For 30-year old Manish Bhandari, the choice of equity research and fund management as a career was a natural outcome of his interest in understanding the way businesses operate. The profession gave him an opportunity to gain unique insights into various sectors and helped him make informed calls on stocks.
Like an avid learner, he keeps tweaking the knowledge gleaned over the last eight years in the markets to cut down on mistakes and improve returns. So what are the key parameters that govern the investing process for Bhandari who has graduated from collecting coins as a kid to managing a portfolio of funds?
From coins to funds
Bhandari, who runs the Domestic Opportunities, the Tax Saving and the MIP (hybrid) funds believes in a blend of top down and bottom up styles. This of course is the second level of analysis, the one before ensures that the investment universe has those companies which pass the liquidity, consistent sales and growth metrics.
Further, to qualify as a potential investment, a stock has to pass three key tests or investment thesis. At the macro level, favourable emerging sector dynamics would attract his immediate attention ensuring that undervalued companies are noticed.
He cites the example of the cement sector, which he identified as a strong investment case a year back and which is now reporting high growth. A stock valued at a reasonable level is another criterion for selection.
Finally, market sentiments and perception also play a significant role in Bhandari's decisions. "Unfavourable market or stock sentiments may be an important time to pick up a stock," he says.
Grasim, according to him, passed all the tests and was as an excellent buy three and a half years ago when it was in the race to buy L&T's cement division, having purchased a 10.05 per cent stake in L&T from Reliance Industries.
He recalls putting up a strong buy research report as a sell side analyst. The price appreciation has been more than five times in the last three years. When the market saw utter chaos in the stock, he was busy looking at the risk of investing at those levels. His conviction grew for investments in large cap turnaround stories.
Catching the mid-cap wave
A key insight for this business management post graduate has been the jump a small cap experiences when it expands and turns into a mid-cap and further into a large cap.
"Investing in mid-cap companies means that you have to grow with these businesses and management and stick with them as they increase their market and spread their presence," he says.
One of his multi-baggers has been Elecon Engineering bought two years back at Rs 185 and which has appreciated more than 700 per cent. What he saw was a strong business with changing dynamics.
Another pick was Jindal Steel and Power, which he recommended at Rs 300 as a sell side analyst over four year ago and the stock has offered stellar returns.
His investment rationale? A stock trading at a PE of just 2, a boom in the steel segment and the misplaced fear of the market about corporate governance issues of the company.
What clinched the story for Bhandari was an ambitious, forward looking management that had made JSPL a fully integrated player and among the lowest cost producers of sponge iron in the world with a strong balance sheet.
To get information about sectors, Bhandari depends on industry or business consultants and publications. In addition, he keeps himself updated with primary data released by various agencies of the government and goes through annual reports to get a perspective of both the industry and the way a company is run.
He likes companies that do not excessively dilute their equity to fund aggressive growth plans and lays emphasis on enterprise value rather than conventional valuation tools while scouting for investments ideas. While these parameters have ensured big catches, some damaged the netting.
The unmentionables
Topping the list is Geodesic. "I did not comprehend the technological risk completely," he says. Lesson learnt? Don't stray too far from your circle of competence. "You must understand the business otherwise when the tide turns, fear sets in and you are clueless," he says.
The second embarrassment has been Micro Inks, which he picked up a year back. "I was interested in changing qualitative parameters but miscalculated the industry dynamics which were not favourable," he says adding that in the market you can neither come too early nor arrive too late. He likens this to a "Chakravyuh".
He believes that an entry into the markets should be preceded by an understanding of the stocks while the point of exit should be reviewed under changing circumstances. The other component is the level of risk that one undertakes in all investment decisions.
Together we win
Bhandari strongly believes that success in asset management depends on the team, which is as strong as its weakest link. Strengths of individuals get reinforced and weaknesses balance out as team players add value to the effort in a complementary relationship.
While his professional world revolves around his investments, does Bhandari get time to add to his coin collection? Not anymore. He finds it cumbersome and instead pursues his other passion-autobiographies. His all time favourites: John H Johnson's Rising Against Odds and The Noonday Demon: An Anatomy of Depression by Andrew Solomon.