000 invested in HDFC Equity Fund, managed by Jain since its inception 20 years ago, has returned #440,000 – that’s a CAGR of 20%. Over the same period, Nifty has returned #68,000, that is a CAGR of just 9.7%. Yet, being in the money management business, with custody of #30,000 crore of assets directly under his management, he can’t escape being judged on his every move. This is not the first time Jain is facing the heat of underperformance. Back in 2000, when he got off the technology gravy train, and the market went berserk with tech valuations, he lagged behind for many months. Then again, his decision to back off

4 March 2016 / Outlook BUSINESS

from the infra-led euphoria that was halted by the global credit crisis saved him pots of money only after he had severely underperformed in the months before January 2008. But this time, patience is being tested a tad more. For the first time, his funds are struggling to keep pace with the benchmark over a five-year period. Over the past five years ending February 16, 2016, HDFC Equity Fund delivered a return of 6.43% versus 6.04% for benchmark Nifty 500 and a category average of 8.87%, while HDFC Top 200 delivered 6.02% versus 5.67% for the BSE 200 and a category average of 6.47%. There are several concerns. For starters, he has to contend with the winner’s curse of having to manage very large-sized funds. HDFC Equity Fund has assets of #14,470 crore and Top 200, #11,515 crore. That kind of size surely raises questions about how nimble-footed the manager can be in a shallow market like ours. You can’t jump on to a bandwagon along with everyone else – you need to be boarding much in advance because you won’t get a chance to hop on in the nick of time with your kind of bulk. On the way down, it’s even worse. Of immediate concern though is Jain’s contrarian stance that is the root cause of this pain. Jain has foregone his winning bets in the consumption space in favour of financials and capital goods that are currently under stress. His conviction stems from his earlier wins in 2000

HDFC'S SIZE RAISES QUESTIONS ABOUT HOW NIMBLE-FOOTED CAN JAIN BE IN A SHALLOW MARKET LIKE OURS

48

and 2007, when he swapped market darlings for the unloved. With much caution, one is tempted to ask, if “it’s different this time” because those are the most dangerous words in the stock market anyway. The difference between now, 2000 and 2007 is that the market is not as starkly polarised as it was during those times. There are surely regions of overvaluation and islands of undervaluation. Economy-oriented stocks have been hammered because of underlying stress, not because growth or future prospects in other pockets look earth shattering, making them cheap for no valid reason. Actually, part of the overvaluation in pockets is a result of stress in certain other pockets. While there is no way to make money in the market but to buy low and sell high, too early or too late can make a significant difference to your returns. As you’ll hear him speak, Jain is expecting a recovery in 12 months and his portfolio is positioned to lead that transition. But thus far there is little evidence of that on the ground, and the market is not buying that argument yet. Ironically, what seems to be a big pain point today may turn out to be the biggest opportunity for outperformance. Astute stock selection has been the biggest driver behind Jain's returns thus far. But with his current fund size, he needs large calls that go right. Jain runs a fairly concentrated portfolio for a mutual fund his size. Contrarian calls on large stocks offer that chance for big outperformance. To his credit, Jain has demonstrated the most important trait for a fund manager – rationality, and conviction to hold his own against the crowd. This simple, soft-spoken, embodiment of humility is not the one to run after the next new bet, but he goes for the tried and tested where the odds of success are relatively higher for the same level of risk. He is also the manager who has consistently got the better of Mr. Market – the metaphor used by Benjamin Graham to describe the manic-depressive, emotional business partner, who makes an offer to either sell his share or buy your share everyday which you are free to take or reject, for he’ll come back again the next day with a fresh offer. What you decide to take and reject is what determines your financial destiny. As we discuss his everyday quarrels with Mr. Market, the industrious Jain pulls out a sheet of

4 March 2016 / Outlook BUSINESS

paper with a list of leveraged corporates, which are either NPAs or stressed assets each bank is exposed to. “It took me six months to prepare this.” That hard work should surely bear fruit. Except that in market neither skill nor study is enough to win. A heavy dose of luck is an essential part – just as in life. Excerpts from a freewheeling interview with Outlook Business: This is perhaps the first five-year period where your performance is barely matching the index performance. Does this worry you? Rather, should it worry your investors? Normally, 3 -5 years is a reasonable time to measure performance. But when market cycles are changing this may not suffice. For example, in 1999, if one wanted to preserve near-term performance one should have held on to IT stocks and not bought old economy stocks that were remarkably cheap. Again in 2007, if one thought

IN 1999, WE TRAILED COMPETITION BY 60%. AFTER WE SOLD INFOSYS, THE STOCK DOUBLED AND SO DID THE P/E from the near-term perspective, it would be very difficult to sell power or infra stocks and buy consumer, pharma stocks. When one feels that the market is moving from one theme to the other, you have to let go of your winning bets and buy something that is promising for the future. Till the time this works out, performance suffers. And if your one-year performance is weak, it impacts the three- and five-year performance as well. Fortunately, this is not the fi rst time I am facing weak performance. In 1999, we trailed competition by 60%. Why? Because after we sold Infosys, the stock doubled and so did the PE from 150 to 300. But when IT stocks fell, we more than made up. The NAV of HDFC Equity Fund, since its launch in 1994, has grown from #10 to #440 now. As you can see from the chart, there are periods of underperformance in this journey. But

each time the fund has lagged behind, it has come back stronger and more than made up for the underperformance. For example, 2007 was a weak year for us as we stayed away from real estate, infra plays. Instead, we concentrated on FMCG, pharma and auto sectors. Today, the index is up some 20% and the fund’s NAV has nearly doubled. If to avoid underperformance in 2007, we had instead participated in infra, real estate sectors, today’s results would not have been possible. Why are you betting on banks and capex? In my opinion, the pain is maximum in capex and related businesses. Capex should grow faster than the overall economy. Consumption and export-oriented businesses represent high quality but, in my judgement, there are better

50

business models and if India were to grow, both should do well. But corporate lending is more cyclical; it goes through ups and downs with business cycles and in stressed times asset quality issues can rise. This is what is happening today. It’s not the first time this has happened nor will it be the last such cycle. Way back in 2001, the situation was similar. As the economy improved, the stock performance did too. In my opinion, the same should happen this time. As economic growth improves, interest rates move lower, some assets are sold and banks provide for impaired assets, things will improve. Also, there are chances that imposition of minimum import price (MIP) will work out favourably for the stressed steel sector. In any case, post asset quality review (AQR) by the RBI, banks have already recognised or will

IF THERE IS NO PAIN, WHY SHOULD VALUATIONS BE ATTRACTIVE FROM A LONG-TERM PERSPECTIVE? opportunities elsewhere. Also, the risk-reward of large-caps appears to be better compared with small and mid-caps. You are not just buying shares that are undervalued because the market is focusing elsewhere, but stocks that are actually under stress. Isn’t that risky? Valuations are attractive only when there is pain. If there is no pain, why should valuations be attractive from a long-term perspective? The key is to figure out if the business can deal with the issues and come back to health over a period of time. When you look at financials, you have to first understand that there are two types of banks in India. The popular way of looking at banks as public vs private is not the most appropriate. In my opinion, corporate versus retail framework is more apt. SBI, ICICI, Axis Bank and several other public sector banks are corporate lenders, while HDFC Bank, Kotak Bank, IndusInd are predominantly retail banks. Both are good

4 March 2016 / Outlook BUSINESS

recognise stressed assets by FY16. Bank of Baroda's managing director expects steady improvement in profitability and has suggested that return on equity should reach 15% by FY18. As Buffett says, “The future is never clear. You pay a very high price in the stock market for a cheery consensus. Uncertainty is the friend of the buyer of long-term values.” Governments usually take the path of least resistance and can do unpredictable things that may not please the market. Although some public sector banks may look relatively robust, there are others that are under more stress. Is there an outside chance that the government may saddle better banks with bad apples – that will only destroy value? In my assessment, while mergers can’t be ruled out completely they are unlikely. But as I said, with the impact of AQR behind us, likely improvement in cash flows in the steel sector post MIP, asset sales by some leveraged corporates, and capital infusion by government should lead to im-

THERE'S NO CORRELATION BETWEEN FUND SIZE AND PERFORMANCE. ONLY, LARGE FUNDS ARE MORE NOTICEABLE provement FY17 onwards. That will pretty much take care of things. When it comes to banks, is the fact that stress will subside soon from balance sheets enough to bet on them? Do you see them growing? What drivers are you counting on? There is good value in corporate banks. Value is the biggest driver of stock price over time.

52

If most industries are operating at less than 70% capacity, where is the question of expansion? I expect recovery to be visible within 12 months. Capex recovery will be led by infra capex coming from sectors such as roads, railways, power transmission and distribution, mining and so on. Manufacturing capex will take time because of overcapacity. But over the next few years, capex should lead economic growth. What is the risk to your analysis? Risk either comes from flawed analysis or from lack of patience to stay the course when the market is not supportive, not from a contrar-

ian view. We have taken contrarian bets in the past and we have been proved right over time. Time will once again tell if our analysis is right… Is size becoming an impediment for HDFC Equity Fund? Do you have to time your entry much ahead or exit much before? In my opinion, this thought is an illusion that keeps on coming back for as long as I can remember. In a universe of, say, 100 funds, there will be large funds and there will be small funds. When a large fund underperforms, it is noticed a lot more and the easiest conclusion is that size is to blame; when a small fund underperforms, it is simply noticed less and size cannot be blamed. Reality, in my opinion, is that there is no correlation between size and performance; anyone who feels this way should arrange all funds either in order of size or performance and the picture will be clear. Actually there are no large funds in India; the largest fund is less than 0.2% of the market capitalisation!

SEVERAL OF JAIN'S BEST INVESTMENTS IN THE PAST HAVE BEEN CONTRARIAN STOCK

MONTH OF PEAK HOLDING

AVG PRICE AT PEAK HOLDING(#)

EXIT

EXIT PRICE / CMP(#)

(X)

BHEL

Jun-04

50

Jun-08

276

6

Aurobindo Pharma

Dec-11

160

Held till date

876

5

Titan

May-09

50

Mar-13

256

5

Reliance Industries

May-06

427

Apr-09

1,806

4

Glaxo Consumer

Nov-07

713

Jun-11

2,403

3

Maruti Suzuki

Nov-13

1,475

Held till date

4,622

3

BPCL

Nov-13

304

Held till date

892

3

P&G Hygiene

Mar-14

1,989

Held till date

5,630

3

Tata Motors DVR

Nov-11

116

Held till date

289

2

Hero Motors

Mar-08

722

Jul-11

1,785

2

Dr Reddys

Mar-08

637

Aug-11

1,496

2

Nestle

Jul-07

1,183

Mar-10

2,671

2

Source: HDFC Mutual Fund

4 March 2016 / Outlook BUSINESS

MACRO-ECONOMIC INDICATORS, CYCLICAL RECOVERY POINT TO A BETTER OUTLOOK AHEAD CORPORATE BANKS, UTILITIES ARE TRADING AT LOWER END OF VALUATION

54

5YR AVG PE(X)

DEC-2015 PE(X)

Automobiles

11.6

14.2

Positive on 4W, Neutral on 2W

Corporate banks (P/B) x

1.4

0.9

Near stress valuation, positive outlook over medium term

Retail banks (P/B)x

3.3

3.4

Steady growth

Cement

16.9

21

FMCG (ex ITC)

31.8

36.6

Unfavourable risk-reward

Oil, Petchem

10.2

10.1

Fairly valued

Industrials

19.1

24.1

Outlook positive despite high P/Es

OUTLOOK

Improving non-south outlook, expensive

Metals

10.3

11.6

High intrinsic value, near-term earnings a challenge

Pharma

21.5

23.7

Unfavourable risk-reward

Technology

17.2

16.6

Average prospects

Telecom

21.9

21.6

Reliance Jio should have adverse impact

Utilities

12.6

11.7

Attractive outlook Source: HDFC Fund/Kotak, Factset| PE- 1 Year Forward

How do you expect the economy to perform over the next five years? The Indian economy has experienced steady growth for the last several decades irrespective of changing global and local conditions. Secular growth drivers like attractive demographics, rising purchasing power, low penetration of consumer durables, skilled and competitive manpower have fuelled this growth. While these long-term drivers continue to be in place, the outlook for the next few years is better due to a cyclical recovery that is firmly underway. Unlike most emerging markets, India is a large commodities importer. The sharp fall in oil prices has led to savings of 2.5% of GDP. This has lowered CAD from 4.3% of GDP in FY12 to 0.8% in FY16, as per Citi Research estimates; fiscal deficit in on a steady decline from ~5.8% of GDP in FY12 to 4.1% in FY15 (is projected at 3% in FY18). Inflation has fallen sharply from 10.2% in FY13 to 5.9% in FY15 (latest reading is 5.7% in January 2016). Interest rates are also steadily coming off.

4 March 2016 / Outlook BUSINESS

Improving macro-economic indicators and a cyclical recovery that is underway in capital spending point to a faster economic growth in the future. The current year’s growth is projected at 7.5% compared with 5.1% in FY13 and this should go closer to 8 -9% in two years. India will most likely be the 5th largest economy by 2020, behind US, China, Japan, and Germany. It is also likely to be fastest growing. What is the outlook for Indian equities? The correction in Indian equities at a time when the economy is improving on nearly all parameters offers good opportunities for the discerning investor. There is a clear evidence of falling commodity prices working to India’s advantage. The policy direction is right and the economy is making good progress on most fronts. Both the economy and equity markets appear to be transitioning from consumption to capex. Improving margin outlook of corporates, likely lower interest rates, soft commodity prices and reasonable valuations point to a positive outlook. b

GROWTH HUNTER Jinesh Gopani's bold contrarian bets have paid off and he plans to hold onto them

Jash Kriplani

56

F

rom a middle-class household in central Mumbai to a top fund manager, the rise of Jinesh Gopani has been as swift as some of his stock picks. Over the past five years, his fund — Axis Long Term Equity — has delivered an annual return of 18 .6%, racing past its peers. When Gopani picked up Eicher Motors in July 2011, the stock was quoting at #1, 319. Today, it is trading 14x higher at #18 ,682 . When they were deliberating on Eicher Motors, a new management was trying to revive the brand, offering an alternative to Harley Davidson at Indian prices. The question before Gopani was whether to invest in the big boys or in this company and did it have what it takes to become big, in terms of cash flows. “This was at a time when there were just two or three big two-wheeler companies in the country. And here was this company — small at that time and operating in a niche segment.” A series of checks on the management, corporate governance, dealer meetings

4 March 2016 / Outlook BUSINESS

THE LONGTERM PLAYER Religare Invesco Mutual Fund’s Vinay Paharia puts the diverse and varied lessons from each of his previous associations to good use at the twin funds he manages

JINESH GOPANI/37 Axis Mutual Fund

EDUCATION B.Com, MMS

YEARS AS FUND MANAGER

5

CAREER

Prior to joining Axis AMC, he worked with Birla Sun Life AMC, Voyager India Capital, Emkay Shares & Stock Brokers Limited and Networth Stock Broking

AUM (# CR)

6,867 SCHEME Axis Long Term Equity

WORST YEAR

BEST YEAR

2011: -14.76/

2014: 66.18/

RETURN (IN %) 1-YEAR

6.70 3-YEAR

27.36 5-YEAR

18.67 Outlook BUSINESS / 4 March 2016

57

TOP HOLDINGS

SECTOR ALLOCATION (in %)

Diversified 2 Energy 2

(% of net assets as on Dec 31, 2015)

Communication 1 Textiles 1

Services 3 Engineering 4 Consumer durables 6

Financial 30

FMCG 6 Chemicals 8

Automobile 13

Technology 9

Healthcare 12 As on December 31, 2015

were organised to receive feedback. The company was changing the model, design and size in its attempt to stand out. But the numbers were there for everyone to see. “Companies in the 100 -250 cc category were growing at 10 %12 %. And there was another company growing at 50 %,” he adds.

INVESTMENT MANTRA 58

“Corporate governance is of paramount importance,” he says, adding that management quality, strength of the business model and the company’s ability to reward shareholders are important. There is also an in-house philosophy at Axis AMC , laid down when it started operations. “The fund house decided that PSUs and highly cyclical sectors like commodities should be avoided.” Besides Gopani, Chandresh Nigam (CEO), Pankaj Murarka (head of equity) and Sudhanshu Asthana (fund manager) were part of the

GOPANI BELIEVES PRIVATE BANKS AND NBFCS ARE EVERGREEN STORIES AS THE INDIAN MARKET REMAINS UNDER-BANKED 4 March 2016 / Outlook BUSINESS

Axis Long Term Equity HDFC Bank

7.75

Kotak Mahindra Bank

7.22

Sun Pharmaceutical Industries

6.25

Tata Consultancy Services

5.68

HDFC

5.46

Tech Mahindra

3.80

Pidilite Industries

3.66

TTK Prestige

3.59

Maruti Suzuki India

3.40

Motherson Sumi Systems

3.20 Source: Value Research

founding team at Axis. Gopani and Nigam go way back. “I knew him well and I joined Axis because I liked his investment style. When he was on the buy-side in ICICI , I was on the sellside at Emkay. At one point, when I was in Voyager India Capital, Nigam was in TCG Advisory. We were in the same building and would meet regularly.” Gopani’s interest in equities was kindled at home. “Growing up in a Gujarati household, there were always relatives and cousins talking about the market. Gujaratis are by nature risk-takers. They invest their profit for a better return instead of parking that money in fi xed deposits. When I was in college, I was weak in subjects like chemistry and science, so engineering was ruled out. Meanwhile, I was good with accounts and numbers. And when I did my MBA in fi nance, the inclination towards the market became stronger.” It was perhaps the risk-taking attitude at home that drove Gopani to bet on air-cooler manufacturer Symphony. Axis AMC fi rst bought shares of Symphony in September 2011. The company had previously been referred to the Board for Industrial and Financial Reconstruction (BIFR). A three-hour long meeting with the management clarifying why the company was sent to BIFR ; channel checks in Delhi, Gujarat and Rajasthan to fi gure out demand and feedback on promoters sealed the deal. As it turned out, there was a huge demand for the product in these areas during summer. The company was also reporting good numbers with high-margins and high ROE s.

JINESH GOPANI'S SCORECARD Return in % Axis Long Term Equity

1 YEAR 3 YEAR 5 YEAR 10 YEAR 6.70

27.36

18.67

-

2015

2014

2013

2012

2011

2010

6.70

66.18

16.51

33.68

-14.76

29.99

As on December 31, 2015

When the fund fi rst bought Symphony, the price was # 257. Today, the stock trades at # 2 ,073 . The bullishness around the stock has still not subsided as 80 % of the air-cooler segment is still unorganised. While consumer plays have always interested Gopani, he believes private banks and non-banking fi nancial companies (NBFCs) are evergreen stories as the Indian market remains under-banked. When the fund bought Gruh Finance in May 2011, the stock was trading at #40, today it is trading at # 249. From trading at 3x book at the end of FY10, it is now trading at 12x book. Here was a pure rural housing fi nance company catering to the needs of the un-banked self-employed populace in rural areas. Although, lending to the selfemployed class rather than salaried ones posed more risks, the company’s lending had grown at 17% CAGR over the last 15 years, with 30 % ROE and near- 0 % NPA s. When it comes to NBFCs, Gopani says his main focus is asset quality. Sundaram Finance is an-

RAPID FIRE  Biggest hits in five years Carefully weeding out few sectors (as per investment process) and investing heavily in select identified themes like private sector banks and niche NBFCs, high cash-flow generating consumption basket, high growth auto and auto ancillaries and agrochemicals

 Key success factors Our stringent investment process of identifying and sticking to high quality stories that have strong corporate governance standards and superior business models

 My returns are driven by... Most of it would be stock selection

 Confidence in replicating past performance In this dynamic market, we are confident of our investment process and hence the performance trajectory

 Currently bullish on: Auto and auto ancillaries, private banks, NBFCs, consumer discretionary and select pharma, capital goods

other NBFC where the fund has done well. Bought in March 2013 , when the price was #491, today it trades at #1, 208 . The NBFC has maintained healthy asset quality compared to its peers despite adopting the 120 -day NPA classification norm instead of the regulatory norm of 180 days. As on March 2015, the net NPA of the company was at 0. 52 %. The average ROE in the last five years has been 20 %.

MORE MONEY Gopani remains bullish on the fi nancial space. “The demand for credit is very high in India. We have still not been able to reach tier 2 and tier 3 sections of the market. The Indian consumer as such is not indebted like in the developed world. It is very easy to gain in this sector if one is in the right stocks,” he says. While Axis does have some exposure to infrastructure stocks, Gopani feels that the sector has a lot of risk to contend with. “A large EPC and infra company took 75 years to get to a market cap of $13 -14 billion whereas one IT company took only 20 years to get to a market cap of $ 80 billion. Infrastructure is inherently a risky business as you are dependent on projects and those projects are cyclical. Executing projects is not easy and there is regulatory overhang too. Even aft er all these risks, you make only 15 -16% IRR . I have other companies beyond infra that are asset-light and delivering 25 30 % ROE with healthy cash flows. Finally, investors give value only to cash flows,” he adds. Among capex-linked stocks, the fund holds L&T, Siemens and Torrent Power. Gopani says that unless there is a really good opportunity in other sectors or stocks, he doesn’t intend to replace his current crop of multi-baggers. If valuations rise, Gopani says, they will trim their position, but the plan is to stick to these growth stories for a long time. Does he feel that fi nding highgrowth companies will become more challenging given the economic slowdown and global scenario? “Once corporate earnings momentum picks up at a more sustainable pace of 15%, we should see the market delivering similar CAGR over the next five years. Further, from a stock specific perspective, we should see more and more opportunity to generate higher returns for our investors.” b

Outlook BUSINESS / 4 March 2016

59

60

4 March 2016 / Outlook BUSINESS

NEELESH SURANA/46 Mirae Mutual Fund

EDUCATION

B.E (Mechanical), MBA

YEARS AS FUND MANAGER

8

CAREER

Prior to joining Mirae AMC, he worked as fund manager (PMS) with ASK Investment Managers and as analyst at IL&FS Investmart and Dimensional Securities 61

AUM (# CR)

2,699 SCHEMES

Mirae Asset Emerging Bluechip Reg Mirae Asset India Opportunities Reg Mirae Asset India-China Consumption Reg

HITTING BULLSEYE Spotting winners in high growth sectors has made all the difference for Neelesh Surana

WORST YEAR

BEST YEAR

2011: -15.15/-19.64 2013: 9.92

2014: 84.62/ 52.86/42.69

RETURN (IN %) 1-YEAR

7.38 3-YEAR

23.20 5-YEAR

18.14 Outlook BUSINESS / 4 March 2016

V Keshavdev

A

62

a pretty good job in managing money, posting a return of 13% at the India Opportunities Fund vis-a-vis 6% by the BSE 200 Index over the past five years. With 300 stocks under coverage, Surana’s bottom-up approach lays a lot of emphasis on management and attaches even more significance to the nature of the business. “You can be subjective about the management, but not about a business. If you look at a company’s past 10 -year fi nancials you can determine if it is good or not and whether the free cash flow is making a decent return on capital employed. Even in a business like commodities you can have a moat if you are a low-cost producer like Hindustan Zinc or Tata Steel (standalone), which can fetch you decent money in worst times and good money in better times. If the return on investment over a cycle is 15 -20 %, it’s good business, while a lower single-digit Ro CE , which is below the cost of capital, is an inferior business,” says Surana, whose favourite book on investing is Common Stocks and Uncommon Profits by Phil Fisher. In mid-2008, when the fi rst fund was launched, Surana bought into ancillary major Amara Raja Batteries, which was a distant number two to the market leader Exide Industries. “We bought the stock when it was a follower and in this case you couldn’t have purely judged the management based on its past track record. Here’s where the market tends to reward you if you are able to identify delta return on investment and a change in management which cannot be properly quantified,” says Surana. The fund bought close to 4 lakh shares in July 2008 when the stock was trading at around #41. As he kept meeting the management, Surana’s conviction in the business grew and the fund loaded up on the stock, increasing its holding to over 9 lakh shares by May 2009, even as it tanked to a low of #16 in March 2009. “If we didn’t take dis-

s an engineering student from Bhopal in the late ’80 s, Neelesh Surana had a faint idea of how the stock market functioned. But he wasn’t immune to the IPO frenzy that was sweeping every nook and corner of the country. Tapping in, Surana ended up making tidy gains in a market, which was then riding high on the Harshad Mehta factor, albeit on a modest sum. Today, the 46 -year-old manages #2 ,700 crore in assets at Mirae, the South Korean fi nancial major that entered India in the fateful year of 2008. On completing his engineering, Surana landed up at Blue Star but soon realised that the job wasn’t half as exciting as he had thought, and fi nally quit to pursue his MBA from IIM Indore. After that, Surana shifted base to what was then Bombay in 1994, briefly working for Ashok Leyland Investment Services. He later on moved to research at a boutique broking fi rm, Dimensional Securities, followed by a stint with the institutional arm of IL & FS Investment from 2000 to 2003. But it was at ASK Investment Managers that Surana cut his teeth in fund management. While he initially joined ASK as an analyst, it was in their PMS division that he learnt the ropes of fund management. Under Bharat Shah, the CEO of ASK , Surana learnt how to sniff a business opportunity, value businesses and the importance of return metrics in the context of growth. “Coming from the myopic world of sell-side, it was an interesting phase of learning under Shah,” says Surana, who quit ASK aft er five long years to join Mirae in 2008. Given the long learning period and vast experience gained along the way, Surana has done

NEELESH SURANA'S SCORECARD 1-YEAR 3-YEAR 5-YEAR 10-YEAR

2015

Mirae Asset Emerging Bluechip

14.08

31.76

23.07

-

14.08

84.62

8.61

45.56

-15.15

-

Mirae Asset India Opportunities

4.25

20.19

13.20

-

4.25

52.86

8.95

33.28

-19.64

23.12

Mirae Asset India-China Consumption

3.80

17.64

-

-

3.80

42.69

9.92

35.61

-

-

Return in %

2014

2013

2012

2011

2010

As on December 31, 2015

4 March 2016 / Outlook BUSINESS

AVERAGE SECTOR ALLOCATION Diversified 2 Consumer Durables 3 Construction 3

(in %)

Communication 2 Textiles 1

Metals 3

Financials 24

Technology 5 Engineering 6

Services 11

Chemicals 6 Energy 7 Automobile 7 Healthcare 8

FMCG 11

As on December 31, 2015

proportionate weightage earlier it didn’t mean we weren’t convinced about the investment, but it was more of a conscious decision to safeguard the portfolio against undue damage,” explains Surana. The bet paid off, with the stock going on to become a 50 -bagger at the current level of #825. In a twoplayer market, Amara Raja very quickly managed to gain market share from 20% in FY10 to 40% by FY15, with its return on capital employed improving from 22% in FY09 to 38% in FY15. “A well-managed company will have better capital efficiency and they tend to be better in the same sector,” says Surana, who has since cashed in and pared the position to 5.3 lakh shares.

IN PHARMA WE TRUST Another sector Surana is betting big on is pharma. “The sector has seen significant wealth creators and over the past eight years, we have been overweight. The best part is you don’t have to compete with each other because the opportunity size is huge,” he adds. Surana as on date holds close to 10 % of assets in Natco, Torrent and Sun Pharma. In the case of Natco, which Surana picked up two years back, the Hyderabad-based company has moved up the value chain from being a bulk drug manufacturer to emerge as a leader in the domestic generic oncology market. It commands a 30 % share thanks to a portfolio of 26 products to treat diseases of breast, brain, bone, lung and ovarian cancer. While the domestic business remains the cash cow for the company, Natco is now looking to tap into the US market with niche fi lings. In backing his calls, Surana doesn’t mind going against the tide. One can always get stocks that are

cheap but to find contrarian opportunities is not as easy, he believes. For example, “Good companies pass through tough times when the short-term is impaired but long-term prospect is intact.” In other words, in periods of distress, there is a good chance for investors to buy into good companies at an attractive valuation. In 2011, when the country’s biggest passenger car maker was bearing the brunt of a strong yen, the stock fell to #900. As per estimates, every 1% appreciation in yen was impacting Maruti’s earnings per share by 2%. Surana, however, bought into the stock, which has since quadrupled to #3,500. “I don’t shy away from taking contrarian calls because the market can get myopic even about good companies, and if your time frame is longer, then you have to back your conviction and bet against the crowd,” says Surana, who continues to hold the stock in his portfolio. The challenging phase that Maruti went through then is now being played out in the case of Sun Pharma, after a run-in with the US FDA over the

TOP HOLDINGS (% of net assets as on Dec 31, 2015)

Mirae Asset Emerging Bluechip Reg/ Mirae Asset India Opportunities Regular/ Mirae Asset India-China Consumption Reg Kotak Mahindra Bank

4.12/2.73

Torrent Pharmaceuticals

3.25

Natco Pharma

3.16

Hindustan Petroleum Corpn

3.12/3.16/3.42

Federal Bank

2.67

Gateway Distriparks

2.62

Sundaram Finance

2.60

ICICI Bank Voltas

2.56/5.44/5.22 2.48

Zee Entertainment Enterprises

2.37/2.96

HDFC Bank

7.20/7.54

Infosys

4.86

Reliance Industries

4.14

Maruti Suzuki India

3.81/4.74

Indusind Bank

3.57/4.36

Sun Pharmaceutical Inds State Bank of India

3.39 2.87/2.99

Asian Paints

3.91

Hindustan Unilever

3.43

Amara Raja Batteries

3.10 Source: Value Research

Outlook BUSINESS / 4 March 2016

63

RAPID FIRE  Biggest hits in five years Amara Raja Batteries: The stock went up 10x over the past five years. We believe this is owing to the company's ability to deliver superior margin profile, growth and return ratios

 Key success factors Working as a team

 Fund managers you admire: Bharat Shah, ED at ASK Invesment Managers. I admire him for his ability to identify growth oriented quality businesses. Also, his words of wisdom show the correct path to investing

 Other investors you monitor I do look at portfolios of fund houses which have longterm track record of superior performance

 My returns are driven by... Most of the returns could be attributed to stock selection

 Confidence in replicating past performance: 64

Broadly the same, give or take couple of percentage points

 Currently bullish on Retail banking franchise and consumer discretionary company’s Halol plant and integration issues with Ranbaxy. “Sometimes the market punishes a stock for an event where there is ambiguity, and because there is ambiguity, there is double counting — that results in lower valuation.” A scenario where everything is rosy and price is more than value is the worst situation to be in, he feels. Surana says that it is much better to not have a rosy outlook and get a stock at an attractive valuation. Surana’s fund, itself, has increased its exposure to Sun Pharma to 3.39% of assets from 2.91% in January 2015. This, after the stock fell from a high of #1,200 in mid-2015 to #700 by end of the year. “There could be further downside, but that’s why you have to keep risk-adjusted weights in the portfolio,” says Surana. Businesses that generally don’t make the cut for Surana are those engaged in commodities or in consumer businesses such as spirits. “Commodities in general are not good, unless the company has a moat. For example, Tata Steel on

4 March 2016 / Outlook BUSINESS

a standalone basis looks attractive but because of the Corus issue, it’s now trading as a mid-cap. The point I am trying to make is there can be tactical opportunities but per se the commodity business is not good,” says Surana. In the case of spirit companies, Surana’s view is that these are more like FMCG companies where there is no pricing power. “They don’t have the core consumer traits of having the freedom to price the product. In fact, a lot of delta in price hikes goes to the government in taxes, which has seen an irrational increase over the past 10 years,” he adds. Though the fund follows a bottom-up approach, financials constitute 24% of assets, largely spread across HDFC Bank, ICICI Bank, IndusInd Bank, Kotak Mahindra Bank, SBI and Federal Bank. The exposure to Kotak is by virtue of the fund’s holding in ING Vsysya Bank, which was taken over by Kotak. The skew towards private players is largely because Surana believes that as banking becomes increasingly consumer-centric, state-owned banks will find themselves marginalised. “The other issue with PSU banks is that there is still no clarity on the quality of their books, even if today I am paying 1.5x price to book. If banks such as Kotak can raise fresh money at 3.5x book isn’t that self-explanatory,” asks Surana. Going ahead, Surana believes within the consumption story, it will be the retail banking franchise and discretionary segments that will continue to do well, driven by triggers such as improving incomes, the recent pay commission hike and changes in consumer habits. Following a bottom-up unfortunately means you cannot have names from the infrastructure space as almost most all players have cash flow issues. “Many of these businesses don’t generate the sort of free cash or return on equity that we would ideally like to have, besides we also avoid companies where we don’t have a comfort level with the management,” explains Surana. The sharp correction over the past four-anda-half months has made valuations reasonable, feels Surana. “I believe the margin of safety is high and over 15% in the next five years is quite possible, provided one is in the right pocket of stocks. Having said that, return will not be linear,” says Surana. Coming from a fund manager, who made his debut during the worst phase of the Indian market and managed to generate 15% tax-free return, you just cannot disagree. b

66

4 March 2016 / Outlook BUSINESS

VINIT SAMBRE/40 DSP BlackRock

EDUCATION B.Com, CA

YEARS AS FUND MANAGER

7

CAREER

Prior to joining DSP BlackRock, he worked with IL&FS Investsmart, UTI Investment Advisory Services, KR Choksey Shares & Securities and Crisil 67

AUM (# CR)

6,861 SCHEMES

EARLY BIRD

For Vinit Sambre, lessons in analysing the stock market started right from childhood

DSPBR Equity DSPBR Micro Cap DSPBR Small and Mid Cap

WORST YEAR

BEST YEAR

2011: -23.89/ -27.16/-27.21

2014: 53.00/ 101.80/70.53

RETURN (IN %) 1-YEAR

8.96 3-YEAR

24.67 5-YEAR

14.77 Outlook BUSINESS / 4 March 2016

T

68

Jash Kriplani

o trace the beginnings of Vinit Sambre’s love affair with the market, one has to go back in time — all the way to his school days. Sambre, vice-president, investments, at DSP BlackRock Investment Managers, fi rst developed an interest in the stock market when he came across his father’s interest — and persistent losing streak — in stocks. “My dad used to invest based on tips given to him by his friends and would invariably end up losing money. That was my fi rst impression of the stock market,” Sambre recalls. “Back then, I didn’t know that there is a branch of studies called fundamental analysis that can help one make better investment decisions.” In 1997, following his father’s footsteps, Sambre completed his CA and began his career. At that point in time, Crisil was looking for fresh CA s for its research division Crisil Research and Information Services (CRIS INFAC). “It is there that I developed a strong research background. However, most of this research was debt-oriented and not meant to guide any equity investments. It would oft en occur to me that if I was spending so much time doing research, the best way to gain would be by doing equity research.” Sambre was at Crisil for a year as a trainee, and moved to KR Choksey (KRC) in March 1999 as an equity research analyst. At KRC, he got a ringside view of the market. “Kisanbhai Choksey is a fundamental investor. I felt that KRC would be a good platform for me to learn what equity investing is all about. Working there gave me a lot of insights about valuation, what the equity market is really about and what one should look for in companies,” he says. Sambre says Kisanbhai’s in-

4 March 2016 / Outlook BUSINESS

vestment philosophy played a key role in shaping his own thought process. “Whenever the market tanked for reasons that were not fundamental, he would buy more and more. I have seen him gain disproportionately when the market used to stabilise. So, I thought to myself that this is the best style of investing. One should have patience and conviction in one’s investments.” Even after so many years, as Sambre manages DSP BlackRock Micro Cap Fund, he swears by the philosophy. “There was this well-managed agrochemical company that was doing extremely well. When we analysed the business and met the management, we felt even more confident. The management had a hands-on approach and a strong distribution network across India. However, one of its products was facing a ban.” In May 2011, following the United Nations’ suggestion that Endosulfan be put on the trade ‘watch list’ for the health risk it poses, the Supreme Court banned the pesticide in India. From January 2011 to May 2012 , the stock corrected by almost 64% as the company’s profitability took a pounding. By the end of FY12 , the topline had shrunk 6%, while

AVERAGE SECTOR ALLOCATION (in %)

Consumer durables 3 FMCG 3 Services 3

Diversified 2 Communication 2 Financial 18

Metals 4 Energy 5

Chemicals 15

Technology 5 Engineering 7

Construction 11

Healthcare 8 Automobile 8

Textiles 10

As on December 31, 2015

VINIT SAMBRE'S SCORECARD 1-Year

3-Year

5-Year 10-Year*

2015

2014

DSPBR Equity

-0.74

14.97

9.03

16.05

-0.74

53.00

DSPBR Micro Cap

20.37

36.09

20.84

-

20.37

DSPBR Small and Mid Cap

7.26

22.96

14.42

-

7.26

Return in %

2013

2012

2011

2010

0.07

33.26

-23.89

19.83

101.80

3.75

40.47

-27.16

43.86

70.53

1.65

45.00

-27.21

29.62

As on December 31, 2015

**The scheme has been in existence before Sambre took over

profit had contracted 62%. “The market capitalisation was down 50 % from the time we met the management. I had taken a look at the company, but I still ignored it. As the stock corrected further, there came a point where the company was available at 0. 2x sales.” In August 2012 , the market cap stood at #118 crore, which was 17% of the #694 crore revenue posted by the company in FY12 . “I thought this was a good time to invest as the company was working on addressing the situation instead of dwelling on what happened in the past. We were lucky to get a good chunk.” The fund bought 2 .4 lakh shares in August 2012 when the price was #113. Well, the company that he is referring to is Excel Crop Care, which the Mid Cap fund still holds. Today, the agrochemical player's fortune has turned around. Its current market cap is #1,089 crore and the stock trades at #990. Sambre’s thesis has played out and the company has managed to revive its earnings with a new set of products. At one point, Endosulfan alone accounted for 35% of the company’s revenue; today, five products — Glyphosate, Chlorpyriphos, Profenofos, Aluminium Phosphide and Zinc Phosphide — account for 60 % of the topline. The company’s revenue has grown at 13.9 % CAGR over the past three years, while profit has grown at 55% CAGR .

CHEMICAL REACTION The agrochemical and specialty chemicals businesses have worked well for Sambre. For instance, the Micro Cap fund bought 2 .13 lakh shares of Navin Fluorine International in January 2007 when the price was #327; today, the stock is trading 4.7x higher. Another specialty chemical player that has done well for the Micro Cap fund is Atul. The fund entered the counter in July 2013, buying 100,000 shares when the price was #327. Today, the fund

TOP HOLDINGS (% of net assets as on Dec 31, 2015)

DSPBR Equity/ DSPBR Micro Cap/ DSPBR Small and Mid Cap HDFC Bank

8.70

Maruti Suzuki India

8.27

Tata Consultancy Services

4.05

Infosys

3.64

IndusInd Bank

3.61

Axis Bank

3.47

UltraTech Cement

3.47

Ashok Leyland Bharat Petroleum SRF

3.13 3.01/3.05 3.01/3.54/4.62

KPR Mills

4.27

Indoco Remedies

4.15

Navin Fluorine International

3.47

Aarti Industries

3.05

Atul

2.87/2.75

Eveready Industries (India)

2.83

8K Miles Software Services

2.68

Capital First

2.64

Sharda Cropchem

2.59

Techno Electric & Engineering Co

5.33

Kotak Mahindra Bank

4.75

Arvind

3.57

Sadbhav Engineering

3.28

Ipca Laboratories

2.79

Max Financial Services

2.72

Gujarat State Petronet

2.52 Source: Value Research

Outlook BUSINESS / 4 March 2016

69

RAPID FIRE  Biggest hits in five years Stocks in agrochemical and speciality chemicals business have contributed meaningfully to returns due to enhanced visibility on growth and ability to deliver sustainable RoCEs

 Key success factors A disciplined approach towards investment has been one of the biggest factors for success

 Fund managers you admire I admire Peter Lynch for his remarkable track record of managing Fidelity Magellan fund for 13 years despite the fund growing significantly in size.

 Other investors you monitor I avoid tracking other investors' trading patterns because it hardly adds any value to the core work

 My returns are driven by... All returns can be attributed to stock selection

 Confidence in replicating past performance 70

I would not like to comment on future returns but remain 100% confident about equities delivering the best returns over the next five years.

 Currently bullish on: Consumer discretionary: auto and retail. Private sector banks from a long-term perspective holds 4. 3 lakh shares, with the stock trading at #1, 328, a return of 4x. Sambre attributes this superior return to expanding RoCE s and enhanced growth visibility. In fact, both the top-performing chemical stocks in the Micro Cap Fund — Atul and Excel Crop Care — have seen their RoCE s go up by 4.9 and 12 percentage points, respectively, in the past three years. But while Sambre agrees that the chemical space has set his portfolio on fi re, he feels that infrastructure plays could trigger the next spike. “Our belief is that the corporate sector has not seen earnings growth since the economy has been down for the past eight years. So, it is high time that things change. A year or two down the line, things will defi nitely turn around. We need to build a portfolio of companies that are going to gain in that phase,”

4 March 2016 / Outlook BUSINESS

he says. Sambre has taken exposure to power transmission and distribution players such as Kalpataru Transmission, Techno Electric and Engineering and Skipper. There are several companies in the power equipment construction space with bloated balance sheets. Most of these were not able to collect money and ended up with a huge amount of debt — some even went under. "But some companies cut their debt, understood the current nature of the market, remained upfront with collection and showed discretion while taking orders. These companies may not have shown growth but have been focusing on cash flows and balance sheets. Once the economy turns around, these companies, which have managed well in a bad phase, will enjoy strong order flows and reduced competition, as certain peers would be out of the business by then,” points out Sambre. Within the industrial space, the Micro Cap fund also has exposure to Finolex Cables and Finolex Industries. “In the cables space, nearly 50 % of the business of some companies is consumer-related, which is still decent. Meanwhile, 50 % is B2B, which is industrial, and this will play a big role in growth when things turn around. So, the B2C business will take care of the near term.” Sambre adds that while these companies may not show great growth, “They are decent companies in terms of balance sheet and cash flow. We like such businesses, but the real change will happen when the B2B businesses start playing out well.” Having worked across a whole spectrum of fi rms — UTI Investment Advisory Services, PMS division of IL & FS , Global Private Client team at DSP Merrill Lynch, PMS team at DSP BlackRock and, fi nally, DSP BlackRock AMC — Sambre feels that investing is simple, as long as investors don’t get swayed by the market. “We spend a lot of time on due diligence. We try to understand the company's performance. In a bad phase, have they managed to emerge stronger? Once we understand the strengths and weaknesses, there is a level of comfort with the investment. We try and look for companies with decent RoEs or RoCE s. Till the time that is verified, what is happening in the world outside doesn’t affect us. What is happening in the US economy, Chinese economy – these questions don’t matter,” Sambre says. b

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4 March 2016 / Outlook BUSINESS

SOHINI ANDANI/45 SBI Mutual Fund

EDUCATION B.Com, CA

YEARS AS FUND MANAGER

6

LONE STAR

CAREER Prior to joining SBI Mutual Fund she worked with ING Investment, ASK Raymond James & Associates, LKP Shares, Advani Share Broker, CRISIL, and KR Choksey Shares & Securities

Sohini Andani is happier being an underperformer than an outperformer during unsubstantiated rallies, and with good reason

AUM (#CR)

5,095

73

SCHEMES SBI Bluechip-G SBI Contra-G* SBI Magnum Midcap-G

WORST YEAR

BEST YEAR

2011: -24.23/ -28.25/-25.79

2014: 47.96/ 71.94

RETURN (IN %) 1-YEAR

11.45 3-YEAR

25.34 5-YEAR

16.10 *Sohini was in charge of the fund till June 2011. Only fi ve-return considers Contra G performance

SOUMIK KAR

Outlook BUSINESS / 4 March 2016

V Keshavdev

M

74

eet the star of our fund house,” says R Srinivasan, head of equity at SBI Mutual Fund, introducing Sohini Andani, fellow fund manager in charge of the Bluechip and Magnum Midcap schemes. Both Srinivasan and Andani have made it into the list of top 10 fund managers in the Outlook Business-Value Research five-year ranking. If you thought Srinivasan was being generous with his praise, well, the 44 -year-old has earned every bit of it. She was offered the role of a fund manager in 2010, two-and-a-half years after she joined the fund house as its head of research. A CA by qualification, Andani started out as an equity analyst, working for some of the most reputed domestic broking houses and later moving to the buy side as a senior analyst with ING Investment Management. When she joined SBI MF in October 2007, the fund house was in transition following a churn that saw some fund managers making their exit. As the head of research, Andani was instrumental in building the team of analysts that today serves as the backbone of the fund house. “I know the strengths and weaknesses of each of my team members. Most of the analysts whom we hired were fresh out of college and very new to the market. But in these eight years, they have really shaped up well and their understanding of sectors and companies is impeccable,” says Andani, who continues to track IT and banking sectors closely. Even as Andani kept building on her team’s strengths, it was the impressive performance of her model portfolio — which she periodically kept showing to the fund managers — that landed her the job of managing the two schemes. What the management told her when she took on the assignment is what continues to drive her investing philosophy. Given that the fund’s historical performance for the previous five years was bad and that it had no room to surprise investors negatively, the mandate given

4 March 2016 / Outlook BUSINESS

to Andani was that come what may, the scheme could afford no further mistakes. “This meant that I had to build a portfolio which could generate maximum return with minimum risk. Even today, whenever I invest in a stock, the thought ‘what if I go wrong’ keeps playing on my mind. In that sense, the stocks you don’t own are also a source of alpha, especially in a falling market,” says Andani. Thankfully, so far, things have turned out just right for Andani. Her conservative approach to investing has worked wonders for the Bluechip fund, whose assets — which had fallen to #1,000 crore before she took charge — more than trebled to #3,800 crore, even as her five-year return of 15% dwarfed the 6.78% managed by the large cap-dominated BSE 100. The stellar performance is also an outcome of judicious portfolio construction, which ensures adequate margin of safety. “If I go wrong in my decisions, what is important to me is how much I am protected and what is the counter-balance in my portfolio. This is especially true in the largecap fund, which is a relative-return product. The emphasis is on counter-balancing risks so that the portfolio doesn’t become too risky or too defensive, which can prove to be detrimental one way or the other,” says Andani. Putting this in perspective, she points out how if she has Yes Bank in her portfolio, it is counter-balanced by an exposure to HDFC Bank. “So, if I bet on Yes Bank, which is perceived to be a huge risk given its corporate book exposure, I have been equally cognisant of not tak-

ANDANI WAS INSTRUMENTAL IN BUILDING THE TEAM OF ANALYSTS THAT TODAY SERVES AS THE BACKBONE OF THE FUND HOUSE

SOHINI ANDANI'S SCORECARD 1-Year

3-Year

5-Year 10-Year*

SBI Bluechip

7.99

19.76

12.46

SBI Magnum Midcap

14.92

30.92

19.76

Return in %

2015

2014

2013

2012

2011

2010

-

7.99

15.09

14.92

47.86

7.58

38.23

-24.23

11.89

71.94

13.57

47.98

-25.79

14.70

As on December 31, 2015

* The scheme has been in existence before Andani took over

ing further exposure to stocks such as ICICI Bank or Axis. In doing so, I don’t end up taking too much risk and can focus on maximising my risk-adjusted return,” adds Andani. And in doing so, she doesn’t mind holding on to an expensive stock such as HDFC Bank as long as the bank is growing at 15 -20% every year and there is no risk of de-rating of its earnings multiple. “The mistake most of us make is to forget that if growth is expensive in one year, but it gives return over two to three years as the growth continues to kick in,” explains Andani. Not surprising, then, that at over 6% of assets, HDFC Bank is currently the top holding in the Bluechip fund.

IT’S THE MANAGEMENT, STUPID While betting on a stock, besides structural growth stories, Andani also looks out for companies coming out of a capex cycle or those primed for a windfall arising out of approvals, especially in case of pharma companies, which can give superior earnings growth. “We are always conscious of these two things [structural growth and windfall gains] in the portfolio,” adds Andani. But the big swing factor for her in any investment is the quality of management and what it is doing to address growth. It was this approach that led the fund to avoid IT bellwether Infosys, as it was in a state of inertia before Vishal Sikka took over. “That was a big decision considering that we were a blue-chip fund. But we generated alpha by betting on HCL Technologies — which back then was not counted as a blue-chip — and Tata Consultancy Services. These kept compounding at a decent rate,” says Andani. What worked in HCL’s favour was that it had an ambitious CEO who was betting aggressively on the future. “Under the leadership of Vineet Nayar, the company was investing in growth, but that was coming at the expense of margins, which were trending down. But our view was that even if the margins fell in the initial years, they would move up significantly when growth kicked in, resulting in positive earnings surprise and a re-rating of earnings multiple,” explains Andani. As expected, HCL’s growth story played out, and so did the share price, which zoomed from #240 in

June 2012, when the fund had the highest exposure at over 9.4 lakh shares, to over #1,000 by March 2015. Andani used the rally to pare her exposure to over 4 lakh shares, as on date, with the price now hovering around #820. Similarly, in the auto ancillary space, Andani took a position in Motherson Sumi five years back, as she liked the approach of the management and the fact that, unlike other promoters, Vivek Chaand Sehgal, was not taking any salary apart from dividends and hadn’t diluted equity to raise money from investors either. “The fact that the world’s top luxury car majors were the company’s clients and were willing to commit more business spoke volumes about the quality of the management. What was also great about the management was that even at the plant level,they were aware of the RoI of the machines,” explains Andani. Once again, instead of opting for bluechip two-wheeler stocks Bajaj Auto and Hero Honda, the Bluechip fund loaded up on Motherson. While the management was a big pull with Motherson, in the case of Bharat Forge — given that the company had incurred huge capex in the past — it was a big beneficiary of operating leverage playing out, aided by a recovery in the US market. “The management had invested heavily to bring the cost structure down, which is an internal advantage that no player can take away from you. So, when the cycle turns for the better, margins go up and the company ends up gaining market share,” says Andani. Lon-

AVERAGE SECTOR ALLOCATION in %

Textiles 2 Consumer Durables 4 Energy 4

Metals 1 Communication 1 Financials 19

Diversified 4 FMCG 5 Technology 6 Automobile 6

Healthcare 15

Construction 7

Engineering 10

Chemicals 8

Services 9

As on December 31, 2015

Outlook BUSINESS / 4 March 2016

75

TOP HOLDINGS (% of net assets as on Dec 31,2015)

SBI Bluechip/ SBI Magnum Midcap

76

HDFC Bank

6.88

Sun Pharmaceutical Inds

5.68

Reliance Industries

5.41

Infosys

4.54

Maruti Suzuki India

3.70

Tata Consultancy Services

2.96

Larsen & Toubro

2.73

The Ramco Cements

2.69/4.04

Mahindra & Mahindra

2.58

Titan Company

2.36

Strides Shasun

5.75

Cholamandalam Investment

4.42

PI Industries

3.52

Credit Analysis & Research

3.13

FAG Bearings India

2.99

Sanofi India

2.98

Sequent Scientific

2.80

Britannia Industries

2.71

Dr Lal Pathlabs

2.65 Source: Value Research

gevity of top management is something that Andani also likes to bet on, which is not surprising when you realise that PSU banks don’t find space in her fund. “We don’t invest in any PSU banks because the chairman’s tenure is just around 2.5 years. By the time one understands what needs to be done, more than a year has passed, and before you set the ball rolling, the chance is gone. Also, changing priorities at the top confuses employees about future outcomes. Basically, whether Aditya Puri will run HDFC Bank for two decades or more makes a lot a difference in taking a view on the stock, because that acts as a big kicker to the performance of a bank or company,” says Andani. That overemphasis on management has also led to situations where Andani has exited from stocks even when the going is good. Highlighting an instance where the fund pulled the plug on a stock, Andani mentions how they got excited about Omkar Speciality Chemicals, a manufacturer of inorganic and organic intermediates and active pharmaceutical ingredients, which went public in 2011. “It is a good company with strong manufacturing skills, technical know-how and marquee clients. They were coming out of a big

4 March 2016 / Outlook BUSINESS

capex programme, which meant that return ratios were set for an improvement. We were right about all those factors, but the more we interacted with the management, the more we realised that it was a one-man show and that there was nobody else there apart from the promoter,” says Andani. The company neither had any strong processes in place nor did it have a professional set-up to ensure longevity and sustained growth. “It’s not that we don’t like family structures, but in the absence of professionals, the company could in future very well see its competence erode if outside competition came in and undercut the business. This kind of competitor will not make money but will definitely make the incumbent’s life miserable. In that sense, Omkar looked quite vulnerable,” explains Andani. Since the fund held a significant portion of the mid-cap company’s equity, exiting the counter would have become a challenge if it waited for its assumptions to play out. There was merit in what Andani did, as she could have easily instead overlooked the fact that the stock was minimal as a percentage of assets. But in an absolute sense, at over 8%, the fund held a substantial stake in the company’s equity. “We slowly started exiting the counter once we realised that the thesis by which we had bought the stock no longer held true. Since there was no negative news flow, we were lucky to get out with negligible impact cost within a year’s time, ending up with 25 -30% return,” she adds.

PLAYING TO HER STRENGTHS Being aware of one’s shortcomings is not a trait that comes easy to most people, but for Andani, it’s second nature. That is also one of the reasons why she has stayed away from commodity stocks — because of the number of variables at

ANDANI LOOKS OUT FOR COMPANIES COMING OUT OF A CAPEX CYCLE OR THOSE PRIMED FOR A WINDFALL ARISING OUT OF APPROVALS

play in the space. This is also why metals and aviation stocks don’t find place in her portfolio. “In the case of metals, you have to get the cycle right or you will miss the opportunity. Who would have expected crude to fall from $60 -70 levels to $30? Having said that, we did take a look at some aviations stocks but weren’t comfortable about whether the managements were disclosing enough profits; besides, aggressive competition had bled even the strongest players,” explains Andani. In cement space, the fund has bet on Ultratech and mid-cap Ramco Cement. With Ramco, which was hit by a slowdown and overcapacity in the south, the company worked on improving its cost structure, and that worked to its advantage. Despite a slow recovery in the sector, the company has improved its Ebitda per tonne from #300 to #1,200 over the past six quarters. “In a bad market, the cost structure will help us stay competitive and in a good cycle, it will help generate higher profit,” explains Andani.

RAPID FIRE  Biggest hits in five years Motherson Sumi: Strong growth, executed well by able management, focus on internal efficiencies, which are long lasting. HCL Technologies: Focus on IMS segment which led to industry leading growth with improvement in profitability which led to rerating.Divis Laboratories: Focused CRAMS company, good execution which provided steady growth over a period of time

 Key success factors Focus on growth visibility, identifying managements which have strong execution track record, avoiding exposure to companies which get disproportionately affected by macro environment

 Fund managers you admire: We respect most of our peers which have long-term track record in the market. Would especially like to mention Franklin Templeton AMC, which has one of the most consistent track record of risk adjusted performance

 My returns are driven by... Stock selection

 Confidence in replicating past performance I cannot predict returns, but having said that we always strive to put our best efforts

Currently bullish on: Industrials, cement and pharma

ANDANI FEELS INDUSTRIALS AND CAPITAL GOODS WILL COME OFF THE BOTTOM FIRST AS THEY HAVE BEEN THE MOST BEATEN DOWN STOCKS Unlike ACC and Ambuja, which have not invested in fresh capacity given the current environment, the country’s largest cement producer Ultratech has increased capacity. “If the cycle turns in future, ACC and Ambuja will do well till they reach full capacity. But that’s not the case with Ultratech. In other words, both the cement companies in my portfolio have advantages that are uniquely inherent,” adds Andani, who holds both the stocks in the Bluechip and mid-cap schemes. In the coming years, Andani feels industrials and capital goods will see the fi rst to come off the bottom as they have been the most beaten down stocks. Already in a weak environment, some companies are faring well because of their lowcost structure. However, fi nancials is not something that appears exciting for Andani. “There are still asset quality issues, besides the challenge of raising additional capital. I believe this sector will not be the prime beneficiary of an economic recovery and, hence, I am not overweight fi nancials,” says Andani, who expects the market to compound 15 -20% over the next five years. Her reasoning is that the fruits of government’s push in reviving the economy will only be visible after a couple of years. But for all her optimism and a strong five-year track record, the fund manager sounds modest when she states that in periods of high momentum in the market, her funds tend to underperform. The midcap fund, in particular, underperformed during the pre-Modi rally and ended in the fourth quartile, as the fund did not buy into stocks based on hope and expectation. But once the rally fizzled out, the fund was back in the reckoning. “I am willing to be an underperformer based on my investment philosophy rather than being an outperformer without any substance,” smiles Andani. b

Outlook BUSINESS / 4 March 2016

77

JANAKIRAMAN RENGARAJU/41 Franklin Templeton Mutual Fund

EDUCATION B.E, MBA

YEARS AS FUND MANAGER

8

CAREER Prior to joining Franklin Templeton, he worked with Indian Syntans, Citicorp Information Tech and UTI Securities Exchange

AUM (# CR)

20,282 78

SCHEMES Franklin India Flexi Cap-G Franklin India High Growth Companies-G Franklin India Opportunities-G Franklin India Prima Plus-G Franklin India Prima-G Franklin India Smaller Companies-G

WORST YEAR

BEST YEAR

2011: -22.25/-24.97/ -23.32/-16.42/ -22,06/-25.91

2014: 55.90/79.58/ 58.58/ 56.79/ 78.14/89.92

RETURN (IN %) 1-YEAR

4.42 3-YEAR

23,91 5-YEAR

15.22 RA CHANDROO

4 March 2016 / Outlook BUSINESS

PRUDENT INVESTOR Janakiraman Rengaraju attributes his success to patience and his ability to cut out noise from the market Kripa Mahalingam

J

anakiraman Rengaraju knew right from his school days that he was destined to be in the stock market. While the sizes of the portfolios he manages have increased many times over since he first started off as a fund manager, his investment philosophy has remained the same — invest in quality mid-caps that generate a good return on capital and free cash flows. After managing a corporate investment portfolio, he now manages Franklin India Prima Fund and Franklin India Smaller Companies Fund. He is also

the co-portfolio manager of the Franklin India Prima Plus Fund. Just like his predecessor K N Siva Subramanian, he too has a zen-like personality, which helps him stay grounded during volatile times and is also self-effacing to a fault, attributing all his success to timing and luck. It is his repeated refusal to beat his own drum that makes Franklin Templeton one of the most respected fund houses in the country.

MARKET CALLING Rengaraju’s first brush with the market came when he was in high school. His neighbour, a professor as

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Outlook BUSINESS / 4 March 2016

79

JANAKIRAMAN RENGARAJU’S SCORECARD 1-Year

3-Year

5-Year

10-Year*

Franklin India Flexi Cap

1.96

19.39

11.70

Franklin India High Growth Companies

1.49

25.79

16.31

Franklin India Opportunities

2.30

18.33

Franklin India Prima Plus

4.38

19.98

Franklin India Prima

6.81

Franklin India Smaller Companies

9.56

Return in %

2015

2014

2013

2012

2011

2010

15.04

1.96

55.90

7.07

31.45

-22.25

21.01

-

1.49

79.58

9.22

42.54

-24.97

14.79

10.13

12.48

2.30

58.58

2.14

27.51

-23.32

14.52

13.59

16.81

4.38

56.79

5.55

31.04

-16.42

19.48

26.90

18.12

14.51

6.81

78.14

7.40

44.42

-22.06

19.11

33.06

21.49

-

9.56

89.92

13.22

51.70

-25.91

18.59

*The scheme has been in existence before Rengaraju took over

80

well as Rengaraju’s good friend introduced him to the stock market. Right from 1988, he began investing in IPOs, which were extremely popular then, and it was his mother, who gave him the initial capital. “That’s how my interest started and it continued throughout my college days. I was able to pay for my college fees and manage expenses, too,” he says. They must have been good investments you tell him, but he is quick to retort, “Rather than good investments, those were good times. There was money in the market and you didn’t really need very sharp or differentiated thinking like you do now.” Rengaraju completed his engineering in 1992, and then went on to pursue his management studies at IIM Bangalore. It was clear to him by then that the fi nancial market was his calling. Right out of IIM, he joined Indbank Merchant Banking in 1995 and worked in the investment banking division for a year. Later, he went on to join UTI Securities in Mumbai and was part of its research team for four years. “While Mumbai is a great place for networking and establishing contacts, I was fairly certain that it will not be the place where I will be building my professional career.” As if on cue, he bagged an opportunity in Chennai, when one of his clients in UTI Securities sold his business to Bayer and was looking for an efficient hand to build an investment portfolio. “It was equivalent to what people call a family office these days. We were the only two involved in investment decisions. Our strategy was simple — to identify quality mid-caps and buy a material stake in them. Our timing was good as the tech bubble had just burst and assets were low. We had three years to build the portfolio, but it did not do well in the set time-frame. It was after the market recovered that the portfolio performed.” Some of the bets they took back then — Bayer, Pidilite and Karur Vysya Bank — paid off well.

4 March 2016 / Outlook BUSINESS

As on December 31, 2015

After spending seven years managing the portfolio at Indian Syntans, Rengaraju felt that the time was right to move to a more organised environment. Luckily for him, Franklin Templeton was hiring and he joined them in 2007. “If I had stayed any longer, it would have been difficult for me to get into an organised environment. In Indian Syntans, the approach was more intuitive whereas in Franklin Templeton, there is much more rigour in the process. We follow a more disciplined and well-thought-out approach in order to convince the team about our decision as well.” While being at Franklin Templeton meant taking fewer concentrated bets, his personal investment philosophy wasn’t vastly different from that of the fund. “I would not have fit in otherwise,” he states.

SIMPLE YET EFFECTIVE Ask him about his investment philosophy and he says, “It is very simple and nothing really very exciting. I look for businesses that generate a good return on capital and has the ability to generate free cash flows through a business cycle. They tend to be less capital intensive, not highly leveraged and more often tend to have consumer-facing characteristics. It need not

RENGARAJU LOOKS FOR COMPANIES THAT GENERATE A GOOD RETURN ON CAPITAL AND FREE CASH FLOWS OVER A BUSINESS CYCLE

be a direct consumer-facing business but could be in manufacturing with a large after-sales market.” Some of his most successful investments such as Amara Raja Batteries and FAG Bearings came through this thought process and he calls them business compounders. “They don’t grow in a flashy manner but every few years, they manage to grow their earnings steadily and double their business over a period of time and we ride on that growth.” For instance, for Amara Raja Batteries that the fund bought in 2007- 08, Rengaraju liked the fact that the company was keen on its brand building initiatives, which strengthened its position in both the auto and telecom segments, although it supressed margins initially. By 2009, the company was firing on all cylinders with a strong aftermarket in auto, a bounce back in the telecom business and with margins improving as they scaled up the business. “What I liked about the company is that it is not too fixated on quarterly margins and is realistic about sustainable margin levels. It improved its processes continuously and has dealt with dealers in a better way than its competitors.” Besides, Rengaraju looks for companies that are good in their day-to-day execution and can spot tactical and strategic opportunities. Take the case of Repco Home Finance, which is into lending to people without a regular income — a segment with not much competition. “It is a large business with multi-year growth opportunities. But it is a tough business to execute and these people are doing it reasonably well since the focus is on discipline.” Rengaraju also pays attention to boards that are alert in preventing the misuse of access and that understand related party transactions. “Pass the companies through these fi lters and only a few will clear the list. So, you will end up having a buy-and-hold strategy and stay invested in them through business

cycles, unless there is a big change in their business characteristics.” But a simple buy-and-hold strategy in reality is tougher to execute when the market tend to test your patience and you are constantly compared with your peers. “I have realised that patience and time are my biggest competitive advantages. The filters are not all that complicated and many can identify these companies, but it is the ability to hold on to the stock through its idiosyncratic down phase that creates the difference. If your initial framework is robust, you must have the maturity to hold on to the business.” Case in point is Finolex Cables where the company’s business fundamentals were sound, but it bore the

RENGARAJU ALSO PAYS ATTENTION TO BOARDS THAT PREVENT THE MISUSE OF ACCESS AND ARE COGNISANT OF RELATED PARTY TRANSACTIONS brunt of the financial crisis as some of its forex options led to huge losses. “They had an active treasury that went in for some options and incurred losses. The company was paying nearly #60 crore as markto-market losses but the good part is that they wrote it off for each year completely without carrying it forward or renegotiating with the banks. After the payouts, they were still making profits. But this was for a definite period and once it ended in 2011-12, the

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Outlook BUSINESS / 4 March 2016

81

company emerged as a much stronger brand-oriented business with efficient operations. FAG Bearings was another stock that Franklin Prima Fund had a substantial holding in around FY05, which was subsequently pruned down. In 2009, it caught Rengaraju’s attention given its larger share of revenues coming from the after- sales market and the demand from the automobile segment picking up. “The bearings business has a fantastic operating leverage

TOP HOLDINGS

RENGARAJU PREFERS TO DO HIS OWN RESEARCH RELYING ON PRIMARY DATA AND ENGAGEMENTS WITH COMPANY MANAGEMENT

(% of net assets as on Dec 31, 2015)

Franklin India Flexi Cap/ Franklin India High Growth Companies/ Franklin India Opportunities/ Franklin India Prima Plus/ Franklin India Prima/Franklin India Smaller Companies

and when the demand goes up both volumes and prices increase, so it’s a double bonanza as far as margins are concerned.”

HDFC Bank

MAKING THE RIGHT CHOICE

Yes Bank

5.28/ 4.16/ 2.54/ 4.18/ 2.51

ICICI Bank

4.28/ 7.04/ 4.37/ 3.67

Larsen & Toubro

3.53/ 4.06/ 3.47/ 2.79

Infosys

82

7.63/ 7.94/ 7.01/7/ 2.59/ 2.05

Torrent Pharmaceuticals State Bank of India

3.15/ 3.79/ 4.50 3.14 2.91/ 6.70/ 3.76

Dr Reddy's Laboratories

2.58/2.65

Bharat Petroleum Corpn

2.44

Tata Motors DVR Axis Bank

2.43/ 6.59/ 2.59/ 2.23 7.47/3.28/2.47

TVS Motor Co

4.96

Idea Cellular

4.39

Aditya Birla Fashion and Retail

3.40

Mahindra & Mahindra

2.80

Maruti Suzuki India Bharti Airtel Tata Motors Indusind Bank Kotak Mahindra Bank

3.33 3.24/3.68 3.15 3.59/2.57 2.50

FAG Bearings India

3.11/2.99

Finolex Cables

2.70/3.40

eClerx Services

2.54

Voltas

2.51/2.55

Kansai Nerolac Paints

2.36

Repco Home Finance

2.30/2.10

Atul Karur Vysya Bank

2.07 2.02 Source: Value Research

4 March 2016 / Outlook BUSINESS

According to Rengaraju, if investors are willing to look beyond one or two quarters, there are a lot more investment opportunities and the risk comes down sharply if a calmer approach is adopted. “You will feel some pressure due to competitive positions but you just have to live it. If investors are in search of portfolios that outperform all the time and through all cycles, it will be like a physics quest of the grand unified theory, it simply doesn’t exist!” He points out that the tenets of investing haven’t changed much since the 1990s. “At that point in time, you had limited set of information to process. The challenge today is to sift through all the data and figure out what is relevant and what is not,” he says. Every investor has his own toolkit. Rengaraju prefers to do his own research relying on primary data which is mostly annual reports and meeting the company management. “Once you get the model right and the valuation at reasonable levels, the maintenance job is much easier. I will be much relieved if we go back to semi-annual reporting. There is too much focus on quarterly numbers and a lot of energy is spent predicting the accuracy of the numbers. So if the company fails to achieve the estimated growth, the analyst is quick to say that it has disappointed even though the base reference are his numbers.” In fact in the past five years, his levels of engagements in his most successful investments have been restricted to meeting the managements probably twice a year and reading up their an-

nual reports. According to him, the only bright side to all the volatility created by the noise surrounding the market, is that, it gives long-term investors like him good entry points. While his buy-and-hold strategy has helped him ride out the market’s ups and downs, the challenge of managing a large fund investing in mid and small caps is the higher impact costs. Buying large quantities in this space automatically pushes the price up and the buy-and-hold strategy provides the solution to this problem. “In a larger portfolio with a buy-and-hold approach, you are removing the single largest obstacle to scale which is why my portfolio turns are low, so the impact costs are not material in terms of portfolio returns.” For instance, Franklin Prima which has 55 stocks has a portfolio turnover of around 20%, while Franklin Smaller Companies Fund with 70 stocks is lower at 15%. “Managing a higher number of stocks has not been too much of a challenge. Handling these 70 stocks has not kept me beyond 6.30 pm in the office,” he quips. For managing a fund that invests in mid and small caps, a simpler framework is adequate. “The mispricing in stocks is much more in mid and small-caps. So, the probability to generate a higher alpha is also much higher. The large-caps are widely researched and calls for differentiated and sharper thinking for you to generate a higher alpha. It is much tougher to generate a higher alpha in large-cap stocks,” he adds. While his investment framework has held him in good stead over the years, he is the fi rst to admit that whenever they have deviated from the framework, the outcome hasn’t always been great. “The charm of the business is that it allows us to make some mistakes and still be in business. In certain cases, where the business visibility has not been that clear, the returns haven’t been great. He cites the example of Coromandel International, in which they invested

AVERAGE SECTOR ALLOCATION Metals 3

in %

FMCG 3

Consumer Durables 3 Textiles 1

Communication 4

Financials 26

Energy 4 Chemicals 4 Construction 4 Diversified 5

Engineering 10

Healthcare 5 Services 6

Automobile 10 Technology 7 As on December 31, 2015

and a positive return is yet to be seen. “It is a company with a high quality management in an average industry. Given the structure of the industry, there is so much volatility that it requires risk management at several levels. But given the quality of management the hope is that they will manage it all and outperform in the long term.” Rengaraju admits to going wrong in interpreting the contract terms in the airport businesses of GMR and GVK . “These were viewed as sunrise industries and the market was willing to overlook some contractual terms which came to haunt us. When there is a sector re-rating, your thought process does get influenced and the risk you are willing to assume within the sector goes up. When that happens, you relax the quality requirements assuming the sector tailwind will take care of those things and it hardly turns out to be true.”

THROUGH UPS AND DOWNS Like every other fund manager, Rengaraju too has seen his share of businesses that have not scaled up the way he had hoped. He also has his list of lost op-

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Outlook BUSINESS / 4 March 2016

83

84

portunities. “I haven’t been all that great in spotting businesses where two or three things fall in place and the business takes off. Classic examples would be Aurobindo Pharma, Motherson Sumi and Eicher Motors. We were one of the earliest investors in Eicher Motors, but I did not build a material position because I didn’t expect the company’s super normal growth to continue for such a long time. Similarly in Motherson Sumi, I was generally a bit wary about its acquisition spree, but the company’s ability to not only scale up the business of its acquired assets but also improve on its margins was truly impressive. Such investment decisions call for some imagination as these drivers are difficult to predict and we must improve on this.” While he counts Warren Buffett, Charlie Munger and John Maynard Keynes as people who have influenced his thought process, some of his favourite writers include Peter Bernstein and Adam Smith, author of The Money Game, which he has read five times. He also loves to read up on investment history, especially the works of Charles Kindleberger and John Kenneth Galbraith. Quoting either Yogi Berra or Niels Bohr (there is a debate on who said it first) “It is tough to make predications, especially about the future”. Rengaraju points out that in economies that have long periods of high growth, demographics has been a powerful driver of that growth. “If you get the demographics right, you have reasonably good tailwind. Without the tailwind, your stock picking ability has to be very sharp and the odds of success are considerably lower when it comes to equity investing.” According to him, India has the demographics advantage till the late 2040s that gives the country over two decades of good economic growth. “This advan-

RENGARAJU EXPECTS EARNINGS GROWTH OF ABOUT 13-14% OVER THE NEXT COUPLE OF YEARS LEADING TO BETTER STOCK RETURNS 4 March 2016 / Outlook BUSINESS

RAPID FIRE  Biggest bets in five years Amara Raja Batteries, Finolex Cables, eClerx and Yes Bank

 Key success factors Patience and maturity to hold on to a good business during its downcycle

 Fund managers you admire: Howard Marks, Seth Klarman, Anthony Bolton and Peter Lynch. Needless to say, Warren Buffett and Charlie Munger as well

 My returns are driven by... We follow a bottom-up approach, so all of our returns are based on stock selection

 Confidence in replicating past performance At the index level, I think the past five years’ returns look achievable. But, it would be challenging to match the alpha that some of our products have delivered over the past five years

 Currently bullish on: Consumer discretionary, technology and industrials tage gives us reason to be optimistic when you have a short-term crisis. It is in those times of crisis that we get good prices,” he says. Predicting a trend line of economic growth of about 6% and adding inflation of 5%, he expects earnings growth of about 13 -14% over the next couple of years to lead to better stock returns. While he believes the demographic advantage will ensure stock returns will remain positive in the long term, he says any short-term volatility should provide investors good entry points. “There has a sharp correction in some stocks post the quarterly results. While the fall has been significant in stocks of average businesses, I would still stay away from them,” he says. For instance, he believes PSU banks can still be a landmine. But he is using the current volatility to add some quality stocks that have fallen to reasonable valuations in the consumer discretionary space, technology, domestic industrials and regional banks. This time around, he believes that the return will be measured and gradual and will not come through in a hurry. b

MBA MBBS ENGINEERING

Higher Education!Do you feel you have saved enough money for your child? Do you know how much money is sufficient for your child’s higher education? You must be having those old figure in your mind which you had paid for your higher education. But you may be amazed to know that those fees have increased unbelievably. IFAN has just completed a survey to know what was the average fees in 2000 and the situation in current year, 2014. Though these numbers may increase your tension but don’t worry, we will guide you how to achieve those dreams which you have dreamt of for your loved ones.

Rs. in Lacs

Plan

20,000,000 18,000,000 16,000,000 14,000,000 12,000,000 10,000,000 8,000,000 6,000,000 4,000,000 2,000,000 0

MBA Engineering MBBS

2000

2014

Engineering

`1,60,000

`6,00,000

MBA

`4,00,000

`17,50,000

MBBS

`15,00,000

`30,00,000

fla

Cost of Higher Educa

Current Cost of Educa

5 Years

10 Years

15 Years

20 Years

1,750,000

2,818,393

4,539,049

7,310,184

10,702,841

600,000

966,306

1,556,245

2,506,349

3,669,545

3,000,000

4,831,530

7,781,227

12,531,745

18,347,727

Please find enclosed more specific cost chart accordingly your child age. Table will guide you on how much you have to invest on monthly basis to achieve higher educational goals for your loved ones. For more details contact:

IFAN Finserv Private Limited (Erstwhile ING Financial Services Pvt. Ltd.), 301, VIP Plaza, Near Infinity Mall, Off Link Road, Andheri (W), Mumbai 400 053, India. Email: [email protected] • Website: www.ifan.co.in CIN: U72900MH2005PTC154875

1800 22 6784 / 022 4061 7990 One Answer Timings: Monday to Friday (10:00 am to 7:00 pm)

RESEARCH / INFORMATION IS ONLY FOR IFAN REGISTERED ASSOCIATES AND INTERNALCIRCULATION PURPOSE. IT IS NOT A MARKETABLE MATERIAL.

VINAY PAHARIA/36 Religare Invesco Mutual Fund

EDUCATION

B.Com, MBA, CFA

YEARS AS FUND MANAGER

8

CAREER Prior to joining Religare, he was associated with DBS Cholamandalam AMC, KR Choksey Shares and Securities and First Global Stock Broking

AUM (# CR)

86

1,319 SCHEMES

Religare Invesco Business Leaders Religare Invesco Mid Cap Religare Invesco Mid N Small Cap Religare Invesco Tax Plan

WORST YEAR

BEST YEAR

2011: -21.92/-17.50/ -19.24/-18.92

2014: 39.52/ 77.03/ 72.11/54.30

RETURN (IN %) 1-YEAR

5.87 3-YEAR

22.82 5-YEAR

15.04 4 March 2016 / Outlook BUSINESS

TRACKING THE STARS Vinay Paharia puts the diverse and varied lessons from each of his previous associations to good use at the schemes he manages

87

SOUMIK KAR

Outlook BUSINESS / 4 March 2016

H

88

V Keshavdev

ow diverse businesses could fetch non-linear profit from similar capital has always intrigued Vinay Paharia, who grew up watching his own relatives dabble in varied businesses — albeit on a much smaller scale — right from trading to chemicals to software. “It all seemed very fascinating to me,” he says. But instead of trying his hand at the family business, Paharia chose to complete his MBA and CFA to pursue a career in fi nance. “Until my graduation, I never knew that a formal career in equities was possible,” smiles the 36 -year-old, who today manages #600 crore in cumulative assets across Religare’s Mid N Small Cap funds, besides co-managing the Business Leaders and Tax schemes with Vetri Subramaniam, who is also the chief investment officer of the company. During his MBA , microeconomics was what caught Paharia’s fancy, as it dealt with businesses and the markets. But once he got a chance to read Peter Lynch’s One Up On Wall Street, Paharia knew his calling lay in investing. Back then, the most important takeaway from Lynch’s lucid tome for him was that stocks were slaves of earnings. “The fact that, irrespective of economic booms and crashes, stocks — over a period of time — always followed earnings was so insightful,” says Paharia, who got his first break with First Global after completing his CFA and later went on to work with KR Choksey and DBS Cholamandalam AMC. From each of his bosses — including Subramaniam — Paharia says he learnt some unique lessons. If Devina Mehra introduced him to the rigours of analysis, Kisan Ratilal Choksey taught him how a passion for long-term investing can be transformed into good investment ideas, while Pradip Pathak at Cholamandalam trained him to have a process-driven mindset and a dispassionate approach to stocks. “If the

4 March 2016 / Outlook BUSINESS

facts change, your view, too, has to change,” says Paharia, who holds close to 50 stocks in his portfolio. Following are the parameters that he keeps in mind while picking stocks: fi rst, the business should generate a RoC higher than 15% per annum on a sustainable basis, although it could have lower RoC in the interim. “Internally, we use 15% as the cost of equity and, hence, would want the company to generate a positive economic spread to create value. For us, that is the definition of a good business,” says Paharia. The second parameter is good management, which the fund house believes is evident from how prudent the capital allocation record of the management is, especially in mid caps. “There are only two ways to allocate: one is that you plough the money back into the business and the other is that you return it back to shareholders. That track record itself will speak volumes about the quality of the management,” says Paharia. The third aspect that the fund looks at is the execution track record. “The biggest clues about the management come from its past history. You can never judge the top management just by meeting the board members, as you will end up getting sold on their ideas. As investors, we place far more emphasis on what has happened than what will happen. Hence, the 10 -year track record of the company is more important than what the

WHEN IT COMES TO VALUATION, PAHARIA SAYS INVESTORS MUST NOT EXTRAPOLATE THE CURRENT OUTLOOK INTO THE LONG TERM

VINAY PAHARIA'S SCORECARD Return in %

1-YEAR 3-YEAR 5-YEAR 10-YEAR -

2015

2014

2013

2012

2011

2010

4.57

39.52

9.20

24.33

-21.92

17.67

6.23

41.70

-17.50

25.69

11.17

43.88

-19.24

34.69

30.31

-18.92

22.13

Religare Invesco Business Leaders

4.57

17.79

9.11

Religare Invesco Mid Cap

6.38

26.00

18.51

-

6.38

77.03

Religare Invesco Mid N Small Cap

6.73

26.87

18.85

-

6.73

72.11

Religare Invesco Tax Plan

5.81

21.60

13.68

-

5.81

54.30

10.13

As on December 31, 2015

management hopes will play out over the next five years,” he says. When it comes to valuations, Paharia believes that in the current context, investors should be cognisant of not extrapolating the current outlook into the long term. “If the business has momentum, I shouldn’t extrapolate lifetime high profit margins in my longterm forecasts. The same rule applies if a business is suffering in the short term. The only way one can arrive at a reasonable value is by normalising the numbers,” says Paharia. Talking about how his team ascertains the reasonable value and margin of safety, he explains, “The value of any asset is the sum total of all future cash flows it can yield, but there might be huge variations in the final value depending on the way you compute cash flows. After all, this is not a precise number but an approximation. Our objective is that, over a period of time, the market prices converge with the underlying value so that we get the benefit of both the discount rate [15% every year] and the value gap closing in.” All the stocks that the team screens have to make it through the abovementioned filters and seven additional parameters, the first three of which are related to growth. This includes a parameter that deals with companies whose growth is relatively higher than the companies under coverage and others in the industry. Internally, the fund house calls them ‘stars’.

SEEING STARS “High-growth companies have the inherent ability to expand their profitability once operating leverage kicks in,” explains Paharia. If one was to take a look at the company’s portfolio, an investee that falls under this category appears to be Aditya Birla Fashion (formerly, Pantaloons Fashion & Retail). The company is India’s largest pure-play fashion and lifestyle player, comprising the brands and retail businesses of Madura and Pantaloons. While Madura has four

leading brands under its fold (Louis Philippe, Van Heusen, Allen Solly and Peter England) and a network of 1,735 stores across the country, Pantaloons is one of India’s largest affordable fashion retailers, with a presence in 49 cities and 134 stores and a strong portfolio of exclusive private brands (which form nearly 52% of its revenue). Given that Madura is looking at incremental store additions through company owned franchisee operated (COFO) or franchises owned franchises operated (FOFO)formats, wherein the capex responsibility lies with the franchisee, RoE is expected to trend higher in the coming years. The stock accounts for 1.45% of the mid-cap fund’s assets. Going by the same yardstick, Dish TV, at close to 5% of assets in the mid-cap fund, falls in the high-growth bracket as well. The company is India’s largest DTH player, both in terms of subscriber base and revenue. It is also among the fi rst-listed pure-play DTH companies in the country to report a profit after tax in FY15, as opposed to the operating profits reported by some of the other Goliaths, for whom DTH services is just another small business segment. More importantly, its average revenue per

AVERAGE SECTOR ALLOCATION Consumer durable 3 Communication 2 FMCG 3

(in %)

Metals 2 Textiles 1

Engineering 4

Financial 23

Construction 4 Diversified 5 Energy 7

Services 12

Chemicals 7 Technology 10 Healthcare 8

Automobile 9 As on December 31, 2015

Outlook BUSINESS / 4 March 2016

89

user (ARPU), too, has trended higher — from #138 in FY10 to #172 as on date — and its revenue has gone up threefold over the same period to over #2 ,500 crore. The second growth parameter relates to companies that are leaders in their business not just by market share but also in terms of return metrics. And that is evident in the Tax and Business Leaders' scheme, where SBI is conspicuous by its absence and HDFC Bank has the highest combined weightage in the portfolios at over 16% of assets, thanks to its high RoA of over 1.8% and RoE of over 18%. The third parameter covers companies that are growing faster than the market leader. Very clearly, the fund has opted for Axis Bank, which has been growing its retail book at a fast rate. “Companies that are growing at a fast rate and taking away market share are categorised as ‘warriors’,” reveals Paharia, who holds Axis Bank

TOP HOLDINGS (% of net assets as on Dec 31, 2015)

Religare Invesco Business Leaders/ Religare Invesco Mid Cap/ Religare Invesco Mid N Small Cap/ Religare Invesco Tax Plan

90

HDFC Bank

9.25/8.39

HDFC

9/4.46

Infosys

8.50/4.98

Kotak Mahindra Bank

7.25

Maruti Suzuki India

6.74/5.57

Tata Consultancy Services

6.38/5.77

Hero MotoCorp

6.32/4.76

Power Grid Corporation Of India Axis Bank ITC

4.55 4.22/3.02 3.66

Dish TV India

4.62/4.70/2.95

Aditya Birla Nuvo

3.98/4.31/2.98

Gujarat State Petronet

3.90/4

Divis Laboratories

3.73/3.85

Sanofi India

3.68/3.80

Voltas

3.60/3.54

PI Industries

3.33/3.50

Shriram Transport Finance

3.33/3.36

Ramco Cements

3.26

Supreme Industries

3.04

IndusInd Bank

3.25

DB Corporation

3.07

Hindustan Petroleum

4.50 Source: Value Research

4 March 2016 / Outlook BUSINESS

PAHARIA'S FUND LOOKS AT STOCKS THAT HAVE NEARTERM CATALYSTS SUCH AS DEMERGERS OR SPINOFFS ON THE HORIZON across both the Tax and Business Leaders funds. Similarly, given that DB Corp has been aggressively gaining market share in each of the seven states that it has entered, the stock accounts for close to 8% of assets in all four of its schemes. Analysts expect the company to derive significant operating leverage from higher ad yields and lower newsprint cost in the near term. The remaining four parameters that the fund house looks at before buying stocks are more value-oriented. “Simply put, this means buying cheap assets or cheap earnings,” explains Paharia. Which is probably why he has bought into Gujarat State Petronet, a gas transmission utility that has its current core network in Gujarat and which now accounts for 8% of assets in the midcap and small-cap funds. This is because the company, which generates RoCE upwards of 12% and RoE of 15%, is trading at a discount to fair value at the current level. Also, given that consensus on the Street values Redington India at 10x one-year forward earnings, Paharia, too, seems to have taken a liking to the stock, which accounts for over 4% of assets across three of his schemes. Paharia had also purchased GE Shipping in the past as it was trading at a discount to net asset value, but sold it once the valuation discount narrowed. Some other parameters that could prompt Paharia to buy a stock are the company being in the middle of a turnaround or some other special situation. The fund scrutinises companies that have near-term catalysts such as demergers or spinoffs on the horizon or if the investee is actually a holding company that is going to list a subsidiary that enjoys a higher valuation. If one was to consider the turnaround criteria, then VIP Industries seems to fit the bill. The luggage company, which went through a lean patch, has, of late, been aggressively building its brands

— Skybags, Carlton and Caprese, resulting in the company’s market share rising to 45%. Given that the Street expects VIP to grow sales at 15% CAGR and operating profit at 18% over FY15 -FY18, it’s not surprising to see Paharia holding the stock [4% of assets] across three schemes. Similarly, in the case of Aditya Birla Nuvo, which accounts for nearly 8% of assets across the two schemes managed by Paharia, it’s clear that the fund house, just like most analysts, is looking at unlocking value. The commodities space is another target that makes the cut for Paharia. “But the company needs to be well placed in the cyclical business,” he adds. Which is why he has picked up Ramco Cements. The Chennai-based company, a victim of oversupply, is best placed in the pack, given that it has plants closer to the market and a strong brand, and has worked on its cost structure, resulting in better profitability per tonne. Paharia owns the stock across two of his schemes, accounting for 7% of assets. With the market now cooling off from the highs, Paharia believes that based on 12 -month trailing earnings, the market is closer to its long term average after having traded at 20% premium about a year back. From a top-down perspective, sectors where the underlying valuations are reasonable and the underlying earnings are suppressed is where the fund house is sensing an opportunity. “Our sectoral views get reflected in our large cap fund, where we are overweight on consumer discretionary and financials and underweight on staples where we see valuation concerns, besides materials and industrials,” says Paharia. In the mid-cap space, given that the mid-cap index has outperformed large caps by 40% over the past two years, there is a distinct possibility that the next leg of correction would be seen in mid-caps. “Though mid-caps comprise a very wide bouquet of stocks,

SECTORS WHERE VALUATIONS ARE REASONABLE & EARNINGS ARE SUPPRESSED IS WHERE THE FUND SENSES AN OPPORTUNITY

RAPID FIRE  Biggest hits in five years Stocks where we correctly identified a valuation mismatch or where we were able to identify trends earlier than the market

 Key success factors Having an independent opinion, focus on business fundamentals over a longer time horizon and giving more weightage to facts

 Fund managers you admire: Seth Klarman of Baupost Group and David Einhorn of Greenlight Capital. Both run hedge funds based on value investing principles. I admire them for their independent opinion and the way in which they have evolved their investment strategies

 Other investors you monitor Warren Buffett

 My returns are driven by... Over the past five years, almost the entire alpha of the Religare Invesco Mid N Small Cap Fund has been driven by stock selection

 Confidence in replicating past performance: We cannot predict if we can replicate historical performance. We have strictly adhered to our investment process and we endeavour to continue that way in the future

 Currently bullish on Consumer discretionary and financials you can’t paint all of them with the same brush. But there could be some catch-up. Either the large-caps catch up with mid-caps or vice versa. In short, there will be a reversion to the mean,” feels Paharia. Given that the past five years have been a rollercoaster for investors, Paharia is guarded in his prediction. “Given that equity is a non-linear asset class, it is safe to assume that returns will be in line with earnings growth and will outperform both fi xed income and inflation.” As far as the schemes he has been managing since 2008 is concerned, Paharia points out that in the past five years, the entire alpha in the Religare Invesco Mid N Small Cap Fund — which has over #474 crore in assets — came on the back of stock selection. “Our bottom-up approach and decision to adhere strictly to our investment process — both in letter and spirit — have made all the difference,” he concludes. b

Outlook BUSINESS / 4 March 2016

91

R SRINIVASAN/45 SBI Mutual Fund

EDUCATION

M.Com and MFM

YEARS AS FUND MANAGER

11

CAREER

Prior to joining SBI he worked with Principal PNB AMC, Oppenheimer & Co, Indosuez WI Carr and Motilal Oswal

AUM (# CR)

7,972

92

SCHEMES

SBI Contra SBI Emerging Businesses SBI Magnum Equity SBI Magnum Global

WORST YEAR

BEST YEAR

2008: -53.15/-68.54/ 2009: 90.59/108.96/ -56.26/-66.65 88.71/119.58

RETURN (IN %) 1-YEAR

7.03 3-YEAR

21.79 5-YEAR

14.70 4 March 2016 / Outlook BUSINESS

COMPLIANT RISK-RIDER R Srinivasan employs skill while sticking to the fund’s template

93

SOUMIK KAR

Outlook BUSINESS / 4 March 2016

V Keshavdev

W

94

e run multiple philosophies and would want the market to rate us on those philosophies and not categories,” states R Srinivasan, head of equity at SBI Mutual Fund, who manages #8,000 crore of AUM across five schemes. It’s not without reason that — ‘Vasan’, what his colleagues call him — has seen both adulation and infamy. In mid-2009 when Srinivasan moved from Everstone Capital to SBI Mutual Fund as a senior fund manager and was assigned the Magnum Emerging Businesses Fund, it was ranked 41 among the 47 funds in the mid- and smallcap category after a massive 69% fall in 2008. But in the same year when the fund bounced back with a 109% return and over the next three years ended up as the top fund in the mid-cap category with an impressive 56% return in 2012, Srinivasan made headlines in every pink paper. However, following a below average performance with a negative return of over 7% in 2013 and since then, based on the past three-year returns of 12%, the #1,600 -crore fund is now at number 63 among the 68 funds in its category, as per Value Research. “That is because the fund is an absolute return product and that could lead you to periods where you could underperform the benchmark,” explains Srinivasan, who is 8th as per the Outlook Business-Value Research five-year rankings. The other fund that he runs is the #2,470 -crore Global Equity Fund which focuses only on quality stocks and is a relative return product. “Companies in this fund won’t face existential issues. They will not suffer if the market falls sharply,

4 March 2016 / Outlook BUSINESS

but they will not rise either, if the market goes up sharply. Over time, it will fetch you good returns,” assures Srinivasan. He adds how the focus is on stocks with regard to this fund. The fund house runs two philosophies: large cap (relative return) and mid cap (absolute return). The relative return is based on four factors — sales growth, ebitda margins, volume, and market share changes. “In large caps it is very difficult to have expectations any different from the sell-side which have an in-depth coverage of large caps,” says Srinivasan. As for mid caps, the key factors that the fund manager focuses on are — core competency, competitive advantage in business, minimum growth of 20% and consistent ROC of 20% over a period of time, reliable management and an attractive valuation. “We are not saying that we are buying because of excellent management, by that yardstick one cannot buy anything in India. It isn’t always just black and white, there is always a shade of grey,” he says matter-of-factly. He further elaborates that while the filters for relative and absolute funds are clearly defi ned, the stocks can be bought for any of the following reasons — market share, brand franchise, cost

THE FUND HOUSE RUNS TWO PHILOSOPHIES: LARGE CAP (RELATIVE RETURN) AND MID CAP (ABSOLUTE RETURN)

R SRINIVASAN'S SCORECARD Return in %

1-Year

3-Year

5-Year

10-Year*

2015

2014

2013

2012

2011

2010

SBI Contra

-0.10

13.17

6.89

13.06

-0.09

47.65

-1.75

34.24

-28.25

9.57

SBI Emerging Businesses

4.33

14.95

16.24

14.72

4.33

58.01

-7.87

56.31

-10.58

33.08

SBI Magnum Equity

2.43

15.53

9.96

15.06

2.43

42.65

5.54

29.89

-19.69

18.35

SBI Magnum Global

7.92

25.40

18.12

16.84

7.92

66.55

9.69

35.98

-14.20

18.10

SBI Small & Midcap

20.56

39.92

22.28

-

20.56

110.66

7.85

31.91

-24.31

18.97

As on December 31, 2015

*The scheme has been in existence before Srinivasan took over

competitiveness, tech advantage, regulatory edge and network effect.

A MIXED BASKET The Srinivasan-run Global Equity Fund comprises Procter & Gamble Hygiene and Health Care (P&G), Solar Industries India, Cholamandalam Finance, Grindwell Norton, Britannia Industries, and Dr Lal PathLabs among the top 10 holdings. While P&G continues to increase its market share in the feminine care market (currently 57%), so has Britannia under new MD, Varun Berry. In the case of Cholamandalam, he believes that even though they are not low on financials, the fund cannot be more than 8% underweight in the sector. Thus, to maintain a benchmark, it had to make a choice. “Shriram Transport Finance is by far the best in the commercial vehicle loan business. That’s because nobody has been able to do what it has done for decades. But Cholamandalam is the only player that has managed to make its presence felt in this business, if Shriram lends to seven of the 10 vehicles funded, the other three will be by Cholamandalam. Then again, we won’t simply buy anything in fi nancials because we need a sector representation…Chola also makes the cut due to its high ROC and better growth prospects,” Srinivasan points out. Since the emphasis is on quality and high-growth companies in the Global Business Fund, valuations may not necessarily be attractive. He is cognisant about it and defends his position, “In the Global Business Fund, the philosophy is more important than price. While quality is not a function of price, recommendation is always a function of price. So, at these levels, the sell-side could have a “sell” call.

P&G may underperform the market for three years, but it will not give a negative return of 50%. Stocks that can deliver 500% may also fall 90%, like we had seen in the case of JP.” Though P&G with an impressive portfolio comprising Whisper — India’s leading feminine hygiene brand — Vicks and Old Spice, is trading at 40x one year ahead, Srinivasan claims that the best is yet to come. “I strongly believe in the structural growth story of P&G that will be driven by low market penetration in the feminine care segment [two-third of sales] of around 15%. In addition to this, its distribution reach and diverse product portfolio make for higher entry barriers," he says. Despite the presence of Johnson & Johnson and attempts made by Emami to enter the sanitary napkin space, they have not been able to snitch market share from P&G. “There is a huge amount of brand stickiness and as more

AVERAGE SECTOR ALLOCATION (in %)

Metals 3 Textiles 4 Consumer durable 4

Communication 2 Diversified 1 Financial 23

Construction 5 Healthcare 6 Engineering 8

FMCG 12

Technology 9

Chemicals 11

Services 10 Energy 10

Automobile 10

As on December 31, 2015

Outlook BUSINESS / 4 March 2016

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and more women move up the affordability curve, brand aspirations will continue to rise. It’s not exactly getting commoditised as there is a tech edge which other domestic players can't match up to,” says Srinivasan. In fact, for the just concluded second quarter, the company posted a 62% jump in net profit to #147 crore riding on the back of a 11% rise in total income to #734 crore, with double-digit growth in Whisper’s sales. Srinivasan’s firm belief in P&G’s future performance stems from the way his bets on Page Industries, TTK Prestige and Hawkins have played out in the past. At 2.6% of assets, Page Industries continues to sit pretty in the top 10 holdings of the Global Fund and has returned a whopping 1100%-plus return since 2010 at the current level of #10,750, that is after the stock hit its closing high of #16,860 in mid-2015. “When we tanked up on Page it was an illiquid stock and to be honest, we didn’t expect the story to play out the way it has. When we bought it in 2009 at #600 - 650 levels, right up to #1,200, we expected it to double in three years with an earnings growth of 25%. What was clear to us was that the growth was occurring in the men’s category, but we never imagined that subsequently all its products — shorts, tracks, swimwear and women’s wear — would hit the big time,” explains Srinivasan. Though the management in Page has been paring down its stake from 65% in 2009, to 51%, as on date, Srinivasan is not too worried. “As long as the management continues to be a majority stakeholder after selling, you don’t panic. Especially in mid caps, if a promoter hasn’t seen so much wealth and observes a chance to make some money, it’s quite natural. It’s human nature.” The fund manager too has trimmed his position in the stock from 2.72 lakh shares to 50,000 shares.

APART FROM LOOKING AT BALANCE SHEETS, HE THOROUGHLY UNDERSTANDS THE BUSINESSES HE INVESTS IN 4 March 2016 / Outlook BUSINESS

Another multi-bagger that he took a while to identify was Eicher Motors, which the fund had held at a certain point of time. “I still remember, I was at a signal on my old Bullet, when a couple of guys offered me #30,000 for the 25 -year-old vehicle. I didn’t expect the motorcycle business to take off the way it did under Siddhartha Lal. I had bought the stock because it had cash on its books. But once things played out, I ended up looking smart with my purchase,” he smiles. Another stock that has found its way into three of Srinivasan’s schemes is Solar Industries India. It currently boasts of a 30% market share in India and a 57% market share in the exports of industrial explosives, making it the largest manufacturer of industrial explosives and initiating systems in India. It is present across the product value chain comprising bulk explosives, cartridge explosives, detonators, detonating cords, cast boosters, PETN (raw material for detonators) and HMX (warhead in missiles). During FY09 -15, even as coal mining production grew at 3% CAGR , the company saw a volume CAGR twice that of the overall industry at 6%. “Solar Industries has a huge cost advantage besides its 20 -25 factories,” points out Srinivasan. With the revival of demand in infrastructure and pending demand from recently awarded mines in the coal auctions, a strong pipeline of new tenders is expected in the coming years. More importantly, return ratios, which had dipped to 19% (RoE) and 17% in FY15 — as the company incurred capex due to increasing capacity and foraying into the defence business — are expected to improve going ahead. Srinivasan holds close to 21% of his three scheme’s assets in the stock, which also happen to be the fund’s top holdings. In the Emerging Business Fund, Srinivasan has loaded on quite a few stocks that recently went public such as Manpasand Beverages and Navkar Corporation. Apart from looking at their balance sheets, Srinivasan attempts to thoroughly understand the businesses he invests in. “In Manpasand, we have bought 8% in the fund across categories, except the Global Fund, as we couldn’t justify it on the competitive advantage aspect,” reveals Srinivasan. The Gujarat-based fruit drink manufacturer earns 97% of its revenue from the mango-based fruit drink ‘Mango Sip’ (with ~12 14% mango pulp content). Manpasand Beverages’ brands are present in 24 states through over 200,000 retailers, 2,000 distributors and 200 plus

TOP HOLDINGS (% of net assets as on Dec 31, 2015)

SBI Contra/ SBI Emerging Businesses/ SBI Magnum Equity/ SBI Magnum Global/ SBI Small & Midcap HDFC Bank Infosys State Bank of India Kotak Mahindra Bank

10.21/9.97/9.89 7.79/9.49 6.85/6.13 4.39/4.42/5.56

Axis Bank

4.24/3.86

Coal India

4.21/5.15

IndusInd Bank Procter & Gamble Hygiene

3.76 3.44/9.34/3.87

Hero MotoCorp

3.44

Bosch

3.21

Solar Industries India

7.57/3.95

Manpasand Beverages

5.80/6.39

Divis Laboratories

5.18

Navkar Corporation

5.17

3M India Shriram City Union Finance

4.90 4.59/2.57

Great Eastern Shipping Company

4.30

HCL Technologies

5.14

Tata Consultancy Services

4.38

Bharat Petroleum

4.11

Bajaj Finserv

3.42

Britannia Industries

3.48

Cholamandalam Finance MRF Tyres

3.35 3.06/6.44

Grindwell Norton

3.02

Kajaria Ceramics

2.78

Sundaram Finance

2.73

Page Industries

2.70

Shriram City Union Finance

2.57

Solar Industries India

9.40

TV Today Network

6.49

Radico Khaitan

5.17

Atul

5.12

Gabriel India

4.84

Relaxo Footwear

4.53

Nesco

4.15

Graphite India

3.77 Source: Value Research

super stockists. Its products are primarily consumed in semi- urban and rural markets. The company has two manufacturing facilities at Vadodara in Gujarat, one each at Varanasi in Uttar Pradesh and Dehradun in Uttarakhand and another is being set up at Ambala in Haryana. The beverage-maker deploys an innovative strategy to sell its products. It offers distributors higher margins of up to 15% by funding their vehicle purchases, paying for fuel and driver charges. “In doing so, it doesn’t spend on advertisements and manages to sell its products to places where Coke and Pepsi are sold,” explains Srinivasan. During the non-summer period, to keep the momentum going, it sells to the railways. “The best part about the company is that the promoter is passionate about the business and is a big admirer of BM Vyas, the man credited with transforming the Gujarat Co-operative Milk Marketing Federation into a #10,000 -crore brand, Amul. The company has managed to get Vyas on board as a whole-time director,” he adds. On a #360 -crore top line, the company earns a profit of #30 crore. Srinivasan has allotted 5.80% of the Emerging Businesses Fund assets to the stock, which has gained #46 to #440 since its listing in mid-2015. In the case of Navkar Corporation, the Maharashtra-based company owns container freight stations (CFS) in Panvel at close proximity to the Jawaharlal Nehru Port, the country’s largest container port. While the three CFS’ aggregate handling capacity stands at 310,000 TEUs (Twenty foot equivalent units) per annum, the company’s biggest advantage is that it has a private railway freight terminal, which allows them to load cargo from container trains and transport domestic cargo from inland destinations on the Indian rail network. It owns and operates 516 trailers for the transportation of cargo. “The company makes a decent ROC and has good assets with another inland container depot coming up in Vapi,” says Srinivasan, who has bet 5% of the Emerging Businesses Fund assets on this stock that made its debut on the Street in mid-2015. Among the new entrants in the stock market, Srinivasan has purchased 6.2 lakh shares of Dr Lal PathLabs, which listed in December 2015. He predicts that the diagnostic chain will eat into the unorganised market. “While blood testing is a highly commoditised business, the company has created a niche for itself in the biopsy space. More importantly, it makes a decent ROC of 35% on capital employed,” says Srinivasan. But he is also cognisant of the fact that the growth story is still a few years

Outlook BUSINESS / 4 March 2016

97

away and he is accordingly building that into his portfolio construction. “You can create a pocket for such stocks where you should be ready to say that I won’t make money on 15% but on the rest 85% I will manage to make money and stay in the top two quartiles. And then if I am right, the 15% will be my biggest driver,” he says.

LEARNING CURVE

98

Apart from riding on the high of making successful bets, there have also been instances where stocks have not performed the way he had envisaged. In 2012, when Srinivasan picked up SpiceJet, his reasoning was that the bleeding airline would be taken over by a bigger airline, with the Marans selling out. Since that didn’t happen till 2015, Srinivasan had exited the stock with a loss before that. Interestingly, it was when Ajay Singh was still a partial owner of the low-cost carrier that the fund manager had entered the stock. “Ajay Singh is brilliant, I should have got in again when he bought back his stake, but I was so screwed up because of the earlier loss that I did not consider the opportunity,” he admits. Similarly, JP and Wockhardt are the other stocks where the fund manager did not make money. It is to avoid such cases that the fund house has well-defined templates in place. Srinivasan points out that no one can deviate from the investing framework that the fund house has created since its revamp in late 2008. It is around this time that SBI Mutual Fund implemented a few changes — it got a chief investment officer in Navneet Munot, set investing templates for 70% of the schemes, which at that point looked all the same. “Each fund manager is tied to that template to ensure consistency,” explains Srinivasan. In addi-

SRINIVASAN SAYS THAT ACCORDING MORE IMPORTANCE TO ANALYSTS CREATES A CULTURE OF OWNERSHIP AND ACCOUNTABILITY 4 March 2016 / Outlook BUSINESS

RAPID FIRE  Biggest hits in five years SBI Magnum Equity: Tata Motors DVR, Eicher Motors, BPCL, HCL Tech and Maruti Suzuki SBI Magnum Global: Page Industries, Eicher Motors, Blue Dart Express, Amara Raja Batteries and MRF Tyres SBI Emerging Businesses: Page Industries, 3M India,

Divis Labs, Hawkins Cookers and Goodyear India SBI Contra: Blue Dart Express, Tata Motors DVR, Eicher Motors, Maruti Suzuki and Motherson Sumi Systems Note: Up to end-2015, balanced, for the equity component of 75%; Small cap, since we took over from Daiwa, i.e. November 2013

 Key success factors The research team, stock selection and loads of luck!

 My returns are driven by... SBI Magnum Equity: Five-year active return 36% (Allocation 12%, selection 24%) ABI Magnum Global: Five-year active return 103% (Allocation -3%, selection 106%) SBI Emerging Businesses: Five-yr active return 81% (Allocation 12%, selection 69%) SBI Contra: Five-year active return 11% (Allocation 9%, Selection 2%) * Note: Up to end-2015, Balanced, for the equity component of 75%; Small cap, since we took over from Daiwa, i.e. November 2013

 Currently bullish on We are overweight financials, energy and industrials tion to these steps, analysts were accorded more importance than the fund manager and in doing so it created a culture of ownership and accountability. “These three things have an element of sustainability which keep the fund house and its schemes functional even if I were to quit and go. That is what an investor wants. These guidelines ensure that there are no star fund managers but just an investing philosophy that investors trust.” Not surprising then that Srinivasan loathes the crystal gazing on which way the wind is blowing on the Street. “I have an eye on stocks and not on the market because there are too many moving parts at play, which you have no knowledge about. However, from a thematic perspective, as a team, we like consumption and manufactured exports. We are overweight financials, energy and industrials and underweight utilities and consumer staples. This is not a five-year view, but it’s pretty dynamic,” he concludes. b

PANKAJ TIBREWAL/36 Kotak Mutual Fund

EDUCATION

B.Com, MBA (Finance)

YEARS AS FUND MANAGER

9

CAREER

Prior to joining Kotak AMC, he worked with Principal PNB Asset Management as fund manager

AUM (#CR)

100

2,377 SCHEMES

Kotak Emerging Equity Reg-G Kotak Mid-Cap Reg-G Kotak Opportunities Reg-G Kotak Tax Saver Reg-G

WORST YEAR

BEST YEAR

2011: -26.64/-26.90/ -22.85/-26.03

2014: 87.32/74.02/ 49.95/56.61

RETURN (IN %) 1-YEAR

7.89 3-YEAR

22.79 5-YEAR

15.10 4 March 2016 / Outlook BUSINESS

MIDAS MASTER While his debut was at a less-thanauspicious time, Pankaj Tibrewal has made the most of the opportunities that have come his way

101

SOUMIK KAR

Outlook BUSINESS / 4 March 2016

I

102

Jash Kriplani

t may not have been the best of time to start one’s career in the financial market. The year was 2001: the world was shaken up by the 9/11 attack in the US and the dotcom bubble burst was a very recent occurrence. Around this turbulent time, Pankaj Tibrewal graduated from Manchester University and joined Principal Mutual Fund on the credit side. He says that back then, he didn’t have much of a choice when it came to picking debt or equity. “I was a newcomer in the industry. My thinking was to grab whatever I got fi rst.” From being a credit analyst at Principal, Tibrewal slowly started making his way into the business of managing funds. To begin with, he was managing funds only debt. Soon thereafter, he was given a hybrid fund with a equity side. During this time, he was also tracking a few sectors as an analyst at Principal. Tibrewal says it was this experience as a credit analyst in the early 2000s that helped him manage equity-oriented funds in the latter part of his career. To his credit, Tibrewal managed to steer clear of some leveraged infra names that got decimated after the 2008 crisis, ahead of time. “In 2007- 08, when I was at Principal, there was a lot of hype around construction companies and people were offering crazy valuations. I was wary of some of those names as they were not generating cash and were just leveraging their balance sheets,” Tibrewal recalls. “One company was calling itself the Infosys of the energy sector — it actually went on to create a huge market cap. Today, it is down in the dumps, as the cash flows were never really there — the company had been piling debt on its balance sheet just to support growth. Once the cycle turned bad, it was saddled with debt and was referred to the CDR cell,” Tibrewal says without naming the company. But no prize for guessing, the company is Suzlon. In a 2006 interview with a TV channel, Suzlon Energy’s chairman and managing director Tulsi Tanti had said that Su-

4 March 2016 / Outlook BUSINESS

zlon is Infosys, in terms of creating market value for its shareholders. While the start of his career was not a great time to be in business, November 2008, when Tibrewal got the chance to manage a pure equity fund, that is, the Principal Emerging Bluechip Fund, was not such a great time either. Stock markets all over the world were still trying to pick themselves up from the fallout of the sub-prime crisis. However, it all worked out in Tibrewal’s favour, as unlike most of his peers, he did not make any significant cash calls and was fully able to capture the 2009 rally. His fund gained 147.3% in 2009 and was the best performing fund in the industry that year. While the BSE benchmark Sensex had gained 78%, only 7% of the 322 funds had outperformed the markets, as several fund managers had taken significant cash calls. Banks and NBFCs dominated Tibrewal’s portfolio back then (17% of net assets), with pharmaceuticals (7.79%), consumer non-durables (6.6%) and IT (5.3%) being the other sectors that had a high weightage. Of course, his outperformance didn’t go unnoticed. In 2010, Tibrewal got a chance to work as a fund manager at Kotak AMC, where he has since been managing two pure equity schemes, that is, Kotak Emerging Equity and Kotak Midcap. Over the past five years, the funds have gained 15.9% and 14.3% absolute returns, respectively. Tibrewal has had his share of hits. For instance, he bought Shree Cements in September 2009, with

TIBREWAL EXPLAINS THAT CEMENT SECTOR IS A CLEAN WAY OF OF PLAYING THE INFRA SPACE, AS CEMENT COMPANIES’ BOOKS ARE BETTER

PANKAJ TIBREWAL'S SCORECARD 1-Year

3-Year

5-Year

10-Year

2015

2014

2013

2012

2011

2010

Kotak Mid-Cap

7.36

21.11

14.29

13.55

7.36

74.02

-4.91

50.23

-26.90

28.00

Kotak Emerging Equity

8.42

24.46

15.91

-

8.42

87.32

-5.07

47.99

-26.64

21.17

Returns in %

As on December 31, 2015

the stock gaining 507% since then. In fact, he continues to be heavy on the cement sector. Tibrewal explains that cement sector is a clean way of playing the infra space, as cement companies’ books are relatively better, there are ample cash flows and return ratios are healthy. Fittingly, both of Tibrewal’s current portfolios at Kotak feature Ramco Cements, JK Lakshmi Cement and JK Cement.

STARTING YOUNG Tibrewal developed a taste for the stock market thanks to his upbringing — he grew up in a tightlyknit Marwari household. “My brother and father used to invest in the market. From my brother, I learnt how to read quarterly reports and balance sheets. Then, in 1992 -93, my father lost quite a bit of money in the Harshad Mehta scam. The painful experience of seeing family money getting washed away in the markets made me realise that investing is not an easy business.” The experience motivates Tibrewal till this day. “I can’t let down the retail investors who have put in their hard-earned money in my fund.” Tibrewal also got a peek into how businesses function through lessons at home. “My father runs a transportation business. While I was pursuing my commerce under-graduation degree at St Xavier’s

AVERAGE SECTORAL ALLOCATION in %

Metals 3 FMCG 4

Energy 3 Communication 2 Financial 18

Automobile 4 Technology 4 Textiles 5

Engineering 13

Cons Durable 8

Chemicals 10

Services 8 Healthcare 9

Construction 9

As on December 31, 2015

College, I used to visit my father’s office during the day. My schedule used to be to wake up at 5 am, attend college from 6 am to 9.45 am, then go to my father’s office and come back home at 9 pm, and finally study till midnight and then be off to sleep.” Tibrewal says his investing style is about identifying companies with a track record of high return ratios and competitive edge at the right price. For instance, when Tibrewal set his sights on the explosives manufacturer Solar Industries in FY09 while still at Principal, the Nagpur-based company’s average RoCE over the previous four was 21.5%, and the average trailing 12 -month price-to-earnings ratio was 15x in FY09. The company had a market share of 16% in the explosives market. The Principal Tax Saver Fund in September 2008 had built a position of 89,722 shares in the company at an average price of #400. From that average price, the stock has run up 657%, trading at 36x. From a #700 -crore market cap in September 2008, today, the company’s valuation stands at #5,586 crore. Similarly, when Tibrewal’s Mid Cap and Emerging Equity bought Bajaj Finance in July 2013, the NBFC had posted RoE in the range of 19 -22% in the previous three fi nancial years. “The ability of the company to build a diversified retail asset base with market share gains, focus on risk management and superior return ratios has led to the re-rating,” Tibrewal says. Tibrewal has stuck to star performer Solar even at Kotak: the company was included in the Kotak Midcap Fund in August 2011. The stock has gained 297% since then. Tibrewal has also had some success in the auto ancillary sector. The Kotak Midcap Fund built a position in MRF in September 2012. Since then, the stock has surged nearly 250%. Apart from auto ancillaries, Tibrewal has also made good returns from his investments in consumer-facing companies — Kewal Kiran (304%) and Britannia (290%). Going forward, Tibrewal believes infrastructure is the sector to be in, as it is going to trigger the next leg of growth. “Cement is a cleaner and better way to play infra and housing growth rather than asset owners and also the

Outlook BUSINESS / 4 March 2016

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other way to play infra revival is through good quality capital good and engineering companies and early cycle plays like bearings.” At 2.56% of net assets, Bearings has seventh highest weightage in the Kotak Midcap Fund. Tibrewal’s past experience in the bearings sector has also been a good one. In March 2010, Tibrewal bought shares of the Kolkata-based bearings manufacturer SKF India. Since then, the company’s stock has gained 237%. While Tibrewal does not have many regrets, he does rue the times when he exited early from a position and missed further re-ratings of some of his investments. “About two years back, there were a couple of companies that we exited from. In the next two years, there were multiple reratings on these counters and their earning surprises continued for the next few quarters. One was an auto OEM company and the other was a consumer-facing company. They gained 2 -3x our exit price and were the best-performing stocks in the past two years. We sold because we thought the valuations were expensive, but the valuations continued to rise. We estimated the earnings wrongly and the earning surprise continued for the next few quarters. However, over the years, Tibrewal has learnt how to remain calm and not let market volatility disturb his decision-making. “At times, it is natural to get worried if the performance is not that great. But I try and remain patient and check whether the reasons for which I bought the company continue to exist. To un-

TOP HOLDINGS (% of net assets as on Dec 31, 2015)

Kotak Emerging Equity Reg/ Kotak Mid-Cap Reg Whirlpool Of India

3.56/2.54

Ramco Cements

3.35/3.08

Solar Industries India

3.16/2.88

Indusind Bank

2.75/3.06

V-Guard Industries

2.63

Hawkins Cookers

2.56/2.61

FAG Bearings India

2.53/2.57

Finolex Cables

2.39/2.74

Persistent Systems

2.36/2.57

DB Corporation

2.19

Techno Electric & Engg Co

2.56

Supreme Industries

2.46 Source: Value Research

4 March 2016 / Outlook BUSINESS

RAPID FIRE  Biggest bet in five years Bajaj Finance, which grew 9x in last five years

 Key success factors Sticking to the core investment philosophy. Focus on long-term risk adjusted return

 Fund managers you admire: Anthony Bolton of Fidelity Special Situation Fund in UK . He managed the fund for 28 years, generating an

annualised return of 19.5%, far in excess of 13.5% for the index. His investment philosophy was for a longer haul and his investment style in managing an openended fund was admirable

 Other investors you monitor I look at portfolios of fund houses that have a long track record of superior performance

 My return is driven by... Stock selection

 Confidence in replicating past performance The focus is on generating consistent risk-adjusted return on a long-term basis by sticking to our core investment philosophy. If we are successful in doing that I don’t see a reason why we shouldn’t generate superior performance going forward

 Currently bullish on Cement, capital goods, auto ancillary and bearings wind and maintain my focus, I make sure I do some meditation and chanting every morning. It helps me stabilise myself and start my day on a fresh note.” That calm and composed attitude seems to be showing up on his portfolio, too, now more than ever. “From a medium- to long-term it is a stock-picker’s market. Over the medium- to long-term as the global volatility subside, this time you would see a good amount of disproportionate flows coming into India. The Indian macro, which we dreamt 5 -7 years back, is a reality today i.e. low commodity, low inflation, low current account, decent fiscal deficit and a pro-active and a stable Government. Companies with high cash flows and having invested in this downturn will be able to out-perform its peers and march ahead.” b

The year 2016 has begun on a note of increased volatility and stress across global markets. Equity markets fell, spreads on high-yield bonds widened, and commodities tanked further. The current downtrend in the market is being compared with 2008 and reasonably so. Historically, whenever we see equity market fall of more than 10 per cent, the period has coincided with an economic recession. While the world economy has some structural challenges, there is a tail risk that current financial market stress can have a reflexive impact on the fundamentals themselves. The improving labour market in developed markets, strength in European manufacturing activity and strength in US consumer balance sheet indicate sufficient muscle power to keep the growth at current levels. Globally, markets have become strongly linked to crude oil in the recent months. Even for the Indian market,

which diverged from crude oil movements last year, saw renewed correlation with crude oil prices over last few months. On the domestic front, the fundamentals of the Indian economy are relatively better than that of most other emerging market economies. But these better macros are yet to translate into better micros. A broadbased earnings recovery is yet to take shape. Some of the hard hitting measures taken to improve the macro have affected India’s micro. For instance, fiscal consolidation by way of curbing revenue spending (low MSP hike, reduced subsidies) has led to a fall in rural income. While contained inflation is a boon for overall economy, it has caused nominal growth to slip below the cost of borrowing, thus hurting the debt dynamics for the private sector. A low nominal growth also hits corporates’ ability to improve their revenues. Other factors like two successive years of bad monsoon (hence low rural income and demand) and weak global demand has also led to persistent capacity under-utilization. And lastly, stress in corporate balance sheet which in turn impacted bank balance sheet are some of the reasons affecting corporate profitability.

The above piece reflect the personal views of Navneet Munot, Chief Investment Officer, SBI Funds Management Private Limited.

105 109

Recently, IIFL Wealth sold its 21 per cent stake for R1,220 crore to General Atlantic (a PE firm). While many deals happen in a year, this deal underscored a particular thing—the value of the financial intermed iation a nd distribution business. And the fact that a PE has paid for it, means that they see the business and its valuation growing far more rapidly than is currently visible. What I am arriving at is that IFAs are sitting on a large gold mine, but are mining individually and therefore in small quantity. In our IFA community, many are good at identifying potential investor communities, many at reaching out to them; many at communicating; and many at selling and retaining them. Due to these unique skills developed over a period of time, we have IFAs who have created individual islands of excellence. But they are operating in isolation. They are utilising

only one or two of their unique selling points; and still these IFAs have managed to do wonders. The time has come that these islands of excellence come together. Only when these different operating efficiencies merge will a more robust, a more enriching and a more fulfilling business enterprise rise. IFAs need to come together and corporatise their individual businesses into a corporate structure to create and sustain significant value for all contributors. Such a merged and corporatised IFA setup would have reach and access to towns, cities, villages and settlements. A corporatised IFA entity would help India mobilise and allocate its savings more effectively. It will give further depth to the domestic capital markets, accelerate financial integration and boost entrepreneurship. This fact and its benefits need to be now understood by IFAs. Unification and corporatisation is not a loss of freedom. It is gaining of reach, access, brand, organisation, and size. It’s not an easy job. But it’s not an impossible dream either. The above piece reflect the personal views of Nilesh Shah, MD, Kotak Mahindra Asset Management Co. Ltd. Outlook BUSINESS / 4 March 2016

KRISHNA SANGHVI/42 Canara Robeco Mutual Fund

EDUCATION

B.Com, ICWA, MMS (Finance) and CFA from ICFAI

YEARS AS FUND MANAGER

9

CAREER

Prior to joining Canara Robeco AMC, he has worked with Kotak Mahindra AMC and Kotak Mahindra Old Mutual Life Insurance 106

AUM (# CR)

1,746 SCHEMES

Canara Robeco Emerging Equities Reg-G Canara Robeco Equity Tax Saver Reg-D

WORST YEAR

BEST YEAR

2011: -22/-16

2014: 96/45

RETURN IN % 1-YEAR

6.83 3-YEAR

23.59 5-YEAR

16.15 4 March 2016 / Outlook BUSINESS

SLOW BUT STEADY Despite an initial attraction, Krishna Sanghavi took his own time to warm up to the equities

Jash Kriplani

T

SOUMIK KAR

he year was 1993. India had just opened up its economy. A nation was cutting ties with its old ways and looking to break free from the shackles of the Hindu rate of growth. Krishna Sanghavi, a fresh commerce graduate from Sydenham College, had just begun pursuing his master’s degree in management studies at the Narsee Monjee Institute of Management Studies, when his love affair with equities blossomed. “I was young and excited. I started investing in the market, including IPOs,” he recalls. “I also had friends who invested in the market and we discussed trends with each other.” But Sanghavi had never imagined that idle chatter among friends would one day turn into serious business. This serious business fi nally took shape in January 2007, when Sanghavi moved to Kotak Mutual Fund from Kotak Life Insurance, and from there to Canara Robeco in September 2012. Of course, Sanghavi took his own sweet time to move to the fund management industry. After finishing his MBA , he worked at the development financial institution IDBI for a couple of years. Working on the credit side, Sanghavi’s job was to check the financial statements of companies before loans

Outlook BUSINESS / 4 March 2016

107

KRISHNA SANGHAVI’S SCORECARD Return in %

1-Year

3-Year

5-Year 10-Year*

Canara Robeco Emerging Equities Canara Robeco Equity Tax Saver

13.06

31.74

21.47

17.11

0.60

15.44

10.83

16.39

2015

2014

2013

2012

13.06

96.02

3.16

48.89

-22.28

28.32

0.60

45.17

5.34

29.99

-16.35

24.93

TOP HOLDINGS

108

(% of net assets as on Dec 31, 2015)

Canara Robeco Emerging Equities Reg/ Canara Robeco Equity Tax Saver Reg IndusInd Bank

3.57/3.35

Indian Oil Corporation

2.88

Tata Communications

2.39

Ashoka Buildcon

2.27

Arvind

2.23

Divi's Laboratories

2.21

Britannia Industries

2.21

Navin Fluorine International

2.14

Tata Elxsi

2.10

Atul

2.09

HDFC Bank

7.40

Reliance Industries

6.41

Infosys

5.90

Axis Bank

3.05

Tata Motors DVR

3.02

State Bank of India

2.97

ICICI Bank

2.96

Hindustan Petroleum Corporation

2.73

UltraTech Cement

2.49 Source: Value Research

4 March 2016 / Outlook BUSINESS

2010

As on December 31, 2015

* The scheme has been in existence before Sanghavi took over

were disbursed for their existing projects. After that, Sanghavi moved to the Kotak Group and worked there for the next 15 years. Initially, he was deployed in the company’s retail finance business and also did a bit of fi nancing for automobile dealers. But Sanghavi’s interest in the stock market persisted and in 2000, he tried to move to the mutual fund industry. However, life had other plans and he got a shot at the insurance industry instead, joining Kotak Life Insurance in August 2000. It is here that Sanghavi had his fi rst brush with fund management. His initial investments were largely restricted to risk-free instruments such as T-Bill and Government Securities, as premium money was yet to trickle in. “But as money started coming in, we started out with fixed-income investments. At that time,

2011

we had not yet launched any unit-linked plans. In 2003, we launched a unit-linked plan and that is the first time in my career that I got a chance to manage equity assets,” Sanghavi recalls. In January 2007, he moved to Kotak Mutual Fund and was there all the way till August 2012. Right away, he was given the responsibility of managing six schemes. As Kotak AMC continued to expand and hire, Sanghavi was able to focus all his energies on Kotak Opportunities and a new fund called Kotak Select Focus from 2009 onwards. He narrowed down on Yes Bank which was trading at #134. When he bought it, the bank was still a new player in the banking industry and in 2008, the bank’s stock had corrected by as much as 80%, as the subprime crisis had sparked a selling frenzy among banking stocks. However, as a relatively new entrant in the industry, Yes Bank was in expansion mode and was recruiting new people. Its growth story had also not shown any signs that suggested ugly twists in its tale. The company’s assets had grown at a CAGR of 76% over FY06 FY09. By the time Sanghavi was ready to move on from Kotak, the fund held 6.4 lakh shares at an average price of #334, which was 2.3x higher than the original cost of acquisition. Since then, private bank stocks have always been on Sanghavi’s radar. He says that his best calls in the last five years have been among private banks, which have

AVERAGE SECTORAL ALLOCATION in %

Diversified 2 Energy 2 Services 3

Communication 1 Textiles 1 Financial 30

Engineering 4 Cons Durable 6 FMCG 6 Chemicals 8

Automobile 13

Technology 9

Healthcare 12 As on December 31, 2015

a preference towards retail lending. “These banks have demonstrated a healthy growth momentum on both asset and liability franchises, and without diluting qualitative parameters.”

RAPID FIRE  Biggest hit in five years Private sector banks with preference to retail lending

STRATEGIC MOVE

 Key success factors

IndusInd Bank is another investment that has worked out well for Sanghavi. In October 2013, when Canara Robeco Emerging Equities bought shares of IndusInd Bank, the stock was trading at an average price of #416. Today, the stock is trading at #812 or close to 2x higher. A positive management change and a strategic call to focus on the retail business drove Sanghavi to buy the stock. The bank continues to grow its topline as well as bottomline. “The weak capital base of certain state-owned banks has given other players an opportunity to eat into their market share,” Sanghavi says. He does admit that luck has been a key factor in his success. And this luck came in handy when regulations made it mandatory for trucks to have antilock braking systems (ABS). An ABS helps control the vehicle during emergency braking at high speeds by unlocking the wheels and allowing traction control by electronic distribution of pressure to them. Sanghavi’s Canara Robeco Equities Fund had the largest supplier of these systems — Wabco India — sitting in its portfolio. And this stock had already been bought by the fund in September 2011, a year before Sanghavi joined Canara Robeco. The stock began rallying from June 2013, amid reports that the government was mulling making ABS systems mandatory. In fact, in the run-up to the official announcement in June 2014, the stock rallied more than 80%. After the decision was made public, the fund started to increase its stake and ride the next leg of rally. The stock was trading at an average price of #2,896 in the month of June, 2014 and today, the stock is trading at #5,671. One sector that Sanghavi is keeping close tabs on is logistics. Currently, his company’s Emerging Equities Fund holds Gateway Distriparks, the Transport Corporation of India and crane supplier Sanghvi Movers. “Logistics is a highly unorganised sector. The largest players don’t have more than a 2 -3% market share. That leaves a lot of turf for the organised players to move in and capture,” Sanghavi says. “The government’s thrust on the infrastructure space would also create opportunities for the logistics sector. For instance, a crane company’s services would be required to transfer equipment needed for the construction of a power plant or windmill. The e-commerce boom is also good news for logis-

Team support, hard work, discipline and luck

 Fund managers you admire: Those able to identify emerging trends and those who demonstrate conviction and sit through stormy weather

 My returns are driven by... ...combination of allocation and stock selection

 Confidence in replicating past performance No comments

 Currently bullish on: Consumers, banks and logistics tics companies.” As things stand, the fiscal situation in oil-rich countries amid plunging oil prices, the slowdown in China and the delay in private sector capex are all weighing down on the market, Sanghavi says. “Today, most Indian corporates are suffering from leveraged books, while some are facing trouble due to exposure to international markets not playing out well. However, over the long term, we see an economic revival triggered by infrastructure capex. In the past 18 months, the government’s focus has shifted back to infrastructure.” The Emerging Equities Fund has thus already invested in power and railways sectors. For instance, Texmaco Rail & Engineering and power transmission companies Techno Electric & Engineering and Kalpataru Power Transmission are all part of the Emerging Equities Fund. “So far, the government’s focus has largely been on building generation capacity in the power sector. However, in the past 12 -18 months, the focus has been on the transmission and distribution space. Equipment supply companies can benefit as a result of the incremental capex,” he explains. So far, this strategy has stood Sanghavi in good stead, as the Emerging Equities Fund has delivered a return of 21% over the past five years. But Sanghavi admits that in the future, if a fund were to cash in on the government’s focus, the challenge would be to fi nd companies with good balance sheets, a low interest burden and relatively low capital requirement. That can’t possibly be an easy fi nd, but Sanghavi will surely find a way. b

Outlook BUSINESS / 4 March 2016

109

110

4 March 2016 / Outlook BUSINESS

CHIRAG SETALVAD/41 HDFC Mutual Fund

EDUCATION B.Sc, MBA

YEARS AS FUND MANAGER

15

CAREER

Prior to rejoining HDFC AMC, he had worked with New Vernon Advisory Services, and ING Barings

AUM (# CR)

111

14,066

LEARNING FROM THE MASTERS

SCHEMES HDFC Capital Builder HDFC LT Advantage HDFC Mid-Cap Opportunities HDFC Small and Mid Cap Reg

Chirag Setalvad has held on to his headstart after picking up the basics from the stalwarts at his fund house

WORST YEAR

BEST YEAR

2011: -24/-23/ -18/-26

2014: 52/45/ 77/51

RETURN (IN %) 1-YEAR

3.61 3-YEAR

20.97 5-YEAR

SOUMIK KAR

12.50 Outlook BUSINESS / 4 March 2016

C

112

Kripa Mahalingam

hirag Setalvad was all of 25 when he started his stint as an analyst at HDFC Mutual Fund during its inception. Two years into the fund’s existence, he managed his first fund, HDFC Tax Plan 2000, which had a corpus of #1.5 crore. He left in 2004 to join hedge fund New Vernon Capital, only to come back in 2007. Today, he manages four funds with a corpus of #14,066 crore. The straight shooter readily admits that a fund manager may not always be the smartest person in the room. Then comes the caveat. “It is not always the smartest guy who turns out be the best investor. The guy who is hard-working, afraid of losses and who sticks to common sense is the one who is more successful,” says the 41-year-old. When Setalvad is not making his investors richer with this simple philosophy, he is spending time with his toddler son.

TRYST WITH STOCKS It was during Setalvad’s first job with ING Barings in the investment banking division from 1997 to 2000 that he started reading up on stocks. “I wasn’t doing much back then and the organisation wasn’t doing much either. But they had all the resources — a high-quality database, extensive collection of research reports and a solid research team.” Setalvad didn’t need to count on too many people for inspiration or to seek guidance after moving to HDFC Mutual Fund. After all, he had Sanjoy Bhattacharyya and Prashant Jain — two of India’s smartest money managers — as his immediate bosses. “I have been very lucky to work with both. Bhattacharyya gave me a great introduction to the business and taught me the most basic principles of investing and stocks. Jain is a tremendous investor and thanks to his great track record, I got a rare opportunity to witness the

4 March 2016 / Outlook BUSINESS

rigour and discipline inherent in the process. Both have different styles and I was fortunate to learn from them. You had to be an idiot to not absorb a lot after working with them,” he laughs. His early bosses not only helped shape Setalvad’s investment philosophy, but also the fund house’s philosophy. “This is what we practice across for all our funds — to buy good quality companies at reasonable prices, hold them over a period of time, buy during adverse times and stick to our circle of competence. All fund managers are going to say this. No one is going to tell you that we buy bad businesses at high prices. But the proof of the pudding lies in the portfolio,” he says. While performance could move up or down depending on the market, the RoCE and RoE of the portfolio has been 1-3% higher than the benchmark, while the P/E of the portfolio has been 5 -10% lower than the benchmark on an average.

MAKING THE RIGHT ASSESSMENT Setalvad explains that before investing in a business, he looks at how the company has performed over a period of time. “I look at the variability in the margins over a period of time, which gives me a sense of profit and loss in connection with the balance sheet. I also look at how efficiently the management has deployed capital, look for some

BEFORE INVESTING IN A BUSINESS, SETALVAD LOOKS AT HOW EFFICIENTLY THE MANAGEMENT HAS DEPLOYED CAPITAL OVER A PERIOD OF TIME

CHIRAG SETALVAD’S SCORECARD 1-Year

3-Year

5-Year 10-Year*

2015

2014

2013

2012

2011

2010

4.61

20.61

11.46

14.69

4.61

-51.95

10.37

28.42

-23.64

28.44

HDFC LT Advantage

-2.4

16.15

9.08

11.91

-2.4

44.68

10.96

28.83

-23.48

28.37

HDFC Mid-Cap Opportunities

5.81

27.02

18.5

-

5.81

76.63

9.64

39.62

-18.31

32.13

HDFC Small and Mid Cap Reg

6.42

20.12

10.96

-

6.42

51.48

7.52

31.57

-26.21

23.27

Return in %

HDFC Capital Builder

As on December 31, 2015

* The scheme has been in existence before Setalvad took over

stability in the return generated on capital and how the company has fared in comparison with its peers. We like companies that manage difficult businesses well,” explains Setalvad. He cites the example of Supreme Industries. “The company is into plastic processing and it is not an easy business. It has a 30% operating margin business with consistent return on equity and capital employed. The company has a great brand and distribution and it sells a product we all understand. This is the kind of business we like to own.” In the case of the plastic processing company, what helped it stay ahead in a commoditised business was its product selection. The company chose to stay away from the B2B and B2G segments and supplied to individual consumers instead. “Supreme Industries could have chosen to sell sewage pipes to the government, but it is so much harder to sell to the government or even to sell canisters to businesses, since this is a commoditised business. It also has a packaging business that is doing extremely well,” he adds. Amara Raja Batteries, Bayer Cropscience and Grindwell Norton were some of the other stocks that checked all the boxes for Setalvad. What sweetened the deal in the case of Supreme Industries and Amara Raja is the fact that the fund house managed to buy the stocks at reasonable valuations. “It is not enough to buy good-quality businesses — you have to do that at reasonable valuations. Supreme Industries was perceived as a commodities business, so we got it cheap. Similarly, in the case of Amara Raja, the market was more enamoured with Exide, which was quoted at 13 -14x. Amara Raja, on the other hand, was quoted at 8 -9x because it was perceived as a weak competitor. All that has changed now,” he says. Vesuvius India, which supplies refractories to steel companies, was another quality business the fund managed to get

for a bargain. “It has technology coming in from the parent company and its Indian operations are efficiently managed. So, we were getting global technology at Indian costs and the company was doing really well. However, the market perception was that it was a commodities business since it was supplying to steel companies.” Apart from a thorough check of all the parameters of a company’s business, what Setalvad also prefers to do each time is set up a meeting with the management. One such chance meeting with officials from Bajaj Finance, the largest holding in Setalvad’s mid-cap fund, changed his perspective about the company. “I was aware that it was a good business, but when you go ahead and meet the senior management, you see the passion that is at work across the company. You can ask the officials directly, say, what the cost of distributing product A in region C was and how it has changed over the past two years. They will know all the details — they live and breathe the business, after all. I came back very impressed after meeting them,” he explains. Apart from its great

AVERAGE SECTOR ALLOCATION in %

Metals 4 Consumer durables 4 Construction 4 Diversified 6 Automobile 6

Textiles 3 Construction 1 Financial 22

Technology 9

Services 6

Health care 9

Chemicals 6

Energy 8

FMCG 7 As on December 31, 2015

Engineering 8

Outlook BUSINESS / 4 March 2016

113

RAPID FIRE

...a bottom-up approach

So, does he take the risk of owning a business that he doesn’t understand? “I have never owned too much of real estate, as the cash flows in the business are opaque. Commodities is more of a global business, which is difficult to understand sitting here in India. Across the cycle, I am not clear of how much return of equity it generates. It is much harder because you have to get the cycle right. Personally, I find telecom also a little difficult to comprehend. There’s a lot of regulation and competition. It is a tough business,” he says. But even such sectors end up providing valuable lessons. And Setalvad says he has taken his mistakes and missed opportunities as a learning platform to do better.

 Confidence in replicating past performance

LEARNING FROM MISTAKES

I don't know about the past five years, but the next five years are going to be good

When the going is good, mid caps get more than their share of attention from the market, but the reverse holds true as well. But managing volatility has been no hurdle for the fund manager. Why is this? “Market volatility is something everyone has to deal with. While one just needs to ride out volatility, the pressure to get out is more when the business starts turning adverse. In a large portfolio, it doesn’t matter if five to six stocks underperform, because the problem actually arises when a large part of the portfolio doesn’t do well. Though we haven’t had too many challenges in the past seven to eight years, today, we hold a lot of PSU banks. They have done badly and asset quality has gone to new lows. We are holding on to them and only time will tell how it will work out.” Commenting specifically on some of the promising opportunities that his fund ended up missing out on, Setalvad says, “Oh, that would be a long list. If we had zeroed in on every opportunity, our NAV would have been #93, not #33. We

 Biggest hits in five years Supreme Industries, Bajaj Finance, Vesuvius and SKF Bearing

 Key success factors Common sense

 Fund managers you admire: KN Siva Subramaniam at Franklin Templeton;

Pulak Prasad at Nalanda Capital

 My returns are driven by...

 Currently bullish on: Economically sensitive sectors

114

understanding of the business, Bajaj Finance has very good MIS systems and is great in execution and cross-selling products.

RISKY AFFAIR Although quality mid-caps help you generate a higher alpha compared with large-caps, some of them come with execution risks and have little to show in terms of track record. So, how does one mitigate execution risks? “There is a lot of misunderstanding that execution risk, overleverage, poor management quality and corporate governance are issues faced more by mid-cap companies. I strongly disagree because you have some of India’s most dishonest managements running some of the biggest companies. There are incredibly difficult execution risks in larger companies as well. Leverage is a function of the nature of the business and the decision of the management, not a function of the size of the market cap,” he says. According to Setalvad, as long as the fund house sticks to the basic investment framework, it needn’t worry about execution risks. “For us to understand the risks, we need to understand the business. We do a lot of channel checks with suppliers, customers, ex-employees and dealers. We also speak to other investors and look at companies overseas and unlisted companies in the same space,” he says.

4 March 2016 / Outlook BUSINESS

SETALVAD ADMITS HE HASN’T OWNED MUCH OF REAL ESTATE BECAUSE HE THINKS THE CASH FLOWS IN THE BUSINESS ARE OPAQUE

missed some opportunities in pharma stocks, especially Glenmark and Cadilla. Before Sun Pharma turned to mega-cap, we had the stock in our portfolio, but never held it in size or duration. We missed out on IndusInd Bank and didn’t own enough of HDFC Bank. In the case of Sun Pharma and HDFC Bank, we felt the stocks were expensive and got swayed too much by the price. But because they compounded so well, the stocks did extremely well over a long period of time. What we learnt from this was

TOP HOLDINGS

SETALVAD FEELS FINDING QUALITY COMPANIES AT REASONABLE VALUATIONS IS BECOMING DIFFICULT FOR INVESTORS

(% of net assets as on Dec 31, 2015)

HDFC Capital Builder/ HDFC LT Advantage/ HDFC Mid-Cap Opportunities/ HDFC Small and Mid Cap Reg ICICI Bank

6.06/6.96

Infosys

5.34/7.46

HDFC Bank

5.07/5.29

Reliance Industries

5.04/4.15

Grasim Industries

5.01

State Bank of India

4.56

Tata Motors

4.31

IndusInd Bank

3.28

Cipla

3.17

Bharat Petroleum Corporation

3.03

Tata Motors DVR

4.75

Larsen & Toubro

4.59

HDFC Bank

4.49

Tata Consultancy Services

4.33

Vesuvius India

3.54

Supreme Industries

3.51

Bajaj Finance Voltas Aurobindo Pharma Hindustan Petroleum Corporation

3.17/2.73 2.67 2.49/4.23 2.27

Divis Laboratories

2.25/2.26

Torrent Pharmaceuticals

2.15/2.11

NIIT Technologies

2.05/2.49

Bharat Electronics

1.93

Ipca Laboratories

1.87

Axis Bank

1.85

Sarla Performance Fibers

2.71

Titagarh Wagons

2.49

Navneet Education

2.28

LIC Housing Finance

2.01

KEC International

1.98 Source: Value Research

to pay a little more if you fi nd a good business. As Buffett would put it, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” HUL went all the way to #85 and we still didn’t buy into the stock. We didn’t want to own something at the bottom of the cycle. That was a different kind of mistake. Things looked difficult back then and sometimes you forget to consider that things eventually normalise and you end up not owning the stock,” he adds. But with the market getting ever more efficient over time, Setalvad says finding quality companies at reasonable valuation is becoming a difficult task. “When we started out, we didn’t even have the luxury of quarterly reporting and it was easier to dig deep and find these rare stocks. Now, we have 51 analysts covering Infosys and the market will continue to be more efficient over time, meaning that we have to work harder.” But Setalvad says he remains optimistic about the market over the next three years. “Improved earnings growth and reasonable valuations should result in higher stock returns. We expect earnings growth to be driven by a recovery in revenue growth and better operating leverage. Operating margin will also be boosted by softer commodity prices and lower interest costs.” He expects the economy to be in better shape over the next couple of years on the back of cyclical recovery, increased government investments, better consumption and a better regulatory environment. So, Setalvad is bullish on economically sensitive sectors such as fi nancial, industrial, infrastructure and energy spaces. He also feels that a falling market is a great opportunity to buy into good companies at reasonable valuations. No wonder, then, that Setalvad is smiling a bit more these days. For him and his fund, the great big discount sale is on, and he plans to make the most of it. b

Outlook BUSINESS / 4 March 2016

115

MRINAL SINGH/36 ICICI Prudential Mutual Fund

EDUCATION

B.E (Mechanical), MBA

YEARS AS FUND MANAGER

7

CAREER

He has been associated with ICICI Prudential AMC since June 2008

AUM (#CR)

116

13,195 SCHEMES

ICICI Pru Advisor-Very Aggressive-G ICICI Pru Midcap Reg-G ICICI Pru Select Large Cap Reg-G ICICI Pru Value Discovery Reg-G

WORST YEAR

BEST YEAR

2011: -11.36/-32.60/ 23.76/23.73

2014: 26.62/86.96/ 39.59/73.76

RETURN (IN %) 1-YEAR

0.80 3-YEAR

19.19 5-YEAR

11.75 4 March 2016 / Outlook BUSINESS

VALUE PURSUIT Mrinal Singh’s bet on out-offavour stocks across sectors has delivered big hits

117

SOUMIK KAR

Outlook BUSINESS / 4 March 2016

Jash Kriplani

I

118

don’t belong to any one place,” declares Mrinal Singh, deputy CIO, equities, ICICI Prudential Mutual Fund. He is referring to having grown up in different parts of the world and describes how his father’s transferable engineering job took him across the globe. However, what seemed to have intrigued the young engineer was the stock market. “During my school days, I was interested in stock quotes that appeared in newspapers. Back then, I couldn’t understand any of it.” By then, the curiosity had turned into an interest. “During my student life, I always asked around for guidance. I spoke to informed people, some acquaintances and relatives. They suggested that I pursue an MBA in order to work in the fi nancial markets.” So, when the 20 -something Singh completed his graduation, he knew what he wanted to do. Singh joined the R&D department at Robert Bosch GmbH Motor Industries in October 2000. After a three-year stint at the mobility technology service provider, Singh secured an MBA in finance from the SP Jain Institute of Management& Research in Mumbai. He followed this up with a job at Wipro, as a financial consultant. It was finally in June 2008 that Singh found an opportunity to fulfill his true desire to work in the financial markets when he joined ICICI Prudential Mutual Fund. Fate certainly was out to test the young professional as he entered the sector a few months before the 2008 global financial crisis unfolded.

UP FOR THE CHALLENGE In August 2009, Singh was assigned the technology fund. The Indian IT sector was in dol-

drums then as the industry struggled to fi nd its feet after two major blows. First was the Satyam scam and the other was the subprime crisis. The latter exposed the rot in the US economy, which was a major source of revenue for the country’s IT sector. Indian IT firm eClerx Services found itself in the middle of the financial crisis storm. The knowledge processes outsourcing vendor was a client at Lehman Brothers, the investment bank that was one of the first biggest casualties of the mortgage crisis. eClerx had informed the domestic exchanges that the company earned as much as 13% of its revenue from one of its clients that ‘recently filed for a petition under Chapter 11 of the US Bankruptcy Act in a New York court’, without naming the bank. As per media reports, Lehman Brothers owed the Indian firm $1 million. In 2008, the stock had corrected 80%. Singh recalls the difficult phase, “There were concerns about the US economy. IT is a B2B business. As long as the clients are there, they need those services. So, the crucial thing was to look at companies and the profi les of its clients. There were companies where the risk-reward proposition was interesting.” Around 3 lakh shares of eClerx Services valued at #299 were already part of the ICICI Prudential technology fund, bought in December 2007. When Singh took over the fund in August 2009, the price was #162. The fund’s exposure in the previous month was 4.2 lakh shares. However, Singh continued to buy eClerx. In the first six months of heading the fund, he had 50,000 shares. During this period, the average price was of #192. Singh’s call was bang on as the fund sold its last tranche of shares in June 2011, when the av-

MRINAL SINGH’S SCORECARD 1-Year 3-Year

5-Year 10-Year*

ICICI Pru Advisor-Very Aggressive

3.90

7.38

ICICI Pru Dividend Yield Equity

-5.19

Return in %

9.74 -

-

ICICI Pru Midcap

5.09

28.3

14.85

ICICI Pru Select Large Cap

-5.22

13.05

7.59

ICICI Pru Value Discovery

5.44

25.66

17.17

* The scheme has been in existence before Singh took over

4 March 2016 / Outlook BUSINESS

11.24 -

2015

2014

2013

2012

2011

2010

3.9

26.62

0.45

21.9 -11.36

14.5

-5.19

-

13.4

5.09

86.96

7.5

-32.6

19.56

-

-5.22

39.59

9.22

30.9 -23.76

21.27

5.44

73.76

8.31

46.01 -23.73

27.71

18.35

-

-

-

40.47

-

As on December 31, 2015

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AVERAGE SECTORAL ALLOCATION in %

Metals 2 Healthcare 3

Cons Durable 2 Communication 2

FMCG 2 Financial 22

Chemicals 4 Textiles 4 Services 4

thing that had to be verified was whether the cash was real or fudged. A simple phone-call to the auditors would suffice to determine that. In any case, post-Satyam, the auditors had become more stringent,” says an industry source requesting anonymity. But then, the call did require a certain resolve to buy when the market was totally sceptical.

CONSISTENT REWARDS Energy 9

Engineering 5

Technology 7

Construction 6 Diversified 6

Another sector where Singh earned handsome returns is auto ancillaries. Take the case of Amara Raja Batteries. As per Morningstar, this stock was added to the Value Discovery Fund in Janu-

Automobile 7

TOP HOLDINGS

As on December 31, 2015

120

erage daily price was #605. This was 2x the original value of shares held by the fund in 2007. In May 2013, the fund re-entered the counter, purchasing a small number of shares (24,895) when the average daily price was #472 and sold them in November when the average daily price was #831 or 1.7x. Singh’s approach to investments is based on the belief that equity investments call for a long-term perspective and there aren’t any shortcuts to wealth creation. In addition to eClerx, Singh also struck gold with another IT stock-pick. Singh added engineering services provider, Cyient — earlier called Infotech Enterprises — to the technology fund in November 2003. This counter was not only affected by sector-specific headwinds, but also by the Satyam scandal. Here was another Hyderabad-based company with cash in hand; the Street feared another Satyam. The fact that Satyam and Cyient’s auditors were the same — PriceWaterhouseCoopers — didn’t help matters. But, like a true value-investor, Singh was opportunistic while everyone else was afraid and the rest as they say is history. In FY10, Cyient’s stock traded at an average price of #124. Today, the stock trades at #397, an increase of 220%. During this period, the stock touched a high of #641. The mid-tier IT player continues to be a part of the technology fund. Singh explains given the nature of equities, mid-caps tend to be more volatile than large caps. Singh is firm about undertaking lesser risks but securing better returns. Those in the industry who closely track Singh’s calls contend that Cyient was a no-brainer as the stock was trading below the cash. “The only

(% of net assets as on Dec 31, 2015)

ICICI Pru Dividend Yield Equity/ ICICI Pru Midcap/ ICICI Pru Select Large Cap/ ICICI Pru Value Discovery ICICI Bank

9.50/8.83

Federal Bank

6.29

Infosys

5.41/6.75/2.42

ITC

5.30

Bank Of Baroda

4.45/3.13/2.87

Tata Motors

4.42/6.80/2.66

Cummins India

4.19

Karur Vysya Bank

3.59

Jammu & Kashmir Bank

3.56/3.32

Coal India

3.45

Bajaj Finserv

4.33

Bharat Forge

4.14

Welspun India

4.10

Petronet LNG

3.63

Mahindra CIE Automotive

3.11

Punjab National Bank

2.97

Ashoka Buildcon

2.90

Grasim Industries

2.89/7

Power Grid Corpn Of India

9.84

Axis Bank

8.21/3.10

Larsen & Toubro

7.57/6.72

HDFC Bank

5.94/5.18

Oil & Natural Gas Corpn

5.05

Cipla

4.74

National Thermal Power Corp

6.61

Sadbhav Engineering

2.84

Mahindra & Mahindra

2.53

Wipro

2.53 Source: Value Research

4 March 2016 / Outlook BUSINESS

ary 2010. Back then, the stock was trading at #83, and today is at #870. Tying-up with one of the largest US auto-parts maker Johnson Controls, early on has helped Amara Raja create a strong brand in the form of Amaron. This has helped it pull up ahead of market leader Exide Industries in terms of financial performance. For instance, in the last seven quarters, the average revenue growth for Amara Raja has been 17%-18% as against Exide’s 8%. It is the shift in preference for diesel cars that require high-current batteries that influenced Singh’s purchase. With consumers moving from petrol to diesel cars, Singh capitalised on the trend by looking into auto-ancillary companies that could be key beneficiaries of this shift. Another auto-ancillary company that has done well for the value discovery fund is Balkrishna Industries. The fund first bought shares of the off-road tyre manufacturer in December 2009, while it was trading at an average price of #86. Today the price stands at #600. What is the thesis that governed Singh’s decision to opt for Balkrishna? The off-road tyre industry has few players all over the world. The competition is not intense. However, cheap labour costs in India works in favour of Balkrishna. Singh continues to have faith in the stock that has taken a beating due to a slowdown in the mining sector, which is a big user of off-road tyres. Once demand from the mining industry picks up, the hope is that the stock will perform well. Pharma is another sector where Singh has been early in identifying trends. In March 2011, the discovery fund bought shares of NatcoPharma, a company focusing on oncology. There was not much awareness about cancer research in the country around that time. The stock was trading at an average price of #51 in March 2011. Today, the stock is trading at #491. On January 5, 2016, the stock reached an all-time high of #567, a 10x increase from the average price back in 2011. PI Industries is another stock that has done well for the fund. Shares of the agro-chemical producer were trading at an average price of #131 in May 2013 — which is when the Discovery Fund began building its position on the counter. Today, the stock is trading at #676. While, the discovery fund has performed well under Singh’s stewardship, the fund manager

RAPID FIRE  Biggest hits in five years A mid-cap oncology-pharma company, an agro chemical firm and some auto ancillary companies

 Key success factors Process, passion and teamwork

 Fund managers you admire: Warren Buffett, Peter Lynch and Benjamin Graham

 My returns are driven by... Bottom-up stock selection

 Confidence in replicating past performance: All I can say is I am 100% dedicated to my work

 Currently bullish on: Industrials, banks and auto ancillary has had his share of value-traps as well. “There were two paper companies. We had bought one with the intention of reaping high dividends, while the other was for capital appreciation. However, the one bought for dividends did well on the bourse, while the other one remained flat. On further analysis, we found out that our assessment of the management in the latter was wrong,” he reveals. Singh feels that while management–related issues are a concern, one can still make good bets by exercising caution. Despite the prevailing sombre outlook and governance issues, the infrastructure sector is not ‘touch-me-not’ for Singh. “There are still companies in this sector that are well-run with good corporate governance practices in place,” he assures. Among stocks in the sector, Singh is currently holding onto Sadbhav Engineering, Ambuja Cement and Larsen & Toubro. “Indian equity markets have corrected in the first two months of 2016, mirroring global sentiments on oil prices, developments in China and Europe still grappling with its own recovery. We feel that a slow and gradual upswing in the Indian domestic market would make it a compounding market over the next three to five years. Therefore, we believe that a correction due to these non-fundamental reasons is an opportunity for investors to allocate towards Indian equities,” he adds. b

Outlook BUSINESS / 4 March 2016

121

WHO GOT THE FLOWS While 5 fund managers of the 14 profiled in this edition saw aggregate outflows from their funds over the past five years, a majority continued to see investors flocking to them

Atul Kumar

266 Quantum

Chirag Setalvad

6,987 HDFC

Vinit Sambre

-446

Krishna Sanghavi

329

DSP BlackRock

Canara Robeco

Jinesh Gopani

5,313 Axis

Vinay Paharia

460

Religare Invesco

122

Mrinal Singh

8,391 ICICI

Sunil Singhania

-16,905

Reliance

Neelesh Surana

1,705 Mirae Asset

Sohini Andani

2,241 SBI

Pankaj Tibrewal

-364

R. Srinivasan

-2,236

Kotak

SBI

R Janakiraman

21,652

Franklin Templeton

Prashant Jain

-6,550

HDFC

Figures in # crore Period considered from FY12 to FY16. The fi gure for FY16 is as of September 2015; The inflows for diversified equity schemes and tax planning funds managed by the respective fund managers have been taken into consideration; Index funds and ETFs have been excluded

4 March 2016 / Outlook BUSINESS