All about REITs (Real Estate Investment Trust)

With growing popularity, many investors may be wondering what REITs is all about. 

 We published an article in our monthly newsletter on REITs. Reproducing the same here for be benefit of investors. Also publishing a news article in The Business Line dated 20th May 2024. Hope these articles are helpful in undestanding REITs.

Gold & Silver Funds

Gold is the first choice for Indians. It is invariably part of everyone’s investment portfolio. Many are happy to wearing them as jewellery. In recent times, many have been buying Gold as coins and Bars – just for investment purpose. But the real challenge is:

• Safety: You need to keep them in SAFE lockers for obvious reasons.
• The Purity of the gold you buy is a big question.
• The bazaar rate of Gold and Silver is different from its international price – due to jewellers margins, taxes etc.
• When you buy gold, the rate is usually higher when compared to the rate at which you tend to sell.
• And when you buy in tranches, you keep adding multiple jewellery / coins / bars – making it difficult to keep track.

Now you can Buy Gold and Silver in electronic (demat) form - as Exchange Traded Funds. All the above challenges have been addressed here:

• Since you buy in demat form – there is no need to keep in locker
• The purity of gold you buy in electronic form is 24 Carat.
• The price at which you buy / sell is at transparent, international rates.
• While you may buy in tranches – like 5 grams, 10 grams etc – all of them get pooled under single entry in your demat statement. Hence there is no bits and pieces of gold here.
• Gold is traded as 1/100th of a Gram. Hence if you wish you buy 1 gram – you need to buy 100 shares of Gold ETF. And Silver is traded in grams.

Action... Reaction

 In stock market, the price movement is influenced by variety of factors like:

• company specific news
• sector specific news
• Macro news on overall economy
• Global factors like Geopolitical tensions

While all these factors are the tradional reasons for moving a share price, sometimes simple shift in buyer - seller demand can move the needle.

But whatever said and done, it is ultimately the fundamentals that dictate the stock price. 

If a stock price is running up but the fundamentals are not supportive, when the results are declared and is subdued - then the price crashes. Below mentioned screen shot is an evidence of the same. 

Having invested your hard earned money, you need to be mindful of the fact that - THE MOST IMPORTANT THING while investing is to keep an eye on the results of the companies in which you invested in. 

What goes... Comes back... The Jet Airways Way

What you do to others WILL come back to you. It is a sort of cause and effect. And when we see LIVE EXAMPLES of such cases, we refrain from inflicting pain on others for selfish gains. At the end - Wise people learn from others mistakes. JET AIRWAYS could be one such example.

Teary-eyed and dejected, aviation veteran Naresh Goyal felt so hopeless about the system that he told a special court last week that he would prefer to die in prison. For a man who ruled Indian skies, that's quite a fall. 

While one may pitty the fate of a person who once ruled Indian skies, the reasons that lead to his fall his unethical business tactice can give us a different opinion.

To read the full article, kindly visit: https://www.ndtvprofit.com/bq-blue-exclusive/naresh-goyals-turbulent-ride-from-ruling-indian-skies-to-hopeless-imprisonment

• Hailing from Punjab, Goyal started his career in the late 1960s in a relative's travel agency. 
• He quickly learned the ropes and set up Jetair Pvt. in 1974 to provide sales and marketing services to foreign airlines. 
• After representing global giants such as Cathay Pacific and Air France for years, he established Jet Airways soon after the Indian economy was liberalised. 
• When Jet Airways launched commercial operations in 1993, its competitors were Damania Airways, Sahara India or Air Sahara, ModiLuft and East-West Airlines, along with government-owned Indian Airlines and Air India. 
• There was a time when any major aviation policy by the government was speculated to have the prints of  Mr.Naresh Goyal's.
• "He knowingly or unknowingly caused more harm to Indian aviation than good through his ways of functioning," Jitender Bhargava, former executive director of Air India, told NDTV Profit. "Goyal prevented airlines from starting operations and later growing by creating stumbling blocks through political clout and influence in the policymaking—only to thwart competition."  The 5/20 policy formulated by the government can be cited as one major example of that, according to Bhargava. The policy required carriers to complete five years of commercial operations and own 20-aircraft fleet to begin international operations. No other country had such a rule. Goyal, according to sector watchers, was even said to be behind derailing Air India's divestment in early 2000s.
• Goyal, according to sector watchers, was even said to be behind derailing Air India's divestment in early 2000s.
• The Tata Group, along with Singapore Airlines, had withdrawn the proposal after criticism from trade unions and political backlash. 
• As a result, Jet Airways climbed higher and gained domestic market share, backed by its world-class service with no other airline to match it. 
• The next step was going public, which it executed successfully. Its initial public offer was subscribed 4.25 times on the first day.

Emerging Threats 

• Indian market changed with the launch of new carriers such as InterGlobe Aviation Ltd.'s IndiGo, Air Deccan, SpiceJet and Go Air (now Go First). As the number of flyers increased, low-cost became the name of the game and the quality of services took a back seat. 
• Feeling the threat from budget airlines, Goyal overplayed his hand by acquiring Air Sahara for Rs 2,200 crore. After the expensive acquisition, Jet Airways' costs began to balloon on international routes. Rapid network expansion, not enough in-house talent and price war among low-cost carriers created the perfect storm that rocked Jet Airways. The 2008 financial crisis hit demand and oil prices soared. Jet Airways, already burdened with rising costs, resorted to heavy borrowing.

Unending Turbulence  

• When Kingfisher Airlines was in dire need of funds and Vijay Mallya was pleading the government to allow foreign airlines to buy stake in domestic carriers, Goyal was reported to be against such a policy and denied the need to tie-up with a foreign carrier. When Mallya's Kingfisher stopped commercial operations in 2012, Jet Airways' efforts for survival came under the spotlight.
• Conveniently, Goyal changed his view: "Today, I may not need FDI, but tomorrow I may need," he was quoted as saying. In another "twist of fate" that year, Jet Airways got a booster as the government changed its foreign direct investment policy. It allowed foreign airlines to own up to 49% stake in Indian carriers, just when Goyal was hunting for more funds to keep Jet Airways going. 
• Etihad Airways acquired 24% stake in Jet Airways for Rs 2,000 crore when India and Abu Dhabi agreed to increase flights under the bilateral agreement. But that respite didn't last. Over the next few years, IndiGo's business model, led by single aircraft and frugal operations, became something to imbibe to run a sustainable and profitable airline. Jet Airways again needed funds. 
• In April 2019, a consortium led by State Bank of India refused to inject more funds in Jet Airways as it crumbled under huge debt and years of loss. Etihad didn't come to rescue either this time. At the time, Jet Airways operated over 120 aircraft and flew on hundreds of routes. And the airline was grounded and ceased operations. Soon after, the lenders initiated bankruptcy proceedings against the airline and the National Company Law Tribunal admitted the case in June 2019. Allegations came to the fore that Goyal was siphoning funds from the airline. Jet Airways' board, which included Goyal and his wife, had to step down. The Enforcement Directorate began examining Etihad Airways' investment in Jet Airways, reportedly on claims of violation in foreign direct investment rules. Goyal was barred from leaving India.

Losing Hope 

• In May 2023, Canara Bank filed a complaint with the Central Bureau of Investigation, accusing Goyal of cheating, criminal conspiracy, criminal breach of trust, and criminal misconduct. Based on the CBI's FIR, he was arrested in September by the Enforcement Directorate for alleged fraud of Rs 538 crore. The case has since been heard in a special court.
• When Goyal first emerged in the aviation scene, many pointed to his charming ways and how he had the potential to become Indian aviation's face after JRD Tata. Years later, during the hearing last week, he stood with folded hands and bowing before the court to express how he's missing his bedridden wife in the jail. "He came before the court with continuous tremors in his whole body and hands," the judge said. The 74-year-old said his wife is bedridden and their only daughter is unwell, too. Referring him to JJ Hospital would be useless and he conveyed reluctance to travel to hospital from the Arthur Road jail.

While the Airlines may Survive - Naresh Goyal may not. That is true for any one who does unethical business.

WHAT GOES... COMES BACK... THE JET AIRWAYS WAY

Should you Shun Mid and Small Cap's? - Taher Badshah of Invesco MF

 

Reflections of 2023

 We had made an YouTube Video on "Roller Coster Ride" on 15th may 2022 - explaining the underlying opportunities in the then lackluster markets. Indeed it was a timely video showcasing the merits of investing.

Infact, it could be interesting to watch this video again and see what we said then:

https://www.youtube.com/watch?v=iNHnDNswCzg

While many of us are rejoicing the market rally, and many think the turning point for markets has been the state election results on November 2023, markets showed signs of growth way back in May 2023 itself - exactly one year after we posted the above mentioned video.

Since FII's were net sellers since october 2021, it was the Mid and Small caps which were ruling the roost till Nov 2023. The state election results gave clarity on upcoming elections and FII's joined the bandwagon to pump in record money in the last two months of 2023. 

In Nifty 50 stocks, 48 ended the year positively. And large cap index gained 20% in 2023. 

But the real winners in 2023 has been Mid and Small Caps - which gained 44% and 49% respectively. 

The Midcap 100 index surged 46%, driven by REC Ltd. and Power Finance Corp., which gained 3.5 and 3.4 times, respectively. Mazagon Dock Shipbuilders Ltd. witnessed a near threefold increase in its share price, led by the push for indigenous defence production. Of the Midcap 100 pack, 93 stocks ended in the positive. Aditya Birla Fashion and Retail Ltd., ACC Ltd., and Page Industries Ltd. were the top laggards and experienced declines of 22.5% and 10%, respectively.

The Smallcap 250 rose by 49% in 2023. BSE Ltd., with fourfold gains, emerged as the top performer in the pack. Suzlon Energy Ltd. saw a 3.6-fold increase, capitalising on the thrust for renewable energy. Campus Activewear Ltd. and Easy Trip Planners Ltd. faced challenges. 

Sectorwise, 

• Nifty Realty led with an 81% surge, driven by Prestige Estates Projects Ltd., DLF Ltd., and Brigade Enterprises Ltd. 
• Nifty Auto and Nifty Pharma also performed well, growing by over 47% and 32%, respectively. 
• The auto sector gained due to steady demand, a softening of commodity prices and favourable policy changes this year. 
• However, sectors like Nifty Bank, Nifty Oil and Gas, and Nifty Financial Services experienced more modest gains of 11%, 12%, and 12%, respectively.

IPO Market:

A vibrant IPO market is curcial for a healthy secondary market. 2023 will certainly be remembered as the year of the primary markets. And more infamously, IPOs in the SME space. Out of over 150 companies that hit the primary markets in the SME space, 51 companies hit subscription levels of over 100 times and 12 of those hit subscription levels of over 300 times! A logistics company received subscription for Rs 10,100 crore against the IPO size of Rs 32 crore. Another SME IPO received Rs 18,800 crore worth of bids against an IPO size of Rs 78 crore. And the most subscribed IPOs were not oversubscribed 'merely' 100-200 times. Kahan Packaging was subscribed 730 times. Speaks of the mania in the markets in 2023. 

Going Forward...

FII's have just resumed their investments. And you have a BIG event in 2024 - Central Government elections in May 2024. Markets are running up on expectations. But investors need to keep in mind the following:

• Investments made when past year(s) returns have been muted - gives Best returns.
• Last year has been spectacular. Expecting similar kind of returns in 2024 may be tough.
• Run up to the elections is usually noisy. That can create lots of volatality.
• Cut in interest rates is widely expected in 2024. If that happens - that can fan liquidity and fuel inflation too. It can pump up stock price.
• Above all - a run up in stock price (hence MF's NAV) has to be substantiated by rise in earnings. It is ultimately the fundamentals which justify / determine the stock price.
• Having said that - while one year forward may be tough to predict, over next 3 to 5 years Indian economy is bound to do well. 
• So Investors who need funds in next 1 years needs to be cautious. All others can invest at every opportunity you may get in the markets.
• But it FII's continue to invest - 2024 could be an year for Large cap's. 

So multitude of factors - election results + Interest rate cut + FII Investment + Earnings Growth justification - are likely to dictate 2024. Asusual - it is Interesting times ahead...

Be Passionate - Be Crazy - #Motilal Oswal

 The difference between being passionate and being crazy is often hazy at best.

The most passionate individuals often seem to be nuts. The most gifted and successful artists, entrepreneurs, scientists, you name it, are often said to be a little crazy.

One such is our Stock broking partner - M/s Motilal Oswal Financial Services at Mumbai. While their office - Motilal Oswal Tower (MOT) is an iconic building in Prabha devi in Mumbai, the things that they do there is sometimes wiered. While illuminating the building to suite the occassion like Christmas or Diwali is ok, there are things that may look crazy to first timers.

It begins with the LIFT BUTTON - For going up - you have BULL symbol and for going down you have a BEAR symbol. That sums it up. Do they mean - what goes up cannot stay there for ever and it has to come down. ... or something else. 

And I leave it to your imagination on how dealing room, Cafetaria and wash rooms looks like. 

You can breath, see, feel and experience stock market all through this building. Indeed it is a place to visit for stock market investors . 

Secret Behind Success... Mr. Pankaj Tiberwal of Kotak AMC

Retaining Talent - is THE BIGGEST CHALLENGE in any profession. But you can't do much when people want to move out for whatever reason it is.

In Investment Management industry - it is this talent that dictates results. While no one is to debate the role of process, team work etc, it is the ultimate decisions - made by fund managers - which deliver results. And when such fund Managers call it a day - for what ever reason it may be, it is indeed a loss to the organization. But it could be good for both people - if they are able to evolve better than before.

Rarely Fund managers have a decent exit. One such has been for Mr.Pankaj Tiberwal of Kotak AMC. Infact he has left a farewell note - for the benefit of everyone. 

Following is the gist of this letter:

1. Joins Kotak MF in 2009
2. In 2010 – Fund manager of Kotak Emerging Equity Fund (Rs.113 Cr) and Kotak Small Cap Fund (Rs. 127 Cr). Today KEEF is Rs.36000 Cr (2^nd largest Midcap Fund in Industry) and KSC is 13000 (4^th largest Small cap in Industry)
3. 400 unique names identified and invested in 14 yrs
4. 
   
   
   
   
5. Point to Point return – can be influenced by start date and end date
6. Rolling return is better metric
7. Investment philosophy:

• Trust takes time to build. Can be lost instantly. Reputation and Integrity – most valuable
• Avoid short cuts. Maintain ethical decision making.
• To Cut noise: Invert. Rather on focusing on where you can make 2x return over 1-2 Yrs, focus on where you can lose money over next few yrs. Maintain check list of factors for company selection. Avoid BIG mistakes.
• Process – more important. Fundamental analysis.
• Portfolio Construction – Gorilla to King Kong Strategy. Invest in 50 leading names – some could become King Kongs.
• To avoid:

1. Avoid extreme portfolio allocation. Monitor Sector / Stock weight relative to benchmark
2. Don’t Chase Momentum
3. Prioritize valuation cosiderations
4. Focus on earnings capacity rather than earnings itself.

• Stay Calm – Avoid overconfidence - Meditate 15 to 30 min a day

Prasanth Jain - Farewell : Not so great

One of India's longest serving fund manager Mr.Prasanth Jain quit his job in July 2022. 

In the last minute I got a message that there is a zoom meeting which will be addressed by Mr.Prasanth Jain for one last time at HDFC Mutual Fund. It was scheduled by 4pm or so - if I recollect right. I was right there on time. And the meeting ended in flat 15 minutes. 

And a month later the fund house 'released' a 'farewell' letter writtend by Prasanth. For a person who has created so much wealth for investors, for a fund house which sold all its funds saying his name, it was indeed a shabby farewel. 

Anyway - thought of posting this letter today for following reasons:

1. is indeed a treasure trove of information.
2. Another fund manager - from another AMC has also resigned and he has also posted a farewell letter. Before I post Pankaj's letter - I thought it is right to post Mr.Prasanth Jain's letter.

Here's an extract from the letter where Jain shares his key learnings:

a. In my experience, efficient markets hypothesis does not hold true, especially over short to medium periods. Markets can be driven by emotion and herd behaviour for extended periods

b. Sizing is very important. Any portfolio will have its share of big winners, winners, losers and big losers. In my case roughly 1/4 were losers, 1/100 were big losers, 1/20 were big winners and the rest were winners.

c. The data above in (b) highlights what Warren buffet has famously said – Rule no 1 don’t lose money, rule 2, don’t forget rule no 1. I have made more mistakes of omission than commission – some prominent missed opportunities were Asian Paints, Bajaj Finance, Eicher, Kotak Bank, Divi’s laboratories, etc., but successfully avoided the long list of businesses that caused large and permanent loss of capital.

d. Markets are reasonably efficient over long periods. The duration of mispricing or inefficiency can vary from several quarters to several years. It is important in this period to stay the course and remain solvent (for a mutual fund manager this means to retain the job / fund).

e. Equities are a generous asset class. The tailwind of a growing economy and growing companies overshadows mistakes of timing and security selection in diversified portfolios in most cases over long periods. The key is patience to stay invested for long periods.

Impeccable Vellayan Subbiah – Executive Vice Chairman, TI Industries, Chairman SRF Ltd.

• Son of M.V.Subbiah of Murugappa Group

• UG from IIT Madras

• MBA from the University of Michigan

• 2009 – DBS ends partnership with Cholamandalam Finance

• Aug 2010 – S Vellayan takes over as MD of Cholamandalam

• Till he stepped down in 2017 – Cholamandalam Income compounded at 25% and profits compounded at 42.87%. 

• Today Cholamandalam trades at a premium to competition — 6.85x 12-month trailing price-to-book compared to 1.99x for Mahindra Financial and 2.99x for Sundaram Finance.

• 2018 to 2022 – MD of Tube Investments

• TI Industries – 

o 2018 - Market Cap: Rs.4000 Cr.

o 2023 – Market Cap : Rs.64000 Cr.S

o The market cap has compounded at 72.74%

o Today’s PE: 66X

o FY 20-23 : Sales – Compounding at 47.25%, Profit after Tax – Compounding at 46.11%

o 3 Main Verticals – Engineering , Metal formed Products, Industrial Chains

o 70% revenue from automobile industry

o To derisk – 3 Pillar Strategy - diversifying into:

 Organic Growth in Existing Business.

 Venture Capital Style investing

• Optic Lens – for automotive industry

o Currently manufacturing 5 Lakh lenses a month

• 3 Wheeler Electric Vehicle Manufacturing

o TI Clean Mobility

o Acquired 2 companies: 

 Celestial eMobility – Mfr 55 HP e Tractor

 IPL Tech Electric – Mfr Medium & Heavy duty commercial vehicles

o Current production Capacity per annum:

 E 3 Wheelers – 19000 Units

 E Tractors – 25000 Units

 E Trucks – 2500 Units

o To rampup production: invested Rs. 1950 Cr along with Co investors. Additional Rs.1050 Cr mobilization is underway.

• Inorganic Growth

o Acquired CG Power for Rs.800 Cr in FY 21

o Turned it from loss to profit in just one year

o From loss of Rs.1323 Cr to profit of Rs. 1295 Cr

o Green pasture in Manufacturing space

 Acquired Lotus Surgicals

 To participate in infra growth – invested Rs.140 Crores into manufacturing of large diameter tubes

• Mr. Ashish Bharat Ram of SRF made S.Vellayan’s as the chairman of SRF, a multi speciality chemical company. He says “…What I admire about his leadership style is that he believes in hiring the right talent, empowering his team, and allowing them the freedom to execute and deliver successful outcomes. His ability to think creatively and critically to solve complex problems and make informed decisions has helped him stay ahead of the competition,” 

• Vellayan strongly believe that: debt must be a manageable burden, ensuring that it never surpasses two times the annual free cash flow — a threshold designed to maintain financial stability. He has achieved that by equally mastering the art of strategic partnerships to mitigate the capital burden on his company.  

• In a recent analyst call S. Vellayan says “Most of our businesses are focused on first getting an established position in the domestic market and following that up with export opportunities. We are very focused on both capital allocation and capital efficiency, which is why for the surgicals business we partnered with Premji Invest to reduce the capital outlay. For the EV business, we partnered with Multiples to reduce the potential capital burden,”

• He understands that nurturing growth requires patience — an antithesis to the marathon mindset on the Street fixated on quarterly sprints

Full article can be read at: https://www.fortuneindia.com/long-reads/the-thalaiva-at-murugappa-group/114344