Coffee Can Investing: Sunil Singhania shares the rationale behind Bajaj Finance, Eicher, JSPL, TVS bets

“I am okay with the DCF (discounted cash flow) forecasting,” he says. “The only thing is that how can you focus something for 50 years in this disruptive world, and in the DCF world even if you increase or decrease the discounting rate by 1 percent you can have stock going up by fifty percent or going down by fifty percent,” he says. DCF is a popular valuation method used by analysts to arrive at a company's fair value by forecasting its future earnings growth.

Edited transcripts of the interview:

Q: In the late 1980s, you were a rank holding CA, and at that time, the default setting for a rank holding CA would be to join a large Indian company and build a long and successful career there. What led you to stay on as a Chartered Accountant in the late 1980s early 1990s in India? A: I was very young that time. I completed my CA when I was 20 years old and as you rightly said, I got lot of offers.

However, from day one I was a little bit fixated towards practicing as a chartered accountant. And my uncle was a chartered accountant. So, there was a natural progression towards joining him. And that's how my career as a practicing chartered accountant began.

Q: So, you must have been travelling across the country, auditing companies, seeing the country up close. Any recollections, any memories from the India of late 1980s and early 1990s? A: So, one very funny instance is, we were on the panel to audit State Bank of India (SBI) branches. That was my first professional visit outside Bombay. We had to audit the Gwalior and the Shivpuri branches of SBI.

It was a very different Gwalior at that point of time. I had never seen gun shops which I saw in Gwalior. In fact, the place where we used to stay in Gwalior, next door, when we used to go out for dinner you had people with guns joining us for dinner. So that was very different.

At the same time, I would say that the vibrancy which we saw, even in India at that point of time, was quite different. Obviously, we have matured as a country, we have grown quite dramatically, but these were one or two sort of funny instances.

Q: Even now, most hotels in UP and MP have a sign outside saying guns not allowed. So I suppose for people like you and me, we continue to be a little taken aback. From chartered accountancy into stock broking, 1994 if I'm not mistaken. By that time the liberalization happened, the Harshad Mehta boom happened. What bought you into stock broking, given the amount of volatility that the stock market must have seen in that early part of the 1990s? A: Right from my student days, I was interested in the equity market. I used to read some balance sheets because my father had some shares and he used to get balance sheets at home. And, my first investing began when I was a student. I applied for a few IPOs, and I remember I got allotted in a company called Godrej Gujarat Innovative or something. And from investing a thousand rupees I made ten thousand rupees at that point of time, which was quite big.

Obviously, money is something which lures you. After I completed my CA, I used to do small bits of investment, read balance sheets, and do limited research because information at that time was not as easily available as it is today. And, Harshad Mehta obviously was a big factor which catapulted the market at that point of time.

Also, during my practicing days, a few of my clients were stock brokers on the Bombay Stock Exchange. At that time, just visiting the BSE building used to be so fascinating. So, it was a combination of a lot of these things. And, when NSE started operations in 1994, that is, the time when I got an opportunity. Maybe it was destined but I took on that opportunity.

Q: The NSE is less than hundred meters away from the NSE as we do this interview. So, it is destiny in a very roundabout way. In the 1990s, through mid-1990s, late 1990s, there was almost an IPO a day. There were apparently more stock broking accounts than are open in India now. Just tell us a little bit about trying to identify investment opportunities when there is an IPO hitting the market every single day. A: I would say from 1994 to 1998 it was a very different kind of market. NSE had just started, and for the first time investors could see the stock prices live. Earlier in BSE, it used to be so opaque. You never knew at what price you bought the shares, what price you sold them. That led to a lot of trading mentality because you could finally sit in front of the screen, see the price, and buy-sell easily. But that also led to a lot of transparency coming in, and broking rates started to fall.

The first two-three years was more of a trading kind of market. And then, when the IT boom started, we saw foreign investors starting to look at India differently. From 1994 to 1997 it was predominantly the GDRs and the FCCBs (foreign currency convertible bonds). Many foreign investors burnt their fingers because in 1997 you had the South East Asian crisis which impacted India as well.

Post 1997 to up to 2000, we had a very different kind of market, but it was an IT driven market. And, then obviously from 2001 to 2003, you had one of the most depressing times as far the economy and the markets were concerned. But at the same time, 2003 was a great learning experience and a great opportunity for investors because stocks had become so cheap.

And by that time the regulations had changed. Getting hold of balance sheets was much easier than it was earlier. I would say corporate governance was just sort of picking up though it was still not as transparent as it is today. And need for quality research increased.

Q: So, one of the things that I have seen with great investors is, they are all in a way shaped by the decade in which they enter the market. Benjamin Graham entered the market after The Great Depression and he became the renowned value investor. Warren Buffett entered the market in the 1950s- 1960s in booming America and he became a very different sort of investor. The generation watching the program right now is primarily steeped in DCF (discounted cash flow) and spread sheets and elaborate models. In your first ten years in the market, there wasn't really this whole plethora of spreadsheets and culture of DCF. How did you identify investments back then? A: There were few things. First of all it was a very different India then. You had a lot of companies which were already in business. And there was some License Raj, you can say which sort of continued. So, though during the early 1990s when Manmohan Singh and Narasimha Rao were there, and you had this first phase of massive economic reform, the liberalization where License Raj was slowly getting dismantled. Still in the late 1990s and early 2000, it was all these traditional companies which were dominant, though IT as a sector had started to come up. But, I would say that at that point of time, it was not about DCF. It was all about capacity utilization and you had this recession. Companies had capacity, they were not utilizing their capacities. Interest rates had shot up to 18-19 percent and were beginning to come off. So it was much easier you can say, to take a call from a 3-4 years perspective where all you had to do is to just figure out which companies would increase their capacity utilisation and which companies would benefit from lower interest rates. I would say that today it is much more challenging than it was back then.

Q: So, then we go to through this decade and come up on that sort of crucial turning point of your career. You leave the sell side, you enter the buy side, you enter Reliance. Talk us through how it happened. Because it was one of those big turning points, not just for you, but the market as a whole. You meeting Madhu Kela and entering Reliance, talk us through that episode. A: Between 2001 and 2003 was the best time to buy equities. I was on the broking side, and we used to do a lot of mid-cap kind of research when I was in Advani Share Brokers. But funnily enough, maybe logically, no one was interested in buying any of these stocks. So, stocks used to be like 2 PE (price to earnings), 3 PE, still you know it was impossible to convince anyone. And, you have been on the broking side and, you know how tough it is. So first, you make the fund manager buy the stock and then ensure that the fund manager is able to exit at a profit. So if the profit happens it's their intelligence, if a loss happens it's your fault.

So, in 2002-2003 somehow I convinced myself that I need to be on the buy side. I had to take the buy calls myself rather than trying to convince someone else to buy stock. All the mutual funds were my clients when I was on the broking side. And somehow you know Reliance was perceived as an entrepreneur-driven company and though it was 35th out of 35 mutual funds, I met Madhu and I met Amitabhji and in 10 minutes I was in.

Q: Wow, as little as that, just 10 minutes. A: Yes, without a resume.

Q: One of the things people say is that when you like someone at an interview you decide in 60 seconds. The rest of the interview is just a kind of passing the time. I am sure Madhu Kela must have reached the same conclusion after meeting you for 60 seconds. Now let's get into that period at Reliance. You run several funds. I think from 2007 through to 2011, Reliance was the largest mutual fund house in the country. But, if you focus specifically on the Reliance Growth Fund which is the only MF in India to have given 100x in 22 years, stellar rate of compounding. What stands out for me in the pattern of investing is you spotted several winners very early in the day. And if I take four different companies, four very different companies Bajaj Finance, Eicher Motors, TVS Motors, and Jindal Steel and Power (JSPL). Could you sort of talk us through how each of these investments sort of happened and how come you spotted them so much before the market, starting with Bajaj Finance? Not too many people knew about BAF. How did you spot BAF so early? A: So, again if you went through the balance sheet of Bajaj Finance at that point of time obviously they had huge, gross non-performing assets (GNPAs). Predominantly, because it was a two wheeler financing company, most of it captive. And Bajaj Auto scooters had the unique dubious distinction of having very low resale value. So, when you borrowed money for a Bajaj Auto scooter, and you defaulted even if you sort of took the scooter in your custody you could not sell it for more than 50 percent and that is the reason why you had this huge NPAs. But once we dug deep we noticed that even with factoring in complete write-off the company was trading at half the book (value).

Q: And this was in which year, 2009? A: 2007 to 2009, in between somewhere there, just after that Lehman Brothers crisis. And, you had this gentleman called Rajiv Jain who had joined. And fortunately or unfortunately for me, we were the only ones to meet him. So, I used to meet him every quarter and he was very kind to always take me out for lunch when I went to Pune. So, we engaged with them. Slowly, we started to get a little more convinced. At that time we had a philosophy – buy companies at a market cap with a potential where the net profit can be equal to the market cap at some point of time. So, the first time we looked at Bajaj Finance it was like Rs 400 crores but it had the potential of generating or reaching up to Rs 500 crores of profits in the next 5 years. So, that was the thought process and, we bought into it, we built a small position. When they did the first QIP we raised our exposure to almost 8-9 percent in the company. But this is among one of those companies, where we bought in early, but we booked profit also too early.

Somewhere along with Eicher Motors I have reached a conclusion that it maybe better to be the second or the third rather than the first investor. Because, the second and the third investor gets in after being completely convinced and therefore, the holding period to that extent becomes much longer. When you are the first investor, you double, triple your money and there is this natural instinct of booking out.

Q: Right. Because you are so apprehensive making the investment. A: And, you are the only one. So, you don't have support and you don't have people pushing you to buy more.

Q: So let's discuss how you got into Eicher because by 2008, Siddhartha Lal had taken over. There were rumours that they would sell the motorcycle company and so on. In fact, I remember 2009-2010, when I was looking at it we used to focus more on the trucks side than on the motorbike side. How did you guys get into Eicher so early? A: So, Eicher was a 2009 buy, and, again if you drill down on the financials, first their history was not all that great. They had a tractor business that they sold off. They had this two wheeler business which hardly used to sell like 3,000-4,000 units a month. The truck business had sort of just about being nurtured in the sense that they were trying to get Volvo into the company. But there was one thing which made us very positive. One was that Siddhartha Lal was very focused from a long term perspective. Second was, Volvo bought 46 percent in their truck venture. And to make it 50 percent, they put eight percent in the listed company at some crazy price, it was Rs 675 or so.

And what the promoter did was, they announced the buyback. And they said that they are selling X percentage to Volvo at Rs 673. They will allow all the minority shareholders via a buyback to partially exit in the same proportion at Rs 673. So technically, the stock price was some Rs 230-240 and some 13-14 percent were going to go in the buyback at Rs 673. So you are getting the balance businesses at Rs 140 and it was like a debt-free company. And post-Lehman when there was a sale in the market you were fortunate that one large global investor gave us almost 10 percent at one price

Q: Let's come to TVS Motors, where I remember 2013 my colleagues at Ambit put a buy on it and I used to call up various fund managers saying TVS Motors is three times earning Rs 30, please buy it. Everybody would tell me to get lost. Again, I remember you and your colleagues were among the earliest buyers of a stock which is now given something like 7-8x in 4 years. Could you talk us through what you spotted in TVS Motors so early on? A: I had a very good colleague, you know Ashwini, who was an expert in auto. And she was very convinced on TVS Motors. But from my perspective few things stuck out. One is that two wheelers or the motorcycles market generally in India is a three-four player market. It is now four players. When you talk about the mass 100cc motorcycles earlier you had Hero Honda. Now they are two, you had Bajaj and you had TVS. And when you looked at the sales to market cap ratio TVS Motors was like a decimal of sales, you know, 0.1 times of sales or .15 times of sales where others would be traded 4-5 time sales. The only concern TVS Motors time and again had, was low margins here and losses from their Indonesian ventures. I think these two things used to just suppress the market.

But it was a very, a sort of more of a game of patience. Because you somehow knew that the product was good. The company had great financial strength as well as great corporate governance. And in a three player market you can't have two players making 18-19 percent margin and the other one making 2 percent margin. I think that is what played out. So you had ultimately even TVS go up to like 7-8 percent margin, which is still much lower than others but it was enough for the market to, give it a discounting and the price went up.

Q: So, they had volume growth and the margins improved. A: On sales to market cap, in a three player market it was very cheap.

Q: In a way it was astonishing that unlike Eicher or Bajaj the business itself took a U-turn in TVS's case…… A: ….business was always steady and growing. It was more about one or two products doing well and the margins inching up and for them Jupiter was the one product that made the difference.

Q: So you know Bajaj Finance, Eicher Motors, and TVS Motors. I tell myself if I was switched on enough I would have been able to identify them. But one investment I don't think I would be able to ever make in million years and you know investment business is stuff of legends is the JSPL investment. I think we are talking about 2003-2004 here. If you can just give us the backdrop as to how Madhu Kela and you hit upon this credible investment. A: So, basically I used to track this company even when I was on the broking side. This was among those companies which was 2-3 PE and which no one wanted to buy and Madhu had faith in me and he bought even before I joined Reliance and then we added on to it. So I think this company has never gone public. It is a spin off from a company called Jindal Stainless. It was a division of Jindal Stainless and when the youngest of the four Jindal brothers came into business one part of Jindal Stainless which was the sponge iron business was carved out, hived off and given to Naveen Jindal. The market cap that time maybe was like Rs 250 - 260 crores. And, the company was making Rs 50-60 crores of net profit but almost Rs 150 crores of cash profit and it was investing very easily. So, a lot of people used to get put off because their plans used to be like Rs 500-2,000 crore for a company of this size. However couple of things happened. One was the cycle for metal per se changed dramatically and this company I don't know what it was it was, foresight or luck, had all the ingredients. It had captive coal blocks; it had captive iron ore blocks. So if the cycle sustained the way it was they would be the biggest beneficiary.

Q: So already in 2003 they had the captive…… A: ….they had the coal blocks, they had the iron ore blocks but there was no value to it because coal and iron ore were like commodities, you know, you could buy it like for Rs 2/kilo.

Q: And this is exactly where your training in looking at the balance sheet and looking at the resources a firm has rather than trying to do some DCF forecasting becomes very useful. I think that's in a way the skill that our generation hasn't quite absorbed. A: I See. I am okay with the DCF forecasting. The only thing is that how can you focus something for 50 years in this disruptive world, and in the DCF world even if you increase or decrease the discounting rate by 1 percent you can have stock going up by fifty percent or going down by fifty percent.

Q: Now changing track a little bit. One area where your work, you have done has benefited people like me enormously is the CFA Institute works. As a CFA charter holder moved to India in 2008 and whatever the society was then the CFA society the Indian IAIP was, was your courtesy, your involvement. You already had a busy schedule buy 2006 -2008 you were running several funds. Why did you take on the challenge of the CFA construct in India? This is 10- 12 years ago. A: So I will tell you how the society was founded. It was very funny. When I cleared my CFA it was in 2001. We were a few handfuls of us, 10-15 in India. Our exams used to be held in Oberoi Hotel because we were so few of us. It was with luxury at that point of time. In 2002, I went for a voluntary event globally and I found out that Pakistan had a society. And I enquired about Indian society and there was none. I said if Pakistan can have a society why don't we have one in India. And at that point of time, the rule was you needed to have 15 charter holders to form a society and I was not able to get 15 charter holders. By the time we got to 15, the rule changed to 50. I think it was only in 2005 we got 50 and we formed the society. However, one thing is that getting involved in these of activities, whether it is CFA society, I was also involved in the Association of NSE members when I was on the broking side, one gives back to the society and second you end up learning a lot and I think CFA the program as well as the CFA Institute and my volunteering both at the society level and as well as the CFA Institute globally has enormously helped me in broad basing my thought process, thinking, adding a different dimension to what you had already learnt while you were in India.

Q: The annual India conference in January has become a sort of an almost a centerpiece of the investment calendar in India. But distinct from setting up the society in India from what I know you are the only Indian person to have been the chair of the investment committee at CFA Institute. I am thinking you are sitting with Wall Street stalwarts on that investment committee. What does it feel like walking alongside Wall Street stalwarts? Is there thinking meaningfully different to what we do over here? A: So this is an honorary position fortunately or unfortunately I don't know, I don't get paid for it. So, CFA has a free reserve of almost 400 million dollars plus and obviously has to be maintained under guidance from the board. So, we have a board sort of guidance which we follow at the investment committee. I chair the investment committee. The good thing is that you know we have consultants. Global consultants we have Mercer as our consultant and on monthly basis we discuss the portfolio. It's a global portfolio and the perspective which you get about what is happening globally that also helps directly or indirectly because you know sort of the world is flat now and what is happening in one part of the world is going to impact other parts of the world including India and that also has helped quite – I would say you can't measure it but I would say it's a meaningful kind of contribution which happens.

Q: You are an astute reader of financial statements we have heard tales over the years that there are mountains of annual reports in your office room and I remember having several discussions with you on financial statements of various companies over the last decade. When you pick up the annual report of a company for the first time what is it that you look for in that annual report? A: I don't know how to answer that because every annual report will have a different kind of thing. So apart from the numbers I think cash flow becomes very important. Sometimes the auditor's report gives you lot of insights. I would say the management discussion along with the director’s reports are very good. In fact the earlier annual reports were much more transparent than they are today because you know you had data of quantitative sale as well as purchases which has now been sort of exempted. So, for any company you knew what quantity they were producing at what price they were selling and the same thing on the raw material side.

So, if there was some things which are not very transparent you could make out because if one company was buying say coal at one price and the other was buying it at some other price you could make out. And then there are some you could say you know less - I don't know how to describe it, but for example, I like companies where the promoter's wife and daughters are also directors.

Q: Okay, tell me why? A: Because logically a promoter who does not have good intentions would not like the wife and daughters to be in problem.

Q: Fantastic. A: So there are a lot of different kind of things you sort of make out over the years I don't know how to lay down each of them but over a period of time you know more often than not you will not make a mistake if you follow them.

Q: That's great A: All the numbers and all are all there. Earlier it was easy to make money by just reading balance sheet. Now lot of people are reading balance sheets.

Q: Specifically in the balance sheet beyond data, what are you looking for? A: So it is different. In some companies for example, they have subsidiaries and in the quarterly earnings, the subsidiary numbers are not given. Lot of companies report subsidiary numbers only at the end of the year. If there is a significant turnaround in any of the subsidiaries which you can sort of foresee I would say that you would be sitting on lot of returns because the street would know it only after one year and if you have been reading the balance sheet and the turnaround in each of these subsidiaries over the last four - five years you would know that the tipping point is there. And so when you meet the company rather than focusing on what is obvious you know what you have to focus on.

Q: You are saying quarterly will only have standalone everybody will focus on the standalone. The annual report will have the consolidated. A: Right. So now the rules will change, they will have to give even the consolidated on a quarterly basis. But, you know you have this time frame.

Q: If you step back to look at your career repeatedly you are putting yourself in challenging leadership roles where there is lot of ambiguity, lot of wide screen on the canvas and you did it as CA, as a broker, as a fund manager at Reliance, and again you have set up a new venture Abakkus. If you look back on your career why do you think there is this sort of yearning desire to be a leader in a highly challenging ambiguous situation? A: I don't know. I was at Reliance for a long time, 15 years.

Q: Yeah but you chose to leave the comfort of a large MF and set up a new house. A: Yes so you are right you know it was very comfortable. Even my daughter asks me why I did it because she hardly sees me nowadays as I am constantly travelling. But you know the whole genesis of my investments have been backing entrepreneurs. If I chicken out being an entrepreneur then there is something wrong in my hypothesis, right? There is an opportunity here, there is an opportunity I am good at what I have been doing and I have 10 to 15 years of active professional life ahead of me, and if it was not now than never.

Q: There is that. So if I come at the same issue another way right from what I have seen standard template for success in Indian fund management is you join the buy side you create a 4-6 years successful track record and then you move to somewhere like Singapore and Hong Kong and you setup a fund there and you run FII money sitting in an overseas locations. You have chosen to reject that, you chose to live in the suburbs of Bombay, commute to BKC and live the standard Bombay executive life again why? Why not leave the country live in a lovely foreign city in a 30th floor of a penthouse? A: See, I have always desired to be in Bombay, in India of course. But even within India in Mumbai and I would continue doing that. There is lot of passion, lot of energy and ultimately it is all about also being happy about it, right? Here you know you have friends, you have a work culture which you are comfortable with. You have lot of opportunities. Obviously there are few downsides including the traffic, infrastructure, but ultimately I would say that staying where the action is always helps and my view is that if India is going to grow the way it has grown and if India is going to be a six - seven trillion dollars economy and then you know you better be where the action is. And frankly as I said I always have desired to be in India. In 2006-2008 and all through the career I have had great opportunities to shift abroad. But somehow it never you know, sort of appealed. I used to not even consider them.

Q: I am glad that was the case. There are many young boys and girls watching this program. They aspire to be to be the next Sunil Singhania. What are the books what are the references, what are their influences you would point them towards if they want to learn how to become a good investor? A: Actually, I haven't read a good book for at least a month or so now. I have been traveling continuously, but there are a lot of books you know. I think in these kind of a market to be grounded you have to also read a book called ‘Anatomy of the Bear’ by Russel Napier, so that you are grounded. But there are other standard books of Warren Buffett's History, and my favorite ‘A Zebra in the Lion’s Country’. I think ‘Outliers’ is a great book; Jim Collins series of books are really good, because they are practical. And I would say the books which you have written because these are like autobiographical. I find autobiographies the cheapest way of gaining knowledge because a person who writes a book puts in 20-25 years of his experience in that book. Everyone wants to write a book and for Rs 500 you are getting the experience of someone over 25 years. So, I would say they read biographies of all successful people whether it is Elon Musk, or you know Warren Buffet or even Steve Jobs or even some of Indians have started on that course. It gives you a lot of insights.

Saurabh: We tried to squeeze in 30 years of Sunil Singhania into 30 minutes in Coffee Can investing. We hope you enjoyed that.