“We are actually getting a good response on our roadshows because there is a bit of a freshness and newness in what we are presenting. So, there are pros and cons. I think the timing is not too bad and as we say, timing the market is less important than time spent in the market,” says Mihir Vora, CIO, Trust Mutual Fund.

You coming with a mutual fund when markets are at an all-time high. The general view in the market is that valuations are also looking slightly stretched and above historical valuations. Normally, you want to raise money when there is gloom and doom, when there is value in the market. What is the thought behind coming with a mutual fund now at a time when Sensex is at 75,000 and Nifty is at 22,000?
See to launch a new business, it is sometimes more about getting the right team in place rather than timing. So, we were making sure that we have the right team in place. I joined last year. I built my team and now we have I think the best of the high-quality team in place and now we are ready to go. It just so happens that the markets have done so well and there are two ways of looking at it in the sense that when the markets are doing so well, people are open to new ideas, people are willing to look at new strategies. So, we are actually getting a good response on our roadshows because there is a bit of a freshness and newness in what we are presenting. So, there are pros and cons. I think the timing is not too bad and as we say, timing the market is less important than time spent in the market. So, we are here to build the business over a long period of time in the right way, with the right quality and the right investment strategy and I think there is no better time to start than now.

How are you planning to differentiate because the AMC market is now a crowded market and if that was not enough, you got PMS and plethora of PMS now which pretty much are giving you a differentiated strategy.
Certainly. See, for any fund manager or asset management company whether it is on the PMS side or mutual fund or insurance or whatever, what matters is three things in my view.

One is who are the promoters, what is the background of the promoters. Second is who are the fund managers and third is what is the investment strategy and philosophy.

I believe we have something unique in all the three aspects. The promoters Utpal Sheth and Nipa Sheth are giants in their own respective fields, Utpal in equities, Nipa in fixed income. I come with 30 years of experience across asset classes managing very large sums of institutional money and I have done it across different mandates. I have done it in mutual funds for almost 18 years. I have done it for sovereign wealth funds which is the Government of Abu Dhabi, sovereign wealth fund and I have done it for the previous nine years in a large insurance company and that included all asset classes, equity, fixed income, real estate, InvITs, REITs, AIFs. So, I think with my kind of experience, with the promoter background that we have, investors should get the comfort that this institution which we are building is here for the long term. We have seen cycles. The promoters and myself are fully committed for the long term and we will not get swayed by short-term swings because we have seen swings in our careers.

We know that markets can be volatile. We know that markets can be even unforgiving at points in time, but we will not get swayed by that.

A lot of time we have seen that when there are performance patches which are not so great, we have seen some houses or some fund managers buckle, they either change their style or they change their strategy. We know what we stand for.

We know very clearly what our investment philosophy is and we will run it truthfully and we know that it works. So, for us, it is not a question of whether it will work or not, it is only a question of sticking to the right strategy.

The mutual fund business is never an absolute performance business, it is relative. You have to beat the benchmark and you have to do better than the competition. So, what is the benchmark you are setting for yourself?
Benchmark is the NSE 500 and our strategy is to run a focus portfolio of about 40 to 60 stocks. About 15 stocks will be what we call stocks which in our view can become potential gorillas because I would ideally like to have all 50 stocks along that strategy, but it is not easy to find such stocks with such high conviction levels. So, about 15 out of those 50 stocks will be stocks where we have that kind of conviction and the remaining stocks will be GARV, growth at reasonable valuations, kind of an approach. But very clearly, we are not looking to hug the benchmark. We are here to take active bets against the benchmark across largecap, midcap and smallcap. So, we are market cap agnostic, sector agnostic. We just want the best stocks in the portfolio whichever bucket they come from.

Gorillas are rare. You rarely find a gorilla in a jungle. They are dominant and they live long unlike the monkey tribe. Now good companies are rare to find. There are very few companies which will survive the ups and downs of disruption and market volatility and macro uncertainty and if they live long, they can create a lot of wealth. So that is the underlying thesis behind gorilla investing.
Absolutely.

Okay, so let us understand first why are good companies hard to find? Because if India opportunity is so great, everybody should do well.
Absolutely. So, that is a very pertinent question and gorilla investing actually is kind of a personification of our investment style which is to find stocks with high terminal value. We call it terminal value investing.

What is terminal value?
Exactly. So, normally in markets like India, India is anyway a high growth market, we grow GDP at 6-7%, so nominal GDP grows at 11-12% and within that the corporate sector, the organised sector is growing faster so say 12-13-14%. But even within that, there are always segments and sub-segments which grow much faster than even 12-15%.

What is typically happening and this is a mental thing that all analysts and fund managers have that it is easier to predict for the short term. So, we look at the past few years of track record of good growth, we meet the company, we know the company’s business plans for the next few years, and it is easier to predict or at least forecast some numbers for the next two-three-four-five years.

Typically, beyond 10 years nobody forecasts. So, in high growth stocks and sectors what happens is you would predict 30-40% growth for the next two-three years, then you are not sure, so you taper it down to 25%, then maybe 20%, 15% and beyond the 10th year it is just not visible so you just say that it will grow at GDP levels.

Like IT, 2000 growth 100%, came down to 50 and they spoke about 30% growth, it was called as a profit warning and today they are growing at a rate which is lower than India’s nominal GDP.
Absolutely. So, that is what typically happens and that is the mindset that the further you go the less clear it becomes and so you assume conservative numbers say 5-7% GDP growth kind of numbers.
What happens in high growth stocks and segments is that this growth rate beyond the 10th year that you are assuming does not end at 7%. It stays high or even in some cases even accelerates.

Just for academic purposes can you enumerate that with an example. We are discussing not a stock recommendation here but perhaps an idea which can just go well with the audience.
So, let us say the largest jewellery company in the country promoted by the most respected business house which was into watches earlier and in the 90s they diversified into jewellery manufacturing.

The company which is known as RJ’s famous stock.
Yes. So, this company in 2006 because we have data, we have done a lot of studies since 2006. In 2006 this company had a profit of approximately Rs 80 crores and the market cap was approximately give or take Rs 4000 crores.

At that time also it had already become a high growth company. So, it was growing at 20-30-35%. So, it was Rs 80 crore profit company, Rs 4000 crore market cap and growing at a fast pace.

So, typically, the framework that we use, we would assume a few more good years of 30-35% growth, then 20-25% growth, then 10-15% growth and beyond 10th year let us say 7% which is kind of like GDP growth.

By that logic today the profits of that company should have been approximately Rs 1300 crores. Today, for FY24, the profits of that company are probably closer to Rs 4000 crores. So, our model was so conservative that we got today’s profits wrong by almost three times. It is even more stark in the market cap sense. Remember I told you the market cap was approximately Rs 4000 crores and the profits were approximately Rs 80 crores.
So, at that time the PE was 50. Today, I told you the profits are closer to Rs 4000 crores. So, effectively the PE was 1, not 50 because the profits went up by 50 times.

So, you will only buy stocks in this mutual fund or in this scheme which you can hold for 10 years. Is that what you are indicating?
No. That is where the biggest misunderstanding happens. It is that, as I told you, you would have thought in 2006 the PE is 50. Even I would have thought the same. We did not have the vision of Rs 4000 crores profits. Which means that we would probably have not bought the stock because we would have found it expensive.

But if somebody had a view that this stock is in a blank sheet in the largest consumer segment which is jewellery in the country with a brand name like their sponsors and virtually no competition in the branded space at that point in time, even now 80% is still unorganised, then if one would have taken some vision and predicted some kind of a profit, even if you are wrong by 100%, it still would have been a huge pathway, so that is where the difference is.
So, the stock made money in the first 10 years which is the projected period, but it continued to compound even after that. So, the CAGR for the stock from 2006 to 2016 was 8x, almost a 23% CAGR; but from 2016 to 2023, it again grew by another 7.5 times.

So, it became a 60 bagger. So, first of all, by having that bigger terminal growth rate in mind, you would have actually ended up buying the stock instead of ignoring it and treating it as an expensive stock.

And you would have held on to it because you are not buying it for 100% gains or 200% gains because you still have a view about the long-term growth rate.

So, just to break it for our viewers, what you are saying is that you are in the quest of identifying that how high the peak of a mountain is. When you are at the bottom of the mountain, you cannot see the peak. It could be clouded. It could be snowy. You do not know how high the peak is. But you are trying to understand that how strong the runway, pathway or the peak is, that is terminal value investing. At the current juncture, can you identify some potential themes or mega trends where you see there is a 10- to 15-year visibility to you? Have you done your homework on it? Is that ready?
Absolutely. So, there are three themes that we like, basically, and these are mega themes or mega trends as you can call them for India. First is premium consumption. All premium services and goods will grow at rates much faster than what we think they will.

What is premium consumption? What is the ticket value according to you?
It is the segment, I would say, not the ticket value. Say, travel and leisure, hotels, high-end cars, high-end bikes. You can say a lot of high-end electronics. All that consumption basket, premium real estate, all those segments will grow at a rate much faster. And the logic is simple. First of all, the pyramid is shrinking at the bottom and growing at the demographic pyramid, income pyramid is growing at the top much faster than the bottom.

Urbanisation has started.
Urbanisation, higher income levels. But the numbers, if you just put in perspective, it can be very stark and when we talk about 10-20-year runway, you need to keep those big numbers in mind. Between 2005 and 2018, or 2006 and 2018, the number of households with an income level of more than 30 lakhs grew by eight times. It was about 10 lakh households, it became 80 lakh households.

8x.
8x. That number from 80 lakhs is going to go to Rs 3 crores by 2030.

Another 80 times.
No, 80 lakhs to 3 crores, another four times.

And the base is 30 lakhs.
No, no, 30 lakh income levels absolutely which is the highest end, top affluent. Upper middle class will grow by three times similarly. So, 4x increase in the highest income level segment, three times increase in the upper middle class, and the bottom shrinking. So, this will lead to a long runway of premium consumption.

Premium consumption, that India grows, per capita will grow. Indians will consume more, whether it is travel, whether it is leisure, whether it is experience, or whether it is perhaps buying a better car, a better mobile phone, or a better real estate.
Higher end car, higher end mobile phone.

So, that is one trend.
Jewellery, eating out.