"In a bull market like the one we had between 2003 and 2007 everything that you do seems to be correct. But in the last three to four years, the real worth of a fund manager is being tested." - Srinivas Rao Ravuri
6/14/2012 9:00 PM Thursday
With an experience of more than 17 years in the Indian capital market, Srinivas Rao Ravuri has worked across the entire value chain of the industry. Starting as a sell side analyst, he rose through the ranks to become the senior fund manager in HDFC Mutual Fund. Here, he shares his investment philosophy and what investors should do to succeed in the market.
How did you come into the profession of fund management?
I did my graduation and then I did my MBA. Basically I was interested in equity research. In 1994, equity research in India was at a starting point. I got interested in it. I spent 10 to 11 years in the sell side which gave me an exposure of tracking multiple sectors.
We are talking about the early 1990s when the internet was not that much in use. How did you conduct your research then?
Well, computers were there, but what was lacking at that point of time is the flow of information. Interestingly during those times too the telephone had its own use. I remember studying Global Tele in 2000-2001 or Crisil, from such a small institution that I was working with I could talk to S&P Asia Director in South East Asia on what is their outlook on Crisil and how they look at it. The point is, if you put in sincere efforts you can get ahead by procuring information. I talked to GE Asia which was a partner of Global Tele and got their perspective on what they think about Global Tele. It was difficult, but if you made a sincere effort even in those days you could get what you want.
What is the kind of information that you primarily look for?
While interacting with the companies they tend to give out all positive information about themselves. But as an analyst you have to analyse what is the other side of the coin. What you as an analyst should be doing is look at what a company’s competitors are saying. Also, you have to look forward to how is the reputation of the promoters in the market. If you talk to the customers and also talk to people in the supply chain it will enable you to actually get an insight whether the products are good or not rather that only depending on what the company has to say. Whenever you hear some good about the company from its competitors then your opinion about the company changes automatically.
What has been the temperamental change that you have observed when you shifted from sell side to buy side?
When you are an analyst in a Buy side team then the entire responsibility is on you. Sell side analysts deal with meeting companies and writing reports. But here, on that recommendation actual buying and selling is happening and your responsibilities extend manifold.
So, what has been your investment philosophy?
One is you look for a sustainable business. I will not buy anything looking only at two or three quarters of data. Secondly the price at which I am buying is important. These two things are very critical. The investment philosophy that we follow is to have a bottom up approach
Can you share with us your first investment idea and how did it come?
It was an explosives company which had come up with an IPO. During the IPO I went to their plant and this was pretty impressive. Coal India was their number one customer. However, the company had a tough time for two years. We met the management again and we concluded that there is a cyclical down trend that is happening in the industry. Their number one competitor said that its cost competitiveness is very good and no one can beat that. We were convinced about the future profitability and future growth of this company and we actually added more.
Are we trying to say that persistence and patience is the key to garner better returns in the equity markets?
Persistence and good homework can give you the conviction. But there may have been cases when the economic scenario changes and we see that after holding a stock for more than two years it is not performing and going forward its earnings prospects too look grim. In such a situation we exit the stock even with minimal losses. It is more important here that a person should book profits and also book losses wherever necessary and work with strict stop losses. What we do here is avoiding making big mistakes in choosing stocks.
Should an investor keep a check on the size of their portfolio to avoid big mistakes?
Yes, some people have 30 to 40 stocks in their portfolio and it is certainly not possible to manage all of it. You should have a limited exposure and one should take exposure where one has a better understanding.
What are the crucial signals that may define your entry and exit in a particular stock?
The first would be my understanding on the industry and also the price that you are buying at. A bottom up approach is utmost necessary while buying a stock. The more crucial part is the exit. Two points to be considered while looking at an exit from a stock position would be that a) the business outlook for this company is deteriorating and b) valuations are expensive.
So how critical is meeting management and how often you carry this exercise?
It is very critical. We have 230 companies in our portfolio and we make a point that we meet all the companies once in a year.
If say a particular sector is doing well and a particular stock in that sector is not doing well and it is in your portfolio. What do you do to such stocks?
First we will analyse why it is not doing well and is it going to remain that way. Only then will we exit the stock depending on the valuation and the price we will exit the stock.
Is it really possible to identify a bear market before it deepens its grip?
It is all matter of regular exercise. Bull markets are built in complete cynicisms and so very high valuations and high number of IPOs hitting the market may be an indication of excesses. This may set the tone to the start of bear markets.
Where do you think the Indian markets are headed?
In the short term the economy is going through a tough time and that is why we see the markets where it is. But if you see valuations, we are at 13x FY12 reported numbers. We are below the 10-year average multiples. At this valuation I think most of the negatives are priced in. But as the scenario is panning out I feel that FY13 would be challenging.
Can you name some sectors that can be looked at for the next five years?
Financials, which is a proxy play for the economy and in which case even the valuations are on your side. Second is infrastructure, India is already short of infrastructure. We will see a huge demand coming for infrastructure.
What is the most important advice that you will give to retail investors?
India is growing and you are getting a growing economy at a P/E of 13x which is quite good. If you have not made money in India in the last five years it does not mean that you will not make it in eight years. Even if valuations are at 15x for the next three years the money you will make is significant.
What is your take on the overall skill level of the Indian fund management industry?
In a bull market like the one we had between 2003 and 2007 everything that you do seems to be correct. But in the last three to four years we have seen interesting and challenging times. The real worth of a fund manager is being tested. It is a very young industry and it is maturing with time.
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