Curious Buyer

In the busy world of managing funds, sometimes it can be difficult to maintain a work-life balance. But, you can have the best of both worlds if you follow Ajay Garg’s lead. “I have started enjoying shopping now. Visiting stores with your family over the weekend can give you good insights about how consumers are behaving and which products they are likely to buy,” he says with a smile.

Garg, 46, has been managing funds at Birla Sun Life since 2006. Although he started managing the Birla Sun Life MNC fund officially in 2008, he started taking investment calls from 2006 under the supervision of A Balasubramanian, who was then the chief investment officer. Working with Bala sharpened Garg’s focus on quality investments. “He would tell us to avoid leveraged companies and focus on quality companies,” recalls Garg.

Since then, Bala went on to play a larger role as CEO, while Garg became a successful fund manager at Birla Sun Life. While Garg prefers to call himself a bottom-up stock picker, he took a more sectoral view in his early years as a fund manager. This was a time when the MNC fund bought Honeywell Automation in 2007. The US-headquartered Honeywell had several factors in its favour. The company was operating in a niche segment. It offered products and solutions for certain critical operations in projects. In India, Honeywell’s business is spread across four verticals — aerospace, home and building technologies, safety and productivity solutions and performance materials and technologies. What gave further comfort was that since these solutions were critical, the project owner would never compromise on quality. It looked like a long-term secular compounding story. According to data from Value Research, the stock, bought as part of the fund portfolio, is trading more than 450% above its average investment price, raking in a profit of Rs.200 crore for the fund.

Another investment that Garg made during this period was in credit rating firm ICRA, Moody’s arm in India. India needed infrastructure and companies needed to raise funds for that. The bond market needed to be deepened and that required ratings from credible agencies to instill confidence in investors. The fund made a profit of Rs.181 crore on the stock. It bought ICRA in April 2007 when the company got listed. The stock, which is still a part of the fund’s portfolio, closed at Rs.798 on the day of its listing and currently trades around Rs.4,033, a five-fold rise. 

But, such robust returns don’t come without resilient conviction. When the 2008 crisis engulfed the financial markets, rating agencies were punished on rising concerns about their role in rating mortgage-backed securities. The stock crashed to Rs.350 from Rs.1,000. However, Garg stuck to his conviction and was more than amply rewarded.

Garg feels 2008-2010 was a period of learning. It taught him the inherent risks in taking a top-down approach. This was a time when almost all fund managers loaded up on infrastructure names as it was quite apparent that the government would drive the much-needed infrastructure investment that the country needed.

Those expectations, however, never materialised thanks to the 2008 crisis and the policy logjam that followed after the Congress government was re-elected in the 2009 Lok Sabha elections. Many had hoped that the UPA government would be able to put the infrastructure plan back on track, but that never happened. 

Garg couldn’t escape the hit infrastructure stocks took. His Birla Sun Life Tax Relief ’96 had exposure to a Hyderabad-based power and infrastructure company and a Mumbai-based infrastructure firm. The power and infrastructure company saw its stock fall 42% by the end of 2008 while the stock price of the Mumbai-based company ended the year with a loss of 56%. While Garg was never really a fan of real estate, he had some marginal exposure and little choice but to see his investments tank.   

Wiser from his learnings from the slowdown between 2008 and 2010, Garg shifted to a more bottom-up style of picking stocks. He believes that a slowdown separates the men from the boys. “When the domestic economy is slowing down and conditions are tough; that is when you can identify which companies are the ones that are able to pull ahead despite the headwind. These are the moments when a company evolves; when a micro-cap company becomes a mid-cap or a mid-cap becomes a large-cap,” he explains.

And going by the performance of his funds, it seems to have worked well for him. For instance, when the investment call was made on Bayer CropScience in August 2011, the company had been consistently growing even though the sector was not. Being a global player, the company had a wide-range of agro-chemical products that could cater to the present as well as future needs of Indian farmers. The bet on the stock in an otherwise stagnant sector paid off, making the fund richer by Rs.234 crore. 

Sundaram Clayton is another example of a bottom-up call that has worked well for Garg and his fund. He first invested in the stock at an average price of Rs.157 in March 2012. It currently trades at Rs.3,385, raking in a Rs.195 crore profit. He made the investment as an integrated proxy play on the auto sector. The stock was available at an attractive valuation on a SOTP-basis. The promoter pedigree along with the strong two-wheeler business of its subsidiary TVS Motors and its brakes business which was demerged into another subsidiary, Wabco India, was the key attraction, apart from the core automotive component business. Despite a steep increase in the stock price, Garg continues to hold on to Sundaram Clayton as he believes there is still more steam left. “If the company can deliver growth in the future then there is value. If the company’s value is going to get destroyed by a disruptive force then that is a trap,” he points out. He sees no such trap for the stock.

Garg’s strategy has been to look for companies that can maintain their competitive moat across business cycles. He looks for companies with best-in-class technology or solutions or companies such Bayer CropScience and Gillette which can access the strong bouquet of products of their global parent as and when market dynamics require.

As he continues to scout for bottom-up winners across sectors, he feels that airlines and tourism are two sectors that can throw up interesting opportunities. “Airlines have become more of a utility. It is no longer a luxury for consumers.” He believes the opening-up of regional routes will be beneficial for the industry and that taxes should get rationalised if the airlines are going to be used as a utility. “When GST comes in, the taxes of fuel should get reduced,” he says. 

When he first invested in Jet Airways in December 2008, the traffic at airports was inching up and that strengthened Garg’s belief. A partnership with a strong foreign partner, Etihad in 2013, increased the comfort level further resulting in a higher exposure to the stock. Garg adds that companies such as Thomas Cook, a play on the tourism sector, are also likely to do well. “We have started visa on arrival. If we continue to make India a more tourist-friendly destination, then these players would be major beneficiaries. Given India’s vast diversity, the tourism sector has a lot of potential,” he says. He holds the stock in both the MNC and Tax Relief ’96 funds. Apart from tourism, its manpower business (Quess Corp) and vacation lodging (Sterling Holidays) make the stock more attractive, according to him.

Garg says that it was his curiosity to learn new things that led him to financial markets. Garg passed out from Hartmann College, Bareilly in 1987. From there, he moved to Bangalore to finish his graduation in engineering. In 1991, when Garg graduated, India was on the verge of becoming a liberalised economy and the market was making a steady gain.  

Garg wanted to know more and be in the thick of action. So he did his MBA in finance from Mumbai University in 1994 and got placed at American Express. However, banking didn’t sustain his interest for long. He wanted to be in the stock market. After working at American Express for some time, he spent the next 7-8 years working on the sell-side before joining Birla. He says that being in the dealing room gave him a ringside view of how investors and short-term traders behaved and how greed and fear created and destroyed wealth in the market.

While he follows no one in particular, he believes when it comes to investing, everyone is learning including Warren Buffett. “That is why he got into airlines recently after he had vehemently shown his dislike for the industry at one point of time, calling it a death trap,” says Garg. He also believes an investor must closely watch the trends youngsters are latching onto. “They will tell you what the next decade is going to look like. So the closer you are to youngsters, the better you will be at investing,” he says. 

Also, first on his list is quality of products, followed by awareness and availability of the product. “Product quality and awareness are equally important. A good product will sell only when people are aware about it. If your product is good and you are spending on research, you will continue to be ahead of the curve. If you have a No.1 position in the market, you will have scalability and that will help you in improving your profitability,” he says. 

Garg points out that his conviction on names such as Gillette, Nestle and GSK Pharma are only increasing with time since he continues to hear good things about them in the market place. “You always hear great things about certain companies from all stakeholders — distributors, employees, customers and retailers. If it is a pharma player and you hear positive feedback about its product on a visit to doctor, then you can be assured of the product’s quality.” That’s why he loves being in the market place. Shopping with his family has helped Garg to find the right balance, but for his unit holders, it has helped fetch rich dividends.