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He Made 42% CAGR In 9 Years. Here’s His Exact Microcap Framework! | Kushal Lodha #402 — Transcript

by Kushal Lodha · 20,039 words · 3,117 segments · language en · Watch on YouTube

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0:00At this point in time, I feel that there
0:02is an opportunity in agriculture stocks
0:04.
0:05>> We know that in India, 50%of the
0:07workforce is employed in agriculture.
0:10>> So, if you look at all these stocks,
0:12they are at three-year lows. We like one
0:14company a lot, which is Kaveri Seeds. If
0:16you see the last 15 years of history,
0:17they have consistently generated 25%
0:19ROCE. If you look at its revenue growth
0:21in FY26. It is the highest in the last
0:2310 years. And it is at what? 8 PE or 9,
0:25that's it. Yeah, this company is
0:27available at a 1x PE for the forward
0:29year. If logistics picks up, do you
0:31think it can get a 20 times PE? We are
0:33not sitting in a bear market. It is not
0:34like we are sitting in a bear market. We
0:36are sitting in a very good market. Those
0:37who think we are in a recession, tell
0:39them to pull up the stock price charts
0:41from February and March 2020, and August
0:432013, to see what a real recession looks
0:45like.
0:46The meeting lasted for 4 hours. I asked
0:48, how did your revenue growth come about
0:49? So he said half of it is genuine and
0:51half we just showed. So I asked, what
0:53does that mean? He said half is inflated
0:54. Oh, is revenue inflation normal in
0:57companies?
0:58>> I have seen it multiple times.
1:01>> What is not normal is for a promoter to
1:03admit that I did it.
1:03>> So what happened to the company then?
1:05>> The company is currently being operated
1:06. It doubled from there.
1:08>> Oh.
1:08>> Why did you invest in a 100 PE stock?
1:11>> I don't think I am a value investor.
1:12Because a 100 PE stock can also be an
1:15undervalued stock.
1:16>> Wow.
1:17>> So how would you classify IT stocks, as
1:18cheap stocks or undervalued stocks?
1:20>> I have a reason to believe.
1:32India is currently the fastest-growing
1:33large economy in the world. And if you
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2:22Check the link in the description for
2:23details and stay tuned for this entire
2:25episode of Conversations with Kushal.
2:28Before watching the video, I have a
2:29request for you. I was looking at the
2:31channel analytics and 71%of the audience
2:33who is watching our content has not
2:34subscribed to the channel. If I have
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2:40bring the best guests possible on
2:42Conversations with Kushal.
2:44So you mentioned that you have been
2:45investing since 2008 and you had already
2:47read 90 books on investing back then,
2:49and of course, you would have read more
2:51books.
2:52You were basically given ₹ 1 lakh and
2:54you turned that ₹ 1 lakh into ₹ 32 lakhs
2:57within three to four months.
2:58>> In four months.
2:59>> In four months, and then that ₹ 32 lakhs
3:01became ₹ 2 lakhs in that same period,
3:03correct? In just 2 months. So you have
3:06been investing for the last 18 years now
3:08, and I also read that you have studied
3:10196 small and micro caps across two full
3:13market cycles. So you are the best
3:14person to help us understand how wealth
3:17can be created in small caps and micro
3:18caps. But just before that, from 2008 to
3:212026, what would be your percentage CAGR
3:23on your personal investment portfolio
3:25over these 18 years?
3:26>> See, my salary was very low before that
3:30, and I was putting everything I
3:33received in my salary. I would put it
3:35into the market on the very first day.
3:38Right? And then I would withdraw for my
3:41expenses. Right? So, I started tracking
3:44the record of my personal portfolio
3:47specifically from April 1st, 2018.
3:51From there, because that was a very,
3:53that was a decent time.
3:55Because 2018 was a time when we were at
3:58a peak, right? 2018, '19, and '20 were
4:00very bad periods.
4:02And then from there, we had a secular
4:04bull market, with some hiccups here and
4:06there, but since then I have delivered
4:0842%.
4:10>> Wow, 42-32%in 9 years.
4:13>> Yeah, that is XIRR.
4:14>> So, in between, I have withdrawn money
4:16and I have also put in money. Got it.
4:19>> So if I put all of that date-wise and I
4:21look at today's value, let's say
4:23September 30th as the ending value. So
4:26it comes to 42%.
4:28>> If you had asked me this question in
4:30March, this number would have been quite
4:32different.
4:32>> It would be like in the early 30s. Got
4:35it.
4:36>> Amazing, man. So I think you are the
4:37best person to explain all these things
4:39to us. So now let's talk about your
4:41investing framework. Okay?
4:44So I was just reading about your
4:45analysis, and as you studied 196
4:47companies across two full cycles, in the
4:50up-cycle, more than half of them tripled
4:52, and over the full cycle, only about a
4:54quarter of them maintained that 3x.
4:58So, what exactly did you see in the
5:01companies that tripled, and how did you
5:03identify them, because these micro-caps
5:05that can 3x are either companies that
5:07can grow in the future?
5:10>> See, the article states that in an
5:12up-cycle, when a bull market arrives, 78
5:15%of the companies become 3x or more, so
5:18if you pick four out of five companies
5:21with your eyes closed, they will 3x.
5:24>> You're saying 78%of the companies become
5:263x?
5:26>> Yes. Out of how many companies?
5:28>> Out of, like, 1,000 companies that I
5:31studied.
5:32>> 780 companies tripled.
5:34>> They tripled, right?
5:35>> The same thing happened from 2020 to
5:372024 as well, right?
5:38>> Hmm.
5:39>> So money is made from micro-caps, but
5:42that doesn't mean money can be made by
5:44picking just any stock.
5:46You have to remain invested, right? And
5:48if you remain invested, you will lose
5:50money too, right?
5:52So what you have to ensure while you are
5:55100%invested is that after remaining 100
5:57%invested, you shouldn't lose money.
6:00So that when good times come, you make
6:02money. Right?
6:04I feel that all the research we do, or
6:07whatever work we do, channel checks,
6:10looking at balance sheets, it only has
6:12one use. What should we do in a falling
6:14market and with falling stocks? Should
6:16you put in more money, or should you sit
6:18tight, or exit? Right? So even though in
6:22a bull market the majority of companies
6:24make money.
6:26Even though their fundamentals may or
6:28may not work, you know, because
6:30liquidity drives valuations, right?
6:33So, nothing specific to do for those
6:36companies. What is important is, which
6:39are those companies that, after going up
6:42, didn't come down when the market
6:44crashed and then participated again in
6:47the next bull run. Those are a very
6:49handful of companies. Right? And by
6:51definition, because they are very small
6:53. The probability and possibility that
6:55you will be able to catch that company
6:57and hold it is very low. So my belief is
7:00that any small micro-cap company is
7:02investable for a three to four-year
7:05period because today there is so much
7:08disruption; AI is like the biggest
7:11disruptor. Something that seems like it
7:13cannot be disrupted today. Tomorrow,
7:15some new model comes, and it will be
7:17disrupted. So I have a two to three-year
7:20view.
7:20In these two to three years, whichever
7:23companies I find well-positioned, if the
7:25market turns bad, those companies will
7:27naturally go down.
7:30But in my holding period of two to three
7:32years, I don't feel I will lose money,
7:34and if my thesis plays out, then I will
7:36make very good money.
7:38So that is what I look at when I invest
7:40in micro-caps. So, just summarizing,
7:42because I think I might have said a lot
7:45. You don't have to be a very short-term
7:48investor in micro-caps, but you have to
7:51have a medium-term view here; however, I
7:54can't take a 10-year view in this market
7:57.
7:58>> So I understand that a three to
8:00four-year view is ideal for you to
8:01invest in a micro-cap based on that
8:03outlook.
8:04But I read something very interesting.
8:07You basically use six valuation measures
8:09and have three ways of calculating
8:11adjusted earnings.
8:13So you use this to invest before, like,
8:14before investing in a company. What are
8:17these six measures? I will briefly
8:18discuss them once. You can elaborate on
8:20them.
8:21One is EV/EBITDA, EV/EBIT,
8:22Price-to-Earnings, EV to OCF which is
8:24Operating Cash Flow, Price-to-Sales, and
8:26EV to Sales.
8:28These are the six valuation measures
8:29that you use. And the three ways of
8:31adjusted earnings are your cyclical
8:33normalization, then the second is
8:35stripping out one-offs to get clean
8:37earnings. And the third is forward
8:39earnings, which is one to two years out
8:40for capex already done. Right.
8:42>> So can we discuss both these things—the
8:44six valuation measures one by one, what
8:46they are exactly, and then what the
8:48three types of adjusted earnings mean?
8:51>> So, it's a very interesting topic. First
8:54of all, most of the companies I invest
8:57in have been listed for at least five
9:01years. Right? They have been listed in
9:04the markets for five years or more.
9:07Which means I don't invest much in newly
9:10IPO'd companies. The reason is that they
9:13don't have a history. A company had its
9:15IPO five years ago. Right? Its
9:17management told you a story at the time
9:19of the IPO. Right?
9:21You have five years of data, and you can
9:23cross-check by watching their YouTube
9:24videos from the time of the IPO to see
9:26how much they have achieved.
9:28Right? After five years, you will have
9:31their quarterly results. Their annual
9:33report will come out. They will have
9:34their con-calls. They will also provide
9:35guidance in the con-call. You can see
9:37how they have generated cash flow. So
9:39the parameters and frameworks you talked
9:42about are very relevant for these things
9:44. Right? I am not saying that I never
9:46invest in IPOs. I am always on the
9:48lookout for dislocations. If I find a
9:50good IPO that has come from a good group
9:52, and the market doesn't have a fancy
9:54for that sector or that promoter group
9:56right now, then I will be happy to
9:58invest there as well. Now coming back to
10:00the valuation parameters, first, I use
10:03relative valuation. Right, there are two
10:05ways of valuing, either you can do DCF
10:07or you can use relative valuation. I
10:09follow relative valuation a lot;
10:11different companies and different
10:13industries have different parameters.
10:15Right? Now, take a cyclical company,
10:18right? You cannot use PE for that.
10:20Because many times it won't even have
10:23earnings. Right? The PE will be a
10:25non-meaningful number. In that, you will
10:27use EV to Sales because sales cannot
10:29become zero, even for a cyclical company
10:31.
10:32>> Then EV.
10:33>> What is EV? So, in EV to Sales, what is
10:35Enterprise Value and how do you
10:36calculate that?
10:37>> Enterprise Value is like, suppose I want
10:39to buy a business today.
10:40>> Hmm.
10:41>> If I want to buy 100%of that business.
10:43Who do I have to pay? To claim 100%
10:46ownership. You will have to pay the
10:47equity holders ₹ 100.
10:49If the equity is ₹ 100, and if that
10:51business has taken a loan from a bank,
10:53you also have to pay off the bank loan;
10:55that is debt.
10:57And whatever cash is inside that
10:58business becomes yours, so that cash is
10:59your benefit.
11:00So, Equity plus Debt minus Cash is your
11:04EV, right? That is Enterprise Value. Now
11:08, why is Enterprise Value relevant?
11:11Because if there are two companies, one
11:14has a lot of debt and one has no debt at
11:17all.
11:18And you want to compare these two
11:20companies, then market cap cannot be
11:23compared if a company has a lot of debt
11:25. It is leveraged, and one company has
11:27no debt at all. So you cannot compare
11:29market cap.
11:29>> When you say equity, it is the market
11:31cap.
11:31>> It is the market cap. Right?
11:32>> So, EV is a very comprehensive parameter
11:37to judge.
11:38>> Now you look at sales. Right? In sales,
11:40sales is a very clean number.
11:44Unlike PAT, there was a book on
11:46accounting I read which had a saying
11:49that P&L is just an estimate; the P&L is
11:52just an estimate.
11:54Even sales is an estimate.
11:57But in sales, there aren't as many ways
11:59to manipulate it as there are for
12:01adjusting PAT.
12:03For example, you can load up expenses in
12:06any company's P&L.
12:08Right?
12:09You can show house rent, show a driver's
12:10salary, and if you feel you're about to
12:12get listed, you can remove those
12:13expenses to show increased margins.
12:15Right? So people will think it's a very
12:17good business. Your margin has expanded
12:19. So, PAT is a very subjective number.
12:24Sales has less subjectivity because,
12:26while you can still play with it based
12:28on how you record revenues, the number
12:30of ways you can manipulate sales is very
12:32low.
12:34So when you look at a cyclical company,
12:36right? And you look at its EV-to-sales
12:39and check its 15-year chart. You
12:41understand what multiple this company
12:43received during good times. Right?
12:45EV-to-sales, and when you look at it
12:47today, you see where we stand compared
12:49to the last 15 years. If it is way below
12:51the average,
12:52>> Hmm.
12:53>> It means that the industry is not
12:54performing well. Today's example.
12:56>> Yes, look at paper companies today. Up
12:58until a month or two ago.
13:00>> Or you look at textile companies. Right
13:03? Yarn companies. Hmm.
13:04>> And tire companies, so if you take their
13:0710 or 15-year chart and look at it, all
13:10of them are at their bottom decile or
13:13lower quartile. Right.
13:15>> EV-to-sales.
13:16>> EV-to-sales, you can't use EBITDA
13:18because EBITDA for a textile company
13:21could be 1%or it could be 25%.
13:23>> Why such a range?
13:25>> Textile is a delta business, right? What
13:27are you? You are a converter business.
13:30What are you doing? You are taking
13:31cotton from the farmers. Processing it
13:34and selling it forward. The farmer who
13:36gives you cotton, the MSP is decided for
13:37it. Right? Which always goes up in our
13:39country. Inflation is the Minimum
13:41Support Price.
13:42>> Yes, the government decides that. Why
13:44does the government decide the MSP and
13:46why do they increase it? That, everybody
13:47knows, it's a political subject. And you
13:50have no control over your raw material.
13:53You have to pay what the farmer is
13:55demanding. You have to convert it. And
13:58ultimately, yarn prices are dictated
14:00globally. Right?
14:01So globally, if China is dumping
14:03somewhere, or Bangladesh and Pakistan
14:05are dumping, you have to accept that
14:06price.
14:07Because it is a commodity. There isn't
14:10any difference in the yarn. So, you are
14:12actually price takers on the supply side
14:15, on your raw material side.
14:18And when you sell your goods, you have
14:19to accept the prevailing market price.
14:23In the meantime, if your inventory or
14:24raw material is at a high price and the
14:26world, you know, Bangladesh and Pakistan
14:28have a lot of inventory that they are
14:30dumping, then your realization from
14:32sales will be lower, and your margins
14:34will be squeezed significantly.
14:37Right? And then you have some fixed
14:39expenses regardless. You have employees
14:41, costs to run the factory, and
14:43electricity expenses. Right? So, the
14:45margins get squeezed. That’s why you see
14:48a wide range of margins for these
14:50commodity companies. Now, if you look at
14:53EV to EBITDA or PE ratios, these can
14:56range; they can be very volatile for a
14:59cyclical company, got it?
15:01>> But when you look at a very stable
15:03business, let’s say you look at any
15:05consumer company. Right? It won't be the
15:08case that one year you see 10%EBITDA and
15:09the next year you see 25%EBITDA. It will
15:12roughly be in the range of 9%to 12%. So
15:15you know how to play it. So these
15:17parameters—EV/EBITDA, EV/Sales, Price to
15:21Book—these are relevant for cyclical
15:23businesses. Right? Now come the
15:26profitability ratios, which are EV/
15:29EBITDA, and then PE ratios, right?
15:33Or like Market Cap to Sales, Market Cap
15:36to Sales is again like a...
15:39>> EV to Sales, EV to Sales.
15:41But for those companies that don't have
15:42any debt, like if you have some
15:44companies without any, you can look at
15:45Market Cap to Sales as well.
15:47Now for PAT, for EBITDA, right? When you
15:52look at a company that can be analyzed
15:54on PE, right? You look at it on a 10-
15:56year basis; you see for that ₹ 1 of PAT
15:59, what PE the market gave you at one
16:01time and what PE it is giving you today
16:03. Now, if a company's PE is 18, what
16:05does it mean? If the company is earning
16:08₹ 1, the market is ready to pay 18 times
16:11for it. Right? But that same 18 times
16:13sometimes becomes 10 times, and
16:14sometimes it even becomes 40 times. Let
16:16me give you an example.
16:18There is a company called Apar
16:19Industries. Right?
16:22We will talk about Apar later.
16:25There is another very famous company,
16:27Shivalik Bimetal, which is quite trendy
16:29these days. Right?
16:31It was the most discussed stock among
16:34value pickers in 2017, 2018, and 2019,
16:36and people had done so much research and
16:39work on it—I mean, they had done a crazy
16:42amount of work, attending AGMs.
16:45Talking to their customers. Its PE at
16:48that time had gone up to 30-35.
16:51>> When are we talking about?
16:51>> This is from 2018.
16:53>> Okay?
16:54>> One of its quarterly results was poor.
16:56The stock halved. Right? All the people
16:58who had done the work on it sold off and
17:01exited. Right? That is one stock where I
17:04invested based on the work done by value
17:06pickers. I didn't do any work of my own
17:08. The people who had done the work
17:10became bearish. One bad quarterly result
17:12came out, and I felt that it was fine,
17:14as capacity had been built. One quarter
17:16here and there is normal. Even though I
17:18didn't invest a huge amount. But back
17:19then, whatever it was, I put a decent 3
17:22%of my portfolio into it.
17:24Today, that stock is trading at a PE of
17:2660. 60.
17:27>> 60 PE, yeah.
17:29>> So, PE is a very subjective thing; the
17:33market can give a company a PE of 50 at
17:36one time.
17:38It can give the same company a PE of 10
17:40. A classic example is IT companies;
17:42after COVID, people thought IT was the
17:45next best thing. These companies are the
17:47next best thing.
17:48You can see the price chart of all the
17:50IT companies like TCS, Wipro, and
17:52Infosys, which people hate today; back
17:54in 2021-22, people called them the best
17:56capital allocators, best governance,
17:58best dividend plays, and growth stocks.
18:01Right? If you look at their PE today,
18:03what used to be 30 times is now 13 times
18:06. Right?
18:07Another example was railway stocks.
18:10Right? Which were very fancy 3 years ago
18:14. Right? Today, no one is talking about
18:16railways. Today, everyone is talking
18:17about defense. Talking about aerospace.
18:19Right?
18:20So, PE tells you; the range of PE tells
18:23you how much momentum or euphoria there
18:25is in a market. So, when you look at
18:28long-term history, you understand what
18:30valuation something has received over a
18:32period of time and at what stage you are
18:34standing. Now, the three parameters you
18:37talked about, right, that you need to
18:40analyze. Now, there is profitability;
18:42right now you are calculating P. Price
18:44is not subjective. In the market, you
18:46have your market cap and your price.
18:48There is no subjectivity in that. There
18:50is quite a lot of subjectivity in
18:51earnings. Right? So, you need to look at
18:54the last 12 months 'earnings. In the
18:57last 12 months, there could be many
18:58one-offs. They could be on the positive
19:00side or the negative side. Right?
19:03You need to add back the negative ones.
19:05Suppose a fire broke out in the
19:06company's plant. Right? And that
19:08resulted in a lot of expenses. And those
19:11are like one-off expenses. They had to
19:14pay compensation to people. Right? So,
19:16you will add those expenses back and try
19:18to arrive at the adjusted PAT. Right?
19:20And then see the valuation. For cyclical
19:23companies, I told you that we should
19:24look at EV/EBITDA. But there is another
19:26parameter. What can you do? You look at
19:2815 years of history. Calculate a simple
19:31average of it. In some years it will be
19:331%, in some 25%, four, eight, 12.
19:35>> Whose average is this?
19:36>> Of EBITDA margins. EBITDA margin.
19:38>> Hmm.
19:38>> Calculate the average of that EBITDA
19:41margin and multiply it by the current
19:43sales. You will get your adjusted EBITDA
19:45. Right? You have the depreciation for
19:47this year. You know how much loan this
19:50company has. Calculate the interest
19:52expenses for that. You arrive at a PBT.
19:54Take a tax of 25%. What remains is your
19:58PAT.
19:58>> Right?
19:59>> Now you look at what multiple it is
20:01trading at.
20:02>> Right?
20:03At what multiple do you want to buy a
20:05cyclical company? I know that I want to
20:07buy a cyclical company at a single-digit
20:09multiple. If I get it, I will buy it. If
20:11I don't, I won't even look at it. Right
20:12? You might have a different parameter;
20:14you can buy at 12 times, 15 times, it is
20:16up to you. Right? So that is called
20:19cyclically adjusted PE. Right? Something
20:22I have started doing recently in the
20:24last two years.
20:25Because what happens is there are many
20:26growth companies that don't have a
20:27history.
20:28Right? But they are like growing
20:30businesses. Like, for example,
20:32businesses like Zomato or Paytm, even
20:34though I am not invested.
20:36And but if you want to invest in new-age
20:38businesses where you don't have anything
20:40to compare with, and you want to invest
20:42in those businesses.
20:45So you have to see what their PAT could
20:47be in one, two, or three years based on
20:50your assumptions, and what their P/E is
20:53at that PAT.
20:54Right? And if you feel that P/E is
20:56reasonable and it could get a higher
20:59multiple. Right? Then that becomes a
21:01good buy.
21:03So that’s the significance of these
21:05three parameters: trailing adjusted,
21:07where you look at the P/E after
21:08adjusting for any one-offs in past
21:10earnings.
21:11Cyclically adjusted, where there is a
21:14loss in the last 12 months but the
21:16company’s EBITDA margin swings by 20%,
21:18so you look at its 15-year average. And
21:21thirdly, you are trying to value the
21:23company on a two-to-three-year forward
21:25basis. In this, you mentioned cyclically
21:27adjusted P/E, where you said to take the
21:29average EBITDA margin and multiply it by
21:31sales.
21:32You get the adjusted EBITDA, subtract
21:34interest and depreciation to get PBT,
21:37subtract tax to get your PAT, and divide
21:40the market cap by this adjusted PAT to
21:42get the cyclically adjusted P/E.
21:45>> So, could you explain this with an
21:48example—how you used this cyclically
21:51adjusted P/E to identify a company, and
21:54are you trying to say that it is more
21:57important and useful compared to just a
22:00normal P/E?
22:01>> Yes, so look, there is a company,
22:04Vardhman Textiles, in 2022, right, which
22:07may have split since, but I remember it
22:10used to be a ₹ 400-₹ 500 stock. Right,
22:14uh, it was, it was trading at below
22:17one-time book value.
22:19Right, uh, if you look at book value,
22:22right, any company starting any business
22:25has to earn a reasonable level of return
22:28, right?
22:30If you are putting ₹ 100 from your own
22:32pocket into equity today to start any
22:34business. What are the alternatives
22:36available to you? You have the
22:37alternative to put it in a bank where
22:40you will get 8 percent. Right? You have
22:42the option to put it into a mutual fund
22:43. There, you might get 12, 13, or 14%.
22:46Then, if you start your own business.
22:48You feel that I can earn 18, 20, or 22%
22:50ROE here. Right? Then you start your
22:52business.
22:54Textile companies, if you are getting
22:55something at book value. Right? And if
22:57you think that the business's inherent
23:00profitability is 15 to 20%, then you are
23:02getting that company at 5 to 7 times PAT
23:04. Simple, right? Because if the ROE is
23:07100/15%, then it's seven times. If that
23:10company can generate a 20%ROE, then you
23:11are buying it at five times. Right?
23:14Vardhman Textiles was trading below one
23:17time book value in 2022. Right? At that
23:20time, its margins were around 4 percent
23:22.
23:23And which EBITDA margin, right? And
23:28sorry, not four, it was eight or nine
23:30percent. There was a company called SWM
23:32in the same sector, its was negative. So
23:35the management always used to say—not
23:37just in 2022, but in 2019 and 2017 as
23:40well—that my long-term average margin
23:43should be 14%to 18%. Right, 14%on the
23:46lower end and 18%on the higher end. Now
23:49when you do that calculation, right, you
23:52take a mid-range of 16%. You take that
23:5516%EBITDA margin and try to calculate
23:57the PAT. You see what the ROE is
23:58becoming. So it was coming out to be
24:0018-19%.
24:02In 2022, in a way, you were getting an
24:05opportunity where India's largest, most
24:08well-managed textile yarn manufacturer
24:11was available to you at a forward
24:14adjusted PE of five to seven times.
24:18Which, to me, was pretty amazing.
24:20I was able to buy that company at that
24:23time and it became 3X; again, it is
24:26going through a bad phase now, but it
24:28has done well, and when these cyclical
24:31companies make money, they make it
24:33really quickly.
24:35>> So I hope I am able to help you
24:38understand how it works; in cyclicals,
24:40you know, there are so many other
24:43sectors like the power sector, right,
24:46where there are two power sector NBFC
24:48companies, Power Finance Corporation and
24:51Rural Electrification Corporation (REC)
24:54. So both these companies, even though
24:57they are large caps, have become 5X in a
25:00year. Right? And it's not like they were
25:02loss-making companies before. Right?
25:04They were making good profits back then
25:07and in 2022-23-24, their growth became
25:10good. Right? So again, you are investing
25:12in a cyclical manner there as well. What
25:14happened there is that the loan growth,
25:16which was single-digit, became
25:17double-digit. That's the change that
25:19happened. And why did that happen?
25:20Because there hadn't been any capex in
25:22the power sector for a long time. Right
25:24? I would like to mention the name of a
25:26book now. There is a book called Capital
25:28Returns. What is the fundamental idea
25:30behind it? That when too much capital
25:32enters a sector. Right? Then returns
25:35stop being generated. And when that
25:37capital exits, the possibility of
25:38generating returns begins to emerge. And
25:40why does that happen? When a lot of
25:42capital enters, new players arrive. They
25:44become VC-funded. Everybody is competing
25:46for the same pie. And when a recession
25:48hits, all that capital exits.
25:51The stressed, weak, or marginal players
25:54shut down.
25:55The ones who remain gain pricing power.
25:57They earn super-normal profits. Which is
25:59what happens in most cyclical companies
26:02, it always happens. What about EV to
26:05OCF?
26:06>> EV to OCF is like a function of EBITDA
26:09to cash flow conversion. Right?
26:13EV to OCF will benefit those companies
26:15where EBITDA to cash flow conversion is
26:18very high.
26:20This is a very important way to
26:21determine the quality of a company's
26:23earnings.
26:25I told you earlier, a little while ago,
26:27that P&L is just an estimate.
26:30Right? Some make estimates aggressively
26:33, and some make them conservatively.
26:35Right? Some companies, if they want to
26:38show revenue growth, might record a lot
26:41of revenue. Aggressively, let's say for
26:45a contractor, right? If an EPC
26:47contractor works for someone who will
26:51pay them after 200 or 250 days. Right?
26:55Then, for the sake of it, revenue growth
26:56will appear in their P&L. They will show
26:58EBITDA by making assumptions about raw
27:01materials and expenses.
27:03But if you look at their cash flow, it
27:05will appear negative.
27:07Versus another company that only does
27:11construction for good, Tier-1 players.
27:15They receive their money within 3 months
27:17. Their debtor growth on a YoY basis is
27:20less than their sales growth. So, their
27:23cash flow will be positive. Then, a
27:24company that is very aggressive will
27:27have very low OCF, and a company that is
27:30conservative will have higher cash flow
27:32.
27:33On this basis, if you look at EV to OCF
27:36for both companies, the company doing
27:38conservative accounting will have a
27:40lower EV to OCF, and the company that is
27:43aggressive, where OCF is very low or
27:45negative, will have a very high EV to
27:47OCF.
27:48So, what does this tell you? When you
27:50look at these five companies in a sector
27:53, you realize how valuation matters on
27:56OCF, right?
27:58Meaning, if a company is cheap on an
28:00EV-to-OCF basis, that's like a very safe
28:02investment, right?
28:04It is an even better parameter than PE,
28:06EV-EBITDA, EV-Sales, or whatever
28:08parameter we can talk about. But even
28:10within OCF, you have to make adjustments
28:13, right?
28:14There could be a reason why its debtors
28:16increased significantly in one year, or
28:17it set up a new plant and bought a lot
28:19of inventory for that plant in that year
28:21, right?
28:23So you have to check, you need to look
28:25at five or six years to see if its
28:26inventory is abnormally high or
28:28abnormally low, right?
28:30It’s not as if its peak cash flow for
28:312026 has arrived. You shouldn't just
28:33invest because the company looks cheap
28:34based on that. It could be its peak cash
28:36flow. So you have to adjust those
28:37parameters as well. Right?
28:39So the PE we see on Screener or
28:41Moneycontrol.
28:43Those PEs have no value. You have to
28:46adjust that PE.
28:48You have to look at the numbers to see
28:50if the denominator in the ratio you are
28:52looking at is the correct number or not
28:54.
28:55So, to get a context of valuation.
28:57So, I spend a lot of my time on this—
29:00how to value a company correctly, right
29:02? How to look at the right number.
29:05And this sense comes over a period of
29:07time, and the longer a company has been
29:10listed, the more context you have, the
29:12more information you have to value a
29:14company.
29:15>> Ideally, what should the EV-to-OCF be?
29:18>> Five times to 15 times.
29:20>> Oh, okay.
29:21>> Yeah.
29:23>> So that is a good industry benchmark.
29:25>> Yeah, got it.
29:26>> Again, it can vary a lot from industry
29:28to industry. For a new-age company, it
29:30might even go to 100 because it isn't
29:31generating OCF at all; this factor is
29:33not relevant there. Right? So, there is
29:35a saying, right, by Charlie Munger, that
29:37"to a man with a hammer, everything
29:39looks like a nail." Right? So it's not
29:41like you can just pick any parameter and
29:43apply it blanketly to everything.
29:44>> Hmm.
29:45>> So when you look at a business and
29:47understand it, you should understand at
29:49that time what parameters are relevant
29:51for that business.
29:53>> Hmm.
29:54>> And based on that, you have to apply
29:56those valuation parameters.
29:58>> Now, here's an interesting question.
30:01So you are basically a value investor
30:04and you basically wrote a defense of a
30:06100 PE stock, Virtuoso Optoelectronics,
30:09and you did this I think in September
30:122025, which was at 100x PE.
30:14>> That is a Nashik-based company, by the
30:16way, yours.
30:16>> Oh, it’s from Nashik itself, wow.
30:18>> And it was at 29x EV/EBIT on FY25 and
30:21volume sales was 65 to 70%of the revenue
30:23.
30:25So, first of all, for those who don't
30:27know what this company does, and
30:28secondly, why did you invest in a 100 PE
30:31stock and what was your thesis?
30:33>> Right? So, two clarifications, you
30:36called me a value investor. I am a value
30:39investor—I don't think I am a value
30:41investor.
30:42>> I am, I look for mispricing. Right?
30:45Where I see that money can be made. I
30:48also invest in a lot of growth companies
30:50, but I should be able to buy those
30:53companies at reasonable valuations.
30:55Right? So that is one. So, would you
30:57call yourself a growth investor then? I
31:00will call myself—I would not put myself
31:02in any bucket, right?
31:03>> I can buy a 50%growth company at 50 PE,
31:07right?
31:08>> If I can underwrite the growth longevity
31:10.
31:10>> Right, or I can buy a zero-growth
31:13company also at 5 book value.
31:16>> But in that, what matters to me is that
31:17I should see that growth will come after
31:19I invest; I’m not saying it will come in
31:21the next quarter.
31:22It's not that I have some information
31:24that growth is going to come in the next
31:25quarter and I am buying it. But I must
31:27have an analysis that some things are
31:29changing in the industry. See, let's
31:32come to the topic of Virtuoso now. A
31:35very good topic that you have raised.
31:38The difference between a cheap stock and
31:40an undervalued stock. Right? A cheap
31:43stock may not be an undervalued stock.
31:47You have to see the difference. Why is a
31:49cheap stock cheap? See, in the market,
31:51everyone wants to make money. Right?
31:52It's not that people are investing just
31:55because a company's name is good. Right
31:57? A cheap stock is cheap because it
31:59isn't seeing any growth, or there is a
32:01problem with the management, or there is
32:03a problem in the industry. Right?
32:06>> If you are buying that cheap stock, the
32:09seller is selling because they feel
32:11nothing is going to happen here. You are
32:14buying because you think something is
32:16going to happen. So don't buy just
32:18because it is cheap. That's a wrong way
32:20. Right? Because many value traps will
32:22catch you this way.
32:24What do you have to do?
32:26If you see a cheap stock, you have to
32:27first understand what the perspective of
32:29the seller is. Is it their growth
32:31concern, management concern, or an
32:33industry structural concern? A prime
32:36example today is IT companies. Everyone
32:38is selling them. Mutual funds are
32:40selling and someone is buying too.
32:42Whoever is buying must feel that their
32:44business won't be disrupted by AI.
32:47And the current dislocation in
32:49valuations will correct a bit, and
32:51companies with a 13-14 P/E will reach a
32:5420 P/E, and with earnings compounding at
32:5710%, they will generate a 40-50%return.
33:00>> So, would you not call IT stocks cheap
33:01stocks, but undervalued stocks?
33:03>> I am not saying that. I am saying the
33:04person who would be buying IT stocks. I
33:06am not buying IT stocks.
33:07>> So what would you classify IT stocks as
33:09? Cheap stocks or undervalued stocks?
33:11>> I have a reason to believe that they are
33:12cheap stocks. I will not venture out to
33:14buy IT stocks. Hmm.
33:17>> First of all, sitting here in India with
33:20a very limited understanding of how
33:22these large trends play out, I won't go
33:25and buy a 5 or 6 lakh crore company;
33:28people much smarter than me work in very
33:31large funds.
33:33They have better databases than I do.
33:35They talk to bigger experts in this
33:38space, which I will never be able to
33:40reach. And even after that perspective,
33:42these stocks are cheap. Right? Right? A
33:44large-cap stock is a cheap stock. That
33:46means there must be a reason. And
33:47sitting here, I don't have that extra
33:49insight to say that all large-cap mutual
33:52funds and big FIIs and DIIs don't know
33:54anything, but I am smart and I will go
33:56and buy IT stocks. So I will not venture
33:59out to take that guess.
34:00So I am giving you an example regarding
34:03IT stocks that IT stocks can be cheap
34:05and can also be undervalued. Right?
34:09If someone has a reason to believe that
34:10their business model won't be as
34:12disrupted by AI companies as the
34:14valuations suggest they are.
34:16Then they are undervalued companies. If
34:18someone feels that these AI companies
34:20will eat up their entire margins and all
34:23their sales. Then these are cheap stocks
34:25which will always be cheap stocks and
34:26they will become value traps.
34:27>> Got it.
34:28>> So differentiating between the two is
34:30very important to make a call.
34:31>> Now coming to Virtuoso. Why did we write
34:34about Vertoz? Because I don't own it. I
34:36don't own Vertoz, so I haven't even
34:39invested.
34:41We wrote that blog for educational
34:43purposes because a 100 PE stock can also
34:45be an undervalued stock, right?
34:48That was the message of that blog.
34:50>> Wow, a 100 PE stock can be an
34:52undervalued stock.
34:53>> Wow.
34:54>> Now, let's say there is a company, right
34:56? It has been about five or six years
34:58since it started its business. It has
35:01one customer, and it has just concluded
35:03the biggest capex of its life. Right?
35:06Let's say in 2025, when you conclude a
35:08capex, what all do you have to do? As of
35:11today, suppose you have one podcast
35:13showroom. Right? Tomorrow, you currently
35:15do finance. Tomorrow, you want to do it
35:17in art as well. I want to do it in
35:19fashion, I want to do it in Bollywood,
35:21and I will hire 10 people who will
35:22record podcasts. One after another. You
35:24will have to build five different
35:26studios like this.
35:26>> Correct.
35:27>> The day the first podcast is made will
35:30be a year later. But in this one year,
35:32you will have to hire those people. You
35:34will have to build your entire content
35:36team. You will have to take that space
35:37and refurbish it completely. You will
35:38have to pay the rent for it. Right? And
35:40where will the expense for all of that
35:42come from?
35:43That expense will come out of the
35:44revenue of your current business.
35:46>> Right?
35:46>> So the profit that was ₹ 100 today,
35:48after incurring all these expenses, it
35:50will be left at ₹ 10, ₹ 20, or ₹ 30. Now
35:53, if your PE ratio was calculated on
35:54that ₹ 100 profit, it would look very
35:56cheap. But after these expenses, your PE
35:58ratio increased. So that doesn't mean
36:00you have become expensive in terms of
36:01valuation. It means you are making
36:03upfront expenses. That's why your PE
36:06ratio became 100.
36:08So which again brings me to the previous
36:10point that when you are analyzing
36:12something, you must know that the
36:13denominator, right, like PE is what—
36:15price upon earnings.
36:18Are the earnings you are looking at
36:19adjusted, meaning are they even relevant
36:21or not? Which in the case of Vertoz was
36:23not relevant.
36:25That was the whole point of that uh...
36:26So what does this company do?
36:28And...
36:29>> So they are basically like EMS, not EMS
36:31, they are like third-party
36:33manufacturers for all the AC companies.
36:36>> Hmm.
36:37>> And there is a new segment which is the
36:39motor segment, which is 100%imported.
36:41They are getting into those motor
36:43segments and they are expanding their
36:45capacity in a really big way. And when
36:47your capacity increases, all your
36:48expenses are incurred upfront. And what
36:51happened is that when a major capex is
36:53about to happen, they say, "Murphy's Law
36:56: whatever could go wrong, will go wrong
36:59," right? Which happened in the case of
37:01these AC manufacturing companies. Last
37:02year’s summer was very bad, right? There
37:05were rain showers all throughout the
37:07summer season, so what happened is that
37:10the marginal buyer didn't buy an AC at
37:12all. So, there was so much AC inventory
37:15in the system that the OEMs, like Voltas
37:18or Carrier, didn't give orders to the
37:21people who manufacture the ACs. Now,
37:24think about the person who built a huge
37:26manufacturing facility thinking they
37:28would get orders, but the inventory was
37:30so high that they didn't get any orders
37:32. They had to bear the full cost of the
37:34new plant. They also have to pay
37:36salaries for the new plant. They are
37:37also accounting for depreciation. On top
37:39of that, the poor guy has taken a loan
37:41and is also having to pay interest on it
37:43. Right? So, there was no profit left
37:45for him. So that’s a business model
37:47virtue. So
37:48>> Hmm.
37:48>> It has doubled in the last one year.
37:51In fact, a lot of these AC companies
37:52that were performing poorly last season
37:54.
37:55All of them have given very good returns
37:57, all the AC companies.
37:59>> Today, I feel that sector is agriculture
38:02.
38:02>> Hmm.
38:02>> Regarding rain, I come from Goa. I
38:06shifted to Goa about two and a half
38:08years ago. The first year, I saw rain
38:11every day, and people in Delhi see rain
38:12. In Delhi, it rains for three days and
38:14there's flooding everywhere. In Goa, you
38:16see rain daily, morning and evening,
38:17morning and evening. Right?
38:192024 was a good monsoon year, 2025 was a
38:23very good monsoon year, 2026 had hardly
38:26any rain, at least in Goa, and even next
38:29year, rather, in Goa. I think there is
38:32going to be a water shortage for the
38:33same reason. But as of today, I think
38:35there is an opportunity in agriculture
38:38stocks because all these stocks are
38:41priced as if the monsoon will never
38:43return to India.
38:45As if the farmers in India are not going
38:47to consume seeds or are not going to
38:49consume agrochemicals.
38:51So, if you look at all these stocks,
38:54they are at three-year lows, but I like
38:56one company a lot, which is Kaveri Seeds
38:59, which is, like, if you want to play
39:01agriculture in India.
39:03What are the options you have? You buy
39:04agrochemicals which are like the
39:06commodity of the commodity. You have
39:07financing companies, which is only one
39:09by definition. You buy fertilizer
39:12companies whose main raw material is
39:14crude oil. Right? And the government
39:17ultimately decides your price and then
39:18you receive a subsidy from the
39:20government. They become your debtors.
39:22You have to take a loan on that to fund
39:24the working capital. It means it's a
39:26very volatile business model. And there
39:29is a very clean seeds business which,
39:31like, if you see the last 15 years
39:34history, they are always making 25%ROCE
39:37. Right?
39:38>> Which one?
39:39>> Kaveri Seeds.
39:40We like, and it brings me to another
39:43factor that if a company hasn't grown
39:46for 10 years, right, and you look at it
39:48on a screener, you won't see growth, but
39:51you have to see what segments are inside
39:54it. It is possible that there is a
39:56segment inside it which is a large
39:58portion of revenue but is declining.
40:00But now, after declining for 10 years,
40:02it has declined so much that it has
40:04become non-meaningful.
40:07Let's say, in the case of Kaveri Seeds,
40:1050-55%of its revenue used to come from
40:13cotton seeds in 2017-18, right, and it
40:17is declining because of various illicit
40:20seeds and because they sell cheaper, so
40:24it dropped from 55%to 11%today.
40:27Right?
40:28>> From cotton seeds.
40:29>> From cotton seeds, hmm.
40:30>> The percentage of revenue.
40:32>> So what exactly, what do these seed
40:34companies...
40:34>> They produce seeds. So basically, what
40:36is their...? What is the seed business
40:38model? You contract farmers.
40:40>> Hmm.
40:42>> And you get them to produce seeds, and
40:44then you sell them, and you do R&D on
40:46the seeds.
40:48So, the better the seed, the higher your
40:50yield will be. Right? You will be able
40:53to have higher yield.
40:54>> For farmers, higher yield per acre of
40:55land—the higher it is, the better for
40:57them. Right? Hmm.
40:59>> So, in Kaveri, it's a very interesting
41:01concept because I think we should talk
41:04about how its revenue has been stagnant
41:07for 10 years.
41:08>> Hmm.
41:08>> But something that was 55%of revenue has
41:11now come down to 11%. But the revenue is
41:13stagnant. What does this mean?
41:15>> The remaining revenue segments must have
41:17increased.
41:17>> The remaining 45%has reached 90%. Which
41:20means it has doubled.
41:21>> Right?
41:22So, in this case, because the cotton
41:26part is only 10-11%now,
41:28>> Even if it halves next year, I will only
41:30see a 5%decline in revenue.
41:32>> Correct.
41:32>> But the remaining 90%of revenue is
41:34growing at double digits.
41:35>> Where did that come from for them now?
41:36>> Which is maize, vegetables, rice, all
41:39the other segments.
41:40>> Right.
41:41>> And if you look at the products they’ve
41:43launched in the last three years, as a
41:46percentage of sales, it has grown from
41:4817%to 35%, right, which means it’s a
41:50very high R&D-based company.
41:52>> Hmm.
41:54>> So again, I’m saying this is not a
41:56recommendation.
41:58>> But the people who are listening to this
42:00should take it as educational; we are
42:02not recommending you to buy the stock.
42:05But the thing is, if you look at its
42:07revenue growth in FY26, it’s the highest
42:09in the last 10 years, but nobody is
42:11noticing that revenue growth because the
42:14monsoon was bad.
42:15>> Now, imagine a scenario where the
42:18monsoon is good, right, and its base
42:20business grows well. And you have the,
42:23you have the base effect of two years.
42:26How are the numbers going to look next
42:28year? And it's at what?
42:31>> 8 PE, 9, 8? Yeah. And can I...can AI
42:34disrupt it?
42:35>> Will AI come and make and sell seeds? I
42:37don’t think that will happen. Right? So
42:39, I don’t think there is an AI
42:41disruption risk here. Which is what...
42:42>> Any company I look at today, I have to
42:44understand the AI disruption risk. Even
42:46if I might not be able to understand it
42:47fully,
42:47>> but my thoughts have to go toward it. So
42:50I don’t think there’s an AI risk here,
42:52and if there’s no AI risk, and farmers
42:54have to grow crops, then seeds are
42:55definitely required. And this company is
42:58investing a lot of money back into it
43:00via R&D. I think it’s a very great setup
43:04.
43:04>> I think we should do a podcast two years
43:07later to discuss how Kaveri Seed has
43:09performed. Definitely. And your point
43:12here is basically that Kaveri Seeds'
43:14revenue used to come 55%from cotton
43:16seeds. Then it became 11%.
43:18The other segments, rice, maize,
43:20vegetables, have all grown. And then in
43:22FY26, you are saying there is the
43:23highest revenue growth. And it currently
43:25trades at 8 times PE.
43:26And this highest revenue growth is again
43:29because the base of the denominator was
43:31low, first, and secondly, the monsoon
43:33has been, uh, better.
43:35>> '26 was a good monsoon year because in
43:38India, uh, June, July, and August are
43:40the peak sowing seasons, right?
43:43So last year it was very good. This year
43:44it has been bad. So FY27 is going to be
43:47bad. That’s why the stock is cheap.
43:49>> But I buy stocks for a three-year period
43:51. Right?
43:51>> Yeah.
43:52>> So bad luck is if the monsoon stays bad
43:54for three years.
43:55>> Hmm.
43:56>> But if the monsoon is bad for three
43:57years, we have bigger things to worry
43:59about.
43:59>> So from what I understand, you would say
44:01Kaveri Seeds would be an undervalued
44:03stock and not a cheap stock.
44:05>> It's a cheap stock which is undervalued
44:06.
44:06>> Okay? It's a cheap stock which is
44:08undervalued.
44:08>> Okay?
44:09>> Based on my, based on my analysis. But
44:11for the person selling Kaveri Seeds
44:13today, it is a cheap stock. They feel
44:15that, man, it has no growth coming in.
44:17>> I’d rather leave this and put money into
44:18AI stocks. That's where the money is
44:19being made.
44:20>> Hmm.
44:20>> Right?
44:21>> You said that a cheap stock may not
44:22always be an undervalued stock.
44:24>> But an undervalued stock will always be
44:26a...stock.
44:26>> So IT stock.
44:27>> But, but, but again, a company which is
44:30growing at 50%.
44:32If you get to buy it at a 30 PE. So a 30
44:34PE is not a cheap stock. But it's an
44:36undervalued stock for that growth.
44:37Because the Price-Earnings to Growth
44:39ratio is lower in that case, 30/50 is
44:410.6, so that is of course a very
44:43attractive PEG ratio. You also look at
44:45the PEG ratio? I look at the PEG ratio,
44:47and ideally, it should be less than one
44:49. Less than one would be very attractive
44:51.
44:51>> It should be less than one, so basically
44:53, the companies I try to buy.
44:55>> Hmm.
44:55>> Their growth today is not as much as it
44:57could be in the future, right?
44:59>> So here is a term we use at 9 Month
45:00Capital called "Earnings Gap."
45:02>> Right.
45:03>> What it means is, the earnings that are
45:05growing today.
45:06>> Hmm.
45:07>> Can that earnings growth accelerate in
45:08the next three years compared to the
45:10last three years?
45:11Hmm.
45:12>> The multiple you get today, if something
45:14is at a 10 or 15 PE, it means it is
45:16ignored.
45:16>> What it has done in the last three years
45:18and people's expectations about it are
45:20not that amazing, that's why it is at 10
45:22or 15.
45:24>> But if we think that its earnings can
45:25accelerate in the next 3 years, which
45:27means it will surprise the market
45:29positively, and when that earnings
45:30growth accelerates, it will be discussed
45:32on Twitter, people will write reports
45:34about it, people will visit its plant,
45:36then the value gets realized.
45:38Got it.
45:40And you mentioned something very
45:41interesting, that you have to remove
45:43one-off earnings in order to calculate
45:45the adjusted EBIT.
45:47So, how do you distinguish a genuine
45:49one-off from a habit?
45:52Like, you wrote an article on Substack
45:54in March 2026 about Emami FY21 where the
45:56ad spend was cut.
45:58And you also talked about an engineering
46:00company that provided warranty costs
46:02equal to 25%of their FY25 sales.
46:05So how do you figure out if it's one-off
46:08earnings or if it's a habit?
46:10>> See, there are two ways. Either you
46:11compare it with history, or you compare
46:13it with the competition. Right? When you
46:16compare it with the competition, you
46:19look at their P&L today and see five
46:21line items. Right? Raw material,
46:24employee cost, and then other expenses.
46:27Let's remove interest and depreciation
46:28for a moment. That becomes a bit
46:30complicated. You basically see three
46:31line items. Right?
46:33Employee cost and raw material are more
46:36or less standard. What happens in some
46:39companies? There are packing expenses
46:40that some put in raw materials, while
46:42others put them in other expenses. But
46:43you should know this. If you are looking
46:45at five companies, all five will have
46:47different auditors and different finance
46:49teams. And accounting policies can vary
46:51a lot. Right? Now, for example, suppose
46:53you talk about Colgate today. Right?
46:55Just for a moment. What is the raw
46:56material in Colgate? I don't know what
46:59raw materials are used to make the paste
47:00we use.
47:01Whatever the raw material, X, Y, Z, but
47:03the point I'm trying to make is that its
47:05outside packaging, the plastic or
47:06aluminum part, some companies treat it
47:08as a packaging charge and put it in
47:10other expenses, while others might put
47:11it in raw materials because it is a raw
47:13material, right?
47:16You are creating the raw material anyway
47:18. So the company that puts it in raw
47:20materials, its raw material as a percent
47:22of sales will look higher, and its gross
47:24margin will look lower. But the company
47:26that puts it in other expenses will show
47:27a higher gross margin.
47:29So you might say this company is better
47:31, but you don't even know how this
47:32company is treating packaging expenses.
47:35So you can't compare. So first of all,
47:37when you are comparing between companies
47:39, you have to know if you are comparing
47:42on a like-to-like basis or not. Right?
47:44Advertising is there. Right? Let's say
47:46there are many expenses within other
47:48expenses. Advertising, drivers, this and
47:49that. Now, many things matter within
47:51advertising as well.
47:54For an FMCG company like Emami, they
47:57spend 10%of their sales on marketing.
48:00Right? One of the companies with the
48:03highest advertising budgets. Right? If
48:06they are having a slow year and want to
48:09increase their profitability. It's very
48:11easy. They could cut that 10%in half and
48:13show a 5%EBITDA margin to report growth
48:15. People who only look at PAT or EBITDA
48:17will be happy to see that. They will say
48:20, "Look, other companies couldn't grow,
48:23but this guy showed earnings growth,"
48:25without knowing he cut advertising. You
48:28will see the impact of that later, next
48:30year. Right? So, you have to compare
48:33between companies, and while comparing,
48:35you must check whether you are comparing
48:37like-to-like or not. You cannot just
48:39broadly look at other expenses as a high
48:41percentage of sales. You should know
48:43exactly what companies are recording in
48:45those other expenses. And whether you
48:47can compare these two things or not.
48:49When you clean the numbers, adjust them
48:52, and compare the companies, if you look
48:55at five companies, one might show 12%,
48:58another 10%, and another 13%.
49:01Suddenly, you see one company at 4%.
49:04Then, the question should arise that in
49:07a sector where other companies are
49:08spending 10 to 12%, why is one company
49:11spending only 4%? Yet, it is still
49:12showing growth. So, why is that? Either
49:15this company is doing something on a
49:17completely different level, or the
49:18product doesn't need marketing, or there
49:20is something that isn't adding up. So,
49:22it should give you a lot of questions.
49:24Right? Coming back to your point on how
49:27to compare? So, one way is to compare
49:29companies against each other. Now, let's
49:31say the company has no competitor, or no
49:33other competitor is listed. You only
49:35have the company's history. You have 15
49:38years of financials. Right?
49:41You might not find such detail on a
49:43screener, but if you open annual reports
49:46—and these days AI is a big thing—you
49:49can download 15 years of annual reports
49:51, put them into the AI, and ask it to
49:54make a like-to-like revenue or expense
49:56breakdown.
49:58In one line item, let's say marketing
49:59expenditure, you will get the data for
50:01the last 15 years. Right? You can look
50:03at 15 years of marketing or packaging
50:05expenditure as a percentage of revenue.
50:08You will be able to see what it broadly
50:10stays at. And what it is today. If, for
50:13example, your packaging expenses have
50:15been 5%for 10 years. And last year, due
50:17to an increase in polymer prices, your
50:20packaging expenses rose to 8%. Is that 8
50:23%sustainable? The answer is no. Because
50:25something that was at 5%for 10 years has
50:27now become 8%. Because of an abnormal
50:29increase in polymer prices. So it is not
50:31like polymer prices will always remain
50:33abnormal. Polymer is a derivative of
50:35your crude oil. Crude oil is at $ 130, $
50:37120 today. Is it going to stay at 120? I
50:41don't think so. I mean, I'm not saying
50:43I'm giving you a view on crude. I am
50:44saying that if crude comes back to 70,
50:46this packaging will also come back from
50:498%to 5%.
50:50The PE will start looking expensive to
50:52you. Because your EBITDA has fallen. But
50:54when your packaging charges normalize
50:56again, your profitability will return.
50:59So, it will look cheap to you on a
51:00one-year forward basis. That is an
51:02opportunity to buy. Right? So, investing
51:04in these kinds of companies, like when
51:06you are analyzing numbers, when you are
51:08looking at different companies, you
51:10should know what you are comparing it
51:12with. You should know whether you can
51:14compare it historically or not.
51:17Now, like retail companies, you cannot
51:19compare their EBITDA margins over 10
51:21years because of Ind AS.
51:23>> Because of...
51:24>> Ind AS, right, right.
51:26>> So...
51:27>> Indian Accounting Standards.
51:28>> Previously, rentals came above EBITDA;
51:31now rentals have moved into interest and
51:33depreciation. There is no way you can
51:35cleanly compare it over 10 years. You
51:38cannot even look at Jubilant FoodWorks
51:39on an EBITDA basis for 10 years.
51:40>> So their EBITDA margins must have
51:42increased automatically.
51:43>> They have increased.
51:43>> Because their rental is now interest and
51:45depreciation; the lease cost comes under
51:46interest.
51:47>> Yes, um.
51:48>> So you basically have to create your own
51:50parameter. Now what parameter should be
51:51created? That is where the wisdom lies.
51:53You have to see that some part has gone
51:55into interest. Some part has gone into
51:57depreciation. Right? Let's say we are
52:00getting a bit technical, but let's...
52:02>> No, no, I understood, it is actually
52:04easy because in the case of a lease,
52:05basically according to Ind AS, it
52:07depends on which lease it is—operating
52:08lease or financing lease.
52:10If it is a financing lease, it will go
52:12into interest.
52:12>> No, you have to compare, suppose you
52:14want to compare a parameter for 10 years
52:16.
52:16>> What should you do today?
52:17>> Look at how much debt there is today. I
52:19am not saying lease debt. Today, when
52:21you see debt on Screener, lease
52:22liability is included in it. Which is
52:24not real debt. Right? You need to see
52:26how much core debt there is. Calculate
52:27the interest expense for that. Generally
52:29, the interest rate is around 10%. Now,
52:31calculate that 10%. You will know that
52:33this is the interest cost.
52:34>> Now, basically, beyond that, for
52:35depreciation, you know what the fixed
52:37expenses and fixed assets are. What is
52:39the company's depreciation policy
52:40regarding that? Depreciation is usually
52:42around 4 to 5%. You have the 4-5%
52:44depreciation. You have the 10%interest
52:46rate.
52:47>> When you set those off, you will get a
52:49clean EBITDA. Many companies already
52:51provide the pre-adjusted margins. But
52:53for the companies that don't. It’s not
52:55like you can't calculate it there. If
52:57you put in a little effort, in 5 years,
52:58you will have the adjusted EBITDA
53:00margins. Then you can compare 10 years
53:02to see whether it’s the right EBITDA
53:03margin or not. Right? Right? Meaning,
53:06you get a 10-year context.
53:08And I strongly believe that, generally,
53:11you know, cycles broadly come back to
53:14where they were.
53:16If an industry's EBITDA margin is 20,
53:19and structurally if nothing has changed
53:21, it will stop at 20%.
53:23>> Right? So generally, cycles come back to
53:26where they were, so 20%is like the
53:29average EBITDA margin; I am not saying
53:31for all, I am just hypothetically saying
53:3420%is what I mean.
53:36>> If an industry, let’s say we take...
53:39>> 10 companies, and if you look at the 15
53:41years of those 10 companies.
53:43>> Hmm.
53:44>> Meaning, take simple textile companies,
53:46the yarn ones, calculate the EBITDA
53:48margin for those 10 companies, in the
53:49last column take the 15-year average for
53:51all of them, and then take the average
53:53of those 15 numbers as well. That’s like
53:56the historical margin for the industry.
53:58>> Hmm.
53:58>> Some company will be much more amazing
54:00than that. Like KP.
54:03KPR Mills. They have performed at a
54:05completely different level. Right? And
54:07what does the company do?
54:08>> So, it's a very well-managed yarn
54:11company.
54:11>> Back in 2019-20. Then they got into
54:14garments.
54:14>> Hmm.
54:15>> And it's the next value-added thing.
54:18Either you make cloth, or you make
54:19thread, which is called yarn.
54:22Then you make fabric, from fabric you
54:24make garments, and for garments also you
54:26can do different things; either you can
54:28make really cheap garments or you can
54:30make for Zaras and like the Burberries
54:33of the world; the higher up the value
54:35curve you go, the more margins you make
54:37, right, because their pricing is higher
54:39.
54:40So KPR Mills has been getting into more
54:42value-added stuff and it is one of the
54:45most wealth-generating companies in the
54:47textile space.
54:49Why do you say so? Because of their
54:51execution, they did capex ahead of the
54:53curve. They got into garments, and then
54:56in garments too, they were able to get
54:58new customers. A tailwind came, you know
55:00, from the UK FTSE side. And the
55:02management is also very credible, even
55:04though there was a governance risk in it
55:05. When we were looking at it in 2018-19
55:07, it had a car showroom business within
55:09a textile company, right, which was a
55:11loss-making business; so again, you have
55:14to adjust those losses when you are
55:15valuing a company, right?
55:17>> So, how many multibagger stocks have you
55:20invested in throughout your entire
55:23career? How many multibaggers would you
55:26have generated?
55:26>> See, I have figured out many multibagger
55:28stocks and invested in them too. But I
55:30could not ride the entire multibagger
55:32journey.
55:33>> Right?
55:34>> Let’s take the example of Apar
55:36Industries.
55:36>> Yes.
55:37>> July 2020 call.
55:39>> Right?
55:40>> On that call, the management gave a 20%
55:42ROE guidance, that within 2 years, my
55:45ROE guidance would be 20%. Right?
55:47>> It will be 20%ROE.
55:48And that company is not newly listed.
55:50That company's calls have been happening
55:52since 2013. Right? It used to have
55:54investor relations.
55:55They hired in 2012-13, and they are
55:58usually pretty solid, clean guys.
56:01In their July 2020 call, they said that
56:04our ROE would be 20%. Right?
56:09At that time, the company’s market cap
56:11and its net worth were the same, it was
56:141000 crores.
56:16I mean, roughly 9000 crores, I’m giving
56:18you a range. It was at one-time book
56:20value. So, as I told you a while ago, if
56:22a company generates 20%ROE and you are
56:24getting it at book value. You are
56:25essentially buying it at a 5 P/E. Right
56:27? If you look at their 2020 annual
56:29report, they had stated all the triggers
56:31in their report about what was going to
56:33happen in the power sector and what they
56:36were doing.
56:36>> I mean,
56:37>> What does this company do, for those who
56:38don’t know?
56:38>> They are into conductors and conductor
56:41oils. They are into fiber cable
56:42manufacturing. Hmm.
56:44>> And in 2018-19-20, people used to write
56:46off the fiber cable business, saying the
56:48growth came only because of 4G
56:50implementation. No growth is going to
56:52come now.
56:52>> Why?
56:53>> The 4G capex happened then, right, the
56:554G capex happened in 17, 18-19. At that
56:57time, all fiber companies showed great
57:00growth.
57:00>> Then, when the capex concluded, the
57:02growth from fiber stopped. People
57:03thought no more growth was coming.
57:05By the way, for this company, the
57:06best-growing business has been that
57:08fiber business itself.
57:10So, it had also done capex there
57:12two-three years prior to that, but the
57:14results hadn't come yet. Meaning, its
57:16gross block capex had doubled. But sales
57:19had only increased by 50%in the last
57:20three years. So, it also had a lot of
57:23unutilized capacity. After utilizing
57:25that, it was talking about a 20%ROE.
57:29And it had talked about power sector
57:30reforms in its annual report, that the
57:32government was going to announce a
57:34package of ₹ 3,000 crore for SEBs.
57:36All of that was written in the annual
57:38report. As of today, that ₹ 250 stock,
57:40or the one that had a ₹ 1,000 crore
57:43market cap, has a stock price of ₹
57:4517,000.
57:46>> Right, that
57:46>> From ₹ 250 to ₹ 17,000
57:48>> Yes
57:49>> July 2020, right
57:51>> And its market cap is ₹ 77,000 crore.
57:55Right, so but I have not made 77x.
58:00I invested at 250, I started selling
58:02from ₹ 1,000. I felt, because in 2018,
58:04Apar used to be a ₹ 500, ₹ 600 stock; it
58:07came back to 250, for me, it was a power
58:10sector play, cyclical. Right? Nobody
58:12could have imagined that the power
58:14transmission side would become like this
58:15or that the tailwinds we see today would
58:17come. I was not that visionary. In my
58:19view, in two years 'time, I made 4x, my
58:22own CAGR was built.
58:24My IRR was built, I was very happy, but
58:26now I am very sad because, potentially,
58:27I missed out on 17x.
58:29I sold the stock between 1,000 to 1,500
58:31, and if the blended price was ₹ 1,000
58:34or 1,200, at ₹ 17,000 it's like 12-13 x
58:36for me, right? The same case happened
58:39with Force Motors. Force Motors is again
58:41very interesting. I have been tracking
58:44this company since 2016-2015. At that
58:46time, this company was uninvestable for
58:48me. Because this company had spent a
58:50very large amount, ₹ 300 crore, on their
58:52aircraft. Right. If you ask the promoter
58:55why you bought the plane? They say that
58:57we need to go from Pune to Indore to our
58:59facility, so we bought a plane for that
59:01. If someone comes to you from a
59:031500-2000 crore company and tells you
59:04this, you wouldn't invest money. Right,
59:06that they are buying a ₹ 300 crore plane
59:08.
59:08>> Right?
59:08>> So, its percentage
59:10>> Market cap 1500 crore and they are
59:11buying a 300 crore plane.
59:12>> Buying a plane.
59:13>> Wow.
59:14>> But I am still following the company.
59:16The company's business is very good.
59:18Right? Still, there are some triggers in
59:20the business.
59:22Like, today people are talking about
59:23Rolls-Royce engines and giving the
59:25company an 80 PE ratio for it. This
59:26company has been working for Rolls-Royce
59:28for the last 10 years.
59:29>> Right.
59:29>> What do they do? They make engines.
59:31>> They make engines.
59:31>> Okay.
59:32>> So, are all Rolls-Royce engines...
59:34>> Not all, some.
59:35>> Some engines are made by Force Motors.
59:36>> Their main business is OEM.
59:38>> Their main business is school buses,
59:41ambulances......
59:42>> making all these types of buses. There
59:43is a company in that space, SML Isuzu,
59:44which is also in a similar segment and
59:46has done very well.
59:47>> Which one? SML Isuzu.
59:48>> Okay.
59:49>> Which is now acquired by Mahindra.
59:51>> Okay.
59:52>> So, in 2021, they launched a new product
59:55called Traveller, and out of pure
59:57interest, I passed by it and saw a
1:00:00really nice vehicle parked there.
1:00:04I watch a lot of Netflix and series, and
1:00:06you see abroad that there are Mercedes
1:00:09buses, right?
1:00:11>> Which are like ambulances with the
1:00:12Mercedes logo on them; we never used to
1:00:14see them in India, but this one they
1:00:16made, the Traveller...It looked very
1:00:18similar to those kinds of mini-buses. So
1:00:20I thought let me go check it out and sit
1:00:22in it to see how it is. I looked at the
1:00:23product and all, it seemed very amazing
1:00:25. Then I looked at the price; it had a
1:00:27market cap of 1,100 crores. It had a net
1:00:29worth of that much too. Right? But the
1:00:30company was not clean. Now, I told you
1:00:32that there is a big difference between a
1:00:34cheap stock and an undervalued stock.
1:00:35Right? It was cheap, but was it
1:00:37undervalued? To understand undervalued,
1:00:39you have to understand what is going on
1:00:41in this company. One thing was the bus
1:00:43market, the school bus segment, because
1:00:45it was COVID and buses were not selling
1:00:47. Schools were closed, so bus sales
1:00:48stopped. Would buses never be sold again
1:00:50? The answer was no. That's why I was
1:00:53tracking both the companies. Force
1:00:54Motors as well and SML Isuzu too. I
1:00:56missed SML Isuzu because of some very
1:00:59bad, like, myopic thinking. It came down
1:01:01to ₹ 490 and went up to 510. I thought I
1:01:04would buy it only at ₹ 490, and that
1:01:05stock slipped out of my hands. That is a
1:01:07₹ 7,000 stock today. Oh my God.
1:01:10>> You learn from your mistakes, like being
1:01:12penny wise and pound foolish, but let's
1:01:13talk about good experiences regarding
1:01:15Force Motors.
1:01:18>> I can't believe this was the reason, 49
1:01:19...
1:01:20>> Yes.
1:01:21>> Oh my God.
1:01:22>> This was the reason, I mean, I think
1:01:24this is about June 2022.
1:01:25>> The June 2022 market was a very bad
1:01:27market.
1:01:27>> Right.
1:01:29>> I mean, it wasn't a Covid-like market,
1:01:30but for those who saw June 2022, I mean
1:01:32, it was fun.
1:01:332021 market was fun, 2022 market was fun
1:01:36. In 2022, Russia waged war on Ukraine;
1:01:38February was bad temporarily. After that
1:01:40, there was a great rally for four
1:01:41months. But June was bad again. June
1:01:44felt bad. I felt it was a bad market. I
1:01:45thought it would be available again
1:01:46sooner or later. But it didn't come back
1:01:48down again. Coming back to Force, it was
1:01:50an ₹ 1100 to ₹ 1200 stock. That was the
1:01:52market cap. Three or four changes
1:01:54happened there at that time. One was
1:01:55that a new product was launched.
1:01:57Secondly, it fit well in the cyclical
1:01:59framework that, look, buses aren't
1:02:01selling. But when schools and buses
1:02:03start running, their goods will sell
1:02:05really well. And 2019 was also very bad
1:02:08for this segment of school buses and the
1:02:10ambulance market.
1:02:12So what happens is, there is a base rate
1:02:14in these.
1:02:16In things like trucks and buses, they
1:02:18have a shelf life; it's not like one
1:02:19year, but after 10 or 12 years, you have
1:02:21to replace them.
1:02:23And if you haven't had growth in 2019,
1:02:2520, and 21—three years—then all the
1:02:27pent-up demand hits in a single year,
1:02:30and that is the time everyone wants to
1:02:32buy, there's a 9-month waiting period,
1:02:34and the dealer also earns great margins
1:02:36, and the OEMs, of course, earn good
1:02:38margins too.
1:02:40That's why you see why auto is a very
1:02:42cyclical sector, right? And when the
1:02:44auto cycle runs, the ancillaries make
1:02:47even bigger deltas, right, because we
1:02:49get cost escalations and all.
1:02:52So in the case of Force, one was that
1:02:54their new business was launched. And I
1:02:56felt that for 3 years, schools, buses,
1:02:58and ambulances hadn't been doing that
1:03:00well.
1:03:01And very interestingly, in its annual
1:03:03report, it talked about a capex of ₹ 400
1:03:05crore on the EV side.
1:03:06Which is a very futuristic thing in 2022
1:03:09. Right now, everyone is doing EV. But
1:03:11in 2022, very few companies were doing
1:03:13EV, and at that time, Sona Comstar's IPO
1:03:15was about to come. People were really
1:03:17crazy about it. Right? So we felt that,
1:03:19okay, there is an EV angle here too. A
1:03:22bigger factor than that was that there
1:03:23is a very big and respectable group in
1:03:25India, Enam Holdings.
1:03:26One of their senior guys from Enam
1:03:28became an independent director in this
1:03:31company. Right? And the name is known
1:03:33for its image. Right? They are like the
1:03:35most respected name in India. Right?
1:03:37So when I saw that senior person as an
1:03:40independent actor, I got the courage to
1:03:42press the button.
1:03:44But today that stock has gone up to
1:03:4622,000 or 23,000. It is at 17,000 or
1:03:4818,000 right now. Today it feels like it
1:03:49was very easy. It was a no-brainer. But
1:03:51any company that is about to make a lot
1:03:53of money is never a no-brainer.
1:03:55At that time, you are scared about which
1:03:57group you are putting your money into.
1:04:01You don't know if that cycle will turn
1:04:02around next year or after three years.
1:04:04Right? You didn't know at that time;
1:04:07remember, in 2021, the Covid wave had
1:04:09arrived. In 2022, there were still some
1:04:11Covid cases coming up. At that time, it
1:04:13felt like if another Covid wave came,
1:04:15then it would be delayed for another
1:04:16year.
1:04:17And in our business, money today is more
1:04:20valuable than money tomorrow. Because of
1:04:23the present value of money. You earned
1:04:25five paise. You will then put it into
1:04:26the next best opportunity. You will then
1:04:28compound it. And I was a salaried person
1:04:31at that time. Right? So we wanted high
1:04:33returns. So we needed it. I still need
1:04:37it, but back then I needed it even more
1:04:39. So it felt like, man, there's
1:04:41opportunity cost, this and that. But
1:04:43still, with a heavy heart, I invested
1:04:45the money. And mind you, whenever I have
1:04:47had such a feeling where I felt scared
1:04:49to press the button. I have never lost
1:04:51money in those cases. I have always made
1:04:54amazing money in those opportunities
1:04:56where I was scared to press the buy
1:04:59button. Right? Because the reason
1:05:00intuitively is that if I am scared,
1:05:02everyone else must be scared too.
1:05:04Right, and something that is apparently
1:05:06wrong but somewhere something is
1:05:08clicking, that is why I am buying.
1:05:10>> So long story short, I sold that stock
1:05:13at ₹ 7,000. Right? When I sold it, very
1:05:15credible investors were entering it at
1:05:17that time.
1:05:18Back in 2022, I didn't follow what other
1:05:20investors were doing as much, which I
1:05:22follow a lot now.
1:05:24So, and if I am selling now and the
1:05:25stock is selling very quickly, getting
1:05:27absorbed immediately, then I stop
1:05:29selling. Which is something I have
1:05:31improved a lot.
1:05:34So that 67,000 stock took two years for
1:05:36me, but the stock from 7,000 to 18,000
1:05:38went up in just one year.
1:05:40So for those who bought in at 7,000,
1:05:42their IRR turned out better than mine.
1:05:44Right? I mean, it went from 7,000 to
1:05:4820,000 in like six months. So now mutual
1:05:51funds are realizing that the next level
1:05:54of opportunity is that.
1:05:56I feel everything here is at a peak and
1:05:59it might extend further, but I wouldn't
1:06:02venture to come in at this price.
1:06:05If I see opportunities elsewhere, then I
1:06:07will go there. Right?
1:06:10Like Kaveri is one example that fits
1:06:11into this framework, where the last few
1:06:13years look very bad, nothing seems good
1:06:15to you, you feel scared to buy because
1:06:17you wonder if the monsoon will be good
1:06:19next year or not, which was the same
1:06:21doubt with FS Motors four years ago
1:06:23regarding what would happen if COVID
1:06:25came next year.
1:06:27New products have been launched, just
1:06:29like they were in FS Motors, and here
1:06:30too, new products are accounting for 90
1:06:32%of the revenue now. Right?
1:06:35So there are a lot of similarities even
1:06:36though they are from very different
1:06:38industries, but if you look at it
1:06:39framework-wise, you will see many
1:06:41similarities.
1:06:42Now, I'm not saying Kaveri is going to
1:06:44be a 20-bagger from here. Right? But can
1:06:46it, in the wildest of the wildest
1:06:49imaginations, go 20x? What needs to
1:06:52happen for that? If this 300-crore
1:06:54market cap has to go up 20 times, what
1:06:56does it need to become? It would have to
1:06:57reach a 60,000-crore market cap. Right?
1:06:59Which simply can't happen for a seed
1:07:00company. But can it become a 12,000 to
1:07:0315,000-crore market cap company? To
1:07:05reach a 15,000-crore market cap, it
1:07:06would need to make a PAT of 500 crores.
1:07:08Right? It is already making a PAT of 300
1:07:10, 350, 400 crores right now. And on that
1:07:12PAT, can it get a 30x multiple? The
1:07:14answer is yes. As of today, agri-stocks
1:07:16aren't getting much capital. But if
1:07:17there is a boom in the agri sector
1:07:19tomorrow, anyone will give it a 30x
1:07:22multiple. And you've made your 4x. I am
1:07:24not saying that it is going to be a 4x.
1:07:25I am giving an example of how it can
1:07:27make money from today, where everyone is
1:07:30pessimistic about the stock, right?
1:07:33And that is why I am buying the
1:07:35pessimism, so I...sorry, I...so these
1:07:38are a couple of examples, again, like
1:07:40there is a company Sharda Motors which
1:07:42has done very well for me, right?
1:07:46Again, a 45-500 crore market cap company
1:07:49in June-July 2020, right?
1:07:52I would say that a lot of people could
1:07:54say that in 2020, all companies were
1:07:57cheap. Tell me something latest. Right?
1:08:00So, let's talk about a latest example,
1:08:02let's take last year's. Right? The
1:08:03markets were bad. Since 2024, the market
1:08:06has been flat until now. There is a
1:08:09company, Venus Remedies, right? Again,
1:08:11no recommendations. We are still on it.
1:08:15That company doesn't hold calls. No PPTs
1:08:18come out. Its transcripts don't come out
1:08:19. By the way, even Eicher Motors didn't
1:08:21have any calls, PPTs, or transcripts.
1:08:23When the stock hit 20,000, its first PPT
1:08:26came out. Right? So, at 1100 rupees,
1:08:29there was no PPT. And the promoters, he
1:08:32is like one of the richest persons in
1:08:34India, I think. Right? So, you keep
1:08:38sending emails. No one will reply to you
1:08:41. You send questions to the AGM. Your
1:08:43questions will not be answered. Right?
1:08:46So similarly, the same thing played out
1:08:49with Venus Remedies. No calls or PPTs
1:08:51have come out for it yet either. One
1:08:53about Venus, I feel that when the
1:08:55company gets a bit bigger, then perhaps
1:08:57the PPT will come, when everything is
1:08:59already built inside.
1:09:01So with Venus, I have been tracking this
1:09:03company for a long time, again, listed
1:09:05for donkey's years, right?
1:09:08The balance sheet inside has improved a
1:09:10lot. At one time, it had a debt of
1:09:13350-400 crores, which became zero. There
1:09:16was no cash, it became 150 crores of
1:09:18cash, cash flows started generating,
1:09:20right? And the sons and daughters of the
1:09:23promoters have joined the business,
1:09:25right?
1:09:26If you look at their annual reports,
1:09:29like we use a lot of AI, right?
1:09:32And like AI helped us figure out Venus
1:09:34Remedies' annual reports, we downloaded
1:09:3610 years of annual reports, put them in
1:09:38a folder, told Cowork to figure out the
1:09:40changes, and it showed the entire 10-
1:09:42year trend, how the company is
1:09:44transitioning from there to where, right
1:09:46?
1:09:47>> The first page of an annual report, if I
1:09:49make a presentation, right?
1:09:51Take any company's 15 years of annual
1:09:53reports, and its first page generally
1:09:54has just the name for very small
1:09:56companies. But in some companies, a
1:09:58theme is created. Someone is showing the
1:10:00sun, someone is showing rain, you know,
1:10:02someone is showing Sachin Tendulkar's
1:10:04bat. You know, it means they are
1:10:06creating a theme for their annual
1:10:07reports.
1:10:07>> You look at the first page of those 15
1:10:10years of annual reports of the company,
1:10:12right?
1:10:12>> Put them in one, two, three slides and
1:10:15press your button 15 times while
1:10:16scrolling down. You will see a story of
1:10:19how the narrative is playing out.
1:10:21Now obviously you can't do it, we are a
1:10:23very lean team, a three-member team, you
1:10:25can't do it for all companies, but we do
1:10:27it via AI.
1:10:29>> And AI tells the story about these
1:10:31companies that aren't doing calls, or
1:10:32the PPTs or AGMs are just for the sake
1:10:34of it, right?
1:10:35>> So you figure out where the company's
1:10:37story is moving, how Venus moved.
1:10:39>> At Venus Remedies, they were initially
1:10:41talking about how we will grow rapidly,
1:10:43they couldn't do it, took on debt, faced
1:10:46huge losses, then started talking about
1:10:48consolidation, saying we are
1:10:49consolidating, we will recover.
1:10:52Then, when the recovery started, they
1:10:53began saying, "We are proud of what we
1:10:55achieved.""We have come out from a very
1:10:57bad period." In the '25 annual report,
1:10:59they are saying, "We look like we are
1:11:01pressing the growth trigger." So you
1:11:02were seeing that entire life cycle
1:11:03happening right in front of you.
1:11:04Regarding the annual report, I haven't
1:11:06spoken to the management even once yet.
1:11:07Right? Until the time I pressed that
1:11:09trigger. When I made my buy, I hadn't
1:11:10spoken to anyone until then.
1:11:12In June or July 2025, I wrote publicly
1:11:15about Venus Remedies. I provided my
1:11:17entire thesis in it. And none of that
1:11:19thesis was from a management call. And I
1:11:21hadn't had a call with any expert either
1:11:22. It was all based on research from
1:11:24annual reports.
1:11:26We researched the molecules mentioned in
1:11:28those annual reports and put it all
1:11:30together into a well-crafted article.
1:11:33That became like a famous, that became a
1:11:35very famous article. Right? In no time.
1:11:38It was a ₹ 450 stock.
1:11:41Today it is a ₹ 1700 stock, in like one
1:11:44year and 3 months, and even now the
1:11:46stock is only at 20 times after becoming
1:11:494x.
1:11:50Right? So imagine the kind of cheap, how
1:11:53cheap it was. Right? This is a 2025
1:11:55story. I am not talking about a 2020
1:11:57story. Now 2025, meaning just to be on
1:11:59the record, we are not sitting in a bear
1:12:02market. It is not like we are sitting in
1:12:04a bear market, we are sitting in a very
1:12:05good market. People say we are in a
1:12:07recession, those who say we are in a
1:12:08recession.
1:12:09Tell those people who think we are in a
1:12:11recession to pull out the stock price
1:12:12charts for February and March 2020 and
1:12:14the August 2013 charts to see what a
1:12:16real recession was.
1:12:18Right?
1:12:19I mean, the stock was hitting 10%
1:12:21circuits on a daily basis within a month
1:12:24.
1:12:25Right? Without any news. It’s not like
1:12:27the company's factory closed down, so
1:12:28circuits were hitting. But any news. So
1:12:31there is no slowdown at this moment. We
1:12:34are currently sitting in a very good
1:12:36environment.
1:12:37So, Venus Remedies is one example where
1:12:40, solely because of annual reports,
1:12:42looking at the changes, looking at the
1:12:44cash flows, we were able to trigger.
1:12:48The last AGM was very superficial.
1:12:53Like there is a guy whom I really
1:12:55appreciate, Counter Cyclical Investments
1:12:57, his name is Keshav Ji, he is like
1:13:00there in all the AGMs.
1:13:02In that AGM, the promoter even scolded
1:13:05Keshav Ji, as he had asked all sorts of
1:13:08questions, this and that.
1:13:10Interestingly, the promoter asked, "How
1:13:12many shares do you have?" So he said I
1:13:14have one share.
1:13:18Now, what happens is that you need at
1:13:19least one share to attend the AGM, right
1:13:20? Only then you become eligible. He must
1:13:22have bought one share for tracking
1:13:24purposes.
1:13:25>> The promoter felt that, man, he has come
1:13:26after asking so many questions. The guy
1:13:28must have many shares. That's why he has
1:13:31done so much analysis.
1:13:34Wow, funny part about Venus. What did
1:13:36the promoter say? The promoter didn't
1:13:38answer anything, it was very superficial
1:13:39. "Lala" company is still "Lala,"
1:13:41something like that. The promoter is a "
1:13:42Lala" after all, right? If the Venus
1:13:45people are listening, please excuse me,
1:13:46I am calling them "Lala." Being a "Lala
1:13:47" is a good thing, I am a "Lala" too, in
1:13:49a way. "Baniyas" are "Lalas," right?
1:13:51>> So
1:13:53Fast forward to the last AGM that
1:13:56happened in August 2026, look at their
1:13:58AGM, it lasted for two hours and was
1:14:01held in a question-answer format.
1:14:04Generally, what happens in an AGM?
1:14:06You give people an opportunity to come
1:14:07as shareholders and ask questions.
1:14:0915 shareholders come. Four questions,
1:14:12they ask on an average two to three
1:14:13questions. 10 people asked, 30 questions
1:14:15got gathered. The promoter comes at the
1:14:17end and speaks two paragraphs. He feels
1:14:19he has answered everything. He feels
1:14:20like he has answered 15-20 questions in
1:14:22those two paragraphs. Whereas, he has
1:14:24broadly answered only one question. And
1:14:25he doesn't say anything incremental that
1:14:27isn't already written in the annual
1:14:28report. If you read the annual report
1:14:29and the AGM, you will find it roughly
1:14:31the same.
1:14:32But in this case, it happened like a
1:14:34concall; shareholders asked questions,
1:14:36they answered, then asked more, and
1:14:38answered again, and it wasn't one person
1:14:41answering; a team of people were
1:14:43answering. The person in charge of
1:14:45exports was answering exports; the
1:14:46domestic person was answering domestic;
1:14:48the finance person was explaining their
1:14:50finance. That shows how companies are
1:14:52reaching maturity, right?
1:14:54>> And there isn't even any PPT or concall
1:14:56for this company yet; this company is
1:14:58still available at 18-20 times, sorry,
1:15:0018-20 times, and this company has 350
1:15:01crores in cash. This company had 20%
1:15:04revenue growth last year, and on an
1:15:06absolute basis, their debtors have
1:15:08reduced. I can tell you, I can say this
1:15:11in writing, that there would hardly be a
1:15:13handful of companies in India where
1:15:16revenue has grown and debtors have
1:15:18fallen on an absolute basis.
1:15:20>> Right?
1:15:21>> This is one of those companies.
1:15:23>> Yeah, very interesting. Meaning revenue
1:15:25grew and plus their debt receivables
1:15:27decreased. Meaning their cash recovery
1:15:29basically increased a lot. And there is
1:15:30working cash as of today.
1:15:31>> So their working capital has become very
1:15:33strong. Right?
1:15:34>> Yes.
1:15:34>> They have 350 crores in cash.
1:15:372200 crores is the market cap. They made
1:15:39100 crores PAT last year.
1:15:40>> Oh wow.
1:15:41>> Right. And
1:15:43>> But they don't talk much. Nobody knows
1:15:45what is happening. And there is also an
1:15:46optionality in this.
1:15:47>> What is the option?
1:15:48>> That they have a drug called VRP 034.
1:15:50Which is like, which is in Phase 1
1:15:52trials.
1:15:53>> Okay.
1:15:53>> And it's not necessary that your drug
1:15:55has to be commercialized after Phase 2
1:15:57or Phase 3 for you to make money. You
1:15:58can out-license the drug. You did the R
1:16:00&D, developed the drug, and brought it
1:16:03up to Phase 1 trials. Now you don't have
1:16:05the money to take it further. You can
1:16:06sell it to bigger innovator companies.
1:16:08Who will take the journey from there
1:16:09onwards. Right?
1:16:10>> Like there is a torch in the Olympics.
1:16:12Right? You must have seen in childhood,
1:16:13on the very first day, a man is running
1:16:15with the torch. He passes it on, he
1:16:16passes it on. Similarly in this case,
1:16:18they lit the fire, made the torch. Now
1:16:21they can pass it on. Money can come from
1:16:23there. So a lot of good things can
1:16:24happen here. I am invested, I am biased
1:16:26, again, please do your own research
1:16:28before investing; it is not a
1:16:30recommendation.
1:16:30>> Yeah, no, very interesting. Thank you so
1:16:33much for being so candid and frank. I
1:16:35wanted to pick up on one thing you
1:16:37mentioned. So, you mentioned a promoter
1:16:39bought a private jet just to fly from—
1:16:42where was it—Mumbai, sorry, Pune to...
1:16:44>> Pune to Indore, right? A 300-crore jet
1:16:46and a 1500-crore market cap. Now, I want
1:16:49to move to governance. So, how do you
1:16:51decide that a company's governance is
1:16:53very good?
1:16:55I was reading an example of yours where
1:16:56a promoter admitted in your first
1:16:58meeting that revenue and advances were
1:17:00inflated, so what did that promoter say
1:17:01?
1:17:02What was the story, and then did you
1:17:04decide whether to invest in the company
1:17:05or not?
1:17:06>> See, the promoter thought I was a very
1:17:08big shot. Right? And he thought I was
1:17:10going to provide him with funding. And
1:17:12for some reason, he thought so. I don't
1:17:13know what kind of vibes I gave off. He
1:17:15found me very friendly. I don't know if
1:17:17I seem that friendly. People don't think
1:17:19so.
1:17:19>> You are actually very friendly.
1:17:20>> I am sure many people must have said
1:17:22that. Right?
1:17:22>> Yes, yes. So, I think he found me very
1:17:25friendly and he thought—let's be honest
1:17:28—because what happens is that when
1:17:31there's an IPO, especially during a bull
1:17:33market, all sorts of frogs come out of
1:17:36the woodwork.
1:17:37That's what they are called, frogs.
1:17:39Right? So they put lipstick on a frog
1:17:42and bring out an IPO. Right? So that
1:17:45happened in that case too.
1:17:49He was trying to fool everyone, but his
1:17:51stock price kept hitting new lows.
1:17:53He felt he needed some funding to grow,
1:17:56and he was worried about potential
1:17:58police cases or something.
1:18:01And the person who set up the meeting
1:18:03for me was a large shareholder in the
1:18:05company. He had told him that he could
1:18:06speak openly in front of me. That's why
1:18:08he opened up in front of me. It was a
1:18:10Pune-based company and the meeting
1:18:13lasted four hours. Right?
1:18:15And midway, he said—I asked him how he
1:18:18got his revenue growth. So he said half
1:18:21of it is genuine and half we just showed
1:18:23. So I asked, what do you mean by "just
1:18:25showed"? He said half is inflated.
1:18:28Now, it is very common, you know, in
1:18:30SMEs and small companies and recent IPOs
1:18:32, that this is very normal.
1:18:34I mean, I was not surprised that he had
1:18:36inflated it.
1:18:37>> Oh, is inflating revenue normal in
1:18:39companies? In many companies.
1:18:40>> Yes. It is very normal.
1:18:42>> I have seen it multiple times.
1:18:43>> Okay.
1:18:44>> Right.
1:18:46Do they do window dressing? They do
1:18:48window dressing. What wasn't normal was
1:18:50for the promoter to accept that I have
1:18:52done it. Very few companies accept it.
1:18:54He did it in front of me.
1:18:55>> Hmm.
1:18:56>> Now, this company had a market cap of
1:18:57300 crores. What does it have to do with
1:18:59me? Right?
1:18:59>> What I wanted [to check] was who all are
1:19:01involved in this ecosystem when a
1:19:03company's IPO comes, a lot of people are
1:19:04involved.
1:19:05>> Correct. There is an auditor inside the
1:19:06company. It's not like he wouldn't have
1:19:08a clue. The promoter met me for the
1:19:09first time. He told me, so wouldn't the
1:19:11auditor know? I mean, come on, the
1:19:13auditor must definitely know. If the
1:19:14auditor is signing, then which other
1:19:16companies 'balance sheets is that
1:19:17auditor signing?
1:19:19>> That will let you know whether you
1:19:20should invest in those companies or not
1:19:22.
1:19:22>> Yeah.
1:19:23>> I am not saying they would be thieves.
1:19:25But I have so many opportunities in life
1:19:27because in small micro-caps, I don't
1:19:29just have 250 companies.
1:19:31I don't invest in large-cap and mid-cap
1:19:33. So for me, my universe is like, I can
1:19:35even invest in 50-crore companies; right
1:19:37, for me, that is also investable. I
1:19:39need a reason to say no. And if an
1:19:41auditor is signing a fraud company's
1:19:43balance sheet, what is the assurance
1:19:44that the other company where he is
1:19:46signing is not a fraud? I mean, that
1:19:47raises a doubt in your mind. The next
1:19:50step was, the company was newly listed,
1:19:52so its merchant banker wouldn't be
1:19:53saintly either; he would also know
1:19:55everything, right? So, which IPOs did
1:19:57that merchant banker bring, right? So I
1:20:00took out the list of all those companies
1:20:03' IPOs.
1:20:04Apparently, the good thing that came out
1:20:07: out of 20 companies that happened via
1:20:09this merchant banker, 18 of those
1:20:12companies had the same auditor, right?
1:20:15So if you make a Venn diagram.
1:20:17>> The number of companies audited by the
1:20:19same auditor and the number of companies
1:20:21where the merchant banker was also the
1:20:23same, it was a very large common shaded
1:20:25portion; right, so you know that even if
1:20:26God comes and tells you that something
1:20:28is going to happen in these 18 companies
1:20:30, I am not going to get involved. It's
1:20:32simple. I need a reason to say no. Fast
1:20:34forward to today, that merchant banker
1:20:36was banned by SEBI temporarily. Right? A
1:20:39lot of companies 'stock prices are
1:20:41hitting such lows. It's possible one
1:20:42company out of them might emerge that
1:20:44does outsized returns. But I am in the
1:20:46business of increasing my possibility of
1:20:48making returns. If out of 18, one
1:20:50company becomes big, there is only a 5%
1:20:53possibility. For me, there is very
1:20:54little possibility of making it out of
1:20:56there. Right?
1:20:57Instead of that, look at the companies
1:21:00in India; there are 4000 companies
1:21:02listed since 2011.
1:21:04Why? Why should I go for new IPOs where
1:21:05there is no history? Will money not be
1:21:07made from 4000 companies?
1:21:09Only new IPOs will make money, and that
1:21:11too, when they are brought at a time
1:21:13when their business is doing its best.
1:21:15That's when they sell their stock; the
1:21:17promoter is the smartest. He will never
1:21:19sell his business cheap. You are a
1:21:21business owner, and I am a business
1:21:23owner, right? You will never sell your
1:21:25business when you are down. You will
1:21:27sell your business when you are making
1:21:29peak profits, peak valuations. Which is
1:21:30what an IPO is all about. Right? You are
1:21:32raising equity in the company, you are
1:21:34diluting yourself. Right? So you will
1:21:36bring it only when everything is going
1:21:38great. Your times are going great. So at
1:21:41that time, I don't even want to enter. I
1:21:43would rather go to a company that has
1:21:44been listed since 2011. And it has seen
1:21:4715 years of ups and downs. And by
1:21:49watching those ups and downs, I can see
1:21:51how the promoter behaved. How they
1:21:53pulled out cash from where. How they
1:21:55handled related-party transactions. How
1:21:57many people left them. How they moved
1:22:00from one product to multi-products. I
1:22:02mean, I have 15 years of history. And
1:22:05the more data points I have, the better
1:22:07decision I can take. So
1:22:08>> What happened to the company? Then
1:22:10>> There was an operator in the company,
1:22:12and it doubled from there.
1:22:13>> Oh.
1:22:14>> That company has doubled.
1:22:16>> There were fake volumes in it.
1:22:19>> Oh yeah.
1:22:21>> But the merchant banker, SEBI suspended
1:22:23them.
1:22:23>> Temporarily.
1:22:24>> Okay, and the auditor?
1:22:26>> The auditor is doing the audit.
1:22:29So, in India, nothing happens to anyone
1:22:31. Hmm.
1:22:32>> And I don't even want anything to happen
1:22:33because of me speaking. I am not in the
1:22:35business of correcting the environment.
1:22:36>> I have to look after myself. Right?
1:22:39>> So I just know that this is what is
1:22:41happening.
1:22:41>> Once it happened that you went to a
1:22:43factory, right? The security guard said
1:22:45we came here after 15 days, and the
1:22:47promoter was saying we work at 80%
1:22:48utilization.
1:22:49>> Yes, yes.
1:22:50>> So, there are two ways to look at plant
1:22:52visits.
1:22:53You can do two things.
1:22:56First of all, you meet the promoter. All
1:22:58the promoters are trained now. The
1:23:00promoters of newly listed companies are
1:23:01trained. Just look at Zomato’s
1:23:03shareholder letter, or look at any other
1:23:06. It would seem like an equity research
1:23:08analyst wrote that letter. Adjusted
1:23:09EBITDA, adjusted base—you know, these
1:23:12terms are mentioned, and I have been in
1:23:14the markets for so long looking at
1:23:16financials and accounts. Even I come
1:23:18across certain terms. I have to use
1:23:19ChatGPT to ask, "Hey, what does this
1:23:21mean?" I mean, how are they arriving at
1:23:22this? So, there has been a lot of
1:23:24creative accounting. I am not commenting
1:23:26on any specific company.
1:23:28I am just saying that people have
1:23:30trained a lot on how to portray
1:23:32themselves in front of investors.
1:23:34If you talk to someone for half an hour
1:23:36, that person will impress you. But if
1:23:39you stay with that same person for three
1:23:41hours, you will get to see how they deal
1:23:43with others. What kind of calls they are
1:23:45getting. What they are saying in front
1:23:46of you that they shouldn't have said. So
1:23:48, during a plant visit, you get to see
1:23:50the promoter when you go for a two-three
1:23:53hour visit. You get to see what is
1:23:54happening and what is not. I mean, I ask
1:23:56you a very simple question. If you go to
1:23:58a plant tomorrow, what will you look for
1:24:00?
1:24:00I am asking.
1:24:01>> Yeah, I mean, whether all the workers
1:24:03are working in the plant or not. Whether
1:24:06the factory is operational or not.
1:24:07Whether the machines are running or not
1:24:09. Plus.
1:24:10>> Exactly.
1:24:11>> First of all, you will see if the plant
1:24:12is running or not. Right, correct.
1:24:13>> I mean, you won't look at how much
1:24:15inventory is in the plant, right? First
1:24:16, see how many...
1:24:17>> First are the normal, basic things.
1:24:19>> Yes. How many trucks are standing
1:24:20outside. You ask the employees, "Hey,
1:24:22what is going on?"
1:24:23>> Correct.
1:24:23>> Same thing. So, in that case, the
1:24:25employee said we were just called here.
1:24:27We have come after 15 days.
1:24:28>> And that promoter is saying our plant is
1:24:30running at 100%utilization. Smoke is
1:24:32coming out. This is happening, that is
1:24:33happening.
1:24:34>> Hmm.
1:24:34>> So, fast forward, its revenue growth, I
1:24:36mean, it came first and then everything
1:24:38got decimated. Right?
1:24:40>> Hmm.
1:24:41>> So, a lot of these subtle things give
1:24:43you that indication.
1:24:45Obviously, it doesn't work all the time
1:24:46. It's never black and white.
1:24:48>> It will always be gray, just that a
1:24:50shade of gray can be darker or more
1:24:52subtle.
1:24:53>> True.
1:24:54>> So, you have to take a judgmental call
1:24:57about it.
1:24:57>> Very interesting.
1:24:59Lastly, I just want to spend some time
1:25:01on some sectors that you are bullish on
1:25:03and which interesting companies are you
1:25:05studying in them?
1:25:07>> So, there are two sectors I want to talk
1:25:09about: one is a cyclical sector and one
1:25:11that I think is an emerging sector.
1:25:14Hmm.
1:25:15>> So let's talk about the emerging sector
1:25:17, which could be the CBG space. Right?
1:25:20>> What is CBG?
1:25:22>> CBG is called Compressed Biogas.
1:25:24>> Okay.
1:25:26>> So I'll tell you how we arrive at themes
1:25:29—like last year it was CCTV—because we
1:25:31keep talking to a lot of promoters, even
1:25:34though we may or may not invest in them
1:25:37.
1:25:38But knowing what promoters are thinking
1:25:39and what they are doing helps a lot in
1:25:41connecting the dots. Right, rather than
1:25:43reading the newspapers, right.
1:25:45So I generally don't read newspapers, so
1:25:48I tend to speak more to promoters to
1:25:50understand what is happening and to
1:25:52gauge how the economy is doing.
1:25:56So, last year it was CCTV, this time I
1:25:58think it is the CBG space, which is
1:25:59Compressed Biogas.
1:26:02Now, the reason—CBG has always been
1:26:04there.
1:26:05When I was young, I come from a very
1:26:06small town, even then people used to
1:26:08talk about setting up CBG plants, right
1:26:10. But the plants wouldn't run because
1:26:12raw material wasn't available and the
1:26:14supply chain wouldn't pick up. So what
1:26:16has happened now is that when the Middle
1:26:18East war happened, I am sure everyone
1:26:20must have experienced that everyone
1:26:22faced issues with cylinders. Right? I
1:26:24come from there. There, the shortage
1:26:26started first. I mean, as they say, the
1:26:28more educated you are, the more worried
1:26:30you are. So, people there were the first
1:26:33ones to panic. People started hoarding.
1:26:36>> So, there was a shortage of cylinders.
1:26:39Which means that if you look at the data
1:26:41, 90%of the natural gas that comes in
1:26:43comes from the Strait of Hormuz.
1:26:45Right, so for the government in India,
1:26:49it is very important to reduce this
1:26:52dependency. Right?
1:26:54Energy is a very important thing for the
1:26:57government.
1:26:58People—ethanol blending is happening in
1:27:00petrol. I am not saying whether it is
1:27:02good or bad. On social media, people
1:27:04keep creating an uproar that the engine
1:27:06is getting damaged, etc. In the CBG
1:27:08space, it makes a lot of sense. Because
1:27:11scientifically, look, I am not an expert
1:27:13in oil and gas.
1:27:15I have spoken to two experts, one is
1:27:17funded by Nikhil Kamath’s family office
1:27:19, and one is another unlisted player.
1:27:22And I have done a lot of work on AI
1:27:24tools to figure out the scientific part
1:27:26. I am not a scientist, and I'm not even
1:27:28from a science background, but what I
1:27:30have understood is, unlike ethanol,
1:27:32which has practical limitations for
1:27:34mixing into petrol. CBG has no such
1:27:36restriction. Right?
1:27:39So, as of now, the government has
1:27:42mandated taking that blending into
1:27:44natural gas and CNG, which is currently
1:27:471%to 5%by FY29.
1:27:49If that happens, the volumes have to go
1:27:51up by five times. Sorry, six times,
1:27:52because the market is also growing by 8
1:27:54%.
1:27:55So, that is number one.
1:27:58>> Whose volumes?
1:27:59>> CBG.
1:28:00>> Okay. CBG gas volumes.
1:28:02>> So, CBG is...how does this happen? I
1:28:04don't know, sorry. So, is CNG made from
1:28:06CBG?
1:28:07>> No, no. CBG, you get a compost from your
1:28:10compost.
1:28:11>> You put it in a distiller.
1:28:14>> You compost it, then some gas...
1:28:17>> Compost it means?
1:28:19>> We let it rot.
1:28:20>> Right, I mean, fermentation is a better
1:28:22word.
1:28:22>> We'll remove "rot" from the video, right
1:28:25?
1:28:26>> We ferment it, and after fermentation, a
1:28:29gas is released which is not pure.
1:28:32You purify it, you take it to 98%
1:28:34methane; that's how CBG is made, and
1:28:36that is the chemical property of natural
1:28:39gas.
1:28:40>> Right, and then once it is 98-99%
1:28:42methane, you can burn it for cooking,
1:28:45you can burn it in your auto as fuel,
1:28:47okay?
1:28:48>> So, that is called CBG. Now, how is it
1:28:51made? There are four or five ways.
1:28:54One is you can grow Napier grass; you
1:28:56take 100 acres of land and grow grass on
1:28:58it.
1:28:59Napier grass is such that you cut it, it
1:29:02grows back; cut it again, it grows back
1:29:04.
1:29:04>> Grass or Na...
1:29:05>> Napier grass.
1:29:06>> Napier.
1:29:07>> Yeah.
1:29:07>> If you look at the photo, it's a very
1:29:10long, lush green grass, right?
1:29:13>> So, through that grass, you can make
1:29:16natural CBG.
1:29:18>> Hmm.
1:29:19>> You can use cow dung, you can also use
1:29:22the byproducts which are left, which are
1:29:25like waste from distilleries that make
1:29:27ethanol or alcohol, right?
1:29:31So, what has changed? I mean, why CBG
1:29:33now? CBG has been around for 20 years,
1:29:35why am I getting interested now? I'm
1:29:37interested because, for one, we saw in
1:29:38April that there were issues with
1:29:40cylinders. 90%of our state comes through
1:29:42farmers. We have to become independent.
1:29:45And reduce imports. Save forex. The
1:29:48rupee is depreciating. Crude oil is
1:29:50going up.
1:29:51Bad inflation, everything makes it make
1:29:53sense to be energy independent.
1:29:56Second is, what is CBG, right?
1:29:58It's a very good political subject also
1:30:00. Ultimately, who benefits from CBG? Who
1:30:03grows sugarcane or who grows Napier
1:30:06grass? The farmer grows it. The most
1:30:08votes come from farmers. Right?
1:30:10>> Yes.
1:30:11>> Farmers were not taxed before either.
1:30:12They are still not taxed. Why do you
1:30:13think the government has so much love
1:30:15for farmers? Right? Because votes come
1:30:17from farmers, farmers are never taxed.
1:30:19Right? So if farmers benefit, political
1:30:21parties benefit. So it gets figured out
1:30:24that way anyway.
1:30:27Thirdly, the government introduced the
1:30:29GOBARdhan bill, but what was the problem
1:30:32?
1:30:33For one, CBG plants existed before but
1:30:35weren't operational. Right?
1:30:38So, there was an issue with feedstock.
1:30:40Feedstock was not available.
1:30:43Second is, the price wasn't good. The
1:30:46rate was ₹ 60 per kilo. Feedstock was ₹
1:30:4915 per kilo. The product wasn't selling
1:30:51. So people weren't excited, and there
1:30:53was no subsidy either. So, what does any
1:30:55project need to be successful? For one,
1:30:57your capital cost must be low. The
1:30:59government is giving you a 50%subsidy
1:31:01for a new CBG plant. Right? Second, you
1:31:04need production offtake. Someone must be
1:31:06there to buy what you are producing.
1:31:07Right? It shouldn't be that the
1:31:09government said to produce it, but
1:31:10nobody came to buy. You end up sitting
1:31:11on your production. It won't sell. Right
1:31:13?
1:31:13So, the Government of India is telling
1:31:15GAIL, Indian Oil, and all these oil and
1:31:17gas companies that they have to do "
1:31:19take or pay," meaning either take the
1:31:21product or pay for it. Right? So, they
1:31:24have given you that guarantee. The one
1:31:25that was ₹ 60 has been increased to...
1:31:28it's now ₹ 98, which is a 40%hike.
1:31:30So, the models that were uneconomical
1:31:32have become economical.
1:31:35Now, for CBG gas offtake, if you fill it
1:31:37in trucks, weigh the truck, and have it
1:31:39transported, it's very uneconomical. And
1:31:42in CBG, the feed is a very voluminous
1:31:45thing. It's not that you build one plant
1:31:46for a 300 km radius. You aren't
1:31:48collecting material from 300 km away.
1:31:50Because the logistical cost for a CBG
1:31:52plant to travel 250 km would be too high
1:31:55and wouldn't make economic sense.
1:31:57So, it has to be a 50 km kind of thing.
1:31:59And if a CBG plant has to be set up
1:32:01every 50-60 km across India, then a
1:32:03pipeline infrastructure will have to be
1:32:05built. Right? So, those pipeline
1:32:07companies could also be quite
1:32:08interesting. So, for CBG, an even bigger
1:32:11factor than what the government said
1:32:12about 5%is that one of the largest
1:32:14companies, Reliance Industries, is
1:32:16involved. Right? Just the day before
1:32:18yesterday, the news came out that Anant
1:32:20Ambani went to Andhra. He announced an
1:32:22investment of 1 lakh crore. Right? That
1:32:241 lakh crore investment was stated as
1:32:26being for horticulture. But it is not
1:32:27horticulture. It is for Napier grass and
1:32:29CBG-related plants. The entire plant is
1:32:30being set up in Andhra. Just think, if a
1:32:32company like Reliance is entering a
1:32:34segment, they wouldn't be doing it for
1:32:35something small. Right? And Reliance,
1:32:38being an oil and gas major in this
1:32:40country. Even though they have other
1:32:42businesses, if something interesting is
1:32:44happening in oil and gas, they are
1:32:45becoming a part of it. So, it's not like
1:32:47they are entering just for 5%. Right? So
1:32:50I feel that, scientifically, there is no
1:32:52problem with 20%, 30%, or 40%blending.
1:32:55The existing infrastructure pipeline can
1:32:57accommodate that 40%CBG blending.
1:32:59Also, the largest conglomerate in India
1:33:02is getting into this in a big way, which
1:33:04means there are tailwinds in this sector
1:33:07, which is why they are entering.
1:33:11Going from 5%to 10%, 15%, or 20%becomes
1:33:14easy once the group is there, and it
1:33:17happens; then the sector is big and has
1:33:20tailwinds.
1:33:22Right now, you need to understand the
1:33:23sector's value chain to see which
1:33:25company in the value chain will make
1:33:27money. Take any company, like airlines;
1:33:29it's not as if airlines just started
1:33:32operating in India now. Growth was
1:33:34always there, but money has been made
1:33:36only recently, and sometimes it even
1:33:37turns negative. So, you have to see
1:33:39which part of the value chain you want
1:33:40to enter. If you want to play the
1:33:42aviation theme, how do you play it?
1:33:45Either you buy the ones who operate them
1:33:47, or you buy the ancillary companies.
1:33:50Right? So in this case too, within CBG,
1:33:52you have to understand the entire value
1:33:53chain.
1:33:55Which I think we have done a good job in
1:33:58analyzing.
1:33:59Within that, one option is to buy those
1:34:02who provide the capex. Right? Either buy
1:34:04those who make the equipment, or buy
1:34:07those who take the equipment, produce
1:34:10the gas themselves, or buy pipeline
1:34:12companies, pipe manufacturing companies
1:34:15, or EPC companies. Right? So, I want
1:34:18such companies where, even if CBG
1:34:21doesn't take off. This is my belief,
1:34:24right? That CBG will work. But who knows
1:34:26if it will work or not? Today the
1:34:28government says we will do CBG, right?
1:34:30If tomorrow some issues arise or a
1:34:32political issue comes up where the
1:34:33government says no, we won't do it, then
1:34:35I don't want to be left alone holding
1:34:37that stock.
1:34:38So, within that business, there should
1:34:40be other businesses too that can protect
1:34:42its value. Right?
1:34:44So, after looking at all these
1:34:46combinations, TrueAlt Bioenergy is one
1:34:48company which is the largest player in
1:34:50ethanol in India and they have the
1:34:52largest capacity on the multi-feed side
1:34:55.
1:34:55Right? So that in itself is a very
1:34:58sizable business. They also have a
1:35:01sustainable aviation fuel business.
1:35:04By the way, regarding the air fuel we
1:35:06use, the Government of India is setting
1:35:08a 1%blending target for SAF, and this
1:35:10company is the only one in India doing
1:35:11it.
1:35:12Right?
1:35:14So, my current market cap, or rather a
1:35:16major part of the valuation, is
1:35:18protected by the current ethanol
1:35:19business.
1:35:22In the CBG space, they will have the
1:35:23largest capacity one year from now.
1:35:26On the CBG side, they have tie-ups with
1:35:29Sumitomo Corporation for technology and
1:35:32offtake, and the conglomerate also has
1:35:34sugar mills that will provide them with
1:35:37feedstock in the markets of Karnataka
1:35:40and Maharashtra.
1:35:43So, they have solved the feedstock
1:35:44problem as well, and then they have this
1:35:46optionality of sustainable aviation fuel
1:35:48, which I count as zero for now.
1:35:51But I was just reading an article that
1:35:53the French government is going to take
1:35:55some SAF from India.
1:35:56I don't know whether SAF should be mixed
1:35:59with aviation fuel or not; I haven't
1:36:01done that study, but they also have very
1:36:03big plans in that area. So, the thing is
1:36:06, I am interested in the CBG theme, but
1:36:08I don't want to play a 100%CBG theme
1:36:10where the entire market cap comes only
1:36:12from CBG. In this case, its value is
1:36:14coming from all the other businesses as
1:36:16well. So if CBG takes off, it becomes a
1:36:18CBG company, it gets a high multiple,
1:36:20and I make money—again, no investment
1:36:22recommendation.
1:36:23>> TrueAlt Bioenergy.
1:36:24>> TrueAlt Bioenergy is a recently listed
1:36:26company; sometimes I have said, right,
1:36:28that I don't invest in newly listed
1:36:30companies.
1:36:30>> But here, I am investing in a newly
1:36:32listed company, right?
1:36:33>> Got it.
1:36:33>> So I am contradicting myself, but that's
1:36:36what I'm saying—there is no
1:36:37generalization.
1:36:39>> That's true; is there any other company
1:36:40you mentioned in the ancillary space?
1:36:43>> In this space, there is a very small,
1:36:44like it's a 600 crore market cap company
1:36:45; if I name it and it hits the circuit,
1:36:47it might create a regulatory problem for
1:36:48us.
1:36:49>> But they are a pipeline EPC player,
1:36:52right?
1:36:53Where again, they have two businesses;
1:36:56on those two businesses alone, it is
1:36:59cheap, right?
1:37:01CBG is kind of an optionality that we
1:37:03are playing, so even if CBG doesn't
1:37:05happen, the stock earnings should be 3x
1:37:08in two years' time because of the two
1:37:10businesses already there, and if CBG
1:37:12comes through, it becomes a multifold
1:37:14earnings scope, hmm.
1:37:16>> So these are the two companies we want;
1:37:18again, when a theme works, it's not
1:37:20limited to just two stocks.
1:37:22We continue to evaluate new stories and
1:37:24new companies. Many IPOs will come now,
1:37:27and then you will feel that yes, this
1:37:29theme is exciting.
1:37:30>> And what is the second sector?
1:37:32>> The second is a very, very old sector:
1:37:34the logistics sector.
1:37:36I think we can put up that chart which I
1:37:39have created.
1:37:41Yeah, so what I have done is, I have
1:37:43taken the top 10 companies that have
1:37:45been listed in the logistics space for
1:37:47like 15-16 years.
1:37:49So, this is like the customized index
1:37:53chart for logistics.
1:37:55As you can see, over a 10-year period, 5
1:37:58-year period, 3-year period, the sector
1:38:01has underperformed the broader BSE500
1:38:03index.
1:38:04And if we were to believe that India is
1:38:07going to become a manufacturing hub, and
1:38:09services share, which has only been
1:38:12going up because of AI, if it stagnates
1:38:14, manufacturing is something, and I
1:38:16think manufacturing as a sector is
1:38:18really interesting as of today. So if
1:38:21manufacturing were to pick up, it has to
1:38:23pick up, then this is a sector that
1:38:25needs to do well. Right?
1:38:27>> So a sector that has not made returns in
1:38:30a 10-year period, it gives you a very
1:38:33good setup. Right? Most of the companies
1:38:36are at their 3-year, 5-year, 10-year
1:38:38lows. Right. So this is a very
1:38:41interesting sector. A lot of capital has
1:38:43exited this sector. So very handful of
1:38:46companies are left. And when when the
1:38:49efficient players are left and market
1:38:52situation becomes better. You make money
1:38:55. We own three names in this space. This
1:38:57is about that conglomerate company. So
1:39:00what this chart shows is the combined
1:39:03market cap of this particular
1:39:05conglomerate was the same market cap as
1:39:08it was in 2015, right, as you can see
1:39:10from the red line.
1:39:13>> Before that as well, and below that, I
1:39:16have provided a few parameters of what
1:39:19it was in 2015 and what has changed in
1:39:222026, even though the market cap is the
1:39:25same.
1:39:27>> Here, the market cap has actually gone
1:39:29negative, so from 15 to 26 it's down 28
1:39:31%.
1:39:32>> Yes.
1:39:32>> But everything else is positive, like
1:39:34EBITDA and revenue.
1:39:37>> Yeah, that has also increased, but it
1:39:39has increased less than the network and
1:39:41loss block.
1:39:43>> So, a very interesting setup, right?
1:39:47>> A demerger has happened, and new focused
1:39:49CEOs and CXOs have come in to manage
1:39:51these businesses.
1:39:53>> I mean, what exactly does the company do
1:39:54in logistics?
1:39:56>> So, I can name it; it’s called Allcargo
1:39:58Logistics and Allcargo Global.
1:40:01>> So, Allcargo Logistics is a domestic
1:40:03business where they have express cargo
1:40:05as well as domestic business, and the
1:40:08other business is Allcargo Global, AGL—
1:40:11again, not an investment recommendation
1:40:13.
1:40:14I can't stress this enough.
1:40:18So, AGL is a global LCL; think of a ship
1:40:22, just a ship.
1:40:24If you are a small import-export
1:40:27business, you can't book the entire ship
1:40:29, right? You need some space on the ship
1:40:32, so they consolidate that space and
1:40:34give you a smaller portion. They
1:40:36tokenize the shipping for you, right? So
1:40:38, they are the largest player in this
1:40:39sector, not just in India but globally,
1:40:41I'd say.
1:40:43So, I think this company is available at
1:40:461x P/E, four years forward.
1:40:52Four years forward, right? And if
1:40:55logistics picks up, you think it can get
1:40:57a 20 times P/E, right? And if that P/E
1:41:00comes, if the PAT comes, it’s a 20x.
1:41:03Saying here that a company can become
1:41:0520x is very difficult to imagine, but
1:41:07when you think of possibilities, you
1:41:09have to account for them.
1:41:12Look, if I am thinking negatively about
1:41:14a company that it might have a downside
1:41:16, I also have to think about its upside
1:41:18. Because if I only wanted to protect
1:41:20against the downside or risk, then I
1:41:22should be a debt investor. Right? If I
1:41:24am taking equity, then I have to think
1:41:28about how big the scope can become.
1:41:32Right? So, I feel the downside here is
1:41:34limited because of the parameters
1:41:36discussed here. Right?
1:41:38If this company does what I think it can
1:41:40, and I don't need to make many
1:41:41assumptions for it to achieve that. It’s
1:41:43not like I am growing its revenue by 10x
1:41:46or anything; I am just adjusting for the
1:41:48losses they have incurred in the last
1:41:50few years.
1:41:51I am trying to build in a scenario where
1:41:53the environment for logistics companies
1:41:55is a bit better than what it has been.
1:41:58Right?
1:41:59And when the environment changes,
1:42:00everyone is surprised as to how it
1:42:02changed.
1:42:03Let me give you an example.
1:42:05Did anyone think that HDFC Bank would
1:42:08derate and ICICI Bank would rerate?
1:42:11Right? In 2016, ICICI Bank was at 1x
1:42:13book value adjusted for SOTP; SOTP means
1:42:15if you discount the value of its
1:42:17subsidiaries and separate them, the
1:42:19price would come to ₹ 180, and its book
1:42:21value was also ₹ 180, so you were
1:42:23getting it at one time.
1:42:24>> Sum of the parts, sum of the parts,
1:42:27today ICICI Bank is valued higher than
1:42:31HDFC Bank.
1:42:32I think it would be very interesting to
1:42:34show that chart, if we look at the stock
1:42:36price chart from 2015, I think we should
1:42:38look at it right now if we can, how much
1:42:41return HDFC Bank has given since 2015
1:42:43and how much ICICI Bank has given. Hmm.
1:42:45>> At that time, if you had thought in 2015
1:42:46, no one would have even imagined that
1:42:48this would happen 10 years later.
1:42:50So today, we feel that things that
1:42:52haven't worked in the last 10 years
1:42:54won't work in the future either.
1:42:57But when things change, they surprise
1:43:01everyone on the upside.
1:43:04So in this case, if it happens, I think
1:43:06a lot of money can be made in this. Very
1:43:09interesting. Wow, I really enjoyed
1:43:12talking to you. This has been a complete
1:43:13masterclass. We discussed many things
1:43:15about micro-cap investing with you. And
1:43:17this conversation was very insightful. I
1:43:20think I should launch a series with you
1:43:22. We should do a podcast every quarter
1:43:24or every half year, with lots of
1:43:26learnings. But thank you so much for
1:43:27doing this. The last question that I ask
1:43:29my guests, it's a tricky one. If you
1:43:30were in the shoes of Kushal Lodha and if
1:43:32you were interviewing Gaurav Agarwal?
1:43:33What is one question you would like to
1:43:35ask him towards the end?
1:43:37That's actually a very tricky question
1:43:39and.
1:43:43I would ask how the next, when we do a
1:43:45podcast after two-three years, where 91
1:43:47would be.
1:43:48>> Yeah, that's a good question. So if we
1:43:50do a podcast two-three years from now,
1:43:52where will 91 be?
1:43:53>> So I think we will have a very good
1:43:55track record of micro-caps in India. We
1:43:58would have created a name; as of now, we
1:44:00are known for our, people currently know
1:44:03us for writing good blogs and having
1:44:05intellectual discussions.
1:44:06>> Generating returns and having
1:44:07intellectual conversations are two very
1:44:09different things. So I guess, hopefully
1:44:11in three years 'time, along with
1:44:12intellectual discussions, we can also
1:44:14earn good returns, that would be
1:44:16interesting.
1:44:17>> Yeah, no, I'm sure, but I wish you the
1:44:19best in your endeavors as well, and your
1:44:20AIF is coming up soon too, so wishing
1:44:22you all the best for that as well.
1:44:24>> I'm sure it's going to do well and yeah
1:44:26, anyone who is watching this can click
1:44:29on the link in the description to reach
1:44:31out to Gaurav, and we will also provide
1:44:33his Substack link below so that you can
1:44:35read his articles. Thank you so much
1:44:37Gaurav for doing this once again and
1:44:39would love to have you again on the show
1:44:41in the future. Thank you so much for
1:44:42watching this video until the end.
1:44:43Before we end this video, I would like
1:44:45to thank Groww for being our title
1:44:47sponsor. With such support, we are able
1:44:49to bring actionable finance content to
1:44:52our audience.
1:44:53If you want to know more about Groww,
1:44:55check out their app by clicking on the
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1:44:58And let us know what kind of guests we
1:45:00should invite on our podcast.
1:45:02Which questions I should have asked,
1:45:03which questions I should not have asked
1:45:04, and which are the parts that you
1:45:06didn't like, so that we can trim those
1:45:07parts in future episodes.
1:45:09Thank you so much once again for
1:45:10watching this entire episode of
1:45:12Conversations with Kushal.
1:45:13>> Investments in the securities market are
1:45:15subject to market risks. Read all the
1:45:16related documents carefully before
1:45:18investing.
1:45:18>> If you have watched this video until the
1:45:20end, then according to the YouTube
1:45:22algorithm, we think you will like this
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1:45:28Kushal.

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