CIO: Anoop, what brought you to the field of investments and what has been your experience so far?

Anoop Bhaskar: After my MBA, I worked with various companies in Delhi. I got an opportunity to work with Kothari Pioneer Mutual, when it was being set up. Actually, it is an interesting story, The company where I was working had had worked with Vivek Reddy at ANZ Grindlays.  When we read in Business India of Investment Trust of India receiving a license from SEBI to start a mutual fund, we approached him for setting up the Research team at Kothari Pioneer Mutual Fund.  Actually, those days only MDs would have access to STD lines, we could not call him from our office.  So I remember, we went to a PCO outside our office and spoke to Vivek (STD rates were Rs.20/min to Chennai from Delhi).

Focus has always been on mid-caps

My friend and myself both came to Chennai and worked in research.  He later went to join a private equity firm in Delhi. Post 1998, we internally reorganized ourselves to sector specific analysts because till then anybody was doing everything.  So, 1998 onwards there was a focus on the sectors, which is now a standard practice today.  I was analyzing Auto, auto ancilliaries, Pharmaceuticals and FMCG sectors.  In addition, I would also look at mid caps across sector.

In 2002, Templeton took over Kothari Pioneer.  After one year with them, I decided to move on to Sundaram in 2003 and 2003 was the start of this great bull market.  My focus had always been on mid-caps. Over the last decade or so, I think, I gained some experience of how these companies would shape up.  This experience, has been the foundation stone of the success over the last four years.

CIO: Can you tell us about your experience so far and what kind of achievements you have had right from the beginning, from working in Delhi at the broker’s office?

Anoop Bhaskar: Only last year, people have recognized the hard work put in over the last decade and a half!  Achievements like awards and public recognition only help in giving higher self confidence.

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CIO: No, no. Not in terms of actual results, but in terms of what learnings you have had from those experiences.

Anoop Bhaskar: When I started my career, equity research was relatively unknown. At my first job, we built a large team, though it was a very young team in terms of experience.  We didn't know how to go about this process. We tried to be a little formal in our approach, what we were trying was to put estimates for the future with key assumptions.  We had very basic models, which focused primarily on EPS and PAT.  We had certainly not heard of concepts like enterprise value and EV/EBIDTA.  We struggled to meet managements.  We certainly did not know of any sector specific knowledge.  The impact of global trends on Indian companies was another area where we were totally clueless. Which is why, the Union Budget was a great event.  Each year, the custom tariffs came down and certain companies and industries used to get impacted.  I think most of the analysts and most estimates only forecasted perpetual earnings growth even for commodity companies!.  It was a period of naivety. 

“Why shouldn't NAV of mutual funds trade at a multiple?”

I think that most people made money because they were there and not because they had any skills as such.  So you had exceptional period in 1991, better known as Harshad Mehta boom time.   I remember in 1994, a company called Maral Overseas, which on the day of its listing was quoted at Rs.250 and had the highest ever market cap in its history and they had just done bhoomi puja for the plant!  It was a period in which some of the schemes of the SBI Mutual Fund got listed at a premium of NAV.  A “respected” stock market journal actually came out with an article saying “Why shouldn't NAV of mutual funds trade at a multiple”? So that was the kind of market we are talking of in the nineties.   Trading used to be a nightmare because we never knew what was the right rate. Bad delivery was rampant. I think capital could get actually locked in for a larger period of time because of book closures and bad deliveries.  So that was a tough time.

CIO: So the structure of the capital market itself was inefficient?

If anyone had even a gram of sense of how to value stocks, he could have plundered money out of the market

Anoop Bhaskar: It was not only the case of inefficient market structure.  It was an outright jungle.  Individuals had to trade through sub-brokers.  There was no investor protection.  It was also time, when you could pick up great bargains.  One of the earliest picks that we had done well in was to buy Tata Power, Andhra Valley, Tata Hydro Electric Power and they used to quote below book value and used to give dividend yield of around 7-8%.  I think they went up almost 10 times or 8 times from those lows.  That's how the market was.  There were these kinds of stocks available which were hugely cheap.  If anyone had even a gram of sense of how to value stocks, he could have plundered money out of the market.  Unfortunately I didn't have that kind of sense, so I am still working.

Analysts focus more on the P&L account and not on a balance sheet

With the advent of private sector mutual funds, started the professionalization of the market.  I remember the first foreign broker, Peregrine -one of the largest brokerage at that time, and of course they would come out with fancy models, but the numbers would never be achieved.  They were the first players to come out with the comprehensive study of a company and they had a framework for projections.  They came out with the projections of the balance sheet.  Actually, they focus more on the P&L account and not on the balance sheet.  In 1992-93, the Government allowed Indian companies to access global markets through the GDR route.  That led to a frenzy, any Indian promoter of any repute had to have at least one group company to issue a GDR.  It became a status symbol.  Ironically, foreigners who were supposed to be smarter than us, natives, turned to be as greedy and at times even dumber.  With the crash of the market in 1996, several companies with GDRS were quoting at 1/5^th or even in rare cases 1/10^th of the issue price.   A fall out of this was abhorrence to fund expansion, even if it was justified. Thus, investors went from one extreme (enthusiastically subscribing to GDRs) to abhorring companies which needed capital to grow. The rise of IT sector and its free cash flow model, was taken up investors as the model for every sector to follow.  Given that India was going through an economic slowdown between 1997-2001 and faced a period of high interest rates, manufacturing sector was the hardest hit and investors just ran away from such companies.  Yes, you would have an odd Hero Honda which did well and caught the investor’s fancy but by and large investors ignored manufacturing sector during 1997-2003.

CIO: Based on your experience, so far, what would you say is the best way to go about for investing and what is your core investment philosophy?

Anoop Bhaskar: I wish there was a right way for me to go about on investing.

CIO: Not the right way.  The best way based on your experience on how you feel about with investing?

The markets keep on changing their character

Anoop Bhaskar: The markets keep on changing their character.  The bull market of 1994-95 was different from 1999, which was different from 2003-.  So you can’t say that if you had one single trait you would have been able to actually do good.  So a lot of times I get very scared when individual investors ask me on how to invest in stocks.  As an individual, you are last in the food chain of information flow.  And the level at which you are in this chain determines what is the level of success one has.    My advice to individual investors is to carefully analyze sectors you best understand – if you work for a paint industry, then try to invest in such companies.  Invest in sectors or companies, where you are not at the bottom of the food chain for the information on the company.

CIO: Do you follow any kind of core investment philosophy or it’s just instinct?

I don't know if there is any core investment philosophy

Anoop Bhaskar: I don't know if there is any core investment philosophy.  It’s just a combination of study of company and sectors - trying to see whether being in the sector the opportunity is large enough to give sub par management a chance to deliver.  In today’s environment of excessive liquidity and low risk aversion, managements are constantly being tempted with acquisitions, deals etc.  If the managements themselves do not know where they would be five years from now, how can I take that call sitting outside.  Thus, for us price is everything.  Every company, is crudely, an asset which is attractive at a price and not so attractive at some other price.

CIO: Would you say that it would be better to go to the management and understand from them the perspective?

Crosscheck whatever argument the management puts forth

Anoop Bhaskar: Actually you need to do some homework and re-check or crosscheck whatever argument the management puts forth.  That's what every professional investor needs to do.  If you get the right company in terms of management, size, skills, but in the wrong sector, you might have to wait for a long period of time to get market returns.  Good managements are critical when the markets are trading at high levels – in 2000 investing in Infosys was far safer than having done so in Pentafour if you had a five year forward perspective.

CIO: What is your style of investing and what would you first prefer, to look at the size of the opportunity in a particular sector or look for the investment ideas?

Anoop Bhaskar: No.  We started going to a lot of companies.  I don't believe in any database based identifying investment opportunities, where you put filters for sales or profit growth.  I have never done that.  So I can't say whether it is right or wrong.  But that’s one way lots of people do and do so successfully.  I look for sectors where there is very less research from the sell side. That is the starting point.

CIO: Don't you face any difficulty in meeting up with the companies which are not very open or not very known to the public?

Anoop Bhaskar: I remember that in 2003 we got those odd companies.  But most of the time people are willing to meet you. Often managements don’t want to meet, and we missed several opportunities because we were trying to meet the company while the stock ran up. Yet most of the time people are willing to meet, some more wiling than others.

CIO: What do you think would be the sensible investment objective in terms of current interest rates?  How much of a percentage of person’s asset should be allocated to equity and debt?

The key in any allocation has to be return expectation

Anoop Bhaskar: Well, it depends on the person and the risk appetite.  Those who are willing to invest in stocks and take a dip of 30% or 50% can do it individually. So you can follow various formulas eg. 100 minus your age, could be your equity weight. But it depends on the individual temperament and individual risk-taking capacity.  I think it's very personal and that the key in any allocation has to be the return expectation – do you want to keep a high equity component, or you are willing to sacrifice returns for the next 12 months by going overweight on debt.  In the end, you need to be invested across various asset classes rather than just one. That’s the bottom line.

courtesy - www.capitalideasonline.com