Navigating Market Volatility with Saurabh Mukherjea | CA Rachana Ranade

"I suspect next two two month two years this prominent pharma company will blow up."

"most of the new age companies uh return but no no ability to generate profits or cash."

"investing in IPOs has generally you know not been a you know good uh you know in you know like a good investing proposition not just in India I mean globally right? If you look at track record of you know investing in you know IPOs of any kind forget about new age not new age uh it's not you know it's not worked out yet right"

"we avoid companies which have been recently IPOed in the portfolio so we stay away from companies for at least a year till things settle down and we can you know analyze these companies in better detail"

"99 out of 100 IPOs, but the sheer novelty sucks people in and as you were describing, they end up losing 60 70% of their hardearned money."

"long run multibaggers what is the formula in India we showed in that book relatively simple formula u you know you're looking for uh clean companies. The accounting may pass first level is they got to be clean. If the promoter is a crook uh it'll be multiagger for him as he runs away to Dubai or London but not multibagger for you and me. So step one assess cleanliness of the promoter. Make sure he's not a chore using forensic uh techniques. Step two, make sure that his return on capital as we were discussing a few minutes ago, make sure return on capital is come say come 15% minimum 15% over a 10ear cycle. Right? This is the second layer. And third is look for proof of growth. Proof of growth as evidenced in a quant framework by by doubledigit revenue growth. Double-digit revenue growth over a decadal cycle."

"if you can follow this disciplined formula good accounts 15% ROC or higher 10% revenue growth or higher you typically compound at 22 23%. So if you follow if you take the rule of rule of 72 if you're compounding at say 23% every four years or so you are able to uh every four years or so every three and a half years or so you double your money every seven years you quadruple your money and every 14 years you will have 8x your money."

"Christian then took this approach and turned it into what he calls me Q which is a an improved version of this where he added the debt equity parameter. He also said I don't not only do I want good ROC and good revenue growth I also want low debt equity just to derisk the portfolio further and we've seen in India Ra that if you follow this approach upa the sickest percent 20 21% returns become very doable"

"So, so the formula is clean accounts, ROC above 15, doubledigit revenue growth, uh, and Christian and has added low debt equity. If you, if you read my book, Coffee Can Investing, you'll see returns end up being 20 20 21 22%. Over last 10 years, 15 years. It's a very steady return profile. And every three and a half years, you end up end up doubling your doubling your money."

"three things to look out for chi if you want ch get out right it doesn't matter P multiples if you can see the promoters stealing money and you know cas like you in my next life I want to be born as a chartered accountant in India right thankfully in our office we have 20 such smart CAS like you as soon as they tell me ch we I I asked the promoter Malik chi he usually says no comment which means chi so we get we get we get out of there as quickly as possible second is second is you see lethargy right uh promoters become multi-billionaire uh he's now you know spending a lot of time playing golf or doing you know doing uh you know charitable activities uh franchise is weakening competitors are coming in time to check out and and third is poor capital allocation company generating lots of capital lots of cash but Malik is not investing it properly return on capital is going down"

"if the fundamentals weaken if the ROC starts coming coming down then his quant framework starts saying time to reduce the position perhaps even get out. The second is perhaps the fundamentals are not weakening but price to free cash flow. Price to free cash flow we believe P multiple are useless right price to free cash flow right uh a price to free cash flow has rocketed through the ceiling I share price has risen far more than free cash flow then his his merri signal starts saying that either reduce the position or get out."

"for people with long working hours, which is pretty much everybody out there, my suggestion would be think about getting an investment advisor. Sebi website has I think 1200 rais email address exact etc. Um uh uh in the context of taking an investment advisor, look for someone who can give you a disciplined rigorous approach."

"Christian uses as we were discussing first step forensic accounting he uses a disciplined forensic accounting algo to to eliminate the naughty companies the chore companies secondly uses return on capital and debt equity to say which promoter is doing a sensible job of running the business. Acha business high ROC, low debt equity and finally he uses price to free cash flow to say amongst the good companies which are the ones where the p the valuations are particularly attractive"

"the minimum ticket size is 10 lakhs."

"every once in six months what we do is uh you know we refresh this portfolios per rules I think sort of already talked about those rules the three brahastra um and so you know we repeat that rule so that's something we do so I'll be you know sitting and you know you know you refreshing the portfolio by exactly the same rules. Um and then this will be reflected again in the you know whoever subscribes to this to this product. Right? So every once in six months you get a notification uh once you're subscribed to rebalance your portfolio and then again you need to just click a button and all the trades will get executed."

"this entire methodology for most parts is uh you know again it's completely driven by the set of rules right I if people have questions on their mind you know do we have u you know some kind of you know you know we taking qualitative judgments no we are not right this is completely a rules based portfolio. So we are completely looking only at factual data to build this portfolio, right? We are not looking at you know any any judgments any analyst estimates so on and so forth, right? It's completely factual."

"we have also tested this over a 16-year period from 2006 to 2022 and we found that again it gives you you know if you follow the same rules you know again per you know the exactly the same sequence it generates anywhere around 20 to 20 21% cross of fees but we don't assume any reinvestment of dividends."

"the challenge with the coffee can investing formula today is actually the reverse. uh uh remember the coffee can investing formula is every single year for 10 consecutive years company has to do 15% ROC very few companies in India will make it through that right especially the covid years may ROC got absolutely pulverized so if I take the last 10 years every single year pra% barely 25 30 companies in India will make it second on top of that you now have to apply every single year 10% revenue growth you can imagine that covid walasal revenue growth 10% almost."

"once we apply our forensics screen uh roughly you know we lose around 200 odd companies. So we left with around 300 odd companies from that again if you apply the second bast which is uh your depth to equity uh you know the debt to equity ratio. So we you know again remove companies which are overleveraged and then we also look for consistency of the profitability right so this is the third step so after these three steps you know we are left with around 80 to 100 companies on these 80 80 to 100 companies we look for companies which are both profitable as well as undervalued and when I say undervalued again going back to what sort of mentioned we're looking at under valuation with respect to their free cash flow generation ability right so if the company's price is cheap or you know uh is you know it looks undervalued with respect to its pre-cast regionability."

"and that's one component that goes into the selection right and we select anywhere between 35 to 45 stocks in metor at every rebalance"

"the formula for ROC is very simple. Annual reports data formula. Uh we've given the formula in diamonds in the dust. It's simple or numerator earnings before interest, taxes and earnings. Sorry, interest taxes and amortization. EBIT numerator denominator may take total total equity and total debt. Keep it simple. Denominator is total capital employed. Total equity or total debt. Uh for debtfree companies, it's only the equity."

"I don't think look I mean firstly never get focused on industries right in any given industry there'll be so much wide diversity surgeons. There'll be the Sachin Tendulkar player in the industry and then there'll be the local Galika cricketers as well. So no point saying you like cricketers or you like footballers, you like tennis players, your overweight tennis underweight football, that sort of stuff is mumbo jumbo, right? Identify the star cricketers, the star tennis players, the star chemical companies, the star IT services companies, star in what sense? Firstly, honest clean accounts. Secondly, competent uh uh good ROC, low debt equity. And thirdly for their honesty and competence on price to free cash flow very reasonably valued"

"So this is available for uh 2.25%. So this is only a fixed fee product. uh kind is charged quarterly. So 2.25% annual fees are charged quart divided by four. So every every quarter you'll end up paying basically 60 60 yeah 60 bips 60 bips or a little bit below 6% every quarter and every on the invested amount"

"So there's no lock in as such basically."

"India historical problem people have taken that money and bought flats and gold and done fixed deposits and through our books we're trying to change that habit and saying invest in good quality companies and get the returns that you deserve for your hard work."