Vinit Sambre, Head - Equities, DSP Investment Managers, shared his investing philosophy during the Morningstar Investment Conference India, held in September 2022. The stocks he mentions are not recommendations, but just examples to drive home a point.
- Think rationally and do not get carried away by market exuberance and excesses.
Back in 1999-2000, I was tracking the tech sector. Companies were changing their name to include the word dotcom or tech – any company, manufacturing or any other sector. And, the very next day the stock used to hit circuit. It was a very easy way to make money.
I had cleared my chartered accountancy in 1997. The early days when I did not know how to value businesses. Fortunately, I was working with people who knew how to do so and were very rational in their approach.
I was excited with the returns that the IT sector. Even 100 P/E was looking okay because it was divided. Everything was getting justified on a PEG basis, even 200 P/E. My boss told me to study Nestlé and Ramco Cements. He told me to study the old economy stocks and he kept investing there. He stayed focused on annual reports, long-term track record, management history…
I used to wonder why, when all these tech companies were making so much more money. We all know how that played out. Then came 2008. I started managing money since 2010 after having learned the lessons of 2000 and 2008.
- Never lose sight of your fiduciary responsibility.
When I travel, I get to meet many Independent Financial Advisers, or IFAs. Some of them have told me that they are doing SIPs of Rs 5,000 of small farmers into my funds. That cast a very big responsibility in terms of how one has to think in terms of compounding capital as well as preserving capital.
- Willingness to stand against the crowd must be rooted in in-depth research.
When I invest in a company, I ask myself: “If tomorrow this stock gets to the lower circuit of 20% then should I sell or buy?” The answer has to be that I should be buying more when it falls. And that is what we have actually done in most of our companies when they corrected.
But it is a tough call - to buy when everyone else is wanting to sell. When the news is very bad and negative. But that's the time one has to. We have had to sit through with patience, and sometimes our patience has been tested for long years.
You can do this only if you are confident of your in-depth research on the company. That's how most times returns have got generated. We've lost as well, but I think more times we were positive than negative and that has worked overall.
The maximum wealth creation has happened where we have exercised patience in most turbulent times, and it is not easy. Our portfolios are open to the public. We are subject to daily NAVs. To sit through underperformances is not easy. I think it is the most toughest phase, to endure underperformance because of your conviction.
- Know when to enter, know when to leave.
Eveready was part of my portfolio, now it is not.
We had invested very early in it. That was the time the company was going through a transition from the management side, the young leadership had taken over. I was really impressed by the management - the focus was on rectifying the balance sheet first and bringing down leverage, and not just the P&L. It was not a high growth business, but a low growth business but wanting to use the channel to invest into other businesses which can actually grow. They wanted to leverage on their distribution and grow on other parts of the businesses and basically de-lever the balance sheet with the cash flows.
The stock was really cheap. We bought the stock, and it gave handsome returns. But at a point it so happened that because of the other group companies' leverage and other problems, this company went down the drain. That was a time when instead of doubling down, we took a decision to knock off our position.
We look at developments in the company and ask whether it is going to cause permanent damage to the structural story or is it a temporary damage? Good companies going through a temporary period of disruption are the best time to invest into those companies; the stocks really multiply from those points.
In 2017, DSP Small Cap Fund was closed for subscription. But during the lows caused by the pandemic, we opened the fund for subscription. We did not know when things would get back to normal, but valuations were very attractive.
- Develop your own investing philosophy.
Bottom-up stock picking dominates our philosophy in terms of selection, and sector generally becomes the outcome. But it is not that we don't look at the sector allocation at all. We keep an eye.
Let's say we start liking many companies from a sector. Then it is possible that we may gradually start increasing our exposure. And in terms of the highest exposure, the top sector where I have gone is as high as 25% in terms of the sectoral allocation.
But principally, it is more bottom-up in terms of the idea generation.
We are valuation conscious, and we like to buy at good price, so that we gain a lot more.
When it comes to valuation, there are some nuances. Various sectors go through cyclical lows where recovery will take place in the next few years. So the stock may look expensive on low earnings. Eicher Motors for example. It was trading at Rs 35,000 crore - 40,000 crore market capitalization and the profits had fallen from Rs 2,000 crore, to let's say Rs 1,300 crore.
If you look at the Rs 1,300 crore profit and the market capitalization, the valuations look high. But one should also understand that the profits (when the cycle turns) can grow at a multiple of that number and which is where the valuations will start looking okay. So, if on a low cycle the evaluations are looking expensive, then we don't wait. It may appear expensive, but it is not and that's where we keep building on to our exposure.
Wherever companies are going through any corporate events, that's the time to dig a bit deeper into what's really happening and ask why these events are taking place. I have seen maximum amount of wealth creation if the right changes are taking place, that's the trigger point where a lot of P/E rerating, if it were to happen, has to happen. But that's the time when also people tend to ignore the big picture. For example, when GCPL saw the top management change; Sudhir Sitapati came from HUL. That day itself the stock went up by 20-30% and then corrected. The point I am making is that so much valuation premium got ascribed to this small change. So, likewise, we've seen that management changes or any big events can actually drive wealth creation.
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All the above views were shared during the Morningstar Investment Conference India, September 2022
