What went right with Pranjal Kamra? Part 2

In this article, PK talks about the absolute dos and don’ts of investing, the steps he takes to analyse a company, what he looks for in the company's management and the makings of a good stock. 

This article is the sequel to What went right with Pranjal Kamra?, so make sure to check that out first to know where he is coming from!

Continuing where we left off…

PK: Now I invest in companies of whom I am a customer. That gives me good insights. So this is the first step in shortlisting the stock, and then there are certain absolute dos and don'ts. 

First, I will never invest in a shrinking pond. You don't want to be a big fish in a shrinking pond. Your mobility is affected.

About 3 or 4 years ago, Godrej finally discontinued manufacturing typewriters. And before that, for the last 25 years, they were the world's biggest typewriter manufacturer. 

Insider: Because they were the only manufacturer?🤔

PK: Yeah! Because no one wanted to. It was a shrinking market. But from another perspective, they were the World's No. 1 for 25 years! 

You know, before going almost bankrupt, Videocon was the world's biggest CRT TV manufacturer, but the technology was irrelevant. Since LCDs and LEDs were already ruling the market. 

You know what a CRT TV is, right? Remember this?👇

Market leaders can sometimes be very misleading. So, it doesn't matter if a company ranks high or low. If the industry is growing or thriving, there is room for everyone.

Once you like the present business model and see that there is scope for growth as well, you dive down into whether what you see is what you are getting.

Just like winning a race doesn’t really matter if you’re the only one running, leading an industry is pointless if the industry is near death.

I start by comparing the past of the owner with the present. So in my mind, reading this year's annual report is way less useful than reading the previous five years' annual reports. 

If given a choice between reading a company's annual report for FY 2022 versus FY 2017, I would prefer reading the report for FY 17. Because every year, they make promises to their shareholders. So I would read what they promised in 2017 and 2018 and where they are today.

Long-term investment requires an analysis of the long-term historical data.

Insider: Okay, so you analyse the administration first and then the company?

PK: By analysing the company, you mean financial statements, yes. That's the second last thing before valuation. 

Here’s how you analyse a company, PK Style!

So, to make the final decision, I think, “Okay, they promised something in FY 17; how much of that they achieved?” 

I think a lot of businessmen are like politicians asking for a vote; they promise you a lot, and they hardly deliver. With companies too, what they promised and how much they delivered matters. I understand they cannot deliver everything. But if, to an extent, they do, then to me, that's the biggest certificate. 

The next hack may sound questionable at first. Bear with it a little, and you will find out a little something for yourself too!

Another simple hack is what they wear and how camera-friendly they are. The car they use, the house they live in, that's a giveaway. 

Fashion analysis for stock selection… We need to go deeper!🤔

Because, in my opinion, if you are very particular about being visible in the media, dressing well, and showing off your luxurious lifestyle, then I can't figure out how you focus on the business. Always ensuring that you look the best amongst your peers takes a lot of mind space. This is why people like Steve Jobs and Mark Zuckerberg stick to the bare basics. 

Insider: They hardly made any effort! Their world’s all Blacks and Greys. 

PK: Absolutely. Because it takes a lot of mind space, and then it's constantly on your mind. And apart from that, there are certain aspects of your look you can control, but there are certain you can't. And then if something happens, if you're balding, if you're growing your waistline, things like that, it takes a lot of your mind space. 

So I want someone who focuses on the business and not how he or she looks. I don't want to fund that person's wardrobe. I want to fund their business. And it works like magic…

Plus, if a person is more focused on making a splash in the media with their appearance or a lavish lifestyle, maybe they have something in their businesses that they want to hide? You want the promoters to be incognito and the business to be loud.

Now, for a little IRL application of what to look for in a business before making an investment decision.

… Apart from that, the financial statements of the company matter. Just to give you an example, sometimes what happens is that you see a lot of profits in the books, but the money is never really coming in. 

Like there is this lingerie brand called Lovable Lingerie. I saw a lot of visibility five years ago. I had missed Page Industries, so I was desperate to get into that space. 

If you don’t know already, Page Industries Limited is the exclusive licensee of JOCKEY International Inc. for the manufacture, distribution and marketing of the Jockey brand in India.

I wanted to find the next Page Industries. So superficially, the company looked good. There was a brand recall, and there was visibility. But there was one problem. I saw that sales drastically increased in the March quarter and drastically reduced in the June quarter, which was extremely surprising. 

Why would people buy more innerwear in January, February, and March but not April, May, or June? And I thought that there might be something I was missing. But this pattern was not visible in any of its peers, and their sales were mostly similar each quarter. So then I was sure, “Okay, there's no such buying pattern in the consumer's mind.” 

Even assuming that winter could be a thing, the December quarter should have also been good. But there's no such pattern either. So, there is a problem. Something is wrong with this company. 

This was when I realised that it's after the March quarter that you have to prepare the annual report. And your annual report needs to be good. So what would you do?

You would ask your distributors and retailers to buy a lot of stuff from you. If it doesn't sell, you can return it to us after March. You take it from us. You don't give us cash. We'll say that payment will come after 15 days. Everything works on credit. So we'll bill you on 31st March, and you return it on 1st April. 

By the time March annual report is done, the results are good, but the cash never came in.

People cook their meals, these businesses cook their books. You are not the same bro!

We see that the company is growing every year because every year, they do more of this stuff.

A little disclosure, the company is still listed; and it's not proven. It's just a personal observation. They might be doing it. That's my opinion. 

Sometimes the numbers are not believable at all, which is when you dive deep into financial statements and figure out what is real or not. And there is no set of defined parameters for how to do it. Look for variations.

So one hack is finding variations in numbers in comparison to your peers. So the only reason I found something was fishy was because its peer did not have such a pattern. Which meant there was something different about this company. 

And this was the reason why we introduced a peer comparison feature on Ticker - so that you have all the ratios parallelly listed, and you can check each of the ratios for your peers as well, and you will find any such variation.

Like this!

Make a product that you would use too! A product is a solution to a problem afterall.

That was a long answer.

That it was… and insightful too!

Insider: Right. Okay. So, next question. One thing that we have noticed about you is that you search for stocks in your environment. Like, when you went on a trip, you completely studied the hospitality and hotel industry.

PK: I know the best hotels now. 😂

Insider: Would you like to suggest some? 

As stocks? If not, then… well, for the company trip’s recommendations?

Insider: Okay, so how do you go about finding or recognising that particular thing? When you try finding out about out a hotel or a facility, do you follow the top-down approach or the bottom-up? 

PK: Right. So mostly, I prefer bottom-up simply because I am not actively looking for companies. I'm waiting for companies to come to me. And I can cross paths with companies across sectors and genres. It's not really in my control, which is why by design, it's bottom-up. 

Also, I think the bottom-up approach invariably leads you to analyse the macro industry as well. It's just that the chronology of these steps differs. So I think because my investing starts with liking something as a customer, it's invariably bottom up.

For someone who is actively seeking companies, it may be top-down. Earlier, when I was filtering stocks, it was a mixed bag, so sometimes, it was a top-down approach. But now that I give absolutely zero time finding new companies, and the companies have to come to me; it's the other way around. 

Ever wondered what PK thinks about trends in investments?

Insider: So nowadays, people are running behind industries that are trendy or technologically advanced, like EVs, AI and healthcare. What is that one industry that is in front of our eyes, and the retail investor is completely overlooking it because they are too focused on the trends? 

PK: Oh, tough question. 

[A long pause…] The second set of questions really had some punch to them!

Okay. One problem with trying to predict winners is that even if you know the industry is changing, say EVs will be mainstream, it's very difficult to pick the winner because, initially, it's about who can pump in more money.

Right now, Tata Motor looks like its ahead of others, but that's because Maruti and Hyundai have just started to take an interest in the sector. 

So right now, the one who looks like the leader is simply so, because others have not taken it seriously. Others are waiting for someone else to justify and create a proof of concept.

And now that the proof of concept has been created by Tata, others are realising, “Okay, we should also do it.”

It's similar to how the first tablet PC was conceived by Microsoft and not Apple. Apple was waiting to see how consumers react. “What's the feedback? How can we make it better?”

So predicting the winner in an emerging industry, in a fast-changing industry, is infinitely tougher than picking a winner in a settled industry. So I usually don't take that risk. I don't think it's worth it.

It’s not a race to win. So the first mover is usually the test dummy. It’s development on existing ideas that create survivability.

Insider: Like HDFC and ICICI. 

PK: Right. Like HDFC and ICICI. 

So for people who don’t know about this, PK has often talked about how ICICI is the disruptor and HDFC is the follower. ICICI plans and executes new things, and HDFC takes that idea, plans better, executes better and becomes the leader. 

I think it's safer to stick to settled industries. Having said that again, because we work in the fintech space, it's a no-brainer that credit card penetration will increase, life insurance & health insurance penetration will increase, and index funds will increase. Index funds will gradually take market share from active funds. 

And when it comes to index funds, tech players have an advantage and not financial players. Because the index is tech, you don't need to do any research, which is where wealth management as an industry will change from being a finance industry to becoming a tech industry. So that's a change that's very obvious to me.

New entrants and industries are shiny and attractive, but that doesn’t earn them the medal of trustworthiness. It’s the ability to stay shiny when the players aren’t new anymore!

One thing that I see from specifically retail-focused banks who have built their glory around giving car loans, and personal loans to consumers is they are in for a lot of volatility because banks, to me, will become B2B, back-end technology and not B2C. 

Five years ago, you would choose a bank that had a branch near you. Now branches are almost irrelevant. Now you open a bank account in an app that you like, and there are a lot of neo-banks. Neo-banks are not even banks themselves. They have a tie-up with a bank at the back end. 

So the banks that will do well will be the ones who can give good APIs to the neo-banks so that neo-banks find it cheaper and easier to integrate with them. 

Because the biggest distribution channel for banks will not be branches but neo-banks. That way, a lot of good banks that look really good right now (in terms of financials) are really lagging behind in terms of tech collaborations, and they'll suffer.

So, for most businesses, tech really is, the next frontier.

Speaking of good banks… how about you take a look at some Efficient Banks?

Insider: Okay, so the next question is a bit hypothetical. What is that one business or a company that has the potential to grow very much, but the management sucks? And if you were the head of the operations, what would you do differently? 

PK: Oh, interesting. Okay. I’ll have to think about this! 

[Another long pause…]

So I have been tracking the hotel industry for the past 3 or 4 months, and I noticed they put in a lot of money. A LOT of money, like ₹300-400 crore, and put it where?

In designing a really grand lobby, a huge chandelier, giant gates, put up expensive paintings, and all of these cost a lot. This is really money-consuming, and they leave out many low-hanging things. 

So as a hotel owner, what do you want? You want that the guest dines there, the guest takes the spa treatment; anything that you can offer as an add-on, the guest avails it. That's where you earn money. It's a business where you have a live human being with a lot of cash in his wallet, staying with you for 24 hours. You want to sell anything you can to him during that period!

Today’s fintech and other tech companies have the customer for three to six minutes, and they have to make the best use of it. Hospitality is the only industry, apart from hospitals, where the client, the guest or the patient stays for a long period of time. I think hospitals use it very well. Hotels miss a lot of monetising options.

If you build it, they will come. If they stay, they will pay.

For example, someone takes the game zone at a mall at a very high lease cost and then opens a gaming zone on the mall. If you are a 500-room hotel, 1000 guests are staying. Why can't you place two air hockey tables, one table tennis, one pool and a few digital arcade games and charge for it? You could do maybe all of these in, say, ₹5 lakh. 

They waste it on buying paintings. That at least, does not actively give you more cash flow. Apart from certain really resort-focused hotels in certain tourist areas, I have not seen a lot of hotels doing this. It hardly takes a 500 sqft area to install all of this.

And even if not for monetisation, you keep it free of cost so guests spend more time in the hotel, and it makes it likely for them to go to the cafe once they are finished playing the games. It's a very simple thing. So I've not seen a lot of hotels do that. 

Also, I think, why is there a system where I have to pay each time? Just give me a prepaid card, and I load the balance in it just like the game zone.

I enter whenever I want to. You have my card, and you have my ID. I just go to a screen. I see the inventory - number of rooms available, their size, and other details. And just like self-check-in kiosks in the airports, I check myself in whenever my card is swiped. 

So I see a lot of inefficiencies in the hotel business.

Prepaid cards also provide service providers with a pool of funds they can dig into without having to to resort to debt or equity!

Insider: Alright. Last question. One thing that you would like to change about yourself as a value investor. 

PK: Okay. There are a lot of things I want to change about myself. I think my lack of in-depth knowledge of understanding financial statements. I find reading 200 pages of an annual report really boring.

I wish I was more interested in doing the forensic analysis of the company, going deep down into the financial reports, analyse it end to end, but I've never been able to do that.

I think if I do that a lot, I'll quit investing itself. Ideally, I should (conduct analyses), but yeah, that's what the Research and Analysis team does really well.

This is why you build a team, you know? Not just to outsource the things you don't have time for but also to find people who can complement and supplement your skills. So as a team, I think we have got it covered well.

No man is an island, and the point is not to become one alone.

Insider: Right. Thank you so much for answering all the questions so patiently. This has been very insightful. 

This was it, peeps. Let us know in the comments if you have any other questions, and we’ll set up another interview with your fav investment guru.

Would you like us to interview other players in the finance domain too? Tell us who you’d like to see added to our roster.

Till we meet again!