In the special series Wizards Of Dalal Street, Ramesh Damani caught up with Mrinal Singh, Deputy CIO at ICICI Prudential AMC where he spoke about how he spotted Natco Pharma.
Below is the verbatim transcript of Mrinal Singh's interview to Ramesh Damani on CNBC-TV18.
Q: Let me take you a decade back, 2007, you were married, you had engineered, you were working in London and yet your wife tells you 'go, follow your dreams', what were the dreams?
A: The thing was I used to get up early in the morning, 4o'clock and my wife would ask, what is it that you keep looking on the screen. I told her, the markets are opened in India and I am seeing how the markets are doing. She kept on seeing that and it was very obvious for her, she said, if you want to do that in your life, why don’t you pursue that. It gave me the push which I needed.
Q: They say wherever there is a fire, there is smoke. At what point you think you have the bug of equities?
A: Even as a child -- in those days, even the leading daily used to have those price quotes in the back page and the business page. So I would look at them and I was always intrigued about what is it, the prices keep changing, the numbers keep changing and I ask the elders and they said, this is the share price. It is a part ownership of a business, you are entitled to some bit of profit because you are part-owner. They changes every day because the market decides the price every day.
That was interesting and it always was on the back of my mind that I want to pursue something in this. It attracted me.
Q: 2008, your dream of getting into stocks almost became a nightmare, thanks to Lehman. Tell me how you handled that period, your experiences of that time?
A: The professional investing started for me in 2008 starting. In those days, there were murmurs of something called subprime happening in the West and there were always these talks that yes, we keep talking about these things but nothing happens.
Then clearly, for a bottom-up fundamental guy, I could see that things were not in lace. Fundamentally, we are not able to justify a lot of things that are happening in the markets and it was troubling. Then even approaching Lehman incident, by October the market has started drifting down and then Lehman happened and then there was sheer pain. But as an investor, particularly a bottom-up investor, clearly there was hunting ground, there were a lot of opportunities, prices were appealing. So yes, baptism by fire they say.
Q: In retrospect, it is fine, the markets rebounded, everything is fine. Did you ever feel going back to engineering as the Sensex went below 10,000?
A: No, in fact, everything I wanted to -- in the jigsaw of understanding of the markets -- feel and understand was there. It was so obvious that this had to happen. You need to have a temperament to see through it.
Q: So you felt that that crisis gave you an opportunity, right? Because you were pushed into a sector that no one was looking at that time, technology?
A: Yes, besides other sectors at that juncture, post Lehman, everything to do with West was uninteresting. Particularly to do with the US and technology in India is very much US facing. So we were like okay, we will look at it.
Although it might have not been the most interesting things in those days, to me it looked like a very good opportunity. There were hoards of things happening, a lot of action, a lot of price movement and a lot of potential great investment opportunities.
Q: In real estate they say, location, location, location. In investing, in finding great stocks, the first thing you say is marketcap, marketcap, marketcap. How does marketcap help you make better investment decisions?
A: Because I look at potential investments as trying to buy a part of the business.
Q: What you learnt early on?
A: Yes and that is very important that I look at it in terms of what the market is ascribing to it as a value and that is marketcap and even a target marketcap. So I typically work in terms of marketcaps. The businesses may be evaluated better on price to earnings, price to book but those are ratios.
Q: How do you assess management, how do you look or spot the indifferent management from the great management?
A: We at ICICI, go to a very great extent trying to get that assessment right and that is very important particularly if businesses are small. We tend to do a huge amount of work around -- if they have a vested history, we see how they have dealt with minority shareholders in the past good and bad times, lenders, stakeholders like vendors and customers and things like those -- we also like to evaluate if -- as minority shareholders, investors are aligned with the promoters, how have their accounts been, how have they dealt with the balance sheet.
Q: What are the red flags that you spot?
A: Very often we have seen there are businesses, which tend to use capital markets to wash their sins in capital allocation and when they do have great times, they tend to have accounts in a way, which are not trying to share profits with minority shareholders and that is a very important parameter that we look for. We want to see how they have done in their bad times, we want to see how they have done things in the good times.
Q: Let us put it all together, you figure out marketcap, you figure out management, you figure out the opportunity size and you put it all together in a stock called Natco pharma. Tell me how and why you spotted that and why did it turn out to be such a winner for you?
A: We don’t comment stock specific but as an illustration, I will talk about it. So during our primary research in the healthcare sector and this is one of the sectors which has a lot of third party NGOs and the likes, it impacts everybody a lot of data also is available. So we notice that there is one part of that therapy, Cancer, which is getting missed because it is not getting captured because the pharmacists typically don’t dispense the cancer medicines.
Q: It is sold in the hospital directly.
A: Yes. So it is in the very nature of how cancer is treated in India and interestingly if you notice even today 56 percent of Indians are below 30 years and that is a very young society. So they are young, they have aspirations but then after ten years, these same people would be 40 years and at that juncture they will start knocking in terms of lifestyle diseases maybe a combination of diabetes, healthcare and the likes. So it is a big potential market for lifestyle diseases, chronic as they are called and cancer was being missed because the data wasn’t getting captured. So we did a huge amount of work trying to capture the data on cancer, went to leading practitioners, hospitals, opinion makers, NGOs, third party bodies.
Q: The prices also were generically far lower than they compare it as?
A: Yes. Besides the obvious names, there were couple of names which particularly from leading practitioners came across, we did work around it, meeting the management -- not the most important thing but obviously is -- do work around their vendours, competitors and competitors are a very good source to talk about.
Q: One of the competitors -- if I am right -- bought the shares after you did?
A: Yes. So that is a validation. So we made the investments at what we believe was the right price and we were happy because we knew we were ahead of the street. We were the first institutional investors and then clearly competitors bought at later juncture. We were happy that the stock has done well for us.
Q: Your philosophy comes together, you found a cheap marketcap, you found a great opportunity, target marketcap, good management, absolute return possibility, boom, Natco Pharma is a great pick?
A: Ticks all the boxes.
Q: Yes. Another pick -- PI Industries, what did you spot in this pick?
A: Not being stock specific, if you look in the value chain of the entire agriculture space and agriculture is a very big part of the economy, there are seats, which are partly regulated then there are these fertilisers heavily regulated, crop prices very heavily regulated. So the only part of the value chain is the agrochem which is not regulated -- a bit free market economy, we have been always more interested in that space and we have been invested in that space. So I would track this set of companies, not invested and then I saw this company was increasing its revenue and profitability without increasing volumes and that doesn’t regularly happen in chemical companies.
Q: They are moving up the value chain, higher maring products perhaps?
A: And in the free market, you cannot raise prices so easily and then we did a lot of work, we realised their products were very well accepted, the yields were improving, they were doing very well, in fact there was shortage and these guys were refusing business. They had an export business also and they were doing very well over there also. So, we clearly saw that a business having surplus demand, lack of capacity and to our surprise, they were in the midst of capex. So we knew we had a winner at hand, did all the bottom-up evaluation, financial analysis and all, we did for the price, bought it again the market wasn’t looking at that direction, we were happy, all the tick boxes margin of safety is there.
Q: You manage a lot of money, how much do you manage for the record?
A: Upwards of USD 2 billion.
Q: How do you deal with that kind of money?
A: Being in the market itself is very joyful and money being small and big, responsibility is equivalent. Obviously the money goes up and down based on the market is moving everyday but then that is not something that I keep thinking about or I keep bothered about, the whole key is to keep finding something which will do good to our investors, our unit holders, our investments, keep finding something which is cheap and keep doing that work, keep maintaining what we have and keep evaluating and that is a very happy journey itself. So I obviously try to unwind post office, don't try to think too much about office after office, spend time with family, children, pick up a sport, pick up a hobby, things like that.
Q: A decade ago -- we are at the 'Good Wife' restaurant -- your good wife said, "Go, follow your dreams", are you living your dreams?
A: Yes. I am quite happy about it and my wife has a big contribution in that.
Q: You enjoy to go to work every morning?
A: Yes. It is very joyful.