From a middle-class household in central Mumbai to a top fund manager, the rise of Jinesh Gopani has been as swift as some of his stock picks. Over the past five years, his fund — Axis Long Term Equity — has delivered an annual return of 18.6%, racing past its peers. When Gopani picked up Eicher Motors in July 2011, the stock was quoting at 1,319. Today, it is trading 14x higher at 18,682.
When they were deliberating on Eicher Motors, a new management was trying to revive the brand, offering an alternative to Harley Davidson at Indian prices. The question before Gopani was whether to invest in the big boys or in this company and did it have what it takes to become big, in terms of cash flows.
“This was at a time when there were just two or three big two-wheeler companies in the country. And here was this company — small at that time and operating in a niche segment.”
A series of checks on the management, corporate governance, dealer meetings were organised to receive feedback. The company was changing the model, design and size in its attempt to stand out. But the numbers were there for everyone to see. “Companies in the 100-250 cc category were growing at 10%-12%. And there was another company growing at 50%,” he adds.
“Corporate governance is of paramount importance,” he says, adding that management quality, strength of the business model and the company’s ability to reward shareholders are important.
There is also an in-house philosophy at Axis AMC, laid down when it started operations. “The fund house decided that PSUs and highly cyclical sectors like commodities should be avoided.”
Besides Gopani, Chandresh Nigam (CEO), Pankaj Murarka (head of equity) and Sudhanshu Asthana (fund manager) were part of the founding team at Axis. Gopani and Nigam go way back. “I knew him well and I joined Axis because I liked his investment style. When he was on the buy-side in ICICI, I was on the sell-side at Emkay. At one point, when I was in Voyager India Capital, Nigam was in TCG Advisory. We were in the same building and would meet regularly.”
Gopani’s interest in equities was kindled at home. “Growing up in a Gujarati household, there were always relatives and cousins talking about the market. Gujaratis are by nature risk-takers. They invest their profit for a better return instead of parking that money in fixed deposits. When I was in college, I was weak in subjects like chemistry and science, so engineering was ruled out. Meanwhile, I was good with accounts and numbers. And when I did my MBA in finance, the inclination towards the market became stronger.”
It was perhaps the risk-taking attitude at home that drove Gopani to bet on air-cooler manufacturer Symphony. Axis AMC first bought shares of Symphony in September 2011. The company had previously been referred to the Board for Industrial and Financial Reconstruction (BIFR).
A three-hour long meeting with the management clarifying why the company was sent to BIFR; channel checks in Delhi, Gujarat and Rajasthan to figure out demand and feedback on promoters sealed the deal. As it turned out, there was a huge demand for the product in these areas during summer. The company was also reporting good numbers with high-margins and high ROEs.
When the fund first bought Symphony, the price was 257. Today, the stock trades at 2,073. The bullishness around the stock has still not subsided as 80% of the air-cooler segment is still unorganised. While consumer plays have always interested Gopani, he believes private banks and non-banking financial companies (NBFCs) are evergreen stories as the Indian market remains under-banked.
When the fund bought Gruh Finance in May 2011, the stock was trading at 40, today it is trading at 249. From trading at 3x book at the end of FY10, it is now trading at 12x book. Here was a pure rural housing finance company catering to the needs of the un-banked self-employed populace in rural areas. Although, lending to the self-employed class rather than salaried ones posed more risks, the company’s lending had grown at 17% CAGR over the last 15 years, with 30% ROE and near-0% NPAs.
When it comes to NBFCs, Gopani says his main focus is asset quality. Sundaram Finance is another NBFC where the fund has done well. Bought in March 2013, when the price was 491, today it trades at 1,208. The NBFC has maintained healthy asset quality compared to its peers despite adopting the 120-day NPA classification norm instead of the regulatory norm of 180 days. As on March 2015, the net NPA of the company was at 0.52%. The average ROE in the last five years has been 20%.
Gopani remains bullish on the financial space. “The demand for credit is very high in India. We have still not been able to reach tier 2 and tier 3 sections of the market. The Indian consumer as such is not indebted like in the developed world. It is very easy to gain in this sector if one is in the right stocks,” he says.
While Axis does have some exposure to infrastructure stocks, Gopani feels that the sector has a lot of risk to contend with. “A large EPC and infra company took 75 years to get to a market cap of $13-14 billion whereas one IT company took only 20 years to get to a market cap of $80 billion. Infrastructure is inherently a risky business as you are dependent on projects and those projects are cyclical. Executing projects is not easy and there is regulatory overhang too. Even after all these risks, you make only 15-16% IRR. I have other companies beyond infra that are asset-light and delivering 25-30% ROE with healthy cash flows. Finally, investors give value only to cash flows,” he adds. Among capex-linked stocks, the fund holds L&T, Siemens and Torrent Power.
Gopani says that unless there is a really good opportunity in other sectors or stocks, he doesn’t intend to replace his current crop of multi-baggers. If valuations rise, Gopani says, they will trim their position, but the plan is to stick to these growth stories for a long time. Does he feel that finding high-growth companies will become more challenging given the economic slowdown and global scenario? “Once corporate earnings momentum picks up at a more sustainable pace of 15%, we should see the market delivering similar CAGR over the next five years. Further, from a stock specific perspective, we should see more and more opportunity to generate higher returns for our investors.”