Looking for an impressive bull market

Some call him an astute small-cap stock picker. Some others look down upon him as a trader with a big mouth. Love him or hate him, but you cannot ignore Kochi's Porinju Veliyath, MD and portfolio manager at the portfolio-management firm Equity Intelligence India. Starting his career in the late 80s as a floor trader in Asia's oldest bourse, Bombay Stock Exchange, Porinju, now in his fifties, has gained quite a following among small-cap investors. The stock-market investor explains to Kumar Shankar Roy why keeping hard-and-fast rules in investing may not work always. He also talks about his liking for small IT firms and how painting the entire real-estate with the same brush may be a mistake.

At the end of 2016, you famously said not to miss the year-end stocks sale. You seem to think there is a 'changing India'. What makes you so confident?
Market sentiment was extremely weak during the last quarter for multiple events, none of which were fundamentally negative in the long term for equity markets. All knowledgeable good citizens have been looking for a change and it is really happening. Sustained rise in corruption had been the root cause for many of India's social and economic problems. The current government has strong leadership and better governance. India's efforts to reduce corruption and black money could lead to faster economic progress and reduction in poverty. GST, which is just a question of time, is also an important positive. I am confident that 2017 will be an impressive bull market after two flat years.

You come across as a person who doesn't like rules. But you also say that you like to keep things simple. How do you approach investing?
Keeping hard and fast rules in investing may not work always. Each company, management and sector is unique and must be approached differently. In an emerging and dynamic economy like India, stock pickers must be equally dynamic and flexible in understanding businesses and embracing changes, rather than sticking on to a set of redundant rules. Of course, some of the basic investment principles are evergreen and not to be undermined.

What are the things that you look for in a business when you are considering investments? Do you look for indicators like free cash flow or operating cash flow in small companies?
I consider everything I know about the business while considering whether to own a piece of it. The size doesn't matter, provided there is value significantly higher than the price. 'Free cash flow' is an item highlighted and discussed by amateurs and MBA students; for veterans such basic/prime aspects of a company would be automatically scanned and analysed in the background.

You caused a furore by investing in a company called Saksoft. What made Saksoft so irresistible for you?
Nothing 'irresistible' about Saksoft. I have been buying some e-governance stocks and certain small IT companies during the last quarter, like COSYN, Vedavaag, Rs Software, Datamatics, etc. Considering the structure and visibility of the sector, I created a personal portfolio of ten such small companies, thinking that a few of them may fail, while some could evolve 10x and 20x in the coming years. I liked Saksoft, too, as a well-managed company with futuristic business domains like data analytics, data mining and Internet of things.

We have heard your conviction about the real-estate sector, a space not many fund managers would like to deal in. Despite some positive triggers like housing demand and urbanisation, the real-estate space hasn't done great. Why are you not changing your thesis?
Real estate is too broad a term. There are a variety of listed companies in the space: big, small and penny companies, land owners, pure developers, debt-free companies and highly leveraged companies. Real estate is a challenging business today and it is equally challenging for investors to pick stocks. However, it is a relevant and futuristic business for India and the operational environment for real-estate companies is changing significantly. I feel some of the listed stocks with a promising business model like Godrej Properties could be the winners.

When you go after small caps, don't you worry about the risks? After all, small caps have poor liquidity and there are a lot of unknowns about them.
I don't think there is anything specifically with small caps to worry about if you do your due diligence properly. Perceived negativity on illiquid stocks is a great opportunity for smart stock pickers. Many such stocks have turned extremely liquid after going multi-baggers.

The digital theme is a big thing in markets today. But are there companies and businesses that the public can invest in? App-based cab companies are unlisted. The wallet companies (excluding banks) are unlisted. You have often talked about RIL being a digital company, but its last big-bang business, i.e., retail is still loss making.
There are many listed companies in the digital space, mostly small caps at this point of time. Many others will emerge to take advantage of the emerging opportunities in the space. Flipkarts and Olas are for cash-rich private equity guys. I do not understand much about their valuation dynamics. Small investors can take advantage of their services currently.

For investing, explore the listed space. I assure you it is full of opportunities. After ten years of investor disappointment, RIL seems to be at an inflection point; its traditional business is generating cash. Its retail business is turning around and digital is the future!

When you buy consumption-based stories, what are the top three things you look for?
There is nothing like 'top three things' to look for in any stock or industry. Hundreds of aspects come to your mind while looking at an idea, depending on your knowledge and experience. The priorities of those aspects change on a case-to-case basis.
For me, the whole country is a consumption story; half a billion poor people in India are expected to be given a better deal through more efficient management of the economy. India is getting ambitious. People are looking for nutritious food, better home, education, comfortable travel, quality entertainment, banking facility, better roads, waterways, bridges and flyovers, stable electricity and clean water.

There are a lot of changes happening in the railways. How do you rate railway stocks?
Looking at the state of affairs in Indian Railways and the government's plans and initiatives, I smell great opportunity for investing in some of those stocks. Well-managed railway companies with strong balance sheets are heading for exciting times. Some of them could go beyond railways to defence and infra.

You have never been a great fan of the Tata Group companies. Have you changed your positions since the crisis in the Tata Group erupted?
We have reduced exposure to Tata Group companies since the crisis. Shareholder wealth creation has never been a priority at Tatas before Cyrus Mistry took over. Ratan Tata's style and culture is not shareholder friendly. However, everything said and done, Tata is a big brand and companies like Tata Global, Tata Coffee and Indian Hotels can do well if managed well.

Are there any interesting small-cap stocks in the telecom and pharma space?
Not at this point of time, really. I am generally not a sector fan, though I have focused on a sector as a whole under special circumstances. For instance, I recently bought into e-governance stocks. Take the case of pharma. Nifty Pharma was down 10 per cent in 2016, while Biocon and Jubilant Life more than doubled. Stock-picking is the key.

When you meet the management of companies, what are the things that you usually look at?
I meet managements only when companies have turnaround potential. Understanding their vision and evaluating their ability to lead the company into the next orbit are the two objectives of management meetings.

Do you arrive at a target price or use financial models before you invest in stocks. How do you decide when to sell a stock?
I never have a target price while picking a stock. 'Selling a stock' happens when the gap between 'price' and 'value' narrows down. Equity is more dynamic than most people think.