On being the first investor in a stock
We take a view on companies based on fundamentals which can be justified by the state at which the company is in.
If we are investing in a new company, we take a smaller stake if we are not very confident. When other investors start coming in, we may increase our holdings as the stock gains a presence in the market and also results in higher liquidity.
There are a whole host of mid-cap stocks where I have been the first to invest in over the last three years.
These include stocks like United Phosphorus, Thermax, Balrampur Chini, Apollo Tyres and Shasun Chemicals.
I think that the key to making money in mid-cap stocks is to buy them when they are very cheap, illiquid and when no one is looking at them.
Eventually as the companies start delivering results consistently quarter on quarter, more and more people start looking at these stocks and the liquidity builds up.
On having conviction about a stock
Conviction comes with experience, being successful and with time. In equity investments, along with fundamental analysis, gut feel also plays an important role.
We invested in Adlabs at around Rs 120 – Rs 130 after attending a group meeting with many other fund managers and other investors. We took a view that the entertainment industry in India is in a nascent state and it has great potential.
People who look at current year's earnings will always find the stock expensive. We bought many construction companies thinking that after five or ten years, these companies would see their turnover rise 20 times. When that happens, even the stock price will increase manifold.
On his stock picking strategy
I like to carry out my own internal research before taking an investment decision mainly because I have realised that the views of external analysts are likely to be biased at best. Equity analysis is a nascent industry in this country and as such the experience levels and the talent pool is very limited.
I am firm in my view that equity investing is an art rather than a science. The investor has to not only have an ability to carry out analytical analysis but also be able to independently evaluate softer issues like management competence, future business environment, etc and have a good feel of the way the stock is likely to behave.
Before going in for an investment I would typically like to be confident of the long-term growth prospects of the company so that one does not have to monitor the stock on a day-to-day basis. The stock should ideally have the ability to perform even in adverse market scenarios and provide a positive return. I know that it is a difficult task to expect this to happen all the time, however I always try to go in for such an investment.
On whether he is a bottom-up or top-down investor
My approach to investing has been largely bottom up.
I try to evaluate a company based on its competitive positioning, the growth potential of the business or businesses in which it operates, the available market place for its goods or services, the pricing power and sustainable profits levels of the company in the medium term and its return ratios.
I typically like to take a call on companies after visiting them and evaluating the management bandwidth of the company along with its business outlook.
What I have also observed over the years is that one has to just evaluate the management of the company and its ability to deliver above normal returns to investors.
Such companies are often investment worthy as the management will find avenues for growth which an investor is not able to visualise at a given point in time.
The bottom-up approach to investing typically brings one to the same results as the top-down approach but in a more efficient manner, because here one is focusing first on micro research and then trying to evaluate the same in a macro environment.
For example, we were one of the first investors in the automobile sector. After meeting a whole lot of auto companies in early 2002, I realised that all these companies had undergone substantial restructuring over the previous five years and were seeing significant volume growth.
Volume growth combined with no capital expenditure and consistent cost cutting was a potent combination in an industry with high operating leverage.
My key picks at that time were Mahindra & Mahindra at Rs 100 levels and Tata Motors at Rs 75 levels.
My position in these two stocks based on bottom-up research finally led me to the same results, as a top-down positive view on the auto sector would have resulted in.
On his success