Chennai-based independent investor Gunavanth Vaid is seen as one of the most vocal champions of small and micro cap stocks. He calls himself an accidental chartered accountant-turned-accidental investor, and is an unabashed supporter of the India growth story. Critics among his peers call him overconfident and lacking in sense of proportion, but grudgingly accept that his investing style has paid off.
An avid movie and cricket buff, Vaid has been a believer in the small and micro cap story since 2013 when he first started looking at this space seriously. His early bets that went on to become multibaggers include Caplin Point Lab (up 53x over the last 10 years), Fredun Pharmaceuticals (up 65x) and Kingfa Science (up 60x). More recently he was among the early investors in Gensol which has risen 50x in a little over two years.
In his first ever media interaction, Vaid spoke to Moneycontrol about his journey, investing style, the growing dominance of ultra HNIs and why he is a one-way bull on the small cap narrative.
Excerpts from the interview:
How did you get into investing?
I am a practicing chartered accountant, having got my degree in 1997. In 2013, I suddenly landed up with a huge liability because of a verbal commitment to a close friend. I did not have the funds to pay him but had a good understanding of financial statements. I told the friend to buy a stock, and luckily for me, the price more than doubled in the next couple of months. Looking at the astounding return, I thought I could make a living by identifying such companies.
Which was your first big bet?
Caplin Point. One of the companies I used to audit was owned by a close friend of mine. This firm was a trader in excipients (varying used as lubricant, flavouring agent, binder in pharmaceutical formulation) and used to supply to various pharma companies. Caplin suddenly stepped up its purchases of excipients and I found out that the decision did not have to do with simply changing vendors. It was a sign that the company had bagged a major order. Back then, the market had a poor perception of Caplin because of past issues.
One of my philosophies about money was that ‘paisa wahin jahan koi nahin’ (the money is where no one wants to go). And the Caplin promoters seemed to have a similar approach, considering that they were selling in a tough market like Guatemala. So I decided to buy the stock.
How did your investment in Kingfa come about?
One of the juniors in my audit firm told me that a client was having issues with advance tax payment. I learnt it had received a big order from a sick company recently taken over by a new promoter. I got curious and looked up the acquirer. It was China-based Kingfa, which had a 1.4 million tonne capacity back home for the same product that it had bought a 12,000 tonne capacity in India. I had a hunch that this was just the beginning, and was proved right. Kingfa has scaled up its capacity in a big way over the years.
In the case of Fredun Pharma, it was delaying payment to suppliers. When I spoke to a senior executive there, I learnt that the delay was due to the company having ploughed every available rupee into a big capex plan. I realised that it was a temporary cash flow problem, and liked the promoter’s passion for their business.
Any incident in the initial years of investing you recall that helped you gain confidence to take bigger bets?
When Kingfa did an offer-for-sale (OFS), some of my friends were keen to invest. But on the day of the OFS, the market tanked, and only two of my friends said they would still go ahead. Having committed to the promoter to buy a certain quantity, I borrowed money to buy a bigger block than I had planned to. That turned out to be hugely profitable. My grandfather always used to say: koi maangta hai to de dena chahiye aur koi deta hai to le lena chaahiye (If someone asks, give and if someone gives, take) That approach has worked well for me.
Some of your peers say you have spread yourself too thin by investing in too many companies...
Till Covid, I was taking concentrated bets. There was a time Kingfa accounted for nearly 99 percent of my portfolio. Things changed after Covid. What Indian Premier League did to cricket, the SME platform did to the stock market. Thanks to IPL, you can now have three different teams for different formats. Similarly, an entrepreneur does not have to come from a pedigreed business family to be able to succeed. If someone has a vision and the ambition, there are enough retail investors willing to back him.
HDFC Bank became HDFC Bank because of FIIs, but the next HDFC Bank will be made by retail investors. By retail I mean HNIs and ultra HNIs.
Take the case of a leading solar module maker recently. It struggled to raise money from institutions, but HNIs supported it. And today institutions are investing.
How many stocks do you own in your portfolio?
Around 100. And it will only increase.
Why?
To use a cricketing parlance, India has got a free hit for the next 5-7 years. And you are getting a full toss on the leg side.
Do you manage them through a fund?
No, I don’t run a fund.
Talk in the market is that India Opportunity Fund is managed by you...
No. At one point, there were a few common stocks. But there are a couple of other funds too which have copied some of my ideas. But as we speak, there are no common stocks in my portfolio and IOF’s.
All the stocks you buy are under your name as an individual?
A few of them are in my name, but most of them I buy in my family office name.
We had seen a similar exuberance in mid and small caps in 2018 and it ended badly. What is different this time?
That is like saying if a batsman has got out for 70 two times, he will get out for 70 the third time as well. Why can’t he score a triple century? For the first time you are seeing promoters sounding more confident than investors. Previously only the price to earning multiple would expand, not the earnings per share. This time, the EPS is expanding. How many times in the past have you seen small cap companies delivering a compounded earnings growth of 50-70 percent?
Free hit, leg side full toss. You make it sound as though almost can walk in there and make money.
Not really. If success had a predictable pattern, every Yash Raj movie or Karan Johar movie would have been a hit. Kohli and Tendulkar would hit a century every time. I am not saying anybody, and everybody can make money at will. Just that the conditions are more favourable this time if you know how to make the most of it.
Are you saying there is no exuberance in the market, particularly among retail investors?
Retail today is much more aware than before. If they are buying dubious stocks it is not because they don’t know about the company. They know but think they will be able to get out before the stock crashes. It does not happen that way. If they lose money in bad stocks, they will shrug it off because the chance of that happening was high. The problem is if investors lose money in a company they thought was good. Those investors may not return.
Many of the small and micro cap stocks are quoting at what seems like exorbitant valuations.
They may seem expensive right now. But with many of these companies, the jump in earnings is rapid. So you can’t wait for the valuation to become reasonable before buying them.
How long do you see this craze continuing?
Get used to this continuing for the next 5-7 years. I may sound arrogant, but since the last three years, and for the next 7 years, people who invest in stocks using conventional parameters will continue to underperform. This is the time to bet on the likes of a Yashasvi Jaiswal, Rajat Patidar and Rinku Singh for Rs 40 lakh and see them becoming worth Rs 10 crore, rather than betting on an Ajinkya Rahane or Cheteshwar Pujara for Rs 8 crore even if they are technically better batsmen.
Healthy order books are one thing, but the way the market is many stocks in the manufacturing sector seems to suggest that execution is not a problem at all.
So let us take the case of EPC (engineering, procurement, construction) or defence companies. None of them have created meaningful wealth for the last so many years, barring an L&T. But the work they are doing today is the same as what they were doing in the past. Earlier they would start work on a project, and soon they would run into problems, and usually to do with government approvals for land etc. Or they would not get payment from the government in time. As a result, the cost of the project would go up. That is not the case, approvals are faster, and payments are made on time….one should credit this government for that.
If there are 100 companies in your portfolio, how can you understand so many diverse industries?
I won’t claim to be an expert on understanding businesses. But I am good at understanding the person who runs the business. I believe all businesses are ordinary, it is the promoter who makes it extraordinary. So, the key is to identify the right promoter.
Does that not mean having to take the promoter at face value, and a higher risk because of the dependency on one person?
Agree. But that is the approach I like to take for my investments. There is a keyman risk no doubt, but then investment is about taking risks.
That’s quite an unconventional style of investing...
If one were to go by convention, only Yash Chopra and Karan Johar would be making movies. But look at what is happening today—you have Bahubali, RRR, Pushpa, KGF. These kinds of movies are the rage. Same way cricket. No coach would recommend a reverse sweep, or a Dilshan scoop. Ten years ago, a Surya Kumar Yadav would not have made it to the national cricket team. Today all successful batsmen have some shots that defy logic, but work. That is why teams can case down 400. When T20 was started, the milestones for a batsman were measured in 30s and 50s. Now it is 50s and 100s.
How many companies do you meet in a month?
Around 40, sometimes even 45.
How do you know if a promoter’s intention is genuine?
You develop that filter over time.
Do you recall instances where a promoter seemed honest but later turned out to be a fraud?
In my experience, rarely do promoters start honest and then become crooks. If it happens, I would say my assessment of him was wrong to begin with. I don’t believe in chor bane mor (thief becomes peacock). To me, once a thief, always a thief.
You don’t believe in giving a second chance if the business model is good...
One of my rules is never try to make money off a bad stock. You will win for a while but lose it all and more in the end. I don’t think a crook can reform. Maybe the next generation will be honest. But when I don’t have enough money to give good businessmen, why should I even think of betting on a dubious promoter who claims to have changed.
But promoters don’t always stick to the rule book...
Agree. But there is a difference between a promoter who wants to suppress profits for a year so that the money saved on tax can be ploughed back into the business to grow it, and a promoter who suppresses profits to fund his lavish lifestyle.
What are the themes that you are betting on?
I am still bullish on the China replacement theme. (Clients buying the same product from an Indian manufacturer if it is available). Besides, I am very bullish on the recycling theme. Biodiesel is one of them. In the UK the government has already made it mandatory for manufacturers to recycle a certain percentage of their products under the EPR (extended product responsibility) rule. That will soon be the case in India as well. Recycling is a specialised job, the upside for established players will be huge.
Anything that makes you cautious?
Structurally, India is in a sweet spot till 2030. In between, there will be ups and downs in the market. But that is how the market is. Just because something good is happening, does not mean it should always end badly. Yes, if the sun rises it will set. But have a good time till then. Besides, the sun will rise again tomorrow.
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