Disclaimer: Please note that the views expressed in this interview are those of Mr. Basant Maheshwari and do not necessarily represent the views of, and should not be attributed to, Safal Niveshak.
Safal Niveshak (SN): One of the problems that new or small investors face is that they can’t really get their heads around valuation. It seems so complex. A lot of the terminology is complex, and so are the concepts. How can valuations be made easier? How have you made it easier? Or can it not be made easier?
Basant Maheshwari (BM): There are two aspects to valuation. One is to evaluate the longevity of the business, which is what Buffett talks about – the business quality, moats, etc. But since we can’t get numbers on them, we don’t do it.
Now, while starting a valuation sheet, how many people ask this question on the first row of the excel sheet – “Is this company going to remain in business by, say, 2020?” Most people don’t do!
And then they don’t know which metric to use when. If I am doing a DCF on Sterlite, or a DCF on Hindalco, and the Supreme Court suddenly thinks that it should de-allocate the coal mines given to these companies, then all the DCF goes for a toss.
Let’s assume the Supreme Court is kind enough, and says,” Okay, since you’ve started work on the mines, we’ll give you time to look into it,” who will take care of the London Metal Exchange?
So for cyclical companies, there is no valuation metric that can be used with confidence. Just buy such companies when they are making their five-year lows, and sell them when they go up 3-4 times.
Tata Steel, for instance, will go 3-4 times from the bottom to the top. If it rises so much, you sell. There’s no need to value it anymore. If somebody has to make money, let him make money on it.
But, on the other hand, if you have bought a stable and structural growth company, and if you can predict the growth, then ask how much money it will make in the next 2-3 years. That will be a good time for you to actually look at it from different angles, because you’re sure about the company.
You see, most of the time, it’s not a numbers game only, or it’s not a business game only. It’s just a combination of it.
But if you ask me the PEG (price-to-earnings growth) ratio, for instance, I don’t use it at all. I am a big Peter Lynch fan for the book that he has written, but I don’t believe in PEG.
Let’s say there’s a company that will never be able to grow, you think it will sell for free because ‘G’ is zero? PEG is just a very broad approximation. But in most of the reports, I see people using PEG.
You see, P/E can go up also for high cash companies. P/E can go up for dividend yield stocks also. You will always try to tear your hair off why this stock is trading at a P/E of 40x, but if it trades at a P/E of 10x, the dividend yield will also be at around 10%.
Look at Nestle. Assume the stock trades at a P/E of 10x – just reduce the stock price to get it to 10x P/E – and then work out the dividend yield, you would find that it will be an exorbitantly high yield, which will never happen.
So there’s no single mechanism to get around this thing. Also, there are companies whose P/E are a function of the management also, which you cannot define.
Just because growth is a very good number to work on, most people put P/E equal to G, and then they work on it. It may work in many cases, but in many cases it won’t work at all. This is when there’s something else that is more significant than the G, then that will take over, like the dividend. And there’s nothing more real than the dividend.
Anyways, let me now talk about how to value a moat. Let me give you an example.
Semi-urban and rural India is going to see a boom in the next 5-10 years. One thing that this government is also focusing on is rural housing. I will give you an example of a stock that currently trades at a P/BV (price-to-book value) of more than 10x – Gruh Finance. Now whether this is expensive or not is another issue.
Now consider this – there is a shortfall of more than 6 crore households in India, and Gruh Finance, along with the other rural housing finance companies, doesn’t even have 6-8 lac accounts with them.
At maximum, they would have 10 lac accounts. And the total market is for 6 crore homes.
Now, why would Gruh do so well? A guy who borrows Rs 2-5 lac to actually build his home will always be someone who does not maintain a bank account, at least in most cases.
This is because, in most cases, the situation is where the husband is driving a truck and the wife is selling vegetables. They don’t have a bank account, so how can banks fund them? They won’t, because there is no income proof.
So, even if they are creditworthy, they have nothing to show that they are creditworthy. And thus this market remains untapped. This is why these guys lend at 12% whereas banks lend at 10%.
And this is the 2% that they make. They make it because they understand the structure so well. They understand the market so well. This is a huge competitive advantage I think.
Now, why wouldn’t banks get into it? This is because no bank would be interested in that kind of granular lending.
If you see India’s banking history, most banks have the higher number of NPAs when they have tried to lend below Rs 15 lac. So if you ask me, I think this is one place where can you get the next 20, 30, 40 bagger.
Now whether this company does well or some other companies do well…some companies will surely do very well, if India is to grow.
Over the last few years, you have seen NREGA, land prices going up, people from villages going to towns and cities and earning, working in software companies, and writing cheques back for their parents. So there’s too much money reaching rural homes these days.
Also, prices of food and vegetables are going up, but in some way that is helping rural India. So there’s a transfer of wealth happening.
In the Rs 5-15 lac category, there aren’t too many companies around who can lend and who have a history of lending. I don’t think there are more than 60 registered housing finance companies in India. So there’s a huge opportunity here.
The point is, if you try and focus on this sector, then you will make it big. This is one sector where you can find good companies with sustainable moats. But then, this is a 20 year story, not a 10 year story.
SN: Could you please share a few lessons you learned from the mistakes you made in the past?
BM: I lost a lot of money in Voltas, and went through a lot of pain, because from 2003 to 2008, I had never lost money.
And when I bought Voltas because I wanted to participate in the cyclical game, I lost 60% of my money on the stock.
What I learnt from it was that, when next year I bought Thermax, Voltamp, and Blue Star, the moment they doubled, I sold them off. This is because I knew they were cyclical businesses. Because Voltas was a cyclical business where I had lost money, I thought I should get rid of these other stocks as well, after making 2-3 times.
Now, why this is significant is – I think I sold Voltamp at Rs 700, and I bought Page at Rs 600. Page today is around Rs 7,500, while Voltamp is still below that price. That was possible because I lost a lot of money and a lot of energy analyzing Voltas, which was bad mistake. I shouldn’t have bought Voltas.
Another big mistake I made was holding onto to Trent till 2006. I should have got rid of the stock in 2003 itself.
Also, my early days were spent in not buying a stock in as much volume as I do now. Like if I bought a certain stock at Rs 10, and it went to Rs 20, I bought. But if it went to Rs 50, I did not buy.
Like I sold Bharti too early, because I thought that kind of a market cap couldn’t have sustained. And from the time I sold Bharti, I think it went up 15-20 times. I sold it because I just couldn’t get a hang of it.
Sometimes, not knowing enough is also good. Because had I known too much of it, I don’t know whether I would have been able to hold on to Pantaloon Retail.
Not knowing enough was good, the price was acting, the revenue was growing, market was cheering up, and that is all what was needed. But if I would have done too much of an analysis, I would have probably sold off Pantaloon much earlier. But that doesn’t matter, because I would have made money elsewhere also.
So, sometime not knowing enough is important, as long as your learning process is on track, and you keep adding to your knowledge.
SN: What is your two-minute advice for an investor who is just starting out?
BM: First is, he should not look at the cost of increasing knowledge. So he should not worry – “This book is worth Rs 2,000. Why should I buy it?”
Secondly, even if he looks at the cost, he should remember that these costs are nothing in comparison to the mistakes he will make in his investing life.
In one book – I don’t remember the name – I read of this term called “jewellery retailing companies”. Immediately my mind went to Titan and Tanishq. That book may be worth Rs 400-500 but that was it!
See, if you are passionate about investing, then look at is as a focus area. Even if you look upon investing as a hobby, a hobby always costs money.
Thirdly, a new investor has got to focus on what he knows. If he has understood a few companies, it’s better to put more money into few rather than put a few into more.
This is because you can’t buy 20 companies as a first time amateur investor and expect to do well.
Now, what he should not do is play book cricket, which is, maintaining dummy portfolios. You won’t get emotional about them, and when you will lose money, you will reset the entire portfolio and start all over again.
So it’s like playing book cricket that we did when we were in school. You just open a page and you hit a six. Next page you hit a four, and so on. This does not work in investing, and is just a waste of time.
Also, if you want to learn, you have to put on the table only that amount of money that will hurt you if you lose.
You can’t have a net worth of Rs 5 core and say I will buy 1,000 shares of Unitech and they will go up. Because if they don’t go up, you will not learn anything out of it.
To learn, the losses have to really pinch you. If the losses aren’t pinching you, you aren’t learning.
SN: If you could pick one person other than you, anywhere in the world, to manage your money for the rest of your life, who would that one person be, and why?
BM: There are people who are smarter than me across. But the stock market to me is like my breath. It’s like oxygen to me.
So if I give my money to someone else, it will be like I am put on a ventilator.
I actually enjoy investing on my own, but if you were to put me to somebody else and give my money to that guy, it would be Peter Lynch.
This is not because of the returns he made and in what context he made it, but because of the simplicity with which he approached investing.
Of course, now we have become used to seeing market downturns, but there have been times, like in 2004 when BJP wasn’t voted back to power and the markets fell. There was so much of chaos. I had limited capital and lot of leverage. And all I did then was read Lynch’s One Up on Wall Street again. I looked for the areas where he was talking about the 1987 crash and things like that. It just gave me so much of confidence.
But then, I am in the market because it’s like life and blood for me.
SN: Great, Mr. Maheshwari! That’s all from my side. Thank you so much for sharing your thoughts.
BM: It’s my pleasure, Vishal. Thank you!
Value Investing Workshop in Bangalore: I have my next Value Investing Workshop in Bangalore on 1st November 2014 (Saturday). If you want to be a part of it, just click here to register now . Just 8 early bird seats remain!