Midas Master

It may not have been the best of time to start one’s career in the financial market. The year was 2001: the world was shaken up by the 9/11 attack in the US and the dotcom bubble burst was a very recent occurrence. Around this turbulent time, Pankaj Tibrewal graduated from Manchester University and joined Principal Mutual Fund on the credit side. He says that back then, he didn’t have much of a choice when it came to picking debt or equity. “I was a newcomer in the industry. My thinking was to grab whatever I got first.” From being a credit analyst at Principal, Tibrewal slowly started making his way into the business of managing funds. To begin with, he was managing funds only debt. Soon thereafter, he was given a hybrid fund with a equity side. During this time, he was also tracking a few sectors as an analyst at Principal. Tibrewal says it was this experience as a credit analyst in the early 2000s that helped him manage equity-oriented funds in the latter part of his career. To his credit, Tibrewal managed to steer clear of some leveraged infra names that got decimated after the 2008 crisis, ahead of time.

“In 2007-08, when I was at Principal, there was a lot of hype around construction companies and people were offering crazy valuations. I was wary of some of those names as they were not generating cash and were just leveraging their balance sheets,” Tibrewal recalls. “One company was calling itself the Infosys of the energy sector — it actually went on to create a huge market cap. Today, it is down in the dumps, as the cash flows were never really there — the company had been piling debt on its balance sheet just to support growth. Once the cycle turned bad, it was saddled with debt and was referred to the CDR cell,” Tibrewal says without naming the company. But no prize for guessing, the company is Suzlon. In a 2006 interview with a TV channel, Suzlon Energy’s chairman and managing director Tulsi Tanti had said that Suzlon is Infosys, in terms of creating market value for its shareholders. 

While the start of his career was not a great time to be in business, November 2008, when Tibrewal got the chance to manage a pure equity fund, that is, the Principal Emerging Bluechip Fund, was not such a great time either. Stock markets all over the world were still trying to pick themselves up from the fallout of the sub-prime crisis. However, it all worked out in Tibrewal’s favour, as unlike most of his peers, he did not make any significant cash calls and was fully able to capture the 2009 rally. His fund gained 147.3% in 2009 and was the best performing fund in the industry that year. While the BSE benchmark Sensex had gained 78%, only 7% of the 322 funds had outperformed the markets, as several fund managers had taken significant cash calls. Banks and NBFCs dominated Tibrewal’s portfolio back then (17% of net assets), with pharmaceuticals (7.79%), consumer non-durables (6.6%) and IT (5.3%) being the other sectors that had a high weightage. 

Of course, his outperformance didn’t go unnoticed. In 2010, Tibrewal got a chance to work as a fund manager at Kotak AMC, where he has since been managing two pure equity schemes, that is, Kotak Emerging Equity and Kotak Midcap. Over the past five years, the funds have gained 15.9% and 14.3% absolute returns, respectively. 

Tibrewal has had his share of hits. For instance, he bought Shree Cements in September 2009, with the stock gaining 507% since then. In fact, he continues to be heavy on the cement sector. Tibrewal explains that cement sector is a clean way of playing the infra space, as cement companies’ books are relatively better, there are ample cash flows and return ratios are healthy. Fittingly, both of Tibrewal’s current portfolios at Kotak feature Ramco Cements, JK Lakshmi Cement and JK Cement. 

Starting young
Tibrewal developed a taste for the stock market thanks to his upbringing — he grew up in a tightly-knit Marwari household. “My brother and father used to invest in the market. From my brother, I learnt how to read quarterly reports and balance sheets. Then, in 1992-93, my father lost quite a bit of money in the Harshad Mehta scam. The painful experience of seeing family money getting washed away in the markets made me realise that investing is not an easy business.” The experience motivates Tibrewal till this day. “I can’t let down the retail investors who have put in their hard-earned money in my fund.” Tibrewal also got a peek into how businesses function through lessons at home. “My father runs a transportation business. While I was pursuing my commerce under-graduation degree at St Xavier’s College, I used to visit my father’s office during the day. My schedule used to be to wake up at 5 am, attend college from 6 am to 9.45 am, then go to my father’s office and come back home at 9 pm, and finally study till midnight and then be off to sleep.” 

Tibrewal says his investing style is about identifying companies with a track record of high return ratios and competitive edge at the right price. For instance, when Tibrewal set his sights on the explosives manufacturer Solar Industries in FY09 while still at Principal, the Nagpur-based company’s average RoCE over the previous four was 21.5%, and the average trailing 12-month price-to-earnings ratio was 15x in FY09. The company had a market share of 16% in the explosives market. The Principal Tax Saver Fund in September 2008 had built a position of 89,722 shares in the company at an average price of Rs.400. From that average price, the stock has run up 657%, trading at 36x. From a Rs.700-crore market cap in September 2008, today, the company’s valuation stands at Rs.5,586 crore. Similarly, when Tibrewal’s Mid Cap and Emerging Equity bought Bajaj Finance in July 2013, the NBFC had posted RoE in the range of 19-22% in the previous three financial years. “The ability of the company to build a diversified retail asset base with market share gains, focus on risk management and superior return ratios has led to the re-rating,” Tibrewal says.

Tibrewal has stuck to star performer Solar even at Kotak: the company was included in the Kotak Midcap Fund in August 2011. The stock has gained 297% since then. Tibrewal has also had some success in the auto ancillary sector. The Kotak Midcap Fund built a position in MRF in September 2012. Since then, the stock has surged nearly 250%. Apart from auto ancillaries, Tibrewal has also made good returns from his investments in consumer-facing companies -— Kewal Kiran (304%) and Britannia (290%). Going forward, Tibrewal believes infrastructure is the sector to be in, as it is going to trigger the next leg of growth. “Cement is a cleaner and better way to play infra and housing growth rather than asset owners and also the other way to play infra revival is through good quality capital good and engineering companies and early cycle plays like bearings.” At 2.56% of net assets, Bearings has seventh highest weightage in the Kotak Midcap Fund. Tibrewal’s past experience in the bearings sector has also been a good one. In March 2010, Tibrewal bought shares of the Kolkata-based bearings manufacturer SKF India. Since then, the company’s stock has gained 237%.

While Tibrewal does not have many regrets, he does rue the times when he exited early from a position and missed further re-ratings of some of his investments. “About two years back, there were a couple of companies that we exited from. In the next two years, there were multiple re-ratings on these counters and their earning surprises continued for the next few quarters. One was an auto OEM company and the other was a consumer-facing company. They gained 2-3x our exit price and were the best-performing stocks in the past two years. We sold because we thought the valuations were expensive, but the valuations continued to rise. We estimated the earnings wrongly and the earning surprise continued for the next few quarters. 

However, over the years, Tibrewal has learnt how to remain calm and not let market volatility disturb his decision-making. “At times, it is natural to get worried if the performance is not that great. But I try and remain patient and check whether the reasons for which I bought the company continue to exist. To unwind and maintain my focus, I make sure I do some meditation and chanting every morning. It helps me stabilise myself and start my day on a fresh note.” That calm and composed attitude seems to be showing up on his portfolio, too, now more than ever. “From a medium- to long-term it is a stock-picker’s market. Over the medium- to long-term as the global volatility subside, this time you would see a good amount of disproportionate flows coming into India. The Indian macro, which we dreamt 5-7 years back, is a reality today i.e. low commodity, low inflation, low current account, decent fiscal deficit and a pro-active and a stable Government. Companies with high cash flows and having invested in this downturn will be able to out-perform its peers and march ahead.”