Nemish Shah is a reclusive man. He has not met the media for over 15 years. Even after Axis Bank took over his firm Enam Securities in 2010, he was neither seen at press conferences nor were his pictures bandied about in the media. So when he agreed to talk to Forbes India about his investment philosophy, we were excited. We met him at his sprawling office in downtown Mumbai’s Express Towers with stunning vistas of the Arabian Sea. The office is simple with light brown furniture and plenty of open space. There is no receptionist. It is quiet but it does not have the coldness of a private equity firm.
Shah, 59, co-founder and director of Enam Holdings, comes out and smiles warmly. He ushers us into his room at the appointed time of 12.15 pm. Tall and fit, the master investor, walks in a brisk manner. And we quickly get down to business.
As someone who has seen several market cycles, we are curious to understand the evolution of Shah’s investing philosophy over the years. Investing, according to him, is simple and complicated at the same time, in a sense a lot like art. He says while investing in India follows the same rules as elsewhere, there is one crucial difference—here, the quality of the management has to be considered closely. “Abroad one can go by what is there in the books, but here you have to add one additional layer—the management,” says Shah. But as long as the management is focussed and understands allocation of capital, he is comfortable with the business. What he isn’t comfortable with are companies that are hasty and raise capital regularly. In fact, Shah has ignored many companies where the management did not give him the right vibe.
He then dons his analyst’s hat and gives an example of how a company allocates capital. After quick calculations on an imaginary balance sheet, Shah discusses its return on capital employed (ROCE) numbers. “If the ROCE numbers are less than nine percent, the company is a wealth destroyer. What is the point of being in the business if you can’t generate a sustainable ROCE,” he asks. Ignoring his buzzing iPhone, he continues talking numbers. Shah evidently takes comfort in numbers and uses them as a weapon or a shield, depending on the discussion. It is an art that he has mastered over many years.
If someone has no respect for capital allocation, it shows up, sooner or later, he says, pointing to the numerous examples of over-leveraged companies that saw their share prices fall. For instance, the infrastructure space, in which promoters took money on high traffic projections, low interest rates and quick completion of projects. In effect, they left very little room for error, says Shah. If any of the projections were to go wrong, the company would have a hard time paying off its debt.
It’s not just unsustainable debt that Shah shies away from. He feels a company might often be operating in a sector that suffers from external problems but if the management is good, it can find a way to survive and grow in that market. Take commodities companies like JSPL (Jindal Steel and Power Limited) which had a market cap of Rs 13,545 crore and was priced at Rs 156 per share on January 14. The stock was available for Rs 2 in 2001. It has delivered a return of 37 percent annually against 15 percent for the index over the last 15 years. He gives credit to the company management for such a stellar return.
Since promoters and management are the key to his analysis, he prefers to meet them to get an idea of how they look at business. Shah has always stayed away from firms where promoters are constantly raising capital and diluting equity, and who constantly track their stock prices. What’s most important to him is the way they plan to fund future growth. He is wary of excess leverage, but does not have a negative view of a company that needs to spend more in the short term to enhance its competitive edge.
Much has changed since Shah first entered the market in the 1980s. “Firstly, the breadth of information available on a company and on a business,” he says. Shah remembers when he would write orders at the trading ring and run to the relevant broker to get them executed. In those days, there was huge information asymmetry in the market and smart investors were able to exploit it.
Sample this: Till the 1990s, companies would report their earnings only once a year. For the rest of the time, investors were just fishing in the dark and depending on informal information channels to gauge how businesses were doing. For the auto industry, they would check with dealers. Investors in pharma stocks would check with chemists. Companies were not interested in meeting them, so analysts were focussed on horizontal research where it was important to be on ground and question dealers and customers.
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(This story appears in the 06 February, 2015 issue of Forbes India. To visit our Archives, click here.)