Nalanda Capital’s Portfolio & The Secrets To Finding Multibagger Stocks

Pulak Chandan Prasad, the founder of Nalanda Capital Pte Ltd, is the man with the golden touch. He is 45 years of age and has rich experience in identifying winning companies. He did his MBA from IIM Ahmedabad in 1992 and joined McKinsey. Thereafter, in 1998, he joined Warburg Pincus where he learnt the ropes of equity investing. He is credited with several investments (such as Kotak Mahindra Bank, Sintex Industries, Nicholas Piramal India, Satyam Computer Services) which gave Warburg Pincus multibagger returns. He is best known for the $300 million investment that Warburg made in Bharati Airtel which was sold for $1.9 billion.

In May 2007, Pulak Chandan Prasad decided to strike it on his own and started Nalanda Capital for making investments in India. Thanks to his McKinsey & Warburg Pincus pedigree, he had no problem attracting investors who pumped in $400 Million. He raised another $475m in April 2011. Fortunately, he has lived up to the promise and has had an incredible track record of finding multibagger stocks and enriched Nalanda’s investors.

Pulak Chandan Prasad makes it clear that when Nalanda Capital seeks to invest in a stock, it subjects the company to the same rigorous screening process that a private equity investor seeking to invest in an unlisted company would do. The criteria that a stock has to fulfill before Nalanda makes an investment are:

(i) High return on capital: The company must have a consistently high return on capital because return on capital is a very good indicator of the quality of the management team and the competitive advantage of the business.

(ii) Attractive industry: The industry structure, the conduct and performance of the companies therein is analyzed to determine the long-term prospects for value creation.

(iii) Quality management with good credentials: The entrepreneurs must be clean and transparent and have an outstanding track record. Also, the management must be open to external ideas, discussion and debate.

(iv) Risk-reward ratio must be in favour of the investment:

Now let’s take a look at Nalanda Capital’s latest portfolio and the rationale for a few of those investments:

Mindtree is Nalanda Capital’s single largest investment. It bought a 2% stake in February 2009 and has been steadily increasing its stake by buying more in 2009 and 2012. The purchase price ranges from Rs. 212 to Rs. 400. The confidence in Mindtree is justified because the stock has given a return of 595% since 2009. The stock is still a great buy owing to its consistent strong growth, strong deal pipeline, and reasonable valuations (P/E of 16.9 FY 13).

Page Industries was bought by Nalanda Capital in October 2008 at the price of Rs. 450 per share. It was one of the first large investors in Page. Page has been a rocket stock, giving a return of 1191% since October 2008. It continues to be expensive (P/E 43) but continues to enjoy investor confidence owing to its strong brands and high ROEs. Interestingly, Nalanda Capital also bought a big stake in Lovable Lingerie in July 2013. However, Lovable Lingerie has not given great returns so far.

Exide Industries is a stock where Nalanda has lost money since it starting buying in March 2011. However, Nalanda has been buying steadily and trying to average its purchase price. The stock has been pummeled because it reported poor results. However, the stock appears to have bottomed out and is ripe for an upmove now. This is a stock where the risk-reward ratio is now in favour of a purchase.

Havells India was bought by Nalanda Capital in July-September 2011 at an average price of about 350 per share. At that time Havells had been pummeled because the Sylvania’s lighting business was not doing well. However, Havell’s restructured its operations and the result is that the stock price has nearly doubled at Rs. 752. Havells is still a good buy because it reported strong results in Q2FY14 with strong operating performance and high EBIDTA margins. Havells has guided for a revenue growth of 11-12% and EBIDTA margins of 13-14% in domestic business. It reported a ROE of 32% in FY 2013 and is trading at a P/E of 24.

Berger Paints has been another multibagger for Nalanda Capital. It increased its stake in Aug 2009 by a preferential issue at the price of about Rs. 45. At the CMP of Rs. 224, Nalanda has gained a 419% appreciation on its investment. Berger Paints India is the second largest paint company in India (the first being Asian Paints). It has a consistent track record of growth and well known brands. However, the stock is not cheap and is trading at a P/E ratio of about 30x FY14E.

AIA Engineering was bought by Nalanda Capital in September-December 2011 at the price of about Rs. 310 per share. The stock has done quite well with a 45% return. However, the good times are just starting for AIA Engineering. It is a debt free company and is engaged in the manufacture of high-chrome grinding media for which there is a great demand. AIA Engineering plans to increase its high-chrome capacity by 60,000 tonnes in FY14 and 1,80,000 tonnes in CY15, resulting in 120% capacity expansion by FY15. There is a very good report on AIA by Jwalit Vyas in the Economic Times.

Supreme Industries was bought by Nalanda Capital in April 2010 at the price of about Rs. 98 (adjusted for split). Nalanda has been steadily increasing its stake since then. The stock has given a return of 350% from the first purchase. Supreme Industries is an evergreen stock that is renowned for its steady growth. It is one of the fastest wealth creators for equity investors as per Motilal Oswal’s Wealth Creator (2008-2013) study. It is also amongst Motilal Oswal’s best midcap plays.

DB Corp, the publication house, was bought by Nalanda Capital in June 2012 at the price of about Rs. 200 per share. It increased its stake in September 2012. The stock is a steady performer and has churned out a return of about 35% since the first purchase. The stock has done quite well in Q2FY 2014 due to the spate of advertisements by the political parties on the eve of elections. By the end of Q3FY2014, DB Corp is expected to enter Bihar by launching the Patna edition. Bihar’s advertising market size is about Rs 400 crore. DB Corp’s valuations are quite reasonable at 17 times the TTM EPS of Rs. 15.

Great Eastern Shipping was first bought by Nalanda Capital in July-September 2012 and it has been steadily increasing its stake. Great Eastern Shipping is suffering owing to the oversupply of tankers in the dry bulk segment. There is also a slowdown in the global oil demand and freight rates are soft. However, once the global economy improves, Great Eastern Shipping can be expected to take off. Nalanda Capital probably bought the stock because it wanted a stake in the logistics sector.

Vaibhav Global is a very interesting case. Though the stock has been on fire with a 531% YOY return and a 2065% return in 2 years, Nalanda Capital has not seen those gains because it invested in October 2007 at the price of Rs. 170 to Rs. 230. After that the stock got into serious trouble and touched a low of Rs. 11. Warburg Pincus, which had invested Rs. 245 crore in Vaibhav Global sold its holding in March 2011 for Rs. 18 crore and suffered a loss of 92%. However, Pulak Prasad and Nalanda Capital remained invested and now have a 2 bagger to their credit.