[Music] good evening ladies and gentlemen uh to introduce myself i'm palaverajan one of the founder of pms buzzer it's delighted in welcoming wall for another insightful session thanks for taking your time and joining with us today we have mr maran who is an executive director for unified capital and you will be taking us through an interesting topic indian promoters are the best contrarian are they buying now so before i hand over to mr maharan let me give a quick introduction about unified capital and about mr maran unified capital is a specialized pms firm with a long-standing experience of 20 years headed by mr roti headquartered in chennai and offices across key metros in india unified currently manages an aim of about close to 5000 pro where photos and pro in pms and balance rest in af uh with three thousand plus clients unifi is fully employed own firm and they don't have any other business other than the fund management unifi is one of the top 10 discretionary pms in the country and about mr maran maran began his career in equities investing in 1991 after dropping out of college after 10 years being with brokerage firms and banks he joined a team of four to found unified capital in 2001 based in chennai he has been spread heading unifies initiative in developing new strategies like spin-off whole course and one that shadows insider purchases one in green businesses and recently one that invest in businesses being disrupted his fascination for fact-based assessment that differs from perceptions making to travel across india he shared this insights in educational institutions industry forums investor association and policy making bodies so good evening sir i welcome you for today's webinar and over to you thank you thank you for the generous introduction always a pleasure to connect with investors do presentations based on some unique characteristics india has like many other businesses fund management as a business also many of us borrow the pattern of analysis from western markets some that work globally works in india also but many that works globally doesn't work here and um many of our investors as well as other stakeholders in the industry somehow seem to know more about western markets than about india our own country which actually prompted us to do something called the kyc series the kyc that we are all familiar with is more a regulatory one but this kyc what we mean is know your country so i must have gone around whole of india two three patients outside india and in this presentation quite a few of those presentations are also in the youtube so just type know your country and my name you will get few of those videos mostly done in a q a format and it's not surprising to know that most places where we go and present out of 20 and or the questions that we ask either we get 5 or 10 or 11 correct answers that gives you an ample indication of how little we know about our own country and this one topic also is something which is unique to india so what i will do is i'll run through the presentation um focus on just two three specific um the data points and how to interpret them is that is there a way where we can make use of such interpretations while pursuing investment ideas how come promoters see value and opportunity when investors see only risk and uncertainty it's a long title but when we wrote to our investors a few months back when we had seen a significant decline in market and fund managers media and most analysts talking about india economy macro global events interest rate currency moving lockdowns old world was in some kind of a paralysis people found it hard to decipher these data points and act and that's when when he sent a brief one-page note it was a brief letter but it had a long title and this was the title before we get into insiders insiders activity promoters we need to get clarity on who are all the insiders when we look at companies owner management basically is the promoters the shareholder managements executive management is the board ceo why this distinction we need to make is what we call as management both but both are slightly different um if you look at the most western markets like u.s europe owner management is completely different executive management is completely different whereas in india more or less both are the same maybe if you take the top 500 companies in india which is close to 94 95 percent of our market cap you may find in about 370 plus companies the md is either the promoter or appointed by the promoter and therefore owner management and executive management remain more or less the same whereas in u.s and most western markets ownership management is mostly institutionalized and executive management will be an independent board its own ceo its own professional business managers today our market capitalization of india it's around two trillion dollars when we began 2020 first january it was close to 2.2 trillion dollars by 31st march post over decline it had declined as low as about 1.7 now we are back to close to 2 trillion we have about 1900 plus companies trading in nse many more in bsc and the entire market capitalization of all these two thousand three thousand four thousand companies put together is this two trillion dollars market cap the top 30 sensex companies are about half of india's market cap the top 50 nifty companies constitute almost two thirds of india's market cap the top hundred companies what we call as large caps they are close to eighty percent of india's market gap and the top 500 companies is almost all of it 95 um this is not something recent phenomena about 2001 when we set up unify if you take a then prevailing market cap the top hundred companies were almost 82 percent of than prevailing market cap and uh in two thousand five six seven when small mcats did well market capitalization grew the top 100 companies in 2007 was about 72 percent of the market cap in 2013 it was almost about 82 percent of india's market cap was top 100 companies and 2017 it was hardly 70 percent only so effectively in the last 20 years the skewness of india's market capitalization in favor of few large companies always existed between 70 to 80 percent of india's market capitalization have always been in the top 100 companies today maybe if you take the top five companies that's almost 25 percent of india's market cap extremely skewed and how this market capitalization is owned if you take this two trillion dollars that is the cumulative value of all the stocks which are listed in the listed companies about 55 of india's market capitalization is actually held by promoters 20 is held by fis which include all fis hedge funds endowment funds sovereign fans all put together the diis which means lic mutual funds aafs private insurance companies pension funds all put together own 13 of india's market capitalization rest of the people you me portfolio managers pms schemes investors family offices all non-institutional non-promoter shareholders in india they own 12 percent of india's market gap this is the total as a percentage of the total maybe in few companies like say tcs d mark promoter holding may be 75 80 percent maybe in few companies like infosys it may be less than 10 percent maybe in few companies like hduc htvc bank fis ownership may be 50 60 percent and there are quite a few companies where there is no fia ownership but if you take the total market capitalization f i s won 20 but if you remove the promoters holding and look at only the free float which is forty five percent of market capitalization f is one twenty out of forty five that's almost about forty five so they are dominant and that is why their entry exit gets reflected in the way the markets move but if you look little closely this 20 percent of india's market conversation 2 trillion in value terms close to about 400 billion half a trillion dollars um that is again very skewed almost uh one third of fi investments in india is in hardly four companies reliance dcs hdmc limited hdfc bank those four companies fi holding is one third of fi investments in india little more than 100 billion dollars in nifty the other 46 companies in nifty will be another 50 percent ffa investments so out of this twenty percent indian equities what they own eighty percent of the twenty percent is in nifty fifty companies and which is why significant deficit link significant affair buying gets reflected more nifty than in broader markets but when it comes to the promoter stake the top hundred large caps promoters may own about 53 the next 150 companies mid caps promoter stake is about 59 percent the next 250 small caps promoter folding may be 56 percent so somewhat evenly spread promoters folding unlike fis where they read maybe 80 percent of investments the orange may be 10 15 percent of investments and the brown may not even be five percent of the fi investments if you take say mutual funds in india there may be 41 mutual fund houses 27 lakh roads avm 14 lakh crores in equities but if you take the total 14 lakh roads in equities the red may be about 75 percent of total equities mutual funds own maybe large cats and maybe 10 15 percent in march whereas the promoter holding is somewhat evenly placed is that so in other markets is uh eos also promoters own 55 fis institutions one 20 plus 13 33 percent um no for example if you take the top 30 companies in u.s dow jones index in dow jones index 28 out of 30 cents dow jones companies 28 out of 30 companies you can't find uh promoters holding in double digit there will be five six four three like that in 28 out of 30 thousands companies whereas in sensex 23 out of 30 census companies promoter folding will be more than 40 50 60 70 percent this market capitalization of two trillion that india has is um seventh largest in the world market cap but if you take those six markets which are larger than india in no market you will find promoters holding being more than half of the market so that's very unique to india if that is the case there's so much of media interest literature studies on daily basis we track what fast by cell what dia is by sell but we don't seem to notice much of what promoters buying selling it may look like promoters are not that active obviously if you take the last 5 10 15 years promoters holding companies may look like moving from 55 to 58 to 51 but each of that one percentage moment two percentage moments could be substantial could have a substantial impact so our whole presentation in the next few slides we will focus our attention to what promoters action is and how to interpret them if promoters in western markets own single digit five percent six percent seven percent like that who wants equities there today if you take us market capitalization of u.s is close to about 32 trillion dollars today and almost 80 percent of that is owned by institutional funds and if you take s p 500 that's 80 percent of india's u.s market cap and 80 percent of that market cap is owned by institutions how do promoters increase take when they increase state how do promoters decrease stake we all notice when promoters dilute how do promoters dilute they either sell in market which is very rare but they sell whole company whole stake in the company that we often come to know sometimes company dilutes and therefore promoters take promoter would not have sold any stock but the number of shares issued by the company will go and therefore the stake and the company will decline all this get lot of attention but promoters increasing stake there are different ways most prominent of them are these five first is creeping acquisition in markets well within the regulatory limitations of city there are two broad regulations substantial acquisition of shares and takeovers act and prohibition of insider trading regulations so when a promoter buys or sells stock in the company it should be informed notified to the company and which company in turn has to notify to the stock exchange and before results blackout period they cannot buy itself and if it is more than x percentage it should be separately disclosed and there is a limitation through which they can buy like five percent if your stake is below 55 in a company you can keep increasing five percent a year every year but if the promoter is already owning more than 55 percent take in the company it can increase only five percent not every year cumulatively and if he needs to increase the stake more than this five percent then he has to come out with an open offer tender offer then increase state so there are various routes people follow but in all this they have to buy in market if they happen to buy is significant and what is trading in market is not so much then they will make the company to a lot preferential shares or a lot warrants but again again this will be governed by the regulations the price at which they get the shares should be higher than two week average six month average closing prices and fourth is rights issues that's a little odd unlike preferential issues and warrants which has to be higher than two week average three months six month average let's say march market falls and promoters increase takes till these issues have to take into consideration pre-decline prices and therefore such issues could be at significant premium to market price which promoters may not be too keen to pay such a high price on the other hand the rights there is no price restriction because rights by nature is supposed to be for all shareholders whereas in preferential issue of shares or warrants because it is preferential not for everyone it has to be higher than sebi stipulated price whereas rights can be at more or less any price but even though rights is for all shareholders um we all know at certain market conditions not everyone subscribes to their entertainment and promoters use this as a route to increase the state by subscribing in these rights issues more than their entertainment um it's funny last month there was a company reasonably well known company the market price was 180 190 and the rights issue was at 50 rupees and many retail investors did not subscribe and promoters subscribe more than this entertainment and his stake in the company went up the last method promoters use in all these four cases gripping acquisition preferential shares warrants rights promoter has to commit capital invest money but in the last thing the company may use its money in buying back the stock and such a buybacks any shareholder contender promoters in many cases choose not to tender in which case the total number of shares in the company decline and promoters number of shares they won't remain the same and therefore they stick gossip so promoters take in these companies increase without promoters committing new money um there are quite a few companies where the company may be cash rich and instead of distributing the cash earnings by way of dividends they may do buybacks and in such cases promoters also tender their shares that's more for tax reason but we look for opportunities where companies keep doing buy-back and promoter not rendering the share indirectly he's increasing stake all these methods people promoters use to increase this tech which we notice probably this is the most important part of my presentation the red line is bse mid cap index the blue bars of the number of companies where promoters increase stake within bsc 500 companies and here what you will notice is in 2008 when sensex fell 50 60 percent mid cap index fell 70 it basically fell from 10 to three thousand and when markets declined sharply in october 2008 is when this bottom was touched we had seen almost about 120 companies out of bsc 500 alone promoters increasing stake but when markets quickly bounced back in 2009 just after congress government came back in the second term election upa 2 in 2009 some of you may remember when the results got announced in may 2009 market went up 20 in one day and then those occasions you find substantial decline in the number of companies promoters increasingly and whole of 2012-13 when markets declined it was more a grinding down market for 2-3 years you again had seen large number of companies promoters increase take but when index moved from 2014 the mid cap index moved from 6 000 12 000 to 18 000 basically mid index tripled between 14 and 17 and the 2017 the number of companies promoter increase take was almost 10-year low but that's when you will find mutual fund collection record high fi inflow record high index record high investor return record high invested participation markets record high and number of ipos record high how many ipos in 2017 more than 54. that's almost one per week every week we had one ipo but when mid cap index started sliding down in 1819 initially because mutual fund regulations sun which is semi regulations and mutual funds and small mid caps they had to sell to invest in large gas but on top of this decline we had seen one more kovid fall that is march 2013 index fell 30 percent mid caps fell a little more we all know the biggest sellers were fix but were the biggest buyers the number of companies promoters bought in march 2020 is second highest in the last 20 years after 2008. when march most of us were paralyzed for action not sure about what to do those uncertainties that we read in newspapers and televisions promoters also read but they tend to take a contrarian approach when market goes up 100 200 in three years when valuations are attractive the investor flow is fantastic is when promoters dilute stake but when um markets crash 40 50 percent like it did between 18 and march 2020 and if you are a promoter and you have been running the company for last 10 20 30 years who are likely to run it for the next 5 10 15 years 50 decline in valuation some companies 50 percent some companies more some companies less is a good opportunity to increase the stake in general this graph validates our belief that promoters are contrarians are they good in timing the market are they timing the market here if you just go by the number of bars and the line graph of index it looks like yes but the fact is they don't know what is market bottom they also don't know what is market peak but near the peak you obviously find lot of promoted dilutions it's not that all promoters wait for the peak to dilute they have been diluting there were number of ipos into the 1617 itself in fact last time we managed a fund based on this i still remember the date 21st july 2016 somewhere here we did a conference call to all our clients announcing the closure of insider one of the fund that we were running based on this premise and saying that we would like to sell all these stocks close the portfolio return the capital back and that audio of the conference call is still there in our website under client communication and that was 21st july 2016. so 21st july 2016 it was amply evident by june quarter when the shareholding pattern of these companies have to be filed within two three weeks after every quarter is over which means the current quarter what all the companies from what is taking increase happened instead of tracking every day based on the disclosures these companies make if you wait till september in by 15th october to 21st october all companies have to file their shareholding pattern and if you had noticed in june 2016 the number of companies beginning to see dilutions was growing and which is why we closed the fund so why i am highlighting that is even though the mid cap index peaked in december 2017 promoter dilution started from july 16 itself similarly promoters don't know the bottom it is not that the bottom only promoters buying heads happened promoter buying started as the decline started so they are not perfect timers of market they don't wait for the bottom to buy and peak to sell but when valuations don't attract you near the peak of the markets you begin to find more and more dilutions and when valuations reach bottom not necessarily at the bottom but before the bottom or just after the bottom you begin to find promoters increasing stake the biggest buyers we all look at mutual funds but promoters are also buyers a lot of media coverage how about 277 companies promoters hike the stake if you go strictly by bsc 500 companies almost 93 companies promote a statement up but if you look at these companies that promote a stake venture they're all over the place in terms of sectors but little more than half of these companies about 56 percent of the company's promoters take winter are either zero debt companies are close to zero debt businesses where the debt equity ratio was less than 0.5 and eighty percent of the companies that promote the stake went up had enabled low leverage below one is one why this characteristics has always been like this not only in the recent pool of companies where promoters take went up but even if you take those companies in 2008 market crash and 2012-13 market crash as well as march 2018 market crash majority of the company's promoters increased leak will be zero dead or almost zero dead or close to zero dead businesses because in our industry we often use the term deliverage right what is deliveraging diluting stake raising money what is the opposite of deliveraging which is uh spending money and increasing stay that is leveraging up so when a company buy does buy back it is basically leveraging if you are already leveraged how do you leverage up you would be looking at deliverance so most of the companies which are not leveraged which doesn't have much debt where promoters are cash rich they can make use of market decline to buy more of the stock same thing holds good for you and me also as investors if you are fully invested how do we make use of a market farm but if the promoters don't carry debt on the other hand if they are cash rich which means their cash switch before they fall they can make use of the form if you just take last two years it is not that promoters bought only in march 2020. the number of companies promoters bought in march 2020 were very high but there are few companies that promoters increase take even in 2018 and 19. but you don't find a consumer discretionary fmcg companies which actually did well in 2018-19 they were all trading 40 50 60 pe and they're all best performing sectors of 18 and 19 and you have not seen any promoter buying there on the other hand if you take these sectors like auto pharma metals these sectors did badly in 2018-19 and that's where you could find significant amount of insider buying so not only promoters are contrarian in the timing of their purchases as a group of promoters they buy a lot in 2020 march and they don't buy in 2017 as a group that is contrary but even those companies and sectors where these promoters actually increase take their contrarians with the disclaimer that this is just a name i took only to highlight what price points promoters increase and what price points promoters dilute many of you who have been in markets for a long time um know how successful other oswald had been two founders chartered accountants started from scratch built a great business and they started in late 80s early 90s and built a great business but when did they dilute they diluted in 2007 which is almost near the marketplace and then post 2008 when markets declined material also also declined one year two years they didn't buy but in 2013 they did a voluntary buyback people are gladly selling their stock and promoters are increasing and thereafter the stock did 10x and then um 2017-18 due to aspire home finance some fundamental reasons price declined sharply kept declining and after september 2018 when ilfs crisis happened it declined very sharply and promoters did not buy thereafter the business improved the balance sheet quality actually improved they made all the right provisions with regard to their big fundamental weakness in their business and actually in the last six months if you look at the brokerage industry where motorola is one of the most respected and leader the brokerage business in the last six months hasn't actually grown hasn't been grown because your revenue is a function of the total volume total volume is number of shares multiplied by the share price when share price fell 30 percent volume declined and when share prices increased the quantity increased volume enter but if you actually go by the total volume in stock exchanges in the first six months of this year versus the first six months of last year there is no material change media is writing that there are robinhood investors people sitting at home not having much work and therefore they are doing trading it's not right conclusion and another competition company let's say if you take ic securities they announced in their phone call that they the first three months four months they averaged almost thousand clients per day new clients onboarding it is not that india is producing thousand new investors who are just coming to one brokerage form each day but if you look at the broker number 21 to broker number 100 their volumes actually in the same period have declined when the volumes of zero went up 50 60 percent icc went up 40 30 so the brokerage business has been actually shifting from small regional under capitalized brokerage firms to large well capitalized tech savvy brokerage firms that's the reality while the net volume hasn't had any material growth there are few firms which have had 30 40 50 growth and there are quite a few firms which have degrown so when volatility goes up margin requirements go up and earlier as an investor if someone is placing a 10 crores order and if i have to have one crore limit with the exchange to do the trade when somebody increases the margin from 10 percent to 20 percent to do the same volume i have to have double the capital if i can't raise more capital then i have to reduce my business by half so brokerage business shifts to well capitalized brokerage companies and at times like this when when you have one covered and market falls 30 percent and your stock falls like this the company actually did a passive buyback different i don't want to focus too much attention here but the point i am trying to drive is when you buy only those companies where promoters increase take they outperform but they also decline it is not that companies where promoters increase they keep going up they go they decline if their small cap mid cap they fall along with small cabinet car there are companies where promoters increase take and thereafter you see sharp price there are also companies where promoters increase take which doesn't move for one one and a half years and then makes a big move there are also companies where promoters buy and doesn't on the other hand after promoters buy stock actually declines before making a move and there are also companies who are promoters buy but the stock keeps declining so we did this exercise if you take last 15 years all the companies were promoters taken up how these stocks performed in the subsequent three years actually in about 11 of the cases the stock hasn't moved even though you bought when promoters bought you held three years and still your experience had been pretty bad in in 11 of the cases in 14 15 percent of the cases um the returns were hardly anything single digit neither here nor there but in about 70 73 percent of the cases the inverse of return was substantial i don't want to put a number that number is much higher when when you put some any number which is 20 25 30 percent irr it's not sustainable we all know but when you put that number in a conversation it goes and gets anchored in the investor's mind so point is it's not that blindly you um buy because of promoter buying but because promoters buy you should deserve our attention and when you see significant number of promoters buying it gives you enough clue about the markets and valuations and when you see significant number of dilutions either across all companies or many companies in the sector like in the last two years you may have seen significant incident settling in many of the nbfcs many of the consumer statements consumer goods companies professionals executive management owner management dilutions if you look at this universe we didn't take just last one year number it is not just we take last march number alone because it is possible that some of these companies promoters might have diluted stake in 2016-17 and increase take in march 2020 and there is no net effective stake increase so whenever we take the analysis we look at the previous three years also and any company where there is been a dilution in the previous three years we remove it even though promoters increase take in march 2020 and therefore our test pool will always have uh ongoing four years period that we use to evaluate and in that there are about 167 companies that come into the pool about 17 of them are large cap companies that is company number one two hundred and twenty two percent of these companies are companies with market capitalization between 101 to 250 mid caps and close to 60 percent of the companies are company number 251 and these are all the businesses but when we say bfsa it's not actually private banks it's not which is almost thirty percent of bfsa weightage if you take sense such nifty many indices were private banks here it's mostly it could be um gold finance company many businesses like that this is uh the second most important part graph in the presentation here you find the three line graphs red is mid cap blue is sensex large cap green is small cache so the blue is nothing but sensex movement since ever since we were set up the red is mid cap index green is small cap index and it validates beliefs that we have in a rising market mid caps raise more than large caps small caps rise even more than mid caps and in a market fall mid capsule fall much more than large cap small caps fall and eventually in panics they all converge again in a rising market caps raise small caps rise more again in a fall they fall more and coming rich again the legs but if you take a active look at january 2018 this is january 2018. what is so unique about january 2018 is if you look at the previous three years that is 15 16 17 the sensex and nifty went up 50 percent and mid cap index went up more than 150 percent small cap index actually tripled right almost 600 became 2000 more than typical so 15 16 17 markets in general did well mid caps did far better than large and small caps were getting up and till january 2018 in india we had no clear definition of what is large cap what is mid cap what is small cap so in 2017 if you had shown a five billion dollar company goldman sachs will call that as a small cap hdlc mutual fund used to call that as mid cap and unified capital used to call that as large cap we used to call stocks based on our relative size first time sebi came with the some kind of a uniformity in defining that saying instead of defining a company based on an absolute rupees crores how many crores the company's market cap should be to be called as large camp instead what they said is we'll put all the indian companies in one list and the first hundred companies will be large caps today the company number one is reliance which has 14 lakh roads 200 billion dollars and company number 100 maybe let's say mutual finance or mr of kind of name which will be having say 26 27 000 crores so any company about 26 000 crores is large cap and uh company number 101 to 250 mid cap 250th company today may have 7000 roads market cap so 7 000 to 26 000 gross milk caps now when sebi came with this definition sebi also said it is up to the fund managers to define the schemes as large cap mid cap small cap but once you make that definition define a scheme by that the benchmark should be relevant and your holding should reflect that which means you should not call yourself as a large cap fund and show sensex as the benchmark and then go and invest in small medcaps which is what some mutual funds and many managers were doing which is probably a reason why 80 90 percent of mutual funds outperform the benchmarks in 15 16 17 because the benchmark you are showing is something closer to blue line and some of the investments you are making is closer to red and green line and same managers um almost 70 80 percent of those managers uh we're not doing better than benchmark not because good managers have become bad but because your composition is reflecting today fairly right so when that regulation came it is not only for future investments all the existing investments that you carry in the those schemes where you are recognizing those schemes as large caps and showing a large cap index is the benchmark if you are holding small mid caps more than what is allowed which is hardly 10 20 percent so if you are a large cap fund 80 percent of your fund should be large cap if you are holding more than that in small mid caps more than 20 percent i have to sell them to buy large caps so if you look at january 2018 and december 2018 you would have seen sensex and sensex up seven eight percent nifty of nine ten percent and during that period mid caps well for down 15 percent small caps were down 24 25 that's the only year you would have seen blue going up and red and green falling not in the previous 10 20 30 years of indian history not after that because that's one year we could have seen many people selling small medicares and buying large caps not because they felt that's the right thing to do but because those funds have to comply with the semi-regulations so that's over history began 2019 you don't find that happening now you don't find that happening right but one thing you may find happening is in march 2020 all the lines converged usually small made the large cap evaluation convergence happens in panics it usually doesn't converge by blue going up and touching red and green convergence happens when red and green falls and touches blue 2001 september 11 attack when there is huge crisis globally india had its own southeast asian financial crisis two three prime ministers in two three years and uh security used to be 14 government of india used to borrow at 14 and sensex fell 60 percent many i.t companies like infosys before they all fell 70 80 panic markets converged but the bounce back started only from 2003. similarly in global financial crisis 2008 all the lines converged by june itself may 2008 bear stones collapse panic they all converge but the bounce back started only from may 2009 in 2012 13 we didn't have a global reason for the fall but indian rupee lost 20 percent versus dollar inflation was in double digit g sec yield came almost nine and a half double digit and this is last two three years of congress government scam and many other stuff and that is the year which was coinciding with the fccb's that indian carpets raised in 2007 with the five-year bonds coming for maturity and there's no fccb market which was active in 2012-13 and many indian companies had to do domestic borrowing to return their obligations in fccb because eighty ninety percent of those holders didn't ask for equity conversion and what was conceived by promoters as equity became debt obligation and people had to borrow in domestic markets to return these obligations and almost about one one and a half lakh crores additional borrowing by carpets increased the rates and and valuations decline but the bounce back happened only from 2014 when modi g election happened so the point to note is whenever there is a convergence the bounce back may be in 2001 to 2003 one one year six months in 2008 it took almost one year one month in 2013 september it took hardly about eight nine months now it didn't take any time it's just vertical liftoff but from the convergence point what bounces back shortly here if you see in 2003 blue went up but green went a lot more what looks like a small green line is about 140 percent from april 2003 to april 2004 similarly after convergence in 2008 when the bounce back started from may 2009 may 2009 to may 2010 it's almost about 130 in small gaps similarly in september 2013 when we had convergence the next one year rally in small caps is almost 110 so it's not that in convergence point large capsules the most post convergence the bounce pack is very sharp in small mid caps not because small mid caps is a great place to be in in panics but because before the panic they would have fallen the most and therefore this sharp green and red line but you might have seen many experts recommending in march and april that you should be with leaders because large tends to grow larger small gets thrashed all that but many times as investors we confuse leaders with large caps both are different there are several large caps in india who doesn't have any leadership quality there are several small mid caps in businesses which are leaders in the business they operate there are hundreds of businesses in india where the largest player in the business is still a small cap mid cap and they constitute this bounce back and very very sharply it's been present journey so the last part should we therefore buy when promoters buy actually not necessarily as i mentioned um not all companies promote us by we should buy but should we look at these companies that promoters are increasing stake of course yes because many of these names otherwise will not come into our radar is a pattern of promoter activity a better reflection of market valuation rather than one two three distinct discrete trades answer is yes you should see pattern of promoter activity which gives us for conclusive evidence of the market valuation than any other parameter that i am familiar with is a pattern of promoter activity in a certain sector great valuation you will see that contrarianship like i explained about pharmaceuticals in 1819 and automobiles last year but people often you may find uh saying that oh this company promotes stake is 75 so it's good this company from our state is 40. so it's not good you should not look at the actual promoter holding in absolute terms you should look at in relative to what it was how would this become for example if my network has gone up from 20 to 40 crores and your network has come down from under close to 50 crores at the end of the day you may have 50 i may have 40 but who is doing well is the guy who actually moved from 20 to 40. similarly if someone's stake is coming in promoter's take is coming down from 70 to 60. in another company it is going from 50 to 55 the company where it is 55 is better than the company where the promoter stake has fallen from 70 to 60. so you should look at promoters holding in relative terms is it been rising up or has it been falling now just because promoter holding is falling doesn't mean it's bad promoters can sell for 100 reasons but they buy only for one financial reason or two strategic reasons there are only two reasons promoters increasingly strategic reason will come into play only if the stake is below 50. financial reason will come into play for the rest of the time but the reasons promoters dilute maybe a senior management may be retiring so he is wanting to sell there are many ceos who may not like to continue to have over ownership rather over concentration on one stock in there hopefully they may like to diversify or they may have a genuine other business idea and they may need to raise money there is capital for that so they may have 100 reasons to sell but they will have only one major reason to buy which is financial thank you that's my part i'll be happy to take questions sir thank you uh it was one more highly insightful session thanks for taking us through before taking the questions from forum we have collected few questions so we thought initially we will address this then move on to forum if time permits sure my pleasure so my first question is that given the current run-up and considering the promoters have bought up two quarters at clarity much more prices is there still value see promoters bought significantly in march 2020 and there are quite a few companies promoters have continued to buy in april may june so much so this year if you actually look at the financial year gets over on 31st march and companies had to announce their audited results in april may june and sebi gave one extra month time for disclosure of results and therefore companies can announce audited results even by july but when cebi gave that extra one months time many promoters went to sebi asking for one extra month for them to buy as you know when um financial year gets over or on 31st march and if the company is announcing results in may the promoter is not supposed to buy from first april till the announces results because the period is over and is in possession of price sensitive information and it's a blackout period but after announcing the results he can do buy back he can increase the stake he can do creepy acquisition so when sebi gave time for companies to announce the results many promoters actually went to sebi saying that we should be allowed to increase our stake by doing market purchases which is to be declined the reason i highlight that is the promoter buying was also there in april major it is not that we buy only those companies where promoter stake went up only in march we look at companies where promoter stick went up even last year today if you take those companies where promoter stake has gone up of course they all have moved up to 20 30 percent maybe more in few cases but almost about uh 40 percent of the companies that are in our universe are companies where the current price is lower than the price at which promoters have bought and between 30 to 40 percent of the companies are companies where the stock prices are uh between minus 20 to plus 20 from the price at which promoters are bought maybe 20 to 20 to 25 percent of the companies are the ones where the from current price is more than 20 percent away from the price at which promoters have won now if i am buying these companies because promoters have bought my return expectation is 10 15 no no my expectation is significantly high so if my return expectation is say under 200 kind of number and if i am going to buy 10 20 percent higher than the price at which promoters are bought it doesn't make much difference from from that pay so it is not that promoters bought in march so i'm buying in september so i'm paying a premium i'm also buying companies where promoting state increase happened last year and as compared to last year current prices are still lower than where they were last year so i'm not buying because promoters are buying um i'm these companies are coming to our attention because formulas are buying and i will buy because i see future earnings growth in these companies so i may not buy all the 94 companies promoter stake went up in march i may buy some 10-15 companies where promoter stick went up a year back or two years back number one number two um if you are buying just because promoters buying then you should be buying in march itself and how do you know which company out of this 94 companies you should buy then you can buy you if you can buy all the 94 companies then that's a good approach so if someone had bought one lakh rupees worth of every stock where promoters take went up and they just bought whenever promoters take went up in the last 10 years their return would have been fantastic as i mentioned only in 11 percent of the cases they would not have made money but in majority of the cases they would have made money but that means you should be buying 93 companies one lakh rupees each in march 2020 and you should be buying only 11 12 companies in 2017 which means your total capital investment in small mid caps in 2017 would have been only 10 15 lakhs and it should be one crore today even that way your your portfolio return would have been fantastic because your capital investment would have been inversely correlated to the market valuations if you don't do that then you should do stock selection stock selection requires time we would be rather happy to buy 20 higher than the price at which promoters bought but eyes wide open being convinced about that company and its future earnings growth so that way we know how to get obsessed that march promoter spot so i am buying in september but i might have i may end up paying premium i'm also buying various companies where promoters did not buy in march alone they also bought march 2019 they also bought in september 2018. so that way almost about 40 percent of the companies that we are considering are the ones where the prices are today lower than the price at which promoters have bought in the last two years yes sir thank you sir so the takeaway is that uh still there is an opportunity of course so my my next question uh isn't uh in line with that so how does investor capitalize this opportunity you mentioned that you had a product you know trying to capture this opportunity and your closest product in 2017 july so is there a product which is available with you to encourage this opportunity of course yes uh first time we did that was in 2008 2009 when obviously global financial crisis market fell and large number of companies promoters increase state but many of those companies uh were also indian subsidiaries of mncs and promoters were increasing stake which is basically mncs so when we did that fund we we called this as re-listing fund and many people in india investors if you talk about mncs they immediately get a picture of nestle hindustan liver colgate gillette those kind of companies these are all of course well well-known um companies but there are so many companies um in india those days like atlas copco ingersoll rand carrier aircon about india pharma these are all companies whose parents globally are 50 60 100 billion dollar companies but in india they were small cap meet cats and we built a portfolio and called it as de-listing fund and we said when promoters buy we buy but they dilute will sell but within two years the portfolio did some crazy irr and we closed and returned the money and then again 2011 12 13 market failed we launched but this time our experience was quite surprising um second time when we did insider shadow fund our first year return are actually minus 20 minus 23 or 24 which means when you buy when promoters buy it is not that price won't decline thereafter maybe march promoters bought and then price went up but when promoters bought in march they were not 100 sure it is going to bounce back in april it could have continued to decline and we had we bought it could have continued to decline which means buying when promoters buy doesn't mean your next six month one year return can be positive it can be negative and leaving example was our own fund last time we did but uh in 2016-17 when we closed that fund if you actually that audio is still there in our website on 21st july 2016-17 if you open that it's a 30-40 minutes audio where we clearly said that uh the portfolio has gone up something like 71 percent in one year uh three year irrs were thirty five years worth of six and this is not sustainable and most of this growth has come um not just because from what spot but they were all small mid caps and small mid cap index was racing and promoters were making use of this opportunity to dilute the number of companies which filed the rendering prospectus with sebi in 2016 crossed 100 more than triple digit so these are all future ipos clear indication of future dilutions is a good time to sell which is what we did now we are redoing investors not that all investors should look at it because promoters are contrarians for example um today you may find a brokerage company promoters increase which i showed in the graph and uh today covet postcode everyone says no no aviation is gone total industry is gone entertainment theater all this gone but you will be seeing promoters buying in indian hotels which ones taj group it's not that they don't know about slow down the room occupancy rates would have fallen from 1890 to 10 20 and in a trade like hotel where you have 50 60 level cost are fixed when your revenues decline from profit making you may get into loss making and you have no clarity when normalcy is going to come back but promoters are contradictors they buy at times like this when the prices overreact to a negative news from 150 rupees when it falls to 60 rupees and 60 rupees is 2007 price 2007 to now the last 13 years 11 years the company would have been profitable growing units accumulated reserves which the company would have used in paring down the debt so balance sheet is a lot better today than what it was 13 years back but if you are getting the same price which is 10 year low 11 year low is when promoters actually aggressively bid up so you should buy so contrary investing may not suit all investors it may sound sexy and our human experience have been pleasant but it's not pleasant every day it can see minus 24 and plus 71 as yearly returns and there are some investors who may have a stomach for that they can make use of these opportunities and regular investors who would like to see returns in in in relative merit to an index because that's another curse in our industry um most investors evaluate an instrument saying that okay what is the alpha what is the beta how much is outperformance index is up 20 this fund is up 30 that kind of approach in this strategy will fail miserably is it possible in the strategy index goes up 20 percent and we go down 20 very much possible but is it also possible that index doesn't move anywhere and this portfolio goes up thirty percent that is also possible so if you are an investor who is willing to take a three four year five year outlook and you are understanding the contrary and nature and you see the volatility in the positive straight and you don't measure the return in relation to any benchmark but an around absolute data then i think such investors will find this quite an interesting proposition yes thank you sir so there is an opportunity and there is also an uh way to participate uh to capture to encourage this opportunity to unify thanks thanks for highlighting that sir so i'll move on to next question in your experience do you see promoters again off-road the stake which they bought or they keep pricing stakes or board of course yes it is not that the same companies were promoted by we buy and the same companies promoters will dilute in future only then we'll sell the type of companies promoters increase take in one leg of the market could be different and the type of companies where promoters dilute when the market valuations become expensive could be different so it is not that the companies where we buy when promoters buy we buy we will wait for those particular company promoters to sell for us to sell many of these companies promoters actually buy when prices decline and they may not dilute when the price goes up but if you see even market valuation going up and the company valuation going up and you begin to see a pattern of promoter dilutions in several companies that's when we start closing down the portfolio our selling will be driven by two factors one is the pattern of promoter dilutions which usually happens as a inverse correlation to market valuations when markets are down you find lot of promoter activity and suddenly you can give it in writing for example you pick a one formula cumulative number of companies promoters dilute minus cumulative number of companies promoters increase take it's a proprietary index that we follow um whenever that crosses 0.5 it gives you a sense of more number of dilutions whenever it touches 0.7.8 you know that lot of promoter selling is happening and very few companies promote us buying happening or if you don't have time and passions to do all this in a professional manner the manner that we do just go by the indicator of ipos suddenly when you realize there are 20 30 ipos waiting to hit the market or actually hit the market and all these ipo collection figures are record high and five inflow is record high mutual fund collection is recorded high it's typically a time you should get out you should get out of not only inside your shadow kind of ideas majority of the equity you should be under invested when everyone is suffering and which is why i continue to have this slide should you be uh bullish when everyone is bullish bull markets are actually born in perspective they grow in skepticism and they mature in optimism and dianaphoria today if you look around we are not any furry conditions we are we were pessimistic six months back even today we are skeptical which is when bull markets actually grow when most people become optimistic there's a time this market will mature and when people become euphoric is the time we should just sell and come out yes sir thank you sir so the next question does the extent of pledge share also give you some indication see pledge is different promoters taking increase is different if 54 of the companies promoters increase take don't have debt at all it is very rarely you will find companies with clean balance sheets and promoters corrupted ulta you can find not this way companies with zero debt and promoter being very rare so eighty percent of the cases that promote a state increase happens the leverage will be very low uh below one each one the incentive for promoters to pledge and raise money and complicate their life doesn't come majority of the cases where you find these promoter pledge complications are companies which are in high debt balance sheet low return on the capital employed and a lot of financial engineering happening in that financial engineering first will happen in the balance sheet of the companies then before it happens at the promoters individual level so if you have one rule that i won't buy companies with the high debt 80 90 percent of these complications can be avoided of course you may miss few opportunities if you don't mind missing few opportunities and just say that i won't buy companies with more than one is one dead um 80-90 percent of the carpet governance complications promoter pledge complications can be avoided and i don't think we had any name in our universe even a single name in our universe with the promoter pledge issues yes sir there are many participants who are very much interested to get your presentation and more than a presentation because i mean you have given a lot of numbers more than a narrative so if you can able to share some insights uh you know where to get those data you know they're very much interested in the data whatever your show is there is there any way to get the data is there i mean they need to pay huge money like ask me they need to buy a bloomberg terminal and so on i i don't have bloomberg in our office and i don't watch tv we need a simple newspaper but we read extensively for example when when two days back when gdp numbers came people just read headline gdp is minus 21 and market is at all time high or near the all-time high people get confused but if you had just taken some trouble in just reading through that gdp minus 21 what brought down the gdp actually if you ask people how do you define gdp people struggle people don't realize that constituents of indian gdp and constituents of indian equities are different completely different so people tend to think as if uh good gdp growth is good stock market never i have one graph in the last 20 years we put gdp in x-axis and stock market in y axis there is no correlation between 2009 and 2014 india grew eight percent per annum every year and market didn't move between 2002 and 2007 india grew only five six percent per annum and the index went up four hundred percent because what is gdp of india gdp of india is 2.8 trillion market kept 2.1 trillion and people combine these two say that this is cheap this is sick because that is parameters they use in u.s and we just copy it in india 15 percent of our gdp is real estate 9.1 is construction so real estate construction is 25 of gdp it is not even 2 percent of india's market cap on the other hand not even six percent of india's gdp is financial services which is forty percent of market cap so if real estate and construction do badly gdp will do badly index may not have to the financial services do well index will do well and gdp nina have been on the other hand if you just take businesses like i.t and textile when the gdp numbers came it was quite evident indian i.t industry is about 170 billion dollars and indian textile industry even if you put spinning mill weaving dying garment apparel all this put together is little less than that okay and last one year it has grown maybe 10 11 per annum and textile has come down 10 11 so the net impact of these two in gdp is almost zero but in sensex and nifty you have 580 companies and no textile company so it is possible that the index can go as gdp keep not moving or keep declining but it is also possible look at this way i t is slightly bigger than textile industry but i t has 46 lakh employees and textile has 4.1 crore employees and last year when it went up 10 textile declined 10 percent um iit added four lakh employment and textile industry lost 40 lakh employment so it is possible that gdp can grow and unemployment can also be big issue it is what is important is what is driving economy what is driving market and these are all numbers which is basic numbers which is available so whenever there is an economic survey that comes um it's a long document and just need to have time passions and effort to put in to understand and we don't need the bloomberg or any paid subscription in any websites for this data a simple um access to many of these industry association data company annual reports you know the disclosures different organizations make on our economy and different businesses as well as government amazing data points we have yes sir thank you sir um small cap is generally known as you know high risk category when comparing with mid and large cap so many of them is interested to understand what is unified view on a small cap you know looking at next three years five weeks ten years perspective um so we should not confuse small caps with small companies and we should not confuse large caps with the leaders um this is this may look like an easy statement to make but it's it requires some time to think and believe there are several businesses in india where the largest player in the business is still a small cap so from stock market capitalization point there are small caps but in the business they operate they are the largest players such companies will you will usually find amazing payoffs right but there are several large caps which may not even be any leader they won't have any pricing power they will behave miserably so when you buy a stock you pay a price and you get earnings in future so p p is equal to e multiplied by p divided by e so price of a stock is equal to earnings per share multiplied by pa ratio of the check this is the only ratio which is held valid 20 30 40 years back and even today there are hundreds of other ratios which come and go based on the fashionable discussion topics which means the price should move either when earnings of the company moves or the pe multiple improves unix of the company is a function of the company customer vendor supplier competition their own ecosystem p multiple is a function of market sentiment mood demand supply fia action all this free moves between yesterday and today it moves between morning to often which is what is driving the share price but the earnings of the company doesn't move every day we come to know every quarter of the results but not every quarter results move in different directions earnings is more a business cycle business cycles are little longer two three four years your business do well one two years this is bad so the earning cycle is much longer cycle for a long period of time it is the earnings which will drive the price not the other way around share price of a company could grow when the earnings of the company grows the earnings of the company is not going to grow because price is growing up so if there are only two variables in a price which is eunice and pe multiple pe multiple is function of earnings then it is better to track earnings so if the earnings growth of a small cap is going to be more visible more resilient it is but it is more safer than a large cap whose earnings you can't predict right so people try to narrow frame risk in terms of volatility and volatility is not risk if if fixed deposit goes from 100 108 116 124 and if itc moves only with 10 20 percent standard deviation whereas another company moves with the 30 standard deviation doesn't mean that company with 30 percent standard deviation is highest it is high risk to people who don't know what is volatility or who can't understand why this volatility but if you understand the company and the earnings stream volatility can you can benefit from the volatility high volatility can be your high return if you know when to act but if you don't know when to act the same volatility could be a risk so if you don't know what you are investing maybe large caps are better place which are there at least chances of default doesn't are less it happens but it's less and volatility can also be less but if you know what you are doing then probably in small cap what other specifies risk is an opportunity for us yes sir thank you very much sir uh in fact it was very insightful session and in fact thanks for your patience and addressing you know most of the questions so uh would like to uh you know if you can able to give some closing note for the investor and the participant um probably this is what 28 29 years since i began investing from 91 i started my career with metro stock exchange as a float trader while the degree of volatility has differed year to year while the parameters people use in evaluating performance have changed time to time while the nature of price movers uh have evolved over the years one thing which has remained uh constant if you look around the most successful investors you can learn lot of lessons from them um you need to copy what they are buying you cannot copy a conviction but if you look around most successful investors there are few learnings that you can get in terms of defining what is value what is long term outlook why measuring returns in short periods could mislead us into doing few things which otherwise we would not have been doing so these learnings are constant there is no one inflection point you will say no no i learnt enough but what is surprising is many times such learnings is not directly proportional to the years that you spend there are people who spend 20 30 years and never learnt anything there are people who just spend three five years with sincerity and they learn um so the only point is it's not that small cap is good mid cap is good large cap is good you need to check what is good for you well whether we cannot teach temperament and you cannot change temperament by learning the parent is somewhat uh unique to us and we should do what is good in our temperament and therefore choosing products choosing strategies should not be done based on obviously fast performance it should also not be based on others did it so i'm doing you need to evaluate what is right and whether it is in sync with our own risk tolerance whether it is in sync with our own return expectation and when people say you should be contrarian like be optimistic when everyone is pessimistic and be skeptical when everyone is euphoric all this is nice to discuss but it's very hard to practice if you find it hard to practice you should not be even attempting it and therefore we never will position our products that this is great this is bad this is good it is good for certain types of investors and it may be bad for certain types of investors so the only learning that as investors constantly you should endeavor to do is equip yourself in evaluating the opportunities in a very very basic fundamental manner if this one and a half hours had highlighted that one aspect to you i think i will be personally very delighted with that thank you thank you very much sir participants thanks for your time and i'm sure that this session would have been much insightful looking forward in hosting another event if you need to have any more details on the product you can connect us through info at the rate of pms buzzer.com uh we would love to address your query or whatever i mean you need to understand the product so looking forward in hosting another event have a great weekend sir marin sir thank you very much thank you sincerely appreciate thank you very much you