Our Next Interview Candidate

[Parsad]

For our next interview, we will be speaking to Amitabh Singhi, who runs "Surefin Investments" from New Delhi, India.  I thought that with so many Asian investors, including many Indians and Indian expats on the board, combined with so much interest in Fairfax's Asian investments, it would be wise to get more views on what is going on over there and what the potential market could be.

 

Amitabh's firm is a value shop, and he is an ardent disciple of Ben Graham who makes the pilgrimage to Omaha every year.  He studied at Wharton, and worked for Credit Suisse First Boston in their Investment Banking and Advisory Divison.  You can visit his site at www.surefin.com . 

 

Please submit your questions to me over the next week or so by replying to this thread, and then I'll contact him.  Cheers! 

[mpauls]

What does he own?

 

Offer him, Apar Industries ltd. and ask for something interesting in return.

 

 

[Mandeep]

How do you personally calculate the value of the company? esp. banks and other financial/insurance institutions

 

How do you know when its time to sell?

 

Do you buy tech stocks?

 

What do you think the general public should be doing right now with their money?

 

Is there any time where you could consider trading instead of long-term buy and hold, where long term = more than 1 month?

 

Peter Lynch used to say that the most important organ in investing is not the brain, but the stomach, do you agree with this?

If yes, how have you overcome this?

 

What are the qualities of a "good" company in your book?

 

I could go on and on. lol.

 

-M

 

 

 

[claphands22]

What is your portfolio allocation method?

 

 

 

[keerthiprasad]

What is the operating environment for hedge funds in India.  Is the barrier to entry very high?

[keerthiprasad]

Are corporate governance issues common?  With so many family controlled businesses it would seem likely. 

 

Are microcaps/smallcaps easily valued?  Can their numbers be trusted?

[mpauls]

keerthiprasad

 

I can answer some of your questions first hand. 

 

The barriers to entry in India are quite high if for no other reason, the time it takes to get FII status.  It took us a very long time, but it is getting somewhat better.  Its as though the SEBI drags their feet on everything.  This also assumes you are not a resident of India. 

 

Micro/Small Caps: Generally, the numbers can be trusted, you mostly have to be careful of the motivations of management.  I feel like many of them just want to raise capital so they can quickly raise their pay.  Also don't expect a balance sheet but once a year. 

[keerthiprasad]

thanks mpauls

[savant]

1. On your website you mentioned the workout wiith E-serve delisting which was an interesting situation. I was most fascinated by the scuttlebutt aspect of the process where you called the mutual fund houses to figure out the price they would be willing to sell at. Would you care to elaborate how one goes about doing this? Do you have friends in the mutual funds or is it cold-calling? Are the MF managers willing to divulge information?

 

2. On the same topic, due to lack of M&A activity in India there aren't many merger arb opportunities. What other sort of arbitrage opportunities do you look for to provide returns when  markets are fairly / over valued?

 

3. Recently there have been one or two occurences where Indian shareholders have stood up for their rights (eg. GHCL) - Do you see the Indian promoters evolving to a more shareholder friendly stance and shareholders demanding more from management? What are some of the options (e.g. Corporate Law Board) that shareholders have to make sure that management doesn't rip them off?

 

4. On the same note, are there any opportunities for control situations / activist situations in Indian companies to unlock value? Most of the companies seem to have a majority promoter shareholding which does not incentivize them to be responsible to shareholders.

 

5. Assuming your fund was of a small size when you first started, how were you able to convince management to spend time talking to you?

 

6. I understand that shorting of Indian equities is very different than in the U.S. Would you care to elaborate on some of the differences / risks involved?

 

7. Finally, are you still finding opportunities in Indian equities? I had the best time of my life between Oct 2008 and March 2009 seeing opportunities to invest in strong stable companies at anywhere between 3x - 5x earnings (understood what WEB meant when he said it should be obvious lke a baseball bat to your head) but the opportunities seem to have vanished unless one has strong expectations of growth.

 

Thanks very much

[mpauls]

Savant,

 

To your question on Merger Arb/Shorting:  Its very hard to do in India because by-and-large shorting is not allowed.  You can naturally do it for example with GDR's traded on exchanges outside India or if a global IB/broker is willing to do such a transaction with you, but it's certainly not like in the states. I personally wish they would be more open to short sales.  There are restrictions to the % ownership foreign investors are allowed, but it varies by industry.  If you partner with a businessman in India you can possibly have the option of a Joint Venture, but it in many cases it is not yet worth it.  I believe however, you were more interested in taking control in order to distribute cash, replace management, or possibly to liquidate.  This will be quite difficult if not impossible for a foreign investor.  The system is not perfect for foreigners.  That said, and I say this having been over there, there are some very smart and honest people running businesses in India, many of which are very profitable operating in conditions that are far from ideal.  You just have to make sure you are dealing with good people.  We have not had too much difficulty meeting with management.  (FYI: Indian 10yr gov't bond yields are about 8%.)

[savant]

Thanks for your response mpauls and appreciate your input. I'm of Indian origin (and nationality) so don't really need to get into a JV. I'm familiar with some of the basic investing rules in the country and invest through my broker in India. I just wasn't sure about shorting / options and arbitrage opportunities. For eg. one of the arb opportunities that were widely available back in the day was buying on the NSE index and selling on the BSE or vice versa which had different closing dates and therefore different settling dates. This particular opportunity doesn't really exist anymore.

 

I ask about control situations because there are plenty of companies that trade significatly below asset value . As I'm sure you are aware, several Indian companies hold equity investments in other companies at book value. If you recalculate book value of their stock holdings at market value there are some real bargains out there. Unfortunately these bargains tend to remain as bargains due to lack of interest from the promoter (majority owner) to liquidate. The general feeling in the market is that these companies that tend to trade at a significant discount to value of their tax-adjusted equity holdings (or sometimes cash on balance sheet) will continue to remain as bargains - a self-fulfilling prophecy.

[mpauls]

You are certainly thinking correctly.  I think you may have a tough time getting them to distribute, given the large ownership of managers.    Not quite as attractive as buying the company and selling short the individual securities in equal proportion, but I think you would do just as well by investing in these companies alone based upon the net value of their securities holdings or if you think the intrinsic value of their security holdings are worth a good excess above the price at which the business is currently selling.

[savant]

mpauls - I agree with the first part of your reply. I'm just not sure if the equity of the company holding other securities will rise to the value of the underlying securities. I believe this is because the original business is not making much profit and the dividends from the securities are sustaining the management paycheck. As the management is also generally the largest shareholder the market does not see unlocking of value any time soon leading to the stock being a value trap.

 

I guess you could consider them something like a 'Sanborn Map' with the only difference being that the management has majority control so there is no way to actually realize value.

 

On a side note, one of the men who made a fortune during the Depression was Floyd Bostwick Odlum. Apologies if you have come across his name before - a large part of his fortune was made by purchasing majority control of investment companies trading at a discount to their holdings and liquidating them. I mention this because there were numerous Indian investment companies trading at huge discounts to their holdings back in March - unfortunately they all had a promoter with majority control.

[savant]

No sure if this is too late but I have another question for him:

 

1. What are some of the resources/screens/programs that you use to search for stocks? Is there any source from where one can get historical annual reports of a company - bloomberg only goes back 10 years and the sebi (indian version of the sec) website doesn't work very well (no jokes)

 

2. Any thoughts on publicly-traded Investment Trusts? There seem to be a couple out there that have been around for years which probably hold significant assets at book value but due to lack of disclosure there seems to be no reliable way to guage valuations

 

Thanks very much

[mpauls]

Ask him if he is seeing collective efforts or if he is interested in trying to get a group to pressure SEBI to require companies to submit quarterly balance sheets as part of interim/quarterly "Financial Statements".  Not only something so basic, but in a country with cheap and qualified labor it's inexcusable. 

 

p.s. savant, I think in cases where businesses are not losing really large amounts of cash, and assuming the companies whose stock they own are good ones, I think you will find a group of these will perform well.  Assuming you are able to identify how much really good businesses are worth and if you can buy them cheaply, this is the better option.

[value]

1. How does he decides when to sell? What would his response be for undervalued companies in the markets which are overvalued? How does he decides on overvaluations?

2. How much cash he keeps in portfolio? How does he decide that?

3. Where does he parks surplus cash?

4. Whats the scope of merger-arbs, special situations in the country?

5. Oppurtunities where he has gone wrong

[ragu]

Couple of questions:

 

1. If you'd recommend one text for understanding Indian accounting standards, what would it be?

 

2. What's the investment that you consider your biggest mistake and what were the lessons from that mistake?

 

Best,

Ragu

[ragnarisapirate]

 

2. What's the investment that you consider your biggest mistake and what were the lessons from that mistake?

 

Best,

Ragu

 

I second that, Ragu... In fact, I think that Sanjeev should make that a default question for all interviews! :-)

 

-jeff

[Parsad]

Hi Folks,

 

Please have all your questions in by Friday, as I will be compiling them and setting up the interview over the weekend.  Thanks very much!

[vinod1]

1. What discount rate is used for valuation and what variables/data does he use to determine this? Given that inflation in India is persistently higher compared to developed countries and more prone to upward surprises, does he make any adjustment for this in his estimate of discount rate?

 

2. Does he use any data sources in addition to Corporate annual reports for his research? Is there something like a valueline that summarizes several years of historical data?

 

3. Does he have any position sizing limits to limit the maximum size of a single position or sector?

 

4. Does he try to structure the portfolio into various strategies Net-Nets, Arbitrage, Turnarounds, Inevitables, etc? If so could he eloborate on the various strategies?

 

Vinod

[kvattiku]

1. Which companies do you admire the most (ones with ethical and honest management, great capital allocators) in India?

 

2. Which companies shareholder letters/annual reports are the best in terms of increasing one's business knowledge (ex: Berkshire and BAM in the US)?

 

Thanks.

[savant]

Hi Folks,

 

Please have all your questions in by Friday, as I will be compiling them and setting up the interview over the weekend.  Thanks very much!

 

Hi Sanjeev - I was wondering if this interview ever took place and if you could direct me on where I can find it.

 

Thanks

[Parsad]

Hi Savant,

 

Unfortunately the interview was delayed due to personal and business time constraints for Amitabh, but we expect to redo it at some point in the future.  I've also been quite busy, but I'll try and put together another interview with someone else in the next month as well.  Thanks!

 

 

[SharperDingaan]

 

Perhaps a little hard to do, but;

 

1) Given the once/yr published BS, how do you deal with inside knowlege in India ? (ie: you know that XYZ did a favourable deal 2 quarters ago, that will have materially changed the BS - what is the customary Indian business practice in these instances?)

 

2) Given that reality that bribery is endemic, & that it is how one typically gets things done in India, do you typically need to make any additional adjustments to the P&L to recognize its presence? (ie: is the customary Indian business practice to deduct a few extra bp off a reported margin?)

 

We suspect that you really have to know your partners, local knowledge has a very high premium to it, & that you cannot assume that what happens in Delhi, happens similarly in Mumbai.

 

SD

 

[rohitc99]

Hi SharperDingaan

I have been investing in india for quite sometime now (10+years). The disclosure level vary from company to company (though most have to adhere to certain minimum disclosure norms). so we have a lot of companies which provide P&L and BS every quarter and provide adequate disclosures via press releases whenever there is material information which impacts the business.

 

The problem of disclosure is more with the midcaps and microcaps (practically micro cap by western standards). however in such cases it is best to avoid such companies with suspect management.

 

corruption is endemic, but not as much in the private sector as in dealing with the government or in specific sectors which have more government regulation.

 

As far as adjusting the p&l or other accounts are concerned, i have personally followed a yes/no kind of approach. If you find the management/ promoters are not ethical and cook the books, then such companies are best avoided. fortunately there are enough good companies around with high grade management, that one can build a decent size portfolio.

 

Investing in india is not as risky at it seems .