Investment

Journey &
Learnings
Bheeshma Sanghani
VP Chintan Baithak
June 2017
 Investment Journey
 Started investing in March 15 after reading blog posts on
fundooprofessor (The Vantage Point & I don’t want to be
a toll bridge I want to be its meaning - being the most
memorable) & read most books recommended by him
(the most useful being – Five Rules by Pat Dorsey)
 Initial investment ideas were based from the books read
and centered around quantitative tools like DCF, FCF
multiples, Low PE or high earnings yield, PEG ratios etc
 Had mixed results -
 MRF had a favorable PEG ratio and doubled while TATA Motors
based on the same logic halved
 Zenith Fibres/ Panasonic Carbon strong FCF have gone nowhere
 G M Breweries rejected based on DCF, went up 9x in 10 mths
 Global Vectra Helicorp , Great Eastern Shipping Low PE have
stayed like that
 Personality traits
 Like both short term opportunistic bets & long term
growth oriented plays

 Seek MOS esp MOS coming from growth which is more

potent than any other form of MOS like huge cash
balances, low PE , PB, PS etc

 Strong believer in tech analysis esp base patterns but yet

to develop a consistent “eye” for it. Volume patterns
most difficult to interpret

 Like to spend time calculating opportunity size, often

market caps are unrealistic compared to opp size ( e.g
kitex )

 Knowledge on leading macro indicators like money

supply, housing loans , car sales etc helps to get a sense
of the economy
 Investment Style
 Growth Oriented – some reliable indicators of growth

1. Network effect must - gives me confidence ( a wholesale

market – Binny Ltd , Mahanagar gas – More gas stations
more valuable it becomes). Steady growth without effort
2. Size of opportunity ( massive in 3PL logistics ) v/s MCap
3. Number of competitors – lower the better – Gas
distribution is a monopoly ( Size of opp per competitor
important for me, Size of opp in affordable hsg huge but
no of competitors also huge )
4. Sectoral growth rates - important to know whether you
are in the right bus
5. Capacity utilization – 80% or more indicates potential
pricing power and potential growth.
6. Majority business from repeat customers – means
expectation of steady growth ( Mahanagar gas,
Wonderla )
 continued…
7. I think volume more important source of growth than
margins (Tiger logistics has the highest cap turnover amongst all logistics
players, Mahanagar gas station queues stretch for a km).

8. Addn margin is a luxury that eventually gets

competed away but volume theoretically has no
cap.
9. Salary costs as a % of sales amongst competitors –
generally higher indicates a business with more value
additive activities hence more future growth ( not always
but good indicator, Sun Pharma emp cost ~17% while Aurobindo ~11% | Sun
Pharma 10y growth 33% while AB at 23% , Godrej Consumer emp costs
10.70% while Britannia 2.63% | GCPL 10 yr growth 28% while Britannia at 15%)

10. Change in manufacturing process strong source of

growth (Affordable housing – changeover to Tunnel form, Aluform and
Precast from conventional RCC – Ahluwalia Contracts )
 Investment Style
 Short term opportunistic

 Side car investing primarily exclusively from VP ( e.g. follow

recent likes & posts of VP top contributors & detect any new
companies liked e.g Hi Tech Pipe, Kolte, Maithan Alloys , TD
Power systems etc )
 Here focus is to quickly generate ideas from likes and try to
take entry & exit points based on technical patterns
 Also look for prices around new highs
 Before taking positions quickly read up on the company, AR
& concalls
 Tech patterns - Cup & Handle, H & S , Channel breaks etc
 Success stories – Hawkins, Monsanto, Maithan, Bhansali
polymers, Indian Toners etc
 Must Haves
The Big 5
1. Past growth in revenues >10% & growth visibility in
expected revenue
2. consistent fcf’s during growth phase
3. reasonably high interest coverage
4. RoC > CoC ( Preferably ROC >15%)
5. Reasonable PE in relation to above.

1. Very difficult to get all 5 together

2. Point number 1 & 3 are non negotiable. Rest some
leeway but only if conviction strong.
3. Most often fcf’s are missing in growth companies
4. Growth + FCF = Compounding machines
 Ignorables
1. Increase in debt levels if easily serviceable. Debt is less
costly than equity ( provided debt is reasonable
compared to size of company). Easily serviceable debt
also indicates & gives valuation clues.
2. Pledging for reasons that are valid ( Binny almost 100%
pledged as collateral to Piramal Capital)
3. High salary levels of mgt
4. Related party transactions if value not materially big
enough compared to sales
5. Lack of FCF if growing company
6. No Dividends if growing company
7. Management claims of future growth when company is
sitting on high cash balances
 Non Ignorables
 Oppn size per competitor should be high in relation to market cap
(e.g kitex opp size not more than 1500 cr, at least 10 competitors &
market cap = 1800 crores)
 Increasing inventory + receivable days
 Large receivable write-offs / debtor provisions compared to debtor
levels
 Frequent equity dilutions & high number of shares outstanding (Suzlon
has more than 500 million shares outstanding)
 Low return on capital
 Contingent liabilities > Sales
 No Salary increments or very low salary increments while mgt drawing
handsome salaries. Good companies look after their employees
 Corporate governance ( auditors qualifications however minor, filing
defaults etc)
 Growth in earnings driven by sales volume
 Mistakes & Learnings

 Errors of Commission
 Avoid companies where parent is neck deep in debt
e.g Rollatainers – Parent Amtek (bought at 33 looking
at barista plans, now at Rs 4 )
 Cyclicals follow a reverse PE cycle. PE is high when
prospects are good and low when prospects are bad
(Kolte Patil bought when PE was low thinking value
buy and lost money but bought when PE was high
and made money)
 Time correction is more harmful than price correction
(chose Zenith fibres over GM Breweries - was attracted
due to strong cash flows but exited after a yr of
lackluster movement – in the meanwhile G M
Breweries went up 9x)
 Mistakes & Learnings

 Errors of omission
 Avoid companies where I cant figure out the rough
opportunity size independently (invested in Cupid Ltd
without assessing opportunity size)

 Draw major trendlines on stock price history and revisit

least once every week to see if broken. I may be right
or wrong but the market is always right (something I
should have done in RS Software & Rollatainers)

 Avoid buying businesses with too many subsidiaries esp

subsidiaries doing some real estate biz(something I
should have done in Delta Corp)
 When to Sell
 For Short term Opportunistic buys – I Sell using
common technical rules ( moving avgs , trendline
breaks etc )

 For growth oriented buys – I sell if valuations move

beyond comfort level ( PE indicates unrealistic growth
prospects)

 In all cases – I sell if prices decrease by 15% from my

purchase price ( and I re-evaluate buying thesis )