The reticent investor

Investor Megh Manseta talks about his investment strategy

Software bellwether Infosys has been through a rough ride for the past couple of years and many an investor has deserted and fled. A handful of investors, however, seem to be sticking through times good and bad. Megh Manseta is among them. He first bought into Infosys in November 1995 and again turned bargain hunter during the turbulence of the past 18 months. In November 1995, Manseta was no tech whiz but a part-time newcomer in the market.

So, how did he end up buying into a tech firm whose IPO had devolved a couple of years earlier, in February 1993? “I first read about Infosys in a magazine. I was impressed by the quality and transparency of its management. I acted somewhat impetuously I felt, in converting many other holdings to Infosys in 1996-97, even while booking a loss in some names,” he says. “Luckily, it turned out okay.” Manseta’s loyalty continues to pay off, with the stock having bounced back after the Q1FY14 numbers were announced. This ‘buy and hold’ approach has served him well as he has gone about allocating surplus cash from the family’s copper wire manufacturing and leather exports business.

While Infosys is an important holding, the portfolio that he manages for his family members today has a diverse mix of stocks accumulated over the past nearly two decades. “While FMCG has traditionally been a value investor’s hunting ground, Manseta had the discipline to hold onto HUL, Nestle and Marico for a long time. He also bought Shriram Transport Finance and Godrej Consumer when a lot of investors were skeptical about their ability to deliver,” says Karthikeyan Muthuswamy of Trident Capital Advisors, an investment advisor to Elliott Management. 

Earn and learn

When Manseta returned to Mumbai after completing his MBA degree at Dartmouth, the avenues available to him placed him at a crossroads. He had the option of continuing with the family business, opt to work for somebody else or become a full-time investor. Given that he had dabbled in investing before his MBA, Manseta chose to continue with it. Justifying his choice, Manseta says, “I like understanding what makes businesses tick — why one succeeds and another fails — and what the business can be worth.”

Manseta started off with stocks such as Colgate, Castrol and Hindustan Lever, but during his college days he had never imagined that he would end up as an investor. His MBA degree was in general management and even today he considers himself more of a business analyst than a stock market investor. “I never took finance theory seriously. I always saw it as some sort of a math problem to be solved! Looking back, I got through those classes without the efficient markets theory or CAPM actually entering my brain,” he quips.

Although he is a veteran investor now, his first stock recommendation — McLeod Russell — came from a college friend at Sydenham. He remembers asking his father if they could buy the stock, then trading at ₹110.  His father, in turn, asked a friend, who advised him to stick to blue chips. “We didn’t buy and within a few days it went to ₹160. I bought it at that level, and sold it a few years later at a profit.”

Clearly, the investing advice his father received from his friend was hardly a deterrent as Manseta went about adding stocks to his portfolio. Even today, for identifying or shortlisting stocks, he does not use a screen and most of his ideas are driven by common sense, a basic DuPont analysis or his interaction with fellow investors. “I have run screens occasionally years ago, but that is not a method I prefer.

When you possess curiosity and also have some friends interested in the markets, you hear and read about some good names over time. That’s the starting point. It is then a matter of reading the annual reports and working to understand the business itself. Over time, you come to appreciate some good businesses and companies out there and you constantly seek new ones.” 

One such good company was Gruh Finance, which he bought when it was quoting at ₹45 (pre-split). Manseta recalls being in Ahmedabad for his cousin’s wedding in 2005. “Being my frugal self, I decided to meet the Gruh management during the same trip,” he confesses. Since the finance executive with whom he had an appointment couldn’t make it for the meeting, managing director Sudhin Choksey himself ran Manseta through the business. “During the one-hour meeting, he  explained how Gruh reached out to under-served customers. When I left, I felt strongly that you couldn’t go wrong partnering with such a company.”

That said, Karthikeyan had zeroed in on Gruh much earlier. “We didn’t discuss it while buying but Gruh Finance turned out to be a common investment. I picked it up at around ₹20 (pre-split) in 2002 and Megh bought it about a couple of years later.” Explaining his decision to buy Gruh, Manseta says, “I liked its sheer focus on its core segment. Over the years, I had seen Gruh’s competitors come in, slash rates down to irrational levels, grab market share, poach employees, everything. But over time, they built up high NPAs and exited the market, while Gruh went on.” 

Like Karthikeyan, veteran value investor Chetan Parikh, too, believes Manseta was early and patient enough to hold on to Gruh. Parikh first met Manseta and his father at Bombay Gymkhana when the former was trying to decide what to do with his career after returning to India in end-2003. “He saw inflection points in Gruh that others may not have caught on to. Having reached a certain scale, its cost to income ratio was declining and that led to a rise in net interest margin as well as RoE.” 

Given their long association and Parikh’s long standing reputation as a true-blue value investor, has Manseta borrowed a page or two from Parikh’s stylesheet? “We talk about value investing principles and don’t really exchange notes on individual stocks before we buy them, but we did happen to have a common investment in Bosch some time ago,” adds Parikh. 

Bosch is an investment whose success Manseta prefers to proudly showcase. During his brief tenure at Eaton doing M&A, he worked on a deal with Bosch’s parent (they were selling a small subsidiary in Japan). Despite being miles ahead technologically, they were open and fair in their dealings. That piqued Manseta’s interest; he found out more and invested. “Mico (now Bosch) has never been the cheapest company in my portfolio, yet it has compounded at nearly 30% for nine years from when we bought it in October 2003 to end-2012. It is a great lesson that high quality pays well even though you may not have entered at a very cheap price,” he reveals.

Then there was Hawkins Cookers, which always had high brand recall but not much market fancy. No less than a legend like Rakesh Jhunjhunwala had sold the stock after experiencing fatigue due to its moribund momentum. It seemed like its time was yet to come and come it did once the market bottomed out post the AIG bailout in March 2009. Manseta bought the stock September 2008 onwards at an average price of around ₹160. “I hadn’t followed Hawkins much at all. I remember coming across their quarterly results in a newspaper. I looked up the past ten years’ annual reports, liked what I read and began buying right away,” says Manseta. He, however, regrets not buying enough of Hawkins.

He says his attention was consumed buying Mangalam, a mid-cap cement company, and Voltamp, which makes transformers. “Hawkins looked the most expensive of the three. Mangalam went up much faster, but later gave back 2/3rd of its gains, and the transformer company also eventually retraced its path. The lesson was that it is not enough to buy what looks mathematically cheap. You have to think about cash flows, sustainability and cyclicality.” 

Karthikeyan, who has known Manseta for more than a decade, says, “Buying Voltamp Transformers was unlike Manseta, but he made money there. His focus has always been on a few sectors that he understands and that is why Voltamp was the odd digression.” About his tryst with Voltamp, Manseta says, “Some decisions, you just don’t know what you were thinking. It seemed a growth company at the time. I misjudged the degree of cyclicality in that particular business.”

Well learnt 

A few lessons had also sunk in earlier in 2006 and 2007, when Manseta was trying hard to keep pace with a rising market. That is when he says his portfolio diversification grew and he made some of his worst investment calls. Prominent among them was buying into a transmission company called Jyoti Structures. Manseta admits to getting mesmerised by the Chinese math about how India will need transmission towers because of regional imbalances and power shortages etc. He explains, “It looked like low PE at the time and even lower PE on a projected basis. It was a momentum purchase, and I convinced myself that this was still going to grow. A cursory glance at the past ten years’ cash flow, not just sales and profits, would have told me a lot about how this sad story would play out.”

Another mistake was a commodity firm with high related-party transactions, which doubled after Manseta bought it. It then dawned on him that he had not averaged historical earnings nor examined their chequered past. “I met their CFO and asked, ‘Do you hedge your  dollar and shipping costs?’. He answered ‘yes’ to both and explained the process in some detail. They reported huge losses in FY09, blaming the dollar and shipping costs! And the CFO had left!”

As mentioned earlier, buying and waiting has paid off for Manseta in a lot of stocks. But there was one where his impatience led to him leaving sizeable money on the table. He bought GSK Consumer at around ₹245 in 2004. It was cash-rich but reluctant to return much cash to shareholders. So, he exited in FY10 around ₹1,500. Soon after, a new managing director launched product extensions, paid out a special dividend and the parent announced a buyback at ₹3,900.

“At ₹2,500, I saw the changes and their impact, but I dithered about getting back in. The stock is north of ₹4,000 today. The company had healthy operating margins, decent cash flow, good governance, and an enduring brand. I just got impatient because they were holding cash.” To make amends, Manseta did buy into GSK during its recent fall from its high of ₹6,000 to about ₹3,800 and intends to buy more if it goes lower.

Guide map

While investing is about staying focused on what one does best, Karthikeyan says there are three broad types of investors in the market: the relative performer, that is, the long-only mutual fund. The second type are the absolute return investors, such as traders and hedge funds. The third type are HNIs such as Manseta, who can cash in on the volatility caused by FII buying and selling. Manseta, who has always been on the lookout for companies with a strong competitive positioning, agrees, “FII selling can drive prices down in a hurry at times of macro uncertainty, be it in India or globally. If the price is already high, a good surprise may not do much for a stock, while a negative surprise may de-rate it completely. Your patience is rewarded when you get the chance to buy stocks after a sharp correction.” 

Now, with nearly two decades of investing experience, Manseta believes, “If you force yourself to own only 20 names, you will be much more careful and thorough about each. This is a matter of temperament and discipline, not simply business judgment.” That thought comes from Warren Buffett, an investing legend whom Manseta hugely admires. During his MBA days at Dartmouth, Manseta worked on a report on Buffett’s investment approach. “I sent him a copy of the report and offered to work for him for free. He wrote back a kind and encouraging letter. I called my dad in India, reading out my letter and Buffett’s reply. He was very happy for me,” reveals Manseta, who also makes it a point to regularly attend the Berkshire annual meeting. 

Of Manseta’s visits to the Berkshire Hathaway annual meeting, Parikh says, “He is probably one of the few value investors who goes to Berkshire’s annual meeting on a regular basis and may have even beaten Raamdeo Agrawal (of Motilal Oswal) in the number of times that he may have gone to Berkshire.” Manseta explains his regular presence there thus: “Berkshire is a way of life, a mindset that combines integrity, unrelenting hard work, humility and wisdom. I have met some very nice people at Omaha and a few have even become friends. Someone emailed me a copy of the early Partnership Letters in 2004, which I think are worth careful and repeated study. It makes a world of a difference being there, rather than simply reading the transcript a few days later in a different part of the world.” 

Of all the times that he has been to Omaha, his most favorite moments have to do with interacting with Buffett. Earlier, Buffett would meet international shareholders individually, sign an autograph, and chat briefly in the international meeting, held right after the annual meeting. 

Manseta reminisces, “I always used to say, ‘How are you sir, it’s great to see you again and I’m really happy to be here’. And I always got a broad smile, a few words and a very firm handshake! The 2006 meeting stands out because, “Bill Gates was sitting next to Warren and Charlie and I asked him, ‘When are you bringing Mr. Buffett to India?’ He smiled and said, ‘We’re working on that one’. And then Warren piped in, ‘Find me another Ajit Jain and I’ll come there to hire him!’ While most of Manseta’s Berkshire memories are happy ones, the 2010 one has a tinge of sadness to it. “I travelled to Omaha in 2010, got the news about my dad passing away a few hours later and turned back the next morning. I will always regret not insisting that he come along at least once during my earlier visits.”

Like in Warren’s case, Manseta’s father was a big influence on him and it was to be with his family that Manseta had returned to India. “My father fully supported my love for investing. I remember in January 2005, I computed our family returns, compared them to the indices and left them on dad’s table. The next day, he hugged me and said, ‘Megh, that’s fantastic, you have found yourself, now just stay in this field’.” That, undoubtedly, was the best advice that Megh Manseta ever received and he’s done well to heed it.