How to invest in India, Gokul Ray P.?

Gokul Raj P. is a very good global investor. He was very recently rated No: 1 in the ‘All-Time’ list of analysts tracked by SumZero, Inc. I had the pleasure to interview him in April 2019 in Munich. Here we discuss the question of how to invest in India.


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[00:00:08] Tilman Versch: Gokul, welcome back to our YouTube channel. This time we want to talk about India. Let me start with the question, what are interesting founders and entrepreneurs in India? 

[00:00:20] Gokul Raj P.: See, India’s a market where it’s a pretty deep and wide market so we have almost 5000 listed securities and we have all kinds of sectors listed in the market. So unlike other emerging markets that you look at, Brazil, Russia, South Africa where there are only few kinds of sectors that dominate the index, in India it’s a pretty well spread out market. So you have a lot of great entrepreneurs in the business and I would say the best kinds of entrepreneurs in the country are still in the IT services businesses or pharma businesses or the new-age financial services businesses. So within these buckets, you have great entrepreneurs. Like for example in financial services, it will probably be Uday Kotak, and IT services it would be Narayana Murthy, Azim Premji, the pharma business would be Dilip Sanghvi. So you have a lot of good entrepreneurs even at the mid-cap and the small cap level.

So some of them would be from business families or bigger lineage like the Tatas and the Birlas who have had running businesses for five generations and then you have the first generation entrepreneurs coming up as well. So it’s a pretty good mix.

The IT sector in India

[00:01:47] Tilman Versch: Let’s do a dive into the IT sector in India. How do you see the current state of it?

[00:01:54] Gokul Raj P.: So within the IT space, you have the legacy services businesses which are these large scaled-up Infosys and Wipros of the world who have 200 000 employees and stuff like that, and then you have a lot of very, very vibrant startup scenes founded by VC money and consumer tech businesses and product businesses and SAAS businesses and so on and so forth. So on the IT services side, the growth is slowing but it’s a secularly growing industry, as long as software eats into the world and everything gets more and more digital and as the internet becomes more and more ubiquitous in terms of distribution and in terms of platform. The demand for technology transformation will always be there and you’d always need smart people to do it and India produces the largest number of computer engineers in the world. And the cost of that, the labor cost arbitrage between the West and India is still very high. It’s probably even bigger now than it was 10 years back, adjusted from a dollar perspective.

So the labor cost arbitrage is still there, so there’s still a long runway for growth in these businesses. From a stock market point of view, you have businesses or stocks at every market cap. So you have the big TCS which is like a 100 billion market cap and then you have several good companies in the less than 100 billion market cap as well. So it’s a wide range. Every investor needs to pick and choose where he wants to play from and what he likes. So even within that, let’s say for example there’s Tech Mahindra which is more focused on the telecom vertical or KPIT which is more focused on technology services for the automotive sector, or L&T which does more for the manufacturing sector. So you have different companies in different industries use and different growth to market strategies. So yeah it’s definitely a bottom-up stock because I don’t have a top-down view. It should be a bottom-up view on which stock you’re selecting and why you’re selecting it and who are running it and what’s the growth potential like that.

The internet and platform landscape in India

[00:04:20] Tilman Versch: How is the internet of platform landscape in India compared to Europe or the US?

[00:04:27] Gokul Raj P.: So, the internet landscape is pretty buoyant at this point but a lot of that is in the private market space, so you have a lot of funding happening in the private space. So the only interesting thing about the Indian markets is that India is a space where only the big boots of capital are competing. So for example, Japanese Softbank group pumps in a lot of money to Indian startups. The Chinese guys, both Tencent and Alibaba have their own vehicles in almost every emerging sector, your food delivery or eCommerce or whatever it is. And then you have the US dominant, Google, Amazon’s of the world active in India as well. And then you have domestic entrepreneurs who get capital backing from Tiger Global kind of hedge funds. So it’s a very vibrant market wherein every asset class or every subcategory you look at, there’s a strong competition happening and it’s still in a land grab mode where people are trying to win the market, and India’s probably one of the last markets that’s still available for winning.

So China’s close to most foreign investors and Europe, that’s still dominated by US companies. India’s a market where all these firms compete together along with homegrown talent. So it’s a very vibrant market. For example on the cab-hailing side, there’s huge competition between Ola and Uber. On the eCommerce side, you have Amazon, Flipkart which is now backed by Walmart and then you have Snapdeals of the world, and then Paytm now which is also having Berkshire as an investor or Softbank backing. So it’s still a space where it’s not become like the US where there’s a strong category leading every sector. It’s still in the space where there are lots of people competing for that leadership.

Potential winners in the competing internet market in India

[00:06:24] Tilman Versch: And do you see some winners emerging in the competition or is it still open?

[00:00:20] Gokul Raj P.: It’s still open. You of course still have leaders in all of these categories but it’s still an open market. It’s still an evolving space where everyone is trying new things and the leadership stakes can change pretty quickly. So it’s still a pretty open market.

Competition of value investing in India and Germany

[00:06:45] Tilman Versch: Let’s go a step back; you’re in Germany for around two years. How do you, like in comparison to what you’ve experienced here and what you’ve experienced in India, how do you see both economies in comparison?

[00:06:59] Gokul Raj P.: So, I would probably speak economically, well talk would be a lot of macro is bullshit so I don’t want to get into that. It’s pretty easy to know that India is growing at a much faster rate than Germany for example. And Germany is still a very export-orientated country whereas in India, a lot of it is still domestic consumption. Leave aside those broad things, I’ll probably speak a little bit more about, how value investing differs between Indian markets and Western markets, probably I think that’s where I’ll add a little bit of value. So, for example value investing in Western markets is clearly divided into two broad camps, the old value, the Phil Fisher kind of a model, deep value guys, guys who are really focused on price-to-earnings metrics and price-to-book metrics and so on and so forth. And then the new-age value guys who can justify Google as a value investing bet because of the quality and growth and compared to that, it’s cheap and so on and so forth.

In India, the mean to reversion guys, which is the old style quantitative value investing, works very poorly compared to the growth at reasonable price kind of a value investing. The reason being I think is that institutionally, it’s still a market where you have a lot of frauds. You still have a lot of companies that are uninvestable and they are cheap for a reason. So if you are just really focusing on cheapness as a value investing metric, you end up in not just value traps, you end up in companies that are outright frauds so as to say. And secondly, you don’t have a situation where there is a lot of activist investing happening or there’s a lot of corporate transactions happening so the whole mean reversion kind of a play is not that attractive in India.

India is still a very attractive growth at a reasonable price market. So any GARP investors, any quality investors who are looking at businesses that can scale over a 10-year period and become large buy-and-compound kind of stories, for that India’s a very attractive fishing pool because unlike other emerging markets, which are pretty small in size, where these economies are pretty small, they might grow faster but the size of the economy is still pretty smaller. In India at the point, even at this point is a $2.5 trillion economy. We are speaking about becoming a $10 trillion economy in the next 15-20 years or something. So the size of the opportunity is there and if you’re betting on the right person or the right management teams, and at a price that is reasonable, you don’t need a cheap price. At prices that are reasonable or fair, then the opportunity to compound wealth is humungous.

So I would think in Indian value investing, the style that focuses more on quality of people makes a big difference. I have this analogy which I keep saying to other people that they have 3C’s of credit investing or banking businesses globally. If you see, ask anyone in credit, there are three C’s that are important, which are counterparty, cash flow and collateral. So these are the three things that are extremely important and I think these would be the three things that would be the same for equity investing as well, in the same order. Counterparty, which is who are you betting on, do you think this guy can deliver for you? Is he a great manager; can he take advantage of the opportunities that are arising? And second is cash flow, what kind of business model is he working on, and what kind of cash flows is he generating? And the last would be collateral. What’s the ideal value for this business? What’s the price that you want to pay for this business? So I would say it would be the same order.

Secondly what I would say is also that the importance of investing with good people or good managers is even more important in emerging markets than developed markets. Because in developed markets let’s say you’re investing in a bad guy and maybe it’s extremely cheap and that gives you opportunities. Like someone comes in, does some activism, takes it over or a new manager comes in and all kinds of potential opportunities.  In developing markets, most of these are family-owned and so it’s structurally very difficult to take an existing bad guy out of that company, so you’re always stuck with the bad guys as to say. And the second thing is by nature, emerging markets have much more volatility so there’s much more risk. So tomorrow there’s some bad decision and two years down the line maybe inflation spikes to 10% or currency depreciates by 20%. All of these things will happen in emerging markets and will continue to happen. So when you’re investing with a smart guy, you are outsourcing a lot of your risk management to him so he takes care of those issues. He takes care of regulatory issues that happen; he manages it for you. There’s a macroeconomic issue, he manages it for you. You don’t need to worry about risk management that much as investing in someone where the risk management is really at your level.

So one, risk management, and second, because of this volatility, opportunities also emerge. So you want to invest with a guy who you think can capitalize and grow based on those opportunities. So in both cases, the importance of the management team or the owner-operator is far, far more important in emerging markets and the markets like India, China compared to developed markets. So that’s also something I make sure of when looking at different markets. I think by nature, investing is a trade-off between quality, growth, and value. These are the three big factors because you make some trade-offs. So sometimes you say okay, is this that cheap that I’m okay with lowering my scale on the other two. So, it’s just that when you come to a market like India, the weightage age for management quality should be at least two times or three times the weightage that you will have for management quality in Western markets or developed markets.

Examples for good managers in India

[00:13:31] Tilman Versch: What are some examples of this good management?

[00:13:35] Gokul Raj P.: When you ask for examples, you’re asking for names or what kind of people?

[00:13:40] Tilman Versch: Names or companies you have good experience with.

[00:13:42] Gokul Raj P.: See, every sector I can say a leader for. In a country like India for example, a very smart manager in the building products phase has been Cera Sanitaryware. In the finance space, it has been Bajaj Finance. Now we’re also looking at Piramal Finance who’s also a very smart allocator of capital. And then in the airline space, there is InterGlobe Aviation who has a very smart manager that always takes advantage of some issue in the industry, he takes advantage of it. And you have smart capital allocators across market caps and across the sectors again so it’s a pure bottom-up analysis. And I think because in a market like India, if you’re smart and if let’s say you’re doing well in a particular region, you have the ability to scale up across the country and that gives you a very big market to fend for. Unlike if you’re a great retailer in Sri Lanka; most probably you’re just linked to the growth in Sri Lankan retail, whereas in India, if you’re a Kishore Biyani, who had a few good concepts – then for him to scale up becomes that much easier.

So, for you to have these really big home runs, if you’re betting on the right guy, these big five bag, ten-bagger kinds of stories. India is a very attractive market. I think not just anecdotally, even someone who has done research says that India has produced the highest multi-baggers and probably the US is the only country that is higher than India, so Indian markets do give you those kind of opportunities. The only thing is what the price you pay is and what cycle do you come in. Because, unlike developed markets, for example, the US has been in a 10-year bull market, right, whereas in India, during these 10 years, there’s been two cycles of three cycles between so you had this big 2005-2007 space when it was a bull market and then 2008-2009 was a bear market as were the global markets. But the rally happened only from 2009 again to 2010 number or something. After that, 2010 number to 2013 October, it was a brutal bear market for small and mid-caps.

It was an extremely painful bear market. And then 2013-2017 was one of the best bull markets for small and mid-caps in India. And then 2018 was disastrous, like 40% down but was median level for these small and mid-caps. So because of this higher volatility, on the same good business you get very different prices quoted within a two-year time frame. So your ability to buy into them at the right price is much easier I would say and then to hold onto them and ride the next wave, I think that’s the key. By a bet on the right manager and then buying it at a cycle when it’s not good.


[00:16:49] Tilman Versch: You mentioned frauds before, how do you protect yourself?

[00:16:56] Gokul Raj P.: So, fortunately, or unfortunately it’s still only a game that can be done from bottom-up research and being on the ground. So I would still say that if you’re a global investor who’s sitting outside the country and then trying to invest in India, you should stick with the well-known and bigger names, there’s no point in going into the small and mid-cap space. I think that’s a space that should still be with the local investors; people who can go meet the management, have feet on the ground and do checks. One thing on frauds I would say a little different from the global markets I would say is in the developed markets; most of the frauds that I’ve seen are frauds where someone is pumping up the profits. So instead of showing $100 profit, he’s showing a $200 profit through all kinds of accounting gimmickry and so on and so forth.

In India, the majority of the problems with small and mid-caps are actually the reverse. A company that should earn $100 is actually only reporting $50 because for historical reasons, he’s always shown lower profit to reduce the taxes and he takes out money through other leakages. So in a lot of cases, it’s a great business. It should make a lot of money and it is making a lot of money but it’s not getting reflected in the accounts. So that’s a big dichotomy I’ve seen between the Indian frauds or the Indian companies that do these accounting gimmicks, to the developed markets. And how do you screen for that? I think it is pretty much how you do it globally. You look at cash flows, you look at what kind of accounting policies they have and then do some ground checks and then you meet management and see all kinds of primary and secondary research, triangulate them and then you come to a conclusion.

I would still think that if you want to go into small and mid-caps in India, that should still be an Indian specialist, it should not be someone sitting outside and just trading and doing inputs. That does not work.

Ground research in India

[00:19:02] Tilman Versch: You already told me that you are doing a lot of research on the ground, what else do you take out of it, your impressions from Indian companies?

[00:19:15] Gokul Raj P.: See, Indian companies are entrepreneurial. I would think that India by nature because it’s coming from a socialist kind of mindset where all these entrepreneurs have been forced to operate under very, very hard regulations and hard circumstances, I think they are battle-scarred so for them to work with uncertainty or to work with highly regulated markets or to take risks is pretty much embedded. Who on earth would go and do business when regulations were what they were in India in the 80s or 70s and so on? Only people who really had a high-risk appetite and were really entrepreneurial, so that entrepreneurial streak is still there in the country. So you have a solid set of entrepreneurs and now with the market opening up and regulations dwindling down, smart entrepreneurs are capitalizing on this and you’ve seen by betting on good people, there have been very, very strong returns across the Indian small-cap, or mid-cap, or large-cap.

If you look at the banking for example, if you take the best bank or best housing finance company, almost all of them would have compounded at 20, 25% over elongated periods of time. I’m saying about 20-25 years of 20% compounding, even on dollar terms, I’m saying 15-20% kind of compounding. So there’s been immense wealth creation that’s happened. I think when you have an economy that would go up from $2.5 trillion to $10 trillion in the next two decades or something, that would be value created. So the question is not whether value would be created or not. I think the question should be who are the right guys to bet from, to take advantage of this opportunity? I think that becomes the key in this investing.

Efficiency in the small and mid-cap sector in India

[00:21:14] Tilman Versch: In your field, the small and mid-cap field, how much coverage do companies usually have there and who’s doing research on them?

[00:21:24] Gokul Raj P.: Usually it’s a pretty inefficient space, that’s the reason I fish in that. I was with the older firm, the research reporting, in most of the companies where we would have put research reports; we would have been the first company to put research reports on them. So the coverage on a lot of these companies is low. Now of course in the last three years of bull market, coverage has increased in a lot of these names. From 2010 up to 2013, when the small and mid-caps were in a bear market, there was much less coverage. After that, the coverage has significantly increased.

Shareholder structure

[00:22:11] Tilman Versch: And how was the shareholder structure in this field?

[00:22:14] Gokul Raj P.: So typically the shareholder structure in most Indian companies, including the large caps as well as extremely owner operated driven, so it would be 50-60% with the promoter families and then among the remaining 40% of the float, maybe 20% would be retail, 10% would be foreign institutions and 10% would be domestic institutions or maybe 30 between these institutions and 10 retail so that’s the rough spread usually. So of course in sectors like banking and finance, the foreign institutions have a much bigger proportion but this would be the usual spread that the families, or owner promoter shareholding, in most companies in India is far, far higher than what you see in Western markets.

Reading recommendations for understanding India better

[00:23:07] Tilman Versch: What would you recommend to read to understand India better?

[00:23:35] Gokul Raj P.: India’s a pretty complex market so I wouldn’t think that there’s one book or something that you can read. I would still think that it takes a meaningful amount of time to spend in the country and understand the country’s ethos, and the companies and the people. The reason I say this is, for example, I look at other smaller emerging markets and there are a lot of other emerging markets that are much simpler to learn and you can spend a small amount of dedicated time to get a handle on what is happening. In India, the problem is there are 24 different states and all these states are extremely different in terms of culture, language, religion – everything.

In terms of where they are in the economic curve, what party is ruling it, so technically it’s like saying how do I understand Europe? So it’s very difficult. You need to understand Germany differently, France, Spain differently. So in India, when you’re looking at India as a whole, as a market it’s a single market. But when you go in, you will see that it’s 20, 30 different micro markets. So there’s no easy way for anyone to understand it but yes of course if you spend meaningful amount of time, because it’s an English-speaking market at a business level, because all the annual reports are in English, the transcripts are in English.

And one good thing that I would say in the Indian families is most Indian companies do conference calls unlike from what I’ve seen here, the percentage of conference calls in India is actually higher than what I’ve seen in Europe. So all of these would be in English and if someone really spends time reading them, he can understand them because the accounting systems are more or less aligned to IFRS. So you have IFRS accounting, and English speaking business and if you want to read media and newspapers, all business newspapers and everything are in English. So you just need to spend much more time to understand India than any other emerging markets. I think that would be the same in other bigger emerging markets as well.

[00:25:28] Tilman Versch: Thank you very much for this part of our interview. The next part we will also talk about the value investing scene in India.


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Tilman is a very enthusiastic, long-term investor. Over the last years he has taught himself important investing concepts autodidactically. He tries to combine a positive climate and environmental impact with his investments.
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