Transcript

Ms. Akshara Menon: Welcome to another episode of the Fund Manager Interview Series with PMS Bazaar. I am your host, Akshara Menon. Indian markets have been quite upbeat for the last few years, but with valuations changing and the market entering a different phase, the big question now is: where do we go from here? To explore that, we have with us Mr. Rajesh Tiwari, CIO and Principal Officer at Chanakya Capital Services. Welcome, sir.

Mr. Rajesh Tiwari: Thank you.

Ms. Akshara Menon: Today we are going to have plenty of conversations around markets, around the Chanakya Growth Fund, about Gift City, and also your story, which we need for this current market condition. To start off, I just want to ask you one question. You have spent seven years in Axis Corporate Credit, where you scaled the thing from 1,500 crores to 32,000 crores. That is immense. And you have reduced NPA from 6.5% to 0.3%. That is something impeccable. So if I want to understand that part of it from you.

Mr. Rajesh Tiwari: We focused on the mind of the management. There were a lot of companies which were not doing well. We would talk to the management, try to understand their motivation, what their problems were, what the challenges were. Wherever there could be a solution and the management was trustworthy, we came up with a support program for them.

The second thing was that at that point of time, we needed to increase our portfolio size because 1,500 crores was too small a portfolio size. We wanted to grow. The problem was that our cost of funds was so high that we could not lend to any so-called decent corporates in India. Because of a lack of choice, we had to look at risky mid-corporates. Unfortunately, it was the year 2001. The economy was not doing that well, and two of the major banks, ICICI Bank and IDBI Bank, had their own challenges. ICICI Bank was merging into ICICI, and IDBI had a lot of problems. The main lenders, especially in project finance for mid-corporates, had vacated the market. So we studied that space and decided to get into it.

One thing I used to do before that, when I was head of equity research in UTI—whichever company we looked at, I would always discuss with the main competitors about what they thought of the management of that specific company. We never asked them to give insider information or anything derogatory, but a very mature opinion about who these people were, why they were good, why they were not so good, and what the challenges were. Our experience had been that people used to give us true answers. Maybe they realized that we were in UTI, so we would come to know the truth in any case, or they also had some professional respect for us. We did the same thing in the bank.

In a company which is a risky corporate—meaning it was a medium-sized company but was not doing well financially or even in business—the first thing we wanted to know was: can the management be trusted? Do they have enough competitive spirit so that in the long term they will do well? Based on that response from the field study or from their competitors, we would then do our own study about that company, meet the management, go to different plants, meet different people, and then decide to support that company. That is how we built the portfolio.

Since we went so deep and our thought process was very long-term, we could anticipate the challenges and get ourselves ready if the company needed support. And if the company was not doing the right things as per our expectations, we would guide the company to do the right things. That is what we did. Fortunately, that portfolio evolved, and the NPA percentage kept coming down. Our portfolio was growing at 60-70% CAGR, and our NPAs were coming down. Even in the incremental portfolio, after two to three years of seasoning, our NPA was actually coming down.

Ms. Akshara Menon: True, sir. Actually, very true. One more follow-up question. In your portfolio, I could see the maximum allocation given to Axis Bank. Of course, this stock is not any stock recommendation either from PMS Bazaar or Chanakya. The point is, just out of curiosity—is it because of the connection that you have with Axis, or the conviction that you have with Axis?

Mr. Rajesh Tiwari: First, it is because of conviction, and also connection, because I could become an entrepreneur because of the ESOPs Axis Bank gave me. I am obliged to Axis Bank because if I am talking to you right now, it is because of those ESOPs. More than that, I know it, I earned it. And conviction is there. It was a turnaround. We managed the turnaround of Axis Bank. So that learning helps me in evaluating any turnaround situation.

Secondly, at this point of time, we have looked at all the banks in India, and it is not mainly Axis Bank. We have major positions in some other banks also, and many of them have given us fabulous returns. Axis Bank is because of conviction about their strengths, the way they are evolving, the assumptions we have about the banking sector in general in India, and also the way the management quality has been improving, the way internal processes have been improving. More than that, the internal accountability has been improving in Axis Bank. In terms of systems and processes, Axis Bank is yet to catch up with HDFC Bank or ICICI Bank, but it has been narrowing the distance. As per DCF valuation, the upside potential is significantly high.

So just for my emotional connect, I will not invest so much of my own money into the shares of Axis Bank.  

Ms. Akshara Menon: So it is more of conviction as well as connection, but conviction has a bigger hand here.

Mr. Rajesh Tiwari: Let me put it this way: I have worked also in IDBI Bank, and I have a lot of emotional connect even with IDBI Bank, but I have zero exposure to IDBI Bank. I started my career in SBI. I know it is a fabulous bank. Culturally, SBI is the richest commercial organization in India. I know that. But yet we have not invested in shares of SBI because, despite all that, in terms of conviction, Axis Bank appears to be, as of now, better placed than these banks. We have also invested in HDFC Bank, Karur Vysya Bank, City Union Bank, and South Indian Bank. It is because the upside potential, given the current level of risk, appears to be very meaningful. Same with Axis Bank.

Ms. Akshara Menon: Now that we spoke about a few stock names, let me take one more. As you were mentioning about the banks that you have already invested in, a major chunk of your portfolio—60%—is into financials.

Mr. Rajesh Tiwari: Yes.

Ms. Akshara Menon: Among that, 20-odd percent is into NBFCs. If I were to take Bajaj Holdings, it is one of your top holdings. What is the conviction that you had?

Mr. Rajesh Tiwari: Bajaj Finance is the conviction about this one. I first studied Bajaj Finance in 2010 while I was working with Ruane, Cunniff & Goldfarb. They had looked at Bajaj Finance, and they were not impressed. They decided not to invest, but they told me, since we are there, why don't you look at it? So I went there, met Rajiv Jain, and it was a revelation—the way they were thinking about business. More than that, the type of customer orientation they had, the type of technology they were deploying even at that point of time, the type of risk management system they had, the type of ERP they had at the level of retail customers.

Now in Axis Bank, I tried a lot to come up with customer management software for corporate clients, and my IT department could not develop it. No one ever told me that you could go to Salesforce or so many others, and it would be so tough monitoring all these companies—if the proposal has come, how much time it is taking to get processed. That is one part. Secondly, we also needed feedback from our customers, so it had to be managed very systematically, and it was very tough. Here, Rajiv Jain and Bajaj Finance had perfected that. So I could see it. They not only thought about it, they had done a wonderful job.

And if you look at it, they were largely in the arena of unsecured loans. Now, unsecured loans also, they managed it so beautifully. The loss ratio was within limits. They had a very strong collection team, and they could watch the behavior of all their customers analytically, and that is how they were able to build their pricing and the follow-up mechanism. It was wonderful. And the ambition they had—I had not seen that in case of any financial institution in India.

So in Ruane, Cunniff & Goldfarb, we took a big position at one point of time. Our exposure to Bajaj Finance through Bajaj Holdings was nearly $350 million, and that was one of the best investments Ruane, Cunniff ever made into India. Since then, the company has been progressing in terms of their analytical abilities. They are far ahead of any financial institution in India, though now people have been catching up.

So another thing which happens to be there—we are able to get Bajaj Finance at a much lower valuation through the holding company. Somehow, in the Indian market, even the best of the companies are not getting correctly priced because of holding company discount, which I believe is not fair. Over a period of time, as the market becomes efficient, that discount will narrow down. In our portfolio also, Bajaj Holdings is our number two holding, and it has already given us very high returns.

Ms. Akshara Menon: Let us talk about multibaggers now. When we had a discussion off-camera, you were talking about wanting to invest in something—small caps which intend to go into midcaps, and midcaps which intend to go into large caps. You see the best of the best multibaggers falling into small caps, but none of your top five holdings are in mid and small caps. So how have you positioned it in your portfolio?

Mr. Rajesh Tiwari: In Axis Bank, we had invested in nearly 125 or 130 companies which were passing through a phase of turnaround. The best example is Crompton and Greaves at that point of time. The company had incurred a loss of 241 crores in FY 2001. So they approached us, and we knew about the strength of Crompton Greaves. It was the finest electrical engineering company in India. They had over-diversified, because of which a lot of losses were there. So a new CEO came, Mr. Trehan came, and they decided to consolidate and did a VRS and decided to shift one of their plants from Kanjurmarg to Goa. So they needed 80 crores for financing the entire turnaround. We looked at the company—I myself went to each and every plant, met all the senior managers. We were convinced. So we gave them money, and the company did wonderfully after that.

Then another one was Mafatlal Industries. We studied them; they approached us. There was a big restructuring program of the institutions, and they were not doing very well. Before that, we had some exposure to NOCIL, which was struggling. So we had given a loan to NOCIL, and they wanted an extension. We gave that extension; we did not have a choice. But we came to know that Rishikesh Mafatlal repaid our loan by borrowing on his personal account from somewhere, and that type of promoter has to be backed. So then we asked them what more we can do. They mentioned Mafatlal Industries' restructuring. We studied. They said, look, we have a beautiful company, Navin Fluorine Chemicals; please study that. We studied that company—beautiful company—and right now their share price has crossed 8,000 rupees. So many years, we funded them like that. As I said, 125 crores.

And the best developer in India, Shobha Developers—they were very small; they came to us. Because our board was totally against financing any real estate developer, but someone told me they are the ones who built the development center of Infosys. So that was a revelation. In UTI, we used to own 8.33% shareholding of Infosys. Every year I used to go and spend a full day with all the senior managers, including Mr. Narayana Murthy and Nandan Nilekani, the whole day. So we asked them; they had beautiful words for Shobha. So we gave them some loan, and after that, till the time I was there, we were the port of first call for Shobha. Like that, endless number of companies where we have done turnarounds. So that process we knew, and that is what helped us.

Ms. Akshara Menon: Now coming back to your entrepreneurship. It has been eight years since you started. People talk about success stories, but hardly people talk about the obstacles or challenges they have faced. So what were the challenges that you had to overcome as an entrepreneur?

Mr. Rajesh Tiwari: My story really goes back to my UTI days. In UTI, I had the privilege of meeting a lot of very bright entrepreneurs as well as CEOs and CFOs. So we used to feel very nice about it—that India has a great future, there are so many bright people being there. And we used to feel a bit sad that by and large the senior management caliber of UTI was not of that level. So within our equity research team, we often used to think or dream that someday we will create the finest financial institution in India.

So I moved to UTI Bank. We did well. We turned around the bank, and courtesy the ESOPs of the bank, one day I got the feeling of financial security in my life, given my middle-class lifestyle. Then I realized that perhaps God has given me this one window to become an entrepreneur. By the time I had come up with an idea, I also realized that if I do not avail of this opportunity, would I do it later on? The problem was that my best period as a professional had become that point of time. I had been elevated as the president, and there was a very clear path of further growth, making lots of money. And please remember that that position was very powerful. But yet, just to concretize that dream, I decided to come out of the bank and set up a PE fund which will get into some of our assisted types of companies.

Because what I realized was, if these were good companies, entrepreneurs also were good. The problem used to be that the entrepreneur would like to get his fingers in everything, and in the process they used to neglect building the right type of systems and processes and the management team. So the idea was to guide these people. Because in the bank, we were able to provide them working capital or long-term financing to grease the wheel which was stuck. They were good people, good companies. So they did well. But in order for them to switch to another orbit, they needed to build systems and processes, the right type of management team. So the idea was to provide them equity, guide them how to do all these type of things.

The idea was good. But then came the year 2008, the famous Lehman financial crisis. I could not raise much money. That was a very challenging period. So I tried everywhere. One of my friends said, okay, why don't you do one thing? Ask Axis Bank to become your anchor investor. Good idea. I went to Dr. Pijnak, my mentor. I told him, look, our bank has a reputation in this space because of what I did in the bank. I have a track record. So why not you become the anchor investor in this fund of mine? He said it is a great idea. So do one thing: you talk to your ex-boss who had become ED Corporate Banking.

After one week, my ex-boss, one Mr. Agrawal, called me. "Can you please come? We want to talk to you." I went to him. So he told me, look, you left the bank to get into capital markets. So right now we have a position for you. We have launched a mutual fund. So he appointed one Rajiv Anand as the CEO, and they have been looking for a CIO. So do you not think that position could be of interest to you? So if you are interested, we will talk to Rajiv Anand. I am pretty sure that he will take it seriously.

So I told him, Mr. Agrawal, I left the bank to become an entrepreneur, and any experiment ought to be given a fair trial. I do not think it has been only one year out of the bank. One year is a long enough period for me to think about it. It is a fair trial. So if you want to really help me, invest in my fund as an anchor investor, and then I will see. After some point of time, if I come to the conclusion that my experiment is not working out, I will look at your offer and other offers which could be there. He told me, you are mad. You know your chances of success are so slim, still you want to do that? You do not want to look at this offer? You can call that. That is how it is.

Okay, let me call Dr. Pijnak. He went to Dr. Pijnak, called him. So Dr. Pijnak asked him. So he said, he is mad. We told him about the offer, and knowing that his chances of success are very, very slim, he is not willing to look at it. So Dr. Pijnak then told me, Rajesh, when you left the bank, I did not like it. Actually, he used to tell me every day morning—he would call me till the time he was the CEO of the bank—he wanted me to be there. After that, I could do whatever I want. We had a very close relationship because in the bank we could do a lot of wonders because we knew one thing: some of our decisions would go wrong, but there he would be to back us up. In any business, if you have that support, you can do wonders. And I think if Axis Bank became that creative, it was because of his support. So in a way, perhaps he thought I let him down.

Then Dr. Pijnak said, but now I understand why did you do that, and I appreciate that. He told Mr. Agrawal, "Mr. Agrawal, please realize one thing. Entrepreneurs have to be necessarily mad, because if they are not mad, no one will ever become an entrepreneur. There is something new. Mad." Then he said, "Do one thing. We have a problem." They already had a PE. The CEO of that PE had objected that if you become an anchor investor, the signal you would be sending is that you do not have that faith in me. So he objected. So he said, "Do one thing. Get another anchor investor, even with a little money. Then come back to us with your proposal, make a presentation, all that. We will see what is to be done." Fine.

I came out. Mr. Agrawal came to see me off up to the lift. Then he told me, "Look, Dr. Nayak, you know, he is a very nice guy. He is just being nice to you, being very decent to you. He really does not want to invest, but he cannot say no to you." I just told him, "Mr. Agrawal, whatever it may be, but here I am, and I want the bank to look at my proposition. The bank may accept, may not accept. It does not matter." That is what it was. I could see Dr. Nayak was favorably inclined, irrespective of what Mr. Agrawal was saying. But two months after that, Dr. Nayak himself left the bank. One day he suddenly resigned. There were some issues there about his succession. He took a principled stand. He resigned.

So at that point of time, when Mr. Agrawal made the offer, I had two feelings inside me. First feeling was that all my pain has vanished. Now there is a great opportunity. Life comes back to me. But something took hold of me: no, you have to remain an entrepreneur. That came over me. And after that, again my struggle continued.

There was another good friend of mine, Prakash Arya—now late, Prakash Arya—so he started a PE. So he also offered me—he was launching a new PE—you become the MD and CEO of that PE setup. So we agreed. So one day we had to meet at Mumbai. I went there to discuss my terms. While going there, I was thinking about what the terms would be, what team I will have. When I met him, again the same thing overpowered me. He was very nice, but I do not think I have given my entrepreneurship a fair trial. So let me try it out, and after that I will see.

For a tough time, I kept on trying, kept on trying, not much happened. So one day, Girish Bhakoo of Ruane, Cunniff & Goldfarb, one of the investors in the shares of Axis Bank, he came to me. Before that, he had met me when I was head of corporate credit. So they had invested in our shares, and before investing, they met all the heads of departments, and they asked me a few questions. Two questions I remember. "Which type of company do you give money to?" I said, "Whichever company I feel like asking for a job." Second thing: "Okay, what type of facility would you like to give? What should be the character of that company?" So I said, "The company should be rated triple B. It should get upgraded to A+ in two to three years' time, because that means that company is transforming, plus that company would be obliged to us."

So after that, every six to seven months they would come to me: "Okay, whichever company we are giving credit facilities, if they score for equity, we would like to come along with the bank." So when they left the bank, they met me again. They had invested in the shares of the bank because of my approach towards corporate credit. They said, look, this approach was typical of equity providers, not of debt providers. They said that they were thinking of launching a fund dedicated to Indian investments. So whenever the fund gets launched, they would like me to get involved in some capacity.

After two years, they came to me. "Look, that fund is still on the drawing board, but the Indian investments have become nearly $440 million—quite big. So why don't you get involved?" So I began working with them, and I looked at Indian investments. That is why I looked at Bajaj Finance for them—very good companies. I looked at some companies in Bangladesh, in Mexico, some even in USA. But in 2017, I remembered: I came out of the bank to become an entrepreneur, not for another job. That is when I decided to launch this fund in Chanakya.

In 2017, we launched. We applied to SEBI. I would have loved to launch a mutual fund, but we did not have 50 crores net worth. The choice between PMS and AIF was very easy. AIF required minimum 1 crore investment for every investor. That would have been somewhat difficult to manage. That is why we launched a PMS. So the entire process, the entire time, the support came from very unanticipated quarters. Most of the people I expected would support me, they kept on watching from the sidelines. It was not easy.

But two lessons came. First of all, who are my true friends? And what I realized is: a friend of yours is not because of merely emotional connect. The person also respects you for what you are as a person, as a human being, also as a professional, and your value system. So many people who later on became our investors also—they judged us, they kept on watching us. Because there is a saying in India among the traditional Indian business people: the business is a matter of a thousand days. If you survive a thousand days, then you are there. So the initial three years were really tough. But by the end of three years, things began working out.

The same thing had happened even in Axis Bank. As I said, the first two years—I do not think I told this to you—the first two years, in the month of March, my main job used to be managing the NPA accounts, and it used to be so tough. We were trying to grow, and all that energy was wasted in that. Third year onwards, my main job used to be parking some of the credit with other banks as IBPC, Interbank Participation Certificate, because we were breaching our capital norms. After that, it became very, very smooth. Our reputation traveled to the market.

Once we appointed McKinsey as our consultant for restructuring of the entire corporate banking. So they did a dipstick survey, and the feedback they gave us was that in India, if a company needs a facility, say, in one or two months' time, it will go to its main bank with which they have a relationship and get the facility. If they need it within 15 days' time, it will go to one of the private sector banks. If it needs it in one day's time, it will come to you. So we were surprised, but that was true. Because what we used to do—whichever company we would study, we would get feedback from the competitors. So we would also study the competitors. So in any business, we knew which were the companies which could be supported by us. So any of these companies came to us, same day we were ready. That does not mean we would compromise on our processes. The entire note—a present note—would be prepared, the risk department would vet it, it would go to a committee. We could do that. So that is how it began.

So as an entrepreneur, one realization further came to me: the only person you can depend upon is yourself. And if you know that, you would be able to figure out a solution to any challenge.

Ms. Akshara Menon: I asked the question more professionally, but I got an answer more philosophically, to be very honest. The thing is that a thousand days—if you know an entrepreneur is going to be steady in his business, then I think the rest he will make a History of it

Mr. Rajesh Tiwari: Yes.

Ms. Akshara Menon: These generation—like the upcoming generation, or these generation entrepreneurs—do you think they have the patience to face the struggle or face the obstacles for the first thousand days? Because you have seen a lot of entrepreneurs in your life. So do these entrepreneurs, the upcoming generations, have the patience?

Mr. Rajesh Tiwari: You know what is the average age at which professionals in USA become entrepreneurs? 

Ms. Akshara Menon: 20, 25, or 30? No. Much younger or much older, sir? 

Mr. Rajesh Tiwari: Much older.

Ms. Akshara Menon: Much older. 45?

Mr. Rajesh Tiwari: 45. Why?

Ms. Akshara Menon: Is it that they want to settle a bit and then take a risk? 

No. Because they get a business idea which they know how to implement. Secondly, they are well networked till that point of time.

Ms. Akshara Menon: Network.

Mr. Rajesh Tiwari: Yes. It matters. All of us think of the younger generation of entrepreneurs, thinking of Bill Gates or Steve Jobs or Mark Zuckerberg, all that. But please realize: we have come to realize about Mr. Huang only recently. They took more than two decades before they became really successful. I look at the top life company, Eli Lilly, or Novo Nordisk—they are very famous right now for GLP and all that, but the research they did on GLP, these companies had been working on these for over two decades. So while Indian business people may say a thousand days, internationally or globally, business is about 20 years. You may be very young getting into business, but the journey of success—the true success—is two decades. 

Ms. Akshara Menon: So patience is more important.

Mr. Rajesh Tiwari: For us, it is still 12 years further journey where we would be able to transform something around us in a meaningful way.

Ms. Akshara Menon: Which means you are just getting it started now.

Mr. Rajesh Tiwari: Oh yes.

Ms. Akshara Menon: So with that, you have just spoken about your journey. Along with that, let us take the last one year. Last one year and a half, I would say, the markets have not been very blissful—Indian markets, for that matter. Still, your fund has given over 12% on a yearly basis. So what has proved this alpha, sir?

Mr. Rajesh Tiwari: The 12% alpha—it is not mainly over the last one year. Last three years, our alpha has been around that. Now, many factors have gone into it. First of all, we invest in companies which are transforming, and the process of transformation—or let me call it turnaround—takes two to five years' time. So we began the journey eight years back. So last three years, by and large, many of these companies completed the first or second phase of transformation. They became very visible in the market. While business-wise they were always evolving, share-price-wise only over the last three years they did very well. So that is one thing. So our alpha during the first five years did not do that well. So it is like our past has lent this extra alpha to us. That is one thing.

Second thing: initially, we would invest up to 12% in companies which are top quality management, where the margin of safety—we do a DCF based upon that—is 200% plus. That means we are talking of 21-22% plus type of CAGR in the long term. Then we will go to another set of companies which are very good companies but not top quality management, but where the margin of safety is again 200% plus. They will invest up to 5%. And then the rest of the companies, even if their margin of safety is 400% plus—we are talking about 26-27% CAGR—we will invest up to either 2% or 3% of the portfolio.

Over the last four to five years, we realized that our assumptions, our core assumptions, were really turning out to be quite true over a period of time. So we were good at understanding companies and their future. So then we decided: these type of companies, maybe a smaller cap company where earlier we would have invested only 2% or 3%, we will go up to 5%. So portfolio allocation changed to the companies where margin of safety was quite high.

Third thing also happened: the market has become more rational. You know, a bull market means the market is not that rational. But last three years, especially last two and a half years, it has been a very choppy market. In a choppy market, everyone is more careful while investing. So the set of companies which we have, they have been able to differentiate themselves. Earlier, there were a lot of companies which would make these type of claims, and people would go away—that theme and momentum is to dominate. At this point of time, the core value generation process of a company has become more important. So our portfolio falls in this category where the underlying business is evolving, the companies are doing well consistently. So that is why our companies are getting better valuation.

In addition, we also did one thing around four to five years back. We came up with optimization software. Based upon our quarterly margin of safety data and how the performance of different shares have been over a period of time, we developed that software. And two years back, we used what is called genetic algo. If I engineer—you might be aware of it—engineers know what genetic algo is. That is optimization software. Right now we are trying to evolve it further, looking at some non-convex optimization models, highly mathematical models. So we began using that, and that allowed us to decide in one day what percentage of investable surplus in a portfolio should be allocated for investment and how it should be spread over different stocks, depending upon the respective margin of safety and the allocation percentage—what is the gap. And that itself has been generating somewhere in between 1 to 2% additional alpha for us. So this 12% this year, or 10% plus, consists of the last three years' outcome of all this.

Ms. Akshara Menon: Now you spoke about margin of safety, the CAGR of 20 to 26%. How do you manage risk here?

Mr. Rajesh Tiwari: Risk is always managed through portfolio construction. That is where, even if a company's margin of safety is 500%, we will not invest 18% of the portfolio in that company. The upper limit is 12%. In fact, right now we are using our optimization model even to ascertain whether 12% allocation to our best companies is the optimal one, or should it be lower. That 5%—is it really the best choice? We are working on it. Mathematics is a bit complicated. We are working on it.

So coming to portfolio construction itself, you have to have balance. So we target to have 60% in large cap stocks, around 10 to 15% in midcap stocks, and around 30% in small cap stocks, with the idea that our small cap stocks should migrate to the midcap orbit in something like three to five years' time. Similarly, our midcap stocks should migrate to the large cap orbit in three to five years' time. So that is what we design. And again, the allocation is through this genetic algo, and we keep on refining it every quarter. We continuously monitor all these companies, and every quarter we refine our margin of safety. We keep on doing this time and again, and over the last three years, our confidence in our optimization model has really become very strong.

Ms. Akshara Menon: You just spoke about 12%, which is the maximum allocation that you give for a stock.

Mr. Rajesh Tiwari: Maximum 12%. But right now the question is whether the true maximum allocation is the most efficient. So we are right now examining that analytically and mathematically. We are looking at it based upon the data. In a way, what the market is telling us, we are backtesting: had we gone for another set of allocation rather than 12%—if it were 12.5% or 13% or 14% or 15%, also 15%, or maybe lower than that, or different—and depending upon the market conditions, the margin of safety keeps on varying. What could we do?

So now, can we use even derivatives for that, for portfolio construction? Because if you realize that for a company, not 12% but 15% is ideal, now the portfolio is already there—either you sell some stock, go to that, or invest in derivatives. Same way, if you have to cut down, do not sell it. When the market is choppy, use derivatives. When the right time comes, do that. So we are working on all that. That was our next stage. So the portfolio construction itself has to be analytically derived. That is what we do.

And we also have a sense: if you look at our portfolio, companies, etc., when looking at it, we can see a persona of the portfolio, a character of the portfolio, and it has to be very comfortable. If it is not comfortable, we will do something about it.

Ms. Akshara Menon: You know, 12%, which is the maximum allocation that you give for a stock. So if I could ask, what is the minimum allocation that you would give to?

Mr. Rajesh Tiwari: Any company you choose to invest, Earlier we used to go by 2%, but now 3%. If a company is not worth giving 3% allocation, we will not invest in that company, and we will keep on watching this company over the next one, two, three years. And if we remain comfortable, that 3% will go up to 5%. 

Ms. Akshara Menon: So it is more like a slow graduation. It is more like 3, 5, 10, and 12.

Now let us talk about your Gift City fund. When you started, you started off with PE and then moved into listed, and now in Gift City you have allocation towards listed, unlisted, and global equities. In terms of global equities, all of us know that it has rallied too much, and also there are a lot of investors who have given a major junker to global equities. So let me talk about your Gift City fund and its allocation, and what kind of allocation you have given between listed, unlisted, and global equities, and also why Gift City now.

Mr. Rajesh Tiwari: Gift City fund because what we realized over a period of time is that R&D has been very weak in case of Indian companies. We have been having zero exposure to Indian IT and pharma stocks for the last five to six years because, as per our valuation models, each one of them appears to be overvalued in terms of margin of safety. I am talking of the best of the pharma companies and the best of the IT companies. 

Ms. Akshara Menon: These 2 sectors had a biggest rally. 

Mr. Rajesh Tiwari: So these companies, they throw up more than 10,000 crores in cash every year, yet they are not investing in something true R&D.

Now when you look at the offshore companies—I mean, as I said, I will always look at the global counterpart—we like that, and R&D percentage there used to be much higher, even in case of manufacturing companies. R&D percentage was much higher. That is one thing I saw. Second thing which I also observed: these companies will always acquire so very good small companies or midcap companies in their adjacencies where they were not excelling. These companies were excelling, then integrate those into their companies, and they knew how to merge these companies culturally, system and process wise, and enhance the effectiveness of these companies. Now Indian companies, whenever they tried outside India, they did not do very well. It required a different type of approach. There was a lot of cultural integration. So Indian companies have not done very well. These companies have been excelling. Plus R&D, even in case of manufacturing companies, has been significantly higher than most of the so-called Indian R&D-oriented companies.

The only exception I have seen in my life has been Dr. Anji Reddy leading Dr. Reddy's Lab. Oh, it was a beautiful company. He was the person passionate about it. After that, there has not been any other exception.

So we can see it: if you look at some of the global life sciences companies, global tech companies, they are changing the world. They are attracting the best talent, empowering them. They are coming up with ideas which are going to change our life. So we want to invest in such companies. We have been researching them right now in Chanakya Capital for the last one and a half years. We have our own valuation model. The same model which we have for our domestic companies. We are comfortable, despite this heated market in USA or Korea, etc. I am pretty sure that some company will figure out. But there, the design of the portfolio becomes important—what percentage to allocate to each one of the companies based on the margin of safety. Again, yes. So we are developing that model also.

So in order to be able to access the highest innovative and productivity blast in the world, we want to invest there. To begin with, we are getting offshore money to invest in India because we have a track record in India. But 15% we will invest in such tech and life sciences companies. And also in India, at times there could be some very good companies which are unlisted but which could be coming for listing in the next one year's time. There are many companies in, let us say, e-commerce space or new frontier in India which are doing very, very well. We would like to invest in those companies also, but selectively, because the Indian companies are going for listing in India. This time we can do a ground-level check. For the offshore companies, our investment is still like a VC—that we have to have a mindset of a venture capitalist. Even if we invest in Google or, say, Alphabet, we have to have a mindset of a venture capitalist. Here in these companies, our traditional listed equity mindset will suffice.

So in the portfolio also, if you are listed, unlisted company, what percentage we should do? If we invest in Alphabets of the world or Anthropic of the world, what should be our approach? That we can control through the design of the portfolio. Actually, the design of the portfolio is about risk management. So we have to decide ab initio how much risk we want to take. If we invest in one Anthropic, then what do we do with the rest of the portfolio so that in case Anthropic does not turn out to be that good an investment, the rest of the portfolio should be able to cushion it.

Ms. Akshara Menon: Got it. One housekeeping question: at PMS Bazaar, we have 750 funds on board—I mean, listed with us. With that, why should an investor look into Chanakya? If you could say that in one line.

Mr. Rajesh Tiwari: Some five years back, Finalyca, which is your sister concern, they gave us a free subscription. We took it, then looked at different funds. Then we realized we were among the best performers in India. Before that, we were not aware. Even SEBI did not use to publish that information. APMI was not there. So we looked at it, and we liked it. And not only that, we could look at other funds which were doing well. We could compare ourselves with those funds, not only in terms of performance but also in terms of risk, the portfolio structure, because Finalyca gives you attribution analysis. And there, the selection efficiency is the most important criterion. We could see that in terms of selection efficiency, we were consistently among the top funds in India. Not in timing efficiency—there is another one. Allocation efficiency—there also we were not bad. In recent times, in allocation efficiency, we have been among the better ones. But at that point of time, it was an era where SME stocks and momentum investing were doing very well. So that was the time to invest more in momentum trading, momentum investing. In SME, we are not that much there. But last three years, when the market has become more calm—I would say more rational—then even in terms of allocation efficiency, we are among the very best in India. And selection efficiency, we continue to remain among the very best in India. If we could see it, I am pretty sure so are the investors.

Ms. Akshara Menon: So are the investors. 

Mr. Rajesh Tiwari: I hope they look at it.

And most investors, they make a mistake. They do not look at attribution analysis based on what is the average market cap of the investee companies. Our average market cap is around 2 lakh 40,000 crores. We should not be comparing us with another PMS where the average market cap is 7,900 crores. Fair enough. And you should also look at the appropriate benchmark. So Finalyca itself has done it. If it could reveal to us about ourselves, it will reveal about anyone else to them. And in fact, this year we have been flooded with inquiries from some of the leading distributors who could see the  Finalyca numbers.

Ms. Akshara Menon: Good to know. Actually, your performance itself is going to speak. With that, we have come to the end of the session. This was not just about the fund and the market, but also a psychological mindset of a fund manager—from the start of his journey, how he manages risk, how he sees the fund, the passion behind running the fund. From this, we could understand you more as a fund manager, and this is a very informative session. Thank you.

Mr. Rajesh Tiwari: Thank you a lot. As I said, we are students of the mind of the management, and any question like this educates us. Thank you for educating me.