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D-Street veteran who bled for trusting dodgy companies says market shifting to future-ready hands

According to Shah, investing is an art of differentiating voice from the noise.

Updated: Jul 26, 2019, 05.02 PM IST
Going by his spoils, Mumbai-based Shah (46) seems to have a knack for spotting multibagger stocks.
The stock market does not brook arrogance, says Sunil Shah, a Dalal Street veteran, who claims he earned his big bucks in stocks simply by separating voice from the noise.

He says this is exactly what is going on in the market now; a shift of businesses from messy hands to future-ready people.

“NBFCs shall lose market shares to private banks. Investment opportunities will emerge in private sector banks where there has been a change of guard and where new leadership is trying to reorient people, products and processes,” he said.

Shah should know. For, through his two-and-a-half-decade-long investment journey, he has seen the good, bad and ugly – paying through his nose for trusting a company that kept on reeling out ‘good news’ and doctored sales numbers, and making money on businesses that built fortunes by sticking to the basics.

Going by his spoils, Mumbai-based Shah (46) seems to have a knack for spotting multibagger stocks.

He claims to have spotted many big wealth creators at early stages: Omax Auto created major wealth for him in early 1990s, while Astral Poly and Minda Industries turned out to be golden goose for him in recent years.

Shah says Omax Auto was his first multibagger pick, which also helped him to graduate from a research analyst to an investor. He invested in Astral Poly in 2010 when its market cap was around Rs 200 crore. He still holds the stock, when the stock commands a market-cap of Rs 14,000 crore. Shah picked Minda Industries in 2015 and it has grown seven times since. could not independently verify his holdings back then and now.

“The investment thesis for each of these stocks was different,” says Shah. “But there were a few common links – quality managements, under-researched stock ideas and small firms chasing big business opportunities”

Nooresh Merani, an independent market analyst who knows Shah for more than 10 years now, testifies Shah’s credentials. “Sunil has a good hold over macros. My first meeting with him was in February 2009 and he could clearly visualise the market bottom in next three months. He has made such tactical projections many times and often come up with amazing stock selections,” says he.

When to buy a stock
According to Shah, investing is an art of differentiating voice from the noise. The very basic approach should be to bifurcate a company on the basis of the underlying macros that can be key profit drivers.

He applies some key filters to each stock he picks: sustainable return on equity, low debt-to-equity ratio, high cash flow from operations, low working capital, solid sales & profit growth and prudent capital allocation.

Shah says he relies on certain non-quantifiable factors to judge the quality of a business. Market feedback on quality and competence of the management, its track record in bull and bear markets, size of business opportunity and the company’s willingness and readiness to seize new ones, the competitive edge the business enjoys are some of the key attributes that can tell where a business is headed, says Shah.

“My scorecard for a company swings the investment decision. I also prefer to meet the management and various third parties associated with it before taking an investment decision,” Shah said.

… and when to sell?
The middle-aged investor says he gets extra alert when a company management tries to push growth. “It needs to be seen that financial prudence is not compromised in the growth chase. If I get a right tick on all the points in my checklist, I will continue to hold the stock. If any of the above conditions is not fulfilled, I press the ‘sell’ button,” says he.

Shah prefers to exit a stock when the business environment changes, the company’s management goes off-track or it begins to misallocate capital.

Importance of valuation
Valuation is the mother of all investment rationales, says Shah. “Everything that’s good comes for a price. But when one overpays, the gestation period to generate returns gets prolonged,” says he.
Graph Pyramid
The valuation pyramid that Shah follows.

Dividend yield is a big draw for him. “If a stock is available at attractive dividend yield, which can be close to the risk-free rate of return, it can be safe to initiate a buying decision,” says he.

The next parameter is price-to-book value. This provides the cushion to buy a stock at the historical cost of assets. The other critical parameter is the price-to-replacement cost. “This is one of the ratios that tells you if the assets are available at a bargain. It can largely be applied to cyclical businesses,” says Shah.

Besides, the typical textbook measures like discounted cash flow, price-to-earnings ratio, PEG ratio, EV/EBITDA, EV/EBIT and peer valuation maths also come in handy in deciding when to enter or exit a stock.

“One needs to understand that as we go up the ladder, we are trying to justify the valuation and taking higher risk,” says Shah.

As a prudent diversification strategy, Shah prefers not to hold more than 15 stocks in his portfolio.
Lessons for investors
Shah says serious investors must first learn to ignore the free advice available on social media. “Also, cloning a successful investor’s portfolio is not a good idea, as it is not possible to read the investor’s mindset,” says he.

“Think objectively, restrain impulsive action and try and access all relevant information. One should listen to market gurus, especially their views on emerging trends. That awareness often provides an edge,” says he.

The market is the biggest mentor for any investor. “The day you start being arrogant of your success, Mr Market would come out of nowhere and show you your place,” says Shah.

Journey so far
Billionaire investor Warren Buffett says he was lucky to be born in recession, as he could learn lessons at a very young age.

Shah says he feels lucky that he got to start his investing career at the time when the Indian economy was opening up . “Nothing can beat luck,” he adds.
He started as a research analyst in 1994 with Securities Capital and later moved to ABN-AMRO, where he and his team managed Rs 1,500 crore under a non-discretionary portfolio management service. He later joined Enam Securities Direct as Head of Research, where he honed his skills in identifying midcap and smallcap companies that would become tomorrow’s largecaps.

When Axis Bank took over Enam, Shah partnered his friend Bimal Choksi to run a portfolio management service firm, Turtle Star Portfolio managers.

Lessons from failures
Shah says trusting statements of company managements and his own emotional biases have been the biggest mistakes of his investing journey. His inability to decipher corporate governance standards was another major shortcoming.

Shah cited an experience with RICOH India stock, which he had bought in 2014 trying to cash in on B2G-digitalisation. The company announced an order win worth Rs 1,370 crore from the postal department to digitalise 1,30,000 post offices, which lifted the stock from Rs 200 to almost Rs 1,200 in a year.

The company kept on announcing positive news one after another even as its debt levels kept on rising every quarter. “When I questioned the management, they said the parent RICOH of Japan would bring in more money to fund growth,” he recalls.

That did not happen. Soon the auditors alleged that the company was fudging sales numbers and there was a loss to the extent of Rs 1,123 crore. The stock had a free fall. “By the time I pressed exit, the stock was already at Rs 280 in 2016. It soon got delisted,” he recalls.

Remember, despite all the checks and balances, you could still be wrong, says Shah. “The safest way to play is to be slave of valuations, and trim investments regularly. Even if you have slightest doubt on corporate governance, take it seriously and exit at the first hint.”

Investor guide
Shah recommends Poor Charlie’s Almanack, a compendium of lectures delivered by Charlie Munger on core principles of life, as a must read for every serious investor. “This book is full of wisdom that one can get on life, investment and business.”

He also recommends Mastering the Market Cycle, The Most Important Thing, Education of a Value Investor, Of Long-Term Value and Wealth creation, The Intelligent Investor, Security Analysis, Rich Dad Poor Dad and One up on Wall Street.

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