Buy and hold investing in India

Remember the market cliché about some of the best track records coming from those of dead people’s inactive portfolios? This comes from a supposed study that was done by Fidelity, in which they noted an internal performance review on accounts to determine which type of investors received the best returns between 2003 and 2013. The customer account audit revealed that the best investors were either dead or had forgotten about their portfolios.

From Business Insider

This happens because emotions and opportunity costs are not a factor in dormant portfolios. Does that mean, one should not try to maximize returns from one’s portfolio by switching to better ideas? I don’t think that would be the perfect thing to do, considering the dormant portfolio data. I’ll tell you why. Imagine you were an investor in Wipro in Feb 2000 and somebody told you about inactive portfolios doing better than the active ones and based on that you’d decided not to sell. You’d have had 20 years of zero returns while the indices ran up multi-fold.

Very few companies survive the relentless onslaught of competition, technology, changing consumer preferences, changing government regulations and various other factors. See for example, the below list of top 50 companies by market capitalization in 1992.

Most of the above got replaced by better, sexier, smarter companies. And, most of the ones that did survive in today’s top 50, did so because of issuing new shares. Take State Bank of India for example. From a market cap of 22900 Crs in 1992 to 318,000 Crs today, SBI’s market cap grew at a pitiful 9.5% CAGR. I am not even getting into equity dilution which would chop shareholder returns down to much lower single digits.

Or take ITC, a much debated hot stock. ITC’s market cap went from 9000 Crs to 2.6 Lac Crs, delivering a return of 12% CAGR, excluding dividends. That ITC would grow at a faster clip, 2021 onward, when it is 28x bigger, and is likely to be much more bureaucratic than it was in 1992, will possibly become a case study in hope based “long-term” investing, in the future.

Going back to 1992, as investors who believed in the India growth story, and who wanted to maximize their ROI, why would we have stayed invested in SBI/ITC when there were much better fish in the pond, provided one knew where to look? Shouldn’t we have been looking for faster growing high ROE companies, than the below large caps?

Company19922021CAGR (excluding dividends,dilution,spin-offs)
State Bank of India2290531878710%
Tata Iron & Steel13793863857%
Reliance Industries6654131061620%
Tata Engineering & Locomotive 5287N/AN/A
Associated Cement4924N/AN/A
Century Textiles400352251%
Grasim Industries36609249512%
Tata Tea3516N/AN/A
Tata Chemicals2986189587%
Larsen & Toubro294119633916%
Gujarat State Fertilizers Company2886N/AN/A
Colgate Palmolive27664186010%
Master Shares (Unit Trust of India)2699N/AN/A
Cochin Refineries2619N/AN/A
Industrial Credit and Investment Corporation of India (ICICI)2475N/AN/A
Chemical and Plastics India2133N/AN/A
Bajaj Auto206910417414%
Brooke Bond India2060N/AN/A
Indo Gulf Fertilizers and Chemicals Corp1814N/AN/A
Gujarat Narmada Valley Fertilizers & Chemicals177944563%
Jaiprakash Industries1779N/AN/A
Shipping Credit Corporation of India1762N/AN/A
Bombay Dyeing168614680%
Essar Gujarat1683N/AN/A
Great Eastern Shipping Company166145134%
Tata Timkem153094476%
Nestle India150115977817%
Castrol India1479121668%
Century Enka1461549-3%
Indian Aluminium1452N/AN/A
Motor Industries1445N/AN/A
Britannia Industries13798441515%
Apollo Tyres1328142809%
Madura Coats1308N/AN/A
Gujarat Ambuja Cements11605855714%
Indian Rayon and Industries1144N/AN/A
National Organic Chemicals1134N/AN/A
Raymond Woollen Mills1124N/AN/A
Birla Jute Industries1120N/AN/A
Oswal Agro Mills1112132-7%
Ingersoll-Rand (India)110421162%
Mazda Industries1095N/AN/A
Siemens India10386444915%
Ashok Leyland10283348013%
VST Industries101710170%
ITC Bhadrachalam Paper1003N/AN/A
SKF Bearings (India)963107579%
Data not available for companies marked N/A

Suppose an investor forgot about his large cap portfolio in 1992, 29 years later, in 2021, he would have realized what a poor idea it was, to leave his portfolio dormant. The top performer, Reliance Industries, delivered 20% CAGR, excluding dividends, while most of the remaining companies either ceased to exist or delivered single to lower double digit returns. I am not getting into what happened to companies where data is not available. And I am not inclined to calculate dividends either because we want to look at the most efficient way of calculating returns quickly. My hunch is that, at best dividends would add 2-3% to the above returns. It is not rocket science to understand that active investors who kept learning about companies did much better than the cumulative returns delivered by this dormant portfolio, including dividends.


  • The answer to Buy and hold vs Buy and forget lies somewhere in between. Continue to hold companies that keep executing. For the ones that don’t, switch to better alternatives, because opportunity costs are real.
  • Buy and monitor beats Buy and hold any day. As Ian Cassel says “Fall in love with companies that execute but be prepared to divorce quickly.”
  • The above data is only for large caps. People typically invest in large caps for the certainty and clarity, the big companies provide. I agree with Ken Fisher, who once said “Clarity is almost always an illusion—a very expensive one.” As ROI focused investors we are better off investing in mid and small caps, even after adjusting for the risk involved in smaller companies.
  • Most things in the market are contextual. What works in the west doesn’t always work in India. Buy and hold may have worked in the case of Fidelity’s investors who forgot/were dead. It certainly has not worked in Indian large caps.

Barath Mukhi

How depressed markets can cost you money

This is a case study of how a lot of investors missed a big trend in Indian markets, costing them a 25+ bagger and how we can avoid falling prey to such a trap, ourselves.

Bull markets can delude one into believing that good times will continue. Likewise for bear markets. In bear markets we may start to believe that things around us are gradually getting worse when they could actually be getting better. This notion is compounded by the fact that everybody around us is bearish and negative about the future state of the economy and the markets. As investors, it is our job to keep our eyes on the ball (data) and not lose focus by believing what everybody else is saying.

Imagine what might been on investors minds, after reading scary headlines, such as these.

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Economic Times article from May 2002

Imagine that the Sensex goes down from 50000 to 31000, over the next 3 years. What effect will it have on your psyche?

Sensex – March 202150000
Sensex – March 202237500
Sensex – March 202336750
Sensex – March 202431973

Yet, this is exactly how it played out in the 500+ trading days between 2001 & 2003, in percentage terms.

March 31, 2001-25%
March 31, 2002-2%
March 31, 2003-13%

Most investors are likely to have lost both, the money and the confidence in the above kinda market. Some of us may think, yeah the market rises, every time it falls and we might have just kept buying, had we been investors back then.

However, this ignores the psyche of most investors of that era. In 2000, just when the market was starting to forget the Harshad Mehta scam of 1992, and investors would have been less worried about manipulation, came another blow to their faith in the markets, in the form of the Ketan Parekh scam of 2001. And after they or their peers lost money, some of them are likely to have believed, Indian markets will never change and there will always be scams like these.

Also, in 2001, FIIs started to pull money out, after the Sep 11 attacks on WTC. Back then, FIIs were considered the major drivers of stock prices in India, because collectively, they had the muscle to move markets whichever way they wanted and FIIs selling could mean just one thing.

Investors were perhaps twice bitten, thrice shy (First Harshad, then Ketan). This was an era where the internet was still a luxury and wasn’t considered too important. Information flow wasn’t as smooth as, it is today. Perhaps, not many would have foreseen the impact, the introduction of demat and online trading would have, on making it harder & harder to manipulate the markets at the scale of previous scams. Even today, some old timers believe the market is a gambling den, thanks to historical scams like these ingrained in their memory and to a genetically programmed human emotion, called loss aversion.

Enter, the era, when mobile phones went from being a luxury to becoming a need, and landlines were still the norm. To put things into perspective, this bulky phone, the Nokia 6600, a rage back then, thanks to it’s relatively lower price tag and the all new camera feature, was launched in India, only in Oct 2003 and it took some years for it to be widely accepted.

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So, in the middle of all these things, in 2003, why would you want to put your money into a company whose losses had kept increasing for 4 years? It also had a seemingly insane market cap, of 5000 Crores.

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Investors were also expecting this company to continue making losses for the next few years.

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Yet the stock price started moving up and went on to become a multi bagger over the next few years.

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This is a story about Bharti Airtel. And here’s how one very smart investor kept his ears to the ground, thought differently and made solid money from this stock.

Raamdeo Agrawal’s investment thesis “Bharti Airtel was a big investment for us. It was a combination of two frameworks – value migration from fixed line to wireless phone and the network effect. In network business, the winner takes it all. The number one player makes 80% of the profits and the number two player 15%. I had read this in Michael Mauboussin’s book. In 2003, Bharti was making losses. In Jan 2003, Bharti’s CMD, Sunil Bharti Mittal, announced on the analyst call, that they had started breaking even. I did a five year excel spreadsheet analysis and deduced that they will make Rs. 28 thousand crores, cumulative PAT, in the next 6 years. The cash flows were expanding, the operational cost was fixed and there was a ten year tax holiday. The market cap was just Rs. 5000 Crs then. In life, you get very rare opportunities like these when the market is blind to the numbers. The market was also very depressed in 2003, which contributed to the under valuation. We bought the stock at Rs. 12.5 (adjusted) and it went to Rs. 590 within 3 to 4 years, but I did not sell then. I sold the stock at Rs. 325, when they bought businesses in Africa. So, it was still 25x. Investments like these give you the confidence that your frameworks work. In earlier times, just buying stocks at cheap valuations, made money. But the world has changed. You cannot just buy cheap and do well. You have to buy quality stocks with growth at cheap valuations.”

His investment thesis was a lollapalooza, where multiple mental models came together, which isn’t practically easy to do, by the way. Perhaps there are more models, but here are the ones that come to my mind.

  • Network effects (Pat Dorsey)
  • Loss to profit company (Ben Graham)
  • Using spreadsheets which are frowned upon otherwise (Mr. Agrawal projected a PAT of 28000 Crs. Actual number 22000 Crs)
  • Focusing on the story and not on numbers (RK Damani’s HDFC Bank example?)
  • Operating leverage once fixed costs are covered
  • Focusing on Cash flows (Buffett)
  • Mr. Market was depressed (Ben Graham)
  • Focusing on quality + growth and not just cheap valuations (Munger)

Focusing on cash flows instead of profits

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  • Depressed markets can impact investors’ judgements, even without they realising it. Why else would somebody ignore a massive change in consumer preferences, that was very evident (in hindsight)? If there is a multi-year bear market in the future, keep your eyes and years open. Do not forget that, things will eventually get better.
  • Do not underestimate the effect, negative news flow from social media, can have on your psyche.
  • Buy what you see isn’t always easy.
  • Keep an eye on companies which are reporting losses, yet are cash flow positive.
  • Growth + Quality + Reasonable valuations due to Mr. Market’s bias = Multi baggers.

Barath Mukhi
1st April 2021

Strategies to get lucky in equity investing

Many experienced investors are likely to tell you the role of unexpected pleasant surprises aka serendipity in their investing careers.

The idea that I am trying to explore is how much of equity investing is luck and how much is skill. And, if it is luck, are there game plans which can help us get lucky.

Here’s Peter Lynch “Frankly, I’ve never been able to predict which stocks will go up tenfold, or which will go up five fold. I try to stick with them as long as the story’s intact, hoping to be pleasantly surprised. The success of a company isn’t the surprise, but what the shares bring often is. I remember buying Stop & Shop as a conservative, dividend-paying stock, and then the fundamentals kept improving and I realized I had a fast grower on my hands.

Hero Honda’s (a 150 bagger from 1994 to 2016) early investors had no clue, (at least initially) that they were capitalizing on a massive shift in consumer preferences. Here’s Mr. Taher Badshah’s interview on Wizards of Dalal Street “I started to flesh out the story in my mind and I used to have these repeated sessions with Raamdeoji late into the evenings and that is how it came about that this is a story, not about the capacity expansion, but this whole element of mobility, mobility was so constrained at that point in time in a country like India and especially in the rural markets. Scooter was only a largely urban city led phenomenon. So, we tried to rationalise that this is a product which can become large. How large, even we did not really have the vision to think that what was a 90:10 scooter-motorcycle market would become a 10:90 scooter-motorcycle market.

An astute investor like, Mr. Basant Maheshwari for example, thought Pantaloons won’t do well and it subsequently became a 40 bagger for him. He explains this in this short video.

Ayush Mittal, an investor I admire for teaching us the value of turning over a lot of rocks, nailed this idea in one of his presentations, “Many often the stocks where we worked very hard, where we thought we knew enough, gave the worst returns. While many others – not our favorites – gave extra-ordinary returns. Often stocks where we did lot of work haven’t worked out well. Plus they performed best when undiscovered. It’s like a backbencher performing well – he gets rewarded more.”

Sometimes, even founders/promoters don’t know

And here’s a leaf from the legendary investor, Charles Akre “According to Bill Gates’ first book, The Road Ahead, he and Paul Allen tried to sell the company to IBM some years earlier and they were turned down. And so… hindsight my inescapable conclusion is that neither party of the proposed transaction understood what was valuable about Microsoft. In my mind it’s a huge irony at least because in my point of view Microsoft became the most valuable toll road in modern business history. But here again, even the people running the company at an early stage did not understand what it was that made it valuable. And it wasn’t even visible to them. So my point here is simply that the source of a business’ strength may not always be obvious.

Sam Walton’s biography “I’m always asked if there ever came a point, once we got rolling, when I knew what lay ahead. I don’t think that I did. All I knew was that we were rolling and that we were successful. We enjoyed it, and it looked like something we could continue.”

What’s in it for DIY investors

Given that it is difficult to predict high CAGR stocks, here are some ideas that can help bypass the human limitation of a lack of foresight.

Strategy # 1 – Average up – So what you really need to do is to size positions based on a Bayesian approach. Kill small experiments that you thought would do well but failed, and allocate more and more capital (by gradually averaging up, based on subsequent quarters of good results) to bets that are working in your favor contrary to what you initially thought. Relaxo Footwears was one such bet for me. When I first bought the stock, I thought 40 times earnings is too high a price to pay for this company. Nevertheless, I invested despite what my intuition kept telling me at that time. And the price kept going up, and I kept buying.

The best example of averaging up I have seen till date is Mr. Maheshwari buying Page Industries from 350 to 5600. So he keeps buying the stock until 16x his initial buy price & beyond. No price anchoring. No excuses of the price running up. Just plain execution on his strategy of averaging up on a winner.

A critical part our position sizing process should be to let the validation of our thesis (reflected in business performance subsequent to our initial positions) determine the position size. When we first spot a stock, we shouldn’t pre-decide we’ll allocate 5-10-20-30 or even 40% of our portfolios to a given stock. Every time the management of a company executes on it’s stated plan, by delivering growth and ROE, we should be buying more of the stock. If it doesn’t do as well as we’d expected, we get out of the stock (unless the slowdown is temporary) and add to stocks that are doing well despite what we originally thought.

Strategy # 2 – Basket approach – The second strategy is taking a basket approach. So if you think a sector is going to do well, allocate more of your portfolio to a potential winner, at the start. At the same time, invest small sums into other counter intuitive bets from the sector. Let me give you an example beautifully articulated by Mr. Kenneth Andrade, in an interview from 2013.

So if you were bullish on the 2 Wheeler market in India, in the 90s and 2000s, what you should have done is allocated a lot more to TVS Motors initially and when consumers were starting to accept Hero Honda’s 4 stroke engines, paid attention to disconfirming evidence like a true Bayesian, and moved money from a TVS & Bajaj to a Hero Honda because clearly it was outperforming it’s peers. Hero Honda deserved your capital more than Bajaj or TVS did at that time. The opportunity cost of staying invested in a Bajaj or a TVS was skipping Hero Honda, a subsequent 150 bagger.

Strategy # 3 – Businesses with multiple possible futures aka sidecar investments

I’ll let David Gardner explain this for you.

With this I’ll call it a wrap. Hoping good luck finds you soon 🙂

Barath Mukhi

Why investors didn’t buy Infosys when it was a small cap

Let’s do a thought experiment. It’s August 1997 and you are in the trading ring at the Bombay Stock Exchange. In between the chaos of that place, there are thousands of listed companies. An investor friend, tells you “Buy Infosys”. You are unconvinced and don’t buy because you’ve burnt hands buying stocks recommended by others before. And you forget about the co.

The question I am seeking an answer to is – If Infosys subsequently became a mammoth wealth creator, why didn’t a lot of investors buy it in the early 90s? What biases were involved in causing the massive opportunity loss that followed, due to not buying the stock of this co.?

Let’s go back in a time machine. Here’s what it looked like in mid-1997.

*PAT Data not available for 1992

ROE for all 5 years kept increasing YoY and ranged between 21% and 33%.
The P/E ranged between 15 & 25.

Infy also had a 15 year track record of growing sales at 28% CAGR from 1982 to 1992. So even in 1997, it was not some microcap co. with no track record. It was a fast grower for 15 years, with decent credentials.

Let me quote what some veteran investors have said about Infosys and other technology companies of that era.

Basant Maheshwari – “Between 1994 to 1998, Infosys came right under my nose. We saw their good results, but there was always these thoughts like – “Who would buy Infosys if you take away all their employees tomorrow?” or “It only has computers and chairs and what are those worth for?” or then “I can create an Infosys by hiring all those people.”

Anil Goel – “I had never invested in IT companies. I didn’t understand that business and I did not understand the valuations. The valuations just did not make any sense. The market cap of one Computer Education Company exceeded the combined market cap of the few large conglomerates at that time. That saved me from technology crash of 2000.”

Here’s how the company’s market cap went ballistic, 1997 onwards.

1997 to 1999 – 19 x
1997 to 2000 – 127 x (not excluding new shares issued)

What would have happened if one had purchased the stock in 1997 or prior to that?

Assuming most people could not sell Infy at it’s peak, they would have still done well, had they bought the stock prior to 1997 and sold it post-crash, in 2001.

The point I am trying to make is, just like one cannot be right all the time, one also cannot be wrong all the time either. What was a growth stock for 6 years (1993 to 1999), became a bubble stock in 2000 and most people who bought in 2000, were likely to have been nastily injured. Had one purchased the stock any time between 1993 and 1998, they’d still have done well.

Ramesh Damani, who understood Infy, due to his technology background and made a ton of money from it’s stock, said “Lot of the old hands in Dalal Street didn’t understand technology since there were no physical assets, and all the real assets walked out at five in the evening. They had no idea how to value these companies.”

Would it have been easy to buy this stock without a tech background? No. As a wise investor once said “The risks of this trade always appear lower, after the rewards have been made.” Here’s what Infy’s website looked like in 2000. No investor relations. No annual report PDFs. This was the world back then.

Now let’s look at the situation from the perspective of an investor who had NO tech background.

I am not trying to find fault with investors who didn’t invest in Infy. I totally respect the wisdom, the investors I’ve quoted, have. I am just trying to present the situation from various vantage points, as investors saw it back then.

Here’s what Raamdeo Agrawal’ investment thesis in Infy was, in 1997 (I have shortened & rephrased this a bit). He had NO tech background, just like most people of that time.

“In the Y2K boom, we made Rs. 100 crore. We were 80% invested in technology, 40% of which was in Infosys. Mr. Narayana Murthy taught us that Indian cost was unbeatable. What Americans were doing in Boston for the last 20-30 years, Infy was doing for 1/5th or 1/6th the cost. Due to a friend’s suggestion, to learn about globalization, I started reading The Financial Times, The Economist, Business Week and Fortune. Somewhere in 1997, I read about the effects and challenges of Y2K. It explained what problems would occur when the systems would change from 1999 to 2000 and how it will need to be changed in computer systems for continuity of various industries. I could see a big elephant approaching and that the gate is small. And that it is a dated event. In the market, you rarely get to know about a future event that is dated, that this transition has to happen in just 3 years. The demand was high and the supply was not as much. The IT companies were growing at 100%, but were still available at 20 P/E in the beginning.”

Y2K as cover page on the Time magazine

Selling a bubble stock

Ramesh Damani – “When we saw that the 2000 Technology, Media & Telecom (TMT) bull market was getting over, I realized that these values wouldn’t hold. Infy was trading at 150+ forward P/E. Even if you try to hold the stock, the markets rattle you out of the position. Infy went up three straight circuits to Rs. 13,000 and then started falling. So when it fell to Rs. 8,000-10,000 levels, I sold it, as I could not handle the stress of holding it since so much money was involved.”

Raamdeo Agrawal -“When these companies were trading at 100-200 P/E, we did start selling. I started selling Infy at 11,000 per share. And I sold the last bit in September 2001, at around 2,500.”

Rajashekar Iyer – “My 1995 experience had taught me that when stocks are highly overvalued and start declining, the safe course is to sell them and not be a ‘long term investor’. All IT stocks were tremendously overvalued by Jan 2000 and so when they started falling in February, I sold them as quickly as I could. I could not sell at the peak, mostly 15% down from the peak. One IT company’s stock that I had bought at Rs. 60, came down from Rs. 510 to Rs. 360 by the time I could sell. I sold it almost 30% down from the peak, but it finally ended at Rs. 12.”


  • For most investors, it takes a lot of time to adapt to new business models created by the arrival of new technology. Learning about these new business models quickly is sometimes the difference between great returns and mediocre returns.
  • Holding such investments is never easy. Think how difficult it is, to own Bitcoin today, given all the noise. I don’t own it btw.
  • Having bought early, if you find yourself invested in a bubble, stay put. Booking some profits intermittently and keeping trailing stop losses may be a good strategy, although stop losses may not help at times, given that there could be severe gap downs and no buyers.
  • Cut losses quickly. If you don’t, you may find yourself holding a loser for 8 years. (It was not until 2008, when Infy crossed it’s 2000 high price).
  • No matter how good a business or a management team is, at some price it becomes stupid to buy it.

Barath Mukhi

Case study – How one investor made 25 Crores in 4 years by investing just 7 Lac rupees in a real estate hot stock

A few months ago, I watched this very humble interview of a celebrated investor, Mr. Rajiv Khanna, husband of Mrs. Dolly Khanna.

Mr. Khanna bought Unitech’s stock in 2003-2004, when it’s market cap was ₹100 Crores. His investment thesis was simple. Unitech’s business was being valued by the market at ₹100 Crores, a price Mr. Khanna thought was abysmally low. Just their Delhi office was probably worth more than that, he thought.

This is the functional equivalent of walking into an Infosys’ branch and telling it’s owners, “Sell me your business for the price of this office building.” Insane.

Yes, these kinds of absurdities occasionally show up in the market. When Mr. Market is in such a distressed mood, he throws the baby out with the bathwater and creates bargains for investors who can separate the wheat from the chaff.

This video got me wondering. What causes a stock to go up 350x & beyond in just 4 years. Here’s what I found.

From 1989 to 2002, Unitech was an unheard-of company, an also-ran. And then the bull market in real estate began. In 2002, they were selling the same amount of goods, they’d sold 5 years back.

Profits were down in the dumps, too.

And then began an unprecedented bull market in India’s real estate sector. From 2003 to 2008, the market leader in this sector, other than DLF, turned things around at a scorching pace.

Unitech’s total # of outstanding shares went from 1.2 Crores in 2003 to 162.3 Crores in 2008. To remove the impact of equity dilution, I have taken EPS numbers instead of PAT numbers because EPS & not PAT is what matters, from a minority shareholder’s perspective. BTW, PAT went from 46 Crs in 2003 to 1669 Crs in 2008.

Unitech’s promoters were a celebrated lot. The title of this article read “India’s most investor-friendly companies”

What these developments did to the market cap, starting 2003, was unimaginable.

Led by scorching growth, investors were made to start looking at valuations differently, so the high prices could be justified somehow. Valuations were no longer based on earnings but based on land bank. Consensus was “Buy landthey’re not making it anymore.”

BubbleValuation based on
DotcomEye Balls
Real estateLand bank
Infra companiesOrder book
E-CommerceGross Merchandise Value

And here’s what happened when the party was over.

Would it have been easy to buy the stock of this company? No. The sheer number of subsidiaries of Unitech’s would make your head spin, besides teasing the forensic analyst in you. In 2008, this co. had 337 associates/joint ventures/subsidiary companies.

Info about Mr. Khanna’s exit from Unitech’s stock is not available but my guess is that he might have exited before or after the peak, once the stock fell beyond a certain threshold. (In the same video, he talks about exiting when positions go down by 15-17% from his buy price.


  • Ride the bubble but make sure trailing stop losses are in place. Usually 20-25% from the top is a good enough warning signal. However, let, stop losses not give you a fake sense of security. Like most things in life, this strategy isn’t fool proof.
  • Not watching your portfolio for a few years may sometimes, do wonders for your portfolio.
  • There are bull & bear markets in real estate too. Returns before and after the real estate boom have sucked. Without the kind of growth experienced between 2004 & 2008, most people are likely to have had low to medium range returns.

Barath Mukhi

Case study of a 33 bagger whose sales grew at just 6% CAGR over 5 years

I love biographies. Particularly, those of investors who have experienced Mr. Market’s mood swings, over the years.

In this pursuit, I am currently reading the mind blowing book – Masterclass with Super Investors. There’s an investment case study of a co. between 2003 to 2008, by Mr. Raamdeo Agrawal of Motilal Oswal.

I started the book with the assumption that sales growth is important for a multibagger to happen. This assumption was based on sales growth of multibagger businesses, that I had analyzed in the past, which had some tailwind going for them, in a particular phase of their long journey.

CompanyPeriodSales CAGRStock Price CAGRStock Price went up by
Avanti Feeds2011 to 201753%106%83 times
Page Industries2008 to 201735%74%35 times
Bharti Airtel2003 to 200855%97%29 times

Based on the above table, it looks like, there is some correlation indeed, between the top-line of a company and the stock price, which is what we all are interested in.

Or so, I had assumed.

Until, I ran into the story of CESC Ltd. in the book.

Just 6% CAGR in sales. That sucks, some investors might have thought!

But surprise surprise. Here’s what happened to the company’s stock price.

Here’s the investment thesis given by the legendary investor himself.

“Another investment was in CESC. They had a monopoly in power generation and distribution in Kolkata and had done a wonderful job in terms of operations. Yet the whole company was available at a market cap of Rs.90 crore. The reason was that they had very high debt and were paying an interest of Rs.400 crore. Still, they weren’t generating loss but were making meagre profits of Rs.7 crore. I saw that the interest rates were falling. I had read Security Analysis by Benjamin Graham, and knew that equity is always some kind of option value. With the crash in interest rates, the interest cost fell from Rs.400 crore to Rs.200 crore, so the profits jumped 30x. You get these kinds of opportunities only when markets are very depressed.”

Despite a stagnant top line, the co. was able to turnaround it’s business and deliver a profit growth of more than 300x, thanks to an improving balance sheet.

Here’s how things turned around for this business.

Interest rate reduction coupled with lower debt levels, resulted in money flowing directly to the co’s bottom line.

Total interest paid reduced by 281 Crs
Profits increased by 470 Crs

In other words, a big chunk of earnings per share in 2008 was funded by interest that would have otherwise been paid out to banks.

2002 & 2003 not included because the co. was not making profits

Sometimes, it’s not about ROE, but about growth

At most times, both ROE and Growth are equally important to achieve high returns. Yet, there are times when ROE doesn’t matter as much as growth. Despite having single digit ROEs in a high interest rate environment, this co. turned out to be a multibagger for investors who were smart enough to recognise this anomaly. Had one focused on ROE, he’d have lost out on an 80% compounder.


  • Sales growth is almost always important, but not always important and a good investor recognises the difference between almost always and always. A golden rule to follow in the market is never say never.
  • When interest rates are going south, they are disproportionately beneficial to highly leveraged businesses.
  • Do not assume that a power generation and distribution business cannot deliver a multibagger stock.
  • Do not assume a low ROE business can never deliver a high CAGR stock. An 8% ROE business whose profits are growing fast could still deliver better returns than a 20% ROE business with no growth.

Barath Mukhi

The growth story of Laurus Labs & it’s promoter

Let me start with a story of a fanatic who creates a 20 thousand Crore company from scratch. How does he do it? Where does he start?

The story begins at Andhra, which by the way has produced quite a few successful first generation entrepreneurs in the Pharma space. The ones I know of, are Dr. Reddy’s, Divi’s & Laurus. I don’t know if it is plain randomness or there was something in that environment that led to creation of multi billion dollar pharma companies by people starting from scratch. I speculate, one of the factors, may have been the way chemistry was taught in those colleges, was better than other places.

Or maybe it was about being in the right place at the right time with the right skills. Maybe, in an alternate universe, the same set of entrepreneurs may not have done as well as they have. Too many things needed to fall in place for this kind of, what some people may call, coincidence. Reminds me of the experiment which is widely known on the net, through the article about Justin Timberlake.

One of the key ideas in this article was that too many things need to fall in place, and more importantly, at the same time, for a knockout success story to happen. For example, imagine what would have happened if the exact same set of people were to start Infosys today. Would they be nearly as wildly successful as they have been? Or what if Bill Gates was born just 5 years later? Would we nearly have another giant monopoly like Microsoft or anything close? You get the point.

Will Laurus (20k Crs Market cap) follow the same trajectory as Dr. Reddy’s (75k Crs Market cap) & Divi’s (1 lac Crs Market cap)? In my biased view, chances are it will.

So after finishing his education, Dr. Chava,

  • Joins Ranbaxy as an R&D management trainee.
  • Moves to Veera Laboratories in 1995 and runs the R&D dept.
  • Moves to Vorin Labs which merges with Matrix Labs in 2001.
  • Becomes Chief Operating Officer of Matrix in 2004.
  • Starts Laurus Labs in 2005 due to differences with the chairman of Matrix.

How Matrix Labs strengthened it’s R&D – From Matrix Labs 2000 Annual Report

In 2000-2001, Matrix entered into drugs that treat the deadly AIDS disease. Here’s a snippet from Matrix’ 2001 annual report.

Matrix Labs 2003 Annual Report

Matrix Labs 2004 Annual Report

And here’s what happened at Matrix Labs during Dr. Chava’s tenure. Back then, this kind of growth might have been possible due to a mix of factors such as a growth in the overall industry + the management team driving the company’s focus on to the right products in the right markets, at the right time.

Now, let’s get into the current and future state of Laurus’ business.

In the past, growth was driven by sales of Antiviral APIs. This is the division that sells APIs for AIDS drugs, primarily in low and middle income countries through the Global Fund, PEPFAR and the WHO. A majority of ARV API sales growth came from 4 HIV/AIDS products – Tenofovir, Lamivudine, Efavirenz and Dolutegravir.

As per their latest concall, doubling sales in the HIV segment (APIs + Formulations) is going to be impossible. Having said that, they also mentioned, they should be able to deliver growth in their overall API business in FY22 as well. Based on whatever little info I could find, the largest player in ARVs seems to be Mylan (which acquired Matrix Labs in 2007), and has a 40% market share, in this space.

The other 2 therapies that management is bullish on, are Cardiovascular and Diabetes.

Some part of the growth was also driven Laurus’ Custom Synthesis, CDMO & Ingredients businesses. Custom Synthesis is the segment that has potential to do well over the next few years because the total sale from this division over the last 4 quarters is a minuscule 491 Crs.

Transforming into a full fledged Pharma player

Formulations / FDF showed up for the first time in 2020 Annual Report.

Q3 FY 2021 Concall – “See, if you look at the evolution from 80% to ARV APIs, in the five years we moved to 38% of ARV APIs. Similarly, our revenue dependency on ARV formulations currently is very high. But in the next five years, we will also diversify our revenues coming from non-ARV formulations significantly and the dependence on ARV will come down. Because there are no new formulations to be developed in the ARVs, we are almost done with developments. So, development focus is shifting from ARV to non-ARV. And also, we are adding very large capacity in Vizag and we have taken land for formulations expansion in Hyderabad as well. So if you want to look at where we will be in say, three, four years down the line, I am sure we will be discussing on non-ARV in five years from now. If you look at the calls one and a half year back, half of the times people were asking questions on Efavirenz. Now nobody asks questions on Efavirenz. Two years from now people will not ask questions on ARV APIs. And maybe another two years from then people will not ask about ARV formulations, people may talk about what is we are doing in our Laurus Bio?, what growth we have in Laurus Bio?, what other therapy areas we will be focusing?, what kind of delivery dosage forms we are doing?. So, company s in the transformation phase, so we need time and we are very confident to expand our portfolio beyond just ARV.

The SMILE pattern

This is a pattern noted by the famous investor, Mr. Vijay Kedia. He believes multibagger companies exhibit the following characteristics – Small in size (at least it was small when I started investing in this co.), Medium in experience, Large in aspiration and Extra large in market potential. I am of the opinion that the company has all 4 ingredients and is likely to scale up to the next level, from here.

Regarding aspiration, here’s a person who starts with a salary of a few thousands, moves on to lead the R&D division of another co. and goes on to create a $2.5 billion business in less than 2 decades. If this is not aspiration, what is?

Disclaimer: I have stayed invested in Laurus Labs from lower levels. These are my views and are not to be construed as investment advice. As always, please do your own research before proceeding to buy/sell.

Barath Mukhi

A case against borrowing Home Loans – Part 2

Link to Part 1 – A case against borrowing Home Loans

How I think about asset allocation

Most financial planners advise putting your surplus into real estate, gold, equities, liquid assets (fixed deposits/liquid funds, etc.) and some of them even suggest buying crypto currencies. I have no formal education in asset allocation. However, my experience of a decade, in equities, has convinced me that equities give you an indirect exposure to most, if not all asset classes. Let me tell you how.

Let’s go back in a time machine and do a thought experiment.

It’s 2002 and you are gainfully employed and a forecaster who never gets his predictions wrong, comes and whispers into your ear “Hey, don’t worry about the below average returns that real estate has delivered over the last couple of years. The next few years are going to deliver outstanding returns. Just take that home loan and buy a flat in a remote corner of Gurgaon, Bangalore, Pune or any other upcoming city and you’ll mint money.”

So, as an equity investor, how could you play real estate without actually buying a land/house. Enter Peter Lynch who once said,

“When there’s a war going on, don’t buy the companies that are doing the fighting; buy the companies that sell the bullets.”

So instead of buying that house, you would have been wiser to buy a basket of stocks of “bullet makers” such as Cera Sanitaryware, Gruh Finance, Shree Cements & Unitech.

Let’s start with Unitech, whose share price went up by jaw dropping 1374 times! I doubt anybody made 1374x on their investment because it is impossible to catch tops and bottoms.

Why did Unitech’s stock price shoot up the way it did? The answer is that between 2003 and 2008, there was a boom in real estate and infra companies and people were buying properties left, right and centre and this is reflected in Unitech’s sales figures in that period. Their sales grew at mind-blowing 76% CAGR (17x). A lot of this growth came from volume growth while a lot of it did come from realisation per square feet of land. That Unitech’s management screwed up on their balance sheet by over-leveraging during boom times, is another story. Today it is a penny stock.

Another “bullet maker” Cera Sanitaryware had a similar story. Sales were rising quickly, thanks to Cera’s dominance in their domain.

Resulting in an 11x return in 5 years, for their minority partners aka shareholders…

Gruh Finance – Another “bullet maker”

Gruh’s stock price went up 9x in five years.

Shree Cements – Another beneficiary of the real estate boom.

Also notice, this co. emerged unscratched by the global financial crisis of 2008-09, thanks to a fanatic promoter and a terrific low cost business model.

Shree Cements – Only when the tide goes out do you discover who’s been swimming in their full suit !!

Let’s move to another asset class – Gold.

One of the direct beneficiaries of higher gold prices is Manappuram Finance, a gold loan company based out of Kerala. Here’s how it’s stock compares to gold prices in India, between 2005 & 2013.

While gold gave stable returns, notice the triple digit returns given by Manappuram’s stock in 6 out of 9 years. If you were a prudent investor in Manappuram in 2005, 2006, 2007, etc. when their business was booming, and were following the story closely, chances are you might have done well and maybe managed to sell before it tanked all the way. Their business deteriorated (at least temporarily) in 2011 after RBI brought in a new rule which basically said gold loan cos can only lend up to 60% of a given borrower’s gold value and that put brakes on this high speed train.

The idea behind putting up this chart is that if you can stomach the volatility, then equity markets are the place for you. If for whatever reason, you can’t, then stay away from the markets, particularly stocks of banks and NBFCs which are usually way more volatile than secular growth stocks.

The mortgage lenders want you take that home loan. In my view, home loans are one of the most brilliant pieces of insidious financial engineering ever designed, so millions of zombies can be created. I am sure not everybody will agree and there are psychological reasons to buy that house. The counter view is that buying a house using borrowed funds is a functional equivalent of betting on future real estate prices. If this isn’t leveraged speculation, what is?

Barath Mukhi

Some things that Peter Lynch indirectly said in One up on Wall Street

“The most important thing in communication is hearing what isn’t said.”

Below, I will try to cover ideas that are implied in One up on Wall Street, but aren’t explicitly stated or points that don’t get as much attention as they actually should, in my view.

Be obsessed with financial history

Peter Lynch was a master of gathering data for companies that had done well in the past. It must have been like going back in a time machine and figuring out what had worked and what had not worked, in the market, in the 1950s, 40s, 30s and so on.

I speculate that Lynch simulated successful investments before his time, copied key ideas, and followed the advice subsequently outlined by “Bond King”, Bill Gross.

For example, Lynch quotes the example of Masco Corp.

And how about Masco Corporation, which developed the single-handle ball faucet, and as a result enjoyed thirty consecutive years of up earnings through war and peace, inflation and recession, with the earnings rising 800-fold and the stock rising 1,300-fold between 1958 and 1987? It’s probably the greatest stock in the history of capitalism.

Masco corporation’s single ball faucet

Peter Lynch was born in 1944. And he’s talked about Masco doing well since the 1950s, at a time when he was a teenager. He probably gathered historical data for Masco from Value Line publications or from Masco’s historical annual reports.

He (or his team) was doing this in a world without the internet. The lesson for us is to have access to the right kind of data and make sense of it. Over time, dot-connecting, recallable, well organised data, becomes a remarkable informational advantage.

For example, a widely used metric by some very smart and experienced investors today, compares the cash flow from operations to net profit declared by any co. over a few years. Cash flow of below 80% in comparison to declared profits, is usually a red flag. Consider one company’s CFO to PAT from 2006 to 2010, for instance.

Looking at the above table, a forensic accounting focused investor might have come to a conclusion that this company was destined for failure because the co. was probably not managing it’s working capital well (trade receivables, payables & inventories). But surprise, surprise.. The above is data for the stock of an Indian wealth creator, Sun Pharma. Despite low CFO vs PAT, Sun Pharma’s market cap went up by 5x, EPS went at 18% CAGR while the market doubled the stock’s PE multiple, between 2006 & 2010, and way higher, subsequently.

Sun Pharma is an exception rather than a rule and most co’s that did well in the past, had high CFO in comparison to PAT. However, studying this historical example tells us one should look at the holistic picture rather than just one metric (like CFO vs PAT) and then decide whether or not a business is worthy of your investment.

Or how about breaking some notions, using history as a guide?

Cement companies don’t create value because they are cyclical businessesShree Cements grew it’s earnings at a CAGR of 45% for 13 years (2004-2017)
PSU stocks are always wealth destroyersBEML grew it’s earnings at 110% CAGR (2002 to 2007)
Retailing is a tough businessPantaloons Retail’s stock went up by more than 300x (2001 to 2008). Thanks to a boom in retailing.

Coming back to the book, Lynch has also studied about Electric co’s being fast growers in the 1950s and 1960s and about buying great companies that that did well despite the great depression of 1929-1934. Going back in time machines gives you perspectives like nothing else.

Reject businesses quickly

In a separate interview, Peter Lynch had said his philosophy was “The person who turns over the most rocks, wins the game.”

Now you may say, “But, I don’t have time to read these many annual reports.”

Mr. Lynch has partly answered this question too, in the book. He says “there’s a way to get something out of an annual report in a few minutes, which is all the time I spend with one.”

My guess is he must have figured out a way to quickly glance through the financial statements based on 1-2-3 parameters. He must have been thinking –

  • Oh, too much debt. Skip.
  • Oh, declining sales/profits. Skip.
  • Oh, they have an unsexy product. Skip.
  • Oh, this business has been growing really well. Hmmm.. Let me spend some more time on this.

And so on..

In another book, Rajashekar Iyer articulated this aspect well – “If you are able to look at 100 companies faster than others, you can find the two good companies which are really interesting. If you are slow in rejecting, you will only be able to look at 10 companies. It’s like reading. If you read 20 books in a month, you may find two good books. If you just read two books in a month, you may find only two good books a year. It is similar in stocks. So if you tell me that you like a particular stock – how much time do I have to spend on the company before I can say it’s not for me? If I can do that fairly fast, then I can look at more ideas in the time available.”

In a world, where we have beautifully designed investor friendly websites like, turning over a lot of rocks should be easy. If Lynch could do it without screeners, we can at least do it with all the luxury, the net gives us. No?

Conclusions: Gather data and analyze companies that did well before you became an investor. What were their failure patterns? What were the patterns of success in companies like Asian Paints, Pidilite, HDFC Bank, etc?

Turn over a lot of rocks, every single day, to find those hidden gold nuggets. Figure out a way to reject companies quickly and put most of them into your too hard pile.

Barath Mukhi

Quarterly earnings tracker

We will be using this page to update names of companies, which have shown good traction in their latest quarterly results. I may have positions in 1 or more companies. Please do your own due diligence before investing.

Last updated – 3-Feb-2021

Showing latest quarterly results for Q3 FY2021 – Dec 2020

CompanyDate updated
5Paisa Capital18-Jan-2021
Bhansali Engineering Polymers18-Jan-2021
GTPL Hathway18-Jan-2021
Indiamart Intermesh18-Jan-2021
Tata Elxsi18-Jan-2021
Tata Steel Long Products18-Jan-2021
Tata Steel Long Products18-Jan-2021
Alembic Pharmaceuticals28-Jan-2021
APM Finvest28-Jan-2021
Apollo Tricoat Tubes28-Jan-2021
CG-VAK Software & Exports28-Jan-2021
Cosmo Films28-Jan-2021
D P Wires28-Jan-2021
Gujarat Ambuja Exports28-Jan-2021
Hatsun Agro Product28-Jan-2021
Hatsun Agro Product28-Jan-2021
ICICI Securities28-Jan-2021
India Grid Trust28-Jan-2021
InfoBeans Technologies28-Jan-2021
Mangalam Organics28-Jan-2021
Mold-Tek Packaging28-Jan-2021
Natural Capsules28-Jan-2021
Navin Fluorine International28-Jan-2021
Poly Medicure28-Jan-2021
RPG Life Sciences28-Jan-2021
Sagar Cements28-Jan-2021
Shree Digvijay Cement28-Jan-2021
Shri Jagdamba Polymers28-Jan-2021
Sportking India28-Jan-2021
Titan Biotech28-Jan-2021
TV18 Broadcast28-Jan-2021
Udaipur Cement Works28-Jan-2021
Welspun India28-Jan-2021
AAVAS Financiers3-Feb-2021
Add-Shop E-Retail3-Feb-2021
ADF Foods3-Feb-2021
Ajanta Pharma3-Feb-2021
Angel Broking3-Feb-2021
Bajaj Healthcare3-Feb-2021
Dixon Technologies (India)3-Feb-2021
Finolex Industries3-Feb-2021
Geojit Financial Services3-Feb-2021
Godawari Power & Ispat3-Feb-2021
Granules India3-Feb-2021
Greenpanel Industries3-Feb-2021
Gulshan Polyols3-Feb-2021
Indus Towers3-Feb-2021
JK Lakshmi Cement3-Feb-2021
L T Foods3-Feb-2021
Larsen & Toubro Infotech3-Feb-2021
Laurus Labs3-Feb-2021
Neuland Laboratories3-Feb-2021
NGL Fine Chem3-Feb-2021
P I Industries3-Feb-2021
Pioneer Embroideries3-Feb-2021
Punjab Chemicals & Crop Protection3-Feb-2021
Route Mobile3-Feb-2021
Shree Cement3-Feb-2021
Sun Pharmaceuticals Industries3-Feb-2021
Tata Consumer Products3-Feb-2021
Tata Steel BSL3-Feb-2021
Vaibhav Global3-Feb-2021
Vaishali Pharma3-Feb-2021