Posted On Oct 20, 2022
GuruSpeak| How simple stock-picking strategies helped Harini Dedhia generate alpha
'' Training myself to think like a business owner and not just a stock market owner has enabled me to digest volatilities with far lesser acidity. ''
There are a few examples in the Indian markets where a fund manager left their fund management job in the US to work in India. Leaving a job in a hedge fund in the biggest financial market is not an easy decision to make.
Homesickness and her love for mangoes were too overpowering for Harini Dedhia, making her catch a flight back home.
Armed with a degree in Economics, Political Science and Advanced Mathematics from New York University (NYU), she worked for two years in a hedge fund in the US before deciding that India is the market she wants to explore.
A fund manager with Tamohara Investment Managers, Dedhia mixes her US experience of top-down investment with a bottom-up approach she picked up in India.
Harini is an avid reader with an interest in a wide range of topics from history to genetics. If not reading, she spends time with her camera and exploring single-origin coffees from various estates across India. Camera in hand, if she is visiting a new city, she makes it a point to first visit a local coffee shop, then a local bakery, followed by a visit to the local bookstore.
In this interview with Moneycontrol, Harini Dedhia talks about her investing journey and the process of stock picking.
Q: A brief background and your tryst with investing
Investing was not my first or the most logical career choice by a long shot. My parents are doctors who run a hospital in Mumbai. Probably because of the proximity, I had mentally decided early on that I would not become a doctor, though I didn’t know what I would do.
When I was in 8th grade, I got enamored by history and politics. I was fortunate enough to study economics, politics and advanced mathematical models at New York University after school.
When I first went to college, my mother was hopeful that I would follow a career in academia - add a Doctor to my name one way or the other. But forever the younger child and rebel, I realized I was a generalist. I was at my happiest when I was allowed to read across the board.
Every summer holiday, I tried my hand at different career paths. Teaching after my first year, working at a think tank (CMIE) after my second and I finally landed an internship at a hedge fund in my third. Being a generalist, it was the hedge fund I enjoyed the most.
After working at the hedge fund in New York for two years, I came back to India. In the two years I worked there I realized that every other floor in Midtown Manhattan had a fund management company. The market was far too saturated.
Not being close to my family and not having easy access to Alphonso mangoes was too high a price to pay for being a part of the crowd. I believed then and I do so till date, that if I had to make something of myself, India is the only place to be.
Being close to my family has helped me immensely in my investing journey as well. Investing is more temperament than skill. To remain calm and collected in the face of any adversity is something that I learn from my brother, Rushil, daily. He is a wealth manager who always chooses simple over complicated and discipline over excitement. The clarity of his thought process has helped me evolve as an investor more than anything else has.
Born to Gujarati parents, I was exposed to the idea of markets from an early age. CNBC was a TV channel my father used to watch very often.
I first realized its power when my parents bought their current house-- not from their professional income but the proceeds of a single equity investment. However, as a child, I always thought of markets as a topic of interest for my father which ate into my history story time.
I first thought of it as a career only when I started interning at a hedge fund. There was however a single interview, rather a single statement in an interview, that cemented my belief that I wanted to be an investor all my life.
This was an episode on Wizards of Dalal Street where Durgesh Shah said, ‘Investment is the ultimate liberal art’. That statement may be a cliche, but it resonated a lot with me and has stayed with me since.
After 2 years of working in the US equity markets, and 8 in India, I can say that my conviction in that choice has never been higher.
Q: Can you throw some light on the rationale behind your first few investing ideas?
Disney-- I was an intern at a hedge fund in New York, massively naive. I had just finished reading One Up on Wall Street- and the product I thought had the best pull among consumers was the Walt Disney Company. If a company can create the number of smiles that it does, how can it not be a good company? I didn’t know back then that a good company and a good investment weren’t the same.
When I came back to India, my first investment was Nucleus Software. A Rs 550 crore market cap company with a Rs 60 crore PAT and over Rs 400 crore in cash back then.
While the company hadn’t been able to grow its topline in the 5 years preceding my investment, it had made some changes to its sales model that I believed would yield results. In hindsight, I didn’t have much conviction in the changes working but certainly had the conviction that I would not go wrong at that price. I looked at value before business back in the day.
Q: How have you evolved as a fund manager?
My investment journey can be defined in two buckets- one in the US and one since I came back to India.
In the US I used to work for a macro hedge fund. So we would spend a lot of time determining the top-down themes and then buy the best-in-class companies to play that theme out.
For example, if we hypothesized that crude oil would see a price surge, we would go and buy the best-in-class oilfield services company.
My brain was however completely rewired at my first job in India, at Valuequest Investment Advisors. At the end of my first day, I was called in by our Portfolio Manager and asked to discuss an idea I had worked on in the past.
After I finished my short pitch, he asked me the first question that now I always demand answers to- how does the promoter/ owner of the company treat you, a minority shareholder?
The starting point for this he said was to find out when all the promoters raised money from minority shareholders. What did they claim to need the funds for and what did they use them for? And just like that, I was told to look at businesses from a bottom-up perspective vs. my previous top-down lens.
Today, the way I invest, while I endeavour to maintain the rigor of bottom-up research, I prioritize my ideas to work upon based on my top-down understanding of the world.
Within the time I have spent investing in India, the biggest evolution I have seen is- I say no a lot more today than I did in the past. The second change is a behavioural one- I see a reduction in my need for activity vs. my past.I have made terms with the fact that I will most likely never have an information edge in the market. What I can have is a behavioral edge and that comes from understanding businesses from a longer/ structural lens.
In terms of process, the biggest shift has been in the primary frameworks now being tools to distinguish good and bad businesses vs. the earlier mindset of looking for the cheapest asset available and simply sorting for value.
Training myself to think like a business owner and not just a stock market owner has enabled me to digest volatilities with far lesser acidity.
Q: What have been your best and worst investments?
Best idea- M&M. For all the bottom up research we do, it is surprising that a large cap idea is what I feel the highest sense of pride in and not a unique, undiscovered small cap idea.
Perhaps that is the reason itself. I bought the business in October 2020 when perhaps no one was willing to discuss the idea. Reading the FY20 annual report, prompted me to go build a deeper understanding of the company, especially of the underlying changes.
A company of that size admitting complacency, admitting they used to be great and can get there again but are not there today was exemplary to me. This was coupled with a board willing to showcase focus and decisiveness in capital allocation that had been missing for a while.
Worst idea- Long list, but one in particular- Kesar Terminals & Infra. Bought and sold in 2015-16. The company back then had a bulk liquid storage business at Kandla port and was working to complete and commission India’s first multi-modal logistics park.
The first time I met the management at the AGM- there was enough evidence provided on execution and narrative not adding up. It finally took meeting them again to sell the stock.
While I didn’t lose too much money, it is the complacency that I showed in sitting on the business despite not being convinced that makes it my worst idea yet.
Q: How do you presently invest?
Our starting point is a higher rate of change vs. the rest of the economy. If you are growing faster than the economy's nominal GDP growth, you are gaining wallet share with the Indian customer. Within such businesses, if you grow faster than your peers, you should gain market share.
Fairchem Organics is a business that fit the bill for us. As the end-user industries of paints and nutraceuticals are growing faster than the economy, and the additives- oleochemicals (derived from natural fats) are growing faster than petrochemicals, given environmental concerns.
Wallet share and market share gains combined with prudent capital allocation ensure growth with incremental return on equity being higher than in the past. Incremental RoEs for Fairchem are around 40% of the capacity commissioned in this financial year.
If the company’s cash generating ability is robust, incremental growth should be funded largely by internal accruals vs. debt. As is the case with Fairchem.
Simply put- higher growth vs. the economy + improving return on equity + declining leverage. This is a very simplistic reduction of our framework.
Before we zero in on an investment idea we do a pre-mortem.
We assume we have made the investment and regret the same two years hence; what would be the possible reasons for the same? What are the endogenous risks to the company? For a chemical company, we have found that clearances from respective state pollution control boards is a big scare point.
In Fairchem we found a company that does good for the environment and helps in controlling pollution as its raw material is the waste product obtained from cooking oil refiners.
The Gujarat Pollution Control Board published a paper in 2014-15, hailing the work done by the company. Our concoction of higher growth + improving return ratios + declining leverage was topped off with an operational margin of safety- we went all in. (We still own the stock so please do not treat this as a recommendation. We are biased).
Q: What are your plans for the future?
Continue reading and learning as an investor while creating an institution at Tamohara that adheres to the tenet of investing being a liberal art. I dream that Tamohara becomes a reputed research-driven investment organization and hopefully if we stay the course, in the process, we create significant wealth for all stakeholders involved.
Another dream of mine is to have our research operate out of a smaller town- perhaps a Goan village; away from the noise and cacophony of Bombay. As long as we are an hour away from an airport, we are better off as researchers in more peaceful areas.