India's Best Fund Managers

Value pursuit

Mrinal Singh’s bet on out-of-favour stocks across sectors has delivered big hits

I don’t belong to any one place,” declares Mrinal Singh, deputy CIO, equities, ICICI Prudential Mutual Fund. He is referring to having grown up in different parts of the world and describes how his father’s transferable engineering job took him across the globe. However, what seemed to have intrigued the young engineer was the stock market. “During my school days, I was interested in stock quotes that appeared in newspapers. Back then, I couldn’t understand any of it.” By then, the curiosity had turned into an interest. “During my student life, I always asked around for guidance. I spoke to informed people, some acquaintances and relatives. They suggested that I pursue an MBA in order to work in the financial markets.” So, when the 20-something Singh completed his graduation, he knew what he wanted to do. Singh joined the R&D department at Robert Bosch GmbH Motor Industries in October 2000. After a three-year stint at the mobility technology service provider, Singh secured an MBA in finance from the SP Jain Institute of Management& Research in Mumbai. He followed this up with a job at Wipro, as a financial consultant.

It was finally in June 2008 that Singh found an opportunity to fulfill his true desire to work in the financial markets when he joined ICICI Prudential Mutual Fund. Fate certainly was out to test the young professional as he entered the sector a few months before the 2008 global financial crisis unfolded.

Up for the challenge
In August 2009, Singh was assigned the technology fund. The Indian IT sector was in doldrums then as the industry struggled to find its feet after two major blows. First was the Satyam scam and the other was the subprime crisis. The latter exposed the rot in the US economy, which was a major source of revenue for the country’s IT sector.  

Indian IT firm eClerx Services found itself in the middle of the financial crisis storm. The knowledge processes outsourcing vendor was a client at Lehman Brothers, the investment bank that was one of the first biggest casualties of the mortgage crisis. eClerx had informed the domestic exchanges that the company earned as much as 13% of its revenue from one of its clients that ‘recently filed for a petition under Chapter 11 of the US Bankruptcy Act in a New York court’, without naming the bank. As per media reports, Lehman Brothers owed the Indian firm $1 million. In 2008, the stock had corrected 80%.  

Singh recalls the difficult phase, “There were concerns about the US economy. IT is a B2B business. As long as the clients are there, they need those services. So, the crucial thing was to look at companies and the profiles of its clients. There were companies where the risk-reward proposition was interesting.”

Around 3 lakh shares of eClerx Services valued at Rs.299 were already part of the ICICI Prudential technology fund, bought in December 2007. When Singh took over the fund in August 2009, the price was Rs.162. The fund’s exposure in the previous month was 4.2 lakh shares. However, Singh continued to buy eClerx. In the first six months of heading the fund, he had 50,000 shares. During this period, the average price was of Rs.192.  

Singh’s call was bang on as the fund sold its last tranche of shares in June 2011, when the average daily price was Rs.605. This was 2x the original value of shares held by the fund in 2007. In May 2013, the fund re-entered the counter, purchasing a small number of shares (24,895) when the average daily price was Rs.472 and sold them in November when the average daily price was Rs.831 or 1.7x. Singh’s approach to investments is based on the belief that equity investments call for a long-term perspective and there aren’t any shortcuts to wealth creation. 

In addition to eClerx, Singh also struck gold with another IT stock-pick. Singh added engineering services provider, Cyient — earlier called Infotech Enterprises — to the technology fund in November 2003. This counter was not only affected by sector-specific headwinds, but also by the Satyam scandal. Here was another Hyderabad-based company with cash in hand; the Street feared another Satyam. The fact that Satyam and Cyient’s auditors were the same — PriceWaterhouseCoopers — didn’t help matters. But, like a true value-investor, Singh was opportunistic while everyone else was afraid and the rest as they say is history. In FY10, Cyient’s stock traded at an average price of Rs.124. Today, the stock trades at Rs.397, an increase of 220%. During this period, the stock touched a high of Rs.641. The mid-tier IT player continues to be a part of the technology fund. Singh explains given the nature of equities, mid-caps tend to be more volatile than large caps. Singh is firm about undertaking lesser risks but securing better returns. 

Those in the industry who closely track Singh’s calls contend that Cyient was a no-brainer as the stock was trading below the cash. “The only thing that had to be verified was whether the cash was real or fudged. A simple phone-call to the auditors would suffice to determine that. In any case, post-Satyam, the auditors had become more stringent,” says an industry source requesting anonymity. But then, the call did require a certain resolve to buy when the market was totally sceptical.

Consistent rewards
Another sector where Singh earned handsome returns is auto ancillaries. Take the case of Amara Raja Batteries. As per Morningstar, this stock was added to the Value Discovery Fund in January 2010. Back then, the stock was trading at Rs.83, and today is at Rs.870.

Tying-up with one of the largest US auto-parts maker Johnson Controls, early on has helped Amara Raja create a strong brand in the form of Amaron. This has helped it pull up ahead of market leader Exide Industries in terms of financial performance. For instance, in the last seven quarters, the average revenue growth for Amara Raja has been 17%-18% as against Exide’s 8%. It is the shift in preference for diesel cars that require high-current batteries that influenced Singh’s purchase. With consumers moving from petrol to diesel cars, Singh capitalised on the trend by looking into auto-ancillary companies that could be key beneficiaries of this shift. 

Another auto-ancillary company that has done well for the value discovery fund is Balkrishna Industries. The fund first bought shares of the off-road tyre manufacturer in December 2009, while it was trading at an average price of Rs.86. Today the price stands at Rs.600. What is the thesis that governed Singh’s decision to opt for Balkrishna? The off-road tyre industry has few players all over the world. The competition is not intense. However, cheap labour costs in India works in favour of Balkrishna. Singh continues to have faith in the stock that has taken a beating due to a slowdown in the mining sector, which is a big user of off-road tyres. Once demand from the mining industry picks up, the hope is that the stock will perform well.   

Pharma is another sector where Singh has been early in identifying trends. In March 2011, the discovery fund bought shares of NatcoPharma, a company focusing on oncology. There was not much awareness about cancer research in the country around that time. The stock was trading at an average price of Rs.51 in March 2011. Today, the stock is trading at Rs.491. On January 5, 2016, the stock reached an all-time high of Rs.567, a 10x increase from the average price back in 2011. 

PI Industries is another stock that has done well for the fund. Shares of the agro-chemical producer were trading at an average price of Rs.131 in May 2013 — which is when the Discovery Fund began building its position on the counter. Today, the stock is trading at Rs.676.     

While, the discovery fund has performed well under Singh’s stewardship, the fund manager has had his share of value-traps as well. “There were two paper companies. We had bought one with the intention of reaping high dividends, while the other was for capital appreciation. However, the one bought for dividends did well on the bourse, while the other one remained flat. On further analysis, we found out that our assessment of the management in the latter was wrong,” he reveals.

Singh feels that while management–related issues are a concern, one can still make good bets by exercising caution. Despite the prevailing sombre outlook and governance issues, the infrastructure sector is not ‘touch-me-not’ for Singh. “There are still companies in this sector that are well-run with good corporate governance practices in place,” he assures. Among stocks in the sector, Singh is currently holding onto Sadbhav Engineering, Ambuja Cement and Larsen & Toubro. “Indian equity markets have corrected in the first two months of 2016, mirroring global sentiments on oil prices, developments in China and Europe still grappling with its own recovery. We feel that a slow and gradual upswing in the Indian domestic market would make it a compounding market over the next three to five years. Therefore, we believe that a correction due to these non-fundamental reasons is an opportunity for investors to allocate towards Indian equities,” he adds.