"Experience is usually considered a burden in a bull market" | Value Research Samir Rachh, Fund Manager, Reliance Mutual Fund believes that a combination of good managements and good businesses at right valuations is the key to intelligent investing
Interview

"Experience is usually considered a burden in a bull market"

Samir Rachh, Fund Manager, Reliance Mutual Fund believes that a combination of good managements and good businesses at right valuations is the key to intelligent investing

Samir Rachh's career in stock markets bears an eerie resemblance to his specialisation area - mid and small-caps. Much like a young company, in 1990, Samir began firing on all cylinders at a stock-market magazine, giving stock recommendations. Ebullient and happy, he started his own investment-advisory firm, which did well. However, the untimely death of his partner complicated things but that in turn opened up new opportunities for him as a portfolio manager. Today, banking on his cumulative experience of over 25 years, Samir Rachh, as a fund manager, is responsible for the Rs 4,500 crore Reliance Small Cap Fund and the Rs 3,000 crore Reliance Mid & Small Cap Fund. Witty and pragmatic, Samir tells Kumar Shankar Roy in an interview that his investment approach is a combination of good managements and good businesses at right valuations.

Read on to find out why Rachh prefers bear markets, why he finds the discounted-cash-flow valuation model too simplistic and when he realised that most of the money in stocks is made by just holding onto them.

Can you tell us something about your younger days.
I was born and brought up in Mumbai. I am a graduate in commerce. Accounting was my favourite subject and I wanted to do CA. That would have taken a few extra years and I needed to support my family, so I could not do CA. Later on, I joined the CFA course but after having spent time in the capital market, I found the course too theoretical and boring. Hence, I did not pursue it.

How did you become interested in the stock market?
I became interested in the stock market when I was in college, way back in 1985-86. One of my uncles, who was a broker, came to our house for a few days. He sent me to registered offices of the companies at Nariman Point to give shares for transfer. Later on, I started applying for IPOs and that is how I got interested in the share market. I was looking for good material and advice to read. This is when I came across the Capital Market magazine as a good source, which provided scientifically researched material. I made up my mind that after graduation I would join the magazine.

You have been a financial journalist, too. How did it help you decide on becoming an investment manager?
Capital Market was not a place where we had a journalism kind of approach. In the 90s, there were very few places where equity research was happening. This was one place where we had access to all annual reports, company management details, opinions of industry experts, software etc. We were also expected to give stock recommendations. So, it was a proper equity environment.

Was running your own investment-advisory firm a part of the evolution?
After about five years, journalism was becoming quite a routine. We felt if we were so confident of our recommendations, we should put them to test. So, with one of my colleague, I started a firm called Anvicon Research ('Anvicon' was an acronym for 'analysis', 'vision' and 'conviction'). Also to cover our expenses, we started running investment-advisory and research services. These three years on my own gave me confidence that I could do well in the markets. I was very happy running my own research and advisory firm. But after the sudden death of my partner, I found it difficult to continue with it single-handedly. That's when my ex-boss at Capital Market, Chetan Shah, called me to join Hinduja Finance and this is how my journey as an investment manager began.

Take us through how your investment process evolved over the years as you progressed from the role of a journalist to overseeing research, to heading a PMS and to managing a mutual fund scheme?
Since we depended on investments for our household expenditure, it was very important for us to find short-term ideas where we could book profits. At Hinduja Finance, since it was a listed company, we were expected to report profits every quarter. Therefore, in those years, I was quite short-term oriented, but over a period of time I realised that most of the money is made by sitting (holding the investment). So, that was the main evolution. Also, the quantity you handle in a mutual fund is much larger, so you realise that many of the ideas which can work individually or in a small PMS simply can't work in mutual fund format due to size constraints.

You are a mid/small-cap specialist. Did large caps never interest you?
In mid caps, you get so much variety. You see a lot of new businesses in their early life cycles. You meet so many management teams that I never missed large caps per se. But I do miss meeting some of the senior managements of large-cap companies, since they are much more evolved and you get to learn so much from them.

Smaller companies are a lot less covered by media. How do you research them?
There are multiple ways. You can run screeners, you can go through all quarterly numbers closely, you can filter through news and interviews. You look forward to some of the names where some major upheaval is taking place and then you follow up with your detailed research and management meet. The decision to invest or not is made after that. We monitor about 500 to 600 stocks, and we keep on reviewing them constantly. Based on the filters, there are about 200 to 250 stocks which we track closely.

To figure out what a potential stock is worth, most use the discounted-cash- flow model. For a small company, do you follow the same process?
Frankly, I don't use the DCF model in small caps very often. DCF is too simplistic in terms of value you get for the business. In real life, there are so many challenges. I have never been attracted to DCF as the prime-valuation method, especially for small caps.

We look at factors like quality of management, quality of business and moat, opportunity for growth and traditional valuation methods. There are times we use DCF in some companies as an additional valuation tool.

Does gut play a big role with small stocks?
Gut plays a big role and that's where the 'art' portion of investment comes in. The best way to go about it is to get initial leads through guts, and then follow it up with detailed research and process. In the mutual fund structure, due to strong processes, you can't buy a stock just on guts. But you can prioritise your time based on the gut feel for a stock.

How do you control your emotions when you see a stock getting hammered?
In the investment game, you are likely to, at best, get it right in seven out of 10 stocks you buy. Over a period of time, you get used to going wrong in a controlled manner. Also, after spending so many years in the market and seeing so many bull and bear runs, you realise that it's important to be greedy when others are fearful and vice-versa.

In a bear market, do you get more opportunities to unearth stock ideas?
For fund managers, bear markets are always preferable. Not only do you get more choice but also more time to do the necessary work.

When an investment story does not pan out as you had expected, how long do you stay invested before you exit?
If you find that your judgement on management quality was wrong or your assumption on a story was wrong, it's better to exit at the earliest. However, sometimes things get delayed for reasons beyond one's control. In those cases, it's better not to lose patience and give time for the story to pan out.

How do multi-baggers happen?
Some multi-baggers don't happen by design. We try to get a collection of good managements and good businesses at right valuations. In some companies, due to some changes in the management, government policies or sector dynamics, things start going well beyond what you originally thought was possible. Mostly, if you hold onto stocks for a long time, the kind of returns they can provide, if the story is good, is much better than what you would have envisaged earlier.

Can you tell us about some of your successful investments and what attracted you to them?
It's always a combination of five to six factors. Quality of management, business, quality of assets are somehow ignored by the market due to some immediate issues with performance. If you are able to spot something improving, then there is a nice recipe to produce a multi-bagger.

The chemical sector is one place where we found a lot of great opportunities. We entered when valuations were extremely low. It was around Olympics, when China came down heavily on chemical companies. This caused heavy disruption in China where companies produced bulk chemicals. Due to the strong action taken by the Chinese government, the chemical sector was in doldrums. Many MNCs started exploring India as a sourcing base. Indian companies were into speciality chemicals earlier. We got hold of stocks that were trading at five to six price/earnings multiples or price/book multiple of one.

Do you consider ownership patterns or volumes before buying into a mid or small-cap company?
Our job is not just to find a good stock but also to ensure that we get desired or reasonable quantities of it. So, we do look at holding patterns as well.

A company in its early life cycle often does not show very stable traits. What convinces you to stay put?
It's the management quality which matters most at this stage. If you have the conviction that the management has the capacity to handle challenges and is very clear on where it wants to reach, it helps you to stay put.

Many of the multi-baggers in the last seven to eight years have come from consumer sectors. But haven't valuations got expensive as well?
Most of these stories in the consumer sector are well discovered and valued richly. It's difficult to find multi-baggers from this space at current valuations.

Strong returns in small-caps have convinced many that this is the only way to make money. Is there too much money chasing good small caps?
We always advise investors to follow a disciplined investment and allocation approach. Putting 100 per cent of money in small caps is not a good idea. If one is bullish on this space, one can do a higher allocation but not totally at the cost of large caps. There is a good amount of flow in this segment currently and if the economy turns around, there are going to be good investment opportunities in the future. But one will have to come to this space with reasonable return expectations.

Small-cap space is rife with price rigging, rumour spreading and operator activity. How do you sidestep these problems?
Experience is usually considered a burden in a bull market, when anything and everything is going up. But experience allows you to recognise these kinds of pitfalls and stay away from them.


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