Recycling And Pollution To Be Key Themes For 5-10 Years: Jyotivardhan Jaipuria

Jyotivardhan Jaipuria: It has been more than seven years now, since we launched our first scheme.

So we have two schemes over there. First is what we call the Rising Stars Opportunity Fund. So that is primarily a small-cap fund by today's SEBI market definition. So, 70-80% of our portfolio will be less than Rs 10,000-crore market cap. What that aims to do is, buy the blue-chips of tomorrow. So, we buy stocks today, which are generally not known. And you know, this like, three years later, five years later, all will know about the scheme.

The other scheme is what we launched five years ago, which was our multi cap. So that's like a classic multi cap, with some exposure to large caps, some exposure to mid caps, and some exposure to small caps. So, probably a third of the portfolio here will be stocks, which are already there in our Rising Star Opportunity Fund.

The idea of the multi cap is to reduce the volatility. While the small cap scheme or the Rising Star scheme generally gives very high returns, at the same time it comes with more volatility, which is inherent to the asset class of a small-cap portfolio. So to that extent, this fund is trying to reduce the volatility even at the cost of reducing the returns.

Both these schemes are run in a similar way. Research, research and more research is our mantra. So we focus on deep fundamental research of the company. Our churn ratio is very, very low. We have like the churn ratio of less than 20% in both our schemes. In fact, it is lower in the Rising Star than it is in the multi cap. One other philosophy is what we call the 3Us. So we buy undervalued stocks, which obviously everybody does, whatever way they define undervaluation. We will be happy to do underowned stocks, very happy to do undiscovered stocks, or underperforming stocks. So you know, that's one of our core philosophies. Very, very deep fundamental research goes behind most of our stock picks.

Jyotivarthan Jaipuria: Our ticket size is Rs 1 crore generally. We don't want to do less than Rs 1 crore. The SEBI minimum obviously is Rs 50 lakh, and we've tried to keep it a little higher because we want people who understand the philosophy, we want them to come for three years, five years. So what we tell our investors is, unless you're thinking of a three-year, five-year vision, don't come to my scheme because that is not really meant for people who want to come in and go out.

Right, and if somebody wants to come in today and put money, what are the other terms that would be required? I'm just helping viewers understand, before we go on to talk about strategy.

Jyotivardhan Jaipuria: Obviously, we have fees, which are very similar to what a lot of the other PMSs charge. But one thing you know, because we don't want short-term money, we have an exit load for three years and that is something which we are very clear on. We don't want people who are looking at a very short term. So, the exit load is something that we typically insist on.

Jyotivardhan Jaipuria: Obviously, we have fees, which are very similar to what a lot of the other PMSs charge. But one thing you know, because we don't want short-term money, we have an exit load for three years and that is something which we are very clear on. We don't want people who are looking at a very short term. So, the exit load is something that we typically insist on.

Jyotivardhan Jaipuria: Yes. So you see, we've never really tried to give return numbers per se. You know, that is something, which even if you go through the SEBI regulations you're not supposed to give any return guidance when people come in. What we obviously want to do is, we want to create alpha. And we have a track record where we have sustainably created alpha. And we create large alpha for portfolio investors. So that's something which people want to look at.

Typically, we tell people a lot of this, because especially if it is Rising Star, it is a volatile portfolio. It will go down when the markets go down. The other thing is, where we are positioned today, it is not a cheap market. It is a market which has done very, very well and it is relatively expensive compared to history. We think returns over the next three years, five years will still be made because you know, earnings will be good in India, the economy will do well. But it's definitely not a market which is like a really easy market. The chances are that you will see volatility over the next six months and one year. Returns will be quite muted.

In fact, the other thing which we are doing now is we are telling all our investors that we are not going to invest your money in one shot but we will probably stagger it over a couple of months depending on how the market goes. So we want to invest slowly rather than invest in one shot and keep some money, just in case we get a correction in the market and we want some money to be available to invest at that point of time.

Jyotivarthan Jaipuria: In the new portfolios, what we're typically thinking today is that we will invest over 8-12 weeks. So you know, if somebody's come in, let's say, a month ago, it's possible that we are sitting on 50% cash in this portfolio.

In the old portfolios, we were fully invested till some time ago. We built cash of around 7-8% in the old portfolios by selling something. And this is again, like I said, keeping it as insurance that at some point the market will go down. So if you look at overall as a firm, we are sitting on close to 17% cash, but like I said there is a difference between the new and old portfolio, but overall we are sitting on close to 17% cash.

Jyotivardhan Jaipuria: Yes. May be a little less than that, around Rs 1,250 crore.

Jyotivardhan Jaipuria: We stick to our philosophy—that we want to buy stocks at a certain price, where we are comfortable with. So you know very often what we do is whether the market is going up or down, we may want to buy something at X price. And that price could be like 5% lower than the market, it could be 10% lower than the market. It is more like, okay, at these levels, we feel like the risk-reward works out to be good and we are generally patient and we're waiting for that sort of price to come. On down days, we do find that one or two stocks reach the level at which we want to buy and we end up buying at those limits.

So it's not like a zero-one game because you know you're sitting on cash. So you want to deploy like 1% today, you want to deploy 2% today. And it may happen that one stock has fallen. So you end up buying that stock on that day.

Jyotivardhan Jaipuria: Yes. Without naming stocks, we have like two types of stocks. One, stocks which are already in our portfolio, which we want to buy but we may not want to buy at today's prices because we think they will still do well. But if we can get at lower prices, then we can make even more returns on it… So, just to name a few sectors, some of these are in the engineering space, banking space, and the cement space.

So what we do is that when a new portfolio comes, we want to put 8% weight into that stock. We may at some point buy 3-4% weight in that stock and sit. On correction, we will probably add another 3-4% weight to that portfolio.

And there's another set of stocks which are not there in our portfolios at all. We don't own them at all. But we do want to buy them, if we can get a pullback and if the prices look very sensible. Some of these are actually in the banking sector which we are looking at today. These banks have done quite badly and if we can get them cheap, then we do want to buy them. So there are banking stocks which we want to buy and there are a whole lot of other sectors with waiting lists, normally very, very large linked to some prices and linked to some events.

So now, even some chemical stocks are starting to come on the horizon, because we've not owned them for a long time. But now that they have corrected, there are some chemical stocks which are starting to look interesting. And we may, at some point, go and buy them also.

Jyotivardhan Jaipuria: In our portfolio, we typically have 15-16 stocks. In some sense, it is a very concentrated portfolio if you compare it with let us say the mutual funds. And so, because we have 15-16 stocks, for each stock the minimum weight we like to have is 5%, in a lot of these portfolios. Now it has a mix of stocks which are not known today and which we think will be known three years later. And some of the stocks have now got known and they are generally beaten. But most of the time, when we buy the stock, we are looking for disproportionate returns on this. So our whole analysis works out like what will it take us to double this money in the next 3-4 years and that's the way we start like a lot of analysis.

Jyotivardhan Jaipuria: So in the last three years, I think most of them have done but frankly, you know, last three years is not an indicator which has been one of those very easy phases because this is post Covid.

So you know, like the fund itself has done some crazy amount of returns but that may not be like a great way to look at it because we have this Covid base, which created a lot of problems. And so, what I can say is, over the period since we started the fund, we had at least 3-4 stocks which are up like 7-8 times in the last five years. So that would be an interesting way to look at it—that you managed to get quite a few of those multibaggers there.

Jyotivardhan Jaipuria: Without getting too much into specifics, because we will end up with some compliance issues. So if you think about it, recycling and pollution are going to be big themes for the next 5-10 years.

Pollution is a theme because we are getting more environmentally conscious and you know, India has signed a lot of these climate agreements also. And the Prime Minister himself is very, very aware of it. So, if you think about it, you know, like we all have PET bottles, we use them, you know, the bottle in which you have Bisleri, the Coke bottle, the Pepsi bottle. All these are PET bottles. And plastic, as we know, does not just naturally get into the waste. So it needs to be recycled.

The government of India has mandated that from next fiscal year all the bottlers will need to have a certain amount of recycled material when they make bottles. So it's like what happened to these PET bottles. You can crush it and create PET again and they can be used to make bottles again. So in some sense, you know, it is a whole recycle chain—you buy Pepsi and the empty bottle is converted back into a bottle by crushing it and taking PET chips out of it and making a bottle again out of it and ensuring all the safety and quality standards, because it's food grade product.

So that will be a very big theme for most of the people like Coke and in general. I think they want to move to using 80-90% recycled material rather than virgin PET and companies like this will stand out a lot because the whole ecosystem is going to move in such a way that they will have a lot of demand in future and if you can build a sustainable model around it, you can do very well with it.

Jyotivardhan Jaipuria: We are very open to it. So we never say never is like a philography to anything. It's more like you know, can we understand it well, because we are not great technology guys. So, sometimes, when something comes up, we are like can we understand simply or not. Second is, is it sustainable, because we are not venture funds. So we can't afford to bet on some technology that may or may not work and may take many years. So we may get in at a later stage… We'll get in when the technology model is discovered, or is at least proven that okay, this is going to work. So for us, we are happy to look at lot of the space. In fact, you know, for us it's a theme. So there are lots of these recycling companies, which will do very well when the tech environment comes around which we want to play in. At the same time, we don't want to go and bet on somebody who's starting to do R&D or something else.

Jyotivardhan Jaipuria: It's really interesting because the reason that we took infra and you know, one of our themes was we prefer investment theme over consumption theme and that has been our theme right from 2021. We think investments will do well. The logic for that were two. One was our whole reuse philosophy. The consumption theme was overvalued, whereas infrastructure was undervalued. It had underperformed a lot and most people didn't own that. So it was underowned.

The other was that the government capex as a percentage of GDP was going up and it was going up if you see every year you know, the percentage was going up. So in the last five years it has more or less doubled as a percentage of GDP. So it was like we had to play that government capex. Now one thing which we played and this does not so much—the Prime Minister came up with this Har Nal Jal, which was water at every tap in the villages and that was something which we played in a big way because one of the gainers from that was putting up the pipe companies. So we bought a lot of these pipe companies because one is you know, additional demand would come from this Har Nal Jal programme of the government and the second is the pipes were anyway doing well, because of all the infrastructures thrust from the government. It was a sector which we picked up like close to four years ago. And today, that sector has become universally loved. Everybody's buying it. A lot of the mutual funds own it. But at that time, we had picked up a couple of really small companies in it. Most of them would have become multibaggers now. So it was like taking a very small segment of the government spending which was not a crowded space, not really well-known and starting to play out of that.

One thing, which I always like in these companies is I don't want government sales to be more than 20-25% of total sales. So that is something that will vary on also when you're comparing this versus building companies or something. For us, this was the advantage—that okay, if the government sales become very large and if they don't pay you on time, the balance sheet starts to get strained, whereas if it is at 20-25% back then, you can do much better.

Jyotivardhan Jaipuria: Within the multi-cap space, we are adding to the large cap and reducing the weight of the small cap. And the reason for us is very simple—valuation. Again, I just go back to the 3Us philosophy. So relatively, you know, the large caps have become overvalued, relatively the large caps have outperformed a lot and that's where the ownership has built up over the last couple of years.

So we are, you know, basically switching more to small caps. But having said that, two years ago we owned probably like 40% large caps in our portfolio. That number has come down closer to 20% now. So there's a lot of gaps, you know, if you think of where we were two years ago, we are much, much lower. Part of this has happened just by performance because small caps have done so well that their weight keeps going up every month, if you do no action on it. So I think, the next six months the trend is going to reduce the small caps and increase the large caps in the portfolio.

Jyotivardhan Jaipuria: For us, you know, automatically a lot of schemes which we do guides us to that. I don't split the banks into, you know, public sector versus private sector. For me, it was retail banks versus the corporate banks. Three years ago, we took the call that the corporate banks were the bigger value because retail banks have done very well. So they had outperformed. Retail banks had become very expensive relative to the corporate banks. The corporate banks were undervalued. And you know, the retail banks were overdone and the corporate banks were underdone. And so, you know, that was a call we took. It is the corporate banks that we want to focus on though the whole market is focusing on the retail banks. And in the last three years that worked out really well for us. So for us, we are always getting the space which is not the most common known today. Whether it is a large cap, mid cap or whether it's a small cap that's the way we think. And we get very worried of high valuations. So we typically get out of stocks early on. We also get early into stocks very early.