Macro player

Jayesh Gandhi’s first brush with the stock market happened when he and six friends pooled their money together to invest in the early 1990s. They were all studying to become Chartered Accountants. Given the lack of information during those times, they would do some collective research before zeroing in on their investment ideas. By the end of 1994, the fund which started with a corpus of Rs.1.5 lakh had grown to Rs.2 lakh — not bad for a bunch of amateurs.

While Gandhi didn’t nurse any ambition to become a fund manager before the investing experiment, he got a whiff of the possibilities in the stock market. It would go on to lay the foundation of his investing career that spans more than two decades now. Today, Gandhi is a senior portfolio manager at Aditya Birla Sun Life AMC managing assets of nearly Rs.4,000 crore.

Modest beginning
In 1992, after completing his CA, Gandhi joined the Dalal Street Journal as a research analyst before moving to JM Share and Stock Brokers (JM Financial) as an analyst in their PMS division for a year.  He got his first chance to manage a portfolio at JV Gokal, a proprietary investment and trading firm, where he joined in 1995 and stayed put for the next six years. After working for three years as an analyst, he was made a portfolio manager. His stint at JV Gokal would have a major influence on his investing career due to their extensive research process and training in portfolio management. These were still early days for the stock market, which was undergoing reform. Average corpus of funds were smaller; Birla Sun Life, Alliance Capital and Kothari Pioneer (later sold to Templeton) were the only major private funds at the time.  

This was also a time when some of today’s most marquee companies hit the market with their IPOs. Gandhi didn’t miss the best of them. In 1995, HDFC Bank  came with an IPO priced at Rs.40 and Gandhi put out a buy recommendation, even though the stock was richly valued at 4x-5x P/B.  He was convinced that retail banking which was at a nascent stage back then, would take off in the coming years. He even invested his own money and exited the stock with a 60% gain in the first half of 1999. Around the same time, he also put a ‘buy’ on ICICI Bank as well given its attractive dividend yield. The yield on ICICI Bank was more than what you got if you deposited the same money in the bank; the stock was priced at Rs.40 and gave Rs.5 as dividend — a 12% yield. 

To grow further in his career, Gandhi wanted to move from JV Gokal to a more institutional setup. However, job opportunities were not easy to come by during those times. In 2000, he took a break from JV Gokal and moved to the US for his Masters in International Finance.

After completing the one-year programme at Thunderbird, Gandhi worked for Sovereign Financial Group. “Our job entailed analysing various fund managers’ investment styles, past performance and ability to deliver good return in the future. The firm would invest directly in large-caps, but for small-caps we would invest in the funds post research,” Gandhi says. 

When Gandhi returned to India in 2004, he managed to land a job at Birla Sun Life AMC,  as the equity market was starting to look up again. It was his first opportunity, to work in an institutional framework. During his stint, Gandhi managed the Midcap Fund, GenNext Fund, Tax Savings Fund and India Excel Fund. 

In 2007, Narayan Ramachandran who had returned to India as the CEO of Morgan Stanley India wanted to re-launch its India business. Gandhi was one of the first two senior hires. It was here that Gandhi learnt the importance of avoiding sectors where government intervention could impact growth. For instance, in 2012, Gandhi invested in the IPO of a jewellery company, which he had to later exit at 35% below the issue price. The government had cracked down on gold imports to rein in the country’s fiscal deficit which had an adverse effect on the company’s fortunes. Post that, Gandhi also prefers to stay away from tobacco companies where government intervention remains a risk.    

Gandhi uses a top-down approach to scout for sectors that are likely to benefit due to macro-economic triggers and then buys the stock that he expects to gain the most in that sector. He says working with Ruchir Sharma, chief global strategist at Morgan Stanley, helped him develop a sharp macro-economic focus.

Small cap, big gain
In 2014, Gandhi received an offer to handle the Small- and Mid-cap Funds for Birla Sun Life AMC. “The first task was to reconstruct the portfolios in a way that the focus was on themes. There were some stocks that didn’t fit into any particular theme, so we decided to exit those positions,” Gandhi says. Stocks like Jubilant Life Sciences and KPIT Cummins were sold.  Some of the themes he has focused on include financial services, consumer discretionary and energy.

Over the past three years,  Gandhi has delivered a return of 22% making him one of the top fund managers for that period. His secret formula: investing in companies where earnings growth for the next three years is likely to be higher than the industry and the market. “We are willing to pay market P/E for a stock that will outperform the industry on earnings growth,” he explains.   

One of Gandhi’s first investments in Birla Sun Life was consumer finance company, Capital First. “This was the second-largest company after Bajaj Finance, in the sector. The company had a good business model and more importantly, the management followed good corporate governance practices. They had a strict policy of writing-off non-performing loans, even as they would try to recover them,” Gandhi says. The stock was trading at 1.4x one-year forward book value and at a discount of 46% to industry leader Bajaj Finance. The stock has gained 81% since Gandhi bought it for the Small- and Mid-cap Fund in March 2015. 

Another name from the BFSI space that has worked well for Gandhi is Dewan Housing. The stock has gained 174% since he first bought it in May 2015. Growth of more than 25% in loan book and earnings caught his attention. Despite its robust fundamentals, the company was trading at only 1x one-year forward book, ticking all the boxes for Gandhi.

He continues to put his weight behind housing finance companies with investments in Repco Home Finance, Reliance Home Finance and PNB Housing Finance. “We feel housing finance in India is a secular growth story for the next 10 years as the housing requirement in the country is very large and affordability is increasing,” he says. While valuations of HFCs have gone up quite a bit, Gandhi feels if earnings continue to grow at 25-30% on a consistent basis, the valuation mismatch gets adjusted over a period of time.

Travel and tourism is another theme that Gandhi has introduced in his portfolio. He is playing it through luggage-maker, VIP Industries. “VIP is a market leader, but it was impacted by the volatility in Chinese currency, as China was its main sourcing hub for soft luggage. It has since reduced its dependency on China and the pick-up in the travel industry has turned out to be a huge positive,” he says. When Gandhi picked up the stock in October 2016, the stock was trading at market cap to sales ratio of 1.7x. The stock has gained 141% since then.

The chemical space is another sector that has got Gandhi interested. With China cracking down on its chemical units to curb pollution, Gandhi feels this sector would be one of the key beneficiaries. Gujarat Narmada Valley Chemicals and Fertilizers (GNFC) is one of the chemical companies that has done well for him. GNFC has gained 71% since the time it was added into the Small- and Mid-cap Fund in August 2017. They remain one of the few manufacturers of Toluene Diisocyanate in the world. TDI, as it is widely known, is used in flexible foam applications including furniture, bedding and packaging. Being a market leader with RoE of 15%, it was an attractive bet. “It was a well-run company generating healthy cash flow and available at single-digit PE,” he says.

While investing in mid-cap companies, Gandhi pays close attention to the operating cash flow generated by them. “Operating cash flow of a company after meeting interest costs need to be at least 50-70% of the reported net profit,” Gandhi says. He is extremely wary of lax corporate governance. For instance, Gandhi exited from a realty company after it raised money on a preferential basis at a price lower than the IPO price at which he had bought the stock. Having seen one too many instances where realty companies have done this in the past, Gandhi largely stays away from the space.

He also believes in keeping his portfolio fairly balanced rather than taking concentrated bets. Most of his stock allocation is between 1-3% of the portfolio. “In the large-cap space if something goes wrong in the company, the stock may correct 15-20%, but in a small- and mid-cap, the correction could be very sharp,” he says. Instead of being overweight in one particular company, Gandhi prefers to be overweight on sectors where he has a high conviction. For instance, he is presently overweight on the gas space where he has allocated 4.96% of his mid-cap fund across Petronet LNG and Gujarat State Petronet.

While it is increasingly becoming challenging to spot quality growth stocks with reasonable valuation in the mid-cap space, Gandhi believes mid-caps could continue to outperform the large-caps over the next three to five years given their projected earnings growth and that’s where he is looking for his next winner.