To ask for one’s best investment is like asking one to name the best book that they have read, and there are rarely any one if they have read enough. Over a period of time, I have come across several worthy managements and quality businesses that have produced highly satisfying long-term outstanding outcomes. So, at one point if it was Infosys and Wipro, then in more recent times, Bajaj Finance, Motherson Sumi, Eicher Motors, Page Industries, PI Industries and Gruh Finance have been very rewarding. Even some of the pharma companies like Sun Pharma, Ajanta or Lupin, despite suffering over the past couple of years, have been very fruitful investments overall. Hence, to pick one out of a dozen or more fine investments over a long period of time would be a bit unfair for the many other names that are there. But since the construct of the article demands picking just one, I will pick Bajaj Finance with the clear proviso that many others are almost equal contenders for the title. Bajaj Finance is an interesting instance of a reasonable business that has turned out to be an extraordinary one. It is a company where the quality of the management materially exceeds the quality of the business.
It popped up on our screens which we tend to review on a monthly basis. At that point, research reports on Bajaj Finance were non-existent, and so we decided to go and meet the management. I wanted to understand the opportunity size, how much sustainable growth the company could carve out without diluting the book quality, the capital efficiency and whether the growth would be with or without meaningful payout. I always prefer to meet the management before investing. While management quality is important in any investment, in a finance firm, it acquires an extraordinary dimension. In the finance business, more so than in any other, your only line of defense is the quality and capability of the management. It is a business where a rupee of net worth is levered 5x to 15x. Therefore, even if 5-7% of your assets go wrong, your net worth can become zero. Given that it is an NBFC, P/B or RoA would have been the conventional way to assess the value of the stock. But like the P/E multiple that reveals little, the P/B multiple for a finance firm hides a lot. It reveals more when you back it up with capital efficiency, growth rate and its sustain