When you enter Gautam Sinha Roy’s cabin on the 10th floor of Motilal Oswal Tower, there is no buzz of CNBC or changing tickers on Bloomberg terminals. Roy prefers to stay away from the daily rumblings of the market and his traders track the prices of his stocks and alert him. He believes it is essential to stay away from the daily noise to have a long-term approach to investing and much of his success comes from exercising that discipline. With little over Rs.11,000 crore in assets under management (AUM), he is the top-performing fund manager in the 3-year category with return of 22.2%. Roy, who began managing MOSt Focused Multicap 35 Fund a little over four-and-a-half-years ago, has seen the fund’s AUM grow at 311% CAGR since the its launch. More recently in January 2015, he also started managing MOSt Focused Long Term Fund whose AUM stands at Rs.738 crore.
However, Roy didn’t always want to be a fund manager. It was the 90s and a career in the IT sector was the most sought after at that time. Roy, too, wanted to get a piece of that action. “I wanted to do something challenging and intellectually stimulating. I didn’t want to join a company that just rewrote mundane software. I wanted to work with a company that was at the forefront of emerging technologies. I dreamt of going to Silicon Valley,” Roy says.
When Roy finished school, it was clear that getting into IIT would get him closer to his dream. However, that was not to be. Roy’s score in the entrance exam wasn’t enough to get him into IIT. So in 2001, Roy graduated in engineering from Jadavpur University in Calcutta. While the Silicon Valley dream had faded, a back-up plan was brewing. “I felt that finance was something that would interest me intellectually as much as monetarily.” Roy says. His father had retired by then, there was no earning member in his family and that did play its own role in Roy’s career choice.
After acing the CAT entrance, he got admission offers from all the IIMs. Roy opted for IIM Calcutta, as it was known more for finance. The fact that the campus was just 5 km away from home, also helped in making that choice.
However, Roy still didn’t know where exactly he fit in the wide field of finance. It was only after completing two terms at IIM-C that Roy started getting interested in equities. In 2003, Roy got his degree from IIM-C, but jobs in the stock market were not easy to come by as the market was still reeling from the dotcom burst.
So Roy started with a business planning profile at Bennett, Coleman & Co. After a brief six-month-stint, Roy moved to GE Capital as a business analyst and worked there till 2005. By then, the Indian equity market was starting to buzz again. The benchmark Sensex had gained 178% between 2003 and 2005.
In October 2005, Roy landed a job with Edelweiss as an auto analyst. He recalls Bajaj Auto and Maruti being preferred picks at that time. “We looked at Bajaj Auto and Maruti sometime in 2006. Bajaj was then inclusive of Bajaj Financial Services. Pulsar had become successful and Discover was also doing reasonably well. Meanwhile, Maruti had recently launched the Swift platform and it was gaining popularity in the passenger car segment,” says Roy.
While covering Bajaj Auto and Maruti, Roy learnt how the success of just a couple of platforms can generate huge cash flows for auto companies. “Bajaj and Maruti were great multi-year growth stories. I could make out that these two companies were poised to grow at a rapid pace and gain market share,” he adds. Bajaj Auto had gained 68% and Maruti had gained 92% by the end of 2007.
With the merits of investing for the long-term reinforced in Roy’s mind, he now wanted to exercise his investing skills and move onto the buy-side. Towards the end of 2007, Roy got an opportunity at Mirae AMC. The South-Korean based asset management company had just entered India and was building a team to drive its Indian operations.
Roy was appointed as a sector analyst to cover the infra and capital goods space, which were hot sectors back then. Towards the end of 2008, Roy got an opportunity to work in a hedge fund. Deepesh Pandey, who was deputy CIO for India and China at Mirae was setting up a hedge fund at IIFL for offshore investors. Roy decided to get on board with him. So, Roy packed his bags and left for Singapore where the hedge fund would be based. “I decided to take the plunge because I had worked with Deepesh and the interest to work in a hedge fund was always there. Also, living in Singapore was an additional lure,” Roy says. This was an opportunity for Roy to finally test his investing skills. Initially, Roy covered the same sectors that he covered at Mirae — infra and capital goods.
At the long-short fund, Roy made some good calls in the infra and capital good space. He recalls investing in KEC International, Kalpataru Power, Voltas and L&T which had bottomed out, around the same time the fund was launched in March, 2009.
However, Roy says that by 2010, infrastructure and capital goods companies had peaked out. “The intensity of order inflows was dying down. Competition was increasing in road construction, power transmission and generation. Huge power capacity was being set up with not much visibility on demand. One could see huge leverage building up in many of these companies. Environmental concerns also led to project delays. The tailwinds started disappearing and headwinds began to emerge. That’s when we decided to exit the infra and capital goods space,” Roy recalls.
Betting on quality
By tracking a sector that was cyclical in nature, Roy realised the importance of focusing on more long-term structural stories. “By closely tracking a sector which had weak cash flow and several instances of poor management, I realised the importance of investing in companies with long-term sustainable moats with quality management,” Roy says.
That is when he decided to move to an India generalist role from just focusing on the infra and capital goods space. The experience of looking at sectors across the board, according to Roy gave him a strong foundation on which he could build his career as a fund manager.
By the end of 2012, IIFL had shut down its funds. So Roy joined Motilal Oswal Financial Services (MOFS) in 2013. He was initially given a role on the broking side. Post that he went on to work with co-founder Raamdeo Agrawal to manage the firm’s proprietary investments. Roy says that working with a veteran investor like Agrawal was like going to a finishing school. The experience reinforced Roy’s belief in long-term investing. However, Roy had to wait till April 2014 to start managing his own fund i.e. MOSt Focused Multicap 35 Fund.
One of the first stocks Roy bought for his fund was HDFC Bank. The stock had the highest allocation in the Multicap 35 Fund accounting for 9.15% of the AUM during that time. The stock is up 156% since he first invested in April 2014. The concerns around HDFC Bank were not about valuation, but its ability to sustain the growth momentum. “However, we knew from management interactions that the bank had a solid game plan to deliver better growth going ahead. That turned out to be true as the bank has reported 21% YoY growth in its net interest income even in H1FY18,” Roy adds.
At present, HDFC Bank has the third largest allocation in the portfolio, while Maruti Suzuki has the highest allocation. As an auto analyst at Edelweiss, Roy had liked Maruti given the solid traction that the Swift platform was gaining. When Roy was at MOFS, Maruti was looking interesting again as it had finally cracked the entry-level sedan segment with Ciaz. Up until then Honda City was the undisputed leader in that segment. “Maruti was a company that I understood well. It was available at an attractive valuation and the earnings visibility was quite strong. We were also in a falling interest-rate scenario which bode well for the auto sector,” Roy says. Trading at a P/E multiple of 18.7x, the stock offered a good investment opportunity and is up 157% since the fund bought into the stock in April 2015.
While financial services and auto account for the largest sectoral allocation in Roy’s Fund, his top performing company, however, is oil marketing company HPCL. The fund bought into the stock in September 2014 and it has gained close to 300% since then. “For a long period, OMCs were under regulatory-led pricing pressure, so marketing margins were weak. They also battled with huge working capital because subsidies didn’t come in time, leading to stretched balance-sheets. Post the price deregulation in October 2014, both pricing and working capital concerns for OMCs was addressed. So, profitability was expected to improve. Given this scenario, the fact that OMCs were trading at low single digit P/E multiple made them a compelling investment proposition,” Roy says. HPCL also went on to benefit from lower crude prices which led to higher refining margins making it a winning bet.
Pharma is another sector that features prominently in Roy’s portfolio. Among his investments in that space, Roy’s call on Ajanta Pharma, which was one of the first stocks bought in April 2014, has generated good return for the fund. “It was a company where RoE was improving, operating margins were inching closer to 30% and earnings were expected to grow at a CAGR of 25% over the next three years. Yet the stock was available at a P/E multiple of 15x current year earnings. So, we bought into the stock,” explains Roy. The stock has gained 272% from the level at which it was bought.
For Roy, identifying underpenetrated sectors has also been a way to invest in long-term growth opportunities. He decided to invest in PNB Housing Finance to tap into the long-term growth opportunity in the mortgage business given that the mortgage-to-GDP ratio in India is still pretty low. By investing in AU Small Finance Bank, Roy is hoping to capture the growth opportunities in the huge under-banked populace running its own small commercial businesses. He is also betting on insurance companies given the under penetration of the sector.
Besides Warren Buffett and Charlie Munger, Roy says that reading Nassim Nicholas Taleb has played a very important role in shaping his investment style.
Over the years, Roy has learnt some valuable lessons that have held him in good stead during his fund management journey. One of the most important lessons has been betting on the right set of promoters. By closely tracking companies in infra and construction space in his formative years, Roy has realised the importance of identifying promoters who have long-term strategic thinking. Today there isn’t a single capital goods or infra company in Roy’s portfolio. “We came across corporate governance issues in certain infra and construction companies. Certain promoters tend to focus on short-term wins and don’t even shy away from financial jugglery. So, it is important to identify people who are thinking 10 years ahead and ignore the others,” Roy says. Indeed, focusing on the long-term and the right set of promoters is paying off for Roy.