Session by Mr. Durgesh Shah -2nd Value Investing Pioneers Summit 2018 , Delhi

Contributed by: Jatin Khemani, CFA

Notes for Session I – Durgesh Shah, Catalyst-FLAME Investment Lab (of Flame University, Pune)


What matters in Investing?

  • Mistakes are a great teacher.
    • “The only real mistake is the one from which we learn nothing” – John Powell
  • Investing is all about: Management, Business, Valuation and Self
  • Management: In India, management is more important than business as compared to other countries
  • As Ramdeo Aggarwal says, business is multiplicative of management, therefore, if management is zero then everything would be zero.
  • He beautifully described a management in a simple quote “A bat is very different in hands of Virat Kohli than in our hands”
  • Valuation: Price is very important. As Howard Marks says, everything is good at a price.
  • Self: Above all, an investor must understand himself i.e. what works for him and what does not.

How markets value management?

It is based on various factors:

  • Trust: Management needs to be very trustworthy. Longevity of leadership or employees in a company is very crucial as it helps to think about the competition.
    • Example: In TCS there have been only four leaders in last 50+ years. Contrast that to Infosys.
  • Culture: Ability to attract and retain talent:
    • Example: HDFC Home Loans started by a person who himself didn’t own a home. Company has given home loans to 63 lac people over last couple of decades.
  • Focus: 95% Forbes Billionaires in the US made their first billion dollars from one business.In India, promoters have a tendency to keep diversifying in current hot sectors and that way they end up diluting focus and destroying capital.
  • Example: Munjals (Hero) have done very well in this regard by staying focused on their core competence and scaling up their 2-wheeler business:
Year Vehicles Sold
1986 43,000
2018 75,00,000

Hero never tried to enter into 3-wheelers, passenger cars or commercial vehicles. Even post the termination of Joint Venture with Honda, Hero has continued to do very well.

  • Scalability: Indian promoters generally find difficult to scale the business. In the US, McDonald’s has more stores as compared to pin codes of US in many states. Whereas in India, chains like Haldiram have just started to scale up business.
    • Example: Infosys did it beautifully – from a modest beginning, the company today employs over 2 lac people and gets a million applications a year.
    • In 1990s, within 15 years of inception, while it was still young, it was adding 100 people a day which was phenomenal. A senior employee joked that company had a signboard outside its office which said: ‘Trespassers will be recruited’
  • Delegation: Indian promoters typically find it very difficult to delegate. The lala mentality of retaining complete control further comes in the way of scaling business.
    • Example: Promoters of Motherson Sumi have done it very well. They started the business with one small unit in Noida. Today, company has 230 plants in 37 countries. The ability to empower subordinates and delegate work has been the key in this journey.
  • Integrity & Passion: Among second and third generation of many promoters, while integrity is not a concern, passion is missing. Their focus is more on fancy cars, international travel
  • Digesting Success: Not easy amidst ‘Kamyabi ka Nasha’ as market rewards too much. Beware of the Halo effect.
    • Multiple Examples: Essar, Videocon, Suzlon, Fortis, Unitech

To summarize, ideal management would have following traits – Trust + Culture + Focus + Scalability + Integrity & passion + Ability to digest success

Common causes of downfall (not just in business but politics, sports, bollywood etc.)

  • Arrogance – Beyond a point, confidence turns into arrogance.
  • Bureaucracy – Beyond a point, process becomes bureaucracy.
  • Complacency
  • Debt is the most dangerous thing in the world of business.
    • Cited example of third partner of Warren Buffett & Charlie Munger who had to sell his Berskshire Hathaway shares at $40 due to borrowing.

Men among Boys (related to scalability)

  • There are just 175 Indian companies which make over $100 million (~Rs 700 Cr) in annual pre-tax profit.
  • Out of these; there are only 78 companies whose market value (stock price) increased by 100x. Others may have listed at a decent size or got carved out from a group.
No. of companies Owners 100 baggers Example
59 Individuals 39 Asian Paints
46 Groups (16) 20 Tata
35 PSU 3 BEL
16 MNCs 12 HUL, Nestle
19 Others 4 HDFC Bank

Common traits in Multibaggers:

Vision (to see them) +

Courage (to buy them) +

Patience (to hold, most difficult as generally people don’t have because conviction can’t be borrowed)

Sector (Tailwind) Matters

  • Indian Pharma: Reddy, Ajanta Pharma, Lupin etc., most of them have never raised any capital since IPO.
  • Indian Banking: Private banks winning market share. Bank’s Nifty weightage – 88% private banks while PSUs down to just 12%.
  • Indian Cement: Generally cement is perceived as a commodity but has created a lot of wealth – Shree Cement has gone up 2,800x while Ramco Cement has gone up 2,300x over the last three decades compared to 100x of Sensex.
  • Indian 2-Wheelers: Hero has gone up 3,200x and Eicher Motors has gone up 7,100x over the last three decades compared to 100x of Sensex. Bajaj Auto and TVS have also done very well for their shareholders. At one point in time there were 26 OEMs in 2-Wheelers, the shakeup later led to consolidation.
Year Aggregate Sensex companies’

Market Cap – Trillion Rs

1992 1.1
2000 3.5
2008 30.3
2018 70.6


Beware of Disruption

125 years of monopoly of BSE collapsed in one year by NSE. There were 14 stock Exchanges and 5,000+ brokers. Today there might be less than 30 brokers in the country who would be making a respectable RoE from broking segment.

Phases of Markets

  • Phase I: 1984-88
  • Sensex increased from 260 to 665 points.
  • Dropped 41% in subsequent two years.
  • Phase II: 1988-1993
  • A ferocious bull market – sensex jumped from 390 to 4,547 points i.e. a 12x jump in just four years.
  • Later corrected 56% in a single year.
  • Phase III: 1993-2000
  • Market increased from 1,980 to 6,151 points i.e. a 3x increase in seven years.
  • Later dropped 58% in next 18 months.
  • Phase IV: 2001-2008
  • Market increased from 2,597 to 21,207 points – 8x jump in seven years.
  • Later corrected 60% in a single year.
  • Phase V: 2009-till now
  • Market moved up from 8,000 to 38,990 points i.e. 5x increase in nine years but on a large base.
  • This time it has been broad based – practically participated by most listed companies, therefore the fall too can be steep or there can be timewise correction.

In each phase there were different reasons for rise & fall and hence each phase tested the patience and conviction of the investors. 

Most valued – Then and Now

  • The top companies (by market value) keep churning.
  • Only three companies have managed to stay in top 10 by market cap list after 26 years i.e. Reliance Industries, Hindustan Unilever & ITC.

Market behavior – Think of a Pendulum


·         World will come to an end

·         Total pessimism all around

·         Forget profits, assets don’t get any value

·         Yield is also ignored by seller of equity



·         Trees grow to the sky

·         Great growth means a feel good factor

·         No weakness of companies, economy etc is overlooked

·         Valuations go berserk


Predicting rating (valuation) is tougher

  • Even tougher than forecasting earnings
  • Example: Astral Poly, La-Opala, Relaxo, Symphony
Period Market Cap Net Profit P/E
Jan’10 34 3 11
Feb’16 3,717 42 89
Nov’18 2,516 73 34


Period Market Cap Net Profit P/E
Dec’09 87 22 4
Apr’15 11,145 99 116
Nov’18 6,914 159 43


  • Most market participants are fixated on earning, whereas
  • The rerating/de-rating of multiple can be swift and can change the entire equation
  • Value Investing is simple to understand but not easy to implement
In 2000 Sales PBT Market value
Bharat Electronics 1,457 195 477
Visual Software 68 30 4,978
  • During peak of tech bubble, Bharat electronics looked very cheap but investors focused only on Software companies despite a high valuation.
  • Over next six years, visual software fell by 95% whereas Bharat Electronics was up by 22x.

Importance of selling

  • How High is High?In 1980s, at peak of Japanese property bubble, a Japanese palace ground (2.86 sq. miles) was valued more than the entire real estate asset of California (3rd biggest state in the US with an area of 1,63,696, sq. miles).
    • The peak value can go very high, beyond what’s imaginable.
  • Similarly, in case of WiproBetween 1998-2000 (24 months) Wipro’s stock went up 100x to some absurd valuations. Premji suddenly became part of top 5 richest people globally.
    • Since then, while the profit has been up 25x, the market cap is still 33% lower from the top, 18 years later.

Worst mistakes at best times

  • Our worst mistakes happen at the best of times – like while driving a car on Expressway versus in Delhi’s Chandni Chowk (busy lane).

Errors of Commission

  • Selling winning stocks too early and not able to ride entire upturn
  • Holding on to cyclical stocks for too long

Errors of Omission

Each market cycle I had opportunity and understanding of these great businesses but regret not participating: HDFC, Hero, Gruh (because it was a small cap then) and Bajaj Finance.

Humility Matters

  • More related to management
  • “Humility leads to….listening….which leads to…learning……”

UNLEARNING IS MORE DIFFICULT – You need to be open to change your mind and learn everything.

Mind & Parachute are useful only when they are open


Strive for – Awareness & Equanimity – in markets as well as in life.

Vipassana Meditation has helped me immensely and I will recommend everyone to give it a try.For more visit:


Link to the complete presentation –




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