The 2017 Morningstar Investment Conference was held in Mumbai on October 10-11. At the conference, Rahul Rathi, Chairman and Fund Manager at CapMetrics Investment Advisors (Purnartha) Pvt Ltd shared his views.
You love big data. And have done so for many, many years. Tell us how you use it to sift through investing ideas.
I look at 11 years of data, which is a complete GDP cycle; GDP would have gone up, down, and drifted.
There are two sources of leadership in every company - visionary and executioner. I want to know how they have done during bad times and good times.
There are two reasons why every business fails. Either customers leave or you target an unprofitable customer segment. I want to know how they have done this during tough times and during good times. If they have retained customers during bad cycles.
How do you track that though?
There are a few metrics to track unit volumes and cost of customer acquisition. Cost of marketing. Distribution costs? Channel checks to identify whether they have been productive or not.
Every business, during lean periods, goes through productive technology changes. Getting 11 years of data helps identify which promoters or visionaries have embraced technology and which have not. The filter is whether or not this translates into volume growth; whether more customers are acquired.
What is the volume growth that's cut off for you? Over 11 years a business would have to grow at a compounded volume growth rate of what?
Twice the GDP growth would be my expectation; 10-12% volume growth would be a great number for any business to achieve as long as it's debt free.
In my universe today, there are only 43 companies that meet this criterion.
Only 43 out of the 5,000 stocks that trade every day meet the criteria of 10% unit growth over the last 11 years?
Correct.
The 10% volume growth is an outcome of a visionary's thinking. His thoughts and strategies have allowed him to compound at 10% volume growth. There are many insights on how different businesses have been able to do that. Maruti has a very interesting way of acquiring customers and holding onto them versus, say, D-Mart.
Let's talk about demographics, a mega trend in investing. By 2050, the population in emerging markets will have risen by 2.3 billion whereas in developed markets, the rise would be only 100 million or so. What are the investment implications?
First, democratization of finance.
The major changes which have come in the last 5 years, thanks to technology, have been ability of finance moving to the bottom of the pyramid. There are a lot of microfinance companies, banks through technology that have moved in.
I have a fundamental belief that businesses drive GDP growth. God did not distribute intelligence according to wallet share. There is enough intelligence at the bottom of the pyramid and they have the right attitude to compete. They are not schooled the way we are schooled. They are schooled in the schooling of life.
And that's where you will see some large companies coming off. If you see some of the promoters that have come in, they have all been through middle class, lower middle-class status society with access to capital they have done wonders.
In the next 10-15 years, you will start seeing larger companies from this bottom of the pyramid going up to large companies and becoming global leaders.
Second, GDP growth will also be driven because of the large population and businessmen wanting to better themselves at the bottom of the pyramid.
If you look at GDP growth, it will still be Roti, Kapda, Makan based on a large population and going by the fact that these are needs, not wants or aspirations.
So you are saying the basic Indian market provides opportunity to a lot of companies to reach that Fortune 500 scale because of doing basic services of delivering goods to people.
I think so. And it can be tremendously wealth-creating for investors to identify these opportunities and play on these strengths; 20% volume growth in all these opportunities is still a small percentage when you look at the macro factors.
Alibaba, nothing to do with the investing world, recently floated a mutual fund, liquid fund, got $100 billion; front-end entirely Alibaba, back-end entirely the AMC. Is that a threat that a technology company and not a finance company will grab asset management?
Let me put this in perspective.
Technology has increased a service level. All large businesses are about service levels. Look at Google, WeChat, WhatsApp, Uber. So a migrant labourer comes to Mumbai and can call his home in the evening which increases his service levels of satisfaction. Every technology that gives clients or customers higher service levels at the same cost will continue to beat current people in the market or current players in the market. But I don't think that the production is going to change.
People pay Rs 300 for a cup of coffee at Starbucks. They can also buy the coffee and come back home and it's a much lesser price. It's all about emotions and service levels and relationships. Technology currently is disrupting relationships in a way which all of us can anticipate.
People went to Alibaba because they have an emotional connect with Alibaba's ability to be transparent and deliver on what it says. Amazon has the same connect with people at a service level. And I think any business that continues to maintain a certain service level and upgrades on it or is aware of how technology can change service levels will be on the right side of profits.
While electric vehicles are making big disruption, does it make any sense investing in old automakers and allied industries, as well as oil sector companies?
For all the current auto companies, it's a very easy to shift to a platform with electric vehicles. Most large auto companies already have large lithium-ion capability and plans to have manufacturing within them. I think brands will continue to play an important role within the auto business. And most auto companies currently will also be a part of the boom that electric vehicles will bring.
But typically that doesn't happen. Kodak didn't participate in the digital revolution of photographs. I mean, there are so many companies that have an Ostrich-like view that they are in the auto industry and not the transportation business. So, do you really think that these guys will transit to take on Tesla or take on BYD?
I was talking to somebody who said to me that the current size for a 400 or a 500-km ride is roughly about $5,000-$6,000+.
I talked about unprofitable customer segments. GM and Maruti started at the same time. GM had a very successful one single launch. And after that, they have faded from the market. So, the whole market for profitable customer segment in India is sub-$10,000.
The place where electric vehicles are today is much more than $10,000. So, identifying a profitable segment, and given Indian road conditions and the Indian scenario, how is it going to pan out and are they going to target a profitable segment or not are two different questions.
If Flipkart and Amazon started selling mutual funds in India, how much of a threat would it be to distributors?
None. Because I don't think they have the service levels and the relationships that are there with current people. And I think that's why it's still going to be – we don't go to a hospital, we go to a doctor. The reason in the U.S. people go to a hospital because every doctor has a certain minimum level. And that is why you are fine going to the hospital because even the below average person will have a certain quality.
In India because of the volatility both on the left tail and right tail, people will still believe in people, relationships will matter, and I think that is why India is going to be driven – like most other places will still be a relationship based.
MNC versus domestic players. Should we encourage domestic manufacturers like Patanjali rather than obsesses over overseas brands?
There are MNCs listed on the stock exchange and MNCs in India which are 100% subsidiaries of foreign companies and we don't know which way profits are distributed. So, it's a very important criterion to identify where you are investing in. If they have their own subsidiary, you might not get all the profits in the listed entity that there is.
Ultimately, I really believe that businessmen drive GDP growth. You're actually investing in a visionary and an executioner, and as long as he can deliver a certain volume, value growth, you are comfortable buying the business as long as there's visibility in the future.
Which comes first, Nifty at 9,000 or 11,000?
11,000.
Bitcoins are a fad or the future?
Fad.
Blockchain technology that underlies bitcoin is a fad or the future?
Future.
