To trace the beginnings of Vinit Sambre’s love affair with the market, one has to go back in time — all the way to his school days. Sambre, vice-president, investments, at DSP BlackRock Investment Managers, first developed an interest in the stock market when he came across his father’s interest — and persistent losing streak — in stocks. “My dad used to invest based on tips given to him by his friends and would invariably end up losing money. That was my first impression of the stock market,” Sambre recalls. “Back then, I didn’t know that there is a branch of studies called fundamental analysis that can help one make better investment decisions.” In 1997, following his father’s footsteps, Sambre completed his CA and began his career.
At that point in time, Crisil was looking for fresh CAs for its research division Crisil Research and Information Services (CRIS INFAC). “It is there that I developed a strong research background. However, most of this research was debt-oriented and not meant to guide any equity investments. It would often occur to me that if I was spending so much time doing research, the best way to gain would be by doing equity research.” Sambre was at Crisil for a year as a trainee, and moved to KR Choksey (KRC) in March 1999 as an equity research analyst. At KRC, he got a ringside view of the market.
“Kisanbhai Choksey is a fundamental investor. I felt that KRC would be a good platform for me to learn what equity investing is all about. Working there gave me a lot of insights about valuation, what the equity market is really about and what one should look for in companies,” he says. Sambre says Kisanbhai’s investment philosophy played a key role in shaping his own thought process. “Whenever the market tanked for reasons that were not fundamental, he would buy more and more. I have seen him gain disproportionately when the market used to stabilise. So, I thought to myself that this is the best style of investing. One should have patience and conviction in one’s investments.”
Even after so many years, as Sambre manages DSP BlackRock Micro Cap Fund, he swears by the philosophy. “There was this well-managed agrochemical company that was doing extremely well. When we analysed the business and met the management, we felt even more confident. The management had a hands-on approach and a strong distribution network across India. However, one of its products was facing a ban.”
In May 2011, following the United Nations’ suggestion that Endosulfan be put on the trade ‘watch list’ for the health risk it poses, the Supreme Court banned the pesticide in India. From January 2011 to May 2012, the stock corrected by almost 64% as the company’s profitability took a pounding. By the end of FY12, the topline had shrunk 6%, while profit had contracted 62%.
“The market capitalisation was down 50% from the time we met the management. I had taken a look at the company, but I still ignored it. As the stock corrected further, there came a point where the company was available at 0.2x sales.” In August 2012, the market cap stood at Rs.118 crore, which was 17% of the Rs.694 crore revenue posted by the company in FY12. “I thought this was a good time to invest as the company was working on addressing the situation instead of dwelling on what happened in the past. We were lucky to get a good chunk.”
The fund bought 2.4 lakh shares in August 2012 when the price was Rs.113. Well, the company that he is referring to is Excel Crop Care, which the Mid Cap fund still holds. Today, the agrochemical player's fortune has turned around. Its current market cap is Rs.1,089 crore and the stock trades at Rs.990. Sambre’s thesis has played out and the company has managed to revive its earnings with a new set of products. At one point, Endosulfan alone accounted for 35% of the company’s revenue; today, five products — Glyphosate, Chlorpyriphos, Profenofos, Aluminium Phosphide and Zinc Phosphide — account for 60% of the topline. The company’s revenue has grown at 13.9% CAGR over the past three years, while profit has grown at 55% CAGR.
Chemical reaction
The agrochemical and specialty chemicals businesses have worked well for Sambre. For instance, the Micro Cap fund bought 2.13 lakh shares of Navin Fluorine International in January 2007 when the price was Rs.327; today, the stock is trading 4.7x higher. Another specialty chemical player that has done well for the Micro Cap fund is Atul. The fund entered the counter in July 2013, buying 100,000 shares when the price was Rs.327. Today, the fund holds 4.3 lakh shares, with the stock trading at Rs.1,328, a return of 4x.
Sambre attributes this superior return to expanding RoCEs and enhanced growth visibility. In fact, both the top-performing chemical stocks in the Micro Cap Fund — Atul and Excel Crop Care — have seen their RoCEs go up by 4.9 and 12 percentage points, respectively, in the past three years. But while Sambre agrees that the chemical space has set his portfolio on fire, he feels that infrastructure plays could trigger the next spike.
“Our belief is that the corporate sector has not seen earnings growth since the economy has been down for the past eight years. So, it is high time that things change. A year or two down the line, things will definitely turn around. We need to build a portfolio of companies that are going to gain in that phase,” he says. Sambre has taken exposure to power transmission and distribution players such as Kalpataru Transmission, Techno Electric and Engineering and Skipper.
There are several companies in the power equipment construction space with bloated balance sheets. Most of these were not able to collect money and ended up with a huge amount of debt — some even went under. "But some companies cut their debt, understood the current nature of the market, remained upfront with collection and showed discretion while taking orders. These companies may not have shown growth but have been focusing on cash flows and balance sheets. Once the economy turns around, these companies, which have managed well in a bad phase, will enjoy strong order flows and reduced competition, as certain peers would be out of the business by then,” points out Sambre.
Within the industrial space, the Micro Cap fund also has exposure to Finolex Cables and Finolex Industries. “In the cables space, nearly 50% of the business of some companies is consumer-related, which is still decent. Meanwhile, 50% is B2B, which is industrial, and this will play a big role in growth when things turn around. So, the B2C business will take care of the near term.”
Sambre adds that while these companies may not show great growth, “They are decent companies in terms of balance sheet and cash flow. We like such businesses, but the real change will happen when the B2B businesses start playing out well.”
Having worked across a whole spectrum of firms — UTI Investment Advisory Services, PMS division of IL&FS, Global Private Client team at DSP Merrill Lynch, PMS team at DSP BlackRock and, finally, DSP BlackRock AMC — Sambre feels that investing is simple, as long as investors don’t get swayed by the market.
“We spend a lot of time on due diligence. We try to understand the company's performance. In a bad phase, have they managed to emerge stronger? Once we understand the strengths and weaknesses, there is a level of comfort with the investment. We try and look for companies with decent RoEs or RoCEs. Till the time that is verified, what is happening in the world outside doesn’t affect us. What is happening in the US economy, Chinese economy – these questions don’t matter,” Sambre says.
