Friday, November 30, 2012

Surrogate Investing

On May 6th last year, I had recommended in a previous blog  of a small Sanitaryware company, Cera Sanitaryware, that i was investing in. It was available at Rs. 192. Some readers wrote to me and I shared the rationale behind this investment. The decision happened a few week earlier when I went hunting with a friend for a plot of land that he wanted to buy. I was witnessing the rapid pace of urbanization in the suburbs where there were large number of houses and flats being built. In general one could see massive build out across the country such as residential and commercial complex, malls, entertainment plazas, self-contained cities, airports. The most obvious idea would be to buy land or flat, but I was reminded that in the gold rush, people who made money are the ones who sold  shovels & pick axe, and not the gold pursuers themselves.

My friend who was excited with the commercial activity started discussing ideas such as opening a hardware shop to cater to the demand of construction. The operational and statutory challenges in managing an enterprise, the vagaries of limited economies and the tied down approach to running a specific business that won't allow for hedging across a larger market opportunity made me think differently. Why not look for existing enterprises who have far greater skills and experience in managing all of these. My search led to the very small but fast growing Cera Sanitaryware. I preferred this over its larger peers due to better ROE and to take advantage of favourable valuation that offered a decent margin of safety. It was not covered my many analyst and was a great candidate for what we call value unlocking. When you feel from the heart, you rarely go wrong. The investment has doubled in 18 months.

The purpose of this blog is different. When some asks what stocks I hold, the typical reply is, it is not important what stocks I hold, but what rate I bought them. The search for the next multibagger is always on.  I was reminded on a recent flight when I read that the closest exit row might be behind you. The next big investment idea is sometimes behind us, already the one we possess. With my recent analysis of Cera, I am once again convinced that it’s worth more investment if one is looking around 20% for next few years. If you are interested in knowing the rationale and risks of this investment, you could write to my researcher and friend I rarely recommend stocks on this blog as the original intention is to share learning from successful investors. I prefer to focus on the process than the outcome. This learning of 'a surrogate play' through my research on  Cera was entrenching and the only focus of my blog. Do not blame me for your investing success or otherwise :) 

One of the biggest challenges to the Indian equity market is the reliability of the promoters. You can have a very attractive balance sheet or financials dressed from a black sheep promoter and he would be superstitiously siphoning away the money. I know of people who do not want to invest in Indian equity markets as they are it is not well regulated. There are scores of company promoters who have made it big and got away at the cost of retail investors. You may remember how 'the darling of the market' only a few years ago, Subex systems (with then revenues about USD 50 Mil) went on to buy a company making revenue of $12 Mil, paying a whopping $170Mil. To every one's wonder, it was an all cash deal and the stocks lost from Rs 800 to sub Rs 20 levels. I have serious doubts about underhand dealings and the promoter is today freely driving in a Prado. Incidentally the company Subex systems, develops fraud management systems, just that we did not comprehend that fully.

other ideas you may like
Trap Door.
and Desire deserve dream destine .


Samant said...

Nice one Naresh ..esp the comment on Subex :) MD has moved on and started a 'solid waste mgmt' company ..wat any Irony .. when he created such as SOLID WASTE of Subex !

Anup said...

Hi Naresh

This was a good read and educative. You invest in what you feel right from your gut. As you rightly said, with the real estate industry still looking to grow in and around Bangalore - Cera still makes a lot of sense.