Shishir AsthanaMoneycontrol Research
Research analysts and fund managers these days have access to various tools and software to analyze a company or to run a query. Within seconds the output throws up companies that meet their conditions.
However, in the good old days when there were no computers, investors had to go through the annual report of every company. Those were the days when meeting management was possible only during Annual General Meetings (AGM) and annual reports and half-yearly reports were the only publicly available information.
There are few analysts and fund managers in the market today who have seen those days.
Bhavesh Premji, who manages a portfolio under the name of Whitestone Financial Advisors, has been in the market for 30 years and has seen it all. Chances of meeting him at the airport are high than at his office in BSE. That’s because often he is busy hopping from one AGM to another. Every year, Bhavesh attends AGMs of nearly 120 companies. This he has been doing for the last 30 years. He meticulously records notes of each AGM that he has attended.
When in Mumbai, if he is not researching a company, he is attending an analyst meet. His obsession with markets and company study is as focused as his love for stocks is deep.
Professor of finance at the New York University Stern School of Business, Aswath Damodaran says that ‘Business valuation is not about numbers, the story is what gives ‘soul’ to your business valuation’. Premji belongs to this school of investing, where he is perpetually in search for the next best story to bet on.
In some respect, Premji is unique: he represents the old school in investing where footwork and financial acumen were equally important but he is equally at home with adoping new technologies for research.
In an interview to Moneycontrol’s Shishir Asthana, he speaks about his journey and process of investing, and what his advice would for small investors.
Q: Bhavesh can you walk us through your journey from your first trade in the market to the present phase where you manage a portfolio management service (PMS) under Whitestone Financial Advisors
A: I started investing in the markets from my college days by mainly applying for the new issues. Those were the days when Lakme, Tata Steel, ITC among many others came out with their issues. I still hold some of the physical certificates of some of those original issues.
In those days I also attended Annual General Meetings of companies like Hindalco, Tata Steel among some others and was fascinated by the way businesses are run. I used to wonder how JRD Tata and GD Birla could run so many businesses. I used to go to the AGMs even during college hours to listen to them.
By this time, I landed a job with a broker named Jagdish and Shah and used to go to the trading ring on their behalf and traded for our clients. While in those days I used to trade on information flow, there was an appreciation of the fact that the underlying force behind this movement is the fundamentals of the company.
Unlike now, in those days there was very little formal training to many of us in the ring. We learned on the job and by reading.
I learned to study the fundamentals of a company and how to calculate and interpret the various ratios on my own through reading various books. But the whole process took a very long time.
The process would have been longer had it not been to my colleague in JM Financial in Ahmedabad, Jayanto Ghosh who taught me to read companies, how PE (price to earnings) expansion takes place, how to identify companies with pricing power.
Q: How did you finance those investments?
A: Initially I took money from my father. I belong to a business family and we had some spare cash to invest. My father used to encourage me to invest. During my studies, I also managed to get a job with a broker that too helped me finance my investments.
Q: What was the main learning for you from your early days?
A: Till 2004-05, I used to base my investment on earnings (EPS) growth. I was reasonably good in projecting forward earnings. For me, if a company was able to double its earnings in three years was a good investment. My target to double investments in three years.
But then I learned that the big money is to bet on companies where the PE expansion is expected to take place. Understanding the concept of PE expansion took a long time for me and involved a lot of reading. EPS calculation is the easier part, it’s a mathematical exercise. But PE expansion is dynamic and is likely to take place in new businesses rather than the older ones.
Having said that, conventional or commodity businesses have a faster earnings growth than PE expansion. Learning to catch the commodity cycle is essential here. If the price realization is growing at a faster rate than cost escalation, we will see earnings expansion and it offers us a good trading opportunity. But the big money is in catching companies which has something new to offer. These companies will see a faster PE expansion.
Q: What are the minimum criteria that a company needs to fulfill to come in your portfolio. And what are your portfolio allocation and exit strategy?
A: We would like to identify a company which has a visibility of a minimum topline growth of 15-18 percent and a bottom line growth of upward of 24 percent. But these companies should be growing at or above the sectoral growth rate. If the sector is growing at the same rate, we might not interested in picking up companies from this stable.
We generally allocate 10 percent of the client’s money in one company. But if the investment is more thematic, we allocate only 5 percent. In our portfolio, there are generally 14-15 stocks.
Our exit strategy for a brick and mortar company is basically on PE basis. Suppose I buy a company on a 7-8 forward PE and it expands to 14-15 I exit. This might result in me exiting early, but then I use the money to buy a company which is available at 7-8 PE but has similar growth potential as the earlier company. This way I am able to de-risk my portfolio by capturing the profit and do not leave it open to market forces.
Q: This type of investing strategy would mean that you have to track a lot of companies. Also, can you give us some examples to illustrate your style of investing?
A: Yes we track many companies. We have a group of analysts with whom we track these companies. I keep track of 120 companies regularly. I attend their AGMs, analyst meets and conference calls regularly. This helps us to be on top of what is happening in these companies.
We generally track the top two companies of a sector which gives us an idea of what is happening in the space. This has helped us in picking winners. There are also times when we have attended an AGM for many years but the stock has no promising story to tell but we still attend for clues. This helps us identify green shoots early.
There are times when we pick up a company from our basket because we attended meetings of some other company in the same sector. Take the case of Camphor and Allied. I attended the analyst meet of SH Kelkar which was coming out with an IPO (initial public offering) at a valuation of 40 PE. Camphor and Allied, which we have been tracking for years and was in the same sector was available at a fraction of that valuation.
Camphor and Allied had not given any return for the last 15-20 years that I have been tracking. But after the SH Kelkar IPO, we knew India will be a leader in aromatics. By this time Camphor and Allied decided to merge a group company Oriental Aromatic. This company has immense pricing power despite being in a B2B (business-to-business) arena. We bought the company at a price of Rs 600, the stock is currently at Rs 1,100 but there is a huge potential left in it. We will continue to hold it for more time.
Another company that we have been tracking is Weizmann Forex. This too had not done much for a long time. But in one of the AGMs, the promoter explained to his shareholders the advantage its recent collaborations with Wirecard and Moneygram. Growth which used to be erratic and at only 10 percent has nearly doubled and the stock has gone up by four times.
CanFin Homes is another stock in our portfolio. We generally look at companies over Rs 100 crore and Canfin Home came on our radar as its growth rate was increasing sharply. I was in Bengaluru for some AGM and had some time to spare. I called up the CFO of Canfin Home who agreed to meet.
The CFO explained that they had 35 branches and this was going to double in the next 18 months. We discussed the company’s plans and was told that each branch can give the company a business of Rs 60 crore. The entire book was asset-backed and relatively safer than a bank’s book. The stock was available below its book value at a time when Gruh Finance was available at 4.5 times book. It was a no-brainer.
Q: Any examples where the call was wrong
A: One bet on which I went wrong was Ricoh India. The stock was available at Rs 150-160 but there were no earnings in it. But there was a good potential in front of the company. The postal department order could change the face of the company and can result in a PE expansion. The stock did go up to Rs 800. But then there were some internal management issues which led to a decline. The premise was right but on account of certain issues in the company which is difficult to read and foresee, there was an issue.
Another company that we were right in the broad call and invested heavily but did not get rewarded was IMFA. We bought the company in 2011 when chrome ore prices were at Rs 45,000 per tonne. IMFA was an integrated player and any price rise of chrome ore, which I thought was near the bottom and would benefit IMFA the most.
However, IMFA was also invested in coal mines. But then the coal scam broke up and the Supreme Court canceled all licenses. In three years chrome ore prices touched Rs 90,000 a tonne but the stock did not perform.
Q: Bhavesh, suppose if there is a company that you have not tracked earlier, how will you analyze it
A: There are a number of parameters that have to be fulfilled. I would like to look at the addressable market opportunity which will offer growth potential. Then I would like to judge if the management and the company is in a position to exploit the opportunity. The bandwidth of the management and the strength and cleanliness of the balance sheet will determine investment.
If future growth visibility is 30 percent per annum then I do not mind buying the company even at a PE of 20. But if the growth is likely to be only 10 percent then I will not buy it at even 8 PE.
Q: How important is attending AGMs in your investing strategy
A: I started attending AGMs at a time when it was the only time when management used to interact with the shareholders. It used to be generally very boring but that was the time one could get an idea of what the company was doing and what are its plans.
Today, times are different. Management gives a presentation in front of analysts, fund managers, and even high net worth investors.
But in case of smaller companies, it is still important to attend AGMs. You will not get the entire picture by reading the annual report. In order to understand the business model and addressable opportunity, one will have to meet the management at AGMs. Many of these smaller companies are still reluctant to meet analysts of fund managers during other times.
Q: How do you add companies to research or track on a regular basis.
A: I have a habit of reading all newspaper and exchange announcements. Suppose if there is a news that NMDC has increased ore prices by 10 percent. I will go back and see how it will impact the financials. If the number is too big for the current ones, I would put it on our radar and try to meet the management. But in any case, the company will be in our monitor.
Q: Any word of advice to the retail investor.
A: In my experience, an investor with a small corpus should invest through mutual funds and allow the kitty to grow. Only when there is a sizeable corpus should one start investing on their own. During the interim, they can invest in learning about investing.
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