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He explained that India has a lot of small-cap companies, which typically find takers in the private equity space and not among other large investors. Because these companies are small in size, they have a lot of room for growth and could even become potential multi-baggers. An ideal time frame for which to invest in these companies would be 3-5 years.Talking about Pabrai’s investment mantra, noted value investor Shyam Sekhar says that India offers a lot of individual stories.
“He is largely investing in the emerging mid-cap particularly not-so-popular companies,' he said.Buying cheapPabrai usually looks at stocks that are trading at a discount to their intrinsic value, thereby offering deep margins of safety. Other things he looks for are whether the company is operating in a space that has room for exponential growth, and the overall quality of its business.Much like the legendary Warren Buffett, with whom he is often compared to, Pabrai also likes to bet on companies that are undergoing a temporary disruption.In 2015, Pabrai acquired a substantial stake in Rain Industries, which was then going through a difficult period and was discarded by most market pundits.
He starting buying the stock at around Rs 30-35 a share. The stock was then trading at a miserly price-to-earnings multiple of 1. His math was simple - when you get a stock at one time its earnings, don't think too much.Before Pabrai picked up the stock, the company reported an annual net profit of Rs 88.5 crore. But the company has since multiplied its profits by nearly 10 times to Rs 800 crore.Pabrai’s investment too has multiplied 10 times since, but he remains invested in Rain Industries - which is currently cashing in on the disruption of supply of calcine pet coke from China.If one wants a bargain, Pabrai reckons the best way to get it would be to buy something someone is selling in distress. The distress could pertain to the respective industry or the company's business itself.When most investors were giving the real estate sector a wide berth this time last year, the ace investor picked up a stake in Sunteck Realty, a developer of luxury and ultra-luxury properties, both residential and commercial. At around Rs 120 a share, the stock was available at 7 times its FY17 earnings, but has since gone up nearly fourfold.The company barely has any debt on its books and got through last year's lean phase with its own internal accruals and by selling existing inventory. It is now poised to make an earnings per share of around Rs 30 in FY20, along with a return on equity of 13 percent, which would be a significant improvement from its meager EPS of Rs 1.9 per share in FY16 and a return on equity of around 1.5 percent.For Pabrai, one of the most important criteria for making an investment is that it should be low-risk.
He talked about this rationale in his famous book Heads I win; tails, I don't lose much! He likes to have an early mover's advantage by buying stocks at considerably low prices. He has also on multiple occasions quoted Buffett’s saying: 'Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results.' Focus on intrinsic valueHaving spoken about how Pabrai likes cheap but good quality investments, one can't help wondering how do companies like HealthCare Global, a loss-making company with a return on equity of 5.4 percent that is trading at 142 times its FY18 estimated earnings, fit the bill?Pabrai has been accumulating the stock over the last couple of months at Rs 290-300 a share.
The investor believes that when buying a stock, one should also think about what the business is today and what it will be 3-5 years from now. HealthCare Global's hospitals make returns on equity of 30-35 percent, with some of its more mature hospitals far exceeding that number.Since the company is still in its growth and investment phase, these inherent advantages have not come to the fore as yet. However, its robust growth, low-cost model, and technical expertise arm it with the necessary tools to rise through the ranks in a growing cancer market. Also, once the operating leverage stemming from the company's 26 established cancer centres starts showing up, its profits could grow manifold.Durable businesses with a strong moatAlthough Pabrai likes stocks that he could buy cheap, he does not limit himself to that criterion. Some of the best companies he has invested in do operate in high growth areas, but trade at slightly higher valuations or offer thin margins of safety.Be it Kolte Patil Developers or the recently-acquired HealthCare Global, Pabrai has typically picked up companies that are run by a competent management and have simple and durable businesses. The Azim Premji fund-backed HealthCare Global, one of the top cancer specialty chains of hospitals, is run by BS Ajai Kumar, an oncologist with over 30 years of experience in both India and the United States.In March last year, Kolte Patil Developers’ stock corrected from its peak by around 70 percent and fell to Rs 80 a share.
Pabrai picked up the stock because the company was known for its unique business model and for being run by a first-generation entrepreneur who challenged conventional practices in the real estate sector.Another important part of his strategy is buying into industries that are predictable and have a slow rate of change. This explains why he chose to invest in sectors like real estate and healthcare.The strategy holds true even in the case of KRBL, which Pabrai bought in February at around Rs 594 a share. The company is in the business of processing basmati rice and has premium brands like India Gate in its portfolio. The business is simple - rice is consumed every day daily and consumers’ eating habits have not changed drastically over the years. But at 30 times its earnings, KRBL was certainly not cheap and in fact, fell after he bought it.' Compared to Pabrai’s earlier picks like South Indian Bank and J&K Bank where he was probably looking for deep value, his style seems to be tilting more towards growth and quality,” says known value investor and screener.in co-founder Ayush Mittal.“His recent picks like KRBL, HealthCare Global lack that deep value, they are certainly good growth stories.
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In India, it seems his experience has been good with the big success in Rain Industries and he seems to have found that golden mean,” Mittal adds. “The good thing is that he is increasing his allocations to India. His performance would attract more and more global investors and convince them about India story.' Stay steadfast yet flexible and learn from mistakesSome of Pabrai’s initial picks failed due to concerns over the regulatory environment and poor timing.' Initially it might have taken him some time to adjust, but he has successfully developed his own stock picking style. Going forward, he should do well in the Indian market as well,' says Sekhar.A key takeaway for investors is Pabrai's exit strategy. He advises value pickers to hold on to the stocks they have bought, even if they fall to below the price at which they were bought.'
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Do not sell at a loss within 2-3 years unless you can say with a high degree of certainty that the current intrinsic value is less than the current price,' Pabrai said. However, he was quick to add that investors should exit their investments should intrinsic value fall below the prevalent price.' Mistakes are the best teachers. One does not learn from success. It is desirable to learn vicariously from other people's failures, but it gets much more firmly seared in when they are your own,' the US-based investor said.Cloning ideasOne can't help but wonder how Pabrai manages to research some of the under-owned and lesser-known Indian companies sitting in California.The answer to this question is that a part of his investing style involves more cloning than inventing.
He prefers to borrow ideas of investors and friends who follow a similar investing philosophy. He also employs a checklist or a set of criteria that every investment idea has to pass through. This helps him a lot in avoiding investment mistakes.For more research articles, visit our.