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Dear Readers,
I’m exceptionally proud and honored to present an interview with one of the top valueinvestors of India, Mr. Chetan Parikh. This interview with Mr.Parikh represents one of the highlights of my career. Mr. Parikh is a man whom I admire and who has extensivelycontributed to the value investing community (viaCapital Ideas Onlineand his numerouswritings). I hope you enjoy the interview.Before we begin, I would also like to thank Mr. Prashant Patel, a loyal reader of SimoleonSense, for facilitating this interview. Thank you very much, I wish bothgentleman the best of health.-Cordially,Miguel BarbosaFounder of SimoleonSense.com “Enriching Ideas for Intelligent Investors”
Mr. Chetan Parikh’s Background
Chetan Parikh is a Director of Jeetay Investments Private Limited, an asset managementfirm registered with SEBI. He holds an MBA in Finance from the Wharton School of Business and a BSc in Statistics & Economics from University of Bombay. He has beeninvesting in the Indian capital markets through proprietary investment companies andfamily trusts.Chetan was rated amongst India's best investors by Business India magazine. He is alsothe co-promoter of capitalideasonline.com, a well regarded investment website. Hiswritings have been published in Business Standard, Business World, The EconomicTimes, and Business India. He is a visiting faculty member at Jamnalal Bajaj Institute of Management Studies (University of Bombay) for the MBA course.
Copyright SimoleonSense & Miguel Barbosa 2009Opening QuestionsQ. There are many different approaches to investing. What led you to choose thevalue approach?
A. Value investing is a logical, safe and disciplined approach to investing. It requires a lotof patience which fits in with my temperament.
Q. Which investors do you admire? Besides these investors who else has influencedyou?
A. Any value investor can learn a lot from the Masters. In India I’ve listened to and learntfrom Prof.
Rusi Jal Taraporevala and Mr. Chandrakant Sampat.
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Q. What’s your opinion of the efficient markets hypothesis and practitioners of technical analysis?
A. I believe that the efficient market hypothesis in the various avatars (strong, semi-strong and weak) is not correct. Sometimes prices deviate far away from intrinsic valuesand it is possible to earn high risk adjusted returns. In fact, the lower the downside risk,the higher can be the upside reward. I do not know anything about technical analysis.
Q. Tells us about your approach to fundamental analysis-what is your focus? Howdo you search for your investment ideas? Where do most of these ideas come from?Describe your evaluation process (both quantitative & qualitative)? How long doyou hold on to your positions?
A. My firm, Jeetay, principally invests in publicly traded Indian securities and seeks tomaximize investors’ capital by buying securities trading at values materially lower thantheir true business value.Jeetay aims to achieve high absolute rates of return while minimizing risk of capital loss.Jeetay combines the analytical vigour of determining the fair value of a security with adeep understanding of the Indian markets. Jeetay will invest in securities where it canascertain the reasons for the market’s mispricing and the likelihood of the mispricing being corrected.Jeetay follows the value investment philosophy, which means that the objective is to buya security trading at a significant discount to its intrinsic value. Since the focus is ondiscovering undervalued stocks, the fund doesn’t base its investments on macro-economic factors like GDP growth.Jeetay determines intrinsic value as the present value of the future cash flows of acompany discounted at a rate that properly reflects the time value of the money and therisks associated with the cash flows. In other cases Jeetay invests in “Special Situations”which involve the following:
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Repositioning assets to higher uses
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Mergers and acquisitions / open offers
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Restructuring troubled companies
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Spin-offs
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BuybacksThe fund invests in a company if the market price is quoting at a discount of at least 60%to the intrinsic value. It sells when the market value approaches intrinsic value or it findsa security trading at a steeper discount to intrinsic value.Jeetay believes that while in the long term, a company is valued by its fundamentals,short term mispricing occurs due to investor psychology, liquidity and macroeconomic
3factors. This provides opportunities for the diligent and patient investor to makeoutstanding risk-adjusted returns.The time horizon of Jeetay is 3-5 years. It believes that short-term market movements can be volatile and the market may recognize mispricing only in the medium to long term.Hence the emphasis is on understanding the corporate strategy and the resultant cashflows for a 3-5 year period. The probability of the markets recognizing the mispricing becomes high over the medium to long-term period.The firm does not limit its investments to certain asset classes or sectors. The fundevaluates any sector or asset class where a conservative estimate of intrinsic value isdeterminable with a reasonably high probability and invests if the security is available ata reasonable margin of safety.The firm does extensive research to arrive at estimates of expected cash flows, assetvalues and earnings. Jeetay culls information from public databases, quarterly and annualfilings, annual reports, meetings with management, competitors, vendors, customers andother industry participants, industry experts, trade journals and bankers. Jeetay hasextensive networks in India to get data and information for superior analysis. Jeetay believes that a disciplined private equity approach to investing that stresses on buying at adiscount to intrinsic value will deliver consistent absolute above average investmentreturns and safeguard capital irrespective of the state of the markets.Jeetay believes that the following steps are essential to its process:
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Opportunity Identification.
Jeetay identifies opportunities through a multitudeof ways. Jeetay has numerous financial models and screens that are used to filter investment opportunities within the framework of the investment philosophy.Jeetay has many contacts and professional relationships. This gives it manyopportunities consistent with the investment philosophy.
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Analysis.
Jeetay does intensive financial and qualitative analysis on companiesonce an opportunity is identified. The analysis is mainly to arrive at whether adisparity exists or not between the traded value of the security and its intrinsicvalue. Jeetay has substantial experience in determining the intrinsic value of acompany across sectors. Multiple valuation metrics including discounted cashflow analysis, price to earnings, dividend discount model, price to sales, price to book, comparative analysis is used to arrive at the valuation of a company.Other than financial analysis, Jeetay extensively meets every possible associate of the company to understand the opportunity better. These include vendors,customers, middle management, bankers, competitors, large stakeholders andsenior management. This helps Jeetay arrive at a closer intrinsic value and alsoexit an investment if unfavourable events arise or the team’s original calculationof intrinsic value was wrong.
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Interview Chetan Parikh
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| Upload Date: | 11/13/2009 |
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