Contributed by: Kapil Pahwa CFA, Neelabh Mishra and Vikas Agrawal CFA
Saurabh Mukherjea, CFA, and CEO, Institutional Equities, Ambit Capital Private Limited has been traveling extensively in the month of September and visited six chapters of IAIP-India CFA Society; Delhi, Mumbai, Bangalore, Chennai, Kolkata and Ahmedabad. The purpose of these visit was to launch his second book, The Unusual Billionaires, and directly discuss its unique aspects with CFA charter and candidates throughout the country.
‘The Unusual Billionaires’ is a quest to define what greatness really means in the Indian Market. Starting with the great Roman Empire’s longevity and sheer size, unmatched by any other empire in the history of the human race, Saurabh delves into what defines legends such as Dravid or Schumacher in their respective field. The aim was to develop a structure to do the same for Indian companies, identify great businesses and therefore great equity investments that have been resilient over time and have generated the elusive Alpha.
‘Coffee Can Portfolio’ (CCP) was a concept formalized in a note by a Capital Group fund manager called Robert Kirby back in 1984. The CCP construct relies on a simple understanding that in order to get truly rich, an investor must let a sensibly constructed portfolio stay untouched for a long period. A combination of high-performing stars, a few duds, low transaction costs and compounding then work their magic to earn healthy returns for the investor. The Unusual Billionaires builds upon this concept of CCPs to quantify greatness for Indian companies. Using the two guardrails of Revenue Growth and ROCE (ROE for financial services companies), for reasons well explained in the book, Saurabh and his team constructed and studied the performance of sixteen, decade-long CCPs from 2000 to 2015 as a part of their research. The companies which occur most frequently in these sixteen portfolios gave the seven companies that form the flesh of this book. The First Among Equals of Indian Corporates; Asian Paints, Astral Poly, Berger Paints, Marico, Page Industries, HDFC Bank and Axis Bank have been studied extensively in this book. After several interviews with former and current employees, Saurabh’s team tracked down ex-CEOs who led these companies as far back as the 1980s. The idea was to understand the reason behind the consistent stellar performance of these companies. What formed the core of these ‘Great’ organizations?
Saurabh identifies three intuitive, yet elusive values that 99.8% of companies miss out on maintaining in the long term; a) Assiduous focus on the core operations b) Moat against intrusion from competition and c) Effective capital allocation. These insights form the basis of a checklist for investors that they can use to, identify and invest in great Indian companies.
Saurabh gives five compelling reasons why an equity investor must put her bet on the CCP; i) There’s a higher probability of profits over a longer term. ii) CCP offers to compound at the Portfolio level iii) It neutralises the adverse effects of ‘noise.’ iv) No churn enhances the terminal value of Portfolio by ~10%. v) Back-tests have proven that rebalancing does NOT increase return.
The extensive research, the insights book yields and its relevance to the local conditions, makes it a compelling read. The idea is to figure out what it takes to be great in the Indian Scenario with our unique conditions. The Unusual Billionaires does a mighty fine job of that! So go and grab your copy of ‘The Unusual Billionaires’ and build your Coffee Can Portfolio so that you can sip your Cappuccino in calm when you retire!
- KP, NM & VA