Rahul Saraogi Of Atyant Capital is an authority on “deep value investing”. This investing technique requires identification of stocks that appear to be in the dog-house but which actually have “deep value” embedded in them.
The advantage of deep value investing is that the downside is protected. As the stock is already in the dog-house and there are no expectations from it, there is not much that one can lose from the stock even if all the projections go haywire.
However, the drawback is that the wait may be inordinately long before the value of the stock comes to the surface. Also, some stocks may be a “value trap” meaning that it continues to remain in the dog-house for perpetuity while you suffer the opportunity cost.
So, this technique of investing requires special skills and temperament. It also requires immense patience to hold onto the stock for several years at a stretch.
Rahul Saraogi is also the author of the book “Investing in India: A Value Investor’s Guide to the Biggest Untapped Opportunity in the World”.
In an interview to Ankur Shah of VIIR, Rahul Saraogi has discussed his book and also given a detailed explanation of how he goes about identifying deep value stocks and the filters that he uses to weed out the bad ones.
Rahul makes the prophetic declaration in the interview that “India will not remain untapped for long” and that “there will soon be a mania about India”.
A practical example of Rahul Saraogi’s technique can be seen in the case study that he provided to the value investing congress.
In that, he talks of how he picked Century Textiles, the one-time blue-chip old-economy stock that is presently outside the radar of most investors.
Rahul explains that the reason investors stay away from Century Textiles is because its management is sub-par and there have been several cases of embezzlement of funds by some business unit heads. Also, Century Textiles generates poor return of equity and also has a mountain of debt. Its core business – textiles – is in the doldrums for the past several years.
However, despite all the negatives, Rahul Saraogi went ahead and bought the stock because he believed that a change in management is “imminent”. He also points out that the individual assets of the company are strategically located and built to best in class standards, however, their operations are sub-optimal and capital allocation at the balance sheet level is done poorly. A restructuring of the balance sheet as well as improvement in management could lead to significant value unlocking in the company, he states with conviction. He adds that Century Textiles has very strategically located paper assets in Uttarakhand in northern India. There is almost no other paper mill of this size and scope in northern India. This makes it a strategic fit for potential acquirers like ITC or International Paper with a deal value in excess of $1 billion.
Rahul Saraogi has also given a detailed explanation of what, in his opinion, Century is worth. He emphasizes that this estimate is based on an “excessively conservative appraisal” and that recent events have shown that there is a “big validation” of the thesis that the change in management to the Aditya Birla Group is imminent. He also points out that given the operating leverage inherent in the company’s businesses, it is the “start of a big value unlocking cycle in the company”.
Rahul Saraogi also makes a mention of the fact that he has already been richly rewarded for his foresight. While he bought Century Textiles at a price of INR 280 per share, the stock has since doubled (CMP is Rs. 555).
At the end, Rahul Saraogi calls Century Textiles a “great example” of a situation where after a stock has a meaningful increase in price the asymmetry can actually increase and the “investment becomes even better today” than when it was first purchased.