forbes - february 6 2015 in

Price rs. 110. february 6, 2015

Xiaomis Lei Jun: the steve Jobs of china pg.68

hoW, WheRe anD When to invest in

ManageMent is king

nemish shah, co-founDeR of

enam, on his goLDen RuLes of investing

the realty question

is the ReaL estate maRket cappeD?

not yet. gRoWth WiLL come fRom

tieR ii toWns

outperforMing Mutual funds LeaDing funD manageRs on hoW they DiD betteR than the maRkets

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investMent guide

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Tablet Edition

Welcome to the

Headline to come here

By writer

Nothing pleases an investor more than a sense of stability, a feeling that he can put his money into assets where things wont suddenly change

Best,

Sourav MajuMdarEditor, Forbes India

[email protected]@TheSouravM

The Investment roadmap

Last year, when we published our annual Investment Guide, uncertainty and volatility were the key themes. No one was willing to hazard a guess about how the year would unfold, and geopolitical and economic uncertainties loomed large. Now, as we bring you the 2015 Investment Guide, things have changed quite dramatically. India has a stable political formation at the Centre, there is an overriding sense of optimism in the business community, and the markets have been buoyant despite occasional blips in between. Nothing pleases an investor more than a sense of stability, a feeling that he can put his money into assets where things wont suddenly change or head in a direction opposite to the position he has taken.

The experts, whose views you will find in this issue, have shared their opinions on various asset classes against this backdrop, in which the government is keen to roll out the next phase of important reforms, with oil prices declining sharply (something which most believe will augur well for India) and inflation finally showing signs of coming under control. In fact, even as I write this note, the Reserve Bank of India (RBI) has announced a 25-basis-point cut in the repo rate, signalling the beginning of an easier interest rate regime. This has, expectedly, also pleased the markets and the 30-share S&P BSE Sensex is up smartly as a result. The overall optimism since the new government has taken charge is also manifested in the fact that the Sensex has risen 13.7 percent between May 16, 2014, the day the general election results were announced, and January 13, 2015. Significantly, during the same period, Brent crude has declined from $109.75 per barrel to $45.65 a barrel, a 58.4 percent fall, making life a lot easier for the government. The stage seems set for investors to have a good year, but as our Markets and Finance Editor Pravin Palande, who helmed this special issue, puts it, we are still a fair distance away from euphoria.

While on the subject of investing, this issue also introduces you to a lineup of Indias most successful and prolific angel investors who are powering the countrys fast-growing entrepreneurship ecosystem by funding startups with great ideas and passionate teams. You will meet them on page 80. These are the people who have been able to spot ideas early and have had the courage and conviction to back them, creating excellent businesses in many cases. India, as most of us will agree, needs many more like them.

L e t t e r f r o m t h e Editor

february 6, 2015 / forbes india / 3

Volume 7 | Issue 03 | February 6, 2015Contents

20 Investing In A Brave New World How to pack a portfolio thatll give you market-beating returns 24 Return Is King The myths of real estate investing revealed 26 For Demand, Look At Second-Time Buyers Watch out for tier II towns; there are plenty of real estate opportunities in new regions 30 Gold Buying Spree Hints At Distrust Towards Dollar The shiny metal allows export-based economies to look beyond US monetary policies 34 Why Management Is King Quality of people running the show can make or break an investment decision

38WhatExactlyIsInflationResponding To? Structural reforms are playing a big role in taming inflation 42 The Supercycle Of Commodities Is Over The monetary policies of central banks will decide future trends 44 Why A Checklist Matters Leading fund manager S Naren and doctor-author Atul Gawande discuss ways to navigate the complex world of finance 48 InTheOffing:MoreInterestRate Cuts But they will not send the economy on a splendid growth trajectory 54 How These Mutual funds Outperformed The Markets Four money managers handhold us through the volatile markets

55 Seeking Quality in 2015 Forbes India crafts its portfolio to make the most of the bullish market

4 \ Forbes IndIa \ February 6, 2015

Upfront

COLUMN 18 Vivid Vision For Success A mission statement wont help a business unless its tangible

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Investment Guide 2015

20 Saurabh Mukherjea

38 rajiv ShaStri30 riteSh jain

24 harSh roongta

42 naveen Mathur

26 Pranay vakil

48 aMandeeP ChoPra

Features

ENTERpRISE 56 EnterpriseInIndia:WhereAngels Fear To Tread Angel investors tell us where they put their money 64 Money Machine How ATM industry veteran Loney Antony turned entrepreneur with a disruptive outsourcing model

CROSS BORDER 68 The Steve Jobs Of China Xiaomis Lei Jun built one of the worlds most valuable private tech companies by mimicking the iPhone 72 Reinventing The pizza How to add spice to the boring dough-and-topping industry? Ask a nuclear submarine commander

INTERVIEW 76 India Is A Country Obsessed With Education But quality of schools is an issue, says Harvard Business School dean Nitin Nohria

WE VALUE yOUR FEEDBACK.write to us at: [email protected]

Letters may be edited for brevity.read us online at www.forbesindia.com

Coverdesignby: anjan das

Subscriber Service: To subscribe, change address or enquire about other customer services, please contact: FORBES INDIA, Subscription Cell, C/o Digital 18 Media Ltd, Empire Complex, 414, Senapati Bapat Marg, Lower Parel, Mumbai - 400013. Tel: 022 4001 9816 / 9783. Fax- 022-24910804 (Mon Friday: 10 am - 6 pm) SMS FORBES to 51818 Email: [email protected], To subscribe, visit www.forbesindia.com/subscription/To advertise, visit www.forbesindia.com/advertise/

Contents

Regulars

18 Letters 22 Check-in114 Nuggets

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Life

RECLINER 78 Six of The Best In the second volume of his memoirs, veteran editor Vinod Mehta lists the people he admires 84 India Incs Tryst With Bollywood The goldmine of the future is content. And that is where the titans are weighing in with their might 86 Where To Stay In 2015 From Marrakech to Miami, the best new hotels

Gimme more: Lei Jun is unwilling to slow down

Editors take: Vinod Mehta says admiration is preferable to unrestrained adulation

Clear focus: Nitin Nohria spells out his concerns

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L e t t e r s to the editor

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Life Daily Sabbatical Magazine Upfront Features Multimedia Blogs Lists News

www.forbesindia.com

Intellectual IndiaRefer to Minds That (Should) Matter (January 9, 2015, issue). The list worked perfectly with the notable exception of Meena Kandaswamy, who is more in the territory of Teesta Setalvad, not even Mayawati! She has zero impact, except on one university that excels in promoting and report-ing the great Dalit divide of India (even when the chief minister of the most populous state was Dalit and an empowered one at that). The religi-osity of these petty positions should exclude her from this august list.Raghuram JR, on the web

If I have to choose one among these luminaries, it would definitely be Dr Jayaprakash Narayan. It is sad that India does not know its heroes. What the article portrays as political failure

Readers Say

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now will be regarded as the greatest initiative in the decades to come. Raju, on the web

Nobel laureate Kailash Satyarthi must be included in the list. We have a moral deficit in most in India. He is the one who gives us hope. Om Prakash, on the web

Connecting PeopleRefer to Internet for All (January 9, 2015, issue). Over the last five years, the internet has picked up significantly in India. It will blossom with proper infrastructural implementation. The upcoming spectrum auctions might help. Even the National Optical Fibre Network project needs to pick up speed. With defence freeing up spectrum, we can expect sunny days ahead.Punyasloke Bandyopadhya, on the web

http://forbesindia.com/multimedia/audio/1

http://forbesindia.com/blog/

Must-Read BlogS

Podcasts

HOW, WHERE AND WHEN TO INVEST IN 2015

By Pravin Palande

Employees in the Outsourcing World are Serious Business Partnerstheir work ethic should be an example for the rest of India

Building a Smart City Landscape in India Before knowing about smart city components, it is essential to identify problems faced by citizens

Commentary Takes a New Turn When Telecom and Cricket Forge a Partnership an imaginary description of events if umpires did trais job for a day Focus on Liveable

Cities, not Smart OnesPeople want quality of life to improve; they want to live in a place which has good career opportunities, and provides good facilities

Indias Education Policy Needs a Complete Overhaul a shift in mindset is needed in order to build a good learning system

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a man holds a giant pencil as he participates in a march in paris on january 11. the world came together to express solidarity with the 12 people killed as gunmen opened fire at the office of French satirical magazine Charlie Hebdo in the capital city. The country saw more violence following the shooting, purportedly to avenge the mockery of Prophet Mohammed in the magazine, as gunmen took two more hostages in a French kosher supermarket. Two suspected jihadists were also killed in an anti-terror raid in eastern Belgium. The magazine went on to print 3 million copies of its post-attack special issue, which had a weeping Prophet on the cover. The title read Tout est Pardonne (All is Forgiven), which the French media interpreted as the Prophet forgiving the cartoonists for lampooning him.

12 \ foRbeS india \ febRUaRy 6, 2015

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/ Impact /

Oils Well for India?

prince al-waleed bin Talal (officially the richest Saudi and a member of the ruling family) has gone on record to say, We will not see $100-a-barrel oil again. The recent weakness in crude oil notwithstanding, this is a very powerful statement. Lets look at some of the factors and why this may just be true.

In the last six months, the dollars strength has been an underrated contributor to the fall in crude prices. The dollar and crude oil have traditionally been negatively correlated. However, not only has the movement in the dollar been much

Declining prices might benefit Indian oil companies but they pose a risk to global economy

by ujval nanavati

Mid 2014 Jan 2015 %Intl crude ($/bbl) 106.83 47.13 -56%Intl crude (Rs/bbl) 6,440 3,050 -53%Petrol Pump prices (Mumbai) Rs 83.63 Rs 68.86 -18%

soon. Besides, financial institutions do not have the kind of risk appetite or balance sheets to create a similar oil bull market.

Now, what does it mean for India?

The initial euphoria over falling oil prices has waned with a growing realisation that low prices are indicative of a deeper global malaise. Gains for the consumer have been tangible though (see table).

The portion of gains not passed on to the end user has been distributed between the central government (excise duty hikes), state governments (hike in local taxes) with the balance going to oil marketing companies (OMCs) such as BPCL, HPCL and Indian Oil as margins. Yet, for an average user of, say, 80 to 90 litres of oil a month, this gives a not-so-modest Rs 20,000 per annum of gains, which can find its way into financial savings, consumer spending or more gold buying.

One of the reasons for this disproportionate decline in pump prices has been the consistent hikes in excise duties; total impact has been Rs 5.75 per litre on petrol and Rs 4.5 per litre on diesel (both absorbed by the OMCs, who by not reducing retail prices are negating the absorption).

This will bring in additional Rs 60-70 billion for the government in the next three months, and that doesnt hurt when the fiscal deficit already stands at 99 percent of full-year target. There is also talk of a VAT increase

Pipelines that carry crude oil from Russia to Germany. Russian sovereign default is one of the risks if global crude prices remain below $50 per barrel

Co

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Difference in global and local prices

stronger in the last six to nine months, even the correlation has been almost perfectly negative.

Where could prices settle? Prince Al-Waleed may not be entirely wrong: History, too, supports a lower top for oil prices. Post the oil crisis of the 70s, prices had been stable for an extended period, reaching a post-dotcom bust low of $19. It took the longest economic boom in history to take

prices from there to $130+ levels in mid-2008, before it crashed to $40 levels in January 2009 post the financial crisis. Sustained liquidity infusions through QE, economic stimulus packages in China, and the building of derivative trades took the prices above $100 levels in a short span of two years.

Neither are we on the cusp of a 2000-like boom nor are we likely to see easy liquidity conditions

bbl - barrel


by the states. Lower subsidy payouts (kerosene, LPG, etc) will also help reduce this deficit.

On the trade front, the gains are tangible given that oil was 36 percent of the import bill and is now 26 percent of it at current prices. However, this needs to be moderated by the lower realisations on exported refined petroleum products, which are 20 percent of total exports.

OMCs have been the largest gainers given that a large part of the fall in crude oil prices has not been passed on to consumers. The BPCL stock, for instance, has doubled in the past one year versus a 32 percent gain for the Nifty.

Other beneficiaries include:(a) Automobiles: Lower inputs costs and rising demand for automobiles with lower fuel prices(b) Tyre manufacturers: Benefits come from the correlation between rubber and oil prices,

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by import-dependent Middle Eastern countries (think luxury cars, metro rail contracts, exploration and production projects, IT services, etc) Derivative losses at financial institutions (a $3 trillion-market has effectively halved in just six months) Rise in downstream and E&P sector NPAs (non-performing assets) for banks, which have been lending hand-over-fist to capital intensive energy companies.

Taken together the supply-related and other factors contributing to the fall in oil prices outweigh the gloom around low demand. India, which is dependent on imported oil and suffers from endemic inflation, will be a natural beneficiary of low prices.

A recent Oxford Economics study predicts a 0.75 percent GDP uptick for India from a $40 per barrel price level. (Philippines is at 2 percent; Saudi Arabia at -4 percent). But fact remains that lasting GDP growth comes from increase in demand and investment, and not from reduction in costs.

Indias wish for a moderation in oil prices has been more than granted, which hasnt proven to be the panacea that it hoped for. The other item on the wish list, ie interest rate cuts, is also being granted. But will it be similarly over-rated? Time will tell whether all is well or all is in the well.

(The wRiTeR is foRmeR senioR

manaGeR, coRPoRaTe finance &

Risk manaGemenT, TaTa sTeel)

Petrol (Rs/lt) Diesel (Rs/lt)Nov 12, 2014 1.50 1.50Dec 2, 2014 2.25 1.00Jan 1, 2015 2.00 2.00

EXCISE DUTY ON PETROLEUM PRODUCTS

while higher auto sales will push volume(c) Plastic industries and chemicals: Lower input costs(d) Paints: Large business-to-consumer manufacturers such as Asian Paints, which have significant pricing power, will benefit substantially from lower input costs(e) Footwear makers: Lower rubber and intermediate chemical prices will add to margins.

Those who have been negatively impacted include upstream oil exploration companies such as ONGC, Cairn, OIL, and service providers like Aban Offshore and L&T (indirectly).

Gains, however, are likely to reflect in the results of corporates only post the fourth

quarter of FY 2015 due to inventory effects and the fact that the steepest declines have come towards the end of 2014; for companies that have already bought inputs at lower prices and have not passed on the benefit to consumers, margins will start improving from the fourth quarter of FY 2015.

The champagne prudently remains uncorked as a number of specific downside risks, contingent upon oil remaining below $50 per barrel, remain to play out. Some risks include: Leveraged US shale producer declaring bankruptcies Russian sovereign default Lower Opec portfolio flows Reduced consumption

Source: Finance Ministry

Correlation Coefficient: 5yr: -0.52; 9 month: -0.96

USD IndexCrude Futures

climate change and clean energy ventures took centre stage at the Vibrant Gujarat Summit this year, almost nudging out traditional industry segments that have made the state the chemical hub of India. Dozens of MoUs signed this year were in the cleantech arena and spanned a range of manufacturing and consulting activity. Some of these were big-ticket investments of global scale which, if fructified, could help India leapfrog into the clean energy game.

In its seventh edition this year, Vibrant Gujarat has been favoured by India Inc as a stage for big investment announcements.

Suzlon Group chairman Tulsi Tanti, who has been attending the event for several years, told Forbes India, It wasnt just the entrepreneurs, climate change was also being discussed and highlighted by almost every high-profile speakerfrom the prime minister, UN secretary general, US secretary of state to the

prime minister of Bhutan. There is huge attention from policymakers and this is very encouraging.

A bulk of the renewable energy MoUs signed had to do with solar power. Not surprising, considering that the new BJP government has revised the target for Indias solar power generation to 100,000 MW by 2022. A slew of incentives, including subsidies, are being considered to help achieve this and may be announced soon, sources in the MNRE (ministry

of new and renewable energy) say.

Gautam Adani, group chairman of the Adani Group, signed a deal with the US-based SunEdison to build the largest vertically integrated solar cell manufacturing facility in the world. The new factory, to be built with an investment of Rs 25,000 crore, will have a production capacity of 7.5 GW per year. It will make key ingredients for solar panels.

Adanis ambitious pitch can be understood in comparison with existing leaders in the global PV (photovoltaic) business. Chinese company Trina Solar is the largest solar panel maker in the world today. It has an annual production capacity of


/ thinking green /

Indias New Solar SystemClean technology MoUs, covering a wide range of manufacturing and consulting activity, stole the limelight at the Vibrant Gujarat Summit this year

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about 3.8 GW, while the second largest company, First Solar Inc, has a total capacity of 2.4 GW (as of September 2014). The facility will create enough solar panels to fuel substantial solar growth in India, Adani Power chief executive Vineet S Jain said. It is expected to start production in the next three to four years.

Ironically, even as the Adani Group pitches itself as a global leader in power generation from renewables, it is battling heavy criticism from NGOs for giving the environment a short shrift at its projects in Gujarat and Maharashtra.

Speaking on the potential of PV manufacturing in India, Dr Tobias Engelmeier, founder of Bridge To India, a solar consulting firm based in India and Germany, says, The global market for photovoltaic cells collapsed two years ago due to oversupply. But it is beginning to pick up now because of consolidation among the manufacturers and improved margins. Many solar industry experts are of the opinion that the real fillip for solar power in India will come from its retail adoption through rooftop generation. Engelmeier says there is currently a big gap in this as individual customers are not comfortable buying solar equipment.

Independent power producer Inderpreet Wadhwa, founder of Azure Power, is among

those wanting to tap the rooftop opportunity. The company signed an MoU at Vibrant Gujarat to launch a national certification programme for rooftop solar photovoltaic installers. The programme is aimed at developing workers skilled in solar PV, engineering, construction and operations.

The other big announcement in renewable power at the event was by Delhi-based Welspun Renewables. The company, which is already a large solar power developer, committed to set up 500 MW wind power and 600 MW solar power capacities in Gujarat. The 1 GW project, in partnership with Gujarat Urja Vikas Nigam, will have an investment of Rs 8,300 crore, the company said. Solar power generation is still about 40 percent more expensive than wind power. Developers also

need much larger parcels of land than for wind power generation.

Tantis response to this is to develop a hybrid modelone that generates wind and solar power in the same facility. Tanti has expressed intent to develop up to 3 GW of such power in Gujarat. Our plan is to develop IPPs (independent power projects) around industrial clusterssay in the textile, auto ancillary or food processing industries, he says. He has already done this for wind power, at clusters like Tirupur, where about 400 mill owners receive electricity from their own windmill.

Suzlon now plans to replicate this in Surat and Dholera (in Gujarat) and at industrial locations in other states, with one big differencehe will also put up solar PV panels in the facility. The SMEs will not be able to afford the solar equipment, so the solar power will only be sold to the grid. The

idea is to increase the overall efficiency. The power evacuation facility is common, and will be better used. And so will the people operating and maintaining the equipment over the years, he says.

The Narendra Modi governments fresh focus on renewables could well be a lifeline for Suzlon as developers look to buy wind power equipment. Apart from equipment sale to other developers, the company is looking at adding capacity as a power generator and developer. Tanti is trying to script a turnaround of the wind-turbine maker, which is straddled with a debt of Rs 17,320 crore (as of September 2014). A major chunk of the de-leveraging is expected to come from the part-sale of its German subsidiary Senvion SE. But Indias first global wind power entrepreneur is also buttressing its presence in the home market. Solar has momentum today, says Tanti. We expect to add 200 MW of hybrid capacity in four states by March 2016.

So, even as falling oil prices have taken the wind out of the sails of renewable energy investments globally, India seems to be bucking the trend and marching towards a greener future. The government is pushing for 10 GW of new renewable power capacity every year. If the queue of entrepreneurs at Vibrant Gujarat is any indicator, we might get there soon.

- cUckoo pAUl

Suzlon Group chairman Tulsi Tanti

Suzlons plan is to develop independent power projects around industrial clusters

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A lmost 90 percent of New Years resolutions go bad, says British psychologist and researcher Richard Wiseman. Yet, half of us will try to beat the odds anyway. For most, our attempts will lead to broken promises in February and failure guilt in March.

Why are resolutions doomed?Theyre too vague, says Wiseman.

Gym memberships spike 30 percent every January. But going to the gym and hoping to lose weight are not hard resolutions. They are airy hopes. Without a plan so clear that it can be seen almost as a movie in ones head, such resolutions will sputter. A resolutions sad cousins in the business world are the five-year business plan and the mission statement. Most of those fail, too. Business plans of the five-year type often have numbers pulled out of thin air. Mission statements are typically mushy, politically correct, clich-ridden and forgettable. The plans are from Mars, the statements from Venus.

A Canadian businessman, Cameron Herold, suggests a way of out of this trap. The idea occurred to him while he was watching an Olympic high-jump competition: I saw how the best jumpers used visualisation techniques. Theyd stand on the runway and use their hands to block out the view of anything but the high jump bar and the landing pit. Theyd look at the bar, visualise their run up, takeoff step and roll over the bar. They could see it all, as if a movie were playing in their head.

Why shouldnt entrepreneurs and executives do the same thing? While chief operating officer at 1-800-GOT-

JUNK?, a trash-pickup franchise based in Vancouver, Herold used what he calls vivid visions to increase sales from $2 million to $125 million. Today he speaks and coaches CEOs.

A vivid vision starts when an entrepreneur, founder or CEO plants one foot in the present and then leans out and places the other in the future, the what could be. Herold specifically recommends a three-year framework, not a one-year or a five-year one.

How to start? Turn off your computer. Get out of your office. Go someplace remote, quiet, inspiringa beach, a mountain. Take an unlined sketch pad and a pencil. Start writing what you see as the epitome of your success. Describe it in detail. Its helpful to imagine that youre filming every aspect of your business: Your employees, customers, supplier relationships and so on. Play the film in your mind. What will the big picture and the details look like three years out?

Hold no detail back, Herold says. What are clients saying about you? What kind of comments are

By rICh Karlgaard

ViVid Vision for successIts helpful to imagine that youre filming every aspect of your business:

Your employees, customers, supplier relationships and so on

your employees making at the water cooler? How is the company running day to day? Cover every area of your business: Culture, staff, marketing, public relations, IT, operations, finance, engineering, production, customer service, etc.

Herold has written a Vivid Vision Checklist. He has also written a book titled Double Double: How to Double Your Revenue and Profit in Three Years or Less. Aim for 1,000 to 1,500 words, which will complete the first step. But dont stop there. Now go out and hire a professional writer to make the words pop and a graphic artist to make it look good, says Herold.

Your vision wont help your company if others dont see it as vividly as you do. Too many CEOs expect others to see the movie in their head. Well, thats impossible. You have to make the movie available and vivid to everybody.

After youve finished writing your vision and had it professionally edited and designed, put it on your website for all to see. Then make laminated copies and bring them to board and executive meetings. Start your meetings by having an executive read all or part of the vivid vision. Herold says the vivid vision should act like a magnet. It should attract people who are committed to your vision and repel those who arent.

If you think a vivid vision sounds like something a religion might do, youre right. The best businesses are almost religions, says Herold without apology. Apple, Google, Starbucks, 1-800-GOT-JUNK? Great companies spring from vivid visions.

Rich Karlgaard is the publisher at Forbes

18 \ forBes IndIa \ feBruary 6, 2015

Investment Guide 2015

Master investor Nemish Shah, co-founder and, currently, director of Enam Hold-ings, is a man of few words. So when he says this is among the best markets situations that he has seen in his investing career, it is a measured assessment of sentiment. And that, in turn, is rooted in facts. Oil prices are down to $45 a barrel: This, he says, will reduce the import bill, thus positively impacting Indias current account deficit. Bond yields are already factoring in interest rate cuts and, over the last year, the equity market is up by 30 percent. For the sceptics, the message seems to be: Under-estimating Indias growth potential is incorrect when the global economy and the domestic market indicate buoyancy. Shahs optimism, however, is balanced by the caution displayed by the various fund managers we interviewed.

The smart investor is always prepared.Take S Naren, chief investment officer at

ICICI Prudential Mutual Fund, who even uses a checklist to guide his team through extreme times. These could be bull or bear markets. Counter-intuitively, one of his rules is to be more carefulor take less risksin a bull mar-ket scenario. We have him in conversation with Atul Gawande, the prominent US-based surgeon who has written the book, The Checklist Mani-

festo, discussing the idea of creating a checklist for industries that deal with complexities on a regular basis (page 44).

Meanwhile, Prashant Jain, one of the biggest investment managers in the country, has a different challengethat of the bigger num-bers. His HDFC Top 200 Fund, with around Rs 14,000 crore AUM, has managed to clock record returns after a period of flat growth. Jain is not intimidated by ticket sizes and has faith in Indian equities as an asset class that will produce the best long term returns. Take equity seriously, he tells investors, when considering asset allocation (page 50).

That, perhaps, has been the common theme for this special package, as the advice and analyses that follow will show you.

To quote pioneering investor Sir John Templeton (of Templeton Mutual Funds) from Tony Robbinss Money; Master The Game: 7 Simple Steps To Financial Freedom, the seminal book on personal finance: Bear markets start on the time of pessimism. They rise on the time of scepticism. They mature on the time of optimism and they end on the time of euphoria!

It is safe to say, we are just stepping away from scepticism, but we are still far away from euphoria.

By Pravin Palande

InvestIng In good tIMes

Portraits by Sameer Pawar

Much has altered over the last decade, and more change is in the offing. So, stick to companies whose business models are easy to understand, which generate healthy returns on capital employed and which have a steady revenue growth

InvestIng In a Brave new world

C hristmas is my favourite time of the year because it is a welcome break from the relentless grind of research and deal-making that defines the life of an Indian broker with clients spread across the world. It also gives me a week or so to reflect, and as I write this column over the break of 2014, my mind goes back to the Christmas of 2004.

During that vacation a decade ago, I had come to India to explore business opportunities for a stockbroker like me in the roaring Indian economy. The small equity research franchise that I had just co-founded in the United Kingdom was growing steadily in a British economy which, in turn, was growing at 3 percent in a world where the price of a barrel of Brent crude was $40. Alan Greenspan was still the revered chairman of the Federal Reserve and hence, by extension, the most powerful man in the world after the president of the United States, George Bush. America and Britain had supposedly

found weapons of mass destruction in Iraq and, consequently, their guns were trained on that region.

In India, the United Progressive Alliance (UPA) had just won the general elections at the expense of the National Democratic Alliance (NDA) and Manmohan Singh was celebrated on the cover of Western business magazines as the intellectual, complex problem-solving leader that many Western countries wished they had as their head of state. The NDA, with its discredited India Shining campaign behind it, was seen as a political coalition out of touch with the harsh ground realities of rural India. More importantly, with former Prime Minister Atal Bihari Vajpayees health on the wane, the Bharatiya Janata Party (BJP)the leading party in the NDA was seen as rudderless compared to UPA leader Sonia Gandhis socialist inclusive view of Indias developmental process.

More generally, in the context of emerging

markets, the acronym Brics had become fashionable 10 years ago. Friends of mine who had been running emerging markets money for a long time suddenly found that over the course of 2004 and 2005, the phone started ringing more often as investors dialled in the dollars into those regions and, more specifically, into China and India. One such friend in Hong Kong found his fund swelling from $100 million at the beginning of 2004 to $1 billion by the middle of 2005. On billboards near my office in London, Brics funds were

Investment guide 2015

New strongmen politicians have no fixed economic ideology. They are willing to do whatever it takes to lift growth and subdue inflation

{EM ERG I N G M A R K E TS}

Saurabh MukherjeaProfile: CEO (institutional equities) at Ambit Capital

Known for: He founded equity research firm Clear Capital in London in 2004 and sold it in 2008, before returning to India. He specialises in investing in emerging markets, and is now working towards future-proof companies

By Saurabh MuKherjea

Pau

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advertised with over 3 percent management fees.

Presuming that my Indian surname automatically qualified me to manage money in India, headhunters used to call me to ask whether I would like to make a switch from stockbroking.

The Western press attributed this rising enthusiasm for emerging markets to the adoption by these economies of the

Washington Consensus ie, the World Bank/IMF prescribed recipe of fiscal discipline, low inflation and an open economy (both from a trade and capital flows perspective). Gurus such as Tom Friedman, Barton Biggs, Stephen Roach, Jim ONeill and Jeffrey Sachs were held in high regard for being the high priests of this new dawn for emerging markets.

New political coNstructsThe instinctive tendency of most analysts is to study historical trends and extrapolate them into the future. However, as Thomas Kuhn explained in his book, The Structure of Scientific Revolutions (1962), while the real world might change in a gradual manner, the intellectual constructs that we use to understand the world alter in a non-linear fashion. That is, when a fresh way to think about the world comes along, and if this new construct gives a more accurate depiction of

reality, we abandon the old construct at a rapid pace. One example of this is Copernicuss view that the solar system revolves around the Sun rather than, as Europeans believed until the 16th century, around our planet. In the space of less than half a century, Copernicuss radical thought overturned centuries of conventional wisdom and became the accepted way of thinking. In a similar vein, 10 years on from 2004, we are now seeing the advent of a new way of thinking about emerging markets in general and India in particular.

The decline of the West and the rise of Asia: The Wests economic decline relative to Asias economic vibrancy is making it less assertive in this great game of global jostling by strongmen politicians. The economically enfeebled Europeans are almost invisible in international affairs. The Americans, while more visible, are no longer as assertive as they once were, even in the face of major transgressions by other great powers.

Witness the way President Obama is dealing with Ukraine. All of this matters because as Financial Times wrote on December 5, 2014: What these leaders do tell is that the multilateralist model of the second half of the 20th century is more likely

Behind every stock is a company. Find out

what it is doing. Warren Buffett


A NEw GENERATION Of STRONGMEN pOLITICIANS wITH NO wESTERN BAGGAGE HAS RISEN TO pOwER

to represent a historical interlude than a permanent shift in the nature of relations between states.

Globalisation is already in retreat. As the strongmen stride the stage, Kant is making way for Hobbes and multilateralism for great power politics. The West is about to relearn what it is like to live in a much rougher world.

The decline of Economics: Economic ideologies both on the Left and the Righthave failed over the last 20 years as evidenced by a series of major economic crises in both emerging and emerged economies (think of the East Asian crises and that of Russia in the 1990s followed by the dotcom bust and then the

Great Financial Crisis of 2008). As a result, hyper-nationalismwith a strong religious flavouris the only prevailing ideology which sells across large numbers of people. Vladmir Putin in Russia, Recep Erdogan in Turkey and Narendra Modi in India are politicians from this school.

The rise of strongmen politicians: A new generation of strongmen politicians with little or no Western intellectual baggage has risen to power. Hypernationalists are now not only the prime leaders of key emerging economies, they are, in line with their billing, aggressively jostling for space and power in international affairs. Other leaders in these countries, who had leanings towards

socialism or towards free-market economics, now have relatively low standing and are seen as indecisive relics from a bygone age.

So, what are the consequences of these three shifts?

The need for political re-invention: The discrediting of both socialism and of free-market economics has shrunk the political space in which most pro-poor Indian political parties, such as the Congress, have sought to operate. These parties, therefore, will have to reinvent themselves. How they do so will have a significant bearing on Indian politics and policy over the next decade.

On a more global basis, the concerted rise

of hypernationalism in a range of relatively sophisticated emerging economies (for example, Russia, Turkey, India) is not accidental. As these countries urbanise, there is an increasing need for people who have left their rural roots behind to find a new source of identity. And as the middle class in these countries becomes increasingly prosperous, it gets confident enough to seek identities which are less Western and more indigenous.

Leaders like Erdogan and Modi, by driving home a philosophy of nationalist pride mingled with religious sentiment, have successfully captured the support of both the urban underclass and the urban middle class. Their political


The West is about to relearn what it is like to live in a much rougher world

{EM ERG I N G M A R K E TS}V

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rivalswho have hitherto banked either on socialist economics or on narrow identity politicswill have to reinvent themselves.

Unstable geopolitics: As international politics shifts from an era of American domination to one where other powers such as China, Russia and India also seek to assert their influence, geopolitics looks likely to become more unstable. To that extent, the recent Russian foray into Ukraine could well be the first of such crises.

Unpredictable economics: The new strongmen politicians dont have any fixed economic ideology. They are willing to do whatever it takes to lift growth and subdue inflation, and in the first 4-5 years of their tenure, they seem to be able to pull it off.

However, as their rule endures, the economic impact becomes more mixed and the lack of structural change in these economies is more obvious. In this regard, this brand of strongman economics is not only less predictable than what the East Asian nations practised or what Margaret Thatcher and Ronald Reagan practised, its longer-term economic credentials are also more suspect. Familiar iNvest-meNt coNstructs So, how should one

invest in our brave new world where familiar political constructsat home and abroadare breaking down and where economic ideologies are no longer the path markers that they used to be?

Alphonse Karr, the editor of the Parisian newspaper Le Figaro, famously said that the more things change, the more they remain the same. That adage works well in the field of investment.

My study of the best-performing Indian portfolios over the past 15 years suggests that a sensible way to invest in stocks for the long run hinges around investing in companies (a) whose business models are easy to understand; (b) which generate healthy levels of return on capital employed (RoCE); and (c) which have a healthy revenue growth.

Indian companies which generate healthy RoCE and healthy revenue growth over long periods of time are very hard to find. But the good news is that when you pack your portfolio with such companies, you usually get market-beating returns.

So, for example, if on June 30, 2000, you had invested in seven companies which had in the preceding 10 years generated RoCEs greater than 15 percentand revenue growth above 10 percentevery year

When the customer is having a good time, you can be assured the company is not

Company Jan 8, 2010Jan 9, 2015

5-yr CaGr (%)

Mayur Uniquote 14.74 441.8 97.40

GRUH finance 21.03 293.8 69.45

page Industries 854.65 11,043.1 66.82

V-Guard Industries 89.95 1,082.75 64.48

Berger paints 30.35 244.3 51.76

Balkrishna Industries 108.7 644.8 42.77

Asian paints 179.57 812.9 35.26

HCL Technologies 351.75 1,545.2 34.45

City Union Bank 22.67 96.45 33.59

eClerx Services 313.17 1310.05 33.14

Godrej Consumer 267.15 1,020.95 30.75

Ipca Labs 217.39 738.55 27.71

Marico 101.15 320.15 25.92

HDfC Bank 342.71 974.7 23.25

ITC 128.23 356.7 22.71

Axis Bank 202.71 495.4 19.57

Source: Capitaline

then, over the next 10 years (2000 to 2010), your portfolio would have compounded annually at 16.7 percent versus the 14.1 percent that the Sensex delivered over the same period. Had you repeated the same exercise a year later, you would have had six stocks in your portfolio. And in the 10 years from June 30, 2001, your portfolio would have generated 21.7 percent per annum versus the Sensexs 18.5 percent. In fact, my colleagues at Ambit find that this approachdubbed the Coffee Can Portfoliohas outperformed the Sensex fairly metronomically over the past 15 years.

For the patient investor

who wants to earn healthy returns from equities in an uncertain world, I believe the Coffee Can Portfolio is close to being an ideal construct. Using the last 10 years financial data, my colleagues have created a Coffee Can Portfolio for the next 10 years containing 16 stocks (see table).

With that, I wish you the best of luck in life and in business in 2015.

(Ambit and its associates have

managed the QIP issue of City

Union Bank and have received

compensation from them. Ambit

and its associates have financial

interests in Asian Paints, Axis

Bank, City Union Bank, HCL

Tech, ITCL and HDFC Bank as

on December 26, 2014. I have no

personal holdings in any of the

stocks mentioned in the article.)

Prices in Rs

the Coffee Can Portfolio


In a high-involvement asset like real estate, the extra return on investment should be imperative

RetuRn is King

Mark Twain is said to have remarked, Buy land, theyre not making it anymore. He simply put words to the thoughts of real estate investors. There are several stories of flats/plots from the 50s which were bought for a few thousand rupees being sold for a few crores today. That is the kind of stuff that keeps the legend of real estate investment alive and kicking.

Is real estate the best investment vehicle compared to gold or equity shares or the perennial favourite, fixed deposits? For starters, it is important to first define real estate investment.

Buying an under-construction flat is not real estate investment. You are actually lending money to a developer with the hope that he will deliver a flat to you in the not-so-distant future. You better make a good return when you buy an under-construction flat. Return follows risk, and in the Indian context, the risks of buying an under-construction flat are so high that developers have to provide a price that gives you good returns.

There is nothing wrong in buying an under-construction flat in the quest for higher returns as long as you understand the risks involved. Most

people dont. And those who are otherwise safety seeking investors make this investment under the notion that they are investing in real estate. Very few investors know that the largest number of pending cases in consumer courts is with respect to developers not delivering on promised flats.

The other mistake people make is the assumption that buying a house to stay in is real estate investment. I would put it more in the category of a consumption item like gold jewellery. You know it has decent resale value but you are unlikely to sell it unless your life is at


Most people dont understand the risks involved in buying an under-construction flat in the quest for higher returns

{R e a l e s tate }

HarsH roongtaProfile: He is a sebi registered investment advisor and director of Apnapaisa.com

Known for: He is also the author of The Complete Home Loan Guide. Follow him on twitter @harshroongta

By HarsH roongtaG

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24 \ forbes IndIa \ february 6, 2015

stake. As an aside, there is a very vocal minority that advocates that it makes no sense to buy a flat for your own residence. They have plenty of charts, tables and rent-versus-buy calculators to prove their point.

I think these rent-versus-buy calculators miss a very significant cost which is that of defying social convention. Buying your own house (even with a fat loan) is considered the sign of having achieved financial stability. The cost of social pressure is enormous and the sense of security you get by conforming to the social norm (of owning your own residence) is way too high to be ignored.

This brings me to why a real estate investment that runs into thousands turns into crores in just two generations. Real estate investments tend to be lumpythe thousands invested in the 50s were pretty big amounts then. Plus, it is not always easy to liquidate a real estate investment unless you are a very active investor. Most investors are not active and this lack of easy liquidity, which is actually a disadvantage, turns into its biggest advantage as the asset continues to accrue and compound returns.

The most crucial bit about these investments are the returns. Lets assume you have invested Rs 1 crore in a flat in Mumbai in 2015. If you could travel to 2065 and find your

grandchild selling it for Rs 117 crore, will you think that youve made a great investment? If you are delirious with the result, it typifies the legend of real estate investing.

The actual return on this investment is just 10 percent per annum, and even that is prior to the payment of capital gains tax. The post-tax return will be in single digits. It is a decent return, but not spectacular. This is what I call the law of large numbers where the large upfront investment accrues decent compounded returns over very long periods of time (because of illiquidity), resulting in a large value on sale.

We did a small dip stick survey on the real estate market in Mumbai. Ready reckoner values [market value of properties] are available for 24 years since 1990 and we looked at the

10-year moving returns over these 24 years. While the ready reckoner values trail the real prices in most cases, they keep pace with the increase in prices, and hence, the returns calculated using these rates will tend to be quite close to the actual returns.

In the best-performing locality of Colaba, the average 10-year return was 8.07 percent with the lowest being 2.09 percent (1996-2006) and the highest being 14.37 percent (2003-2013). The returns are far more volatile if you take a lower time period of five or eight years.

If you include the returns from investing in under-construction properties, you will notice that over long periods, they are only slightly better than safe investments such as fixed deposits. Given the fact that real estate is a high involvement

asset, the extra return over a bank fixed deposit is a must have rather than nice to have.

If you look at a comparative return on the Nifty, it is far superior with much lesser volatility. Not a single 10-year return is negative in this case.

But unlike equities, real estate prices are not published on a daily basis and hence, a drop in rates is not publicly visible. Thus, you dont see panic selling. Because of the illiquidity, the investor also doesnt book profits prematurely (when prices rise) as in the case of equities. Hence, real estate tends to allow the magic of compounding full play unlike any other asset class even if the rate of compounding is not very high.

We have many clients who have up to 80 percent of their portfolio in real estate. As part of the asset allocation exercise, when we ask them to sell one of their properties, they look at us as if we have asked them to sell one of their kidneys. It is always an uphill battle to convince them.

In conclusion, you should definitely invest in real estate as long as you have a fairly large portfolio and only some portion (up to 30-40 percent) is allocated to this asset class. But dont delay buying your own home, and understand what you are getting into if you are buying an under-construction flat.

Rule number 1: Dont lose money. Rule number 2: Dont

forget rule number 1

february 6, 2015 / forbes IndIa / 25

whats the best bet?

Source: Government ready reckoner and Bseindia.com

0%

5%

10%

15%

20%

25%

200

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2

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Real estate - 10 year rolling return

Equity - 10 year rolling return

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urns

Year

And beyond tier I cities, says real estate consultant Pranay Vakil. The realty market may appear saturated but opportunities exist in existing buyers and new regions

For DemanD, Look at SeconD-time BuyerS

Q How will demand be created in tier I cities?The demand will come from second-time buyers. It is important to distinguish

between a first-time buyer and a second-time buyer. Today, the transactions taking place in the luxury and super-luxury segments


A residential building in Gotri, Vadodara. Most of the future growth in real estate is in places like Vadodara and Bangalore, says Pranay Vakil

{R e A l e s TATe }

Pranay VakilProfile: Pranay Vakil is co-founder of real estate consultancy Knight Frank India and among Indian real estates most respected voices. For over two decades he has advised multinational and local corporations on M&A in the real estate market.

By PraVin Palande

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P ranay Vakil, chairman at Praron Consultancy and founder of Knight Frank, is a long time observer and analyst of the brick and mortar business. So when he reassures Forbes India that, despite the five-year plateau in the market, there are still plenty of areas for growth, we stop and listen. Excerpts from a conversation:

Q Over the last 20 years, real estate has yielded high returns, of around five times, in the top metros. Do you see that trend continuing?Markets in the top cities may have peaked in terms of returns over the last 20 years, but that is not the end of the business. You are only looking at cities like Mumbai, but that is not the case in Ahmedabad where rates are still at Rs 3,000 per sq ft. In Noida, too, you can make an investment. Most of the future growth is not in Mumbai or South Delhi where all the appreciation has taken place. You have to look at places like Vadodara and Bangalore as well.

are not from first-time buyers. They [the buyers] are selling one property to buy another. You are also looking at incremental costs for these second-time buyers. Say, I want to buy a luxury apartment (for Rs 10 crore) but I am

getting Rs 5 crore for my existing flat. Im looking for Rs 5 crore as incremental investment. How do I get that? I borrow Rs 3 crore.

The balance Rs 2 crore I will draw from savings, etc. Ultimately, I will be putting down Rs 7 crore (5+2) plus the Rs 3 crore as borrowing. These kinds of structures have become very common in tier I markets. And as salaries

grow and people who have made good returns on existing properties sell their flats, they will create the demand there.

Q Does it make sense to rent a flat in the city?The wiser guys are staying on rent for Rs 30,000 or so in the central areas of cities like Mumbai. They are then deploying, or investing, surplus money into [cities like] Pune and

Bangalore, or in towns where things are more affordable. As and when he decides to buy in Mumbai, he can avail of returns

from these properties. Take Ahmedabad, for

instance. A major real estate group owned a property on a 200-acre land on SG Road. The initial buying price was Rs 2,200 per sq ft, which means a 1,000 per sq ft flat would cost around Rs 23 lakh. Today, in three years, prices have touched Rs 3,500 per sq ft. Our assumption is that the Ahmedabad property was an investment. If the investor had purchased three flats, he would have had a good return. And his ability to buy something in Mumbai goes up to that extent.

Q In general, central Mumbai is capped in terms of appreciation unlike tier II and III cities. Dont you think, to a certain extent, renting is a better alternative than buying property? Do you fall in the category of a floating or permanent population? If I ask you to go to work in Hyderabad for one year, will you buy something there? The answer is no. You should not assume that 100 percent of the population in Mumbai wants to buy real estate. A working professional may have come from Delhi and wants to go back to her hometown. Around one-third of the total population of any industrial city is floating. Some may have a change of heart and buy [a property] where they move. But

Never ignore return on capital employed

and return on net worth


that typically happens after they have stayed in that city for a long time.

Q Do you see the action shifting to the edge of the cities in India?That is the case where all the real estate action happens. The Thane district near Mumbai is a prime example. Then we have Noida and Gurgaon with respect to Delhi. NH8 [the highway] changed these areas. And that is what is changing Mumbai and Delhi: Connectivity. In Mumbai it is the monorail, additional tracks and elevated transportation. The Eastern Freeway has opened up Chembur more than any other suburb in Mumbai. The prices in Chembur have risen from Rs 12,000 to Rs 17,000 in one year.

Theres also a cannib-alisation taking place: Something built as a highway is becoming a

city road. To see this, you have to go to Pune. Every single building on both sides of the Pune Bypass Road is less than 10 years old. The four-lane highway [from Mumbai to Pune] has changed the entire concept of that 50-mile stretch. People are using the highway for community-building within the periphery of the city. Theyve also extended the Pune city limit to many villages. The case is similar with Ahmedabad. The two ring roads there have changed many things and far more emphasis is being placed on infrastructure.

The government wants to make Vadodara the cultural hub of India. From January 23-26, they are holding a fest called VadFest. The musician Yanni is performing against the backdrop of the Laxmi Vilas Palace. The event ends with AR Rahman; 40,000 people attending. A

lot of people are flying from Delhi to Vadodara for it, which theyve never done earlier. There will be night markets. Every single three- to five-star hotel is packed. As an investor, Vadodara is a good destination. Prices there will only rise.

Q Which are the cities in India that you think people should be looking to buy as investors?Right now, Bangalore is one of the best destinations because prices there are very reasonable. You can buy a reasonably good flat with even Rs 50 lakh. Surprisingly, Chennai is 50 percent more expensive than Bangalore for reasons nobody knows. With whatever is happening to Gujarat, I would like to advocate places like Ahmedabad for investment because youre able to buy real estate at low prices.

Q One rule that can help

real estate investors?One guideline is that you should always look at the selling price as a percentage of the land cost. If it exceeds 35 percent, then you should think twice [about buying]. All the speculation happens in land. Normally you can find out about land prices by looking at a ready reckoner. Prices are broken down by land categories: Residential, industrial and commercial. If you know the FSI applicable to a particular area, you will easily be able to calculate the current value of the land going backwards from the selling price.

If this exercise shows that the land component is less than a one-third of the selling price, the chances of you losing money is just not thereand that is downside protection.

When you are looking for property that will appreciate, it is important to look at the surrounding infrastructure and what is happening to that. For instance, in Bangalore, you have to select areas where infrastructure is being strengthened. It might even be on Mysore Road or Chennai Road. Youll be surprised that Whitefield, which was so hot in Bangalore, has no longer remained that big a buyers destination. Reason: Because the connecting road between Whitefield and Bangalore city hasnt stayed that good.



Its waiting that helps you as an investor and a lot of people cant

stand the wait. Charlie Munger

Get

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The Bangalore skyline. The city still has affordable rates and is a good place

to invest in

{R e A l e s TATe }

Asset provides a shield for export-based economies looking beyond US monetary policies

Gold buyinG spree hints at distrust towards dollar

to invest in gold is a classic investment advice. Not only is the yellow metal a safe investment instrument, it is also an effective asset diversification strategy. It is, however, equally important to understand the fundamental price drivers of gold and make an informed investment. In India, in the past, gold has served the twin purpose of being used for jewellery and for maintaining the purchasing value of a depreciating rupee.

Gold has been among the most rewarding asset classes for the better part of the last decade, with prices climbing more than six times during the 2001-2011 period. However, it was followed by three years of price correction, when the metal lost about 40 percent of its value. The sharp price drop in the second quarter of 2013 led to fears of prolonged pain, but 2014 saw the arrest of golds free fall, albeit in a subdued price environment.

Why gold? Gold has been viewed as

an effective hedge against currency debasement and a safeguard against inflation. Gold neither pays dividend/interest (unless lent for yield in return) nor does it carry a guarantee to repay principal over a period of time as there is no maturity date. The threat of default on gold investment, however, is zero. It has little productive use apart from a tiny fraction used because of its non-reactive properties. Gold isnt anything like a residential/commercial property; it requires minimal upkeep. However, during times of despair and runaway inflation, gold has provided protection to investors. When steep declines in the value of assets, such as equities, or high volatility of other assets lead to a demand for a stable store of value, gold is the right answer. It also provides liquidity in an environment (extreme economic events) where it may be difficult to realise the value of other assets. Gold has proved to be a hedge against flawed political and economic policies that have an

Investment guide 2015{g o l d}

Ritesh JainProfile: CIo, Tata Asset Management ltd

Known for: Ritesh Jain managed the Indigo Fund whose portfolio included investing in gold ETFs. He has maintained very strong views on gold since then but doesnt manage any gold-related funds at Tata Mutual Fund

By ritesh Jain


adverse impact on most asset classes. Think of the recent ruble crisis.

Recent peRfoRmanceThe recent lacklustre performance can be attributed to the dollars strength; the dollars gain is golds decline. Gold has tumbled 40 percent from its 2011 highs as the dollar strengthened by around 20 percent. Gold had delivered positive returns every year till 2011

when it peaked. Buyers turned sellers when inflation cooled down post-2011 combined with the Feds taper tantrum. After three years of a rather volatile journey, golds performance has been relatively stable in 2014.

Demand for gold is a good indicator of price expectations and especially

medium- to long-term expectations. The rapid decline in gold prices between April and June 2013 saw investors rush to gold but this buying was shortlived as investment demand weakened in 2014 with investors lacking conviction in their pricing expectations. Local price premium declines in

markets like India and China also confirmed the muted appetite for gold. While gold supply by mining has remained more or less unchanged in the recent past, the supply from recycled gold has come off significantly after high levels of recycling were witnessed during the boom years between 2008 and 2011.

centRal Bank BuyingCentral banks have time

and again sought refuge in gold during times of economic hardship and have been on a gold-buying spree since 2010. Overall purchases made by central banks 2010 onwards stood at an estimated northward of 1,800 tonnes, almost double the sale of gold by central banks in the previous five years. What we see here are two inferenceswith many economic and geopolitical wounds still not healed, central banks continued

Gold rates climbed more than six times during the

2001-2011 period

Investing is the inter-section of economics

and psychology. Seth Klarman

Mic

ha

el b

uh

olz

er /

reu

ters


SInCE ITS pRICE CoRRECTIon BEgAn In 2011, gold loST ABoUT 40% oF ITS vAlUE

Investment guide 2015{g o l d}

to seek protection under gold. More importantly, somewhere we are witnessing a mild distrust towards the dollar and the inflating Western currencies. The usual suspects, the euro, yen or even the sterling pound have exhibited bouts of volatility and a strong consensus of a decline against the dollar. A large chunk of the recent gold buying has been from China, Russia and the Eurasian countries, which have started to distrust the dollar. The larger point here is that many countries (especially export-based economies) would want to, at some point in the future, delink from the US monetary policy and benefit from protection by gold assets.

gold and inteRest RatesOne of the costs of holding gold is opportunity cost,

which is captured by the real interest rate. Higher real interest rates, for some time now, have translated into higher opportunity costs, putting downward pressure on gold prices. In India, with a backdrop of softening real estate market and positive real rates, a higher allocation within incremental physical

savings will come to gold. However, for the average Indian household, the shift from physical to financial savings will be a gradual process. Although real interest rates have turned positive, inflationary expectations of households (still in double digits) need to ease before incremental savings get

diverted to financial assets. Having said that, I

believe that the Reserve Bank of Indias (RBI) stance with respect to real rates has changed with RBI governor Raghuram Rajan repeatedly mentioning the need to keep real rates positive so that household savings can be incentivised to invest in financial assets.

to sum it upThe returns from gold as an asset class for the rupee investor in a dollar-denominated gold is marked by two distinct phasesleading up to 2011 and 2011 onwards. The dollar-denominated price of gold ensured healthy returns for the Indian investor in gold till 2011.

precious metal and its free fall

Source: Bloomberg

100

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il 10

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July

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Oct

12

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il 13

July

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14

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London Gold Market Fixing (PM) price indexed

MCX gold spot indexed

The three years after that were characterised by a rapidly depreciating rupee against softening gold rates. Hence, the MCX gold spot lost only 5 percent during this period when The London Gold Market Fixing (PM) index lost 38 percent from its 2011 highs.

Hereon, I believe that global prices will be influenced by the geopolitical scenariorising risk will drive investors (and central banks too) closer to gold. One counter balance that I see is a possibility of a lower inflationary regime driven largely by globalisation of manufacturing activity (lesser pricing power for workers), technology (lower cost of production), global indebtedness and an ageing population (with the exception of countries like India and large parts of the emerging markets). For rupee-denominated gold, the steep depreciation of the rupee has partially offset the global gold price decline. The new regime under Rajan wants to maintain the purchasing power of the domestic currency, which could maintain the rupee in a relatively tighter band against the dollar compared to the recent past. For the Indian investor, the returns hereon will be increasingly determined by movement in global gold prices rather than rupee exchange rate movement, which was the case in the recent past.


Id like to live as a poor man with lots of money.

Pablo Picasso

gold HAS BEEn AMong THE MoST REwARdIng ASSET ClASSES FoR THE BETTER pART oF THE lAST dECAdE

The quality of the people running the show can make or break an investment decision, says master investor Nemish Shah

Why ManageMent is King

n emish Shah is a reclusive man. He has not met the media for over 15 years. Even after Axis Bank took over his firm Enam Securities in 2010, he was neither seen at press conferences nor were his pictures bandied about in the media. So when he agreed to talk to Forbes India about his investment philosophy, we were excited. We met him at his sprawling office in downtown Mumbais Express Towers with stunning vistas of the Arabian Sea. The office is simple with light brown furniture and plenty of open space. There is no receptionist. It is quiet but it does not have the coldness of a private equity firm.

Shah, 59, co-founder and director of Enam Holdings, comes out and smiles warmly. He ushers us into his room at the appointed time of 12.15 pm. Tall and fit, the master investor, walks in a brisk manner. And we quickly get down to business.

As someone who has seen several market cycles, we are curious to understand the evolution of Shahs investing philosophy

Investment guide 2015{e xc lu s iv e }

By PraviN PalaNde & Samar SrivaStava

Co

rbis


Open outcry trading taking place at the Bombay Stock Exchange trading hall in the days before the markets became automated

An investment in knowledge pays the

best interest. Benjamin Franklin

over the years. Investing, according to him, is simple and complicated at the same time, in a sense a lot like art. He says while investing in India follows the same rules as elsewhere, there is one crucial differencehere, the quality of the management has to be considered closely. Abroad one can go by what is there in the books, but here you have to add one additional layerthe management, says Shah. But as long as the management is focussed and understands allocation of capital, he is comfortable with the business. What he isnt comfortable with are companies that are hasty and raise capital regularly. In fact, Shah has ignored many companies where the management did not give him the right vibe.

He then dons his analysts hat and gives an example of how a company allocates capital. After quick calculations on an imaginary balance sheet, Shah discusses its return on capital employed (ROCE) numbers. If the ROCE numbers are less than nine percent, the company is a wealth destroyer. What is the point of being in the business if you cant generate a sustainable ROCE, he asks. Ignoring his buzzing iPhone, he continues talking numbers. Shah evidently takes comfort in numbers and uses them as a weapon or a shield, depending on the discussion. It is an

art that he has mastered over many years.

If someone has no respect for capital allocation, it shows up, sooner or later, he says, pointing to the numerous examples of over-leveraged companies that saw their share prices fall. For instance, the infrastructure space, in which promoters took money on high traffic projections, low interest rates and quick completion of projects. In effect, they left very little room for error, says Shah. If any of the projections were to go wrong, the company would have a hard time paying off its debt.

Its not just

unsustainable debt that Shah shies away from. He feels a company might often be operating in a sector that suffers from external problems but if the management is good, it can find a way to survive and grow in that market. Take commodities companies like JSPL (Jindal Steel and Power Limited) which had a market cap of Rs 13,545 crore and was priced at Rs 156 per share on January 14. The stock was available for Rs 2 in 2001. It has delivered a return of 37 percent annually against 15 percent for the index over the last 15 years.

He gives credit to the company management for such a stellar return.

Since promoters and management are the key to his analysis, he prefers to meet them to get an idea of how they look at business. Shah has always stayed away from firms where promoters are constantly raising capital and diluting equity, and who constantly track their stock prices. Whats most important to him is the way they plan to fund future growth. He is wary of excess leverage, but does not have a negative view of a company that needs to spend more in the short term to enhance its competitive edge.

Much has changed since Shah first entered the market in the 1980s. Firstly, the breadth of information available on a company and on a business, he says. Shah remembers when he would write orders at the trading ring and run to the relevant broker to get them executed. In those days, there was huge information asymmetry in the market and smart investors were able to exploit it.

Sample this: Till the 1990s, companies would report their earnings only once a year. For the rest of the time, investors were

just fishing in the dark and depending on informal information channels to gauge how businesses were doing. For the auto industry, they would check with dealers. Investors in pharma stocks would check with chemists. Companies were not interested in meeting them, so analysts were focussed on horizontal research where it was important to be on ground and question dealers and customers.

It was only in 1993 that Infosys ushered in a new era of transparency by declaring results every six months and, later, every quarter. Things changed dramatically as regulators ensured that companies declare their market activities to the stock exchanges on a regular basis. Investors now have all the data and analyses at their disposal to the extent that it has even introduced noise into the system. Analysis is leading to paralysis, he says.

Shah is proud to point out that it was Enam that took Infosys public in 1993. He had been impressed by NR Narayana Murthys vision, but he did not believe that Infosys would actually go on to become the bellwether of the stock market. In fact, the issue was undersubscribed and his team and he had to convince a lot of people to invest in the company. But after Infosys, there were many companies in the IT space that went

invesTing is simple and complicaTed aT The same Time... in a sense, a loT like arT, says nemish shah


Investment guide 2015{e xc lu s iv e }


In investing, what is comfortable is rarely

profitable. Robert Arnott

public. But only a few made their mark, he says, emphasising that the reason for Infosyss success was the quality of its management.

In the following years, the IT industry went through a dotcom boom and only a few companies survived the bust. He sees a similar kind of valuation madness in the ecommerce business today. It was only a few years ago that some of the biggest conglomerates in India made a foray into the retail business and now they see competition from young companies like Flipkart, he says.

His take on the frothiness in the valuations of ecommerce companies is somewhat contrarian. Unlike conventional businesses, where the growth patterns are linear, ecommerce does not have a straight-line growth path. In that context, it is very difficult to challenge these companies on their potential numbers over the next few years. And when these cannot be discounted to a present value, you have investors paying any valuation for them, he says. However, Shah doesnt think valuations in the sector have reached a bubble as the potential size is so vast that we may not even have wrapped ourselves around the true potential of the business.

Given Shahs approach to measuring a business, one would have to agree.

Yes Bank

Glenmark

Marico

Nifty

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00

5

Feb

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6

Apr

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07

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11

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12

Jul 2

012

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20

14

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20

14

Top Ipos managed by enam

Source: CAPITALINE Note: July 2005=100

First, he looks at the size of the opportunity, which is clearly there for ecommerce companies. Second, the quality of the managementmost ecommerce players have shown that their managements are forward-looking. Last is the entry price. Here, while valuations may be stretched, there is the possibility of non-linear growth, which will always command a premium.

Shah is also bullish about the present government and its performance, I have not seen such an environment in my entire working life since I took up my first job. These are truly good times for India. I think that there is some scepticism among many people, but they will be proven wrong, he says.

Shah, even as he points out the several pluses of the new government,

veers to the topical subject of oil prices. For one, he is pleased that the government is not showing a populist tendency, giving away the benefits of lower oil prices to the consumer. And then, he does a quick mental calculation and tells us that this year we will be current account surplus and there will be no burden of fiscal deficit. He also says that the rupee is now one of the most stable currencies, maybe after the US dollar and the Chinese renminbi. But the big concern for him is how the government will get into the capex cycle. Will the government start spending first? he asks, wondering how both the government and the industry can create demand and growth by taking advantage of the present situation. It is so difficult to get land. And it takes more than five years to get a cement plant going.

So starting the cycle is not easy, he says. However, there will be enough opportunities to invest.

But then it is always luck that decides success, he says, looking at the pictures of spiritual gurus adorning his walls. Who am I? is the question he is trying to understand. And it is a very difficult question to answer, Shah says. Perhaps that is why he is reclusive and spends his time introspecting. His spirituality is evident. Consider that Shah has avoided investing in tobacco, hotels and liquor as they dont fit in his internal philosophy. He wants to live a quiet life, coming to office at 8.15 am and going home by 3 pm, he tells us.

As the meeting ends, he walks us to the elevator, saying he is always ready for a chat, but is not willing to engage in just yet another media interaction. He had, at the outset, said a firm no to photographs and voice recordings.

As we say goodbye, we ask if there are any investment gurus who he follows or reads. The letters of Warren Buffett, he says. The elevator has reached us at that point and Shah shakes our hand again, for the fourth time since we left his corner office. And we exit, with much to mull over, and thinking that introspection can be an infectious thing.

Low oil prices may not be the only reason why inflation is down. Structural reforms by the government may be playing a larger role

What Exactly Is InflatIon REspondIng to?

among many others, have very far-reaching benefits. While some of these may manifest earlier, the true impact will be felt only in the second half of FY2015.

If this time gap results in economic activity remaining subdued, the subsequent shortfall in revenues combined with our expenditure commitments will lead to huge fiscal gaps. This

will result in increased borrowing with a consequential impact on interest rates. It has the potential of derailing the beneficial economic cycle that the nascent low inflation scenario promises.

The current low inflation environment is more due to some measures instituted by the government and low non-oil commodity prices. Lower oil prices havent

Investment guide 2015{m ac ro}

Rajiv ShaStRiProfile: managing Director and cEo of Peerless Funds management

Known for: His passion for economic theory and analysis, especially in the mutual fund industry

By Pravin Palande

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38 \ foRbES INdIA \ fEbRUARy 6, 2015

t he government has many plans, but most of them are only on paper as of now. They will eventually materialise as macro-economic factors in favour of the Narendra Modi-led government, says Rajiv Shastri, a trained economist and Managing Director and CEO of Peerless Funds Management. The fall in oil prices, for one, will benefit India greatly, he tells Forbes India. Excerpts:

Q What are the prime concerns for you at this point?The primary concern is the time gap between the expectations and the outcome of the measures taken by the government. While many expect such steps to translate into economic growth soon, the benefits of many long-term measures may kick in only after nine to 12 months. Initiatives which support international trade, FDI in railways, removing coal production bottlenecks, solar power policy, easing of labour laws, Pradhan Mantri Jan-Dhan Yojana and GST [goods and services tax],

really been passed on to the economy. While some part of the fall served to reduce the governments subsidy burden, some of it has been used to support government revenues through increased excise and other duties on petroleum products.

Due to this, its extremely difficult to establish a logical link between low oil prices, low inflation and potentially lower rates.

Q Are you saying oil prices and interest rates are not related in India?There is some linkage, but the correlation is lower because of the manner in which successive governments have

intervened in the domestic oil market. When oil prices were

forbes - february 6 2015 in

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