Capital Ideas Online > An interview with Mr. Utpal... -
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Published on: 12/3/1999
Last Visited: 10/26/2006
An interview with Mr. Utpal Sheth of Insigth Assest ManagementCapital Ideas Online > An interview with Mr. Utpal Sheth of Insigth Assest Management
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An interview with Mr. Utpal Sheth of Insigth Assest Management ">
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An interview with Mr. Utpal Sheth of Insigth Assest Management
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Chetan Parikh interviewed Utpal Sheth of Insight Asset Management, son of India's legendary investing grandmaster, Mr. Hemendrabhai Sheth.
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Utpal, is a highly talented money master in his own right.So keen is Utpal's passion for investing, that he volunteered to jointly interview India's investment greats with Chetan, an offer that we quickly accepted.
Chetan and Utpal will be bringing you fresh perspectives from India's investing cream every month.
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Mr. CHETAN PARIKH: Utpal, it is nice to have you here with us.
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Mr. UTPAL SHETH: My pleasure is always Chetan to interact with you.
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Utpal, could you tell us more about your investment philosophy, how you go about actually picking up companies & what filter you put them through?
Mr. UTPAL SHETH: We derive our investment philosophy on the fundamental premise of 3 basic truths -
Globalization.
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Mr. CHETAN PARIKH: Utpal, could you elaborate on condition no.1.
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Mr. UTPAL SHETH: We have this concept of a Change Paradigm.
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Mr. UTPAL SHETH: Okay, on the no-external-change front, I am very optimistic on Colgate
stock, on its business, and on the management.
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Mr. UTPAL SHETH: To my mind, Colgate is probably the cheapest bet in the FMCG sector on an EV / (EBIDTA + Ad spend).
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Mr. UTPAL SHETH: Absolutely, and that has been the history of Colgate India any way.
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Mr. CHETAN PARIKH: Utpal, on a normalized basis, you said that earnings are very depressed at this point of time because of the heavy ad spend, that is going both into regaining its market share and introducing new products.
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Mr. UTPAL SHETH: I'd be very reluctant to put a number on this.
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Mr. UTPAL SHETH: In my experience in any DCF valuation the terminal value plays the major role.Up to 75 to 80 per cent of the aggregate valuation is derived from the terminal value.
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Mr. UTPAL SHETH: Colgate has made 13 product innovations in the past 18 months.
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Mr. UTPAL SHETH: The sustainable secular growth rate in oral care segment is in the vicinity of 8 per cent volume.
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Mr. UTPAL SHETH: giving a 12 to 13 percent value growth.
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Mr. UTPAL SHETH: . . . the faster growth rate of the non-oral care segment.
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Mr. UTPAL SHETH: Certainly in the oral care business because of several initiatives taken by the company - to cut input costs, putting up the Nepal plant for north-India sourcing, DCP plant, consolidating offices and vendors, installing V-SATs and implementing ERP, etc.
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Mr. UTPAL SHETH: I think Colgate surely has the potential to deliver the best return on net worth in the country.How fast that potential will be achieved is a matter of debate.But it surely has the potential.
Colgate is selling at less than half its current worth
Mr. CHETAN PARIKH: Utpal, If you were looking at Colgate and you were to put a fair private market valuation of Colgate what would be the price you think?
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Mr. UTPAL SHETH: Discounting the projected cash flows over the next 10 years and a terminal EV to Sales of 4x, Colgate is selling at less than half its current worth of Rs.500.
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Mr. UTPAL SHETH: I would like to add a few qualitative aspects to the story.
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Mr. UTPAL SHETH: I am very excited about this stock called Tata Donnelley (TDL).
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Mr. UTPAL SHETH: The printing business is a capital intensive sunset business and the company is clearly committed on not investing in bricks and mortar in the future, so that canibalisation will continue.
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Mr. UTPAL SHETH: The present market capitalisation is in the vicinity of Rs.2.5 billion of which the company has cash equivalents in the vicinity of Rs.350 million.
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Mr. UTPAL SHETH: Yes, it's a potential Internet stock which is making a profit right now, has all the content to build great vertical portals.
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Mr. CHETAN PARIKH: Utpal, can we come to some specific picks that you have identified.
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Mr. UTPAL SHETH: Goldiam is an obscure B-group company on the Bombay Stock Exchange.
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Mr. UTPAL SHETH: Initially, Goldiam will enter the existing markets, mainly US, through the existing distributors while it will have to appoint new distributors to enter new markets like Japan.Effectively, Goldaim will, to some extent, leverage on its existing distribution channels.
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Mr. UTPAL SHETH: There is not much to distinguish between the Indian managements in the diamond business.In the jewelry business, strictly speaking, there have been only 2 or 3 successful players.
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Mr. UTPAL SHETH: Ok, presently this company has sales in the vicinity of Rs.1 billion for FY00, a growth of 25% over the previous year.
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Mr. UTPAL SHETH: Yes and I am certain that this company will go in for dividend pay out exceeding 20-25% and if they do that I am getting a 8-10% tax-free dividend yield.
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Mr. UTPAL SHETH: Goldiam's jewelry is not targeted to be on the high end.
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Utpal, I wanted to ask you something about the valuation of this whole sector.You know I was just looking at it.PE ratios for the whole sector are quite low and this includes the jewelry manufacturing cos.Goldiam's OPM while higher than most peers, it is lower than Shantivijay and the valuation case for Shantivijay looks more compelling.You know anything of Shantivijay?
Mr. UTPAL SHETH: Yes, Shantivijay is probably the highest value added jeweler in the country.
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Mr. CHETAN PARIKH: Utpal, gold and diamonds form a very significant portion of the total cost and inventory of Goldiam.
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Mr. UTPAL SHETH: Goldiam carries a negligible inventory and all the inventory is against booked orders.
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Mr. UTPAL SHETH: All debtors are backed by irrevocable LCs, so there is no credit risk.
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Mr. UTPAL SHETH: We specifically asked this question to the management and the management has assured us that there will be no transfer of funds from this company into any other business venture.
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Mr. UTPAL SHETH: No, for having an Internet strategy, the company will have to ensure a brand image first.Secondly, the logistics of managing this will be very difficult.The company might create a web site wherein it will display its designs, which will open it up to other customers.But I think the company is far, far away from selling on the Net.
Mr. CHETAN PARIKH: Utpal, I know you have sort of answered this but I want to highlight this because it appeared in the 26th Oct'99 issue of "Think Tank" of The Financial Express and they have a report on the diamond industry.
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Mr. UTPAL SHETH: As I told you China has a great lead on India in terms of pure gold jewelry, but they are far, far behind in terms of studded diamond jewelry since sourcing diamonds will remain a large competitive edge for India.
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Mr. UTPAL SHETH: Actually speaking, jewelry is a business of credibility.
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Mr. UTPAL SHETH: Any significant indiscretion by the management or a catastrophe in the US markets will threaten this investment idea.
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Mr. UTPAL SHETH: I only know that it is a multi-bagger, I don't know how many times.Even at a measly 6x 2001 conservative earnings estimate of Rs.33 per share, we are talking of a 3 bagger plus.
Bhartiya - Attractive business characteristics
Mr. CHETAN PARIKH: What is the next investment idea, Utpal?
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Mr. UTPAL SHETH: Since we are in an adventurous mode when we talk about stocks like Goldiam, we might as well go a little further and talk of one more obscure company called Bhartiya International.
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Mr. UTPAL SHETH: This company is promoted by one Mr. Snehdeep Aggarwal who started his career in the carpet business, and realised that this is a finite business and does not have scalability and made the right shift to leather garments and then to the fashion leather garments.
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Mr. UTPAL SHETH: By the end of the year it will be more than Rs.25-30 per share and if you take into account all the cash equivalents we are in fact talking of a number even beyond that.
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Mr. UTPAL SHETH: No, there are no group companies but there is a subsidiary in Luxembourg to which Bhartiya has advanced $2.5 million and has invested $0.5 million in its equity capital.
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Mr. UTPAL SHETH: Yes.
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Mr. UTPAL SHETH: Yes there
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