November 18, 2012
I had the opportunity to attend the VALUEx India event on November 3, 2012 in Mumbai. For those of you unfamiliar with VALUEx, it’s an invitation only event for both Indian and global investors to meet and discuss value investing in India. The event is organized and hosted by Rahul Saraogi and Pratik Sharma of Atyant Capital. You actually have to apply to attend and each participant is required to share a unique investment idea or insight about value investing in the Indian context. In addition, some of India’s top investors presented this year. In this post, I’m going to try to summarize the key points from the speakers that I found the most informative and thought provoking. The only two speakers that I found interesting but won’t cover in detail are Rahul Saraogi and Akhil Dhawan, who I plan to interview independently. Ultimately, I’ll plan on publishing each interview as a separate post on the Value Investing India Report website.
The day kicked off with an entertaining talk from Sanjoy Bhattacharyya, the Managing Partner of Fortuna Capital. His presentation was titled, All you need to know about the stock market to get rich in 30 minutes. Sanjoy is one of India’s most successful value investors and prior to Fortuna, he was the CIO at HDFC Asset Management and the Head of India Research at UBS Warburg. His presentation was basically a primer on value investing and his main points can be distilled into the following:
- Forecasting is worthless. Almost all value investors view the future with great trepidation due to the realization that very few people can accurately forecast forward operating earnings with a high degree of accuracy and that includes management. We all know it’s easy to create a spreadsheet in Excel and build a DCF model but the real skill is to be able get the assumptions right. Sanjoy himself doesn’t agree with the use of DCF and is more focused on strong FCF generation over a 5-year timeframe.
- 10 years of historical balance sheet information is worth more than management visits. In my own experience as a global investor, I’ve had numerous experiences with management teams that lie. Thus, I agree without a doubt that management visits are overrated from an investor perspective. I remember very clearly meeting with the management team of Anglo Irish bank in 2008, along with a number of other institutional investors, and even as the Irish housing bubble was collapsing they tried to convince us that credit losses would be contained. Anglo Irish Bank eventually went bankrupt and was nationalized. Thus, it’s always important to remain independent and to remember that management is always looking out for its best interest which is not necessarily the same as that of the shareholders.
- If you’re worried about liquidity then you don’t have enough conviction in your idea. Smart money can score big by taking on illiquidity.
- There are three deadly sins in investing:
- Excessive trading
- A focus on the short-term
Shiv highlighted the following as characteristics of value traps:
- Structurally broken industry with low barriers to entry
- Overly reliant on a particular product or brand
- Technology obsolescence
- Large addressable market
- Consistent and growing cash flow generation
- Trading at reasonable valuation levels based on a cyclically adjusted price to earnings ratio
- Clear and transparent accounting
- Serves as a warning that high levels of cash on the balance sheet is not sufficient to justify an investment
- Massive employee unions blocked any asset sales that could potentially unlock value
- The core landline business is obsolete
- Arvind Mills
- Commoditized denim manufacturer
- Razor thin margins
- ROE consistently in the single digits
- Very low visibility in terms of the financials given the vagaries of government policies
The final speaker at the event was Prashant Jain, the CIO of HDFC’s mutual fund. If you didn’t already know, Prashant has an unparalleled investment track record within the Indian mutual fund industry. Although he’s not a value investor by self definition, he is a highly successful stock picker and had the following to say about his investing strategy:
- Good businesses are those that have sustainable competitive advantages
- Avoid management teams that are incompetent or cheats at all costs, even if the business they run is a cash cow.
- EV/EBIT is a better valuation metric than EV/EBITDA. By excluding depreciation, you will fail to take into account the need for capital expenditures to grow or simply maintain the business.
- As the consummate contrarian he believes the best time to invest is when both the stock market and economy are performing poorly
- When you have a high level of conviction it’s important to take large bets. This is similar to Warren Buffett’s belief that diversification detracts from investment performance
- SBI is a decent bank and its valuation fluctuates between 0.78x to 1.7x book value. You should be buying when it hits the lower level of its P/B valuation level and sell when it hits the high-end.
- Retail investors are excellent contrarian indicators. Retail money flows into mutual funds only when the market P/E is above 20 implying that they are buying only after stocks have had a meaningful run-up. Thus, the retail investor continues to buy stocks when they are already expensive and sell when stocks are cheap.
- The key to investing in the banking sector is to identify banks with a strong liability franchise. CASA is the cheapest and most stable source of funding. Thus, you should try to identify banks with the best deposit franchises.
Overall, the event was well executed and I enjoyed interacting with other prominent value investors in India. It’s always helpful to have to your core investment beliefs reinforced by meeting with other investors with a similar investment philosophy.
In addition to speaking about value investing in general, a number of speakers highlighted investment ideas that they owned in their own portfolios. There were a few ideas I found to be truly exceptional and have done my own research on them. I’m planning on highlighting the best idea in my opinion in the next issue of the Value Investing India Report. If you’re interested in finding out about this investment opportunity, click here now!