Basketball is a sport of aggression and speed, and Soumendra Nath Lahiri, who was a university-level basketball player, has often been quick on his feet in identifying investment opportunities before others have shown interest in them.
A 1988 engineering graduate from National Institute of Technology, Surathkal, Mangalore, Lahiri’s early brush with equities was while investing in the primary market in the 90s. But he had no plans to work in the equity market.
After completing his MBA from IIM Bangalore in May 1994, Lahiri joined Crompton Greaves in Mumbai. Stock market was quite often the main topic of discussion when Lahiri would catch up with his IIM-B batchmates, a lot of whom were working in the capital market. This frequent interaction got Lahiri interested in the equity market.
Around this time, Mumbai-based brokerage Dolat Capital Market was trying to set up an institutional desk. Lahiri jumped at this opportunity. While it was a risk quitting a job at a well-established brand to get into something where he had no prior experience, he thought that it was worth it. “I felt that I didn’t have much to lose by trying out something new in the initial phase of my career. I had a fair bit of success in the primary market and I felt that I could understand how businesses operate as I had worked in companies such as Exide, TVS Suzuki and Crompton Greaves,” says Lahiri.
He joined Dolat Capital in August 1995 and built an institutional desk with a team of six analysts and a couple of sales traders. Lahiri himself covered capital goods and engineering companies. He also covered a bit of autos and cement. At Dolat, Lahiri was encouraged by the promoters to look for mid and small-cap ideas. “We were a broking firm and making clients invest in large-caps would have got us more brokerage, but still the management encouraged us to look for ideas in the mid and small-cap space,” he says.
Lahiri loved the freedom, and made the most of his time at Dolat. Nine years of extensive research of mid and small-cap companies had equipped him with a unique skill set which was getting recognised by Dolat’s institutional clients. One of them, DSP Merrill Lynch (now DSP BlackRock), approached Lahiri to manage their funds. Around this time, the mutual fund industry was still at a nascent stage and it was not as high-paying as it is today. In fact, the broking industry paid better. Eager to move to the buy-side and implement years of his intense research, Lahiri joined DSP Merrill Lynch in 2004.
In June 2004, TIGER Fund (The Infrastructure Growth and Economic Reforms Fund) was launched and Lahiri took over as the fund manager in early 2005. The fund did remarkably well delivering a return of 42% CAGR versus 36.27% CAGR by diversified funds during the period he managed. The fund focused on the infrastructure segment and it also helped that the segment was doing quite well at that time. Lahiri also managed the Small- and Mid-cap Fund, launched in November 2006, and the Micro-cap Fund, launched in 2007. As much as Lahiri was perfecting his trade, his performance as a fund manager was coming into the limelight. By now, he not just understood the art of stock picking, but also constructing a portfolio and making allocations based on one’s conviction.
After spending close to four years with DSP, Lahiri joined Fortuna Capital, an India-dedicated hedge fund advisory firm set up along with Singapore-based JL Capital. At that point, Sebi didn’t allow domestic fund managers to manage offshore money directly. Hedge funds had to be set up using an advisory structure.
The fund had raised around $120 million. Even though this fund was launched around the time of the financial crisis, it delivered 35% in dollar terms while the market was down 3% in dollar terms. The fund lasted for 18 months. Typically, hedge fund investments those days had a lock-in period of three years. However, given the timing of its launch, nobody was willing to give money with a lock-in period. To add to the offshore advisory mandate run by Fortuna, they also started advising Emkay’s PMS division. When Fortuna Capital took over, the PMS business was in its infancy and over the next one-and-a-half years, the asset size of Emkay’s PMS grew 10 times. After his stint at Emkay PMS, Lahiri chose to return to the mutual fund industry joining Canara Robeco in March 2011 as head of equities. Here he was in charge of equity funds which formed a major part of Canara Robeco’s portfolio, having assets under management of around Rs.1,400 crore at that time. Lahiri was with Canara Robeco till September 2012.
In 2012, L&T AMC acquired Fidelity's mutual fund business in India. However, the equity fund managers at Fidelity did not crossover to L&T AMC post the buyout. After the acquisition, L&T became the 13th largest fund house in India with AUM of Rs.13,497 crore and it needed top fund managers to manage its assets. Lahiri seized the opportunity in September 2012, where he began to manage multiple funds with an AUM of around Rs.4,700 crore. He later took over L&T Midcap Fund and managed L&T Emerging Business Fund, launched in April 2014 with the mandate of investing at least 50% in small-cap stocks.
Over the past five years and three years, Lahiri has been on the list of the top-10 best performing fund managers in India. He has clocked a 23% return over the past five years and 19% over the past three years, as per data compiled by Value Research. During his time at L&T AMC, Lahiri has made several investment calls that have helped him deliver a staggering return.
Lahiri says that he looks for companies that are undervalued, under-owned and under-researched, and can deliver strong growth. Another significant criteria he looks for is profit of over Rs.100 crore. “This means that the company has seen cycles and has been around for a considerable period of time. It takes time for a company to build a Rs.100 crore profit base,” Lahiri explains, reluctant to expound on individual stocks.
A look at his portfolio, however, shows that Lahiri doesn’t have any sectoral preference; he has been able to spot undervalued growth stories across sectors. In fact, several of his top performing investment ideas came from sectors that were hardly tracked by analysts.
A classic example that shows up in his Mid-cap Fund portfolio is Avanti Feeds, a company engaged in the export of aquaculture which no major brokerage house had covered and other mutual funds had very little or no exposure to.
The company had profit in excess of Rs.100 crore and was available at an attractive valuation, even as it was debt-free and cash-rich. Backed by brisk growth in the aquaculture export market, the company did exceeding well, and the stock has been one of the top contributors to the portfolio’s performance. The company continues to be part of Lahiri’s Mid-cap Fund which has more than Rs.2,000 crore of AUM today. The stock also entered the Emerging Businesses Fund in November 2016, reflecting Lahiri’s conviction. The fund had an AUM of Rs.375 crore back then. Today, the allocation of this stock has doubled while the AUM of the fund has gone up to more than Rs.3,500 crore.
Another of Lahiri’s top-performing investment idea is specialty chemicals company Aarti Industries. Analyst reports reveal that back in February 2014, when a small portion of the stock entered Lahiri’s portfolio, this company was available at just 5x one-year-forward earnings. The stock was also favourably placed as it had relatively less competition from Chinese manufacturers who were more focused on bulk chemicals. Naturally, the stock benefited from this. Today, the stock trades at 13x the price then. The allocation in the fund is roughly 1.5x and the AUM of the fund has gone up to more than Rs.1,800 crore.
Lahiri says that there are a lot of instances when he ends up buying stocks which he had been tracking in the mid-90s. Since steel ancillary was one area that he tracked earlier, it helped him pick some multi-baggers in the space.
Again, one example visible in his portfolio is Graphite India, a stock that entered Lahiri’s portfolio in January 2017. The stock has been a part of the L&T Tax Advantage Fund, L&T Midcap Fund and L&T Infrastructure Fund. With a market cap of Rs.1,500 crore, Graphite India was not a fancied stock then, despite the fact that it had a good balance sheet (it was a net cash company with Rs.550 crore) and a land parcel which the company could monetise. But the company’s fortune was about to change. Given that China was advocating pollution controls, the methodology to manufacture steel was undergoing a change. This company benefitted from being one of the suppliers in this space. Lahiri appears to have capitalised on this opportunity as the stock has gained 9x since the fund bought it.
Lahiri’s mantra is, if you get a good business run by a decent management at reasonable valuation, you have more or less done your job. These days, underperformance of the pharmaceutical sector is drawing Lahiri’s interest. To him, it is a business also not easily understood by many people and this can throw up interesting opportunities.
Lahiri has had several successes in spotting investment opportunities in mid-cap companies. While investing in mid-cap companies could be risky due to lack of information about the management, Lahiri makes sure he gets to know them as much as possible. He believes that a formal interaction with the management is not enough. “It is important to understand the business and the people who drive them to know the mid-cap space better,” Lahiri says.
That is also the reason why Lahiri remains wary of investing in IPOs. “The companies that get listed in the market usually don’t have a long track-record and it’s difficult to gather information about the management,” he adds. Although Lahiri is bullish on building products, he didn’t participate in the recent IPO of a building products company which is today trading at 2x its issue price as Lahiri feels it is important to be familiar with the background of the promoters.
Lahiri admires Seth Klarman, the US-based hedge fund manager, who has delivered a return of 19% CAGR over the past three decades after holding 40-50% cash. Lahiri’s stock picking style and career trajectory both mimic each other. He has never been shy of taking calculated risks and has often found success in his choice of stocks and jobs. Although mid-caps have had a strong run-up, one can be sure that Lahiri would find multibaggers for years to come given his strong track record and extensive research work on mid and small-cap space.