Siddhartha Bhaiya, chief investment officer at Aequitas, believes the markets have become too overrated to feel at ease. The PMS, therefore, has halted new flows. He also believes there is a bubble building up in SME public issues. The Rs 4,500-crore fund house, which has returned an annualised 34 percent since inception, is waiting for a correction to restart investing.
Siddhartha Bhaiya shares his investing thesis, secret sauce, best and worst bets, and much more in an all-encompassing interview with Moneycontrol. Here's how the conversation progressed:
On how they invest, why they are not investing anymore
What is your investment thesis?
We have a multi-bagger approach to investing. We buy the largest or the best-performing company in the worst-performing sector. We always want to buy stocks at a significant discount to their intrinsic value. We also want to buy growth but that is cyclical. When growth kicks in, it becomes a growth stock, people give high valuation to it. So, we typically look for industries which have not done well in the last 10 to 12 years, like infrastructure, and capital goods. We bought a lot of print companies.
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What are the filters that you run before selecting a stock?
We run multiple screeners on a quarterly basis. Every quarter, we will run screeners on revenue growth, profitability growth, EBITDA, margin expansion. Then we do qualitative research - reading the annual report, going through conference calls, presentations, and management interviews.
In 2020, most fund managers sold the stocks in their portfolios, but you didn’t do that.
On the contrary, we held on to every single stock. Every smallcap fund manager had become a largecap fund manager in 2020. But for ten and a half years we’ve only focused on smallcaps and midcaps. I cannot add any value by buying Nifty 50 stocks. We’re better off in an ETF then.
You recently suspended flows into PMS and AIF...
Honestly, we feel the valuations have become very expensive right now. We have certain minimum thresholds for our clients. If we feel we cannot make those kinds of returns, then we won’t take money from our clients. The market is very overrated in our opinion. And that's why we've suspended flows temporarily and we will reopen when the markets correct.
What about the companies that you still hold?
We are not negative on India; we’re bullish on its long-term prospects. But there's a lot of froth in valuations. That's where we want to be safe. If and when there's a correction, we will again start investing. Our companies and the portfolio are doing well and we will continue to hold them. Somewhere we will book profits if there is a sharp run-up.
On their best bets so far, and the bad ones
You hold print media now? What’s the thesis there?
Yes, we bought it 15-18 months back. They had given zero or negative returns for 15 years. But they all have rallied handsomely in the last 12-15 months. These print companies had come up with their IPOs in 2004-06. When we bought them, they had 30-50 percent of net cash on the balance sheet. They were quoting at three times earnings.
They had spent a lot of money in building their digital lab and not even monetised their digital revenues. Some of the print names we hold were industry leaders quoting at significant valuation. We expected growth to kick in, in terms of advertising revenues. And growth kicked in massively. Today if you open any newspaper, the first eight pages are advertisements.
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So you bought it during the Covid times?
No, much after Covid-19. It was extremely contrarian, nobody was looking at these companies. They have rallied 200-300 percent since then.
What have been your best bets till now?
Avanti Feeds, HEG, Apar Industries, Jindal Stainless, Gujarat Ambuja Exports. More than 75 percent of the money we managed to raise is the profits that we made for our clients.
When did you buy Avanti Feeds?
We bought it in 2013, sold it in 2018. That was nearly 100x for us. When we bought it, it was at 3 PE multiple. It was the biggest shrimp feed manufacturer in the country. The Avanti Feeds management said that they expect 20 percent growth for the next five years. The stock was available at 3 PE, with zero debt, Rs 90-crore market cap, and Rs 30-crore profit. Within five years, they made close to Rs 400 crore in profit. At that point, we sold out because those margins were not sustainable.
Why were the margins not sustainable?
In 2018, they were growing close to 40-45 percent EBITDA. This was because demand was through the roof, anti-dumping duties were not present. Shrimp production in Thailand had reduced because of some disease. And, raw material prices had collapsed. Never in their history they had achieved those kinds of margins; they were not sustainable.
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What about other stocks?
Same. All were industry leaders. We bought them at single digit PE multiples.
Which stocks did not work out for you?
Inox Wind, and Talwalkar.
What happened in Talwalkar?
There were corporate governance issues at the parent level which we missed. We lost a very small amount of money.
Do you have any contra view on sectors right now?
Right now, I have a contra view on the markets.
On SME IPO bubble and typical investor journey to frustration
Why do you think there is a bubble around SME IPOs?
The SME index was at 1,500 three years back. Today it is at 42,000. SME IPOs are getting subscribed 400-500 times. Promoters are getting applications worth Rs 10,000 crore for raising Rs 20 crore. People are playing the lottery game there. Everybody wants to apply for IPOs and sell on listing.
I see a bubble in the smallcap space. Nobody wanted to touch small caps in 2020. With IPOs, the amount of subscription that is happening, promoters are raising more money in one day than they earned running the business for 10 years.
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Typically, first time investors start off as IPO investors. Then they apply to IPOs for one-two years and don’t get anything. Then they get frustrated and start dabbling in those shares in the secondary market. They see that the stock got listed at Rs 200 against the issue price of Rs 100. Then, they buy the share at Rs 100 or Rs 90, thinking they are still getting it cheaper than the IPO price. But eventually the share price goes to zero and they keep on averaging on the way down.
On their investing secret sauce
How has your journey been so far?
When we started in 2013, nobody had ever made money through PMS. People had a very bad experience with PMS, and it was a very nascent industry at that time. I thought we could hopefully change that experience. When we went to Sebi, they told us a lot of people are returning their licences. It was a tough time, markets were very bad, the smallcap index was at a 12-year low. We started with 10 clients and Rs 10 crore. Most of the people gave money because they liked what I said; nobody had belief in Indian equities at that time.
We wanted to change the PMS experience. So we approached clients directly. We decided not to work with distributors. Our industry was completely driven by distributors. We were told it’s going to be a non-starter, because we cannot even raise money without distributors. I decided to try. We also wanted to handhold our clients through the journey, and wanted to focus on long-term wealth creation. Today, seven out of our first 10 clients continue to be with us, which is unheard of in this industry. Our first clients started with Rs 1 crore. Today we manage Rs 450 crore for the family, and have made more than Rs 350 crore profit for them.
We also decided that we’re not going to hire anyone from the industry. Nobody in our research team has industry experience. We teach them our own way of investing, doing simple things. People ask us what is the secret sauce? It’s just doing the simple things. Investing long term, not trading a lot, working in a very fiduciary capacity, nothing complicated, nothing over the top, no going to the media and giving gyaan. We’ll make mistakes but markets are all about making mistakes.
Recently, we said we're not accepting any more money. The easiest thing to do right now is to accept money. More than 100 people have opened their AIF accounts with us, but we’ve not called for the money.
You hire people who have no industry experience...
A lot of things are taught in the industry. A fund manager’s first job is to protect their own job. So they are not allowed to fail or not allowed to take risks. Most of the fund managers eventually end up becoming index hackers; on the average, they're not able to deliver outrageous performance.
The key here is that we allow our people to fail. ‘It’s okay if you want to buy Coal India or NTPC’. We own the same stocks that we owned in 2020. People questioned me on the infrastructure and capital goods stocks that we owned. Today, people are willing to lap up some of those stocks. We are willing to take those bets and stick with them.
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Do you use any algorithm?
No, we don’t. We use plain old Warren Buffett and Peter Lynch style of investing, without complicating life. We use a lot of technology, but as an aid to our research. We don't use technology as a means.
How often do you churn your portfolio?
Our average holding period today is close to six years, which is very high compared to the industry standards. Average mutual fund holding is 8-9 months. We don’t sell unless there is a corporate governance issue or a management quality issue.
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