40 Percent Cagr 13 Years The Engineering System Used To Find 50x Multibagger Stocks Kushal Lodha 21

TITLE: 40% CAGR. 13 Years. The Engineering System Used To Find 50X Multibagger Stocks | Kushal Lodha #21 CHANNEL: Konversation with Kushal DATE: 2026-06-20 ---TRANSCRIPT--- 5,000 plus stocks listed companies. You eliminate most of the companies and stocks in so what I basically eliminate is I don’t look at any cyclical sectors. I don’t look at or cement or sugar. Second criteria is I don’t invest in companies which has got some corporate governance issues in the past. And third is the valuation [music] successful fund manager currently 1400% [music] CG investing journey market experiences or [music] successful wealth creation secret. So management was actually taking a very bold one. That is when we actually invested in Swen Pharma 2013 precisely. It was at the market cap of 200. So 50 bagger for me. basically had a lot of faith in the management and we invested. So the United Trade was like almost 20 times. Oh

and what are like some sectors that you are very bullish on? So I am bullish on small cap midcap large capoc for someone who is just starting their investing journey. So for young investors it better to stick to small YouTube 82.6% 6 percentage of my audience who’s watching this content has not subscribed to the channel. I’ll request all of you to please hit the subscribe button so that we can bring you the best quality of guest and give you the maximum value possible. Thank you so much for subscribing to our channel and enjoy this entire episode of conversation with Kushell. Let’s start from your investing journey and I got to know you worked at Lemon Brothers Access etc. So before that stock markets and first investing. So I basically did my mechanical engineering from Pune University then I basically uh in the end of the in fourth year basically I thought you know let’s check how much I learned actually in the engineering part. So I that’s where basically I appeared for GATE exam. Um I did very little study but I was able to crack the GATE exam. I stood 30th uh all India rank. uh so then but I was not honestly very prepared to go for the masters so I said let’s take some experience for one year let’s see whether it suits and then I will decide whether I want to do the master pursuing the same mechanical uh engineering so I worked for almost one year in techra uh that time it was known techra uh Mahindra British Telecom was the name of the company that time so I worked there for almost one year in the software development uh but after that I decided yeah this software development I was uh honestly didn’t enjoy much uh the software development. So I went for the masters. So I went for IIT KU uh for doing my masters in mechanical design. Uh I did it uh for almost two years we uh I did that Mtech in uh mechanical design. There I was I also worked on the rapid prototyping. So in Kpur we had a rapid prototyping lab. Uh so I’m talking

2002. Okay. So that time rapid prototyping was a very new field. Uh very few people uh knew about rapid prototyping. Now everybody talks about 3D printing and all that. The same it is the rapid prototype what we used to do in 2002. Right? So I worked in rapid prototyping lab and u I worked on multiple projects there. So that so I was honestly very much excited about the technology and I said let’s do something on the rapid prototyping. After my master, I joined geometric software which is again into mechanical uh design software. So I used to work on Katya software which is very uh popular for designing right. So I used to work for Katya software in the development part. At the same time I also worked on few uh ventures. So one was doing rapid prototyping for the jewelry. So uh that time what used to happen is there were keroda there and they used to make the jewelry models prototypes and then using the jewelry models they used to make the final uh pattern using the casting right. So uh k typically used to take 3 days 4 days to make one pattern and it was also costing much higher because it was 4 days work for kag right. So what we used to do in rapid prototyping is we used to produce the same pattern in 12 hours 13 hours in the rapid prototyping machine and we used to sell it at 4,000 rupees 5,000 which was very cheap compared to what carager used to charge right. So that is what that is what the idea was. So I got a venture capitalist who ready to put money in my venture. We started the rapid prototyping lab in Pune and we started supplying to the jewelry industry. So I’m talking 2002 miss uh that time rapid prototyping was very new uh very few very few people knew about rapid prototyping. So we started that but uh somehow uh uh there has been some uh issues uh in the venture. So I need to uh I need to quit that venture. I worked on another venture which was again related to uh 3D modeling which was converting 3D uh from MRI or CT scans. So whatever MRI images or CTS can you get you convert that into 3D images. So I develop my own 3D uh viewing software. So special MD right. So just to test how the market is market acceptance whether people will really pay for it because CT scan MRI used to cost and if patient is able to pay doctors will get a 3D model on his own desktop right and so doctor can plan far better he can also consult far better because he is getting a 3D view uh of the uh particular organ right so we discussed with multiple doctors uh but the feedback was uh so you are far ahead of time uh nobody is going to pay you 4,000 5,000 for extra 3D model and doctors 3D model CTMS so we don’t need 3D model right so feedback I also uh so we didn’t start that venture because of this feedback. So these are few venture that I worked that time and uh in 2005 uh basically the market uh the BJP government actually changed the market crashed uh so that’s where basically I started looking at the market stock market then simultaneous CFA register CFA complete finance stock market interest develop I I basically decided let’s go to stock market area but now moving from software to investment was a difficult path right so I decided to first do the CFA so I moved from geometric to uh headstrong then from headstrong to sunuard then lean brothers so I basically moved into different financial services uh technology right so that’s what I did for uh till 2008 8 in 2008 basically I got a break in the uh private equity fund which is access holdings. So I started my career in the investment side. Uh from 2008 exactly when Leman actually crashed. Just before that I joined Access Holding. There I worked for almost uh three and a half years and then I started uh my own uh professional money management with one family office. a very small amount but uh from 2013 is when 2012 mid I would say when exactly I started this uh and then it went very well in last 12 year 13 it’s been very successful and that’s what it is 2005 to 8 stock market rally but I read somewhere that you lost a lot of your money in those three years itself so it’s actually very interesting so I I think this is something I must tell everybody right

so uh When I started in 2005, I used to only look at the screen. Okay? So I had no fundamental knowledge. I had no financial understanding. I never even know how to read the balance sheet and P&L or anything. Right? Because I was completely from the technical world. screen since I was an engineer. Uh it was more kind of fascinating getting into different algorithms and you know how I can make uh different structures on the future and options side right. So I actually started trading in the future and option side uh in 2005. So I never invested actually in the stocks or equity market as such. It was more of a trading I should say. Okay. in 2005 to

uh and obviously as everybody know trading and that’s where I always say tell people boss please don’t do trading trading say you will lose your time you will lose your money and you will lose your mental peace right so don’t do trading because that’s what I have experienced myself marketally so there were stocks which went up 10x 20x 50x right I actually lost money and I lost money not once or twice it is once twice and then twice. Okay. So and it is not just lo it was zero. So I invested X amount it become zero. Then again I put X amount again it become zero. Then again put X amount again it become zero. So it was not one or two it’s three times it has become zero. And it is only because of trade. In 2008 uh when I joined uh access holding uh the private equity firm that’s where basically I started understanding and knowing about the businesses there I understood that was trading trading when you are actually can think of a long term when you actually invest in a business and that’s where my thought process of investing in a business or you know partnering with a business is what has actually started. So there actually I started understanding deeply into the market understand deeply into the business and what is a wealth creation. This is what I earn learned from 2008 onwards. Uh just say 2008 uh you know 2008 maybe uh when so in P fund also when I was in the P fund right so initially I used to look at stocks like you know steel sector right uh then your power sector. So these were very hot sectors in 2008. Everybody was talking about you know power sector, power sector and all. So I I develop expertise on the power sector. I develop expertise on the steel side. There was no investment framework that time. It was more like a you try to find undervalued stories, undervalued stock. Now it’s very difficult actually to define what is undervalued. How you define undervalued right? Unless and until you know how to value something you can’t say that it is undervalued over but undervalued stock power stock both undervalued because these people are having lot of you know resource in terms of coal mines you know mines having million tons of coal mind. So resource value then you say this is undervalued right this is a see this was a very basic but very rudimentary thinking that time so that time I invested or I put money in lot of steel stocks a lot of power stocks right uh then suddenly what happened is there was a coldgate scam and supreme court canled you know licenses of all the coal mines steel iron or mines right that is where I actually realized well this is not the way to invest right because you are basically playing on the government policies government policies can change any time so when I started my own in 2012 the primary thought was how how will I protect the capital so that was the single most objective when I used to think about you know if I start my own uh professional money management Then how will I protect the capital of investor? In any case, whatever is the situation, whatever is the scenario, external, internal, macro, micro, right? The capital should not be eroded. That was the single uh thought that drove me for almost 6 months. You can’t blame the market. market. You can’t blame the market but you should be able to protect the investor’s money. That was a single thought that drive me for six month and then I actually designed my framework. So that’s how I actually designed my framework. how miss what are the characteristic that I should be looking at in the businesses and how I should be structuring my portfolio. So that investor. So from 2012 onwards I had a framework with which I invested and till now that framework is been successful. I am able to uh return give better returns and there has been only two years I should say in last 13 years where I have seen a negative return irrespective of the market returns there are only two years where returns were negative in absolute terms I’m saying uh in relative term obviously there is only one year where I actually underperformed the market right uh but otherwise 13 years it has been a wonderful journey

so money manage. So right now we manage close to 1,400,500 cr capital. Uh there are some capital which is also in the unlisted side which is not counted in this AM. So we do invest in uh smaller amounts in the unlisted side as well. And what has been your percentage CG over the last 12 years of so we started uh um this PMS structure. So we registered with SEBI as a PMS in

Before that I was actually working for a family office in individual capacity. So if I look at uh the performance of that family office uh right from the inception 2012 to 2025 now today then it is somewhere closer to 40%. KGER uh it has it was actually very good till 2021 it was almost around 50% plus uh but after 21 the return actually dropped a little bit because there was a one year where there was a negative returns so that is where the return actually got impacted uh till 2021 it was actually 50% plus and then it dropped but now even if I calculate it’s around 40% for last 13 years so we’ll discuss about the framework which is there which help you in order to invest but before that brothers experience exactly and did the Leman crisis happen when you were there what happened exactly so Leman brothers I would say it’s a very very short span in my entire career uh I was working in Sunard in Pune uh and that time I got a offer from Leman which was 2x salary so that’s the reason basically I went to Leman brothers. Uh I went there but it was in Bombay Mumbai. I was married with two kids. Okay. Difficult. So within five months I took a decision I can’t do this Pune Bombay shuttling. So I decided I’ll quit the job and I’ll get something in Pune. So so there is nothing to do with the crisis lemon crisis. It was purely a personal family decision because of which I shifted back to Pune from Mumbai and then it was a very short period only five months I worked at nothing more than that and then access join I joined one more software company in Pune which was a talent software uh again very short span five months and then I got a offer from access holding I immediately took the offer and shifted

so up framework I read that 5000 plus elation framework elies. So can you help us understand? See elimination is I think the most important uh step in the portfolio because if your elimination criteras are good then you have to work on only few ideas. If you don’t have your elimination criteras right then you are basically wasting your time on multiple things right. So you will not get enough time to focus on the right things. Right? So that’s where I feel elimination is the most powerful uh thing in the portfolio construction. Right? So what I basically eliminate is uh I don’t look at uh any cyclical sectors. I don’t look at uh steel or cement or sugar or even uh construction or real estate. So any cyclical sector when I say cyclical basically the earnings are cyclical at some time earnings will be higher right so I don’t invest in any cyclical sector that’s first elimination criteria uh second criteria is I don’t invest in companies which has got obviously some corporate governance issues in the past or the management has some corporate governance issues in the And third is the valuation. So I will not invest in companies where valuation is above the reasonable level. Even if the company is very good but if valuation doesn’t see there are only two ways you can actually uh manage your risk in stock market. One is allocation. Second is your entry valuation. These are the only two thing that you have in your hand. Correct? If you can’t use these things rightly then obviously your uh results are not going to be good. Right? So that is where I feel entry valuation is very very important. So even if the business is very good I will not buy it at any valuation. I will buy only if it is a reasonable valuation. Right? So these are the few elimination criterias. So once you eliminate uh you know so that’s where I say that there are only 100 or 150 businesses actually uh get screened with these elimination criterias then after when I look at you know selecting the businesses I first look at the sector so there are three thing that so one is right sector there is right management then the right valuation correct so right sector is the sector which has got a decadal theme so I don’t look for very short-term two three two year threeear kind kind of horizon. I will look for sector which has got a 10 year runway ahead because even if you go wrong on valuation at some point if the story is for next 10 years you will make a in the run right so I look for sectors which are there which has a runway of next 10 years that’s what I call a decadal themes right so I always look for a decadal theme not necessary that I will ride that theme for 10 years but I will when I will invest I will look for a decadal The reason is even if uh for example if I am putting in a particular sector if that sector is going to go only for 2 year or 3 years right it may happen that people will start losing the interest a year before only right if it is for 10 year I have a enough runway to play for the sector correct so that is where I will look for a decadal themes second in that particular sector I will look for the right businesses Now how do you define the right business? Now every sector will have a uh speciality business and commodity business. For example, let’s take a example of say pharma. Pharma will have a generic businesses which are commodity and then it will have a CDMO which is a speciality side. If you look at chemical again you have a bulk chemical businesses which are commodity. You have a speciality chemical business which is a niche. If you look at auto again you will have a commodity auto which is supplying to say Marauti, Mahindra, Nissan right and they are supplying specific you know seats or maybe some chassis right so these are all commodity they are all cost plus model correct and there will be some speciality businesses which are working on the value plus model right so every sector will have a segregation so every sector will have this segregation even in the defense Even in the defense you will have a commodity businesses like nowadays there is a trend that every company which supplies to defense gets a tag of a difference company correct but there are so many companies which are actually in a very commodity type of business like fabrication business there are a lot of companies which do a you know they construct a bridge for defense or they construct a particular you know fabricate particular structure for defense right these are all fabrication companies now whether It works for defense or it doesn’t work for defense. The margins are not going to change. Fabrication will always make 20% gross margin. It can’t make more than 20% gross margin. Correct? So that’s a commodity businesses. Even if supplies to difference, it can’t be tagged as you know speciality business. Correct? So and there are businesses which are working on the software side of the difference which are working on avionics, electronics, warfare thing, right? So these are the speciality businesses. So in every sector you will have uh commodity businesses and you will have a speciality business. Banking uh banking I don’t invest. So I don’t invest in anything in banks or NBFC. No, I don’t invest because I feel there is no uh differentiation. See money itself is a commodity right? So if somebody uh some bank or some NBXC if they want to grow say 50% every year it’s not difficult if they lose the credit they can grow at 50%. Right? If you start you will get number of people who are looking to borrow. So if you loosen your credit criter so because money is a commodity finally. So that is where I don’t invest in NBFC or banks. Uh strict no I will invest in sector which is related to banking or NBFC but which are into technology side. So company which are giving technology to banking or BFSI do that is where I will invest. So I invest. So when I say right business, these are the speciality kind of businesses in every sector. Okay. So I will look for the specialtity business in that particular sector. And then third comes the right valuation. So your if your entry valuation is right obviously your returns will be better. If your entry valuation is very high even if the business is very great you will not make good returns. Can you help me understand key when you say reasonable valuation and with some examples how do you identify okay reasonably valued over very good question actually so valuation is always very subjective it’s not objective you can’t put a particular So valuation is very subjective. See there are two very important parameters when you look at a valuation. One is uh the growth. Second is return on capital. These are these are I call these two parameters the god of parameters. These are the two gods of parame valuation. Okay. One is your growth. Now where the growth comes from? Growth. Growth will come from size of opportunity. Right. So if you have a very large uh opportunity size then obviously there will be a growth. Correct? So size of opportunity will tell me how much growth that particular sector or that particular company has. Correct? Second is your return on capital. Return on capital return on capital will come from entry barriers. It will come from your competitive age of advantage. Right? So competitive age if you have the advantage for a very sustainable competitive advantage. This is the I think the right word. It has to be sustainable. It has to be a sustainable long competitive advantage for a very long term. Correct? Then your return on capital will be maintained. So only uh size of opportunity doesn’t ensure that you will have a better valuation. Only return on capital doesn’t ensure that you will have a better valuation. It has to be a combination of both. For example, uh you take say infrastructure sector right 2008 there was a huge opportunity and even today there’s a huge opportunity in the infra space right so G growth is there in infrastructure but does that ROC is there you will find that ROC of these companies is typically 12% 13% or below that right uh in 2008 what happened with infra everybody knows all infra infrastructure companies actually a lot of them actually went bankrupt. Why? What happened? Because uh their return on capital itself is few basis point more than the their borrowing rate. So if their cost of capital is say 10%, their return on capital will be 12% 13%. And they will leverage their balance sheet two time three times and they will try to make return on equity 16% 17%. That’s how they play right. But when you are actually uh doing the leverage it actually going to cut on both sides. Correct. So what happened in 2008 lot of infra companies they have uh bid for the projects they have taken the project they have borrowed from banks right but the timeline of the project actually got extended either because they were not able to acquire the land correct [snorts] or if they even if they are able to acquire the land in time they were not able to finish the project in time. So what happens when you are not able when project get extended is your borrowing cost will increase right so your return on capital will come down it will come down below your cost of capital and then you are bankrupt correct so so that’s where I say that return on capital is a function of your sustainable competitive advantage what competitive advantage these infra companies typically have infra company doesn’t have any competitive advantage It is only the execution and there are a lot of people who can execute. See whenever you are talking of any business which is given as a tender right it’s not a good business any business I’m saying so that is the reason when I uh invest in defense side also I look for companies which are not just going by the bidding and the tendering process because any business which works on the tendering process is not a good business because there is always race to the bottom everybody wants to quote floor uh to get the tender or to get the order right. So that L1 is I think the bad word for the investment. Uh so this is where I say that the return on capital will come from sustainable competitive advantage. So if if a particular company is having a very good size of opportunity and it has got a sustainable competitive advantage then it will always trade at a premium valuation. So if it is able to grow at say 20% per year and it has got a return on capital which is again 20% plus then it should get a valuation of 30p multiple 40p multiple even if it can get a multiple of 50. Now as the company grows bigger and bigger as the base effect becomes bigger and bigger then the growth also becomes little challenging. So if a company is able to grow at 20% even at a larger base and larger scale then obviously it will get a better multiple because they are able to grow at 20% even at a larger base. So their P multiple will be even at a premium correct now there is one more factor of the valuation which is driven by the liquidity correct. So what happens is for example if I am a uh foreign institutional investor which has got a cost of funding at 4% 5% right then my required rate of return from equity is 15%. Correct now if a particular company is going to grow at say 30% for say next five years. So for example let’s take 25% so that you know calculations easy. So if particular company profit is growing at 25% for next few years so profit for example company price 100 m earnings will be 5 per share. Now in 6 years that earning will become 5 to 20 rupees per share. Right? Now if I’m buying that company at 100 rupees so at a P multiple of 20 right assume that the same P multiple will continue even after 6 years. Okay. So required rate of return. Correct. So I will be ready to pay not 100 but I’ll be ready to pay even 150 180 rupees for that particular stock because I am happy with 15% breadr. So that’s how your P then get enhanced. So when institutional investor starts buying in a particular company, what happens is P gets expanded. So you need to find companies which will become a favor of institutional investors in the future. How do you find that? That is where I basically say that I want to invest in companies which are under research. Okay. If the company is under research, it will be underowned. Correct? If it is under has to be under owned. If it is under own has to be undervalued. Right? So, so you need to find companies which are under research. If the company is under research, it has to be under owned and then undervalued. When it will get researched very well, so if the earning keeps coming, if the business is very good, right? If it gets to particular scale and size, then people will start researching that company. as they start researching they will start you know buying the stock. So it becomes ownership changes to institutional ownership and that’s how the valuation then get enhanced. So you are saying you only invest in micro caps and small caps. Uh I will not say micro cap small cap. I will say that I will always invest in companies which are under research. Lot of time what happens is uh companies go out of favor. So their ownership also decreases right and their valuation also decreases but if the company business is still good they will again come in the favor. So there are a lot of such example right where company goes out of favor and then you invest uh but typically till now if you ask me I have always invested in the micro caps and small caps which are not research uh outside so let’s talk about some of your successful bets and I was going through some of your portfolio companies and I want you to deep dive identify number one and then identify returns is so like a lot of companies which I was going through. So Suen Pharma is one of them, Loris Labs is one of them, Deepak Knight, Monorama Industries. So one by one like I just want you to deep dive and then up price invests and then we’ll talk about other companies. Sure. So Suven Pharma I invested in 2013. Uh that time uh nobody was even talking about the CDMO space, right? uh everybody was knowing only generic pharma because that’s what there in India generic pharma maybe branded generics was another flavor and then they had a lot of pharma MNC’s that’s nobody was even talking or knowing about the CDMO pharma CDMO that is when we actually invest in suen pharma 2013 precisely uh it was at the market cap of 200 crores right uh why how I actually found this company is basically I used to read a lot that time I used to go through each and every company’s annual reports results quarterly results everything right what is what was striking that time with suen pharma is they used to expense out all the R&D expenses they never did a capitalization of the R&D expense that is where I like the started digging deeper into the su farmer usually companies amortize lot of time what happens is they will capitalize their R&D expense Right? They will not put a expense so that their doesn’t get impacted right so management was actually taking a very bold call right so that’s when basically I started digging deeper into the suen pharma and then what I realized is suen farmer has actually been stand out in the Indian pharma industry. Why? Because this guy was working since 2000. So this is the guy who actually started the company in 1995 uh with a CDMO space itself. So they started as a CDMO. Okay. They started working for one MNC supplying to MNC. Uh so they started as a CDMO. It actually started even before di lab okay as a cdmo and since 2000 uh the person Dr. Justi Bangites ji was working on a uh ident on developing a new molecule which is called a NC in pharma space which is new chemical entity in pharma space. So in India the trend from 2000 is mostly toward the generics. Nobody has invested in the R&D side. Nobody invested in uh developing the new chemical entity or new molecule, right? And Suven was actually putting all his profits into developing a new molecule since 2000, since 2000. And if you actually see his thought process, he has actually chosen the most challenging area in the pharma. Right? Firstly doing uh R&D on new molecule itself is very rare in that working on CNS central nervous system it is very very difficult in that working on Alzheimer is the most difficult so he has actually chosen the most difficult in the pharma space so he was working on developing a new molecule for Alzheimer okay so that actually excited me and that is where I invested in suen pharma 200 100 cr market. So it was having two businesses within the company. One was the CDMO where he was getting a huge free cash flow every year and then second was the R&D part where he was actually putting this free cash flow into developing the new model. So on the P&L people were not able to understand that the profit is actually much higher than what it is showing because a lot of his profits is getting invested back into the R&D. Correct. So that is where I like suen farmer. So I bought at a five or six p multiple that time because people were not able to understand what he’s doing. Right. And then I think uh 20 16 onward I think people started knowing Suen faram when uh they started talking about the you know the research therm molecule and all that. uh 202021 I think they deemer both the divisions so they separated CDMO division and they separated the R&D part so that time uh 2021 I think the market cap was 10,000 cr plus right uh it further went to now 30,000 crores uh but I exceeded around uh 12,000 crores so it was a 50 bagger for me uh it has it has been one of the best performer in the portfolio numbers free specific ratios you looked at before investing in the business see if you remove his R&D expense his profit margins was almost around 30%. Okay so that actually what excited him what are the usual profit margins in this industry see in CDMO profit margins are always 30%. But that time nobody was doing CDMO. So nobody knew how the profit margins are. Divis was doing the CDMO. But Dvi has uh Di is not 100% CDM. Uh 30 40% is CDMO. 60% is generics. Right? Uh so Su had actually a very good profit margins. When they deemer both the division then people actually realize what the real profit margins are. Okay. Uh so that was one of the reason actually I invested. But when you invest in so when I invest in companies it is not always that I will have certain number in mind uh for future. When you when I invest in company I typically see boss I like the business I like the promoter movie right so that’s what it is there if the capabilities are there they will be successful so this is a thought process with which I invest got it industry Manorama industry is a very uh interesting uh story for me. So uh I read about monorama industry in one of the uh magazine. Okay. I like the story. So I uh went and met the management. I saw their plant in Rayur. I like the plant. Uh in fact this was the only company I should say where I have taken the decision so quick. So I saw the plant uh and second day I have picked up a maj significant stake in the company. Second day mean I haven’t done any research after that. uh second day I picked up a very significant stake in the company that was a 200 cr market cap right uh so that’s where when so it was 2019 I picked up significant stake in the company because I like the story a lot as I said there are two things that drive the valuation one was the growth which driven by size of opportunity so Manorama had a very large size of opportunity so they are into CB which is a cocoa butter equivalent which goes into chocolates. Correct? So they had a huge huge market for cocoa butter equivalent. Right? So size of opportunity is very big. And second was the return on capital which come from the entry barrier or the competitive advantage. So in this case in case of monorama they were the only uh company I should say which was procuring sal seed in India the raw material which is required for CB. So they were the only company which were procuring sal seeds in India. So that actually created a very strong entry barriers for the business and they were used to supply the CB to uh MNC’s like Mandles uh Ferohor Roshia right so that was again another entry barrier so you don’t get these kind of customers so easily and so quickly so they do lot of audits before they actually give you the contract right so they were having these kind of customers they were having entry barrier on the sourcing side right and the opportunity is very big. So these were the three thing which actually got me very very excited and I acted on it very quickly. decide. So that is what this is the first time when I got so excited with the story that you know second day I picked up this tech. So and I think so I was reading some magazine there I read about what they do. So then I contacted them I investor relation I went and met the management uh and that was the story. And can you deep dive when you say when you met the management very difficult? See it is I would say this comes with the experience one because lot of time it is not about the question and the answer. In my case specifically I can tell you it is not about question and answer. It is about the positive vibes that comes when you talk. So it not necessarily that I will always ask the technical question. It is not always that I will ask you know business related question. A lot of time it will be just you know but the kind of vibes you get and it comes with the experience. uh you will not get it you know in maybe six month or one year. It is like when you meet multiple management, when you meet multiple people, that’s when you will understand you know the vibes that you get from the person when you let’s say talk to them for one hour when you say wibes and all it’s like a mixture of okay numbers like the vision of the promoter clarity business that would be there and then secondly it’ll be more on the comfort level and all of that a lot of time what happens is like in case of manora I spend almost a day with the companies So maybe with the management I spend only one hour but I spend a lot of time with the employees you know uh with the people associated with the management you know people in the city right so you get a lot of feedbacks from these guys also correct so that also helps you to you know understand the company and the management better. Next is lotus labs to lotus labs thesis. So Loris Lapka thesis again uh it was mostly so firstly when I invested the thesis was the operating leverage. Okay. So when I invested they have actually completed a capex which was a mega capex. So they actually doubled their gross block and their earning was same the sales was same because there was no utilization from the new capex right. So when I invested there was a single I would say single investment hypothesis was the operating leverage. Whenever there is a uh utilization of this new capex will happen obviously your operating leverage will kick in and I waited almost one and a half year for that operating leverage to kick in and every call I used to ask the same question to the management and you can check all the calls of loris you see my question. So every time you I used to ask the man same thing how much is the utilization when your grossburg will be utilized fully and what kind of top line you will do with the full gross block utilization and that has exactly happened in 2021 when they actually able to utilize their entire gross block their margin jumped uh their profit went up almost 10x okay and the stock was almost 10x in one and a half years, 18 months. Wow. Yeah. Because it was operating leverage, right? The capacities were underutilized like operating left. What happens is when you for For example, fixed asset was and they did another00 expansion capex right expense because blocks related to expense employee Right? Electricity cost maintenance. Right? So all that will come in your P&L other expense. You will have higher employee cost. You will have higher depreciation because you have already commissioned that plant. Right? So you you will have higher depreciation. You will have higher interest. So but revenue. So when that revenue will start coming fully that time your profit will multiple will jump multiple times right because now uh your cost is getting absorbed. So there are multiple type of leverages that I work uh one uh I call the I call it as a uh uh product mix leverage okay where basically uh your gross margin moves up your gross margin changes why because your product mix is changing earlier you were doing say some product and now you’re moving up the value chain so you are doing better product where your realization is better correct for example Let’s say monorama itself right monorama earlier was doing for example say only butter uh so in the overall revenue uh uh revenue contribution uh the CBE contribution was much lower as the CB contribution goes up which is the value added products as CB contribution goes up the gross margin will also go up correct so that is the one leverage second leverage is basically your operating leverage which comes from your fixed cost and variable variable cost. So your variable cost is basically related to your revenue where your fixed cost is remain fixed irrespective of the revenue. So when your revenue increases your fixed cost as a percentage of revenue actually drops right. So your IITA margin increase goes up. So that’s operating leverage. Third leverage is basically your financial leverage right. So when your interest cost and your depreciation as a percentage of revenue drops that time your PBT actually improves far better. So your PBT margin improves right? So these are the three leverage that you have in the business. So if when all these three business three leverage plays out then what happens is your gross profit will grow faster than the revenue your IITa will grow faster than the gross profit and your PBT will grow faster than your IT and then there is the last leverage which is a valuation leverage so your P multiple also goes up that happens when your return on capital goes up. So if your return on capital goes from 20% to 25%, your P multiple will also jump because as I explained P multiple is a function of ROC return on capital. So your valuation also jumps. So that’s the last leverage. So P multiple change you’re saying it is majorly because of the return on capital. Yes. One is return on capital, second is growth. If the growth rate improves, P multiple will change. If ROC improves or P multiple will change. If both improves then obviously it will change a lot. So are you trying to say that P multiple is something that is in the hands of the company. Company hands hands. It is basically the perception of the investor. Correct. Exactly. If investor pursues the company to have a better growth in the future, he will ascribe a better multiple. If investor pursues company to have a better ROC in the future, he will ascribe better multiple. M and I explain you the reason right mean if company is growing at a rate of 30% whereas my required rate of return is 15% I’ll be able to give higher multiple yeah fair nitrate case maybe same exactly same story so Deepak nitrate was commissioning the largest phenol plant in India there were no phenol manufacturer in India it was all imported from outside and Deepak took the capex of putting two lakh tenol plant which was I don’t I think two lakh if I remember correctly it was two maybe it is four I’m not remembering honestly very correctly so they were taking they have taken the largest uh capex in the history and they have done it with leverage so they have taken loan for doing the capex so it was a bold decision it was a big decision right but I uh going by their track record. I basically had a lot of faith in the management and we invested. So that’s the that was when the price was 150 rupees when we invested because that that phenol plant was about to commission and the same operating livery has to play in case of deep when the plant gets commissioned. So we invested 150 rupees. uh the plant commissioning actually got delayed by almost a year but after a year when plant got commissioned the there was a massive massive jump in the top line and the bottom line and market gave a very good multiple to Deepak 9. So Deepak 9 was like almost 20 times uh from 150 rupees to 3,000 that was the rally uh in almost I would say three years. Oh yeah. So it was all operating leverage uh even in case of deep granted obviously there was one uh parameter of value uh the product mix that I talked about right so when they when they put a phenol plant the idea was to go get into the phenol derivatives the downstream products of uh phenol which will give them better margins because that’s a value addition they are doing for the phenol products right so that has actually improved their margins and the return on capital and that’s so their multiple also went up much more and when you say loan capex is that usually a good sign uh see it is again subjective firstly how much a loan you take is very important whether you can absorb that kind of whether you have a balance sheet to absorb that loan is one question if your balance sheet is strong enough to absorb that loan it’s a there is nothing wrong in it correct secondly Finally when you are taking the loan how you are deploying that capital forget loan whenever you are basically deploying the capital it’s very important to understand where you are deploying that capital are you deploying the capital which will give you better ROC than the current ROC or it will give you lower ROC than the current RO so whether it will dilute your current uh return on capital or it will enhance your return on capital if it is going to enhance your return on capital obviously it’s a good decision U access kids is something that uh yeah access we have invested 3 years back uh again it was mostly because of the ER&D business. So if you actually see all my investment being it suen pharma be it loris be it monorama they are all I would say they are all uh cdmo space right monorama is also food cdmo right mean they uh do uh different type of blending and the formulation for different clients and then they have a long-term relationship with those client they supply them for particular product like they supply for ferro roia for one product they supply mandelis for one product right so this is nothing but a food CDMO right Loris is a CDMO player Suven is a CDMO player Axis CAD was a uh it’s an erd player engineering research engineering which is again I would say engineering CDMO right so that is where I typically if you look at my investment philosophy you will find a lot of companies which are in the CDMO space manufacturing CDMO engineering CDMO food CDMO defense CDMO Now Axis CAD has now actually become a defense CDMMO play. Earlier it was a ER andd play but now with the recent management change they have changed their strategy completely. Now it has become a defense CDMMO. Say they now they are having aerospace uh defense and electronics as three different verticals where they are actually working on the CDMO kind of contracts with the global players. So, so this is basically the common theme which you will find in my all investments identify one obviously it was triggered by the management change. So that time new management joined uh then management came from Tata Technologies which has done very well in year end business. Uh so because of the management uh so my investment was more triggered because of the management change. I like the management the track record that he has delivered in the Tata technology and that is where we invested in and it was fitting perfectly in my investment framework. So that was another reason banking is something that you avoid investing in or sectors that you specifically avoid. As I said steel, cement, sugar, construction, real estate, I avoid all that and what what are like some sectors that you are very bullish on? So if you ask me again as I said so I am bullish on CDMO space be it CDMMO for pharma be it CDMMO for food be it CDMO for defense uh I am bullish on CDMO space wherever it is. uh so we have uh taken say defense CDMO right so I call access CA as a defense CDM we have invested in one company which is Azad engineering which is again a CDMO for defense defense or maybe power or maybe aerospace so they supply to companies like in aerospace they will supply to companies like Honeywell they will supply to Rolls-Royce they will supply to Saffron uh in power they supply to Simmons Mitsubishi uh in uh defense side they again supply now they’re talking to Indian defense they are working on uh developing engine for missiles right so I like the companies which are into CDMO kind of you know business model and anything on the chemical sector yeah chemical sector I was very bullish in 2016 2017 there was a crackdown on uh Chinese chemical companies from the government authorities Because of that there has been huge demand from Indian chemical sector. Uh in the corona that demand actually got multiplied further and lot of chemical and company actually made a lot of money. Uh so I was very bullish from 2016 17 uh and I got little carried away in the corona cycle as well with the chemical companies. That’s where I think I made little mistake that I got carried away with the corona. uh in 2012 2023 I actually realized that you know this sector so I actually cut down my stake in the chemical sector because I realized that you can’t extrapolate the demand of corona so demand has to come down to the normal level again so these companies revenue will again come to the normal levels the profit will again come back to normal levels but I was little carried away due to the covid demand uh I also carried away a little bit because of the uh uh I would say India, China, India plus one theory right but I think uh chemical sector if you ask me today I’m not too bullish on chemical and uh up 2020 2022 5 and a halfx jump portfolio I was studying and then FI23 there was a minus 26% yes kind of a return what went wrong in FI23 and what went right in 2020 to 2022 so 2021 it was a 4x jump and then it was 35% again. So it was a five and a half time jump in two years. Okay. So as I said in these two year what went right is obviously loris went up 10x deep nitrate went 10x monorama went 5x suen pharma went 5x. So there were lot of company actually did very well in two years. Okay. uh what went wrong in 2023 as I said I got carried away uh for pharma and chemical that co demand of covid uh I extrapolated it uh for further which it didn’t happen which was wrong in fact right so it didn’t happen and that’s where basically a lot of these company actually came down so deep nitrate came from 3,000 to 2,000 loris came from 700 to 300 right so because of that portfolio got the hit and there was negative 26% return for that year. But was there some investment where you put in capital and then lost money in that stock? Uh there is one stock where it has happened and there has been massive massive erosion of wealth uh in chemical sector. Okay. And uh 2017 to 20 small cap index went down by 40% but your portfolio was up by 10%. Yes. What had happened exactly? So that time basically uh 2017 uh there was a massive uh I would say midcap rally small cap rally there was a bubble in fact in small cap and medap and that time I actually told I remember very well I told my investor that I don’t want to follow this rally I I want to stick to my framework I don’t want to invest in these sectors which people are going after so I didn’t change my philosophy I didn’t change my portfolio I just stick to what I had and that uh basically because of that I survived that crash in medap and small cap. to 2017 to 2020 was a severe crash in small cap and midcap but I was able to survive and give actually positive return when the entire index has given negative we have like small cap midcap last one and a half year small cap midcap hasn’t done anything uh next one year also I don’t think they will do much because what has happened is again there has been lot of narrative based investing that is happening in the small cap medical there there has been a lot of narrative being created okay in multiple sectors uh and because of that as I said like in defense there is a com there there are companies which are only doing fabrication work for defense right but they are treated as a defense companies and given the valuation of 1560 fabrication cannot make 20% plus gross margin their return on capital cannot be more than 20%. So they can’t get these kind of multiple there has to come down right and there are multiple such examples. So what has happened is it was all narrative based uh valuation that has been given to small cap and midcaps which I think is not sustainable not reasonable has to come down will come down and what about the broader Indian markets do you think broader Indian market when I when you talk about large caps again uh I would say large cap will do well but when I say well it is not going to be like 20% return per year 10x and nifty like yeah so nifty should do I think 10 to 12% return per year or maybe next 3 year, four year. Only reason is right now uh there is lot of liquidity in the market. Liquidity is coming from uh global side also now and it is going to come from the internal domestically also. So only because of the liquidity I feel we are going to get a better rate. If you ask me fundamentally the valuations are not that attractive they are not very juicy honestly but just because of the liquidity I think this can be sustained. Do you invest outside India as well? No I don’t do any specific reason. No, I think there’s no specific reason. It’s just the you need to have more compliance, more structure and all that which I I think there are a lot of opportunity available in India. So I don’t thought so and uh like any other asset class that you invest in apart from equities. No, only% in let’s say how many stocks they should have in a portfolio and small cap, midcap, large capocation for someone who is just starting their investing journey. So for young investors, it’s better to stick to small cap. Okay? Because they have uh they have they can take more risk. They have their entire career with them, right? So they can take more risk. So they should be actually working with small capsu rather than large caps because there the growth will be higher the returns will be better. Uh but obviously your allocation as I said you can manage your risk only by two things uh asset alloc the the allocation and the entry valuation. So you need to be very very strict and discipline in these two parameters. Don’t go for any valuation. Don’t go for just the narratives. try to find actual uh story behind the fundamental behind and whether it is really going to perform right so allocation you can’t just u you can’t mess with allocation you have to be right with allocation you can’t just go with you know uh very high allocation for any small cap you need to have a right allocation for all the companies and second your entry valuation has to be very very defensive you can’t give a very high P multiple as the entry valuation so these are the two advice I would say more than that I would typically say that you know uh this is what I told many times at many public forums uh you should actually focus more on uh building a business understanding rather than just looking at the stock price. So in India everybody in India even globally in the past everybody talks about the wealth compounding compounding of wealth right nobody talks about compounding of knowledge. So I would say that people should actually focus on compounding of knowledge every year you know every year. So every time people thinks in financial term return I would say that try asking yourself knowledge gain in this one year in this one month how much knowledge I gained how much business understanding I have developed right so every day every month every year you should be having more and more knowledge compounding rather than just wealth compounding wealth compounding is a byproduct of knowledge compounding knowledge. So I think people should actually focus on developing the understanding of the businesses and not just you know wealth compounding don’t uh think only about the wealth compounding think about the knowledge compounding rather than stud. Exactly. See there is always a uh what is the difference between a promoter and investor? What is the difference between a knowledge and understanding? Promoter investor promoter is someone who is executing the business. Investor is someone who is putting in capital. Exactly. So investor has a knowledge of business. Correct. Whereas promoter has an understanding of so what is the difference between knowledge and understanding? So people will ask me you know what is the difference between knowledge of business and understanding of business. There is very thin line actually right but investor has a knowledge of business. So he knows what has happened in the past right he knows what is happening right now in the business but promoter will also know what is going to happen in the business in next 3 years next 5 years. That’s the understanding of the business. He know what’s going to come as a challenge to this particular business in next three years, next five years. He also knows what he needs to do to overcome those challenges. He knows where he should be putting his money, right? He should he know how to diversify his business, right? So this is all comes from the understanding of business, right? So what I say is when you basically get to the understanding of business that’s where your return will actually be multiple till the time you are only having knowledge of business you will make you know mediocre returns but when you get to the understanding of a business that is where you will start making the multibagger how to get to that level key you need to do more and more deep dive there are multiple ways everything is available on internet you can go the field visits you can uh do uh you know connect with the industry people right there are multiple ways to do that see what is important is the intent once your intent is clear that I want to develop understanding of something you will do it is all about intent you need to have that intent in your mind then only you will work towards it rights I don’t know. I I think I don’t understand those businesses. Honestly, I don’t understand. If you don’t understand, you can’t appreciate, you can’t value also understanding. So that may be another reason. No matter price to book every industry will have a mediocre business and a speciality business. So mediocre business will trade at X valuation. speciality will trade at 7 2x 3x like in pharma if you look at generic business like sipla it trades at 22 times P multiple right if you look at DV DV straight at 75p multiple just look at the difference this is the range of P I’m talking how do you now you know you understood right mean the range is so huge 22 on one side 75 on the other side so does this mean that DVC is overvalued 75 multiple it all depends upon what is your required rate of return if I am a foreign institutional investor so if you see DV is overly owned by institutions right and they are happy with 10 15% return for many years they are happy even with 12% return for many years right so they will be happy to pay that kind of multiple have you have you never invested in DVS I have average. What what was your reasoning? No, I basically like law more than the only reason. Okay. Yeah. So 20275s but same numbers like for different industries. So different like difference you will have on the lower side you will have 20 P multiple on the higher side you will 100 P multiple like the PSUs right the PSUs will trade at 20 P multiple 25p multiple whereas if you look at the private companies like data patterns or Apollo micro or Axis CAD right they all trade at 100p multiple so see it is all about as I said again the growth opportunities and the return on capital So PEG ratio is something that you will be studying very uh carefully. More than that ROC I think is most important. The competitive advantage is very important. If the company has a competitive advantage, they will get a growth. The growth will come. Amazing. Super insightful conversation. Last question which I asked all my guests. If you were in the shoes of Kushal and if you were interviewing Mr. Jven, what is one question you would like to ask him towards the end? Very difficult here. [laughter] because I think I have given uh everything that I could think of for the investors uh though obviously the framework is something which is very uh I would say very unique and very proprietary though I don’t want to disclose that but other I think we have discussed and disclose everything so but one question you would like to ask yourself anything apart from finance nonwork question what is one question you like to ask what is the what is it uh you basically live for what is it that you live for I live for the passion that I have for the businesses. So I don’t so lot of people ask me uh so I don’t take uh any new accounts in the PMS. So I have kept 25 cr as a minimum check what PMS yes because I feel the the way I invest is very different. I take a entrepreneur view when I invest in the business right which requires very long-term thinking and very long-term vision and you have to stay long-term for a business right so for that I my set of investors are also very different not every investor can appreciate this kind of investing right because a lot of people look for very short-term returns and they want to you know make 25 30% return and you know exit I don’t want to exit with 25 30% return. I am a person who look for 50x return when I invest. So that’s my minimum target. I always see that whenever I am investing in a company, I want to make 50x in 10. This is my target. It may happen that you know some companies will take 12 years to make 50x. Some companies will do it in 8x 8 years, right? But 50x is what my target when I invest in a company. But when you see right that’s where I always say that identifying multibagger is very easy but riding multibagger is very difficult people have the tempt to sell half that is a very very common strategy Correct. Correct. So investing style my investing style is very different. I look for 50x in a very long term. Like 10 year is a long-term period. It’s very difficult to say difficult and going through all the cycle is very difficult. So I want investor who can understand my uh investing style and who are aligned with my investing style. That is the reason why I kept this bar. So I don’t work for uh money or aum or fee. I work for the passion that I get from you know uh in identifying the businesses working with those businesses very closely mentoring those businesses and growing those businesses. So that’s my passion and that’s what I work for but it’s very difficult in this industry to you know have this kind of investing style. Thank you so much for doing this. Had a very very good time learning from you about your companies about the stock thesis and all. Thank you so much for being so transparent and so frank and uh wish you the best for your future. Thanks a lot. Thanks a lot, Kushel. Thanks for all your efforts and inviting me again for your studio. Thanks a lot. Thank you. Thank you so much. I’ll request you to share it with all your friends and subscribe to our channel so that we can give you more value content in the shortest amount of time. So, thank you so much once again for watching this episode and keep sharing all our episodes with your friends and keep giving us feedback so that we can improve and come up with better quality content. And