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    As bottom-up investors, we look for best players in each field: Sumeet Nagar, Malabar Investments

    Story outline

    • You need to be in businesses which allow scalability.
    • We are long-term investors. We do not churn our portfolio very much.
    • Indian economy, after twin shocks of last year, is chugging along very well.
    In last 2 quarters, we found opportunities to invest more: Summet Nagar, Malabar Investment
    We are looking for companies that are very differentiated, have terrific management teams at the helm and where we see long enough runway for growth, Sumeet Nagar, MD, Malabar Investments, tells Nikunj Dalmia of ET Now, in an exclusive interview.

    Edited excerpts:

    Where were you hiding during the selloff?

    It has been a good environment in Dubai. Last year, when the market was moving one way up, it was very difficult to go on buying good opportunities but in the last couple of quarters, when there was a pressure on small and midcaps, we are able to find opportunities to invest more. We like environments like that.

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    So, you are greedy right now. You do not think that tide has turned permanently in favour of largecap stocks.

    No, there is nothing like a permanent shift. I have always said that over very long terms, the market prices will respond through fundamental improvement in companies. If you think about earnings as those fundamentals, if companies are able to grow their earnings, their market prices will reflect that over the long term. It is just that the valuation at which those earnings are valued, changes from time to time. But that is just noise. Over a very long term, if the company is able to grow its earnings, you should see that in the stock price. We can find companies like that. In current environment, if you are able to find them at slightly better valuation, so much the better.

    In general, the view is that only a handful of small businesses become midcap businesses and only a handful of midcap businesses become largecap businesses. Do you think the environment is not conducive for some of the smaller businesses and medium-sized businesses because interest rates are increasing, commodity prices are increasing and the trade war fear is now real?

    The challenges are always there. Nobody would allow you to become big because everybody wants to take advantage of the market, everybody wants to grow their business. You have to have something unique and differentiated about your business and the way you work -- whether it is through technology or scale, something has got to be different about you and your offering and only then can you grow faster than the others.

    You need to be in businesses which allow that sort of scalability. You want to find companies and market that are growing and where there is a lot of room to grow. You can be a profitable business but you can never scale it up to become 10-50-100 times. If you find that scalable business and a great company within that, it is a differentiated offering and those companies can actually compound for many years to come.

    How many stocks have you added or how many new businesses have you invested in this financial year?

    We are long-term investors. We do not churn our portfolio very much. In most cases, we add to existing positions. But selectively, we always look to find great ideas and it is always with the view that if you find a great idea that is better than what you have in the portfolio, then you make that switch. But you want to keep that concentration. The one very sizable investment that we made over the last one year was in a technology company. But we added to many of our existing portfolio companies where we thought the valuations have become reasonable and it provides a good risk-reward tradeoff.

    Where exactly have you added and which is this technology company you have acquired?

    It is very interesting. If you look at the developed markets like the US over the last decade or two, a great deal of value creation has happened through technology or internet companies, like Google, Facebook or Amazon. Even in developing countries like China, there are companies like Alibaba, Baidu and Tencent whose shareholders have done phenomenally well by investing in companies like that.

    Even in India, there have seen some value creation happening through private companies like Flipkart or Paytm but unfortunately the public market investors have been left high and dry. We have not found any great internet or e-commerce focussed companies but we know that there is a huge value migration that is going on and is going to happen for over the next 10-20 years. We have always been looking for the right opportunity. The challenge always has been that even in private markets you find companies that are growing but they are not profitable and there are few ones which are listed in public markets they are profitable but they are not growing. We are lucky enough to find a company that had both of those.

    Is it a listed company?

    It is a private company today but it is going to be listed fairly soon. It is called as Affle India and not many people know but they are probably the largest mobile advertising company in India.

    I did not know about this.

    People have heard of InMobi. It is doing very well but a lot of their business is global but within India, Affle has become the largest player.

    Are they planning to go public soon?

    Yes, they should be going public over the next month, month and a half or so.

    So, you have no plans to sell it when it goes public? Typically, when pre-IPO placements happen, anchor investors tend to sell out after their lock-in period.

    I do not think we have any such intention. It is a fantastic business and a fantastic company if you think about the world today and the way things are evolving. There was Warren Buffett’s interview just a few days ago. When somebody asked him about Apple and why they are buying it more, he said an iPhone is still cheap at a $1000 for the value that it creates for people. What he said is that the most valuable real space in this world is actually on this phone.

    Most of the people are going to be buying things over the phone, the value of being on that mobile phone is huge and as you look forward over the next 10 or 20 years, everybody would want their apps to be installed on the phone and there is a huge gap between advertising wanting their apps have installed and consumers acting on that. Affle is one of those companies that has figured out the optimum way to find the likely users for the product and then the most efficient way of targeting them. As a result, they are quite profitable and growing rapidly.

    What have you bought or added more from the public market?

    From the public market, we have got many of the existing portfolio positions. One of our largest adds was in Safari, something that I had mentioned before. The luggage industry is doing very well. Within that, Safari is gaining share by virtue of being the third largest player but sort of increasing its market share over the years. With increasing size, comes operating leverage and they are benefitting from all of those trends. This has been one of our additions. We have added to the professional staffing companies as well.

    Are they expensive?

    They had become quite expensive in between but over the last few months they have come under pressure and have gone to reasonable levels. They are expensive if you just look at trailing numbers but if you see the level of growth and scalability, these companies can easily become 10 times, 15 times, 20 times the size of where they are today. Given that potential. they are still fairly small.

    The macro regime has changed, crude is at $75-80 or in between $75 and $80, rupee definitely is not sub-70 now. Is that forcing you to think or invest the way you have not done in the past?

    As you know, we are long-term bottom-up investors. The environment is important for understanding what sort of stance you want to take. In cricket parlance, whether to play front foot or back foot. You look at the pitch, you look at the conditions and in the current environment, you are better off playing slightly on the back foot. You want to make sure that the companies that you are looking at do not have exposure to the macro negatives whether it is interest rates or commodities or the currency or if they have strong pricing power, to pass that on.

    You want to be doubly sure of that. That is why I say I will be a little bit on the back foot, be circumspect of that investment thesis that you are thinking about and make sure these companies can navigate through these times. On one hand, you have these macro negatives. The elections are coming up but on the positive side, global economy is still growing fairly well. The Indian economy, after the twin shocks of last year, is chugging along very well. It is picking up and once the election uncertainty is over, it can continue along that path. It is a good balanced situation.

    Are you fully invested in the funds which you manage or are you sitting on cash which is higher than the average?

    No, we are actually slightly below average. Towards the end of the last year, our cash levels were higher but in the last two quarters, as we have seen prices come down, we have been able to deploy some of that. It is also taking advantage of those opportunities. Many of the challenges that you see are shorter term in nature. From a longer-term perspective, if you are able to find great companies at good prices, you want to add them.

    NBFCs had a great run because interest rates kept coming down. PSU banks never had money to lend and NBFCs got the market share. The reason why I am asking you this question is because it brings in the micro part that you own -- Chola. Can the change in interest rate force you to rethink your thesis in Chola?

    I will answer that for NBFCs in general and not talk specifically about Chola. During the rising tide of declining interest rates, many of the NBFCs did very well. There was not much differentiation in terms of quality. But when you have a reverse environment, when interest rates are rising, quality will start to matter a lot more.

    You will see a dispersion of sort coming through and we are likely to see that going forward. The companies that have a strong pricing power should be able to pass on any sort of increases that come in. These are the ones that would do very well. Chola as a business is fairly good. Part of our thesis on Chola was the leadership of Vellayan and with that changing, the thesis changes a bit. On the leadership front, there is still a lack of clarity but as a business it is still pretty good.

    Do you still own Chola?

    We had reduced our position in Chola partly because of the leadership changes and partly because I think a strong run up that we had seen towards the end of last year. But as a business, it is pretty good.

    Siddharth Lal is a great guy but my personal view on Eicher has been that it is an expensive franchise where numbers may slow down. Now let us look at the numbers, the slowdown for Eicher is visible because the base effect has kicked in but the stock has come down from 35,000 to 27,000-28,000. What are your thoughts on Eicher, do you still own it?

    Yes, we still own Eicher. We have not added much to it but we still own it. The challenges are there, the growth has obviously come off. Obviously, the kind of growth that they were seeing in the past is tough to do on a fast enough pace. But they still have many drivers in place that have not come through yet.

    If you turn on the TV, you see ads from most two-wheeler companies but you never see a single ad by Eicher or Royal Enfield. They have not pushed on that lever at all. Part of it is that on the capacity side also, they were a little bit constrained. Once that lifts, maybe they will have the ability to sell more and maybe advertise more. This year, they have one of the biggest changes in terms of new products that is coming through.

    If you think about the twin engine technology, it is a fundamental shift. And more than the platform, twin engine is very different from a single engine. So for a mechanical engineering geek, you get that. It is a pretty fundamental shift that they have made and it provides them a platform with which they can succeed in the global markets. Whether they can or not, time will show but they have done all the right things to put themselves in the right position to succeed.

    So you are in no hurry to sell Eicher but you are in no urgency to buy Eicher as well. Can I put it this way?

    At this stage, it is fairly balanced. It will still provide the upside if they add on capacity and the volume growth picks up again same time if the models do well. With the new models, see that they do not need to generate much volume growth and still do fairly high sales growth because these models are going to be at 1.5-2x the price point. In the exports market, they will probably get 3x the price points. Even with fairly modest volume growth, you can generate fairly good sales growth and with profitable products, bottom line can grow faster. At this stage, it still provides good upside but if the market becomes jittery about their prospects and we find attractive opportunity, we will add more.

    The unique bit about Malabar Investments is that you are not a theme-oriented guy, you are more like a bottoms-up guy. If I look at your top eight, 10, 11 holdings, there is no common thread in them. There is Eicher, an auto company, Cholammandalam, an NBFC, a technology company like Affle, Safari a play on consumer durables, Repro, Avanti Feeds. They are not connected. That is the bottom line.

    The common theme would be that each of these businesses are truly differentiated in what they do.

    Is that a conscious diversification or did it just happen?

    No, it is a bottom up approach. We are looking to find the best players in each field. And we do not want to have too many players in the same area. We are looking for companies that are very differentiated, have terrific management teams at the helm and where we see long enough runway for growth. That is the common theme.

    Which stocks according to you are nearing the expiry age? Businesses may not be nearing their expiry age but which stocks in your portfolio are in their last or maybe the second last lap for investors?

    That is tough to say.

    Even Avanti is not in the last lap?

    Avanti is at a cyclical downturn. Avanti as a business still has a runway to grow on the feed side, maybe the growth comes off but on the processing side they have a long runway to still grow. The challenge with Avanti was that on peak margins, people were willing to give it peak multiples and that is one of the reasons why we very reluctantly ended up selling that position even though we have a lot of faith in the management.

    So you are out of Avanti as a portfolio investment?

    Yes. We sold that off because we still believe very strongly in the business and the management theme but this notion of peak earnings or peak margins and peak multiples on top of that it usually does not end well. And that is what ended up happening but they at some point will become attractive again and over the long term, it is still a great business to be invested in.










    ( Originally published on Sep 07, 2018 )
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    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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