Sinhasi Intelligent Investing Forum 2 (2015)

HELD ON: February 19th 2015
VENUE: Taj Vivanta, MG Road, Bangalore

Since the SIIF – 1, held in April 2014, was much appreciated by our clients, the Sinhasi Intelligent Investing Forum – 2 was held just before the much awaited Budget 2015. The purpose of these forums is to have experts speak about several important aspects of the economy and the investment environment which impact each one of us as individual investors.

Chief Guest: Shri N Rangachary (advisor to Sinhasi Consultants)

Retired as the First Chairman, IRDA, Insurance Regulatory and Development Authority of India.

Secretary in the Department of Space, Financial Advisor to the United India Insurance Company, Chairman of Central Board of Direct Taxes, heads the high level Committee set up by the Prime Minister for bringing clarity on taxation issues, – ‘N Rangachary panel on taxation of IT’, Member of The ‘Parthasarathi Shome Panel’ looking into taxation issues related to GAAR (General Anti-Avoidance Rules) and currently on the board of several reputed companies i.e. Central Depository Services Ltd., Central Warehousing Cold Chain Pvt. Ltd., Cecilia Healthcare Services Pvt. Ltd., Take Solutions Ltd., Shriram EPC Ltd., and Shriram Properties Ltd., Gokuldas Exports Ltd., etc.

THE SPEAKERS

Mr. Prashant Jain

Executive Director and Chief Investment Officer, HDFC Mutual Fund, Mumbai

Topic: Outlook for Equity and Fixed Income

• Shared Statistics and details on the impact of crude oil price reduction on CAD (Current Account Deficit) – positive impact on India.
• Shared facts on slowing car purchase in the US – possibly because younger generation is more connected on internet, prefers other means of transport other than driving – this will cause a huge reduction in the demand for Crude – a point to note.
• In spite of falling Crude prices, key producers are not reducing production, and shale oil production is increasing in the US. So US no longer a key crude oil consumer.
• Commodity prices falling (Slowing growth in China and rising supplies) , including crude , reduction in production of scale – positive impact on India
• Benefits of Crude oil price drop will be seen in the coming quarters – because of six week credit period for payment – positive impact.
• Modi Government – many positives were detailed – some of them being:

a. Jan Dhan Yojana – Bank accounts for all almost 10 crore Indians have been created which will change the nature of investing. Today, without a bank account, most of rural India have limited savings options which is primarily Gold as a means of saving, and leverage able asset. Bank account will change this. With Bank accounts and further linking LPG subsidy to the bank account, rural India will receive income in the form of Interest. Demand for gold will further balance out. Again positive impact for CAD and India.

b. LED lighting for Rural India – electrification of Rural India – Govt. is launching a new scheme where each household will receive two LEDs free of cost and the 10 rupees will get added to their monthly electricity bill to recover the cost – very positive.

• Interest Rates – expected to come down over the coming months as inflation is under control. Investing in Bond funds could yield good returns over the next 1 – 2 years.

d. India: poised as one of the best investment destinations – to become the 6th largest economy by 2020 – some points:

1. Demographics: 50% of population in the ‘earning and consumption’ phase / age – between 10 – 40 years.
2. Low penetration of many consumer goods as compared to other developed / developing countries.
3. Major beneficiary of reduction in oil prices – one of the largest importers of oil as a percentage of GDP.
4. High interest rates and inflation which has to come down. Many Developed Nations are facing deflation issues and in India we are still fighting Inflation – Inflation better than deflation.

f. Current Sensex PE: around 17 – not overvalued. Investment time horizon for sound returns should be 4 – 5 years. Can invest even now at current levels.

g. What is important is over all asset allocation; investment time horizon, discipline, and patience. Can invest lump sum and SIP, based on cash flows and goals.

h. Equity VS gold and FDs since Dec 1979 till Dec 2014 – Returns of Sensex = 224 times ; FDs – 39 times pre-tax ; 20 times post tax ; Gold – 20 times post tax. Therefore equity investment is the best investment in the liquid investment category. Pl refer chart below.

• The Sensex has been doubling every 5 years even with all the challenges and crises having been faced over this 25 year period.
• Chart showing FIIs have systematically invested in India over the past 20 years without fail, every year – SIP, except for 2009 because of their own crisis. Foreigners have more faith in us, even though we are considered very intelligent!

Topic: Start Ups – An alternate investment opportunity

• Shared statistics – Fortune is now with the fringes – technology is rapidly disrupting traditional businesses as sound investment opportunities- e.g.: Amazon, Uber, Birch box, etc.
• These large tech businesses are rapidly looking for inorganic growth, and to buy sound startups since because of size, innovation can sometimes become difficult. This is a very huge opportunity for start-ups to be bought over by these larger companies.
• Because of huge demand for disruptive innovative, seed funding size has become 1 million dollars which is huge. VC funds have set up separate seed funds, investing and mentoring programs.
• This is where market giants are investing in Indian start-ups through M&A s– twitter = zip dial; face book = little eye labs; goibibo.com = redbus.in; etc. Now these cash rich companies are looking for further investments.
• Why Advantage India and Indians – India has the largest pool of IT / ITES professionals – 3 million. India’s smartest and brightest engineers are employed in Enterprise Tech companies. This talent pool is looking to unleash their potential as the ecosystem is growing and current jobs are becoming repetitive and mundane.
• The link between Silicon Valley and Bangalore:

• Investing in Startups could lead to phenomenal results if entered correctly.

CAGR of Valuation - Flipkart

• Earlier, most VCs were bankers and investment bankers, who did not know much about the industry itself. What is important is while investing in a fund, the management team is critical for the success of the fund. Some of the criteria for success in startup investments are:

1. Ability to Add Value to the Business
2. Get connects to the ecosystem of mentors, customers, accelerators, markets, co-investors etc.
3. Advice on sales & business strategy
4. Impart credibility to the business
5. Provide guidance and assistance on HR – org design, recruitment. C&B etc.
6. Allow entrepreneur to execute his vision without being intrusive.
7. Maturity to align interests with the promoter – take a reasonable stake so as to allow room for further capital infusion.
8. Wherewithal and connects to infuse additional capital.
9. Insight to pull out and cut losses if things not working out as per plan.
10. Executive coach and Mentor to the Promoter.
11. Regular engagement with the promoter team and tracking progress vis-A-vis plan.

• Some of the risks of investing in Startups are:

1. Illiquid investment – investors must have a long term view
2. High Mortality Rate – Should be prepared for failures
3. Lack of Mentorship and Engagement can impact a company’s progress
4. IP not defensible or unique
5. Funding risks – Inability to raise future capital
6. Exit risks
7. Technology Obsolescence

• Startup Investments Conclusion:

1. Enormous opportunity in Technology led businesses in the Indo – US corridor.
2. New technologies are scaling faster and can provide superior risk adjusted returns than any other asset class.
3. Risks are high for angel investing or standalone investment without adequate bandwidth to add value and monitor investment.

Conclusion: Imperative for individual high net worth investors to invest in VC Funds for sound exponential returns, but which have domain knowledge, who are connected with the ecosystem and can provide access to capital.

Mr. Charandeep Singh
Managing Director, Girik Capital, Mumbai

Topic: Bottom Up Equity Investing

• How Girik is different:

1. Girik Capital is owned by its investment managers, hence its owner-managers are not driven by short-term targets.
2. Girik Capital has no conflict of interest, as its only business activity is portfolio management and investment advisory.
3. Investment style that is primarily focused on high growth businesses that are industry leaders or emerging leaders, available at a valuation that builds in a sufficient margin of safety.
4. Explained the importance of Bottom-up Fundamental Research Process:

Step 1 – Understanding strategic positioning of the business

- “Look for leadership” in products and / or services

- Analysis of key strengths and moats of the business

Step 2 – Due Diligence Process in order to assess the strength of the business and the quality of its promoters

– Customer and supplier meetings, management meets and plant visits

– Sometimes, meetings with financial intermediaries (e.g. lenders, auditors)

Step 3 – Financial analysis

– Study of historical financials and key metrics

– Cyclicality and capex cycle

– Capital discipline – reliance and requirement of external capital

Step 4 – Free Cash Flow Analysis

– Emphasize sustainability of present day free cash flows and not future projections

Shared few case studies like Relaxo Footwears Ltd. where entry price was INR 65 and it went as high as INR 659. Pl refer chart on the next page.

Conclusion

• Broadly, portfolio management services that Girik provides are different from Mutual Fund investments, but complementary

1. Much more concentrated portfolios (10-20 businesses)
2. Opportunity to participate in relatively young, emerging, “unidentified” businesses that could grow into significant leaders
3. A portfolio manager with a focused approach that is different from those of large mutual funds, could complement investors’ MF portfolios

• Invest in businesses and not in markets

1. Focus on underlying cash flows and value of the business
2. Stocks of leading businesses bought with a margin of safety will do well, irrespective of markets

Conclusion:Addition of Girik PMS as a sound investment, based on overall asset allocation, provides further diversification and also helps generate alpha returns as a result of Girik’ s investment philosophy, discipline and style.