More than a decade ago, a young yet searingly ambitious Madhu Kela cycled 30 kilometers from Kurud, a tiny village in Chattisgarh, to get to college. From there to storming into the heart of Mumbai’s financial district Madhu Kela’s story is an inspiring one to say the least. A man who had no pedigree education to flaunt went on to do his MBA and that young man is today Madhusudan Kela, Head- Equity Investment, Reliance Mutual Fund spearheads India’s largest and most diverse mutual fund.

 

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Kela likes to go and bet in high growth companies that can have 25-35% growth rate.  “We are playing a core India story, which is what we are very bullish on. The company, when you are trading at 35 PE multiple, they don’t make a very exciting bet - but six-months down the line some of these companies are now available maybe 10-12 times PE multiple. A lot of the companies are generating cash. So we are already able to see a lot of opportunity when the margin of safety is clearly visible and if I extrapolate a bull run, which will come at some point of time, if our broad call on India is right, then obviously we are again getting prepared for this proportionate return,” he told CNBC-TV18.

 

Excerpts from an exclusive interview with Madhusudan Kela:

 

Q: I read somewhere that you think equity markets gave you the most equal opportunity, do you think that is true especially for wealth creation for you?

 

Kela: Yes, I am so thankful to God that I am pursuing this career. I do not think I would have been doing anything else but what I am doing today. If you look at equity investing, it is essentially you are in business of businesses. You can switch businesses as many times as you want in your lifetime. Intellectually you are challenged almost every day. In terms of the quality of the networking and the quality of contacts, which you have-you are in the league of best people and also there is no entry barrier. You do not have to be a son of Tata, Birla or Ambani to succeed here.

 

Q: You have a knack for it though as well, don’t you? What excites you so much about equity that is what I am curious to know?

 

Kela: If you are ambitious, which I am and if you come from a small place, if you come from a rural background and if you have to make it in one generation without having capital without having too much contact, I thought this was the best way to do it.

 

Q: When you started off at least for your stint with Reliance, which was around the early 2000s, could you see this coming? Right now we are in a tough phase but did you see this kind of enormous wealth creation coming in the bull run?

 

Kela: As they say the highs are always higher than what you imagine and the lows are always lower than what you imagine in the markets. So I would be very dishonest with you if I tell you that yes this is what I imagined that we are going to do in the next seven years. But did I have a conviction that something like this will happen to India or we will be able to do something like this - that is what I am quite convinced about. But the numbers suddenly are beyond our own expectations.

 

Q: Everyone has this grouse about mutual fund or retail participation in India what is your own sense are we really heading for an inflection point or are people still not sure about the stock market and how much they want to get their feet wet into this place?

 

Kela: I would say a lot of work has been done in the last three-four years. Apart from having highest assets under management (AUM) we are like 65-70 lakh investors, which all have been created in last five-six years. When I joined here 20,000 investors and now we are 65 lakh of them. Majority of our money is less than Rs 50,000; 85% of our money per participant is Rs 50,000. So we have gone all out to woo the retail investor and let him be part of this exciting India story.

 

Q: People call you the ‘Poster Boy’ of the mutual fund industry; apparently when you go out for presentations there is a standing ovation, do you find it embarrassing or do you think this is part of being a wealth creator and you enjoy it and you reveal in that kind of importance that you get?

 

Kela: I do not know whether I would like to be called as ‘Poster Boy’ and I get excited about it. But yes it is nice when you are making money for people for whom it matters. As I said that people who are putting less than Rs 50,000 in our fund and if you are able to generate a significantly higher return for them over a period of time like last five-six years we have generated 50% kind of a CAGR (Compounded Annual Growth of Returns), which compares very favourably with any other asset class, it feels very good.

 

Sunil Singhania, Reliance Capital Asset Management says, “The biggest compliment which can be given to Madhu Kela is a fact that the core equity team of Reliance Mutual Fund has remain the same for the last five years and that clearly brings him out as an outstanding leader who has not been able to only keep the core team motivated but also quite happy.”

 

Q: I know that you are also quite aggressive with your NFOs. You have the most number of sectoral funds; a short while back you launched the Reliance Natural Resources Fund. Do you think at this point is getting a little bit tougher and you have to act or think more smart while looking for outperformers or for spaces to ride out?

 

Kela: Yes, it is and be very honest with you; managing long only money in a country like India and that too a magnitude of USD 10 billion and that too with a daily NAV coming out, I don’t think there is any parallel in there.

 

Q: Did your heart skip a beat when every time on a bad day, the market dips a little bit?

 

Kela: I was very stressed out because at the end of the day this is not my father’s money, I am barely a trustee of this money and not the owner of the money. If it is your money you make money, lose money and you are only answerable to you and your wife but here you are virtually answerable to so many people. It is the responsibility, which you have towards so many stakeholders and you are trying to do your best. If you are trying to do your best in these circumstances, of course there is going to be a lot of stress on you.

 

Raamdeo Agrawal, Motilal Oswal Securities says, “He has that raw ambition and hunger for doing business and making money. What he has achieved in five-six years in Reliance Mutual Fund is completely kind of a dazzled me, and it is well beyond my expectation. I think it is a combination of platform, his passion and perseverance.”

 

Q: Tell me candidly from where we stand right now do you think as a fund manager this is going to be one of the toughest periods you will have to face. So you have seen worse, tell me what the worst part was?

 

Kela: I think in 2000 we saw stock prices erode once at 95-98%. In fact I would say this is the most exciting part of the stock market. When the markets falls like this then only you have an opportunity to make this proportionate return. If it went to 30,000 in a straight row then obviously there would not have been any return.

 

Q: Have you seen that little cushion right now that this proportionate return cushion right now? Where you are seeing it?

 

Kela: As I said that every asset manager has his own style. Our style is clearly that we would like to go and bet in high growth companies, which can have 25-35% growth rate which are where we are playing a core India story, which is what we are very bullish on. This company when you are trading at 35 PE multiple they don’t make it a very exciting bet but six-months down the line some of these companies are now available maybe 10-12 times PE multiple. A lot of the companies are generating cash. So we are already able to see a lot of opportunity when the margin of safety is clearly visible and if I extrapolate a bull run, which will come at some point of time, if our broad call on India is right, then obviously we are again getting prepared for this proportionate return.

 

Ramesh Damani, Member, BSE says, ”He has been one of the true bulls of India riding this great Indian bull market upto 20,000, heads up stock pickers and someone who is experienced, contributes a lot to our understanding of the Indian economy and Indian industry.”

 

Kela: I am delighted to hear this specifically coming from Ramesh Damani.

 

Q: Isn’t it, but I think that is the one thing that people pin on you, they think that you have this incurable knack of picking out stocks. Tell me what is it that draws you to it, what is it that draws you to an Educomp that makes you see what might happen to it over the next few quarters or years?

 

Kela: One is that you need conviction because this does not come easy as I was telling you. Secondly is that you have to have conviction on the platform, which is as I said India is the platform. If you look at, one is what is the size of opportunity in which these companies are playing, if I came across a company in education sector, I am seeing myself that this sector as a whole is going to get reformed and if there is a clear cut demand supply gap the sector is run today by the government, gradually it has to move into the private hands. There will be much more profitability shift, which will happen. So first you look at the size of the opportunity, then you really look at the entrepreneur who is going to drive it. And if you get convinced in the entrepreneur, in the team and the sector, then you really go out and do all your work.

 

Q: But you are a midcap guy at heart?

 

Kela: I am a guy who likes to buy midcaps seeing it go to largecaps.

 

Q: And who would not be in that list, I would like to know?

 

Kela: But there are lots of funds who may not want to take the risk - you don’t want to take the risk of illiquidity; you don’t want to take a risk of not performance proven.

 

Q: And for genuine wealth creation you think you need to do that put that kind of risk on the table?

 

Kela: For disproportionate returns you need to. But if you are looking only at the Index performance, then you can get that index performance in large companies. We are also now trying to mix our approach, where you would like to stand the entire sector before we take an individual bet in that sector, so to that extend it has may be improved over the years but from heart to heart, you would still not buy a company just because it belongs to a sexy sector.

 

Q: What is sexy for you right now?

 

Kela:  As I said 25% to 40% growth, which I am able to see in lot of infrastructure companies today, which I am able to see in lot of capital goods companies today, which I am able to see in lot of financial services companies today.

 

Q: I just want to talk about the whole concept of a wealth creator with you to your own mind what do you think is it that defines someone as a wealth creator whether you are doing it as an entrepreneur, whether you are running someone else’s money like you said?

 

Kela: One is the purity of the purpose; that money can be made by doing lot of trades over a period of time, so you really need the long-term purity of the purpose that you are here for a long haul and you are in a compounding games and that is how the larger wealth is always been created, which is what I talked to you about.

 

Second is that you always have to question, when money is been made too easily otherwise money will loss its relevance.

 

Q: Did you sense that happening last year?

 

Kela: Whenever money is being made too easily, I have seen that it does not get converted into wealth but it is a like a trading income. Third point is that it is always a easy way out and what is the difficult way out and in wealth creation, I have seen that and can very proudly give you a few examples. The company which we admire though we are not very large shareholders in something like a Sun Pharmaceutical is very quietly doing work for last ten years and has created disproportionate amount of wealth.

 

Armed with an MBA Madhu Kela stepped into what he calls the ‘business of businesses’. After learning the ropes at Cisco and SSKI, he started Motilal Oswal’s institutional desk. From there he went to UBS’s dealing room and headed the sales and dealing operations for Peregrine in India. But the poster boy status came in when he joined Reliance Mutual Fund in 2001 and the rest, as they say is history.

 

Q: You have had a long career along with the markets Motilal Oswal, then UBS now you are with Reliance. Tell me at one point in time where you just sat down and said okay I am in a tough job and this is going to be tough right from here on?

 

Kela: Right now.

 

Q: A lot of people are going to be worried to hear that?

 

Kela: No, I am not saying- the last six months have been really worrying and in your portfolio when you hold a stock, which you are convinced about that is going to do very well in three, five years. But if it loses 50-60% of value because at the end of the day we are in a paper value game, so it worries you, it stresses you. I am not nervous, if I am nervous then my investors would be worried I am not nervous but I am worried. Being nervous and being worried are two different things - I am worried because the kind of wealth destruction which is happening obviously it takes more than that much more time to go, where you came from.     

 

Rakesh Jhunjhunwala says that Madhusudan Kela is extremely diplomatic at the same time emotional. He said, “He is extremely hard working, may God bless him. He still has a long way to go. When I see his success, I feel good because I do not have any younger brother and they are like younger brothers and to see them grow and to be successful in life is a real pleasure. It is all their hardwork and great determination.”

 

Q. You are ‘a child of the equity market’ if you had to put forth the case for equity market versus gold or property or any other asset class. Why would you say, ‘pick me’?

 

A: I believe in the India story and in equity because you go through this kind of a bear and a bull phase. In a more chronic bear market, you can’t believe what kind of value you can get and equity will test a lot of patience of yours. Similarly in a bull market because of the greed and fear game, it will always trade at 2-3-4 times of the actual value. That’s why equity actually becomes a very interesting class for a long-term investor provided you really mean long-term. You have to see through the cycles to see the sweetness of equity.

 

Q: When you stand today as someone who is part of the Reliance family and as a fund manager, what is your dream for where you want to take yourself, your fund? Do you want to move away from the mutual fund fraternity into something else?

 

A: I think all my life, I am very clear that I want to do something which is related to stock market because I cannot live without stock markets. I would always try to do something with the stock market. In terms of my own ambition for the job, I would like to have more and more perfection in this game because if you tell me how much percentage of equity investing you know I would tell you barely 2%. So 98% is yet to be learnt and I am very straightforward about it.

 

This market is so dynamic, it teaches you everyday. It makes you humble as you experience more and more, you gain more and more humility. So you never say that I know enough or I have done it and I think God have been just too kind and has supported us to deliver the kind of performance, which we did.

 

For my fund obviously, we have become number one in India but the way we are defining amongst ourselves that we are 358th in the world and a long way to go. 

 

Q: It is a global aspiration now?

 

A: Absolutely.

 

Q: What is the most important lesson you have learned from the market?

 

A: In market, many people at various points of time believe that we are doing it, I can make the difference. Markets are larger than life and this is the lesson, which I learnt seven years ago when I started to manage money and continued to preach myself this on a daily basis. Sometimes we believe that promoter is holding 70% stake, I am holding 10%, the other fund is holding 20% but it may happen that only your 10% may remain, even the promoter may sell and gets out. I have seen that in 2000, in 1992 and some of it even today.

 

So, you have to believe that markets are larger than life. Second thing is that in this game it is not about being the most successful investor, it is about preaching to be the most successful investor on a daily basis because this is a daily game. I cannot say that I identified an X company five years ago so I am good. If I was lethargic in my job for three months, nobody will remember me because this is not about living in your past, this is about living in the present on a daily basis.

 

Rapid Fire round:

 

Q: For stock picking bull market or bear market?

 

A: Bear market.

 

Q: For stock selling bull market or bear market?

 

A: Bull market.

 

Q: Your icon in the equity market.

 

A: Rakesh Jhunjhunwala.

 

Q: One sector you would bet on for next year?

 

A: High growth companies.

 

Q: One sector you would not bet on for next year?

 

A: Maybe oil sector, oil-marketing companies. It will ball down to companies, the companies which will require huge amount of capital and I am not being able to raise that capital, I would not bet on those companies.

 

Q: If you got a call from Anil Ambani asking you to buy a specific stock what would you say?

 

A: I can assure he will never call me.

 

Q: Your biggest fear as a fund manager.

 

A: Losing disproportionate money for my unit holders.

 

Q: One thing you do not like about being in the stock market.

 

A: The format of this very job because if you give a timeframe to investments, it becomes easy but in a mutual fund format there are daily NAV, daily subscription, daily redemption. On one hand you have to manage all this and on the other hand you have to manage returns so it becomes really conflictive.

 

Q: The one person you would take a stock recommendation from any day?

 

A: I have learned a lot from Rakesh Jhunjhunwala. He has a unique quality; it is not only assessing the external environment and combining that with equity investments. So there is a lot of practical approach which is involved rather than just calculating what is EBITDA and PE multiple.

 

Q: The one title you would want people to remember you by?

 

A: Maybe a Stock Picker.