Last month*, our research team at Ambit issued a ‘sell’ call on HDFC. I was taken aback for more than one reason. For one, I have always believed that HDFC is the finest home mortgage company in the world. That apart, it was Deepak Parekh who put in the initial 2 crore capital in Ambit after we moved away from RSM.
The research team did buy my point about HDFC’s superiority as a mortgage company. To their mind, though, the current valuation for the stock was not sustainable in the light of increasing competition, which meant HDFC’s current position of dominance will be difficult to sustain. At that point, we were among a handful of brokerages to have a ‘sell’ call on HDFC. Since then, the HDFC stock has gone on to hit a new high!
As you can imagine, it was not an easy call for me to put out a ‘sell’ report on a company that is led by someone I not only admire professionally, but also am personally obligated to. But then, I learnt early in life that it is important to Think Straight and Talk Straight. It is a philosophy that was inculcated during my tenure at Arthur Andersen, which I joined straight after my chartered accountancy in 1983 as its first employee. By the time I quit them in 1997, I was the managing partner for the Mumbai office.
Incidentally, I was the first in my family to get a post-graduate qualification and also the first to seek employment. My family migrated to Kanpur from Pakistan and I spent my formative years there as part of the lower middle class. My father ran a small business in Kanpur before we moved to Mumbai in 1971. Unlike most business families, he wanted me to become a professional. I did that, but the entrepreneurial gene in me ultimately took over.
My early learnings at Andersen actually became the pillar of Ambit. I can recall several examples of how “talking straight” worked very well for us even though it might have been uncomfortable to talk about. I recall a conversation with Vijay Mallya around the time South African Breweries decided to enter India and had acquired Haywards from Shaw Wallace. Vijay asked me how he should now face competition. My answer was straight: he had no option but to collaborate with someone with capital, technology and a global brand. It took Vijay time to accept this. After all, breweries was a business he had built hands-on. But he did accept it eventually and today, the kind of value that United Breweries has created with Scottish & Newcastle and then bringing in Heineken is legendary.
The other big learning from Andersen was the importance of thinking like a businessman. We were told that unless you think like a businessman, you will never be able to solve his problems. These two invaluable lessons have stood me in very good stead through my career.
I co-founded GW Capital along with Gary Wendt in 2001. It is now known as India Value Fund. Wendt had built multiple businesses and had seen successes and, more importantly, failure as well. He always believed in taking a controlling interest in the businesses he was building. His logic was simple and clear: if you have to distinguish yourself over 20 years, you cannot afford to be just another passive investor. The approach has to be of invest and build.
So, our deal was that Wendt would raise money and we would invest. I brought the team with Vishal Nevatia as CEO. But one morning we woke up to learn from the newspapers that Wendt had joined Conseco. Therefore, there was no money coming. But Vishal and I did not lose heart; we actually raised 100 crore from Indian investors. The fund raising experience told me something very fundamental: people value their money dearly and are very reluctant to part with it. Which means if people trust you with their money, you must deliver outstanding returns.
I learnt something even more important from Deepak Parekh. I admire Deepak a lot — and to my mind, there is no better role model in the world of financial services. When Wendt exited from GW capital, we needed somebody to give us credibility and initial capital. I remember Deepak saying to me, “I will take 30% equity and invest 25 crore [in GW Capital] but Ashok, remember, I am trusting you with this money. Even if you don’t give me an adequate return, never compromise on the platform of reputation.” So it is not just about returns; in the ultimate analysis what matters is credibility. He made us aware of what it takes to build trust and held us accountable. And I am glad he did that.
I have realised that you need to be a risk-taker while building a business. I have taken risks, but only where I thought it was worth it. I set up Ambit and co-founded accounting arm RSM — Ratan S Mama was a very reputed accounting firm and after the founder’s demise, several of us came together and merged different practices. Later we negotiated a deal to pull out RSM from Ambit RSM and merge it with PwC. Most people were quite surprised by my decision to move on from taxation, a business where I had made a name for myself, to get into a new area like investment banking.
It was obviously very risky for me — I was moving from familiar territory into a space where I still had to establish myself and competition was keen. But I saw an opportunity, a missing link in investment banking: it had to be relationship-oriented, not transaction-oriented. DSP had exited from its joint venture with Merrill Lynch, Kotak was looking at the bank as a larger vehicle while Vallabh [Bhanshali] was focusing more on equities and capital markets. Nimesh [Kampani] too was in the midst of talking to Morgan Stanley.
I remember in December that year a couple of managing partners and the deputy CEO of PwC were here for the merger with RSM. I was asked if I would like to be part of the new alignment. My reply was that accounting and the Big Four was my history. Investment banking and financial services was my future.
Still, the initial period was a struggle — a far cry from the period between 2001 and 2004 when I was voted the best tax professional three years in a row. At that point, our independent board asked me what the plan was. After all, 90% of Ambit RSM’s business came from RSM. We were left with an organisation of less than 15 people. I asked the board for three years and said we will achieve the revenue numbers. At the end of three years, we managed to bring the same revenue and had higher profitability. The risk taken to enter a new business paid off and earned decent dividends.
In the equities business, I was fortunate to find a team that had an ethos like mine and the rest is history. Here too, it was not easy. We made some errors initially in this business. Our CEO left soon after the separation from RSM and he did not believe that Ambit could grow as a full-service investment bank. We lost another CEO after that and it was not until Saurabh Mukherjea and his team came on board in 2010 that things took off. Here again, the key was to find the right people — like me, Saurabh’s team shared the ethos of talking straight.
Since we were a late entrant in equity research we needed to ensure that we distinguished ourselves and earned credibility. So even though we were creating a full-service investment bank, I was clear that we would keep our research independent and not be influenced by our investment banking mandates. There have been times we have given up i-banking mandates because we may have been forced to compromise our independence. We also tell our clients clearly: our research team will not change its view just because they give us business. It’s not always easy but we try to balance that.
My colleagues tell me we end up missing opportunities by endlessly labouring every time there is a proposal for investment. But I want a detailed debate on issues. That is more important than winning or losing a transaction. It does not mean we are inflexible or we do not respond quickly. But we will not compromise on the quality of discussion just to be fast.
While taking risks you can’t be obsessing over what you will ultimately end up with. I am a huge cricket fan and you can learn a lot from the sport. I remember what Geoff Boycott, the English opener, said when asked how he managed to spend two days at the crease. His answer was that he thought of the next session only when it began; it was important to look at one session at a time. I tell my team the same thing. Never look at the end because it will appear too far. Break your thinking into smaller parts. It gives you greater discipline and focus.
Especially in our business, attracting and retaining good talent is a key challenge. One way to keep people motivated is to understand what is important to them. We had called over Harsha Bhogle to our office for a motivational talk and he spoke of when Aussie fast bowler Glenn McGrath made his first 50. This was closer to his retirement. The entire team came out to the boundary to clap for him. As a team, they understood and appreciated what was important for McGrath. That is really a fine example demonstrating what is important to an individual and appreciating it.
Personally, I am inspired by Swami Chinmayananda and still remember his invaluable advice. My father had assisted in installing a 11-metre Hanuman statue at Sidhbari in Himachal Pradesh. When I reached there, I kept craning my neck to see it. Swamiji looked at me, and said, “When you want to look at something in its entirety, get to the right distance. That will help you look at it holistically.” You have to be dispassionate and distance yourself from an issue to ensure objectivity.
*This article was originally published in December 2012