Sadhana Series: Mr. Ramesh Damani (Part II)

13/07/2021

Hello Dear Reader,

In our last newsletter, we looked at the early life and investments of Mr. Ramesh Damani.

Today we will talk a little about his process and his some hits and misses in his investment journey. I have taken references from the book Masterclass with Super Investors1 & publicly available information. The link to the book is in the footnote. I recommend everyone buy this book and read it.¹

Photo Credit: Blog, Finology²

Portfolio: Hits & Misses

Pre 2000, over 90% of Mr. Damani’s portfolio was in technology stocks.

Post 2000, Mr. Damani started investing in new themes and new ideas. He sat on cash in a large part of his portfolio for quite some time. We can also say that he was trying to expand his circle of competence. He believed in buying new themes and ideas in bear markets and being patient, riding them in the bull markets. When Mr. Damani invested in these new themes, he did not just look at the themes, he also compared them to their global competitors and saw the market share & market cap of the global peers. As he has an advantage of exposure to living in the United States and had invested there earlier, he could not only think in Rupee terms but in terms of USD as well.

When he invested in McDowells, there was a lot of negativity about his investment in the company citing corporate governance issues. But he saw that a company, which was 50% of the Indian spirit market was available to him for only Rs. 160 crores. The added advantage was that he was getting over 2% dividend yield on this company. The stock went up from Rs. 40 to Rs. 4000 for him. He regrets not buying more stake in the company as his allocation allowed for the same.

Mr. Damani feels that it is our middle class mentality that often stops us from betting big and backing the truck when we spot a great opportunity.

Mr. Damani also made two investments in PSUs in the early 2000s and rode them till the 2008 bull markets. They were trading at very small market caps, had good dividend yields, were strong asset backed companies with good order books and were L1 & L2 bidders on government projects.

Are you noticing a pattern yet? lets continue.

In late 2000s, Mr. Damani invested in a bunch of Media companies. We will here talk about his investment in TV Today.

We can all agree that India is a Hindi speaking nation. When Mr. Damani made his investment, TV Today was the leader in Hindi news and had been since last 15 years. It was available to him at a market cap of only Rs. 350 crores. He compared this company with the American counterpart, Fox News. He felt that the Indian market had not matured yet and there was good room to scale. This investment has also done reasonably well for him.

When Modi government first came in 2013-14, Mr. Damani bought NBCC and Engineers India with the premise that infrastructure spending would be the prerogative of the newly formed government. We will here talk about NBCC

The company was then available at a market cap of less than Rs. 1500 crores, had 600 crores cash and advances, had a decent order book and paid decent dividends. Mr. Damani bet big on the company, but he did not back up the truck on this investment. He feels that his middle class mentality is what defines him. Mr. Damani feels that the trouble with investors backing up the truck is that the outcome is uncertain. He does not want to take undue risks. He is ok with not having great returns on his core investments as long as he does not suffer a huge loss.

Mr. Damani lost good money in MTNL. He considers it a graveyard for value investors. Mr. Damani bought this company in the middle of the Telecom boom. The company’s business kept deteriorating and technology advancement and the private sector ultimately killed them.

His key learning from some of his big hits and misses has been the importance of having independent thought. He feels that to be great in stock markets, one has to find and pave his/her own path. We cannot piggybank on other people’s thoughts and convictions. He has learned from many misses that opportunity cost on investments is a big factor for an investor.

Process

Mr. Damani likes to read a lot. When buying the company, he sees the market cap of the company and sees how the market is valuing it. Then he sees if he would buy the entire company at that market cap. He has a certain market cap up to which he can analyze companies. His core strength is finding and analyzing companies below Rs. 5000 crores. He feels that when he is more bullish on the company than the management, he is getting a great bargain. He also sees how the company can perform in the next 10 years. He focuses on market share and also converts the numbers in dollars to compare with global peers. He feels that there are companies whose advertising budget is above Rs. 4000+ crores. If you can get a company which is a dominant player in its space and has a low market cap or an enterprise value, even lower than a listed company whose advertising budget is around Rs. 4000+ crores, and you understand the business, it can be a steal deal at times. Most times, if people are disagreeing with your thesis, then it means that you are on to something.

Then there are companies that you can buy and hold forever. For these companies, the opportunity size is too great or the terminal value is undefined. If it is evident that a company can grow at 30-35% every year, then it will never be available for cheap to investors.

Normally, he is tracking close to 20+ companies. During bear markets, he is tracking more companies. He only sees the quarterly earnings of the companies that make up the largest chunk of his portfolio. If he has invested in a volatile company, then also he looks at the quarterly earnings. Mr. Damani feels that the gold standard in reading annual reports is reading three annual reports everyday. He is not able to do it and reads two ARs per week. He also reads the annual reports of international companies. He tries to meet one management per month. He feels that the hunger of the management, the passion for building the business, the level of skin in the game, past track record, body language all play a role in judging them.

Mr. Damani has two parts to him. There is one part to him which looks for stocks which can go up 10x-50x-100x. He is constantly looking for such opportunities. He feels India gives such opportunities. Then there is the part to him that takes out some chips from the table and puts them in safe compounders.

A good investor needs only a few hundred baggers in his life to prosper. If we just stay within our circle of competence, do our homework well and have an independent though process, we can do reasonably well in our investment journey.

There will be many stocks that an investor will miss in his/her investment journey. But there is no point in regretting that.

Our main goal should be to double our money every ~3-4 years.

If I were to ask you dear reader about Mr. Damani’s process, what would you tell me reading the above examples? I can tell you what I have observed so far:

• He is an avid reader

• He is a strong believer of having an independent thought process

• He believes in staying within his circle of competence

• He looks at companies wearing the hat of a businessman

• He starts with the market cap or enterprise value (The lower the value, the better)

• Generally, he does not analyze companies over Rs. 5000 crore

• He likes it when he is more bullish on the company than the management

• He does not look backward but looks 10 years into the future

• He focuses on market share

• He converts numbers to international currency and compares the company to its international peers

• His focus is on doubling his money every 3 years, whether it is a bull or a bear market

• He believes in meeting one company’s management per month and reading atleast two annual reports per week

• He does not track quarterly earnings of a company unless the investment is in a volatile company or it is part of his core holdings

I hope you enjoyed this newsletter. In the final part of our Sadhana Series on Mr. Ramesh Damani, we will look at his 2008-09 experience, how he manages risks, his thoughts on selling, his thoughts on bear markets and how he identifies them, his learning from his mentors and circle of friends and more.

I hope I was able to add value to your investment journey through this newsletter.

As an ending note, I would like to give out a special thanks to Mr. Vishal Mittal and Saurabh Basrar. I called their office to use extracts from their book and they were very kind enough to give me permission.

Rgds,

Ayush Agrawal

For any queries or feedback, do get in touch with me on valueinvestorayush@gmail.com

Disclaimer: The author of this publication is not a SEBI Registered Advisor or Analyst. The information on the company and its promotor mentioned in this newsletter is provided for information purposes only. It does not constitute an offer, recommendation, or any investment advice to any person nor does it constitute any prediction of likely future movements in the company’s stock prices or business performance. It should not be used as a basis for any investment decisions or as a proposition to buy or sell any securities. Please seek advice from a registered financial advisor and do your own due diligence before making any investment decisions.

1. https://altaisadvisors.com/masterclass/book/

2. https://blog.finology.in/success-stories/ramesh-damani-investing-story