In a special series Wizards of Dalal Street - A Fresh Breeze, Ramesh Damani caught up with the founders of GIRIK Capital -- Charandeep Singh, Managing Director at GIRIK Capital and Varun Daga, Founder & Fund Manager at GIRIK Capital.
Below is the transcript of Charandeep Singh and Varun Daga’s interview to Ramesh Damani on CNBC-TV18.
Q: Betting that stocks that are higher will go higher is a fairly counter-intuitive way to look. How did you stumble upon that trick?
Singh: It is still counter-intuitive. This is something that was introduced to me by Varun. I am grounded in fundamental analysis from my background in Lehman brothers. But when I met him, he talked about this book called ‘How to make money in stocks’ by William O’Neil and this system called CAN SLIM. It sounded like mumbo-jumbo at first, but when I read it, I said, wow, this is the way fund managers need to manage third party investor money. So, as counter-intuitive as it was, it has worked beautifully for us. Of course, we will get into the details through this interview, but that was the beginning of our CAN SLIM journey.
Q: CAN SLIM sounds like the new diet formula, but it as the core of how you pick stocks, is it not?
Daga: The most important thing about CAN SLIM , one can read the formula and the details of the formula.
Q: Yes, for reviewers, CAN SLIM is a book by Willian O’Neil. But what are the important constituents of it?
Daga: Some of the most important things about CAN SLIM was that it takes away the bias. You are looking at stocks which are making new highs. You are looking at stocks, which are delivering great numbers, so you do not miss anything, which goes up in price and delivering great numbers. So, that is one of the most important part of CAN SLIM. Also riding the winners. So you try to identify some of the stocks, which are having great numbers and moving up in price, but allocating well and riding them, that is what CAN SLIM teaches you.
Q: Looking at stocks that are making new highs is a way of looking at where smart money is flowing?
Daga: Yes, what happens in a correction or in a down market, the focus of a normal investor is on the 52-week lows or on stocks that have fallen 50 percent from the peak.
Q: It is like shopping. You want to buy what is cheap.
Daga: What is cheap, but nobody looks at the stocks that are making new highs and what is the amazing part is that those are the stocks, which are coming up with newer products which are coming out with great earnings, which are having fantastic management or change in management or buying out business.
Q: The ‘N’ in CAN SLIM?
Daga: Yes, new products, new management, new highs. So I feel that that is something which is where the screening is so important where everybody else is screening at stocks, which are low and they are trying to find value at 52-week lows, but you can find value at 52-week highs, because the stock could double, but the earnings could have grown 300-400 percent.
Q: The future is full of exciting possibilities. But that is just your entry into the door. The screen will throw up a dozen stocks early in a bull market, making new highs. Then the job begins, right? What do you do as Part-II?
Singh: So once Part-I is done -- and Part-I is done on a daily to weekly basis -- we shortlist stocks from the screener that have shown up and meet certain criteria. Then we go into fundamental due diligence. And I would say this centres around three main things, the promoter, you want to make sure there is a human being there that we trust who is all in as interests are fully aligned with ours.
Q: All in meaning, buying his own equity, creeping acquisitions or alignment of interests.
Singh: Could be buying and creeping, that is a great thing as long as the ownership is high enough. It is very important that they are focused on creating wealth through the equity route.
Q: Themselves and the minority?
Singh: Yes, and minority will naturally follow. The second aspect is cash flows. We do not look at profits as much as we focus on cash flows. The history of cash flows, and of course and less emphasis on the future of cash flows, but we look at lot at the stability of cash flows.
Q: By cash flow, you mean for our viewers, the earnings, not necessary the reported earnings?
Singh: Yes, how much business makes inherently and then the balance sheet and then the balance sheet. A smart entrepreneur knows how to use the balance sheet, does not get carried away at the wrong time, does not get carried away to borrow money and dilute their capital. They know exactly when to leverage their balance sheet to grow. So, making sure the balance sheet is well managed to the history of the company is something we are very focused on and that is where we spend bulk of our time doing due diligence.
Q: So, how do you both guys meet? How did you meet Charandeep to start your partnership at Girik?
Daga: I was a kid.
Q: You still are fairly young.
Daga: I am 31, but we started when I was 24. And I started investing when I was 18. So my family office and Charandeep’s dad’s office was on the same floor and I met.
Q: His dad, of course being Darshanjit Singh, owner of Bank of Punjab in yesteryears and a very well known investor in his own right.
Daga: Absolutely. So, he told me, why don’t you manage some money for me. So I was managing some, I was investing some money for him and that is when he made Charandeep meet me and the rest is history. I spoke to him about this whole system I was using, CAN SLIM and we clicked in the first meeting and we said, we have to start a fund and let us run it.
Q: Let us talk about using the CAN SLIM method early years tell me one stock that you are particularly proud of that you pick?
Singh: There is this midcap pharma company that we invested in 2013 called Ajanta Pharma. We first visited this company when it was a Rs 900 crore marketcap, we didn’t know much about it. It was coming on the back of a lot of earnings growth -- so we knocked on the management’s door, went and met them. The promoters didn’t meet us apparently they were too busy running their business, so we met the finance guys and the investor relations people who are also very helpful in helping us understand the business, but they didn’t guide too much growth and we said okay, these guys aren’t talking the kind of exciting stuff we are seeing in the numbers.
Q: What the excitement in the company?
Singh: We didn’t find any at that point, so we kept track of the company and we said the stock has doubled again, because the earnings have gone up 50-100 percent in the next two quarters.
Q: And CAN SLIM was keep throwing that up?
Singh: It kept throwing it up, it was right on top of our screen, it was unbelievable and we kept plugging away at the fundamentals and said let us get into the products now. We vaguely remember there were these two products, which were not a Rs 50 crore top line growing at 30-40 percent compound annual growth rate (CAGR).
Q: Not bad for a midcap pharma company?
Singh: For a small pharma -- these guys must be on to something, because they are growing their organic product base so quickly and they are doing out Rs 300-400 crore around of capex, which when you look back they did with their own money and not borrowing a single paisa at that point. I think we finally decided to pull the trigger at Rs 1,800 crore marketcap and the rest is history -- within 18 months we made almost 7 times our money.
Q: Take me through something that you almost pioneered CAN SLIM in your firm, perhaps even in the stock market in India that you found and take us through the back story of how the story evolved?
Daga: I will talk about recent stock which has almost gone up 10x in the last two years -- there is this company called Astec LifeSciences and from 2013 to 2014 the stock went up almost 3x from a Rs 40 crore marketcap to Rs 120 crore marketcap.
Q: So it shows up first on your CAN SLIM making new highs.
Daga: It showed up in the CAN SLIM also the earnings were growing, the earnings were just picking up.
Q: A in CAN SLIM is the accelerator in earnings.
Daga: The accelerated growth in earnings which make the stock prices move. Then the quick part that we did was we dug into the annual reports for the last 5 years and started doing the due diligence and the size of the opportunity looked very big, but more than that we have realised that the promoter had not diluted and did a huge capex of almost Rs 80 crore within two years and that capex was coming on stream, so they were almost sure of doing much higher earnings and the earnings were depressed because of high depreciation in interest.
Q: Normal fund would have gone and bought about 100,000-200,000 shares, but you gave a cheque, you took a fresh issue of equity from the promoters. What give you the courage to do that?
Daga: When we first met it was very hard to meet the promoter, we tried a lot and it was difficult and that is what we realised that promoters that don’t meet are one of the best promoters or best companies to back -- so the Oxford graduate, Ashok Hiremath, he had huge passion in the chemistry, in the products he was developing, he was talking about how his product has more purity than ExxonMobil and it was amazing to see that.
Q: And you had no angst to him and you gave him a cheque directly saying it was probably locked in at that time.
Daga: No, we didn’t we went through the plant, we saw that same passion in his people and that told us that okay we are convinced and we are happy to invest.
Q: A year later I know this that you have validated Godrej came and bought over Astec, so how do you guys celebrated -- all night?
Daga: It was a mixed feeling and initially we were very disappointed, because we generally backed the people and the management and now we thought this management, this person who we were backing and who we thought could create a great business is going out of the business and sold his own stake which we generally don’t like. We like managements to buy their own stake, skin in the game -- immediately the first thing is we called Mr Hiremath and he said that you have nothing to worry I still have 10 percent and I will work 3 times more for my 10 percent.
Q: So Girik is going to be run on this basic formula CAN SLIM, due diligence, extreme focus on a few stocks?
Singh: Yes, you said it. We continue to scream and we will work as hard to do the due diligence. We spend most of the time doing due diligence. The formula is simple it is not rocket science, it is just process.