In an interview to Ramesh Damani, Member BSE, Amitabh Sonthalia of SKS Capital shared his reading and outlook on the market.
Below is the verbatim transcript of Amitabh Sonthalia’s interview to Ramesh Damani on CNBC-TV18.
Q: Let me start with your earlier years, you had an opportunity to work at the Fed actually?
A: That is right, after finishing college at Davidson College I got an offer to work at the Federal Reserve Bank of Richmond as a research associate and I lap that up as a natural extension of my study at college.
Q: Economics major?
A: That is right.
Q: How does an economics major who knows risk and benefit leaves a nice job at the central bank in Richmond and moves back to Kolkata?
A: It was a fixed duration position for two years. I decided to cut it short by year to spend some time with family. Had a great experience working under one of the Federal Reserve Bank governor and reporting to a team of economists but I think I have had enough of economics by then -- four years in college and a year after that. So, I came back to spend some time with family with the intention of going back to my business school.
Q: The real world for you was Kolkata and that was a pretty difficult decade for you in the 1990s. What were the difficulties that you encountered in and how did that help shape who you are?
A: I was clearly a misfit coming back to Kolkata in the early 1990s and my father had a stock broking business going then which was not doing so well. So, I looked around for other opportunities but given the lack of alternates ended up joining his business and tried to make a career out of that.
Q: Lots of credibility but low amounts of cash so you had to deal with those situations?
A: There was very little capital to invest and one had to do with whatever the environment provided you.
Q: You didn’t need lot of capital because the brokers credibility was good enough but broker always needed good clients and you got a lucky break -- Rakesh Jhunjhunwala became your client earlier on?
A: That is right, it was chance meeting through a common friend in 1994 when I met the man himself and that was probably a turning point in my career, which helped me stay in this business and thrive in it.
Q: Why was it a turning point? What did he bring to the table that helped you as you called it a turning point?
A: His persona, his trading skills, what he stood for in terms of his name and reputation at the time and of course the personal rapport that I developed with him which I was lucky to get his guidance and mentorship in the ensuing period.
Q: I don’t understand this, you are an economics major, you understand risk reward. Here you are happy making the brokerage where you could see your clients making fat returns through investing and trading why did you chose to trade rather than broke?
A: So, clearly that was a lucrative profession then and as I said I had very little capital to invest and trade on my own, so I was happy to just absorb and learn by without risking my capital.
Q: You did have a nurture ambition to go ahead and do an MBA, you finally did that in Singapore what did that experience teach you? Did the MBA change you as a person or as an investor?
A: Clearly, that helped me redefine and gave me the confidence to come back and start investing on my own right and risking my capital.
Q: I was told that your style of investing is a hybrid of two models -- hedge funds style and asset allocation. Let us go through hedge funds first what does that mean you go long and short?
A: Thanks to the trading background and the fact that I was broking for mostly large trading clients in the early part of my career, I had a good feel for what the trading opportunities and going long-short opportunities that the market provided and luckily we had a vibrant derivatives market in India all throughout, which allowed one to not only go long-short, but also hedge through various options strategies. I found that quite lucrative in terms of taking non directional bets, which yielded high returns.
We also had an active arbitrage book that was quite profitable for us, for special situations etc and I think Indian capital market specially was quite inefficient in the 1990s and 2000s and even now someone can argue.
Q: The core of that strategy -- if I know -- was that you don’t like losses you don’t like drawdown you always want absolute returns?
A: So, thanks to the early years where I had very little capital. Once I started building up capital through my trading, investment and broking business performance, I was very averse to lose that and that kept me a bit shy of taking bigger bets. At the same time, a mixed of assets namely equity and high debt and trading helped me achieve positive returns all through my career, especially in the last 15 years.
Q: Even today you encourage people not with an all an equity approach but to have a balanced portfolio of exposure to the real world?
A: Especially to an average investor that is the right way to go about things, so I will always prefer to have liquid capital. I was always very shy of leverage, which I never did on my own even though my clients traded on leverage in the early years. That is something that was naturally a style, which I naturally developed over the years and it has worked for me so I am happy to stick to it.
Q: Give me the example where you tied the thread? You were a student of economics, you were mentored by Rakesh Jhunjhunwala, you went to MBA, tie it all together in a stock that proved to be a wining idea for you?
A: Post financial crisis in the year 2008, we came across the company in the IT BPO space called Hinduja Global Services and given that my ethos of a debt and equity style of investing here is the company which is available at a 10 percent dividend yield with high cash on book, so net enterprise value of the company was negative. You are getting company at a market cap below cash on books and with a thriving business, which was generating cash and good earnings for your shareholders.
Q: That is one way to look at margin of safety.
A: That is right, so clearly that seem like a more brainer to me and help me take a reasonable sizeable bet. I saw a lot of scepticism about the company and the cash that was there on the books despite of Big Four auditor being the Security Audit and Testing (SAT) auditors for the company.
Q: Because of this, your confidence grew and then as they say in Star Trek movie the force was with you?
A: That was much later actually, more recently post Modi when there was lot of excitement and people were looking for great ideas to invest in, I came across the company which was again largely ignored by the market called Force Motors. It was trading at a market cap of Rs 600 crore then and an enterprise value of some 4x to EBITDA.
Q: At what market cap you bought at Rs 600 crore?
A: This was about Rs 600 crore then with about Rs 150 crore cash on its books.
Q: What is it today -- the market cap?
A: It is about roughly about Rs 7,000 crore if I am not mistaken, almost a 10x.
Q: Tell me other than Rakesh Jhunjhunwala who you said was your mentor who have influenced you in your career in the stock market?
A: Of course, I was lucky to have the trust in business from other very highly regarded names in those early years like Radhakishan Damani, Ajay Kayan amongst others and some other institutions who had great influence in terms of both their hits and misses, I had valuable learning from all of them in both in that regards. The other key influencing factor in my style was perhaps reading and learning from the works of great investors like James Montier for example.
Q: You keep looking for those returns, but I also know you keep reinventing yourself every decade or so. Talking to Amitabh Sonthalia in 2020 or 2030 what would he be doing?
A: That is a tough one to answer now, but I will take a shot at it anyway. I would like to do less and achieve the same results. My style has involved doing much more work than some of the serious long-term visionary investors like yourself and other names that we talked about have done. So, I would like to sort of develop or perhaps re-invent myself to style, which requires me to do less work to achieve the same kind of returns.
Q: How about golf?
A: Doing less work would allow me to pursue other interest like golf and philanthropy and taking a leaf out again of Rakesh Jhunjhunwala's book.