Asserting that over a period of time investors look for scale, sustainability and maturity in companies, Hiren Ved of Alchemy Capital Management said that great companies going through difficult times can be the best bets.
On Ramesh Damani's signature show "Wizards of Dalal Street", Ved explained that Bajaj Finance
came up trumps after the global financial crisis by tapping into domestic growth and consumption story.
The company, an early entrant then in the consumer finance business, capitalised on the business opportunity by placing in stores executives who would instantly assess and check customers' eligibility for loans, Ved said. Its peers went for scale and cut interest rates instead, he added.Below is the verbatim transcript of the Hiren Ved's interview to Ramesh Damani on CNBC-TV18.Q: I said in my introduction that your passion has become your profession. How did your passion start?A:
It started quite early. I used to go along with my father to attend the annual shareholders meeting of several companies and I was over-awed watching Rahul Bajaj or Deepak Parekh and Dhirubhai Ambani stand up and speak about the vision of their companies and then we used to get those colourful annual reports at home, I used to flip through them.Q: Not understanding much.A:
Yes, but over time, developed a keen interest to try and understand what makes companies move, why they grow, why do the stock prices go up and down. Then being a commerce student, I ran a small stock market game with my accounting professor. So, got indoctrinated.Q: But what is your first job on Dalal Street?A:
I started my career with a firm called KRChoksey and Company, worked with Kisan bhai and Deven bhai there. So, I learned my basics there, going and visiting every annual general meeting, every initial public offer (IPO) meeting, marking out the papers, cutting them, making files on companies, writing copious notes.Q: It is hard to believe 20 years ago, there was not internet.A:
Exactly, you had to go to the stock exchange and physically write down the results because after three days they would take it off. So, those were the fun days, but I got my grounding in research when I worked at KRChoksey. Then subsequently, in 1994, I joined Prime Securities where I was part of the investment team, which was supposed to pick stocks so that the prop book could invest in those companies.Q: How did you get to Alchemy?A:
After working nine years in the markets, I thought it was time to strike out on your own and do something on your own. So I thought I would start a portfolio management company. When you take these career defining decisions, you sit with your best friends. So, Lashit Sanghvi and Ashwin Kedia -- whom I had known since 1991 -- we sat together one evening.Q: And your co-founders now.A:
Exactly. I told them that I was planning to quit and start something on my own and one thing led to the other and we decided that why do we not all get together and start an asset management company and that is how Alchemy Capital came into being.Q: But how do you generate an idea today?A:
We look for a large external opportunity. We look for a competitive advantage that a business has got to exploit their opportunity, we look for scalability, good quality management and valuations and today, with the advent of technology, we are using some algorithms to refine the process and make it more scientific as we go along.Q: Give me an example of this formula, process driven system that you employ now of an idea that it has generated.A:
We were looking at the consumer businesses. We are back in, after the global financial crisis because we were not sure whether the global economy will grow, what will happen? There was a lot of uncertainty. But one thing we were very certain about was that the domestic market was likely to grow. We picked several consumption stocks which came up at that time. So, sales were growing at a healthy clip, margins were expanding and that came through in our filter process and then came Bajaj Finance
and we thought this was a great way to play indirectly the India consumption story.Q: Second level thinking?A:
Exactly. While we bought the stocks like Bata
and the TTK Prestige
of the world, this was a great way to play the credit consumption boom in India. People were buying cell phones, refrigerators, washing machines and you could not buy an LG or a Samsung.Q: They are not listed right?A:
Yes, so the best way to do was to play the consumption theme through Bajaj Finance. There was great under-penetration of credit in India and they had a unique business model to attack this opportunity.Q: Explain that to me. What was unique about their business model?A:
It is not new. There were other players who saw the opportunity in retail consumer credit markets. What they did was that they went after topline growth. So, they appointed third party agents to go and source business for them.
What Bajaj did was that they had their own person sitting in a consumer electronics store. They had their CIBIL database, they had their own algorithms, so they could figure out -- if a customer approached them -- in 20 minutes whether you were eligible for a loan or not, which means that they acquired their own customers. They did not leave it to somebody else to do that. So, their process, their systems, their credit.Q: So, you went to Vijay Sales to check this out?A:
Yes, we did. We have done all our desk work and then I hopped across to the closest Vijay Sales, I went there on a weekend and I saw the person out there from Bajaj Finance sitting there, and I was there for about two hours and it was great to see customers walking by, interacting with them and walking out with a product.Q: It also helped that Bajaj had some of the best management in the business?A:
Absolutely. All the 3-4 people at the top were great. Sanjiv Bajaj with a big picture thinking, he mapped out the opportunity. Nanoo Pamnani, obviously, being a veteran in the financial services businesses.Q: Ex-Citi banker, good in processes, systems.A:
Absolutely. Cutting-edge processes and systems. And the obviously Rajiv Jain who executed the business plan. Every time we would go and meet them, we were surprised. We came away surprised and wowed. They were always two steps ahead. While they liked the growth and they were aggressive in pursuing their growth, they never took their eye off the risks in the business, whether it was providing ahead of the curve or whether it was using technology or whether it was using the best processes.Q: I know one of your partners at Alchemy is probably India’s best investor, Rakesh Jhunjhunwala. What have you learned from ‘Bhaiya’ as you call him?A:
Many things. It has been a great learning experience.Q When did you first meet him?A:
I met him when we were supposed to start out Alchemy and Lashit and Ashwin took me to him and I was obviously over-awed.Q: He was already a legend by them.A:
Absolutely. Learned a lot. But the three most important things I have learned from him is humility, risk-reward and the conviction to play big.Q: Humility? He is not known for humility.A:
I think people mistake it. He speaks his mind, so he is not a ‘yes’ man and it is not very easy to convince him.Q: You talked about his conviction and he is known for having brains of steel almost if you will. You have an example of that?A:
As one of the big learnings in the stock market is what George Soros said. When you are convinced, you should go for the jugular. It is not about you going right, but it is about how much money you make when you go right. As far as Bhaiya is concerned, A] he bets big when he is fully convinced. But more importantly, he bets big at the right price.
So, the risk reward has to be in your favour. If the risk reward is in your favour, you can afford to be a long-term investor. If you buy at the wrong price, then you will always make a mistake somewhere along the way. Those are important learnings that we have tried to imbibe from him.Q: Interest rates are negative and USD 13 trillion worth of bonds. So how does investment principles work in this kind of an environment that we have learned for 30 years, that you say for 30 years.A:
I agree with you that we are in uncharted waters today. I have never seen this kind of a scenario where there is unlimited quantitative easing (QE), negative interest rates, but what the investment grades has taught you is that stick to the principles. I do not think that the basic principles of a successful business change. So, cash flows still matter, sustainable growth still matters, return on capital employed (ROCE) still matters and those basic principles do not need to be violated. It is like the Bhagavad Gita. The basic principles do not change, times change, the context changes, but the principles remain the same. That is what we have got to do. Stock to the basics and you will be fine.Q: That is great because if they could change, they were not principles.A: