900% return in 4 years! This Delhi youth cracked market mantra early
Jatin introduces himself as a value investor and is very bullish on India’s growth outlook.
Delhi-based Jatin Khemani developed a penchant for the stock market by reading some of the illustrious books such as Peter Lynch’s One up on Wall Street , William Thorndike’s The Outsiders, Philip Fisher’s Common Stocks and Uncommon Profits and Saurabh Mukherjea’s The Unusual Billionaires.
Jatin claims to have bought his first stocks at the age of 21 in 2010. Some of these eventually proved multibaggers; some generated up to 900 per cent returns in last four years.
A commerce graduate from Delhi University with an MBA in finance from Christ University, Bangalore, Jatin says good guidance and the right mindset are what can take you places in a challenging profession like investing.
Jatin introduces himself as a value investor and is very bullish on India’s growth outlook. He projects the Sensex to touch the 1,00,000 mark by 2027.
All you need to do is make a few right decisions in your lifetime to be a successful investor, says he.
Jatin doesn’t believe in sectoral or market-cap biases. Instead, he looks for options in smaller businesses that are easy to understand and mostly operated by owners.
“I prefer companies that have a favourable base, are lesser known and have minimum institutional holdings,” he says.
Importance of management
Jatin focuses on management quality before buying a stock. “You cannot partner with crooks and expect to make money even if it is a great business,” he says.
A quality management has three parts: one is the ethical side on which one can get a lot of information from annual reports. Related party transactions, a mandatory disclosure, can hold clues. Check out if the promoter is involved in similar business outside the listed entity. If he has any transaction with the listed entity, it would be reflected in these disclosures, says he.
Jatin is a Sebi-registered investment adviser with over seven years of experience in investment analysis and portfolio management. Also a chartered financial analyst, he started his firm Stalwart Investment Advisors in 2014.
“Find out the salaries drawn by the promoter and his relatives, loans and advances given to promoter entities, interest received from them, any royalty paid by the company for brand ownership, which could reside under some other 100 per cent-owned promoter entity. All of these can be major red flags,” he elaborates.
Shareholding patterns can reveal how much a promoter owns in a company, any change in ownership pattern and whether any of it is pledged. The final part is competence, for which capital allocation track record from the reported financials of five to 10 years can be good indicators.
“The management part is the most critical element. I prefer owner-operated businesses and like it more if it is led by a first-generation entrepreneur,” says Jatin.
Definition of high quality business
According to this young Dalal Street investor, a high-quality business is one which exhibits pricing power.
“It should be part of an industry that is growing and has a fairly large size of the market opportunity. But a company cannot grow by winning market share alone, as beyond a point it would become the industry itself. So, it is important that the industry should be a fast growing one, which also keeps the competitive intensity among the incumbents in check. Unless there is a huge size of the market opportunity, it would not be practical for revenues to grow multi-fold, no matter how amazing the company is or how good the management execution is,” he explains
On weekends, this young investor teaches equity analysis and portfolio management at a Delhi-based MBA college.
A high-quality business does not need to resort to debt or equity dilution to support growth, says Jatin. A quality business generates enough internal accruals to fund growth (capex and working capital). While selecting a business, one should also focus on “Porter’s Five Forces’’ framework; especially ‘the threat of new entrants’ should be low, he insists.
Products and services of the business should serve a need and should be net positive for society.
“Even tobacco and liquor companies would qualify as ‘high quality businesses’ but they fail on this parameter, as these are not good for society, which is why regulations have only been getting stringent. So I avoid such businesses,” he says.
Some of his pet stocks have delivered big returns over the years: Relaxo Footwear surged 896 per cent between April 2013 to April 17, KRBL delivered him 740 per cent return between March 2014 and April 2017. Among others, Ashiana Housing, DFM Foods, Page Industries, Honda Siel and Garware-Wall Ropes have given him 556 per cent, 519 per cent, 334 per cent, 266 per cent and 140 per cent returns, respectively, over different periods.
Jatin does not hold these stocks right now.
He claims he spotted Tasty Bites in April 2015. The stock is up over 750 per cent ever since. He still holds it.
Two other stocks in his portfolio, VST Tillers and Amrujan Healthcare, have generated 527 per cent and 119 per cent returns. (See Table).
ETMarkets.com could not independently verify Khemani’s holdings at present or back then.
Lessons from past mistakes
It has not been a winning trip all the way. And Jatin doesn’t shy away from talking about the bets that have gone wrong.
“I made some grave errors of commission early in my career. The worst was ‘Opto Circuits’. One common element among most of these was focusing too much on P&L and the ‘story’ and less on balance sheet and cash flows,” he confesses.
“These mistakes taught me an extremely important lesson; that balance sheet and cash flows reveal much more about a business than anything else, and over time my checklist grew stronger,” says he.
Jatin loves to read, but spends more time reading annual reports, transcripts of earnings calls and management interviews.
Besides error of commission, there have been errors of omission as well. He rues missing an opportunity in MPS, despite realising the company’s potential at an early stage. In the past five years, shares of MPS have risen 13 times.
Advice to new investors
Investing is not easy as it may seem from outside, says Jatin. “Get into it only if you are passionate about businesses. But if you get into it for making quick bucks, this could be one of the most regrettable decisions of your life.”
It is easy to get swayed by a bull market to quit job and become a full-time investor. However for a vast majority of people, continuing in the job, focusing and growing in the work and outsourcing money management could be much more rewarding financially, says he.
Sensex at 1,00,000
Jatin sees a high probability of the Sensex touching the 1,00,000-mark in next 10 years.
For the 30-stock pack to hit the six-figure mark in 2027 or treble from its current level, the domestic market has to grow at a CAGR of 13 per cent over the next decade.
“Our nominal GDP growth rate itself is expected to be in the range of 12-14 per cent. So, corporate earnings should ideally expand at a similar pace. Despite valuation swings, the index should mimic the earnings growth over the long term,” Jatin argues.
On Thursday, the 30-share index hovered very close to the 31,900 mark.
Sectors that may deliver
Jatin says the ‘government spending’ could be a big theme to zero in on today.
“Look at the events that unfolded in last two years – oil prices crashed improving India’s current account deficit, demonetisation is going to boost direct tax collection and GST is going to boost indirect tax collection, improving the government’s fiscal health and massively improving the government’s P&L account,” says he.
He expects a large portion of this windfall to get invested into productive assets, which is likely to create a huge tailwind for sectors like infrastructure, cement, housing, agri-economy and railways.
“There are some well-run companies from these sectors still available at reasonable valuations, if not cheap,” he points out.
And his mentor?
Jatin follows value investing guru Prof Sanjay Bakshi. “I look up to him as a guru and have benefitted immensely from his writings. I also admire Kenneth Andrade for the simplicity of his thoughts and his ability to have a truly unbiased look at all sectors in order to hunt value,” he says.