In mid-2018, India’s entertainment sector found itself in the limelight for not so pleasant reasons. On the one hand, moviegoers were annoyed at the exorbitant prices of food and beverages served inside multiplexes. On the other, there was the security risk of allowing outside food inside. Add to that, there were poor profits from big-budget films over the previous 15 months. The confluence of these factors led to EV/ Ebitda multiples dropping from one-year forward of 18x to about 12x for PVR, the biggest listed multiplex chain in India. The Supreme Court (SC) order to allow outside food into movie halls was expected to dent PVR’s revenue and its stock crashed from Rs.1,463 in June 2018 to a 52-week low of Rs.1,085mid-July. However, when most people saw trouble, Anil Shah, fund manager at Aditya Birla Sun Life (ABSL) Mutual Fund, sensed an impending boom. “We never owned PVR, but it has always been on the radar. Food or films continue to be the preferred choice of family entertainment in India and it is a theme that is unlikely to break. Secondly, the valuations had corrected. Thirdly, for the food ban part, we met lawyers and analysts on both sides to understand the worst case scenario. And I didn’t think that this issue can stick too long. Fourthly, the first mover advantage of PVR as a multiplex is here to stay,” he says. Thus, in August, he invested in PVR and increased allocation to 2.5% within two months. And needless to say, his bet paid off. “Over the past six months small and mid-caps have given a negative return owing to a declining market. PVR on the other hand delivered positive return,” says Shah. Since then PVR’s stock has risen by 46%. The impact of the SC order has been muted with PVR registering profit after tax growth of 38.96% and 18.01% in June and September quarter respectively. Such calls have made Shah one of the most bankable mutual fund managers in India. At ABSL Mutual Fund, Shah manages Equity Fund and two other thematic funds: GenNext Fund and Manufacturing Equity Fund. The thematic funds have delivered returns of 16.58% and 6.41% since inception. Over the six years that he has managed ABSL Equity, the fund has given return of 18.98% with assets under management (AUM) expanding from Rs.6.5 billion in 2012 to Rs.100 billion in 2018.
Tick before you Pick
Shah’s track record of delivering consistent returns has been possible owing to a checklist that he keeps handy before making any investment decision. The most important thing to him is the management of a company. “You need to understand what the management has delivered in the past, what is it that they are committing to, their bandwidth, ability, policy framework and corporate governance.” He shares that in his analysis, he tends to focus more on balance sheet and Ebitda than over earnings per share (EPS). Scalability and unique selling proposition are other things he assesses. Shah ensures that he goes through this checklist in every bet he makes. For instance, in 2014, Shah entered Strides Shasun, a pharmaceutical company, after they sold off their injectible unit Agila for $1.75 billion in 2013. The company had no institutional coverage or mutual fund ownership. But the core business was generating good free cash flow. Their Africa business was growing at 35% annually and the management looked well-poised to take the company forward. Further, the stock was available at about 4x EV/Ebitda in comparison to Sun Pharma, Dr Reddy’s and Lupin, which were trading at 12x plus EV/Ebitda. Since it fulfilled all his conditions, he went ahead with his investment. Over the next three years, the stock went from Rs.400 to Rs.1,200.
With stock price going up multi folds and valuation peaking to about 11x, Shah decided to book profit and exit the stock. He backs this decision with the view that the Africa part of the business was not delivering as expected and rest of the businesses too were facing some headwinds. Additionally, the balance sheet had moved from net cash to net debt.
At ABSL, Shah primarily looks after three funds. The GenNext Fund, as the name suggests, invests in companies which the next generation will use in terms of products and services. “The GenNext Fund has done exceedingly well in good and bad times (because of its target audience). The fund theme, by itself, takes away a lot of the volatility. So, it is a low beta fund. We ensure that 70% of product sales/services is directly to the consumers. Thus, you have more B2C brands such as consumer durables, consumer staples, auto and private banks in the portfolio,” he says. The fund has invested in companies such as HDFC Bank, Nestle India and Maruti Suzuki and is ideal for people with lower risk appetite looking for a probability of higher returns. Similarly, Manufacturing Equity Fund, started in the backdrop of Prime Minister Modi’s vision for ‘Make in India’, invests in consumer production, automobiles and other industrial sectors. “If India needs to progress and become a force to reckon with globally, then we have to get manufacturing right. Over the past seven to eight years, this segment hasn’t done exceedingly well within gross domestic product constituents. But we need to get it right. It is a fund which will take off along with country’s manufacturing sector,” says Shah. He also manages the ABSL Equity Fund, which offers him the flexibility to move across market caps and sectors. “I construct my Equity Fund portfolio through a top-down approach. We also run many query modules (research on companies) bi-weekly so we don’t miss out on anything from bottom-up perspective. But I predominantly like to think in terms of what sectors will do well, or globally is this the year of emerging markets or equities? Then, keeping in mind this scenario, I identify stocks which are likely to do well. If they fit into top-down and bottom-up perspective, then I can really load up a lot. That is how I marry the two,” he states. The equity fund is currently overweight on FMCG, which, Shah believes, has great growth potential. “The big call which we made 18 months ago was entering HUL and Dabur. We entered HUL very early. It was a complete contrarian call at 35x valuation (It has now gone up to 55x). But I really felt consumption would do well,” he says. Eminent consumer companies were impacted by the Patanjali wave. But Shah observed in May 2017 that this wave was ebbing due to quality issues and constraints to meet delivery schedules. Shah noted that Dabur was coming on the back of two years of no-volume sales growth. So even a slight improvement in consumption will ensure Dabur sees significant growth. Shah also met the management and felt they had a game plan in place. “We went ahead with our investment and it paid off,” says Shah. The stock moved from Rs.260 to Rs.480, a return of 80% within 18 months. In line with his bullishness on FMCG firms, he has also allocated 3.38%, 4.81% and 4.45% to ITC in Manufacturing, GenNext and Equity Fund, respectively. He increased allocation slowly because valuation gap between the rest of the consumer stocks and ITC has widened to its peak. “The taxation environment for ITC has been reasonable, unlike what people feared. The stock is relatively inexpensive, it is a well-managed company, throwing free cash flow and good return. I have gradually added ITC to my portfolio on every dip that it has seen.” Besides consumer stocks, one of Shah’s largest position in pharmaceuticals is Dr Reddy’s. He finds the pharmaceutical sector exciting and believes Reddy’s has a huge growth opportunity in the next 12-18 months. They have increased their weightage in Reddy’s in the past 18 months from 1.71% to 4.54%.
The sector hasn’t done well in past two years owing to the competitive landscape in US and difficulty in getting product approvals. These kept pricing under pressure and the slow progress in getting approvals consequently delayed products launches. But Shah believes the worst of pricing pressure is behind us. He placed his bet on Dr Reddy’s based on their highly under-appreciated product basket. Also, Dr Reddy’s ploughs back 12% of its sales into R&D, of which 5% is into proprietary products. “Next two to three years you will see some of the products being launched in the marketplace and Dr Reddy’s will become one of the best pharma stocks,” he says. He also believes in playing the waiting game. For example, despite telecom/IT companies delivering sluggish results over the past few years, Shah increased allocation to Tech Mahindra. With Tech Mahindra trading at 12x for FY20 compared with its peers such as Infosys at 16x and TCS which is valued at 21x one-year forward basis, he sees it as an exciting opportunity. Also, the potential to grow remains high with the world moving towards 5G technology. At the same time, Tech Mahindra operates at a significantly lower margin profile compared to its rivals. But that doesn’t bother him.
Not every bet goes right and one of Shah’s biggest learning came from his investment in Tata Communications. They bought the stock at 6.5x EV/Ebitda and held it for about two and half years. And though they didn’t lose money, they didn’t make sufficient return. “The one big learning from this was that I need to focus more on core earnings. Option value is great to have, but only if your core earnings are fine, the market gives you thumbs up,” he says.
An interest in finance and a sharp acumen in understanding business come easily to Shah, whose family runs a grocery retail business. However, he was never interested in joining the family business. “I was the only person in the extended family to go out of family business. My grandfather was heartbroken when I took up a job,” recalls Shah, who joined L&T after completing his B.Com and CA in 1987. But he was soon bored of the monotonous work routine. Around the same time, there was a vacancy in DS Prabhudas (now DSP Merrill Lynch) for a research analyst, and he took it up. After three years with DSP Financial Consultants, Shah ventured out on his own and started providing research and advisory services to mutual fund houses. But with the advent of foreign investors, National Stock Exchange and dematerialisation of physical shares, local brokers couldn’t grow beyond a point. Consequently, Shah joined Hoare Govett in 1996 as an institutional broker, and rose to become the Head of Equity. By 2012, the company, which was taken over by RBS, was winding up its India business, and Shah, after a three-month break, joined Aditya Birla Sun Life Mutual Fund on July 11, 2012. He already had a long standing relationship with the company as an advisor and was offered to run the fund himself. He admits that while there was always an apprehension whether he would to do well, managing a fund was a dream he had harboured for long. “I can tell you that every person who has been in the equity market in some way, deep in their heart harbour the aspiration to manage a fund. And that aspiration was there,” he says. Since then, Shah has not only delivered consistent return, but has also become more patient as a person. “On the sell side, you are running on a treadmill. But in managing a fund, you need to understand that you are not playing T20, but a test match. It is a play of conviction, and convictions take time to play out. And for you to play out your conviction, you need to do a lot of due diligence.” Those who can adhere to these tenets with patience, like Shah, can subscribe to his fund and expect stellar return.