Invesco Mutual Fund’s chief investment officer, Taher Badshah, even today, distinctly remembers the day he first met Raamdeo Agrawal, chairman of Motilal Oswal Asset Management, in 1995, and also the questions which he fumbled through, before he finally landed himself a job as an auto analyst. The journey, since then, has been very exciting. Today Badshah has a stellar three-year track record, with his funds outperforming the benchmark by a mile, generating a return of 17.6%. He joined Invesco in early January 2017 after managing MOSt Focused Midcap 30 Fund and MOSt Focused 25 Fund at Motilal for seven years.
A management graduate from SP Jain Institute, Badshah’s education as a mechanical engineer, certainly played a crucial role in his deeper understanding of the automobile space, which went on to drive him to some of the most memorable milestones of his career. The first one being at Motilal Oswal, when he recommended Hero Honda in 1997, at a time when Bajaj was still the leader, commanding a lion’s market share of about 80-90%. “We took this call that market would shift from scooters to motorcycles and Hero Honda had access to technology that was superior and provided better fuel efficiency. With demand from the rural market kicking in and the not-so-good road conditions, motorcycles had a great opportunity. From a 5,000 crore-odd market cap, it went on to become 20,000 crore in 2009 and then to about 70,000 crore in October 2016. It was a stock that brought Motilal into the limelight, and in a way was a great milestone for my career too, since I initiated that idea.”
In 2004, Badshah had moved to Kotak Institutional Equities as a lead auto analyst. The four years at Kotak, were followed by a brief stint as a fund manager, first at ICICI Prudential (2004-07), then at Kotak Mahindra Investment Advisors (2007-10), before returning to Motilal Oswal, but this time as a fund manager. “I was happy that I was called to head the other part of the business, in a different role, ten years later. Mr Agrawal called me back to join the asset management business in 2010, which they had just started.” Badshah stayed there for the next seven years, before joining as CIO at Invesco in January 2017.
Through thick and thin
A look at the funds managed by Badshah at Motilal reveal that Maruti was first bought in May 2013 in MOSt Focused 25 Fund, and even today has the highest weight at 9.3%. The stock has since multiplied 5.5x. The timing was crucial, as Maruti was battling labour unrest at its Manesar plant, which had led to partial burning down of the plant in July 2012.
“Besides being affordable and having high brand recall, it was an overarching franchise. Even when the company was not doing well, it had a 45% market share with the best distribution network, that’s something you do not get easily. At that price, we were paying just for the franchise value, you were getting all that growth for free. It was also about buying companies in distress because it gives you an opportunity to generate extraordinary return,” Badshah explains.
Similarly he bought into Reliance in early 2017, when it wasn’t a significant part of many fund managers’ portfolio. Badshah bought the stock at 640 in March 2017 and it is up around 50% since then. “This oil marketing company was in a sweet spot for the next two to three years. Their capex cycle was finally over, because of which the stock had underperformed for five years. It’s a nice play on telecom, embedded in a business which has great cash flow. While standalone telecom companies may have problems funding their capex, in this case the parent is in a position to fund that capex, because its core business is doing exceedingly well. And it was cheap when we bought it,” Badshah elaborates. He remains bullish on the oil and gas sector going forward, but mainly oil marketing companies.
When he is convinced of an idea, he doesn’t shy away from taking a concentrated bet. “We follow a very active fund management philosophy, by which we mean that every position in our portfolio is overweight with respect to the benchmark. Many funds don’t give it as much attention. If you are going to be underweight, it’s not going to help you generate alpha even if the stock does very well for you.”
Badshah also emphasises that the number of stocks in any fund should not cross 40. He is, in fact, trying to bring it down to 35. “If you ask fund managers the stocks in their portfolio, they won’t be able name beyond 20. At least I can’t if I have more than 25 in my portfolio, so forget managing them. You can’t understand 50 different businesses, especially in the dynamic world that we live in. If you bring in more sharpness then your conviction is much higher.”
He attributes a lot of the rigour he has acquired to the books written by Peter Lynch, Phil Fisher and Pat Dorsey. In fact, he asserts that Lynch is most relevant to what he does, given his long track record at Fidelity.
“The starting point, while evaluating a business”, Badshah describes, “is whether it has a reasonably sustainable competitive advantage. So, if you find a reasonable moat with some growth visibility, then you might have a money-making opportunity. We don’t mind not making money or making modest returns, but I can’t erode 75% of my capital, simply because the franchise was not there, or was not well understood.”
Cash flow is another key parameter in the course of deciding whether to buy a stock or not. “When we come down to valuation, it comes back again to the visibility of the cash flow, because that’s ultimately what you are buying into. Think of it as a partnership, if you have a partnership in the business, you would like that business to give you some cash at the end of the day, not just keep asking you for cash, every now and then. At a very simplistic level, it’s about that. Many a times we confuse ourselves with P/E multiples, Ebidta and all of that, and confuse others also”, Badshah adds.
Badshah, in a way has successfully managed to walk the tight rope of letting only the fundamentals decide whether to hold on or let go. He elucidates a trade-off where sometimes you have a stock which is doing exceedingly well, but not for the reason for which you bought it. “One example was this two-wheeler player we were betting on. There were two parameters we were assessing it on, market share gain and profitability. While there was market share gain, profitability was sluggish, and valuation was getting completely out of whack. We had made 6-7x and then we decided to move out, simply because the investment rationale was not being fully satisfied,” he adds.
Going by the fund disclosure, TVS Motor was bought in December 2015 for MOSt Focused Midcap 30 Fund, when it was trading around 280. Invesco, too, had the stock but exited in June 2017, when the price was 545.
There have also been circumstances where the investment rationale is working but you still don’t make money. InterGlobe Aviation, which owns IndiGo, was first bought in Invesco’s India Dynamic Equity Fund in August 2017, when it was hovering around 1,300, and it has fallen 8.8%, since then. In comparison, its peers — Jet Airways has gained about 50%, and SpiceJet about 8%, during the same period. Badshah elucidates, “In case of this airline we have invested in, we believe that its yields will start improving. Yields have fallen due to fleet expansion and lower ticket prices, as a result of softer oil prices. But if the crude price starts to move higher and you have a more fuel efficient fleet, you will have higher yields compared to your peers. We are willing to wait it out, since we know that this a durable franchise.”
Badshah’s ability to stick to his conviction has fetched him multibaggers like Shankara Building Products (3.4x) and Apex Frozen Foods (4.2x) over a short span of four to eight months. Invesco bought Shankara Building Products during its IPO, in both Invesco India Dynamic Equity Fund and Invesco India Growth Fund in April 2017. “This was a different play on the retail theme and growth was available at a reasonable price; it was trading at 12x-13x. The relatively low-profile nature of the IPO enhanced our prospects of making money,” Badshah explains. The same story repeated in September 2017, when Invesco was among the only three anchor investors in the Apex Frozen Foods IPO. Given that the average number of anchor investors in an IPO usually tends to be around 10, Badshah’s bet paid off big time.
Learning from the best
Badshah attributes a lot of what he has learnt about investing to both Raamdeo Agrawal and Uday Kotak. “They are not only great investors but also great businessmen. Working with them closely was a great learning experience. You could see how long-term strategic thinking could impact a business,” he says. While working at Kotak Institutional Equities was a more structured learning process as it had a joint venture with Goldman Sachs at that point, at Motilal Oswal, the experience was more hands-on as the firm was still building its business.
Currently, Badshah is underweight FMCG, pharma and IT. He feels that FMCG stocks have become expensive, as earnings growth is expected to lose steam. In the case of pharma and IT, he believes that the concerns plaguing their growth will not go away in a hurry and prefers to look closer home for investment opportunities. He continues to be bullish on financial services, banks and auto ancillaries.
Financial services and banks seem to be a major theme in the funds managed by him. “Ever since its inception, our focus has been to buy into those stocks where there is an acceleration of earnings growth. We have been overweight on financials since they have shown consistency in terms of growth, with some earnings visibility. It also has to do with the fact that financials make up a large part of most indices in India.”
Badshah has bought into some PSU banks that have bounced back after recapitalisation. “We have tried to buy into one or two PSU banks that have retained some competitive strength despite the tough phase for them over the last 4-5 years. These are companies where earnings have been beaten down significantly, as a result of the heavy provisioning but we think that they can turn the corner. Earnings growth will not just be a result of lower provisioning but also better credit growth as an when the credit cycle improves.” The fund has bought SBI and Bank of Baroda, which have risen by 13% and 9% respectively, since October 2017.
In case of auto ancillaries, he is bullish on Motherson Sumi and Exide, which are part of his portfolio. His rationale is that both these companies are not going to be impacted by the transition to electric vehicles. In fact, he expects them to be major beneficiaries of increased demand from the overseas markets.
A fine balance of investing in both value and growth stocks has significantly changed the prism through which he examines businesses. And his ultimate learning is, “There is no business which is so bad, that it can’t be bought at any price and you can’t make money out of it and there is no business which is so good that you can buy it at any price and still make money.”