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What attracted you to the stock markets? How did your career progress?
Even in Kurud, I had a strong desire to do something meaningful in life. After passing out, I was very clear that I wanted to get into an area which had no limitations. In most industries, there are some kinds of entry barriers be it scale or capital or something else. In the stock market, there is no limitation; you can buy 100 shares, or 10,000 shares or 10 lakh shares. Here, you can grow with your intellect and knowledge, which are also the entry barriers.
The stock markets had always fascinated me as a subject; I think of it not as a business, but a business of businesses. For example, if the price of Colgate toothpaste goes up by Rs 2, Colgate will not make money immediately, but someone in the stock market will make money on that news.
After my graduation, I joined CIFCO where I did equity research during 1991 and 1992. That was a great period for learning. I then joined SSKI, which was the first domestic brokerage firm to target the foreign institutional investment business. Subsequently, it tied up with Smith New Court. I can tell you with pride that I was the first professional employee of SSKI.
In 1994, I joined Motilal Oswal, which is one of the most renowned domestic broking houses today, to start their institutional desk. I moved to UBS in 1996. At UBS, I was part of the dealing team. Subsequently, I got a good opportunity from Peregrine to head the entire sales trading and dealing operations for India. Unfortunately, Peregrine went through a difficult patch and the India operations closed down.
That was the time when I realised that value does not lie in selling your idea to a client for a fraction of a per cent but in using that knowledge to create wealth. In 2001, I got the biggest opportunity of my life to work with the Reliance group. Since then, the equity corpus of the MF has grown from a mere Rs 12 crore to over Rs 4,000 crore.
Even in 2001, the mutual fund industry was still in its incipient stages. There were a few private players but the growth momentum hadn't gathered steam.
Most other funds were focused on benchmarking against the index or peer group. But our fund's approach was to try and make absolute returns. Of course, it is not possible to make absolute returns in all time frames though it remains our continuous endeavour in the long run. In order to achieve absolute returns, we use conservative investment strategies including keeping cash as and when we feel appropriate.
Our deviating from the commonly held belief on the Street, gave us a lot of leeway in terms of stock-picking. We could hold cash and be able to maximise value for every rupee we invested. We have used cash as an effective tool in our portfolio management. The second peg of our strategy has been to read the trend ahead of the market. In 2001-02, when the government had just started talking about privatisation, we had huge exposure in PSUs. The next year, we found the banking sector to be a compelling buy as the price-earnings multiples were 1 and 2. Interest rates were coming down and there was a lot of value in bank stocks. Though these sectors or stocks were not fashionable at the time of our investments, it is there for everyone to see the results.
The third foundation to our strategy is bottom-up stock picking. We believe that you do not make money in markets or in sectors, but you have to invest in the right companies. We have an interesting study which says that in 2004, which was supposed to be a brilliant year for mid-caps, if you had invested in mid-caps like Cummins, Apollo Tyres or Asahi India, you would not have made any money. Instead, stocks like Mahindra & Mahindra and Hero Honda would have earned you 39 per cent and 25 per cent respectively. This proves our belief that identifying a sector is not good enough; the money lies in backing the right company within that sector.
Fourth, we strive to provide consistent performance. We are in the asset management business and have fiduciary responsibility to our investors. In this endeavour, you can see that we have delivered in the last 15 quarters.
How have you managed to perform every time the market goes down?
We have not hesitated in taking directional views of the market and keeping significant cash in our portfolios. We have combined this with our ability to buy the right stocks at the right prices and book profits aggressively if required.
There was a lot of churning in Reliance funds in 2002 and 2003. How did it help you? Do you still believe in churning a lot?
When you have a small corpus of Rs 100 or Rs 200 crore, it might be easier to have a shorter term view on the market and still make money in the portfolio. Also in 2002 and early 2003, it was more or less a range-bound market. In mid-2003 and 2004, we had a bull run, and in such a scenario, it did not make sense to churn often. Now we manage a much larger corpus, and making large investment bets has become important. However, we would not shy away from taking a shorter term view on 10-20 per cent of our portfolios.
We are extremely proud of our stock-picking and even if we are the only institutional investors in a particular company, we have the conviction to go through the ups and downs in its stock price as long as the longer term picture remains intact.
For the market these companies remain unknown till the time the true potential is discovered by many more people. Let me give some examples. When we bought Radico Khaitan, we got a lot of calls cautioning us that we were stuck with that stock. Today, in about a year, the company is widely covered by some of the best brokerage houses in the country. Let me give you an even better example. Till last year, Bharat Earth Movers (BEML), a large public sector company with a turnover of over Rs 1,500 crore had a market cap of just Rs 300 crore. We had the conviction that this stock would be a multi-bagger and the stock has gone up five times since then. Even today, it remains our top holding.
Whenever we see an opportunity, which is fundamentally very strong and the valuations are mouth-watering, we will go all out.
How do you pick companies?
We start the investment process by gathering information on the company, the management and the business. We apply financial models and forecast its numbers for the next few years. We look at the external opportunities available to the company and its competitive ability. We like companies that can scale up operations. Integrity of management, and the management's respect for minority shareholders is also given a lot of importance. We look at the sector, compare the company with other companies in the sector in India and abroad in terms of valuations. An internal research report is prepared and the investment team brainstorms on the idea, after which it is put up to the investment committee.
After passing a company through a test of fundamentals, we give utmost importance to price and value. If we like a particular stock but if the price is not right, we wait for the right valuation. We like stocks where both the earnings per share as well as the price-earnings multiple will grow. Sometimes, we may buy a stock even if it does not satisfy our criteria, but it is just very cheap.
We have had three years of learning now and the overall investment philosophy is well-defined. We have detailed spreadsheets and questionnaires for every company that we start covering. We have a checklist of processes and rules on how to invest in large-caps and how to invest in mid-caps, what can qualify and what can't, etc. This knowledge base is expanding constantly as we learn more. These processes have to be adhered to by the team and the analysts.
Cash will play a role, but as the fund size increases, there is a limitation on the percentage cash we can hold and it will vary from time to time.
Look at the positive side - invariably, the market provides two or three unexpected opportunities in a year. If you are holding cash, you can make handsome returns by using that opportunity and investing at that time.
Let me give you an example here of the Reliance Power Sector. We raised Rs 400 crore in the IPO, which was a lot of money for a sector fund. Stock valuations were very high, which made us uncomfortable. But we had a huge appetite to hold cash, which we did for months. When markets fell after the election results, we got significantly invested. This fund has given about 45 per cent returns in the last eight months and has beaten the power sector by a reasonable margin. At one point of time, our benchmark power sector index was down nearly 35 per cent, while the fund was down only 6 per cent. Our belief in holding cash helped us achieve this performance.
What's your view on the market now with the Sensex at 6,600 levels?
The concerns like oil prices and interest rates are not local problems anymore. The entire world will be affected by the movement of interest rates, overall liquidity and lower growth. I think we may be in a consolidation phase. Our strategy will be cautious and follow our good old stock-picking approach. One has to be careful and disciplined, and not get swayed by stories floating around.
You have moved a lot of money from mid-caps to large-caps in the last two months. What is the reason?
Look at the valuations in the mid-cap space. A large auto company is available at 11 times, while an auto component company is going at 18-20 times. Just because we have been successful in investing in mid-caps, it does not mean we have to go chasing mid-caps.
Mid-cap investing is a subtle game. Liquidity is of prime importance. You may manage to buy your entire quantity when mid-caps are fashionable, but once they go out of favour, you will struggle to sell a fraction of the quantity at significantly lower prices. I still believe you can make money through investing in mid-caps but from here the men will get separated from boys.
You made a lot of changes to the fund management team after you came in. Can you tell us more?
I am very proud of my team and I have handpicked each one of them. We are a nine-member team today comprising of three fund managers, one dealer, four analysts and myself. Our total experience is over 100 years with each one of us having spent over a decade in the stock market. Interestingly, each person is a generalist as well as a specialist. They understand balance sheets, valuation and market dynamics; in addition to that, each person is a specialist in a particular area. One person understands the automobile sector very well, another is a mid-cap specialist, while another understands pharmaceutical and technology stocks very well.
We are very choosy about the people we hire. We want to get the most appropriate person, not the best or the most brilliant person. The most important criterion is that he or she should fit in well with the team.
The last question, what motivates you in life?
My dream is to make money for millions of our investors, most of whom I don't even know.
Disclaimer: This content is for information only and should not be considered investment advice or a recommendation.
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