Q13: As of now, a lot of seasoned investors like WB, CM and you seem to be in a mode of “I dont know how things will pan out”. And this has hampered the buying that this kind of correction and dips would induce. What would compel you to change your mind with respect to the current scenario?
And even if this kind of scenario were to last would you be open to buying something that appears ridiculously cheap to you where downside is practically negligible?
Q14: On emerging Sectors & sector rotation
Part 1
In my limited experience I have observed that once the fancy of a specific sector is lost it takes years for it to regain its past glory despite having some quality businesses in that sector. We saw the same with a housing finance few years ago and now we are seeing that with Financials. On the other hand we are seeing an uptick in pharma. If it were only a question of over valuation at times of euphoria we would find buyers in cool off periods but we don’t see this. How do we resolve this dichotomy of sectoral preferences of the market as a whole? On one side we look for things which are undervalued & on the other we look for things which have liquidity gushing in after we buy. At present I personally see some value building up in financial and auto sector.
Part 2
Businesses are just like human beings – they are born, grow fast, mature and die. Some have a long life and some die untimely. With the FAANG type of stocks dominating the world market cap are we seeing a fundamental shift in business models away from industrial type of businesses. In my opinion I do not see India as a main contributor to this class of business. Then how will Indian economy benefit from this upsurge in tech. And I think this tech story playing out is actually creating immense value for end consumers and that most of us have seen in the last few months. Therefore I feel the valuations attached to them could be fair. What is your opinion on this.
Thank you.
Q15: The structure of indices represent the breadth of economy and progress of nation state. The emerging sectors in index tend to create a lot of wealth as businesses go from small to global leaders.
US market was represented by large railroads, iconic food companies, manufacturing companies after WWII era. Now US market is represented by large technology companies. Chinese market is represented by large technology companies, large manufacturing companies etc.
Two emerging sectors in India market in last 20 years have been - IT services and pharma/chemical industries. Which newer sectors do you see emerging in India in Post COVID-19 world, where Indian companies will become global leaders? - Technology? Healthcare? Electronics Manufacturing outsourcing? Defense?
Q16. In some of your interviews, you have spoken of themes such as Real Estate, Flexi staffing, animal veterinary pharma and household debt as investment opportunities which are currently very nascent in size and have a long runway given factors such as consolidation, regulatory provisions and comparison to global peers.
Given the current scenario where you juxtapose the depressed valuations for companies in these sectors with near term crisis related headwinds and uncertainty, how do you approach investing in these themes in such times. In other words, how would you advise on portfolio allocations in themes you evaluate to be mega trends over the long term?
Q17:
Part 1
What qualitative and quantitative indicators would you be looking at in order to feel more confident about financial markets in general?
Part 2
What would be your asset allocation advice for a retail investor with fresh INR 5,00,000/- to invest and no prior exposure to financial markets. Should he / she consider investing in equity at these times? And if so, how should he/she think about asset allocation across asset classes?
Q18:
Sir, would you consider buying well-managed PSU businesses like RITES or some other PSUs in defence sector like BEL with huge order books pending. There will be issues in near terms, but they might be going at attractive valuations (now or maybe soon) and have good string balance sheet to survive the crisis period. They might look to be businesses with good terminal value. How should we consider such cases, or even just PSU businesses in general (dependent on government orders/funding) and are they value traps?
Q19: Every crisis either seeds problems or opportunity for next generation - Like bad handling of WW1 led to hyperinflation in Germany & WW2 , while a better handling post WW2 led to opportunities across globe which lasted for decades …
This crisis has brought in several fault lines - souring relationship within and across countries but also seems to leading to new post Covid alliances …
How should one go about thinking through these to spot potential opportunities? Do you see certain sectors better-placed (than others) to leverage/ balance on both challenges and opportunities?? Which are those?
Q20: A few questions more on the process side for us to learn how to execute better
Part1
From what I have observed, your investments have been in cos which have a niche or unique business model and they are growing. While in your recent talk, you shared that a commodity company with decent balance sheet may actually offer much better returns vs a company which has been doing well and is priced richly (eg AMC cos). So a) are you making such changes in your portfolio (contrary to what you have done in past). If not - why? b)How do you develop understanding/competence in new sectors? as usually its a long drawn process.
Part2
How do you cut your losses or exit from your favourite businesses which have been unique/leaders and run by exceptional managers or ones which have done well in past…while some macro event maybe becoming negative for them? Any checklists/ideas you can throw so we can execute better?
Part3
In recent years the market has become quite fast with so many people/institutions being active. In earlier years, we used to come across so many mid small cos which no one used to be aware of for several years but now it doesn’t seem to be the case. With more transparency, digitalization things get discovered faster. How have you evolved yourself to catch new opportunities?
Part4
While investing in small and mid sized cos, it so happens that cos grow in phases. there are few years when nothing happens and then suddenly its like a J-curve, hockey stick kind of growth. I’m sure this must have happened with few investments of yours. So a) how does one keep patience and remain invested when nothing material is happening for the underlying company over 2-3 years b) what checks do you employ to make sure its not a value trap?
Q21: Kuntal I have a single question.
“How should one go with the portfolio allocation if they are already in substantial losses with 20% cash sitting idle in PF? The choice an individual has is to deploy that cash at these levels to reduce average costs (given business is sound and temporarily affected) or to wait ? Key risks would be that once the uncertainty goes away, stock prices automatically would start reflecting that.”
Regards
Kanv
Firstly before even virus came on horizon, we were slowing, debt was ballooning and interest rates were held low for far too long by regulators resulting in high asset valuations. Debt is borrowing from future and too much of it can leave future dry and serve as drag on future growth and returns
Anemic growth in relation to expansion of credit is a distinct possibility going ahead.
Now the attention of some of brightest mind in the world is focused on the pandemic and obviously our knowledge on virus and cure will keep cumulatively increasing every day. However we still don’t know timelines, depth and breath of financial/economic pain and implication of a low touch economy. All we know longer the virus spread continues more will be human and economic tragedy. Also issue of secondary wave and mutations are not known. Also there is no guarantee we shall not see a spike once lock down are lifted.
Please refer to Presentation :https://www.cfasociety.org/india/Presentations/Kuntal%20Shah-%20Investing%20Under%20Uncertainties_13th%20May%202020.pdf
There are still too many unknowns from pandemic, regulatory, business operators, consumers, markets etc view points which have been highlighted in slides 17/24 of PDF in greater details. As variables increases linearly, complexity increases exponentially as 3X3 is 9 but 4x4 is 16 and so on. Investing is an art of examining a large range of variables and drilling down to few critical ones and have conviction on same regards to outcome and timelines. when range becomes too wide and timelines too uncertain, cognitive overload happens and processing information rationally and probabilistic manner became impossible
Key data points in my mind would be most important medicine related, hospital infra related and our ability to ensure we can live with virus while we wait for a definitive cure by adopting our lifestyle. Only then social/economic calculations can be modeled. Absence of length of pandemic timelines, breadth of spread and depth of health impacts, its not possible to have a reasonable handle on many issues. Investors have to consider a wide range of outcomes, probabilities & frequency associated with them and impact of the outcome. The synchronized stoppage of economy has not happened in past and its clear that revival and restoring the output to pre-virus level is going to be a herculean task. Longer this virus pandemic last the worse will be human and economic consequences is only thing clear but that is of no predictive value in terms of actionable idea.
At times of stress, microscope gets turned on and everything comes under sharp focus and what was initially ignored starts getting questioned. That is the nature of market. Many times, it ignores visible perils on horizon and at times it imagines dooms day scenario which do not materialize. Business are living entities and management at helm do matter and in fact at times of dislocations in business environment, men are separated form boys. Henry ford has said that the two most important things in any company do not appear in its balance sheet: Its reputation and its people”
Remember you are getting in minority partnership with management and how they treat you and alignment of incentives to yours matter, capital allocation skills matter, execution rigour and accountability matters, culture matters, and this is analysis is art in itself. Also, this is an unfolding movie in sense culture could decay and behavior might change under stress so its something you keep evaluating on a constant basis. Refer to slide 38 of Pdf of CFA presentation and ask whether managements of companies rushing to announce donation to governments to get into right books compare with stated inability to pay rents and vendors. Evaluating management is akin to evaluating your potential spouse and unlike post marriage where you trust, in business you shall have to constantly keep verifying that your trust remains well placed. Essentially, Trust but verify that the behavior they exhibit is long term oriented ( ability to take short term pain for long term gain) and win-win with the ecosystem they part of ( win-lose situation have short shelf life or unintended consequences around the corner)
Regarding framework to analyze value chain, read a good book : https://www.amazon.in/Understanding-Michael-Porter-Margretta/dp/1422160599
This is not a liquidity or solvency crises to begin with, but they are byproduct of global stoppage or economic engine in response toa contagious pandemic outbreak with no treatment plan or vaccine in near horizon. . liquidity issues are relatively easy to solve and playbook for doing so is with us and being implemented.
Coming to specific issue of NBFC, they have far lower leverage than banks for same precise reason is that they don’t have a lender of last resort and both banks and NBFC will coexist for simple reason that they address different needs of different segment of consumers. Lending is one of oldest business in world and business models have survived test of regulations and time and every lender cannot become a bank. The DNA are different and that is why in some case you have a NBFC housed below a Bank where bank has access to liquidity. Having said that some large non-banks are better off being a Bank as Kotak did in past. one shall have to view this from individual company level lens.
Q22:
Part 1
How do you view the kind of polarization we are seeing in the global and domestic markets with regards to valuations being assigned to few companies which are considered as quality businesses? Some market veterans have opined that narrow markets have led to huge corrections in the broader markets. What is your view on the same?
Part2
Few sectors like aviation, hospitality, real estate which have been directly impacted by COVID have seen huge correction in the stock prices. Although, the earnings for many of them might be marred for a year or two, there is quite a bit of valuation comfort emerging in some of these companies. Do you think some of their business models might be permanently impacted? Or the leaders in these spaces also make for interesting bets - as the whole sector is unlikely to get permanently damaged - leaders with strong balance sheets and liquidity will survive, and will be winner takes all kind of scenarios are possible? Does it make sense to remain on the side lines and let some clarity emerge and then only we can take such calls?
Part3
The entire commodity sector is trading at decadal low valuations. There are few companies in the sector which have low leverage as well. You had also mentioned about the sector in your CFA presentation. What is your view on the sector?
Part4
During the correction in March, 2020, not a single sector or company was spared and many of them saw big drawdowns. Markets didn’t even spare the companies whose earnings were not expected to be impacted by the crisis. However, it now seems that market is differentiating between them and some of the sectors like pharma and chemicals have made a good comeback. Do you think, corrections in the markets will be stock and sector specific now?
Part5
By when do you think the second order effects of the crisis will start becoming more visible as the first order effects are still playing out?
Q23:
Thanks Kuntal and VP team for facilitating this. It’s really much needed at this point of time and will help immensely to all retail investors.
Part1
I went through your presentation on “Investing Under Uncertainties”. It was really insightful. In the presentation, you mentioned about “Barbell Approach of Resilience and Optionality”. But it is really difficult to identify Resilient and Anti-Fragile companies even after so much analysis and deep study of various businesses. In this fast-evolving world, we have so many unknown unknowns. So what is your framework for clearly marking businesses as Resilient and Anti-Fragile?
Part2
Do you believe in sector leadership changes when there is an end of the bull market from one sector to another sector? If yes what do you think will be the next sector leader of the upcoming bull market whenever it starts? Please comment specifically on Chemicals, Insurance, and Pharma.
Once again my sincere thanks to Kuntal and VP Team for everything you are doing out there for investing community.
Regards,
Ramesh
What you are referring to is probably different styles of investing and in our business, there are many ways to skin a cat. If you are a good commodity stock picker and stick to same across cycle you will make money. if you buy quality across long term investment horizon you shall make money, its boils down to personal preferences. Also, same style will always not be in fashion or actionable and like weather the opportunity sets will keep changing. Apathy towards a sector would make it attractive and when mean reverts the same can outperform other narratives. Please remember when something becomes too vivid, be assured that too shall pass. Coming specifically to bigger business getting bigger, that is the part of evolution of business and at some stage they will mature and then shrink as well, and This time is no different. Business cycle are shrinking fast and leadership churn is more rapid in past but at same time scale are getting bigger as well. Passive indexing and closet indexing by MF/Insurers add to that narrative on stock markets. Business have cycles and they get amplified in markets and one needs to be flexible in one’s assessment instead of married to an ideology. However at this stage, clean companies which are compliant, are gaining market share from the weaker competitors and hence they have three things going for them namely, category growth which is linked to productivity and GDP growth of economies they serve, market share gains from unorganized and non-compliant players, and even amongst organized and complaint players, getting market share form inefficient ones which have to9o much leverage or other structural disadvantages. This has nothing to do with narrative but more to do with market dynamics which tend to get amplified in markets from time to time and also with investors own circle of competence, investment temperament etc.
At times of stress, microscope gets turned on and everything comes under sharp focus and what was initially ignored starts getting questioned. That is the nature of market. Many times, it ignores visible perils on horizon and at times it imagines dooms day scenario which do not materialize. Business are living entities and management at helm do matter and in fact at times of dislocations in business environment, men are separated form boys. Henry ford has said that the two most important things in any company do not appear in its balance sheet: Its reputation and its people”
Remember you are getting in minority partnership with management and how they treat you and alignment of incentives to yours matter, capital allocation skills matter, execution rigour and accountability matters, culture matters, and this is analysis is art in itself. Also, this is an unfolding movie in sense culture could decay and behavior might change under stress so its something you keep evaluating on a constant basis. Refer to slide 38 of Pdf of CFA presentation and ask whether managements of companies rushing to announce donation to governments to get into right books compare with stated inability to pay rents and vendors. Evaluating management is akin to evaluating your potential spouse and unlike post marriage where you trust, in business you shall have to constantly keep verifying that your trust remains well placed. Essentially, Trust but verify that the behavior they exhibit is long term oriented ( ability to take short term pain for long term gain) and win-win with the ecosystem they part of ( win-lose situation have short shelf life or unintended consequences around the corner)
Regarding framework to analyze value chain, read a good book : https://www.amazon.in/Understanding-Michael-Porter-Margretta/dp/1422160599
Resilient businesses have buffer to survive the crises while anti fragile thrive in such chaos. Resiliency comes from buffers and cushions developed by good corporate behaviors during good times while Anti fragility comes form business model design, mindset and a culture that allows you to play offensive and for that to happen your defense must permit same. Most of anti fragile business are resilient but all resilient business are not anti fragile. However capacity to suffer fits in to resliency to an extent. Fragility manifest itself in many forms across whole aspect of a business and you shall be best served by inverting this question to what can kill or handicap this business and avoidance of all of those leads to antifragility. High Debt reduces margin of error and can lead to downfall, serial acquisition can backfire, chasing scale at expense of returns can harm, toxic culture can harm …I could go on to many parameter that can cause business downfall.
I would urge the investors to read following:
All I Want To Know Is Where I’m Going To Die So I’ll Never Go There by Peter Beveling ( also seeking wisdom and A few lessons form sherlock Holmes)
https://www.amazon.in/Books-Nassim-Nicholas-Taleb/s?rh=n%3A976389031%2Cp_27%3ANassim+Nicholas+Taleb
Agchem is a business where we have manufacturing skills at country level however the whole Agri chain is under some form of price control be it fertilizers, or seeds or MSP for crops etc. and given that Government is conscious about input cost for farmers, I worry about price controls coming in this business all time and I don’t have certainty or clarity in this aspect form a longer term perspective. IF government wants to double farm income, one way is to increase price of crop but that is inflationary, second is to remove impediments between farmers and consumers which is what government is trying to do and hope they successful but third way is to reduce the cost of inputs for farmers and crop protection is reasonably larger chunk of farmers input cost so I am not sure how this plays out . Exports is more reliable in that sense. So in short i dont know the odds
Q24:
Part1
With more talks about companies moving from China to India and reforms set for attracting FDI’s to India, the contract manufacturing business seems to be a suitor for those niche companies which dont want to set up their complete manufacturing base. What do you think about how this will play out?
Also similar to contract manufacturing there is an inclination in many MNC’s towards branching out their HR/payroll division to external agencies. In such a scenario what are your views in regards to situations which are unfolding?
Part2
It has been observed in every bear market the most beaten down sectors give highest returns after revival of economies. In this fall Entertainment, Travel, Hotel and Banking/NBFC sector seems to be the nost beaten down sector. What are your views about this theory, its application in the current scenario (since this crisis is much different from the earlier crisis) and if this theory plays out which sector seems to be the most rewarding?
Q25: You’ve seen multiple crisis in 30 years investing career. What lessons from past crisis are applicable right now? And what clearly are not?
Everyone is saying this is a completely different - the whole world economy has come to a dead-stop. Parallels are drawn with World Wars - but during the World Wars, actually the war economy flourished? So wondering, what’s teh right way to think about this issue in more granular detail
My thinking is all over the place 
; some pointers would help to think more clearly
