DSIJ Mindshare

'Investing is an art & has to be very flexible' - Sunil Singhania

How did you enter the fund management industry?

I completed my CA with an all-India rank when I was 20 years old but had to wait for a year before I could start working because of the age factor. That was the time when you could do your CA along with a degree in commerce. I then practiced for about 5-6 years. In 1994, when the National Stock Exchange was being set up, a businessman who wanted to enter the broking business offered me an opportunity to join him. I had always been interested in balance sheets and stocks and therefore agreed immediately. I was the president of that company for about two and a half years and in 1997 I moved to institutional broking company as a director. I was with the company for almost six years and was looking both at research as well as sales.

While working there I came into contact with Reliance, which was one of our customers and in 2003 when the equity markets were very bad, I moved to Reliance Mutual Fund. The main driver for my move into asset management was my passion for balance-sheets and stocks. I had found auditing very boring though of course it did help build my foundations.

Were you investing then?

I had not been investing earlier because there was no money to do so. However I did start investing small amounts after I started earning a reasonable amount from my auditing work. I first invested in a Godrej company which, I think, was called Godrej Innovative Chemicals and my investment of Rs 500 instantly became Rs 5000. The markets were at a peak then and this was a good learning
experience, in the sense that it gave you knowledge about when to book profits and how to be careful.

However, information about the financials of any company was hard to come at that time and it was all very opaque. There was no internet then and you had to give a requisition to the stock exchange to get a photocopy of a company’s balancesheet which they would give after a week. Even the company results were published in obscure newspapers.

What is your investing philosophy?

In India we believe that there are opportunities for growth as well as for value. There are good growth oriented sectors which can grow very fast such as Pharma, Information Technology, Telecom and now Education, Retail. At the same time you have decent value oriented companies also. From our perspective as a fund house we believe that India offers a unique situation where entrepreneurship exists along with mature sectors. So you have to marry both growth and value. Having said that, we as a fund cannot buy stocks which are very expensive and so we try and find alternatives which work for us and can give a similar kind of an upside. For example, we are very positive about the consumption story in India.

However, some of the stocks are now trading at much higher valuations than at which we would like to invest in them. So we are marrying that by investing in similar faster growing companies like say pharma stocks. So our investment philosophy is to try and buy stocks which offer disproportionate or higher returns and grow faster than the economy. At the same time we don’t ignore mature companies which can also keep on doing well. Personally, I am more biased towards value-oriented stock picking.[PAGE BREAK]

Talking about stock picking, how do you select stocks?

It is both a process and an art. We also commit our fair share of mistakes. We have done that in the past and we will continue to do those mistakes in the future also, but that is fine. From our perspective the stocks that have done very well have been the stocks where we have believed that the size of the company and the size of the profitability will grow to a size we envisage it would be. That is where
the re-rating happens and that is where you tend to make significant alfa’s. We also have to keep in mind minority stockholder’s interest from a promoters perspective, frequency of dilution, size of the opportunities for the sector as well as the company are some of the very important factors that one needs to consider.

So do you follow some investing rules?

There are some rules of course but not everything can be done by rules. Investing is an art and has to be very flexible because the stocks are affected by the ever-changing situations. When we invest, we look at the future, not the past. Therefore it is important to go by the circumstances prevailing at that particular moment. You cannot do back-testing. For example, the financial sector was doing very poorly in 2009 but that is not the case now. So you keep analysing and you have to keep thinking afresh.

So, where do the ideas come from?

Basically our ideas are related to the bigger picture of what India has to offer. It is therefore essential to keep tracking the new sectors and the growth of the old ones. For example, technology was zero in 1990 but today stands at 10 per cent and telecom was zero in 1995 but now commands eight per cent of the market. We also keep a watch on companies that start small but have good potential. Infosys did not start as a huge company. Also remember that entrepreneurs also start afresh. We have taken a call to track all small
enterprises and as of now we have 450 such companies that are being tracked by a team of 25 research professionals. This is our factory that generates the ideas. We lay a lot of stress on research and procedures.

What was your first big investing idea?

When I joined Reliance, a power stock was a big idea. Again, this came down from the fact that it valuation. It was available at a PE of
4x. But this was a company where we felt that the profits could double in three years time. So our belief was that the profits can double and the PE of 4x can become a PE of 8x and we can quadruple our money. In fact that company is still in our portfolio and our money has gone up by 150 times. This is because the profit of the company has been doubling every two years over the past eight years. In fact, it has become like 35 times. [PAGE BREAK]

What are the crucial figures that determine your entry and exit in a stock?

We are long-term wealth creators and not traders and therefore most of our portfolios are created with a view to generate a long term Alfa and that is what the investor also should be focusing on. We do keep targets in mind while getting into a stock but these are not sacrosanct. So, they can keep changing depending on the circumstances. So you have to look at it in isolation plus you have to look at it relative to the index plus you also have to look at it in relation to how the other sectors are faring. Therefore our entry and exit points are not based on short term figures.

Do you have a research methodology?

We consider the financials as very important. We do take some calls where the benefit of doubt goes to slightly weaker balance sheets. We do believe that a lot of times negatives come into the price. Ultimately we are in a business of generating returns by investing in good stocks and not necessarily good companies. Obviously good companies would ultimately become good stocks but that difference has to be there. For example, Hindustan Lever is a very good company but has not been providing good returns.

How much trust can be placed in the financials of any company?

There are ways of looking at balance-sheets but it is not as if we can do a forensic study. We do single out companies that look as if
they are heading towards disaster. Then there are some companies that may be underperforming now but show potential of doing well later on. You should not get carried away by the financials.

Do you meet the management of the companies?

In fact one of our key performance indicators states that we have to keep meeting the company CEOs and CFOs. Apart from that we also make sure that the analysts meet two other people. This is because CFOs and CEOs will give only readymade masala and will
know what exactly to say, it is important to meet other people working with a company. For example, a production manager will give you information about the actual production data or a marketing manager will tell you about the competition in the market, and so on.

How important is technical analysis?

We look at a few technicals but it is not very important for us since we are not into short-term trading. We keep the technicals in mind to
be able to judge better entry and exit timings.[PAGE BREAK]

Have you ever gone wrong on your investment ideas?

Lots of times but you cannot repeat the mistakes. Everyday there is a new learning and I believe that is what keeps us charged up in life. At times you are not able to foresee certain macro factors, as for example, inflation or political paralysis, which have played out over the past one to one and a half years. At times some sectors don’t work out the way you have planned. But the big thing is that every day is a new day. If you see that the company is headed towards more pain it is better to shift from that counter.

How important is sector selection?

It definitely plays an important role. For example, in the last two years those sectors that are less dependent on huge investments have done well. But it can also happen that a sector doing well may not necessarily have a company that is doing well too. For example,
when the auto sector was going well, Maruti wasn’t doing well enough. Remember, the stock is more important than the sector. A bad  stock in a great sector will perform only till the time the sector is in favour. If a sector goes out of favour the stock may go down. But a good stock will work even if the sector turns bad.

Is ‘buy and hold’ a fool-proof strategy for garnering better returns?

No concept is fool-proof because then every investor would follow that. Keeping track of every company is more important to know when to buy and hold. For example, Tata Motors fell from Rs 1400 to Rs 700 even though the auto sector was doing well. Therefore, no one can be 100 per cent right at all times.

How do you tackle bad phases?

One of the most important fact is that in India there is too much focus on short term. Also there is too much of comparison from various quarters including investors, distributors and the media. These things definitely put some pressure. If you get carried away with the pressure, it is going to be disastrous. We are a very mature team with a long history of tracking companies. Also, we keep looking
forward. The stock market goes through periods of boom and bust and we divide all such periods into a time cycle. Overall, we should have the best cycle. When investors come to us we ask them to define their horizon of investments.

Is it possible to predict the coming of a bear market?

Sometimes you get inklings about where the market will go but in our heart and mind we firmly believe that our economy is on the path of growth and that six months or one year down the line things will be good and we will start looking forward. Over the last one year many negative factors have hit us at the same time such as political issues, falling of the commodity markets, world events, etc but I am positive about the future.

What is your advice for a lay person who wants to start investing?

If a person has the capability and time to do the investing on his or her own, that is good enough. Or else a mutual fund is the best option because the service charge is as low as just one per cent. Investors should not believe in hear-say but keep investing in good companies and give time to their investments to grow. You cannot  expect a newly planted mango tree to immediately start bearing fruits. Also, if you have Rs 100, invest Rs 5 and keep the rest in your bank account. And then work on building up your investment.

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