Samit Vartak of SageOne Investment Managers shares his success and failures. The stocks he mentions are not recommendations.
Stocks I keep away from: Public Sector Companies
When it comes to investing, there is a big difference as an individual investor and as a fund manager.
An individual investor has the option of sitting on cash or timing it and just moving all of his or her cash into those couple of sectors. It's a wonderful bet to play. If I was an individual investor, maybe I would do that. As a fund manager, it is a different ball game.
As a fund manager, money comes in almost on a daily basis. Whereas many opportunities, especially in the cyclical sector or on the PSU side, are very short-term oriented. In the long run, there are periods when they will become huge multi-baggers. But there will be long periods where the investor will not make any money.
How do you manage that? The question is, what is a high probability bet that you take? I don't want to spend much time on that universe which is not a high probability bet.
Look at Tata Steel. From 2002 to 2020 or 2022, it has given probably better returns than many of the FMCG or consumer-oriented companies. But then, you had a period from 2007 to 2020, which was almost 14 years, where you made no money.
Defence is now a crazy. It was also a craze in 2005-2007. Many companies had become multi-multi-baggers. All of that, those returns were given away. Then you had such phase after the Modi regime started in 2014. Question is, when do you bet on it? As an individual investor, you can do it. You can put in 15% of your risk capital in it and wait till it becomes a multi-bagger.
As a fund manager it becomes tricky. You are answerable to others. You need to have a philosophy and clarity on what you're going to invest because it's a product that you are selling to the client. I can't sell A and suddenly have C. If you want to get into it, you need to have a very clear answer as to why.
My philosophy is to make money. If I see a structural story and a more reliable and visible opportunity that I can explain, only then I will get in. I've invested in companies like GNFC where I could see the opportunity.
Success Story: La Opala
I have had multiple successes. The biggest was Bajaj Finance. Another one was La Opala. This is a story of 2013.
If you went to any store, that was the only brand which was known in opalware. After Corelle, it was La Opala. And La Opala was probably not even 25%-30% of the price of Corelle. That means that the brand is pretty well known. It is spread across almost entire India and was sold at 9x multiple and little less than Rs 100 cr market cap.
India put in an anti-dumping duty on Taiwan and most of the other countries. Since 50% of the market was imports, it was a huge opportunity. The promoter knew that the anti-dumping law was coming in and began to put up a new plant, fully modern automated plant. He tied up with Manish Malhotra for branding. He was preparing for the upcycle because he was the only manufacturer and that 50% market was opening up for him.
After I bought, within six months it was up 5x. So, 5x multiple went up to 30 times. Earnings were also growing fast. I exited at 30 times multiple. Next one year it went more 5x. But it's okay. What do you do?
This is my big success story. I was opportunistic with the 5 years anti-dumping duty. I should have held on for at least two three years and then it went to a completely different orbit. I mean, now it never trades below even 50 times multiple. That's the kind of multiple.
Any multi-bagger that I have and which have been the most successful stories, in that P/E multiple has always multiplied by anywhere from 2- 3 times to 5-6 times. With P/E multiples only you get 5 to 6 times returns and then earnings don't multiple that much, other than, say, Bajaj Finance. So, earnings would multiply by 3, 4, 5 times. But that 5 times multiplied by 5, 6 times of earnings multiple, that itself gives you 20, 25 times multiples.
Failure: Indo Count
Sterlite Technologies. The opportunity was too big, that 5G rollout, again it had 10x multiple for the company. And it's not a failure if I was an individual investor. When I bought, the price was Rs 90 and it went up to Rs 400. The company is still doing well. But I see it as a failure for me because there were many clients who I bought it for Rs 300-400. It was a mistake for me because I thought it had pricing power.
I've been managing money for last 10 years. Fortunately, I don’t have any stock that has reduced 80% and I had to sell. I have 50%-60% ones.
Indo Count was one. The company makes bedlinen. A very asset-light model textile stock. It doesn't produce its own yarn but buys it and processes it. In New York, I saw the showroom. On Fifth Avenue there's a big textile building. There you have textiles from all over the world. Their showroom went from 3,000 square feet to 10,000 square feet. I spoke to designers. I got good feedback on the company and saw an opportunity. From bedlinen they were getting into fashion linen - bed toppings, pillow covers, curtains, et cetera. And that opportunity was 3x the opportunity of their current opportunity.
I invested heavily. After two quarters, earnings that were estimated to grow by 20-25%, was flat, plus margin pressure. When we tried to figure out what was happening, we got to know that Amazon was destroying their customers. So, Bed Bath & Beyond went bankrupt. JCPenney – who were their customers – was going bankrupt. Amazon was taking away all the U.S. market. And these guys who were the suppliers could not supply to Amazon because Amazon will not give even a 5% margin.
We realized that it is a very cyclical story with no pricing power, even though it's an asset-light model. The stock went down 50%, but fortunately, we got out.
Sector to bet on: Manufacturing Infrastructure
I think the safest way to play the India growth story, or the manufacturing opportunity, is to focus on manufacturing infrastructure. Companies providing infrastructure to the manufacturing companies. Compressors, for instance. Compressors are used in any factory, in any infrastructure project. So, whether a European company comes in here and puts up a chemical plant or pharma plant or Taiwan Semiconductor comes in and puts up a factory in Sri City… compressors is one of the best ways.
A stock that I am bullish about is one that manufactures structural steel tubes. Whether you're building warehouses, ecommerce picks up, a textile plant, a metro, a bullet train - anything manufactured will need structural steel pipes. So, I think it's a much safer way of betting on that. You know the sector is going to do well. But you don’t know who the winner in that sector is - a foreign player or domestic player. But I do know that we are not going to import steel tubes.
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All the above views were shared during the Morningstar Investment Conference India, September 2022
