Where To Invest Now Portfolio Breakdown

TITLE: JBpTfzAmhtk CHANNEL: Unknown DATE: ---TRANSCRIPT--- PNL is a bride with a two-hour makeup and the cash flow is the girl when she has woken up in the morning. Investing to my mind is not about wedding the prettiest girl. Investing is about finding the best value for your money. So the prettiest girl might be horribly expensive. Now the holy grail of investing shank is if you’re able to identify pockets where you will have earning growth and multiple reality and that is where I make insane amount of money. Every business goes through a bad patch. Companies that emerge out of a bad patch stronger are antifragile businesses. Companies that just survive the bad patch are fragile businesses. Companies that go down and never get up from a bad patch are dirty businesses. So we are looking for antifragile. Give you examples of that. The food and beverage stocks are going to target a market which is going to grow slower than the GDP of India. The clothing stocks are targeting a market which is going to grow slower than the GDP of India. The healthcare stocks are targeting a market which is going to grow faster than the GDP of India. But if you look at the valuation multiples, food and beverage is the most expensive followed by clothing and the healthare stocks are relatively cheaper. Benjamin Graham Khaspati he used to discuss all his current picks in the class. So in the spirit of Benjamin Graham, you don’t take the names. I’ll take the name. Let’s start with Healthare Global Enterprises. It is the biggest bet we have today.

Favorite technologies. We still went right. Why? Because we bought it at the right price. That is the margin of safety entire game. Right? If your entry price is good, even if you go wrong in some of your assumptions, you might still end up. Krishna Diagnostics. Why it’s a great business. After Krishna took over the hospitals, the voting percentage from the 20 km radius of that hospitals for my ruling party went up. Krishna is more of a play on that democracy. How do you make your mind most important mathematical variable here is the riskreward ratio% upside down risk reward is 10 is to1 versus let’s say another idea that I have the risk reward is 5 is to1. So the stock which has 10 is to1 will have a higher weight and the stock which has 5 is to1 will have lower weight. RPG life sciences what was your investment process and the business model Sanjiv going group is the Kolkata based group the harsha group is the bomb bombay based so RPG life is bomb the one who is very active on Twitter the one who’s very active on Twitter that’s right hua they have KC Zensar seat and then they have an RPG life FDC limited business mod the reason being valuations are dirt cheap again if you look at FDC’s brand so do you know what electrol is vima laboratories limited so vima is a metropolis healthcare limited same diagnostic story just like so we have thyroare which is a B2B we have Krishna which is B2G Metropolis are B2C what are other companies that you like but you don’t want to invest in now because of valuation and you’re rigorously looking for them to have a dip honest so this uh drug called Viagra was being developed by Fizer as a cholesterol controlling product and this clinical trial Fiser came they gave the drug to the patients and the next morning the scientists were supposed to check the cholesterol levels but they didn’t because they noticed one common thread across patients that all of And that accident became one of the biggest success stories for Fiser. In the recent years, you have changed your way from P&L, balance sheet and index up at cash flow at the large. And you often say to your analyst that cash flow. Yes. Can we do a small activity? So let’s enter a company name called SG our largest holding. So if I look at healthare global what do you see in the first screen? 10,000 crores market cap stock P of 276 times N R sing. We will not go anywhere. So if you look at the P chart of the stock, this is what it looks like. Right? So P&L is telling you was horribly expensive stock. Don’t even come close. Goodbye. Right? Now let’s look at the cash flow of the company. Hi everyone, I’m your host Shivank and we are part of the 01 network by Zerodhub. Together we intend to bring you insights from the top thinkers in the field of entrepreneurship, technology and investing. last one year return I think 41% something and two years was 39% that is correct I’ll explain we’ll go from economy business industry how do you see the economy of the world right now and similar Economy of India right now. Sure. Uh economy of the world, right? So economy of the world is uh past I would say uh it has been all about productivity and efficiency, right? So new tech, automation way to do things better than what you were doing earlier and therefore a lot of productivity. See look uh so what on the one hand there has been high efficiency high productivity which has happened over the last 40 50 years will probably continue as we make most strides in tech. On the other hand you have had a lot of money building. So if you just put your brains to it the natural state of our global economy should have deflationary. Why deflationary? Given a money supply so what is the price of any product? money supply and the quantum of the product gives you the price of a product. Economics 101. Demand and supply. Demand and supply. Now, ideally given that the money amount should have been constant because money was supposed to be backed by gold. So, it should have been a constant. Um, and then the goods have become cheaper and cheaper to produce because they become more efficient, more productive. Actually, the prices of stuff should have fallen over last 40-year period. What has happened? It has not actually fallen. It has gone up. In fact, we have gotten so used to inflation, we have started to believe that inflation is a good thing, right? And and we call it deflationary phase, a scary phase, right? I believe fundamentally is the other way around. Inflation is should be scary because it’s not that your demand for goods have grown. It has grown because global population is growing. But the prices of goods have grown much more than the population growth. So it is actually driven by money printing. Now money printing has happened because we have sort of abandoned the gold standard where we have said that look money is not backed by anything. Money is its own sort of sovereign unit or store of value. But think about it it represents nothing. It represents a promise. It’s an IOU. If you see the some of the first notes produced in the world uh they said I owe the holder certain of gold in exchange of this promisory note. So the last 40 years I think the world has sort of fallen into a debt trap right every economy you hear will have a huge debt huge debt so because they’ve all printed and they don’t have anything underlying the print so they have basically gone into a situation where uh they all can tomorrow go bankrupt and god knows who owns whom what right so it’s going to be a very very scary situation if that happens but I think global economy last 40 50 years has been a story of productivity efficiency and at the same time a lot of money printing. Now what needs to happen given what is happening geopolitically today or globally uh in the economy today what can happen what needs to happen is more austerity we need to consume less the countries need to unravel their balance sheet they need to sort of reduce their debt by collecting more taxes or being less spend thrift right less uh democratic in the approach of spending money but that’s hard to do because if you do that then most of the economies are in democratic democracies they they’ll fall the governments will fall um so they won’t do back then how do you achieve uh a balance right in in controlling your debt and maintaining your economy. So I think the world is going to see some changes and I it’s difficult to predict what changes they’ll go through but I think you’ll see consumerism slowing down if not declining. We will see people becoming more aware of how much they are consuming where they are consuming. the governments will force you to be more aware maybe by taxing you and that’s how your disposable income sort of contracts or shrinks and given inflation if your disposable income is even if it’s constant it doesn’t expand even if it’s constant it will lose value it will lose value because there is the the price of goods will again go up so so what will happen I think in the global economies you’re looking at a sustained phase of uh slower growth slower consumerism and maybe more austerity. So you will see each country being more self-dependent than being you know globalized. 1991 may globalization your entire globalization drive efficiency and all that. I think given the current geopolitics that that will not sustain that will sort of reverse a little and when that reverses it causes inefficiency. So remember the benefit of globalization was efficiency and now that it reverses there will be an efficiency. So if I could buy something if India could produce something for 150 rupees and I was able to buy it from China at 100 rupees I said what the hell I don’t need to produce I can buy from China. Now given what is happening ge geopolitically India is saying if I’m reliant on China I have a problem with my supply chain. Right. Right. I am dependent on a third party and if the third party decides not to produce it or not to give it to me uh then I cannot make that good. the US biocure act. The US biocure act in the pharmaceutical space or you can see China blackmailing us with the rare earth minerals and magnets and what what else right? Uh China not buying soybeans from US and US farmers protesting. All of this is basically the same equation where where you outsource something to someone else because they were more efficient at it. That was the result of globalization and it was a logical thing to do but that required mutual trust, mutual respect. I think what happened after Russia Ukraine is essentially that that mutual trust and respect was lost. Yeah. Now because that trust and respect is lost the efficiency will reverse somewhat. So that efficiency that margin expansion or that from a corporate standpoint a margin expansion from a economy standpoint and efficiency level. So that will definitely need to reverse a little because now I have to come back to producing it at 150 versus buying it from China at 100. And therefore if I’m producing at 150 and still consuming it then either the demand needs to fall because the good has become more expensive or or the inflation in the price has to be absorbed by somewhere else. So I think globally and locally you will see cost of production going up as the globalization somewhat reverses obviously can’t reverse 100%. Um and with falling efficiency you will have inflation you will have lesser consumerism lesser volume growth that you’re used to having and hence things which we can afford not to consume we may not want to consume. If our disposable income you know stagnates short contracts maybe because of higher taxation or maybe because of just higher prices of the goods then you are looking at a picture in the global economy and the local economy where discretionary consumption discretionary highlighted becomes a flattish to declining or slight growth pocket and discretionary consumption includes a lot of things. It can be real estate, it can be clothing, it can be high-end uh jewelry, it can be autos, it can be anything. So globally if you’re looking at a situation and locally if you’re looking at a situation where discretionary consumption may or may not pick up even if it does pick up pick ups a very small pace then you are looking at a situation where where should investors invest then you’re looking at a situation where investors should invest in non-discretionary consumption things which you cannot avoid to consume examples food healthcare uh examples maybe also education right in India education is not considered considered a discretionary consumption in many foreign markets they do consider it discretionary in India it’s not discretionary parents want to father but uniform right so that’s very very clear so I think uh from an Indian market standpoint um education healthcare and maybe even food you know are the sectors where uh consumption is non-discretionary But again trends within food has been that of premiumization last decade may almost uh whatever uh increasing expense we have seen on food is not on volume it’s more on premiumization higher ticket and again in an inefficient world relatively inefficient compared to today uh some of these trends might reverse so the people might actually downtrade from a premium consumption to a semi-remium or a lower-end ticket consumption. Can that happen? Does it happen? See that’s the whole point. None of us since our birth have seen that. Yeah. Because none of us are more than 4550 years of age. And if you’re not Yeah. So if you’re not, you have not seen the time where money printing was not a given. 45 50 years all central banks have been doing it. Right? So you could not have imagined a world where Russia was attacking Ukraine and it was going on for three years. Right? You wouldn’t have imagined a world where Israel and Hamas were at it for 2 years. Right? No, but you are living in that world today. So this is way beyond what we would have imagined 3 years back. Right? So I think the biggest challenge today people like us, you who’s keen to learn and people like us who are managing money for third party, the future might look like something for which we don’t have a playbook. We don’t have a playbook for a ddollarized economy. We don’t have a playbook for a inefficient production higher cost just because I’m not willing to buy from China or just because China is not willing to sell to me. We don’t have that playbook and if you don’t have that playbook then how do you place your bets? You still need to survive. You still need to grow your capital. So how do you play it right? So then you have to think slightly differently. So one way of thinking differently is let’s say buy gold, buy silver because if fiat currency loses all trust, precious metals go up. That’s what we have been seeing let’s say for the past year or two. That’s one way to think about it. The other way to think about it is if somebody like me who doesn’t understand the pricing of metals or the pricing of uh precious metals, I’ll be happier putting my money in pockets where I don’t or people don’t have a uh choice. They have a choice. They will have to consume, right? And uh there then no matter what happens globally or what happens locally, consumption will be there, right? So my money is safe if not growing, right? U and that is where I feel you know food, education, healthcare uh these are areas where you know a lot of money can be made in the future as well. Think of it the other way around. Okay. So we always in investing we always say invert invert the question. So one question is what will the economy look like and hence how can you h your bets right or how can you h yourself the other way around to think is let’s say if nothing were to happen if nothing were to happen what we just discussed if things were just status quo for the next 30 40 years can you place a bet which will give you return on both sides now food education and healthcare will work both ways both ways now I have this overarching field where the economy is going right. So now to make money I would look for businesses in your terms which has pricing power which has bargaining power which has the ability to not choose between growth and margin expansion both things can happen same what kind of other business qualities are we looking for then we’ll come to the industry and the companies absolutely so look uh if I look at the best best I mean let’s talk about the ideal business, right? Utopian business. Yes. A utopian business will have non-discretionary volume growth. It will have pricing power. It will have the ability to pass on inflation and cost to the consumer. Um, it will have the ability to grow its margins and topline at the same time. It will not need to sacrifice one for the other. It will have excellent cash flows and far more important, it will have one of the best managements that you would have ever seen. they would know the trends of the market, the feel of the market and how to allocate capital in the most efficient manner. So that is the utopian stock that I’m talking about. Okay. Right now obviously you don’t get a utopian stock in the market and if you even if the utopian stock exists in the market the pricing is at a point where you can’t even dream of owning it. Right? So um so and you end up making a choice given you know these five six 10 variables. what you do is you end up sort of doing a balancing act because there is an in our investment philosophy there is always an overarching uh valuation framework as well. So investing uh to my mind uh Shivank is not about wedding the prettiest girl right investing is about finding the best value for your money right so the prettiest girl might be horribly expensive and hence I will not go for it because my objective is not to marry a business which uh seems invincible today no my objective is that you have given me 100 rupees and for 3 4 5 years later I need to return 200 rupees to you and I need to tell you that look I’ve you know made money on the capital that you invested with me the objective is not to identify the best quality business the objective is to grow the capital that you have given to me a part of which is to identify good businesses good you know entrepreneurs and good valuations because if I’m not focused on the right valuation even if I were able to identify the right business I will not be able to grow the capital because my entry price is wrong right 5 years back guys who bought HDFC bank oration paid not made money. Yeah. And these businesses are still great. They are awesome businesses. They’re still growing. So why haven’t you made money in the last 5 years? Because you just entered at the wrong price at the wrong valuation and that matters a lot. Right? So just to say that look a European business will have all these qualities. Um but generally businesses that have all these qualities will not be in a zone where we can buy them unless they are completely misunderstood by the market or completely under the radar for whatever reasons which happens once in a blue moon. Mhm. Right. Hence you end up buying businesses which may not have all these five qualities or 10 qualities but may be you know moderate in a couple of them and great in a couple of them you know that sort of one of the industries that you invest in. You’re the king of healthare. Okay. So look, healthare is obviously one of our largest allocations because non-discretionary the second pocket that we are currently investing in is quasi PSU in India right PSU quasi PSU why now PSUs for the longest time were look at uh look were looked at as social businesses now you can’t be social and a business. It’s actually oxymoronal oxymoron. But uh people were thinking that these uh businesses exist to serve the purposes of the society and which was the case because these companies never looked at their margins roe uh never looked at their market share. They were just about you know that I should provide this service to the most uh needy guy in our country right and ideally that was the mandate that these were given. But of late what we have observed by numbers by interacting is that many of these PSUs are becoming efficient. They have been told that you can’t behave in a fashion where nothing matters to you, right? Yes, you still have to reach the last mile. You still have to serve the needy but there is a proper way of functioning in markets like Mumbai for instance which is an affluent market and and you need to show those numbers. You need to have that margin that ROE that growth and I think this is yet to be priced into stocks a lot. Uh just take example of PSU banks just as an example at a bucket level. I’m not naming any certain stock. PSU banks historically used to do 4% return on equity when private banks used to do about 14 13% return on equity. Today private banks on an aggregate do 15% return on equity. PSU banks have increased their 4% to 12%. Same goes for loan growth. PSU banks earlier loan growth was negative sometimes flat sometimes plus 5%. Private banks used to be in the range of 5% to 15% loan growth. Today PSU banks are 12 13% loan growth. So very very close to what private banks took. Um same goes for roe uh you know NPA levels for instance asset quality. So your PSU banks used to be four 5% uh asset quality credit cost and these uh private banks used to be 1 2%. Now both of them are below 1% and they’re very very neck to neck to each other. In fact PSU banks right now reporting lesser NPS than private banks. So we feel that there has been a structural change in the way PSU banks have been managed but the valuation bands of PSU banks were always very inferior to private banks and I don’t think investors have shifted the valuation band yet and so they have not recognized the structural change in the PSU stories. So this may not be linked to our macroeconomic structure of the economy but this is linked to a fact that structurally something is changing within this ecosystem right. So and what I said about the economy right so you have to place bets on both sides you can’t have a singleminded you have to be hedged so if nothing of this sort were to happen if the you know doomsday were not to happen then banks will do well because our economy global economy is used to leverage so much now that they will use leverage to grow and uh if you are now going to use leverage to grow PSU banks are the best reach right they they are almost everywhere and they will be able to disperse much more than private banks will be able to do and they’re now efficient. So they’re not dispersing with their eyes closed and they’re not four 5% NPS there they’re much more disciplined and the problem with PSU banks if you ask me historically was the discipline it was the asset quality that they were running right so if that has already improved what are we waiting for the street is just waiting for so there is inertia so there is this thought amongst the fund managers that PSU bank means 6 time to 1.2 and two time price to book framework right and that has come from 30 years of experience no doubt and private bank means 1.5 times to less four times five times price to book that is again a framework in the head right at this point we are questioning that framework we are saying why if a PSU bank is dispersing as much as the private bank same NPA levels similar roles then why are these PSU banks not going to get priced up and I think that will eventually happen so that’s another bet we have taken right uh Um on the other side we have taken bets on let’s say stocks like um NBFCs and MFIs. Now I’ll tell you why NBFC MFIs today a very unpopular story. If you talk about MFIs today micro finance institutions I think the world will say ah stay away right because of the stories that we have seen because of the stories that you have seen. So you have seen you know ILFS DHF you’ve seen all of that but understand again investing is about the price value proposition. So these NBFCs, MFIs which let’s say 3 years back traded at two to five times price to book today they’re available at half times to 1.5 times price to book. So about a 40 50% decline in the valuation multiple and the reason why they have come off is because obviously the economy is going through a phase where personal taxation has gone up. uh leverage people are now not taking as much leverage because they don’t have enough disposable income to service the loans and hence uh there is some asset quality issues as well but if you look at their bucket the P NBFC’s MFI’s historical average NPA are around 2 to 3%. Right now they’re reporting about 8% which is the highest in their history. Uh same goes for their ROE their average R tends to be between 10 and 12. Last year they reported minus 8. So most of them were losses. So it was minus 8. Now this to me is signaling a bottom of the asset quality cycle. I may not be exactly at the bottom but I’m very very close range. I’m very very close to the bottom. Now the holy grail of investing shank is if you’re able to identify pockets where you will have earning growth and multiple derating both. Satme see if you if I’m able to identify stories that are only multiple getting stories because earnings is not growing but people haven’t understood the business so maybe multiple will go I’ll make some little money some money if I’m able to identify stories where multiple is appropriate but the earning growth will be there so the multiple staying appropriate you’ll make the earning growth I’ll again make some money but the holy grail of investing is to identify stories where there will be earning growth and multiple will go up with it and that is where I make insane amount of money for my investors So that is the objective whether we happen to do it or not time will tell but today we feel MFIs NBFCs are in that situation where it can’t get much worse with them. So we may not be at the bottom as I said but we are very very close to the bottom and if that is the case today we are betting on that part of the business as well where we are saying that look uh let’s buy these MFIs NBFCs let’s let’s keep a watch on their credit rating their asset quality their dispersals but the moment their asset quality sort of starts taking a U-turn that’s when you have earning growth and the stocks which have fallen to half of their valuation multiples as compared to what they were 2 years back these multiples will also go up so I make 100% just on the multiple and then maybe another 100% on when the earnings basically go back up and hopefully in 3 4 5 years I make 200% of the stock which honestly today I can’t find in defense. So defense is a classic example where today multiples are where you know uh best case they can be. It’s purely about earning growth if you’re playing defense today. And I I really like guys who are playing that. But I’m just saying that for me that is less attractive because I’m paying 40 50 60 times P multiple and hoping the earning grows by 25 30 40% to justify that P multiple and hence I make 10 12 15% ROI on my investment. To me that is a riskier bet. To me a simpler bet is to buy a NBFC MFI. Yes, there will be time cost right. So maybe that I invested money today maybe 6 months 9 months I don’t make any money or maybe even when I lose 10 12% capital but if that turns I’ll make a big if and when that turns I’ll make a lot I’ll make a lot of money so it’s a question of when also right it’s not just if I think again if the world goes to doomsday most of these investments will be lost but you know I can’t prepare I I can prepare marginally for that by investing in healthcare and education I don’t have enough stocks and some food stocks right but when it comes comes to if the world doesn’t go to that doomsday then these are the stories that are high beta alpha generators for me and they will generate that alpha for the fund which I think many investors will miss out on I’ll come to the healthcare thing sure but the thesis that you have mentioned without naming a company can you help us understand how do you now since you have the framework how do you go double down and find the right horse to bet on so it’s a very simple thing we do right uh actually we look at the entire bucket so the numbers that I just gave You are at a bucket level PSU buying bucket, NBSCA, MFI level bucket. So we have identified the bucket first. Now that you have identified the bucket, you take the individual components of the bucket and you see what is wrong or what is happening wrong with each of the businesses and then you predict as and when how will you try to predict obviously no one can know for sure but you try to predict as to you know how these businesses can evolve over the next 5 years. And what we do at Incred here is we for every stock we build a sensitivity analysis. What is a sensitivity analysis? So we make three estimates for their earnings. There is a bare case, there is a base case, there is a bull case. So if things go absolutely or things do not change, what kind of the worst earning this stock can report? Similarly, if things improve the way we expect them to improve, what is the base earnings that they can report? And if things improves much better than we expect them to improve, what is the bull earnings that these guys can report? And then we sort of create a 3x3 matrix where we say okay what is the base multiple bare multiple bull bull multiple. So we multiply the bare earnings with the bare multiple. We multiply the base earnings with the base multiple and we multiply the bull earnings with the bull multiple. That gives you a range of nine potential target prices. Bear into bare is one target price and bull into bull is one target price. Now if the bulltobear ratio the upside downside is is 5 is to1. So let’s say the stock today is 100. The bull into bull shows me the stock can go to 300. That’s a 200% upside. And the bare into bare shows me that the stock can go to let’s say 80. That’s a 20% downside. So 200% upside and 20% downside. Asymmetric. It’s 10 is to1. 10 is to one. Right. Mhm. So that’s going to be a superb bet for us because it’s symmetric. It’s a symmetric. Yeah. So if I lose, I lose 20. If I gain I gain gain to one. 200. So that’s how we basically select individual components within the bucket there. And this is one metric obviously. Then we there are other matrices we look at. We look at the secularity of the growth. We look at the management pedigree. So even if so look um there is this framework of Nasin Talib called antifragile investment. Yeah. So every business goes through a bad patch. Not unusual for a business to go through a bad patch. Companies that emerge out of a bad patch stronger are anti fragile businesses. Companies that just survive the bad patch are fragile businesses. companies that go down and never get up from a bad patch are anyways dirty businesses. So we are looking for antifragile. So we are always looking for businesses that even if they are in a bad patch what are they doing during that bad patch so that they emerge stronger they come out stronger now give you examples of that let’s talk about a certain mfi I’m not going to name him so he’s obviously going through a bad patch he’s an MFI business asset quality has uh you know deteriorated at what market cap approximately this is at 3 and a half 4,000 cr okay so asset quality has deteriorated disbursements are low growth is Haro is suffering but he is now investing in tech and AI to ensure that his underwriting by human beings is also being cross-cheed at make a checker concept by AI tools right now what he’s doing will make no difference to his business today right now right now because end of the day you know uh the environment is so bad no matter how well you underwrite you may not you will still have problems uh but when the environment improves if his underwriting skills dramatically improve because he has used AI or has used some you know frameworks processes to uh tighten his underwriting ability when the market turns this guy will become far better far superior than his peers than his peers and then his own past. So when things were good for this guy let’s say he was trading at two times price to book because his ROE was let’s say 12 13%. Now when things go back to that situation when he was reporting uh 12% ROE and hence two time price to book now when the environment improves to that same level now because his underwriting is even better his ROE may not be 12 it may be 15 because his underwritten better than what he has underwritten in the past and hence his price to book which was earlier two will not remain at two. If the ROE improves from 12 to 15 his price to book will be 2 and a half three and that nobody will be able to see at this point they will see it when those numbers get reported but you will be able to see it now because you know what the company is doing in the bad so the idea is to probably uh understand how they are behaving in a bad phase see in a good market in a good phase every company is antifragile they appear antifragile they appear like super superbly run businesses it is environment and periods like this that you used to evaluate the DNA of companies when When you’re going through a rough patch, that is when your real behavior comes out. That is when the real you becomes visible to the world. And you know at that time if you are able to invest, keep your head down, focus on what you can do better when things turn around. I mean that’s how you become a great business. This is very interesting. So the there’s a mark of a man is defined in the bad times right similar for the company. Similar and the closest example that I can think of is so we hosted the promoter of Safari Sudhi Jatyas. Yeah. And he mentioned market was nothing. He invested in people the mindset ownership increased and the company profit and everything was ded was crazy. Obviously, it’s very interesting. Before we go into your area of healthcare, what is one thing that you have realized which the world and your peer fund managers haven’t just like the MFI thought? Mhm. What is what are some other interesting insight about life investing world economy or a company or a stock or an industry that will be too arrogant I think but yeah one of the things which I think is slightly going under the radar at this point for most for most uh participants in the market is uh probably the fact that um as the Indian GDP grows. So let’s let’s give me your data. In 1950 uh US was 2400 $2,500 per capita GDP. Same as US. Same as US food, right? Right. In 1950, US was same. In 1950, US used to spend 28% of their GDP on food, 10% of the GDP on clothing and 3% on healthcare. Today India we spend 25% of our GDP on food because we are similar$24 $2,500. We spent 24 25% on uh food. We spent 12 13% on clothing. And we also spent 3% on healthare. H what happened in US after 1950 to 2020 is that per capita GDP moved from 2 and a half,000 to 75 80,000. Food came down from 28% of GDP consumption to 13. Clothing came down from 10 to 3 and healthcare ballooned from 3 to 18. Now if we acknowledge that what happened in US is broadly what’s going to happen in India maybe not to the same extent maybe healthcare spend in India will never go from 3 to 18 or 16 but it will certainly move from 3 to 78 that’s the assumption yes that’s the assumption because that’s what we have seen already in the past decade in India so a decade back India was spending 2.7% of GDP on healthcare today we are at 3 and a half% so it has already happen yeah it is already happening I’m just saying it will happen at a faster pace as our GDP grows more so if you think about it. The food and beverage stocks are going to target a market which is going to grow slower than the GDP of India. The clothing stocks are targeting a market which is going to grow slower than the GDP of India. The healthcare stocks are targeting a market which is going to grow faster than the GDP of India. But if you look at the valuation multiples, food and beverage is the most expensive stocks today in India are food and beverage. Yes. uh barring the AI tech uh platforms those you can leave out but otherwise it is food and beverage followed by clothing the trends of the world right which is again going to grow slower than India at least a target market growth and the healthcare stocks are relatively cheaper but they are going to they’re targeting a market which is going to grow faster so a company’s growth is a function of the target market at what level is the target market growing and then their own market share in that target market right so if the target market is not growing I can grow my market share will still grow. But if the target market is growing and I’m able to expand my market share, my growth is bombastic. Mhm. Right. So in a market which is stagnant, if I improve my market share, I might grow at 10%. But in a market which is growing at 12%, if I improve my market share, my mark my topline growth is 15 18%. Double double, right? So you’re always trying to identify uh areas where the target market as well as market share has the potential to grow. Now to my mind the food and beverage target market will grow but it will grow much slower than the GDP of India. The clothing market will also grow but much slower than the GDP of India. The healthcare market will grow but it will grow much faster than the GDP of India because incrementally as we get richer there is a limit to how much we can spend on food and how much we can spend on clothing or real estate. Then incrementally many of our expenses go to healthare. You want to live longer, healthier, you want to live better and that is where healthcare steps in. Right? So end of the day we are all flesh and blood right. So we need to take care of it. So I think that is one thing which the street probably has not understood understood yet. Perfect. Healthare the best. So do have you read Benjamin Graham? Yes. So Benjamin Graham Kasbati he used to discuss all his current picks in the class. So in the spirit of Benjamin Graham you don’t take the names. I’ll take the names. Sure. And I want to know the four things behind this. Yeah. Sure. You help me understand how do you how did you hear you hear about it for the first time? Okay. Second, how does it fits into your overarching theme of economy? Sure. How does it fits into your theme of good, great and ugly business? Of course, it’s fitting in the good and great thing. Sure. How? So, let’s start with health care global enterprises which is around the biggest one of the biggest. It is the biggest bet we have today. So SCG Healthcare Global first time how did you hear about it? So how I heard about it is uh so you have a SCG center here in uh Ali in Mumbai. Okay. Close to Wii uh opposite Ali you have a SG hospital there. Um so school okay so we were driving one day so I just saw CG cancer center. So I just I was just thinking in my head care it’s a good idea to have a cancer center because cancer patients have very special needs compared to you know other patients whereas multisp specialy hospitals will have cancer wards but those cancer wards again um may not be very well equipped because the cancer patients have multiple different needs and unless you have heavily invested in cancer you will not be able to provide all the things that he needs. So that’s when I first heard about SG. Um second time when the stock came to my radar was uh in 2020 uh once covid hit. So SCG IPOed I think sometime in 2018 or 19. Okay. Uh I think 18 and then uh when COVID hit my first thought was people were saying don’t step out don’t step out if you have co-orbidities. Right now cancer patient is severely imunocmpromised. Yes. Because he’s given chemo he has given steroids he’s given so many drugs. He can’t he does not have the ability to fight with any other thing if it happens. Exactly. So my initial thought was cancer centers. This is a death nail co right and I started looking at the SCG stock. Now SCG unfortunately they had expanded right before co they had IPOed they had raised capital and they had used that capital to open new facilities right and in hospitals what happens is when you open new facilities they’ll give you losses for 10 for you know 10 months 12 months 18 months depending on uh how fast you are able to scale up and then they break even and then with more patient footfalls the profit comes now had taken debt they had raised equity And they had opened new hospitals and so forget about new hospitals getting hospitals profitable making and hospitals anyways loss making loss and there was leverage on the balance sheet. So I saw the stock price tumbling if I’m not mistaken all the way from 320 330 rupees to something like 75 80 bucks and when a stock falls like that 75 80%. Look the market is in my view slightly trend is friend kind of place right where in excel sheet if you just drag everything to the future uh it gives you a different picture. uh so I think the market had decided that this company is going belly up right uh that is what the stock price was telling that this company is going belly up they cannot survive given that patient foot now I asked myself two questions first question I asked myself was if SCG goes belly up right can India afford that the answer is no so India as a geography we have 0.5 beds per thousand population global average 2.7 developed markets like Singapore South Korea 123 beds We are nowhere close to the global average. Forget about the developed markets. So I said India cannot afford SG going bankrupt. Number two, can there be someone who can rescue SCG from the debt trap? Can they infuse capital, pay off their debt and take a significant stake in the company and then run the business? Any private equity will do that. Any private equity, any strategic would have done that. The expectation was it would be strategic. It could be an Apollo, could be a Manipal, could be a fort, could be a Naray because it has assets on it has assets on the books. So you’re buying assets and private equity. I think one of the biggest theme somebody told me yes diabetic capital private equity ownership in hospitals is like skyrocket crazy in the IVF sector and all across all it will happen more I’ll tell you why it will happen more anyways we’ll come to so sorry to cut your thought please complete both the thoughts Yeah, I I’ll finish that. So I when I looked at it, I said look, India can’t afford the chain like SG going up and SCG has assets. So it’s not yes it is in a debt trap but it has assets. So there are people in my view who will be willing to pay this off and then I spoke to certain people in the industry. It’s not just a single line thinking right you speak to a lot of people around you and I spoke to uh some patients who have been to SG. I spoke to certain doctors who already practicing at SG or who had practiced at SG at some point and I asked them can the center really close down and the answer was no hell no people will die if the concept if that you know uh hospital chain close goes down and then I spoke to let’s say other hospital chains and I asked them why aren’t you buying this asset and many of them said no no looks interesting we are you know thinking about it we are working on it right so then I got to understand that the asset is generating a lot of interest given the price point at which it the asset is generating a lot of interest and then we thought that the price point is good for us to act. Okay. And that’s where we bought SG into our uh this thing. Now how does it figure in our economy framework? Non-discretionary concern. Yeah. Yeah. Cancer fastest growing disease in India and in terms of market cap the market cap at which we entered there was nothing to lose uh for us. I mean other than that the company could have gone belly up but you know we sort of took that risk after doing our work. It’s not that we gambled. We took our we did our took our time. We did our work and we realized that there are many many many stakeholders who are telling us that there this cannot happen. This company cannot go by. Perfect. So now the decision to hold it and to buy it portfolio maximum goes to small cap. Correct. How did you make that decision? So the 3x3 matrix right um two things. So when you look at the valuation at which you’re able to get it versus what other stocks in similar segments are valuing at. So SCJ is a super specialty they do only cancer. Now think about it for a second. Uh you have a max healthcare or Apollo hospital which I listed. They are multis specialties. When they when they multi specialties what they say is I am a one-stop shop right I’ll do everything for you. Great. That’s a great statement to make. But what happens with them? 70 80 20% of the patient flow of max and Apollo are treadmill patients. What is a treadmill patient that patient comes for a day or two or three let’s say maternity patient will come for 2 days 3 days the kid will be born the couple is out of the hospital may not come back ever right or may come back after 10 years for another kid or after 5 years for another kid or may not come back. So if Apollo in a given year has treated let’s say 100 patients out of this only 20 patients are probably patients who will come for sure next year as well 80 patients have come gotten their arm fixed gotten the bo the baby born and they’ve gone back home and they’re not coming back next year. So the next year they have to acquire 90 new patients to treat huh to treat 110 patients and 10% volume growth therefore right. So that’s a treadmill business. You need to keep running so that your 100 becomes 110 120. HCG because it’s treating cancer patients these patients when they have become patients they will be patients till they’re alive. Yeah. So SCG has a base which is far higher sticky sticky and they just need to keep adding to the base to grow. Their base doesn’t evaporate. their base also evaporates because of deaths. Cancer results in lot of death and hopefully and majority but cancer patients will die but then your base doesn’t decline by 90% like it does in a case of specialy like software stickiness very interesting. So valuation business model better globally super specialties trade at a premium to multisp specialty India that is not the case yet scale scale we when we started recording we said that uh mutual funds scale is an enemy now if I’m running a mutual fund scheme with let’s say 70,000 crores of aum mhm and I have to own a hospital I have two choices I have let’s say a hospital XY right with 1 lakh 50,000 cr market cap multis specialty trading at 50 times aida right and I have hcg um 8,000 crores market cap 25 to 30 times eida super specialty and I know this asset is better quality deserves a higher multiple than this asset can I really buy this asset h no I have a 70,000 cr aum how will I buy a 7,000 cr market cap company 1% of the lana if I buy the stock yeah If I have to buy 1% of my AUM is 700 crores worth of stock, SCG’s entire market cap is 7,000. So I have to buy 10% of SCG. Who will give me that? Nobody will. And even if I buy 10%, it’s just 1% of my portfolio. Even if the stock doubles, what do I make? 1% return. Whereas this stock which is 1 lakh 50,000 crores in market cap, I can buy a decent chunk and then if this stock performs, my portfolio reflects that return. Something will move. Something will move in the portfolio. Right? So in our market and this is why alternate assets are growing in our market because everybody every fundhouse is sort of compelled to look at this stock and ignore this which they may or may not acknowledge or may or may not realize that this asset is actually inferior compared to this asset and still more expensive compared to this asset but they’ll still buy this. The reason is liquidity. The reason is not anything else. favorite and tell us everything that you can tell. Go for it. Thyroare Technologies very close to my thing because I host it Mr. Williama. Perfect. Amazing story. Amazing story. Unbelievable. Unbelievable. I would agree. But you’ve met him? No, I met him multiple times. And one of my friends who a very good friend is also on the board of Thyroare. Awesome. So thyroare me again you own close to 17 20 80%. How did you hear about the company for the first time? Sure. What was the thesis and why do you like the business? Right. So the first time I heard about thyroare was doing their IPO. This is I think 2015 16 their IPO came uh sir who was obviously uh here in our office at DSP. I was at DSP at that point. Oh yeah. Yes. So DSP mutual fund. So they came to our office uh with the bankers. He told us about his story. Crazy story. Crazy story as many. Do you remember anything which he mentioned that time? Actually in that meeting he was very u down toned and the reason for that is his wife just passed. Yeah I know I know I know I know his wife had just passed away. So he was actually not in his true sort of in that meeting but he still you know get it to the great man where it is due where you know he took us through the business model. He took us through what he’s trying to achieve. He took us through how the uh earning growth will look like, what the business model is and everything else. So we like the story, we invested um and then you know obviously we made a lot of money in theare while we were invested since IPO in DSP as well. Um then what happened was that during co things changed. So if you know our incred healthcare portfolio it was launched in February of 2021 midst of COVID. Mhm. So when incred healthcare portfolio was launched mrocoid we did not have any thyroare we don’t have a single stock now why did we not own it at that time because during co all these diagnostic companies were reporting crazy margins and crazy topline growth. Now why those crazy margins and topline growth because they were getting the RTPCR and the anti things done right and that was resulting in very high margin very high top line. Now I as an outsider I could see that these numbers are not sustainable. These are driven. Now in in those days if you had come and asked me how long will last I may not have had an answer for you but I would have told you anywhere between 5 to 10 years because Spanish flu lasted for 10 years beginning in 1920 to 30 and their medical science was probably not as good. Now that we have that medical science, I was hoping was to worst and these diagnostic stocks with the earnings driven by CO were trading at 6070p multiples which implied that CO earnings would last for more than 100 years. G 6070 present value. So it has to last for more than 100 years. So I said this is madness. I’m not going to participate in that madness. So even though we launched the healthcare portfolio uh in February of 21, you didn’t buy thyroidare. We didn’t buy any diagnostic stock. We had no diagnostic peak margin. That is a sin. That is a sin for us. So we do not pay peak multiples and margins are at the peak. We say that the margins need to normalize. When they normalize, multiples will normalize and then we evaluate the story again. And that is what we did with the fog guys. So we did not touch it. As and when COVID went the the inevitable happened. your COVID tests uh were gone, the RTPCR was gone, antigen was gone and your margins started dropping, your revenue started declining. For the first time ever in the history of thyroare, they reported negative revenue growth because RTPC tests were gone. But now what business they were doing? They were doing the normal business. The normal blood test, the health packages, the accident driven test and normal infections and all that. Now that’s the main business. That business will last for a 100 years if you ask me. And the multiples now had fallen from 6070 to

2030. So I said market made error on both sides. one the business which was not going to last now is the time to buy and that’s when we started buying tyroare and by that time sir had sold it to Sedat API and uh we said that look pharmacy is a good platform they’ll be able to you know turn around the business huh

so hm invest so a guy who’s running the business is also running a business which is far where he’s not generating cash that’s okay as a thyro shareholder my lookout was can he make money for thyroare and the answer for that came out to be yes why because pharmacy had a lot of customers which they had acquired by burning capital obviously but they had acquired a lot of customers now for Sidasha to sell the tests or for pharmacy to sell the test of thyroidare to those customers was Easy number one. Number two, think about it. One of the largest shareholders in pharmacy is Manipal Group. Yeah. Ranjan Ranjan Pyer. Now if Ranjan Pyer is one of the largest shareholders in Manipal and Thyroare is a diagnostic business that does business with the hospital industry. A lot of a lot of synergy was there. So we said let’s buy it uh for those reasons. Ironically pharmacy business declined after we bought. Okay. Because pharmacy suddenly realized they can’t keep burning cash forever. Yeah. So they had to increase prices of the test that they were offering and hence the volumes took a dip because earlier they were not you know pricing it appropriately. So volumes are very high. Then they started pricing it appropriately. So volumes took a dip that Manipal and Thyro synergy is still not there. H I don’t know why it’s not there and I don’t know if at all it will be there or when it will be there but Thyroap does no business with Manipal Group at this point. Um and this is about 3 years since they have acquired I think but we still went right. Why? because you bought it at the right price. That is the margin of safety entire game, right? So you can have 10 intellectual thoughts, 10 predictions, you will go wrong, right? Because business is just full of variables. But if your entry price is good, even if you go wrong in some of your assumptions, you might still end up making money. That was the thought. Another reason was why the stock had been beaten down was because pharmacy being a cash burning engine. They had bought 71% in thyroare but that pledged the entire 71% to an NBFC to take loan against their shareholding. Now ideally if you ask me many fund managers and many houses will never look at a stock which is pledged. Why don’t they look at it? They say that look they’ve taken they pledged the stock they’ve taken a loan. So let’s say 71% of thyroidare is worth let’s say 2,000 crores at that time and the promoter of pharmacy or pharmacy essentially pledged that 71% stock to NBFC and took a,000 cr loan if you place 2,000 cr worth you get a,000 cr loan. Now let’s say the stock declines another 50%. Which means now the value of collateral goes to,000 crores versus the loan outstanding at,000 crores. The NBC can actually come and sell the entire stock. Okay. to recover its own capital and when NBC comes and sells it doesn’t look at price market level selling and that causes huge volatility and huge dips in the stock right so that is why many shareholders who could be potential shareholders were not looking at uh thyroare we did very small homework we said that okay let’s assume that the worst happens let’s assume that the stock price declines by 50%. So we originally bought thyroare around 650 bucks right so let’s say it the stock price decline happens and let’s say the stock goes to 325 which implies that the margin call will be triggered now at 325 if let’s say the NBFC comes and sells the stock where can the stock go to what we realized was that out of the 71% by the time the NBFC sells about 2 to 3% the stock will go to zero that is the traded volume of the stock so So now if I am the NBFC am I going to be really that stupid to sell the stock? So if that is not a possibility then that pledge doesn’t matter because the NBFC cannot sell. The NBFC just cannot sell. So then we said if it the NBC cannot sell then it is not a risk and we can understand because I’ve come from the mutual fund industry I can understand why others won’t touch it. So it’s not about what you expect. It’s also sometimes more important to understand why other why are others not looking at it. Both ways. Nobody wanted to take a call on that debt trap. Nobody wanted to take that call that this asset will survive. It’s important for India as a ecosystem for that asset to survive. Nobody wanted to take that call. thyroan nobody wanted to take the call that there’s a 71% pledge and whether the pledge will come to the market or not we took that call we did our math we did our work and we said look it is not possible to sell 71% in theare on the market because by the time you’re done selling 2% the stock is zero what do you do with the 69%. What is the objective of selling to recover capital? No. Yeah, I hear you. You can’t recover. Thanks for taking names and sharing all this thesis. But why did you buy? Why do you still hold? Of course, this is not a recommendation, just for learning purpose. But why do you still hold these two things which are 20 and 20 approximately percentage of your portfolio? What’s the future story? Absolutely. So again, SCG, let’s begin with SCG. So they’ve recently been acquired by KKR. Yeah. as a private equity. Um so look at the past acquisitions of KKR in India. So they acquired JB chemicals what is now named JB Pharma. I think they’re sitting on a 37% irra on that company. They when they acquired that company had margins I think of 15 16% IDA. Today they are doing about 26 27% IIDA and they’re sitting on a 37 38% IR in JB Pharma. uh then they acquired Max Healthcare uh where when they acquired the uh IBIDA margin was 8 today 30%. It was 8% when they acquired it and again they’re sitting on some 37 38% ridiculous IR there as well. So SKR as a private equity gives us a sense that they understand the healthcare business in India. They understand how to scale up margins. They understand how to run the business right. So they understand the ecosystem Indian healthcare ecosystem. That’s one reason why we still hold it. Second reason, it’s still dramatically cheaper than the larger Pers which are multispety. So that trade that a super specialty has to be better priced than a multispety will probably play out till SCG becomes that scale where these houses will be forced to look at SCG as an asset because now there’s enough stock available and and this earning growth and multiple don KR will drive the earning growth. Multiple will be driven by as and when more scale more scale comes more and more houses will be able to take the stock it can get recognized very interesting it will get recognized it is already water recognized something so I think SCG is let’s say about 30 times not even 30 28 times trailing the other larger hospitals they’re at 55 times trailing aida 45 times training something 6070 also yeah something at 6070 also and by definition super specialty has to be more expensive than multispety so that journey is still left. So KKR will drive your double digit bottom line growth and top line efficiencies. You just have to understand how to so I’ll tell you what they did in max because so I can’t talk about that but I can talk about how they increase max% margin to 30 that story we know now because that has happened in the past. So when they arrived at Max Healthcare what they realized was Max had everything in housekeeping in house can in house food in house. So sub they had very u a large pool of employees hired to do all of these things for them and KKR did a very simple study KKR said look if we outsource compared to doing inhouse how does it benefit us or cost us okay study study and that’s I think they hired one of these big four uh consultants to do it for them and the consultant came back saying that look if you outsource it you’re going to save like 10% on your margins right which is huge so said okay then why are we giving putting these people on our payroll. Now, because it is a private equity, they can take that call because they’re very very, you know, oriented in the sense that they want to make the organization the most efficient because it aligns with their interest of taking the stock price higher and higher, which is where they can earn a return on their investment. Right? An individual entrepreneur or a family run business sometimes doesn’t look at it from that lens. They look at these people as their kids, their babies, you know, their hires, their subordinates and they get emotional about how to run the business and someone external someone external a different lens, right? So, so I think that is what they do very well. They very unemotional about how to run the business. They say look end of the day it’s the Darwinian theory the survival fittest. So if I’m if the organization is not fit, I’m not going to survive and hence I have to be the fittest and it’s a very capitalist way of looking things but that’s how things are being run and u that’s why I I sort of tell us one two more stories that you heard what Kare does. It’s not just Kare I mean all private equities of course they they all do the same thing. So uh so they have other assets right so KKR has an interest in a max healthcare they had an interest in JB Pharma um let’s say they would globally have interest in some insurers right now they will try to drive synergies from between the assets portfolio of assets so they will tell a max healthcare that okay if you have let’s say for example if max healthcare doesn’t have a oncology ward in Navati Mumbai so they will tell max healthcare navati Mumbai that if you get a cancer patient send them to SG don’t send them to any other cancer hospital. Are there any other things that they specifically did to max which increased from 8 to 35 what we are saying? So outsourcing was one then there is obviously a uh procurement cost rationalization. So what happens is if you run a hospital a chain of hospitals with let’s say 10 units two in Mumbai two in Delhi two in Madhya Pradesh two in one way to do things is that each of these hospitals individually procure what they need to run which is your machinery your consumables your gloves whatever the other way to run it is you do a you have a central procurement team and the central procurement team procures for everybody in bulk they have economies of scale negotiation economies of scale you negotiate better. So I think in earlier days Max was doing individual procurement. Interesting. Each unit was placing their own orders with their own selected vendors. Very interesting. Very interesting. Promoter sometimes has focus on different things, right? And it was a very low hanging fruit for Max to sort of pluck and you can see how they did it, right? Um and that is where they bring a lot of professionals. They bring a professional CEO, a professional CFO, a professional head of operations, COO, right? And professionals obviously again they’re incentivized the right way. So if you look at private equity again KKR or anybody else, one of the best things they do when they acquire these assets, when they bring fresh talent from the industry, the talent obviously has a fixed comp bonus, but the talent major compensation is a part of ESOPS. Yeah. And that ESOP pool aligned incentive aligns the incentive of the private equity and the managers. What happens with these promoters is and again not all promoters I’m just saying. Yeah. Yeah. In some cases what happens with some of these promoters is because they’ve been running that business for a while now they become super rich. They don’t they’re not running the business for the margin or the valuation that relax. We have made it in life, right? We have created a hospital chain with 12 hospitals or 10 hospitals. I have arrived. I don’t need to struggle with why should I bother and I’m okay. So is basically there’s no captain at the ship. Interesting. Krishna diagnostics. How did you hear about it for the first time? Why it’s a great business right? So again uh Krishna IPO during co not a part of our portfolio too expensive huge IPO because they were reporting all those RTPCR and I really want to understand I want to increase my knowledge about business models about industry. Yeah. So I’m looking it from that way. I get it. I get it. So let’s compare thyroid and Krishna. That way you’ll get a better understanding. So thyroare. So there are in the diagnostic industry in India there are three type of businesses you can do. There is a B2C, there is a B2B and then there is a B2G. Okay. Now the B2C is the easiest to understand. That’s your metropolis Dr. Lal’s right. Yeah. Who are selling their test directly to consumers directly. To consumers directly. Um even these aggregators are B2C businesses, right? So they’re selling someone else’s business uh lab to you. Yeah. So these are the easiest ones. B2B is slightly more complicated. That’s your thyroidare where they do have a B2C presence. Cyroare does have a app. It does have a website where you can go and place orders directly. And there are third people also selling their B2C. Yes. But to you. So there are there part there are partners who sell their test to you. Now who are those partners for thyroare? Primarily two kind of partners. One partner is let’s say a hospital like let’s say Asian heart right here. M so an Asian heart may be having patients and when they run a blood test in house they’ll send it to uh so instead of doing that inhouse they’ll partner with thyroare so they’ll send the sample to thyroidare will send the report and the Asian heart will obviously charge the pat let’s say 200 and pay thyroare 100 so that 100 rupees Asian Asian heart makes for the patient uh recruitment and they do that because had they run that test inhouse it would have costed them 150 to do it and they would have still charged 200 so their margin would have been 50 now because they’re giving to thyro are the margin is 100. Now the good question to ask is why does it cost them 150 and why does thyroidare can do it do it in 100. Soare is pricing at 100 which means his cost must be 70. Yeah. Yes. Why is that? Economies of scale. Yes. Okay. So in diagnostics economies of scale very generic term in diagnostics the largest cost of doing business is that of the machinery. M right the reagents or no no no matter how many times you run the machinery the marginal cost is very very low right the major cost is that of the analyzer the the machinery now if I’m able to engage that machinery 24 hours my marginal cost is so low that my cost per sample comes very low but in any hospital when you have a in-house lab that lab will always has such less volumes that that machinery hence runs very low because it’s only the captive audience right so the machinery runs for very low amount of time. Hence their average cost per test comes out very high and hence they have to price it even higher than the average cost to arrive at a marginal sort of profit on their lab cost which is where’s business model perfectly fits in it is like saying why are you doing it because you are doing only 10 samples he’s doing 10 he’s doing 50 samples I I will do 2,000 samples a day I’ll run my full capacity yeah I will do 2,000 samples so why don’t you all partner with me you tell me your cost your cost is 100 rupees a sample if you’re doing it in house I’ll sell it to you 80 rupees the sample you still save 20 rupees by giving it to me and has the same test. So then for you all it doesn’t you don’t need to do it I’ll do it for you. So that’s thyroid that’s B2B. Now a B2 so thyroid does B2B and B2C both B2C mostly online and B2B you know through franchises through hospitals they do it. Now comes a B2G business model which is where Krishna diagnostics fits. Now in Krishna let’s say what do they do? So Krishna I think started in 2011 and they started with something like two hospitals in Himachal Pradesh. Now what do they do? They basically um so government of India owns roughly 50 to 60% of the healthcare infrastructure in our country. When I say healthcare infrastructure, hospital beds, labs, all that put together 60% 50 to 60 to 60% exact number is not known but my sort of educated guess is between 50 and 60. U because in rural markets it’s mostly government. There’s no private and in urban is mostly private, less government but average would be 50 to 60. And they get only they get less than 10% of the paying patients the government of course right because of lack of option uh so it’s about less than 10% of the paying patients. Now what government realized by looking at this statistic was that it is not enough to own the infra. You have to operate it efficiently for the patients to come to you. Now being a government missionary it is next to impossible to operate it yourself efficiently. So they started doing this PPP contracts, public private partnership contracts where they said look my lab my infra you run it you run it you operate you run you recognize revenue you give me a fees for share of me whatever share of that is where Krishna stepped in so 2011 Himatal Pradesh opened that tender so now healthcare is a state subject most people don’t know this healthcare is a state subject so every state will decide it on its own when they want to float such a tender and for how many hospitals so let’s Say Hasarel Pradesh would have I don’t know but let’s say they would have 100 public hospitals government hospitals of that the first tender that they floated in 2011 had two hospitals and the lab inside the two hospital. So Krishna’s job is to operate the lab inside the hospital, right? So inexpish so government guarantees volume. Interesting. Krishna guarantees price. Correct. So in that hospital, how many patients come and hence what is the demand for XY Z number of tests, right? And then you give me a price knowing that what is the capeex that you will need to do to run those tests. Okay. Government volume mostly. So and Krishna has to guarantee the price and the capeex that they will do for for the machinery. So Himachal Pradesh hospital in I think 2011 Krishna’s annual revenue is about 8 crores. Okay. from that state of Himachal two hospitals cut short to today in Himachal they have about 17 18 hospitals contributing 70 crores of revenue okay and Krishna’s total topline this year is going to be around 750 crores so from 8 crores to 750 crores in a matter of 15 years mhm now if you do your work here when we did that leg work we went to some of these states where Krishna started with one or two hospitals and today they are in 10 12 15 hospitals we asked them why first you started with two And second why then you then later increased it as the so these contracts are generally three years 5 year 10 year contracts. So when they come up for renewal you can increase the number of hospitals and volume volume etc. So we asked them why started with two and we asked them why have you scaled it up to 10 15 20 whatever you have scaled it up to over a period of time. So they said we started with two because we weren’t sure how it would work it. We’re doing it for the first time. So we it was a dipstick approach. So we said what went right in the dipstick for you to sort of scale it up from 2 to 20. The response was that the two hospitals that we gave them at the beginning after Krishna took over the hospitals the voting percentage from the 20 km radius of that hospitals for my ruling party went up the government has incentive to because it’s the direct basic hospital the poor maximum the poor. So if the poor are getting a private level service for free and that too in healthcare they will vote. Yeah, they will vote. Very interesting insight. So for me and in our democracy at least my belief is whatever brings whats will work. Of course we have to stay in power. It has to work. Yeah. So for me Krishna is more of a play on that democracy where people will give him more and more business because everybody wants votes. Simple and end of the day it’s benefiting everybody. It is the state which is financing it. Uh it is the center which is financing it. It is a state which is administering it. It is going to the poorest of people and it is going at a significant discount to what they would get otherwise in private labs. So are they able to get this into other states also sir? Yes. So today Krishna is present in 17 18 states out of India and in compet unorganized organized I don’t think they have any significant competition. And I mean see all these Dr. Lal, Metropolis, Hyro, they have also bit for the standards but they don’t win them because the mentality or the mindset required to run a B2G business versus a B2B or a B2C is going to be very different. A B2G is all about frugality. It is about how you stick to the core metrics and business. So that is where the center financing helps. Oh the funds of uh the state level diagnostics comes from the center NHL national health mission. I think 8085,000 budget national health mission and uh that fund the center releases to the state keeps it in escrow. So the state can’t use it for any other purpose other than this purpose. It solves that problem. It solves that problem. Huh. All those machinery government machinery you can’t that we have to deal with in India. Very interesting. So and how did you make this decision? Same riskreward. So at the time when we bought Krishna income tax rate and I think their stock price had fallen all the way from 900 to 500 or 450 because of that income tax rate. Now why people sold that stock had two reasons. Number one because list stock postcoid anyways volume were declining. Revenue was declining. So people were anyway selling the stock and then came the IT raid. So people thought B2G business you know something something was and this and that. So they sold off you know and the stock completely got depressed from 900 to below 500 and and we we said okay let’s do our homework right. So we again spoke to people, spoke to states, uh spoke to some of the health ministry as well and tried to get some feedback on Krishna and you know whether they are doing some ankipanky like this or are they just a normal company working with the government and working with the government will have its own sort of receivable issues and you know whatever and we got a feedback from the industry that everything’s fine with them. So there was nothing wrong and which analyst got you Krishna for the first time? Which analyst? Yeah. How did you hear about it? No, I was interested in Krishna right from the day they IPOed. Very interesting. But the IPO was very very expensive during code, right? So I never touched it. So that’s another thing you will see very common in in AMC. Uh 80 to 90% of the IPOs we don’t touch uh because we feel it’s too expensive and the person who knows the most about the business is selling. Yeah. Right. So we don’t buy. Very rarely you will see us participating in an IPO. Very very rarely and those are exceptional cases. uh but otherwise we generally stay away let the stock do its own thing let the business do its own thing for the next three four quarters keep the stock on our radar if you like the business keep it on our radar and then revail it after 3 four quarters and that’s where Krishna basically got got her 50% portfolio like jubilant farmova first time how did you hear about that what can we learn about from the business model of this company yes jubilant farmova is a very old acquaintance for me in 2009 was when I was at Nomura Nomura did a investment banking I think a QIP raise for them for jubilant life sciences ah which later got de merged into pharma and jubilant tingravia. Uh so I knew jubilant farmova from 2009. Um what happened was very interestingly uh 15th February 2021 my PMS went live. Okay, 14th February was the X date for the de merger of Jubilant Life Science into Jubilant Pharma and Jubilant Ingravia and I knew that at least my math told me that upon demerging the stock will give me 78% return and I missed that deadline by one day because my license came on 15th and the X date was 14th. Okay. I did not buy jubilant farmova immediately upon listing upon de merger because my product went live the next day after the x date the I clearly remember the x date was 14th 2021 of the de merger and my PMS license came through on 15th partial parts but same problem couldn’t buy couldn’t participate in the merch 15 the same logic will not work to let jubilant far list it listed let it trade it traded then they got some USFDA problem in their generic business they they so jubilant farova has five six businesses five six verticals uh one vertical is the radio business which is essentially a part of the diagnostic industry before the mio city scan they give you those iod protein pill pills huh so that your nerves are reflected in the scan so they manufacture that and they’re the only one in uh India who manufacture for us very interesting huh so they they’re the only company listed in India who manufacture for the American market but they are not manufacturing the end product manufactures the end product it uh to blue jet some products they do intermediate some product they do API nonetheless um so Juba a business radio which is a very large scale very profitable but very slow growing business because they have the older radio pharmaceuticals in their portfolio right then there one business they have and again but one business they have is allergy allergy may so in the US and the advanced economies every year there are thousands of deaths because allergy they are nonvenenomous they don’t include any very high potent venom level cure in them. Jubilant is the only company in our understanding in the US that has a license to handle B venom to make allergy drugs from B venom. What is B venom? allergic reaction to that venomous drug can actually stop your reaction. Whereas a normal anti-allergy drug will not be able to stop your reaction. The patient will die out of allergy. So product and they are now going to Europe with the product Europe existing. So they are a monopoly in US. They’ll probably become a monopoly in Europe in the near future which may be 3 4 5 years. And then they had this generic business which is the US A&DA business. US FDA issue anyways they were not making money because of lack of scale and pricing pressure. And now because of USFDA whatever little revenue they add that was also going to work right and the stock obviously plummeted because of this. So if if I’m memory serves me right again. So then I again sat with my analysts and my team and we did the math. We said okay so radioarma allergy generics CRDMO sterile injectable manufacturing businesses let’s value them individually right and let’s assume the generic value goes to zero so no problem when you have a business with six verticals and two of your verticals or three of your verticals are bleeding in terms of pat so let’s say vertical ABC are profitable DEF are loss making let’s say ABC make 200 rupees of profit and DF together lose 100 rupees in loss or let’s say 50 rupees in loss then your console profit looks at like 150 because 2 200 - 150 200 - 50 gives you 150 now the street because they may not be able to estimate these numbers they value the stock at X

• 150 crores of PAT we don’t look at it that way we say that let’s value the company on this 200 cr profit right and the lossm businesses you have two options as an entrepreneur or the owner of the business has two options loss. Yeah. Yeah. How do I value these businesses at that point? I take the book value. So we valued this 200 to street value 150 into 23,000 value 200 into 24,000 crores plus the book value of the lossm businesses maybe another,000 right margin of 50 margin of business and today out of the three lossm businesses two are profit making one is marginal loss Correct. How do you make your mind variables. So the most important mathematical variable here is the riskreward ratio. Okay,

what I told you was metric those percent upside B downside to risk reward is 10 is to1 versus let’s say another idea that I have the the risk reward is 5 is to1. So that the stock which has 10 is to1 will have a higher weight and the stock which has 5 is to1 will have lower weight compared to the stock but both will make it to the portfolio because both are great risk rewards 5 is to1 or 10 is to1. So that is one thing that explains that sizing. Second thing that explains the sizing is the availability of the stock. So even at our level right and that is offering me 101 but I can’t buy it enough right so some stocks we still like it so much that we cannot make it 10% of our portfolio because of the liquidity issue but we can make it 3 4 5% of the portfolio given the liquidity. So then that becomes a constraint that is not a driving liquidity is a constraint. So what drives the uh higher weight riskreward our confidence our confidence in our ability to forecast also. So if I am forecasting let’s say a steel business. Mhm. Right. I know I have no understanding of the global steel prices. So in a steel business my analyst might have great forecasts but I have very low confidence in his ability and my ability to forecast steel prices. But if I’m forecasting a hospital that to cancer hospital, I have very high ability to forecast and my confidence in that forecast is very high right. So it’s not just the exchange sheet number which is the risk reward is also my confidence in that number which is the art of investing as we were talking and then the liquidity which is a very mathematical number and then you know the reputation of the management. So the management might be telling me that in next 5 years I’ll triple the profits. Triple the profits. But in last 5 years they’ve not even doubled. They’re not walking the talk. They’re not walking the talk. They’re just saying something else they’re doing something else. So again the sizing takes a hit. Even if you want to have it in your portfolio because things might appear different to you this time than what they were in the last 5 years. But the sizing will be different. You will say that okay let me wait and watch. Let me take up a small position. Let me watch. If they walk the talk this time around, I can scale it up eventually. So some of the stocks which you see today as a smaller percentage a year or two down the road, there might be a much bigger percentage. But you you don’t read many books, right? No, few few books. H so obviously the super analyst I think that book uh super analyst. Yes. Okay. Uh that book taught me how to how to value businesses. H um then there’s a book by Gotham Badge. Joys of company. I just hosted him. He was in India. Yeah. I hosted him 3 four months back but I have not published it but I’ll publish. Yeah. So I think great guy to talk to very learned guy uh very admirable his work and I read the Morgan Hustle uh memos and his book u psychology of money he’s just launched a third book yeah the art of spending art of so these are the few writers I follow um I think in my view of the world while reading books is important uh what is perhaps more important is to implement the learnings from the books true and I I mean at least from myself and my team I expect that you learn what you imple you implement what you learn yeah it’s a leaking bucket to otherwise see all these guys be it a Morgan Huzzle beaut any guy when they write these books about investing or about life in general um they write from their experiences their successes their misses and hits right and it’s their psychology it’s their frameworks that reflects in those books M whereas uh you as an individual you might be very different or somewhat different from their personality their uh framework your framework might be different from their framework. So there is no one way of making money. There’s no one way of investing. There’s no one way of living. Mhm. Right. But you are unique and because you are unique your framework will be unique. Your lifestyle can be unique. your way of enjoying life or way of spending life will be different. So you have to tailor these learnings to yourself. Now what happens is when you read like 500 books you have read about 500 individual their lives their misses and hits you lose your originality. One you will lose your originality perhaps. Two, you may try to copy what you feel is most comfortable to you and that may not necessarily be the best outcome that you want. I mean sometimes the right thing to do is very uncomfortable. So I’ll give you an example. I read this book by I forget the name of the author. He is a high frequency trader. H right and he has done some phenomenal 37 40% IR over the last 25 years or something. some great IRA just by trading high frequency trades. So I read the book just to understand how do you make money from high frequency trading because that’s something I don’t know. So I was just interested to understand what he was doing. Now if you ask me today can I be high frequency trader? Absolutely not. And that’s not in my DNA. It’s not my job also it’s not in my DNA and even if I wanted to do it I wouldn’t be any good at it. So what is my strength? My strength is the to restrict my impulse to act. So many many people do not understand or underappreciate the fact that not taking an action is perhaps the loudest action you can take. Uh because history has taught us that people who are less active end up making much more returns than people who are active. High frequency trading it’s a different I know different but in in the cash market. Yeah. Right. in the cash market where you’re not doing high frequency trading uh or in in a in the buy and hold situation. Yes. Right. So if you’re hold when you buy a business you’re thinking 10 years, 5 years, 20 years, two quarters down the road, four quarters down the road, some event happens, something happens and and you end up thinking you know what happened in this business. The stock falls 2% whereas you had expected that because of this event stock should fall 10 12%. Then there is this impulse to sell. It should have been down 10 if it’s down only two should I sell and then maybe I’ll buy back once at 10% down generally would happen if you sell when it’s 2% down let’s say 100 rupee stock went to 98 you expect it to go to 90 because of the event but it went to 98 now let’s say you sell at 98 what happens next sometimes is the stock goes to 105 despite that event now as a human at my psychology yeah true 98 stock 105 it goes normal retail investor cycle it goes against your ego to admit a mistake so there are two ways to overcome it I either don’t have that ego unfortunately I’m not that big a guy I do have a bit of an ego philosophy nothing has changed in that yes there is a minor adverse event which has happened right now which can obviously turn the other way around also next 2 months 3 months or two years I don’t know so the idea is to keep the framework intact the idea is to restrict action unless absolutely important so in healthcare portfolio if you see when we have churned the average churn of the portfolio is around 15 16 17% right so our average holding period tends to be about 6 years for a given stock second if if at all that churn has happened when has it happened number one it has happened if the stock becomes too expensive for us to hold so historically we have held Max Healthcare, SDM, Dr. Yeah. Uh you know these are stocks that uh even at one point we existed exited predetermined value threshold was predetermined value threshold we sold it and then things changed the merger happened with care and you know all that announcement happened. Now it’s again within our tolerance framework in terms of valuation. So now we in bought it. So we have this framework where you know the bull into bull as I told. Yeah. So if the bull tobull price comes we look to exit the stock unless fundamentals are meaningfully improved. If the fundamentals have been the same and my bull to bull price is already there on the screen the impulse is to exit take the profit take that money and put it somewhere else where you can probably grow that profit. So that’s one when we churn two when we churn is let’s say we had thought the management will do ABC but the management went out and did XY Z they did something different compared to what we were expecting them to do. So, so then our investment thesis is violated and once your investment thesis is violated, there’s no point in holding on to the stock because the company has proven to you that it can’t be predicted. And you our job fundamentally is to sort of anticipate not predict anticipate the future and try to get a meaningful sort of uh return out of that anticipation. So if the company is not doing what you had anticipated then there is no point in holding on to the stock be it a profit or a loss whatever you are sitting on let’s just send cash it and move on. So that’s what we did in a couple of other stocks. Sequence scientific being one example where it was a veterinary business. We originally thought they would focus more on the branded piece of the business. Uh but the CEO left, a new CEO came and we realized that they were focusing more on the the new management was focusing more on the unbranded side of why would they do that? So so just this uh between branded and unbranded, right? A branded business is extremely sticky, highly profitable but has a huge gestation period to build. To establish a brand, it takes expenses opex and it takes time. Yeah. So there is a gestation period which is a loss making gestation period. For a unbranded business, if your cost is better than the others, the gratification is almost immediate. Yeah. Immediately you get volume share, immediately you get cash flow. But it’s commodity at that time. But it’s commodity. There is no stickiness. somebody else makes it one rupee lower than yours, you run, right? So it depends on the view that the uh management or the business owner takes of the world. Is he building a business for 10 years or is he building a business for this year’s profit? What is he more oriented towards? If he is more oriented towards a 10-year outlook of his company and his business, um he’ll probably go the branded way. he will say okay I’ll take the five six years of pain and then I will emerge much stronger out of it as I said antifragile and uh an unbranded guy will generally want immediate gratification he wants his capital to be returned to him in the next 3 5 years and then even if the business goes he’ll say look this is the profit my capital has already returned from the business so this is the profit that I’m riding so even if it goes up and down somewhat I’m okay so I mean these are two different mindsets none of them is right or wrong. I’m saying from an equity long-term shareholder standpoint, I want the former than the latter. Very interesting. Sure. But my intent is to two things. Number one is to understand your thinking process and number two to enlighten myself about new and new and you know interesting business models. Fair. RPG life sciences. Yes. How and why it happened? How and what was your investment process in the business model? The business model so RPG Lifense is a branded generic pharma company in India. Okay. So they sell branded drugs in India. Now what happens in India is if a patient has fever let’s say in India he goes to the pharmacy the pharmacist uh the he goes to the doctor the doctor writes let’s say do what do you take when you get fever at home? I don’t take any medicine. You don’t take any medicine. But what do you guys take is what everybody takes, right? Correct. So everybody’s guessing, right? Nobody knows the price. Don’t you think that’s a great business to invest in where the consumer doesn’t care about the price of the product he’s buying, right? So that’s a great business to invest in and that is what RPG Lifens is. It is a it was a great business to invest in. The only thing was because RPG life was a very small part of the RPG group. So this is the RPG group run by Hush going. Yeah. So there are two going H and Sanjie. Sanjie Goena group is the Kolkata based group. The Hushwinka group is the Bombas Bombay based. So RPG life is Bombay. The one who is very active on Twitter. The one who is very active on Twitter. That’s right. Hushya. So so Hush Goinka’s group. So if you look at Hushwinka’s group, they have KC, Zenar, Seat. Cad being the largest of these and then they have an RPG life which was a very small company in the scheme of things. So even though it was a branded business, it did not die because it was a branded business but it had no management focus. It had nobody running the ship efficiently and it was a company which is just surviving on its own because it’s a branded business. So in largest brand a transplant drug called Azoran Azoran is given to patients who are undergoing kidney transplants. Okay. the body accepts the organ. Uh then they have another drug called Lomot. L O M O T I Lotil. Uh Lomot is given in people with uh digestion problems. And the currently largest selling drug is a drug called neproin. Neproin is an NSAID. It’s a non-steroidal anti-inflammatory drug. So it’s given for pain. Uh so patients with chronic pain arritis, osteoarthritis, steroid drugs, steroids, you want to give them non-steroidal drugs. post Nepros. So these are the three large brands out there and there were many more but these are the larger ones. So we knew the brands, we knew the market presence, we knew that they were fairly sort of under the radar and nothing was changing for the company. The growth was very very suboptimal. Margins were even more sub-optimal and I think back in 2016 17 their margins used to be 6 7%. Hm iida and for just for comparable businesses branded businesses in India generally do between 30 and 40% IDIA this guy was 6 7% IIDA uh top line go 2 3 4% which was pretty much coming from pricing nothing to do with volume growth and the market in India at those times the market volume growth was 7 8% and then add to that 2 3% price so clearly an underperformer no captain on the ship nothing happening and then there came out a release uh Mr. Yugal Sikri was joining RPG life as a MD or CEO. Now he was already on RPG life board as a independent director. Mhm. Non-executive independent director Yuggle seere’s background. So he has worked I think about uh 14 years with Noatis before that 10 years with Ryan Baxi and before that with other multinational organizations and I had heard of him from the industry in the past as a very uh tight taskmaster. is very focused on uh getting every penny out of the market and you know maximizing profit for the company. So once I heard this news obviously I went back to the market and I asked the industry peers Yugle is joining back. I mean he had retired actually which is why he was an independent uh but he’s coming back into an executive role. What could be the you know reason rhyme and how do you think he will perform everybody said that look he retired a bit early in our view he has a lot of life left in him and if he’s deciding to come back we are very sure we’ll do a great job. That’s the feedback I got about Google Secret. Was there a sole reason for you to get into the company? So two reasons, three reasons, right? Uh valuation was dirt cheap because the company was not doing anything. Uh margins were low, growth was low. So nothing could get worse for the company. And now you have a new captain who was a great captain. When did he join? He joined in 2017 end and if you see RPG’s IITAA margin from 2017 of about 8% 7% IDIA today they’re reporting 26 27% IITA and what’s the story that you’re looking to play out yeah so it’s a management turnaround story here so good business great business model not being run by anybody credible or good enough suddenly you get someone who’s credible and good enough he will make the changes which are required for the model to yield the kind of results that it should yield. See the tough part is building the brand that already existed. To milk a built brand is the easy part. Easy part which was driving from the RPG. Very interesting which is what Yugul sir came and did. He basically built the brand which was already in place and then he added new brands to it which is obviously the second leg of the story. So in RPG I think our initial purchase was at 350 400 bucks. today I think is 2,400 bucks and we still don’t feel the story is over although Yugal has retired now there is a new captain in the ship but the guy who has just joined as the CEO or MD um he has worked with you sir for a decade or so he knows the playbook he’s basically continuing the job FDC lied business model yes as RPG to be honest uh just to give you in FDC I don’t have very high regards for the execution ability of the management okay so You still hold? I do hold. Yeah. The reason being valuations are dirt cheap again compared to what these franchises similar franchises trade at. Uh FDC’s valuations are very very cheap. Um second, if you look at FDC’s past track record, so they IPOed in 1997 at 7 rupees a share. Today they are at whatever 450 rupees a share. So there’s a 23% CAG return for their shareholders since IPO. And also if you look at FDC’s uh brands, right? So do you know what electrol is? Okay. Or OS. OS. Right. Yeah. Right. So uh we’re very one of the very few people who know that electrol is an OS. NC majority people don’t even know that electrol is an electrol because for us and chocolate were the same by and large it is the same people say electrol Nobody says RS electrol it has become such a household brand. Then they have another household brand called Eneral. It is an energy drink. Eneral so Eneral is basically a competitor to let’s say your Sting or your Red Bull where it is a energy drink which is a crazy thing the amount of caffeine that it gives. Absolutely. Yeah. So but some people need exports people for instance you know biggest market of that’s 20 tre for them it becomes energy you’re giving them double the amount of caffeine that you are getting from other things the biggest market is that of course of young then they have zi also become a very popular drug so you Creating brands is a part of uh FDC’s culture and it is not easy to do it time and again but FDC is again one of the very few companies that has shown us that they can do it time and again and this is despite the top management not being very visible vocal or being very aggressive in terms of how to capture the market. They’re fairly laid-back. They are non-communicative. They’re not visible anywhere. you will not see Chan workers you know in CNBC or so despite all those I would say limited drawbacks uh the business model is great the numbers are good balance sheet is clean they buy back every year some stock promoters continuously increase their stake because they sometimes don’t participate in the buyback and they’re a cash throwing machine they throw cash and they have compounded at 23% for the shareholders right so for me that’s a very low risk this significant return kind of again risk return trade-off is good because my upside even if though it’s 25% my downside is also 5% or 10%. The stock generally doesn’t see much of a downside because the business is such so steady and a secular business. So FDC sort of fills that framework where we find a steady compounder as we call it without much of a risk. It’s just a steady compounding machine for us. Vima Laboratories Limited. Yeah. So Vima is a CRO organization. they do CR clinical re uh contract research organization. So contract research organizations are basically the farmers of the world um they want to outsource the latter part of research and development. So what they want to do is u they want to focus on the earlier part of the research cycle in a drug. So earlier part of the research cycle implies proof of concept engineering the molecule getting to see if the molecule works in mice or you know certain other animals guinea pigs and so on. But once that proof of concept exists they don’t want to do the human trials clinical trials and one time you need a multioraphy presence too complex for them or too time consuming for them to get into. So they want to outsource these things. So companies like Vima and Singin which you will ask next uh they both fall in that same bucket where they basically do this work for the innovators for a fee but India innovators India so they do it for the foreign innovators they don’t do it for the Indians so they do it for the fisers for the Amjs for the Johnson and Johnson’s of the world but what’s the mood why is the business coming to them so their mode is simple uh it’s a cost arbitrage so if a scientist sitting out of US charges you let’s say $600 an our centers will do it for $200 an hour, right? And and it’s similar or better results. It’s not inferior for sure. And they have more access to the geography. So they understand the geography, the DNA better. Mhm. So uh imagine an American scientist traveling all the way to India to doing a to do a trial on the brown skin for a given drug. Right. Now his ability to understand the genetics of a Indian would be inferior to the ability of a Indian doctor working on that Indian using the foreign drug. So he will understand the genetics better and he’s he able to run the trial a little better and he’s obviously lower cost. So you get relatively better output, relatively lower cost and that’s the mode really. Now the other mode here is actually the bigger mode here is the trust. Now look at the fisers or the Johnson and Johnson or the of the world. What is their biggest asset? It is their intellectual property. Yeah. Yeah. Right. IP correct. IP that IP you have to share with your clinical research organization, your CRO, right? So that they can use that drug in the appropriate patients. Right? Now just imagine I am sharing my most valuable information with you. So the kind of trust that I have in you is immense. Yes. Now that trust I’ve been able to build over you through decades if not years and decades of experiences with you. That’s why I’m trusting you. For a new player to come and gain that trust for me is possible. Difficult but difficult possible but it’s timeconuming. It’s going to take 5 10 20 years for the new player as well. That’s the mood. So these guys have the trust of their business partners. How did you hear about them for the first time? So, Vima I heard because uh I was one day so look as fund managers as analysts uh when we travel our eyes and ears are always open to see things around us. Okay. So, Vima in 2014 had gotten some uh gotten in some trouble with ran back seat some drug trial had gone and that’s the first time I heard of him. This time around I heard of him because uh they were opening a lab in J&P Mumbai. Okay. Jala terminal huh put port put port so they were opening a lab there and that was very unusual because it is all government land and it’s a private company opening a lab on government land so later we just tried to I just tried to figure out how is this possible so we came to know that the government has given them a contract that do this testing and for that testing the government wants the lab to be on the port because the product is such that it should they don’t want to take it out of the port and then test it they want the product tested then there at the port So once the product goes off the port it dissipates two sort of directions right so then you don’t get all the samples for a given product which is sampling essentially level. This decision was central government or state government. the state government state JP basically I had last of government 14 and then when I learned from them I also spoke to them about what new things they are doing how they are uh executing business and global tailwind to CRO CDMO yeah how is that going to benefit them and then we realized it’s a very investable story and then that’s how we started investing in Ma and it’s always been a great company they had their misfortunes in the past like 2014 and back issue was a misfortune but like I said in any business those things happen happened to them as well. Torrent or Ericiz Metropolis Healthcare Limited. So Metropolis is again same diagnostic story just like so we have thyroare which is a B2B we have Krishna which is B2G. Metropolis is a B2C pick. So brand Metropolis is the brand. Metropolis is the brand. Metropolis and actually Mumbai if you haven’t heard then you are maybe in a pocket where metropolis isn’t present otherwise Mumbai metropolis especially south Mumbai very interesting huh so they are very very dominant in south Mumbai actually um so they are one of the more higherend diagnostic players when I say higher end what do I mean one higher pricing and that is accompanied by higher service okaycept okay very interesting So when you call up a metropolis, they will tell you a time 7:30 p.m. the flabotist will come. He will be at your door at 7:30. He’ll be wearing a cap, gloves, he’ll open a new pack for you in front of your in front of your eyes and thank you sir. Well read, well understood. He when he sort of draws blood, it probably will not hurt you because he’s that well trained, has a number of years of experience. South Bombay population kind of but not they’re not only in South Bombay. They present in many affluent areas but they mostly affluent area lab you exited because of the threshold valution and then again yes because things changed then the merger happened right so we were valuing as a standalone uh chain of hospitals then what happened was am and care merger announcil western and south focused on its own care on its own is north and east focused now when these to marry or merge you have a pan India chain and with the pan India chain came comes those synergies that we spoke of you’ll have your procurement synergies they will have your operational synergies you’ll have your top management salary synergies which all reduces your overhead and your margins will go up very interesting is portfolio are we missing out any interesting company any interesting business model that you have figured out recently many but valuations are not what I like right so for instance recently an IPO came life sciences It’s also a CRO, great company by all means and measures. The valuation is just so high that I can’t touch it end of the I have to make returns. Uh so I don’t believe in my opinion that I can invest in that stock today and make decent returns for my shareholders. So I will not have it in my portfolio. But I admire the company. They have done well. They’re doing well and hopefully they continue to do well. What are other companies that you like but you don’t want to invest in now because of valuation and you’re rigorously looking for them to have a dip life let me think it’s a branded generic company but they do things slightly differently so this Alchem um Alchem is branded generic but they are also active in the trade generic segment in India okay the trade generic segment slightly differs from the branded generic segment But um I think Alchemas are really good. They have that ability like FDC to create brand after brand after brand. Um so that’s another company I really like. But again the valuations keep me slightly away from them because they have both branded and trade generics PMS holding. If you let’s say if you don’t have the fiduciary responsibility this is your portfolio that we discussed correct. If you were a retail investor right how will the portfolio differ? It would not other than the fact that you you will have a four five stock portfolio not a 15 stock portfolio. So the very reason why we run let’s say a 12 13 14 stock portfolio is for majority of our investors uh the volatility that a four five stock portfolio brings will be too much. Yeah. Right. Right. And they will not be able to appreciate the fact for me that is more important that he should be a relaxed individual. Right? You should have a good quality of life if you have been able to invest with people like me. But if he’s getting stressed because key one month portfolio is up 6%, the other month portfolio is down 4%. Then you know it is not a good experience for him if he’s not able to understand what I’m trying to do. So by the way we have at Incred we have two versions of the healthcare portfolio. This is the more elongated version. This is a 134 stock portfolio. This is the diversified this is the diversified uh portfolio of 134 stocks. We have a 4 to6 stock portfolio as well which is where my personal money and many family offices are top five. Very interesting. But top five top equally distributed. No. So wages are again same very interesting. Got it. So at an individual level that becomes too risky. You’re betting your house on one house, right? Different business models G to SCG cancer super specialy to RPG branded diversified enough. So just taking a for this. Do you think shorting is only possible for liquid names, the larger ones? Okay. We don’t have FNO on the smaller names. Yes. So the only way to short a smaller stock is to not own it. Yeah. Which is what we do. So we don’t own some of the stocks that we don’t like. Interesting. So look if I want to go deep and create some understanding on that. So what are the most important things? Sure. So what does mean for us dollarization right versus other currencies including the rupee which means dollar to rupee which is let’s say 90 rupees today at some point it can go to 60 50 40 possibly portfol. Mach, city scanner, reagents against the dollar. that is built into their model. Very interesting. They import raw material. They import prepared product also. See branded gen. They don’t need to manufacture what they sell. They are selling a brand concept. They not selling the product. Yeah. Yeah. Correct. Economies of scale because you understand this branded game. Do you have any insight? Let’s say if a young person is watching who’s not invested interested in making money through stock market. He’s interested in building a business. Is there any insight about brand building? Is there any case story anything that you have heard which can give goosebumps to us? Um okay so this uh drug called Viagra right? So this drug was being developed by Fizer. Figra is FISA’s product. This was been developed by Fizer as a cholesterol controlling product in clinical trials. So and this clinical trial Fiser came they gave the drug to the patients the scientists and the next morning the scientists were supposed to check the cholesterol levels but they didn’t because they noticed one common thread across patients that all of them were at half mast in the morning. So they decided that let’s test for that. Why is that happening across all individuals? And then they realized a drug may or may not lower cholesterol but definitely cures erectile dysfunction. Yeah. And that accident became one of the biggest success stories for Fiser. Viagra has been a blockbuster drug for them. I mean that’s one but yeah look on a more serious note in India when you’re trying to develop brand right uh the two three things you can do right one is uh most of these companies what they end up doing is they end up doing some clinical research on the molecules for instance I’ll give you an example fantastic story JB chemicals rantac so rantac is ranadine where ranitadine is looks is basically supposed to be taken for gastrointestinal distress so if you are not feeling well in your stomach you take renting. But in India today unfortunately what has happened is this inhibitors what do you call them all these azoles pantorazole razole esome prazole uh they are called uh PP inhibitors or something right so this is basically a certain uh uh mechanism of action I forget the name so so these are all inhibitors and these drugs were actually invented to act on stomach ulcers okay they are very potent drugs these drugs you take when you have actually have a ulcer in your stomach. And what started happening in India and across the globe, doctors started prescribing these azoles for a normal distress, gastrointestinal distress. And then in the US became a class action lawsuit where a lot of so in US we have this concept of class action lawsuits. Yeah. Where a lot of individuals can join together and complain against a organization or a body. So they were complaining against FISA that they have mispromoted a drug to the doctors where the doctors have started prescribing all these even for a small even for a small stomach issue whereas it should have been only prescribed for ulcers and because this drug was so potent it had a high high side effect profile. It was impacting the kidneys of the patients and there was more and enough research available that the kidneys are actually deteriorating uh you know by the time this class action also was filed. Now JB chemical here picked up that research. Okay. JB Pharma from India picked up that research that this is happening. They were the guys who owned Rentac which is which is not a PP4 inhibitor. It is not a competitor to the assaults. This drug is actually working where you give it for normal distress. Right? So they picked up this research. They compared the side effect profile of our anadine which is a 70y old molecule to these PP4 inhibitors which are new more potent aggressive products. And they said our product does not impact kidneys at all. For the last 30, 40, 50 year history of the drug, there has been zero complaints on anybody saying there’s any impact on the kidney of the patient. And hence they didn’t only promote to doctors. They created multiple campaigns where they basically showcased that if your doctor is prescribing you these a PP4 inhibitors and if you just have a stomach ache, say no. Say no and take this rant. Hey, JB is jubilant. No, JB uh Pharma is different. You don’t own this, right? Uh we own it. It’s called JB Pharma. It’s a small weight in the portfolio. May not be visible on the top 10. So they they promoted Rantac in that fashion. So I think uh when uh when KKR bought JB, I think Rantac was a 50 60 cr peranom drug for them. Today I think it’s north of two north of 200 crores. I’m just saying it’s a good it’s a good case study in how you ethically promote a brand. When I say ethical promotion, the other way of building a brand is to just give a lot of incentives to the doctor incentives to that happens the subs the prescribers but this is ethical promotion. We have used a scientific research. We have created research. Another way is how created zero doll. Zero doll is a cycllohenac. It is a prod drug of dicophenac. Now dicophenic is an inside non-steroidal anti-inflammatory drug like neproxin I told you neproin so uh dicrophen it’s a non-steroidal anti-inflammatory drug problem diconac has a high side effect profile but it is very effective did some research they created a cycllohenac is a pro drug so it is in the process of developing dicloanac comes ac then if you further process it it becomes afac you own for 10 up to 10% at DSP right Yeah. Yeah. We still own a small percentage but we own. So they created that uh acloanac and then they compared acacloonac and they said acloanac has the same efficacy as dlopanac but it has much lower side effect profile because it is a pro drug. So it has not been more processed to become dicrophenac. It has been less processed and that caught on. So now many doctors who were earlier prescribing droppen act have started prescribing us and that just took stock and the brand through the roof today is I4500 crores mother brand. Mhm. Walkart was a very interesting story right is one story where I’ve lost money. Okay. It was one of my mistakes. Um how what was the mistake? What can we learn from that mistake? Yes. So great question. So WKAT let’s say had three businesses. Yeah. One was their India business. The cash growing branded no-brainer kind of business. The other was the US FDA business commodity high capital intensity but they were doing good at that point in time as in they had good products in the market. And third is their innovation R&D business where there was no revenue but they’re doing good clinical work. So hopefully someday some revenue comes out of it. Now when we looked at Walkart, their US business had gone to the dumps. So USFD had flagged them off as poor quality, poor standard, never uh you know sell to us, we don’t trust you. All that had happened. The stock had fallen I think all the way from 2,000 rupees to 5 600 rupees. And at that point we stepped in. We thought okay let us do our work again. So the innovator arm he’s burning so much cash. Let’s assume someday he will be able to recover whatever he has invested. So book value. Mhm. Yeah. Book value. So let’s take the book value of the innovator arm. Let’s not give him any merit that he’ll be able to make money on it, but let’s not penalize him for doing some innovation R&D. Okay. So let’s give him book value for that. Depend some companies report the segmental reporting some companies don’t do it. So if if the company’s not doing that we do it segmentally. We take a guess. Okay. We take a guess because we know competitive businesses. So we know percent. So we realize generic business this is huge lossm business because sales have stopped compliance costs have gone up. So imagine when your sales drops so your cash inflow reduces and to your costs go up because your compliance cost has gone up. So your profit just completely gets destroyed. So this was a huge loss making business and the India business was the beautiful sort of cash generating business still because India business. So at this point we said that was our assumption and hence we valued this also at book value and then the India business we valued as an ongoing concern right let’s stock price we said let’s buy what happened unfortunately forunately was that Walker to keep its US business alive started selling part of their India business. They sold those brands to their competitors. They sold some brands to Dr. Ready and they sold something else to someone else and they monetized the India brand. They sold the brand to someone. They got onetime cash and this one time cash they again reinvested in the US business. So they were throwing good money after bad money which to my mind was a complete capital misallocation. And what was their understanding of doing so long term? So they thought they thought that once we overcome this USFDA challenge, we’ll be able to make money. So we will not give up on this business. 2 years was not enough to turn around the business. But let’s say 10 years, if we invest more, we modernize the facility, we file more critical products, FDA will be sort of okay with us and then we’ll make money again. So their understanding was let’s take a 10-year view or whatever, you know, let’s try to turn around the ship even if it requires more effort on our side. I as an investor I looked at it as completely capital misallocating. Uh you’re you’re selling a cash cow for a business which is dirty uh in the sense that it’s already lossm and it’s highly competitive. It’s commodity. So I exited the stock at a loss which again which again then things changed. Why? Because they but they took 10 years for them to change it. So the story I’m telling you is 2014. Oh we are in 25. So not 14 16. Huh? We are in 25. That is not visible in this story. Yeah. 4x is a good interesting interesting right. Have you heard about this? So because you mentioned Dr. Ready. I hosted Dr. Gv Prasad. So but publish and I hosted in Bangalore their their facility and he mentioned that around $200 billion of drugs are falling off the patent cliff by 2030 some something around that number is accurate to how do I figure out which horse to bet on who will be the right person who will be the right beneficiary of this patent clip of $200 billion how do I explain this are you betting on this theme no Why clear commodity over supply see the last patent cliff was in cy 13 cy 14 2013 yes at that time let’s say there were 10 to 15 Indian pharma companies that were in the race to file for these products and bring their generic first h today there must be at least 40 to 50 pharma companies doing that in India and then there is external competition so if for a given apple there are 10 uh suitors versus there 50 suitors the chances of anyone getting a decent pie is negligible. That’s the whole point. The dollar value doesn’t matter. It is irrelevant. What is relevant is how many people go after it. Right? Supply side supply in pharma in US pharma specifically because $200 billion is a US number and expiry number demand grows at 1 one and a half%. That cannot drive your value. Yeah. What will drive value if supply shrinks by 10%. Or is supply going up by 10%. That will either drive or destroy your value destroy. Yeah. Yeah. And now if you see that this drug this GLP semagp is the diabetic capital people will have to get it then also you want. No because I don’t know which house to bet on purchase launch GLP1 not all purchase so any drug market you look at India paracetamol for instance we spoke of do croen you know how many brands in paral very interesting it’s a it’s a kind of very concentated market at the injectable engineering or without infringing the patent of can I bet on that at the right yes but right now it’s it does it fall under in my framework no it doesn’t it doesn’t uh qualify for an investment given and the valuation it is at but apart from that is it a good company Sherry is a great company Sherry is an engineering company it is not a pharma company they’re good at making pens they can’t make the drug yes right so they’re making the pens in which the drug will come that is no doubt that they’re doing a good job at it how much price are they able to realize out of the pen now if you are let’s say a pharma company which is launching the GLP1 what is the tougher part of your job creating the drug or creating the pen drug yeah so how much money will you let the pen make interesting. So you won’t buy on that at the right value. I could have bought on that. But why why didn’t you invest in Shelly in the right? Because the stock has shown a patent infringing that I came to know later after the stock line up. I came to know later in designing it. very interesting important segment but I really wanted to you know learn about this P&L is a bride with a two-hour makeup and the cash flow is the girl when she has woken up in the morning he’s one of the very senior investment professionals of our industry Um having said that uh what he meant was what I told you in a different language that the P&L is essentially uh vanity h the balance sheet is sanity and the cash flow is the reality. You also mentioned that in the recent years you have changed your way from P&L balance sheet and indicate cash flow at the last and you often say to your analyst flow yes can we do a small activity can I open any company and let’s understand cash flow then how do you move it you have screener I have screener just open screener which is your favorite tool I use screener I mean oh sorry most used I think is screener Yeah. So, let’s enter a company name called S CG, our largest holding. I follow it. Uh, and let’s open another tab of screen. Mhm. And open a company called uh Shall Hospital. So, if I look at Shelby, right? What do you see in the first? This is healthare. Healthcare global. Sorry. Yeah. So, if I look at healthcare global, what do you see in the first screen? 10,000 crores market cap. Yeah. Stock P of 276 times, right? And ROC of whatever single normal investor we will not go anywhere in f so if you look at the P chart of the stock this is what it looks like right so P&L is telling you boss horribly expensive stock don’t even come close goodbye right now let’s look at the cash flow of the company so 10,000 cr market cap company cash flow is 317 crores so motor 30 35 times cash is what you’re paying to buy the company this is the annual cash flow and look at the trend of the cash flow and then look at the trend of the profit so 51 60 70 90 100 130 120, 220, 250, 280, 300. Very good. Secular straight line growth almost linear. Despite this period having co Yeah. Despite that, right? Look at the working capital negative. Which means that every time Aida grows by 100, cash flow will grow by 120 because the working capital gives money rather than consuming money. So you saw the trend in the operating cash flow, right? Let’s see the trend in the profit.

• 32 + 5 + 2 + 23 17 - 31 -25 - 220 + 39

• 18 + 41 + 49 + 41

Are you looking at the same company or different company? Same company but the numbers don’t suggest the same Yeah. Yeah. at all. Right. Yeah. So if you look at the P&L you’re looking at a company not even worth your time. If you look at the cash flow you’re intrigued what is this business model that doesn’t change. Hm. But then the key question is what is more important for the stock? Is it the profit after tax or is it the cash flow? Cash flow should be should be. Yeah. Definition definition. First line in your finance book it is that the value of any asset is the present value of future cash flow cash flow not profit bad not bad. So if the cash flow is secular growing linearly definitely the business is good. Why the P&L does this profit loss profit loss we can investigate and figure out later but the fact is that the cash flow is solid and good hence this P ratio is doesn’t stand for anything no value same for the ROC and ROE because they come from the earnings only now they are P&L number no yes so if then ROE and ROC I’m not looking at what I’m looking at crocki cash return on cash invested can we see that no screener doesn’t have it we calculate that so crocki what do we look at we look at operating cash flow that’s cash return. Mhm. Right. Then we look at cash invested. What is cash invested? It is capital employed but the cash capital employed. So if there is any goodwill in this balance sheet it won’t come. So SCG has very minor goodwill that much. Mhm. But that will not come there because that is not invested cash. So you look at cash return on cash invested then SCG is actually 12 13% return business rather than the five or 8% that your ROC shows. So the ro show six seven I think five to 8% right? eight and five actually% if you look at crocking now 58 P&L numbers numerator is P&L yeah yeah so so that is one so this stock now if you look at EV bida also because that’s the more popular ratio that people look at for hospitals so today the EV bid will look like 27 times 26 times right okay and the stock seems pretty fairly priced on EVA bida right now let’s take Shelby now hundreds of people asked me again a hospital okay hundreds of People asked me if you can own SCG you should definitely own Shi. Okay. Right. So I said okay why why do you say that? So no brainer normal retail investor will say of course 28 let’s go to cash flow. Did you ask the second order question? Why? What’s the answer? Working capital numbers working capital negative positive. Yeah, positive. But to what extent? Opposite extent completely different. 70 74 75. What is what’s the wrong that these people are doing? He bought a implant business. H see he’s a hospital that specializes in orthopedics. In orthopedics there’s a lot of hip replacement, knee replacement. So you have to buy the implants. He went to US and bought a implant business because he was buying implants from that business and he thought it would be a great business to buy because anyways I’m buying from them so I’m paying them margins. So why should I not buy their business and keep the margins in house? That was the thought. After he bought the business, I don’t know what went wrong with the business. So I mean look at the inventory and the data has gone berserk and can you imagine if your payable days so people don’t know how to read these numbers if your payable days at some point reach 744 it implies that on an average on an average but that’s on an average which means there are vendors you haven’t paid for three and a half four years also at this point if you have not paid a vendor for three and a half four years he can go to NCT any day and file bankruptcy lawsuit against you. They liquidate this guy. Give me my money back. Give me my money. But stock hospitaler is there any forensic understanding that you can make? No. No. So how we do forensics is essentially we look at the subsegment of a given company. For instance, this is a hospital subset. So we will look at 30 40 hospitals that are listed, right? For each of those hospitals, we’ll have multiple uh numerical boxes. One numerical box will be working capital. Now within working capital, we’ll compare their data days. We’ll compare their inventory days. We’ll compare their payable days and their cash conversion cycle. And then we’ll try to figure out who is the most efficient, who is the least efficient. Question the guys on who is least efficient as to like Shelby, why are you so less efficient? But we’ll also question the guy who’s most efficient as to why are you so efficient? What makes you so efficient? In that answer, you get the motor of the business. In that answer, he’ll tell you that this is why I’m able to squeeze my vendor. This is why I’m able to squeeze my inventory. This is why I don’t need same thing those guy will do with me. They will tell me what in behind closed doors. They will also tell you why is your competitor not as efficient. They never say that in public. But they’ll say that behind closed doors. They’ll tell you why his competitor is so efficient. What is he doing wrong? They exchange talent every year. Yeah. And half of these prey on people who work for some other company, right? So they exchange talent. They know what each other are doing and they know the strengths and weaknesses of each other. That is how these conversations begin. So essentially cash flow reality. this billion return 6x 7x because HCG price point can you tell me from this price I will this will probably break my you know valuation threshold and I will look to sell this business. So I told you that uh uh one the right metric to look at at least in my opinion is EV to OCR right and not EV bida or not anything else. So SCG’s EV to OCF today is 30. I think this is Shelby. No, this is actually so uh so in my opinion today SCG is at 35 times or 33 times uh EV to OCF. And I told you that in my view multispety hospital should be cheaper right than let’s say a max a super specialty. So max healthcare is 1 lakh 20,000 cr. Yeah. Cash flow is 1 and a half,000 crores. So 90 times right 90 huh 95 90 times cash that day is 33 times cash so the day SG becomes 100 times cash you’ll sell it but by that time I will be another 6x from here no because the cash flow will grow and the multiple will grow I’m cautious of your time just this is last time rerating may you play is there a way to predict that rerating Right. There is a way to predict the earning trajectory. Relating will happen when it has to happen. Rating is what? It’s a function of your fundamental change earnings. Yeah. Earning growth fundamentals improve relating will happen. Rating is also a function of somebody else saying that he’s willing to buy at a higher multiple than you were willing to buy. That is also rating. Is there any other insightful question that you ask promoter or promoter he gives out more things? Any so to any see promoters are very very smart. They have built a business. We are simply analyzing what they have done. So you when I approach them I approach them in all honesty and there is no tricks. Huh? So my my simple question to them is that look I can become a part of your shareholder list but I need to know certain things before I do. None of this is UPSI you know it’s all publicly available information. I just need to understand your business model better. How do you do business? Why do you get business? Why doesn’t the next guy get business? Right? And why does the same customer come to you time and again, time and again, time and again? And how will you be more profitable than you are today? Will can you be more profitable than you are today in terms of margins and return on equity? And then in those answers there are cost questions obviously uh and yeah I mean that’s about it. Also one thing very interesting thing which we focus a lot on and I think many people don’t is how is the top management incentivized because see every individual will work towards his incentive that’s that’s the human psychology human psychology so that is why you know these PE companies they give ESOPS by the bundle to the top managers because that aligns the interest of the top manager with the interest of the P uh fund. So we asked them so for example I I will not name any companies here uh one of the companies I met about six seven years back when I met his CEO I asked him how does the board decide your bonus h so he said uh my bonus is decided by revenue growth so a year when I generate 8% revenue growth my bonus is x a year when I can generate 12% revenue growth my bonus is 2x 16% revenue growth my bonus is 3x I said okay to to me that was a very inferior way for the board to evaluate Gentlemen and uh so that business today the revenue has actually grown the margin have fallen to half so their profit hasn’t moved but the gentleman was incentivized to increase revenue he sacrificed your margins get it was not yeah very interesting so he sacrificed his margins to get his bonus so then what’s the right way how do you judge cash flow if your objective is shareholder maximization shareholder wealth maximization then shareholder makes more money when your cash flow goes Because that is what an asset is supposed to do. It’s supposed to give you cash flow. And is there this future cash flow? Yes. And as you mentioned that anticipate is there any insight around predicting that future around predicting that about anticipating the future earning management. Managements obviously give guidance sometimes right and all that. We take it with a pinch of salt there because what biased you know he he runs only one company so he’s biased and he’s sometimes even emotionally invested because he has been working on an initiative for 3 five 10 years. So we we obviously listen to what they saying but we don’t take it at face value. We do our own work to see if that’s even possible to achieve. Got it. Last question. Good capital allocation. What separates how how give me an example of good capital allocation and what separates a good capital allocator to a bad one. So good capital allocator will make investment decisions that give him more than the cost of capital. So for instance, if my cost of capital is 15%. I will make only those investments where I can at least make 16 17 18% or more from the invested capital right I mean that is the irony of the life so today if you look at I don’t want to name companies so there is a pharma company 10 year back ro was 34%. Today ro is 13%. Mhm. because of the investments that they have made right now. It’s not that they did not know that these investments were not going to be lower ROE investments. It’s just that that had they not made those investments, they would have had to pay that money out as dividends and the promoter of that company so rich that he would have gotten 60% of the dividends. He’s a 60% shareholder and he had a problem of what to do with that money. He owns like two halves of two cities and he doesn’t want to own more real estate. He has a business which has values in lacks of crores. Mhm. And he says I don’t want the dividend. So I would rather build scale sacrificing than give out that money to shareholders admitting that I have nowhere else to invest this capital profitably. So you take the capital back. So it’s not that simple to keep investing money at more than 15% is not a joke. Scale becomes a problem. scale becomes a problem and some promoters aspire more for scale less for RO they are more about how much so I’m a $10 billion company you get you know you get that kick right so this company last 10 years stock price return is 30%. point to point 10 year ago the stock price was 1200 today I think 1 1500600 right because they misallocated capital the other company which always deployed at more than 15% their stock price 10 year ago was 500 today 3700 good capital allocation management thinking process how do you do that we asked them current business now what will make you invest this capital in a given in you know initiative What is it that you look at? Do you look at payback? Do you look at IR? Do you look at ROE? If you look at ROE, how do you calculate ROE? Right? And more than that, if the incentive is going to be top line, correct? Incentive cash flow. It’s a thing too different business question. It’s a long life. We’ll learn from you again. So let’s go for the rapid fire. Who is your favorite fund manager? My favorite fund manager Anup Shari without a doubt. Uh he’s was my mentor at DSP. Mhm. I learned a lot from him and I still admire him. I think he’s a great guy. What is one thing or a secret that you would never say in a public? Why would I say it now? Um If there has to be innovators right but if you were to bet on a company the management or anyone it has potential I I would say I would say Glenmark Glenmark farmer I was a former first yeah why why do you say that just the passion that Glenn has for innovation Sana is in Bombay yes their office is here And very interesting. Have you met him? Yeah. I used to directly report to him. Oh, very interesting. Have you Is there any insight that you have learned from the man? Yeah. Yeah. I mean lot of things. He’s a man of passion clearly. Right. So again keeping the investor lens aside. I think uh Glenn Selda is a man of passion and he has that passion that he wants to become the first innovator based out of India. He wants to have the first indigenously developed and researched novel molecule in the world. Um, and I think he’ll do it because he has been at it for 20 years. He’s not gotten it there yet. But the guy has fire. Your favorite fund manager global fund, but one fund manager and I think I can call him a fund manager that I really adore is Morgan. Very interesting. He rarely gives interview. I’ve watched his recent interview that he did with Sonia. Um, he’s a well-known name. Yes. Tell us about an investor who is undiscovered to the public eye. He’s a young person but you believe he will be a great investor. So I had this colleague in DSP. His name is Koshel Maru. Um he was the auto and cement analyst at DSP. He left DSP and he started managing his own wealth. Now he’s joined hand with two of his dear friends and they have opened a small Mhm. U money management outfit. Mhm. I think Koshell is someone with a very levelheaded, you know, a very level-headed human being and good analytical skills. So I think that’s a great mix. So I think Khell would do really well. Honest answer. I don’t want a diplomatically correct answer. Now fair uh look uh to my mind uh the ability to start your own fund uh begins when you have about 15 20 cr rupes to burn opex okay because uh as I told you the MC business takes five six seven years to break even and the opex in those five six seven years comes broadly road let’s say soly mistaken I I wish it was the case but nonetheless the Point I’m making is that I have a money in my mind that this is the corpus I need for my wife and my kids to have a good life. Okay. Once that is done then I need 15 CR to burn. Once that is done 10 to 15 years depending on how my capital incredad zindabad is if you were to predict one thing about future outside inside health about India outside world what is that one thing that you would predict we’ll be spending much more on health than we are spending today much much more whether the rich people will spend on longevity or the middle class will spend on preventive healthare or the poor will spend and on their on their survival survival but everybody will be spending significantly more on healthare what is one thing you often find yourself telling to the young investors out there the analyst so I I tell them to learn how to read financial statements start from cash flow go to the P&L later number one number two I tell them don’t be in a rush you know people try to often uh correlate speed with efficiency Mhm. And they’re different things. Speed is just getting the job done and efficiency and effectiveness are to get it done properly. Mhm. So I push them to be more effective and efficient. I do not push them for speed today. I say speed will come because end of the day it’s slightly repetitive in nature. So you keep doing the good work time and again time and again you become more efficient at it. So efficiency and effectiveness let’s put them in two different buckets. Speed is basically same as efficiency. And effectiveness is how good is your work. So I push them a lot on the effectiveness side. And I tell them efficiency will come with time. Not don’t bother about it. Brazil or Argentina. What was much thing to do there? Yeah. Brazil. Yeah. Argentina. You must see a local football match. You will see the passion those people have. That sport is crazy, right? So second Brazil definitely go to Rio de Janeiro. go to the kopakabana the two beaches uh they’re like the ba andjuna of Goa uh next to each other and beautiful beaches beautiful people they live life to the core uh they work hard they party harder and uh food might be a struggle if you’re a vegetarian uh Brazilians mostly depend on meat oops but you will have fish you’ll have you’ll have rice and you will have pizza and all that sandwiches This will help you to survive but uh yeah food options will be limited vegetarian food global company that you know that you are very passionate about that you are very bullish about absolutely so there’s this company called intuitive surgical so by the way yeah so intuitive they make the dainci robots so India globally robotics surgeries are going up. Why are they going up? For two primary reasons. Number one, uh in a robotic surgery, the uh recovery period is faster. So what do I mean by that? Laparoscopy. Laparoscopy. So the doctor takes two straight arms and he sort of makes the four holes in your body and he will use those arms through these four holes to do whatever he’s doing inside with a camera plunged. or doctor in arms kara. So that is what a laparoscopy is. Now that has become slightly outdated because of Davinci. Now what is Dainci does? Dainci does only two holes. One for the some nowadays in fact one whole robot baga it does only one hole. That hole that arm will have a camera and an arm which is 360° maneuverable. Wow. So you don’t need to have a second hole. So that one arm will show you what is happening and we’ll do what is to be done and we’ll come out with the procedure done. Now the difference between having four holes in your body versus one hole in your body of course is the recovery period. Yeah. Yeah. So four holes take that much time to recover. So economic productivity of the individual goes resumes in day three after a robotic surgery. In laparoscopy it might take day six, day 7, day 10 which is a significant delta significant delta. So that extra that you pay for robotic is much more than justified. Huh? When I invested it in DSP in 2018, I think very unknown story, very little known story. It has been fairly recognized. Um company I like internationally a company called Idex Labs. Uh they make diagnostic equipment for veterary diagnostic tests. Veterinary to animals. Yeah. Mhm. So that’s again a very differentiated market. IDEX is again just like intuitive is leaps and bounds ahead of its competition uh in this area. Idex is leaps and bounds ahead of their competition and again veterary the view on veterinary is that as fertility rates are going down globally and people don’t want to have kids even if they’re fertile veterary will be a fast expanding market. There is a word called dink. Yeah. Double income no double income no kids right. Uh and with pets. Yeah. With with with pet. Fastest growing category. Fastest growing category in India also. Right. And globally be fastest growing. And when these guys when they have a pet that pet is literally their child, right? I got to Bombay. Bombay is a cat city. It went to a friend. The cat got the cat got I was it was it was really good to see that the human is you know so worried about their shark tank if you see shark tank history the biggest thing that has made the highest return is this cat test very very interesting very interesting yeah but inst Right. So you our PMS mandate is purely Indian listed equities. Very interesting. But company valuation threshold. Intuitive today is more expensive than I would like it to be. IDEX falls. Idex is still fairly any other global company that you are you know that you just love unhidden story right now. Undiscovered. Undiscovered. Undiscovered. like regeneron I like at this valuation but it’s not an undiscovered story okay the stock has fallen for wrong reasons which is why it’s a good buy today regeneron but I I don’t think it’s an undiscovered story so undiscovered stories actually because my focus is also the Indian market I don’t get that much time to read globally so undiscovered stories but these are the discovered but still value picks these are rapid fire last three four things very quickly go for it the promoter that you have learned from most God g from Your favorite investing tool. Tool you mean what? Enterprise value to operating cash flow as a valuation metric. Okay, that is good. Tell us about a tool also. So tool basically tool tool or knowledge resource? Knowledge resource that you as a fund manager my LinkedIn network. Mhm. I mean you should just talk to people if you want to invest and talk to people in that industry and industry and industries which are either customers or vendors of that industry. I think many people think of investing as a desk job. I I would harshly disagree with them. I would say 50% of investing is talking to people and talking to people from various industries. Um I was just curious to know that um just learning and understanding AI also. Is there a way that you have thought internally how to how can you train your framework on AI? analysis, data, uh, Excel sheet modeling. So, we’re trying to use AI in these areas. The grant work that the analysts were supposed to do, they’re trying to sort of put it on AI so that they can do the more productive work rather than the grant work. But do you think it would be an interesting proposition? It could be. I I went to US. I was in New York. I met the guy who this guy was the managing partner of Stanley Renilla. Okay. He’s an Indian started his part. Uh so he has started doing this and I I see nobody in India doing this. Everything that he understands he has created a digital twin sources. Now he’s believing that after some time this will be a sparring partner which will be much better than ch and stuff. So look uh as I said at least in my opinion uh investing is part AI part science I can always put the science on AI that’s where the AI will be but the art is the very interesting healthare indry who would you rate I know you’re the one of the best person too and that really depicts in your but who do you think healthare who are your peers who really understands healthare industry you want in the fund management ment community or analyst community or anybody anybody Prashan god sir uh so pranchchan goda pashan goda guys I think they understand the healthcare landscape globally extremely well very interesting and see landscapes promoters I mean in my view with all and are they doing that with also obviously but you own very less ofk I own very less because I don’t find the valuation right but the fact that despite I don’t find the valuation right I own it is tells a lot lot and uh last thing so earlier I was doing promoters only tell me a couple of other industriesry This is my personal question. Sunrise industry sunrise indry. Yeah, as I told you D I G A N T I think he is part of a firm called Green Edge. Right. So if you reach out to him on LinkedIn or Twitter, he’s there on both. Green Edge. Green Edge. Huh. So he he does very very good job on the NBFCI space. He’ll give you insights which you otherwise would not have thought of the other sector industry and the best person. Industry and the best indrying at this point from a investing angle. Yes. From investing angle or I’m figuring out things in life. Yeah. Maru will explain to you about cement like no other person can. Oh and cement is um I I met a couple of investor. I met Govin Parika. He’s very Chennai based. He started with zero capital right now 2,000 crores and his second generation Chennai is just came he’s bullish on cement cement you’re saying correct infrastructure cement is a good I agree with that logic but koshel again will explain to you right from the limestone to the raw material to what is the moat in the limestone and the distribution was so koshel is actually good for both cement and autos. Mhm. He’s a guy passionate about autos and he used to cover auto as a sector at DSV NBFC cement auto sunrise industry but this has nothing to do with stock market doesn’t matter I come from a family of teachers I love tech I hosted all the investors all the big players from juice from topper company so then there is this guy called Ashwini Baj’s based out of Kolkata I have heard about him uh Ashwini Bajach uh he runs this firm called leveraged growth. Is he on YouTube by any chance? He would. I would assume he would be. He’s an ed guy. Huh? He’s an tech entrepreneur. What makes you think he’s worth learning from? He’s doing a good work. I mean uh is now I think he has now got the highest market share in CFA FM in India. Ah very interesting. Huh. Uh, and at one point the guy So I also did my CFA and I did it from the guy who was earlier the market shareholder. So I know that guy was good but this guy must have been really good to sort of overtake him and I’ve heard good things about him. So when I go to hire people, if I see CFA, I don’t go to him. But if I see CFA, I ask them everybody’s like data center. I want the sector to cool off before I jump into it. I think it’s too soon. uh some of these themes when they come to the four they just get hyperpriced and I think data center at one point will become a commodity exactly so it gets hyperpriced so actually more interest if you ask me oh my god that’s so true I’ll tell you so I hosted I mentioned all Indian billionaires one of the billionaire Ram Shri Ramsa Ram Shri Ramsa invested in Google and the Google was not even registered so he’s the founding board member he’s still the board member he’s mentor to Larry and Sergey I hosted him not published uh it’ll publish next year I think um board membain Guess indry power supplyain guess I don’t know guess no it’s a new age thing data centers Bitcoin Bitcoin mining bitcoin blockchain miners blockchains huh you know the stargate project stargate billionate who’s the company executing iso was a blockchain minerigain invested in that company but I’m hoping that this is a applied applied digital is the two three companies that you’re interested power generators distributors so genution both sides because so we trying to see what is the best value play there. That is where we are stuck at this point. But you have not figured out one not interesting player. Very interesting. Very interesting. But this will be a good this will be a good theme to play. 0% exactly US may household consumption of power has gone up. Industrial consumption of power has come down. Yes. Factories have shut. Yes. Right. China household at this point industry footprint is improving and disposable income. So power consumption is directly proportionate to discretionary consumption. Yeah. Right. So I think India future if you believe that our GDP is going to recover and we going to go back to that 10 12% nominal GDP growth power will be a great sector to play it add to that the data center of India is very interesting but whatever you say the opposite is also true so recently I had this interaction with urban company he said is earning 1.5 lakhs and he’s like a 25 year old kid and just by massaging a crazy amount but go for it. Thanks a ton for sharing this being so open. I learned a lot. I can’t tell you and hopefully