If a kid ended up at the doorstep of ASK Financials requesting for an internship, it is logical to assume he would one day head their research team. He did. At 20. Meet the unassuming Utpal Sheth, the CEO of Rare Enterprises, whose standard dinner table and holiday conversational pieces were all things market (read companies, markets and industries). He would prefers to spend a weekened with his daughter over a lifetime chance to spend it with Warren Buffet and, when pushed by Ramesh Damani, says Sensex can be at 50,000 by the year 2020."He has a great desire to earn fame in research and analysis. He is a very ambitious man. He keeps track of all international events, economies and capital market of US. He goes abroad and tries to see what new can be done in India. He understands debt market in the deepest way as he understands the equity market, but by nature he is shy, never wants to portray him as great analyst or boast his achievements. He believes in working quietly." This is how Hemendra Sheth, father of Utpal Sheth chooses to describe him. Another market guru Vallabh Bhansali, Chairman, Enam fondly told CNBC-TV18: I loved his optimism, his energy and his insights and he was ready to see what others could not see or imagine. I remember Utpal Sheth was always willing to take on an elephant. If I thought that okay now how will be crack this or that he will say Vallabh Bhai we will do this we will do that. It will work you just believe me and I loved his child like enthusiasm. I went along because that is the enterprising spirit and that is what has seen Utpal grow to the extent that he has.
Below is the verbatim transcript of Utpal Sheth's interview with Ramesh Damani.
Q: In 1990 you were 20 years old and you became Head of Research at ASK Financials. Isn't that too young to be interested in markets?
A: I was very fortunate that my father, who was one of the pioneers of equity research in India, Hemendra Sheth. He encouraged me to have a much wider perspective from a very young age. We had dinner table conversations and holiday conversations with regard to companies, markets, industries and so on.
Q: And you joined that?
A: I found it very intriguing and right after my standard 12th exams I was at ASK's doorstep requesting for an internship and I loved it so much that I continued.
Q: In 1992 though you still young, big bear market started. What were you thoughts in those early years?
A: Around the beginning of 1992 I figured that this was not sustainable.
Q: All of 22 and you figured it out?
A: Yes, maybe it was a coincidence but the multiples were absurd, the dividend yields were pathetic and everyday stocks were just going up and up. There were some stocks like Karnataka Ball Bearing, which would go up without having any business whatsoever. Therefore, I realised that this is not sustainable. I did not realise that it will fall like this. Q: Did you tell your dad that this is not sustainable? A: Yes we discussed it and in fact at that time in our family brokerage house we had stopped accepting buy orders from all clients. Despite the fact that buyers were willing to give us a demand draft and say please buy for me. Q: Because you knew it would end badly; but that is brilliant at 22. You started your family firm. You helped your dad build a brokerage business. In 2000 there was another crash in the market, the tech bust out there, that bust taught you some painful lessons. What were those? A: The painful lessons that I learned during those times were how important risk management was. How important financial discipline was. How important being well capitalised was; having said that, some of my best work and some of my best picks were around that time. Q: Adversity? A: May be it was that adversity and this adversity thought me things which I think I would not have learnt even if I had done a MBA at Harvard University. Q: How interesting. Most people on this show pick stocks to create wealth. You went the other way. You wanted to pick not the diamonds in the rough but shape the diamonds. Tell me that thought process? A: Every investor aspires for wealth creation. Q: Absolutely. A: However, one cannot have wealth creation unless the companies that we invest in actually create value. Hence wealth creation is a function of value creation. I think, we investors don’t give enough credit to the company teams that create this much value. Q: Early in 2000 you kind of figured out organised retailing was going to be big and you went to the balance sheet of Pantaloons Fashion & Retail, what conclusions did you come to? A: At my first look it appeared that Pantaloons was heavily leveraged and that if it did not raise capital it would run out of money in a few months. When I met Kishore Biyani and I told him that look this is my sense. To give credit to him, he was a true realist and he acknowledged that things were not very good. Q: What was the solution? A: The solution was to raise capital for them. Q: Overnight? A: It couldn’t be done overnight. So, I looked at their balance sheet and then said you have a lot of inventory. Do you think you can go for a flat sale and get cash? He said yes, but maybe I might have some losses doing that. However, credit to him he realised the importance of cash and went ahead with that flat sale and generated cash, buying himself enough time and in the process we were able to raise capital. At that time I was at Enam. Q: Basically set the ball rolling for organised retailing because that was the benchmark stock first? A: Yes, I think Kishore Biyani was a true visionary for organised retailing and I will always have the satisfaction that I played a very minute role in helping Pantaloons overcome its initial challenges. Q: That gave you lot of satisfaction, right? You didn’t want to be a merchant banker, raising equity. You wanted to be a merchant banker – fill in the blanks? A: I wanted to be an investor. I didn’t want to be a merchant banker. However, I wanted to be an investor who would have a partnership with an investing company. As an investor banker at Enam, that was the role that I played for a few of the companies including Pantaloons, Shree Cement, Jindal Steel and Power (JSPL). Q: Leadership involves finding a parade and getting in front of it. Leadership lessons from John Naisbitt author of Megatrends. We are talking about leadership in markets; winner takes all economy and the changing face of the Indian stock market with Utpal Sheth. In 2003, someone told you “Pita mein hu, chad gayi he tere ko”. (I am drinking, you are getting drunk). What caused that outburst and who was it? A: It was 2004, and it was Rakesh Jhunjhunwala. Q: Your Boss? A: Much more than my boss. The company in question was Titan. Q: Clearly! A: We were making a presentation to the Titan management team and I had worked out our mathematical models and made projections over a five year period. The presentation was to be on next day at 10 am. Rakesh Jhunjhunwala and I were reviewing it at 2 am. When he saw the numbers he said you have lost it. Q: You are getting drunk, punch-drunk? A: Though he very well knew that I don’t drink, however, he agreed with the direction if not with the destination, he agreed with the direction. He was the visionary; he had bought the shares even before I had joined Rare. However, I think this whole exercise gave us added conviction, a much larger perspective of Titan. Even the Titan management team saw the numbers that I had projected. They thought that I had lost it. However, the reality is if you fast forward five years later the Titan management team had achieved the topline in the five years that I had projected which they thought was impossible and they achieved the bottom line with one year lag. Q: You knew that, at that time, that this is going to be a super stock? A: I knew that this will be a great company. I didn’t know that this would be a super stock. Q: They go hand in hand. A: They do go hand in hand over a period of time but there were significant lead lags. So, I was quite clear that this would be a great company. Q: You actually told them to change their model, right? To focus on jewellery as oppose to watches, why? A: After, joining Rare when I first went to Titan I realised that Titan was deploying its best talent in the watch business which had great margins and not in its jewellery business which had significantly lesser margins. However, during my calculations I realised that the Return on Capital Employed on the jewellery business was significantly greater than the return on capital employed for watches. More importantly, the scalability of the jewellery business was far greater. To me return on capital employed and scalability are two big mantras for long-term valuation creation for the company and wealth creation for the investors. Q: You even took a company like Shree Cement and made it sexy. How do commodity businesses become sexy? A: I came across Shree Cement when I was part of Enam. Shree Cement I realised was this regional cement company. I realised that this company had not diluted, that this company was the lowest cost producer in the country better than Ambuja Cements at that time. More importantly within its region it was a market leader. It had a 20 percent market share so its earnings before interest, taxes, depreciation and amortization (EBITDA) per tonne was going to be the highest. So, we had a fantastic three tier story. In the first year, the cost reductions would drive the profits, in the second year the realisation improvements would drive the profits because no new capacity was coming in that region. In the third year, Shree Cements own capacity was going to come up and that would drive the profits. Q: For the record how did the stock do? A: Well, Shree Cement at that time was around Rs 25-30 if I remember right and that it is more than Rs 10,000 today. Q: Rs 10,000! So it has been one of the glamourous stocks. Not all fairy tales end well, not every Cinderella finds prince charming. Couple of stocks that didn’t work out were Bilcare and A2Z Infra Engineering. What went wrong there? A: I think capital allocation; compounded in many ways by poor capital structure as well so it is a vicious circle. First, the return on capital employed being generated out of the business was poor. So, while the companies were driving a lot of growth because the Return on Capital employed was poor the free cash flow generation was not there. Q: Constantly need equity? A: You would need external funding. Either equity or debt, so they would keep diluting or they would take that and at some point of time in the cycle it gets messed up. The debt is the enemy of compounding everywhere. Be it in a company or be it for the investor. Q: Colour is my obsession, my joy, my torment said the great impressionist Claude Monet. So, is a career in capital markets though of course we tend to favour the colour green, is it not? Profit is what drives this business? A: Profits definitely drive these businesses. To me partnering with companies means that much more. Q: What are the components of value? A: I look for structural change and leadership attributes. Whenever I see a confluence of these two I feel the greatest opportunities are created. Q: When you add that with a change in price to earnings (PE) ratio? A: These two factors influence both the earnings per share (EPS) and the PE. Q: Let us take structural A: I would like to emphasise that changes in EPS are linear whereas changes in PE are non-linear. Q: That is where wealth comes from? A: When you get the two of them together that is just magic. Q: Is payout ratio or is Return on Capital Employed, how do you use that to identify the great companies of tomorrow? A: In my experience capital allocation and capital structure have been the biggest drivers of value destruction. So, to me it is very important how a company deploys its cash that it earns. Mathematically, how your return on incremental capital behave is very important to your future return on capital employed. To give you an example, once Titan moved from borrowing and funding its gold inventory to gold leasing structure, its return on capital employed suddenly dramatically changed. Its cash flow intensity for the working capital reduced. These two factors put together enabled it to scale its business. Q: You did the same thing with CRISIL, didn’t you? A: CRISIL’s skill sets of knowledge intensive products and services was not being leveraged enough. CRISIL was sitting with a lot of cash and our thoughts were that if CRISIL could find a potential acquisition then that could help CRISIL grow significantly. I think all credit should go to the CRISIL team and zeroed in on Irevna which was catering to servicing international investment banks and Irevna scaled so beautifully over the years. Q: So low growth company becomes the high growth. The PE changes, the market cap changes, wealth is generated. You often said that the greatest investment attribute is – Fill in the blank? A: I would say long-term compounding. Most of us have become obsessed with multi-baggers. We like it a lot if a stock goes up 3x and 4x or 5x. Q: In a short time? A: In a short time. However, the magic of long-term compounding is so powerful and while we have all learnt and read about this I don’t think most of us practice it enough. I think that is one of the great things that I have learnt from people like Asit Kotecha, Nimesh Bhai and Rakesh Jhunjhunwala most of all. Q: But conversely what is the enemy of great investing for corporate? A: I think capital allocation mistakes and capital structure as I have said before. Q: What is now the Utpal Sheth template of good investment? A: Pursuing structural change and leadership attributes. Looking for companies which have great scalability, great return on capital employed and cash flow profile, those would be my key parameters. Q: One of your key events in life has been meeting Rakesh Jhunjhunwala, where did you meet him? A: I met him at the office of Asit Kotecha and the conservation turned to United Spirits and United Breweries Group. At that time I was a big fan of those two companies though the market caps were very small. Q: But you saw the great businesses they were? A: Rakesh Jhunjhunwala had coincidentally bought a stake in each of those two companies just a few days prior to that. I told him that these companies are going to go places. I gave him a price target of Rs 300. He said if it goes there I will take you and your family to Disney World on Concord. Q: Let me understand the personalities here. A colourful man Rakesh Jhunjhunwala, you are cerebral man. You are calm, he is excitable. He a gut value instinct investor, you are number driven. How does this partnership work? A: It has worked very well. Maybe it is because we complement each other in many ways. Q: When you and the boss disagree, what happens? A: I think we are very different personality traits and over the years we have adapted to each other’s personality traits. Incidentally it is not just Rakesh Jhunjhunwala and me. There is also Amit Goela and we all express our points of view in different ways and it works. Maybe that difference of perspective and difference of point of view is a valuable. Q: And it is necessary sometimes for a great investment. You are 45; you worked with a lot of legends, your dad, your boss - Rakesh Jhunjhunwala, Nimesh Bhai, Vallabh Bhansali, Radhakishan Damani you have seen all the legends. What is next for yourself? A: My intense desire and aspiration is to be a part of an asset management firm that has institutionalised over a long period of time. I hope and pray to god that Rare Enterprise becomes that vehicle which institutionalises itself beyond Rakesh Jhunjhunwala, beyond myself, beyond Amit and we are able to create something special. Q: That would be you are calling to greatness? A: I don’t know about greatness because I don’t aspire for greatness. Q: Why not? A: To me greatness is not one aspires for, it is a destination. Rare have had the privilege of partnering a lot of these companies. I hope that those companies also feel the same way about Rare. If they do then we would have succeeded in the mission at Rare. Q: A job well done? A: Yes. Q: We will have some fun now. I am going to give you a rapid fire test. Let us see what is the first thing that comes to your mind when I say these things – Your favourite movie - Top Gun or Wall Street? A: It is a tough choice but Wall Street. Q: If you had a choice of having dinner with Janet Yellen or author John Naisbitt of Megatrends? A: John Naisbitt. Q: Best investor in India that you admire the most? A: Biased answer maybe but Rakesh Jhunjhunwala. Q: A global investor that you admire the most? A: I would say Seth Klarman of Baupost Group. Q: The most important thing that you learned about investing from your dad? A: Growth phase, it is a phase for a company when its addressable opportunity or total addressable market as we call it expands dramatically and it is poised well enough to tap that opportunity. Q: If I give you a choice of a weekend with your daughter or once in a lifetime chance of a weekend with Warren Buffett, what would you choose? A: Weekend with my daughter. Q: Best book you read on investing? A: Charlie’s Almanack. Q: One mega trend you see in the future? A: Beta explosion. Q: Sensex 50,000 by? A: 2020. Q: Final question – Would you go long on the 30-Year bond in India or short the 30-Year Treasury bill in America? A: I would go long the 30-Year G-Sec in India.
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