Thanks Basant for starting this new topic on NCCL. I agree with all of the above points, but we need to keep in mind a coupla things here. Firstly, Mr. Rakesh Jhunjhunwala, despite being aware of promoters shunning their own warrants, has gone ahead and bought around 10 lakh shares at around 112 via Motilal Oswal. The info is available at the exchange webstites. I agree with being pissed off at the promoters attitude and the "good deal with bad person" and also the PRIL bit, but we don't have any control over what promoter does since we don't sit in the board or have significant shareholdings to vote down or veto any actions.
Secondly, we don't live in an ideal and perfect world here. Companies like wal-mart hire illegal immigrants and force them to work ungodly hours. They down the shutters and do not allow the staff to leave the premises when there is extra work. They are notorious for not paying overtime and giving bonuses in the form of coupons that can only be encashed at Wal-Mart itself. They got into trouble for all these and yet they have rewarded the long-term investors a handsome 13000% plus over the last 3 decades or so. All this happened in USA which has the strictest labor protection norms in the world. Despite all this, Wal-Mart is one of the best companies in the history of capitalism in terms of investor returns.
My point is, blind spots are there in every investment which is undervalued. If you find the ideal investment with no blind spots, like Berkshire Hathaway, you gotta pay a pretty steep price for it. Right now, it is trading at $137800 for a share which works out to 64 lakhs plus change for one share.
Strictly from an investor point of view though, the only sins a management can do is diverting company funds/cashflow for personal use, entering unrelated businesses, not keeping costs low, and not keeping up with change. The promoter might have financial constraints preventing him from subscribing to the warrants, who knows? He definitely had enough werewithal to buy shares from the open market and did so. That itself is confirmation that although he may not have subscribed to the warrants, he still has faith in his company. Another large and astute investor also loaded up on his booty.
So as investors, we need to find value and buy it for the sake of our absolute returns at least. This is what RJ has said in one of his essays/articles that he has written, and I think is very relavent in this context.
"At a value, I am a buyer of everything, including the most hated companies. It is important “what you are buying but it is more important at what value/price you are buying.”
My point is, strictly from a money-making point of view, NCCL is dirt cheap and we cannot have a "holier-than-thou" attitude while investing since we don't live in a perfect world. We are free to draw your own independent conclusions regarding the matter but I would like to conclude my argument with the following excerpt from a Rakesh Jhunjhunwala interview (I must apologize I quote him quite a lot as no other single person has had the kind of impact on my attitude and thinking as he has). Please note that this interview was in 2001.
You look at external opportunity. You want a company that can tap that opportunity, that is scalable and that has integrity. While these are necessary conditions, are there any additional conditions that you look for in a company?
Rakesh Jhunjhunwala: Let me point out one thing. Sometimes I invest even when all the three conditions are not present. I got McDowell at Rs20. I think there was a great external opportunity. Liquor consumption in India is growing. They have the competitive ability and they have domination. But in my opinion, there is no integrity. Yet, looking at the valuation if you traded off I think it was worthwhile. So, at times we could trade off all these parameters for valuation. Infosys matches all the first three parameters. But think of the man who bought Infosys at Rs14,000. Where did he go? I think it's not only what you buy that is important but also at what price you buy.
So, would you say that only necessary condition is valuation? Everything else is a sufficient condition that merely strengthens your case for investment.
Valuation comes before everything else
Rakesh Jhunjhunwala: Absolutely, I think valuation comes first before everything else. It's not what you buy. It's at what price you buy.
In your opinion, can valuation be both a necessary and sufficient condition?
Rakesh Jhunjhunwala: Yes, it could be both. It's a necessary and sufficient condition.
How do you go about updating yourself on a stock in which you have built a position? How frequently do you reassess the stock?
Rakesh Jhunjhunwala: Well, I believe in invest now, investigate later. When I see the basic value in a stock, I invest immediately. Let's take the case of McDowell. They have 40% market share of India's liquor industry. At the price I was getting it, its market capitalization was about Rs200cr. It was incredulous. For Rs200cr you could buy 40% of India's liquor industry, an industry with great entry barriers. So, I invested in McDowell without spending much time on further investigation.
Edited by shankar - 02/Oct/2008 at 9:56pm
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