Kuntal Shah on Three Decades of Intelligent Investing in India

The following transcript is an edited rendition of a conversation between Rohith Potti, on behalf of MOI Global, and Kuntal Shah, a public markets investor in Indian equities over the past three decades. The interview was conducted on June 25, 2021.

Kuntal Shah (excerpt): I stumbled upon investing as a case of pure luck and serendipity. I am an engineer by education. This was in the context of the 1990s when computers also had a maximum memory of a few KB, and there was no technology use case as it is prevalent today. We are talking of an era that is almost three decades old. We had extremely limited options in India back then. During the time when I was studying, there was a massive transformation in the Indian economy: the country opened up for global investments.

Simultaneously, there was a securities scam, which resulted in the stock prices of certain companies which I knew intimately, to go up. When I used to ask the management what is driving growth, even they did not know the rationale behind the meteoric rise. I detected a sense of disconnect. My curiosity was aroused, and it seemed like a very great puzzle to solve. Here we were talking about managements who knew the businesses inside out but did not know what was happening in the stock market. Somehow the stock market was aware of something major happening. And I thought if I could find the reason for this disconnect, there could be both, a profit potential, and a hugely satisfying career opportunity. That is how I landed up in the stock market, just by pure luck and serendipity.

Coming back to my philosophy, it has evolved over three decades. In the early 1990s, I was more of a “special situations” investor and arbitrageur. We are talking of an era where interest rates prevalent in the Indian market were in the high teens. You did not have to take too much equity risk to get the desired risk-reward outcome. Looking at it from multiple vantage points, the kind of capital I deployed, the investments I made, the kind of risk-reward outcomes I enjoyed, they were totally different. That geared me up to doing the hard work of evaluating companies for M&A and corporate action arbitrages, special situations, delisting from the stock exchanges arbitrages, arbitrages of securities listed in different stock exchanges.

We did not require too much of a “business analytical” skill set. The biggest advantage we enjoyed then, was informational advantage, with focus on sourcing more and more information and then stitching up a picture of what could be the potential upside and downside. This kind of situation driven investing had a catalyst or a horizon in place and a very definite timeline associated with it. This was nowhere closely resembling to compounding and long-termism, which you see prevalent in the latter part of my evolution journey. The focus was short-term with a clear focus on minimizing the downside and maximizing the upside in a very narrow window of inefficient domains and pockets of the market.

Fast forward, many of these opportunities ceased to exist, because of the large number of smart investors entering the stock markets post liberalization of the capital markets in India. The focus changed to medium-term opportunities which were purely driven by numbers and the business, in terms of what could be done to reduce interest costs, reduce taxes, optimize asset turns, margins, fund the structure well. So, a basic bottom-up focus. The focus changed from information arbitrage to an analytical side, where we learnt to connect the dots and have a longer-term outlook towards the business. This coincided with capital, which was more permanent in nature, in terms that they were proprietary investments.

It was during this phase, that I had the biggest learning curve of my life. I had a short stint of time as a private equity investor, which taught me a lot of things about how real businesses work and what the considerations of the management and customers are. It showed me various vantage points of the ecosystem. I got exposed to how businesses are run at a very intricate level and that probably made me a better investor in the ensuing decade.

The last decade which was 2010-2020, marked a phenomenal change in the attitude and aptitude of my evolution. My focus turned towards intangibles and the competitive positioning of the business, the scalability aspect of the management, their drive and culture and their ability to adapt and grow. Obviously, the underlying overlay of analyzing businesses and their prospects was there, but it was superimposed with more qualitative aspects. That completed the transformation of my journey from a pure arbitrageur to a pure long-term investor, focused on long-term compounding.

This was possible because I had middle-class upbringing. Early on, we were taught to have clear principles of inversion, that not everything matters but some things do. You must pay attention to who you surround yourself with and what not to do is as important as what to do. The whole trick is to have faith in your hypothesis but then to question it as well. This kind of duality in thinking enabled handling contractions and complimented the middle-class ethos of spending less money in order to save, being patient, focusing on the compounding of relationships, habits, knowledge, reputation and culture. This served me well for the time to come.

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