Jason Stipp: I'm Jason Stipp for Morningstar. We're reporting from the Value Investing Conference in Pasadena. I'm here with Amitabh Singhi. He's with Surefin and has talked a little bit today about opportunities to invest in India and also some of the perils and pitfalls. Thank so much for joining me.
Amitabh Singhi: Thanks. It's good to be here.
Stipp: So, first question for you, you mentioned some structural things in your speech that create opportunities in India. Can you just elaborate, briefly--what are some of the things about the Indian market that create, structurally, an opportunity for a value investor?
Singhi: Sure. One of the things that people don't know is that India has the second largest number of listed companies in the world. There are lots of small companies that probably should not have been listed, that are listed. That gives an opportunity for people to find things when others aren't looking there.
The second thing, really, is there are a lot of niche businesses available in India because it's a difficult land to traverse nationally. So you can have a lot of niche local companies that have been doing great work for 15, 20, 30 years that people haven't discovered.
Stipp: You also mentioned the volatility of the market. Now, I think this is something that a lot of investors thing of as a risk. But, how does this play into the opportunity set that becomes available for you?
Singhi: It's a classic value mind-set. You're waiting, but the price is just not right, and some shock comes down, which seems like a shock in an emerging market like India. It could be liquidity flow. It could be some bad news that's not related. It could be the U.S. Lehman crisis and you have all companies in India falling, large and small, that aren't, remotely, affected by what's happening offshore. So, volatility's a good friend.
Stipp: So, question for you on the number of investments that are available. You said there's a lot of companies there that are underfollowed. How to you begin to get a handle, how do you start, what sort of screens do you use to begin to see what might be an opportunity out there?
Singhi: So, we have a lot of magic formula screens, net-net screens, we do a lot of screening on history. If it's cyclical, we look at how it did in the past cycles. You can get cheap programmers. We had a couple of analysts; we had them actually who just programmed this into--just running it every day. They would just take the top 20 names and got through, one by one and I would go through, one by one. So, you can actually use a lot of technology just to give you a subset. That's one way.
The second way is really to go into magazines, newspapers, build a repository in the office of all companies that you've seen. We'd have 350 names filed and categorized and if some sector gets depressed, or some company gets depressed, or something grows very fast, you can pull that up and use that accumulative knowledge.
Stipp: A question for you then about: some of these companies are underfollowed and you think that the value in those companies is going to be recognized, how do you feel about the catalyst? When will the value be recognized? And if these companies aren't being followed, do you ever worry that maybe this company is worth more, but the market's not going to realize it?
Singhi: That's something that I haven't figured out yet. We just buy it because it's cheap. Of course, India has got recognized now and you're seeing things unlock within months or years. But when we are buying it, we look at some kind of earnings yield and to make sure that, if the guy's honest, eventually he'll come to me. So I might get four times earnings and lots of cash, maybe about 30 percent earnings yield on that. And well, it's not coming in my hand, but even if I got it in my hand, I wouldn't know what to do with it.
So I'd rather have him deploy it in an intelligent way, but there is a risk there, and one has to kind of look through company by company and figure out, "OK. Am I comfortable leaving my reinvested capital with this guy or not?" But, we don't know how triggers come, they come, but we just don't know how they come.
Stipp: Sure. And speaking of risk, you also mentioned a few other risks. Some risk involving corruption. How do you handle, what do you identify as some of the biggest risk and how do you think about them as an investor?
Singhi: So, the IFC has a 2010 report of doing business in the world report. India ranks, in some cases, it's fourteen contracts--182, 183 countries. It's worse than sub-Saharan Africa in some cases. What you have to remember is Indian businessman are very resilient. They've gone through that for 25 years. And one, it can only get better.
So imagine, you just clean all that up. What happens? These guys are resilient. They fought through all of it. They got a clean landscape. Some of them will just blow away the field.
The second thing to remember is, you need a local presence to know, and you'll make choices to know what's acceptable, what's not. Because sometimes there's lack of laws. For example, cell phones, mobiles, they opened it up. They liberalized it. How did they get the license et cetera, et cetera? But, now it's become hypercompetitive.
So you have to know when to enter that space, because from being very regulated, they might completely open it up, suddenly, and you might get caught on the wrong foot or you might make a great investment.
Stipp: Last question for you, on a valuation front. How does it look like for investors who may be interested in India? Is now a good time? Is now a bad time? What are you seeing out there as opportunities?
Singhi: You have to differentiate between the big guys who are marketing themselves here, and the small guy who has no time for investors in terms of just going out there on TV and et cetera, et cetera. The large index is at 22 times past earning, 17, 18 times forward earnings. I would sincerely hope nobody invest in those.
But, if you go smaller or you go more niche, you would find a phenomenal host of companies, but I would look for somebody on the ground or do a lot of groundwork on the ground. Or, wait for a time when nobody's talking about India and they're depressed, which is back five years ago, six years ago. It'll happen again at some point.
So if you want to just do an index play, wait for a time when it goes to single digit P/Es, the whole index. Or, go around, dig deeper, and find a real estate company focused on two states in India that do nothing else but no debt.
Stipp: Amitabh, that's so much for your time today.
Singhi: Thanks so much.
Stipp: For speaking with us.
Singhi: Appreciate it. Thank you so much. Take care.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.