Utpal Sheth is the name to reckon with in the field of stock investing and analysis. He is the little known partner in the RARE Enterprises owned by the ‘Badshah of Dalal Street Rakesh Jhunjhunwala’. However, those who know him including the Badshah deeply regard him as one of the best investing minds in the Dalal street.
His ability to crunch numbers coupled with seeing things, which are beyond obvious separates him from the crowd of run of the mill analysts.
And he never comes on the television to share his opinions. So we should be thankful to Ramesh Damani, who took his rare interview on CNBC couple of years ago. Going through the interview, you get the glimpse of his investing thought process.
Every investor wants to create wealth, but this is not possible if companies don’t create value in the long term. Therefore, it’s important to find management that has the leadership attribute and can take right decision at right time.
Cash is God
Very few people know it but Utpal has a role in saving Pantaloon retail when the company almost ran out of cash. He soon realized that the company is highly leveraged and if it does not raise capital, running company would be difficult. However, raising capital could not have been done overnight. So, he advised Kishor Biyani to opt for flash sale as there was a lot of inventory in the company.
Biyani realized the importance of having cash at that moment and did exactly the same. This helped the company to remain float for some time. That’s why free-cash flow is an extremely important parameter for a company.
The Curious Case of Titan
The Badshah of Dalal street was mulling to buy this stock. It was 2 AM at night when he presented a mathematical model to Rakesh Jhunjhunwala.
He saw the calculation and said, “are you drunk?” Though he knew he was a teetotaler. However, he broadly agreed with the direction.
Even Titan management did not believe those figures. But five years down the line company achieved the topline figures and in the next one year they achieved the bottomline figures!
So what did he see in Titan?
After some back of the mind calculation he found that though Titan was deploying the best talent on its watch business, but the RoCE was significantly higher in the jewelry part of the business.
Secondly, sales were fast and the business was scalable.
High Return on Capital Employed (RoCE) + Scalability = Magical Return
Pay Attention to the Capital Allocation
That’s of paramount importance. Even if a company is growing fast, a low RoCE will result inhibit free cash flow. In that case, if you’ll have to take either debt or dilute equity. However, at some point it has to end.
No wonder Essar, Suzlon and JP Associates suffers. Investors should deeply consider leadership attribute and structural changes in a company as confluence of these two creates the greatest value. T
When Titan moved from borrowing capital to buy gold to leasing gold, it significantly reduced the working capital requirement resulting in dramatic improvement in RoCE of the company.
Similar Trends in Real Estate
Similar trend can be observed in the real estate companies today. Earlier they used to buy land parcel, which required huge investment but now they have moved to Joint Development model. This reduces the requirement of huge capital.
So we can see dramatic improvement in the performance of real estate companies such as Godrej Properties and others will reap huge rewards compared to Oberoi Realty that depends on buying huge tract of land.
With land cost making up 30-50% of the total expenditure for any realty project, this will help in prompting land owners and developers looking for joint development model. Many Bangalore based developers are working in this model.
So opportunities are always there in the market and knowing the history helps you find the similar price patterns.
The best way to learn is to observe the investing methodology of great investors and try to emulate their investing style.