The year is 2004. Two top analysts of Rakesh Jhunjunwala's (RJ) Rare Enterprises are at the headquarters of Titan Industries in Bangalore.After two days of meetings with some 20 senior executives of the watches and jewellery marketer, the duo rushes back excitedly to Mumbai. The same night one of them makes a presentation of their findings to RJ, illustrating the bright prospects he foresaw for Titan, particularly in jewellery. RJ, who has picked up Titan shares over the past couple of years, knows the potential in the company, but he still finds the five-year projections wildly optimistic. "He told me: 'Peeta mein hoon, chadti tere ko hai ('I drink and you get high')," recounts the analyst with a chuckle.
Five years later, Titan exceeded those projections comfortably (RJ still owns the stock and hasn't sold any of his holding over the years; the Titan stock has appreciated close to 12000% since RJ first entered in 2002).
The analyst, Utpal Sheth, who convinced RJ about the company's potential in the jewellery business is more than just a bean-counting, spreadsheet-gazing researcher.
A Calm & Strategic Thinker
Sheth, 41, CEO of Rare Enterprises, is the whiz in the visionary's shadow, the man responsible for spotting many of RJ's multi-baggers in the past, from Nagarjuna Construction to Praj Industries.
Such informed investment calls are the norm today at the firm, which in its initial days had a substantial trading component. Sheth has been at the forefront of the firm's renewed focus on a private equity style of investing. For instance, the most recent investment - at the end of 2011 - in Sterling Holidays was made by Sheth, but only once RJ gave the goahead after meeting the management.
Sheth is a perfect foil to RJ. If the Big Bull is known for his intuitive calls, flamboyant views and volatile temperament, the CEO is a calm and strategic thinker happy to be behind the scenes; and away from the cocktail circuit.
"We have disagreements, different points of view and different ways of expressing them," says Sheth, to whom RJ has been friend, philosopher and guide for over a decade. "I am the calmer person but am not the calming factor. It takes two to tango and we complement each other well."
RJ says: "Utpal and I complement each other. We believe our synergy makes 1+1 = 11. We seek to invest with promoters and management teams that are conscious of all types of risks, work towards mitigating them and try to evolve their business models."
It was by chance in 1997 that their paths crossed. RJ and Sheth were waiting to meet Asit Kotecha, founder of ASK Financials, in his office. Sheth, who was then working with Enam Financial's ibanking division, overheard RJ discussing his purchase of liquor stocks and the price at which to sell them. Sheth jumped into the conversation with a radical viewpoint: those stocks were ridiculously cheap and alcoholic beverages had all the characteristics for longterm growth and profitability. "I told him to continue holding them for a really long time rather than look for a fair price to sell them at," says Sheth.
RJ not only took his advice, but also took Sheth along with him to build Rare Enterprises. Sheth accepted the offer because he sensed an opportunity to build an institution from scratch along with a person he considered a genius. "He was kind enough to make me CEO and a partner," says Sheth. While RJ, like Sheth, is a clear thinker with a good head for numbers, his CEO complements him with his negotiating skills.
"Recognising an opportunity is one thing; and structuring a deal to leverage that opportunity in the best possible manner is a strength I bring, with my investment banking background," says Sheth.
In early 2003 - just around the time the stock markets were set for an unprecedented bull run that would last five years - the duo set about building Rare Enterprises. RJ saw the big picture; Sheth laid the foundation and the bricks of the institution.
Titan was one of the duo's early successes. "Whilst many did not think jewellery had prospects, we realised it was a scalable business and that the return on capital employed was higher here than in watches," says Sheth. Sheth had, of course, done his homework to arrive at these conclusions.
Says Rashesh Shah, chairman & CEO, Edelweiss Group, who has known Sheth for the past 15-20 years: "He is an astute investor grounded in research. He works like a PE investor and has added that extra dimension to Rakesh through his PE approach in both listed and unlisted companies."
Like Titan, Sheth has been responsible for identifying multi-baggers in the past like Praj Industries and Nagarjuna Constructions; more recently, he has sealed deals for investments in Mumbaibased JBCN, a K-12 school chain, and Pipavav Defence, besides Sterling Holidays.
But it were the glory days of the bull run of the past decade that provided Sheth opportunities to prove himself - a few times, with calls contrarian to those of the man many consider the Indian avatar of legendary value investor Warren Buffett.
In fiscal year 2004, when Sheth had just finished evaluating Praj, the stock price was at Rs 80 levels. The CEO went up to the founder with a proposal to buy into Praj. RJ refused. Sheth went back to the drawing board, did some more work on projections and hypotheses and came back with another attempt to convince RJ about the viability of the investment. By then, the stock had gone up to Rs 100. RJ gave him the goahead, although he was still not fully convinced.
As soon as they bought the stock, the price promptly slipped to Rs 75. "He never said anything and that is the greatest quality about him (RJ)...Our investments are made with an 8-10 year horizon, and we need to be patient and have conviction," says Sheth.
Sheth's call proved to be a masterstroke. In equivalent terms, Praj's stock price spurted from Rs 100 to Rs 5,000 at its peak in fiscal 2008, an appreciation of 50 times; RJ sold 20% of the holding back then, resulting in returns of 10x. Sheth has been helping Rare's focus to evolve from trading to investing. In 2003, their trading exposure was about 30% of the portfolio; today Sheth says it has come down into lower single digits.
"Two things have happened, the portfolio size has increased and the relative value of investing over trading has become apparent," he opines. Says Kotecha, Sheth's first boss, "Rakesh has brilliant understanding, but Utpal has played the key role of executing his thinking." Rafique Malik, founder of Mumbai-based Metro Shoes, reckons Sheth is a rare combination of caution and ambition.
"He holds the accelerator as well as the brakes," adds Malik, who has known Sheth for the past four years since the time Rare Enterprises bought into Metro Shoes. The challenge today, though, for RJ and Sheth is to spot value - the equivalents of what the likes of Titan, Bharat Earth Movers and Praj were a decade ago - in a market in which little palpability exists.
There are also those in investing circles who wonder whether Sheth has the freedom to make a distinctive mark when in the shadow of a powerful personality like RJ. Says Motilal Oswal, cofounder of the eponymous financial services firm, who has met Sheth a few times: "He is part of RJ's core team, but I don't know how much independence he would have in decision-making."
Sheth, for his part, looks up to RJ as his mentor. Sheth's wife Neepa describes him as an idealist, although RJ's practical approach to life has rubbed off on Sheth and he is more realistic in his expectations, she adds.
Still, Sheth remains a teetotaller! Sheth agrees about the rub-off, and points to one of RJ's philosophies on closing a transaction that he has absorbed. "Pay a slightly higher price to close a transaction so the other guy does not have time to think while negotiating."
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