Buying the pessimism: 27 Aug 2022 CFA Institute

Buying the Pessimism 1
Twitter - @niteen_india
Niteen S Dharmawat
Buying the pessimism
(Everything that you wanted to know about)
27th Aug 2022
Co-Founder, Aurum Capital
Website: https://aurumcapital.in
Twitter: @CapitalAurum / @niteen_india
Email: info@aurumcapital.in
Be a wise
investor…

IMPORTANT DISCLAIMER:
The information herein is used as per the available sources of bseindia.com/nseindia.com/brokers websites, company’s annual
reports & other public/private database sources. Aurum Capital is not responsible for any discrepancy in the data. Investors
should seek advice of their independent financial advisor prior to taking any investment decision based on this report or for
necessary explanation of its contents.
Future estimates mentioned herein are personal opinions & views of the analyst. Analyst Name – Niteen S Dharmawat. For
queries / grievances – support@aurumcapital.in. SEBI registration No: INH000008118
Readers/attendees/viewers are responsible for all outcomes arising of buying / selling particular scrip/ scrips mentioned here in.
This presentation indicates opinion of the author to understand the case studies and it is not a recommendation to buy or sell
securities. Aurum Capital & its representatives may have vested interest in the mentioned securities at the time of this
publication, and its partners / company may have positions / financial interest in the securities discussed.
Aurum Capital, or its associates are not paid or compensated at any point of time, in last 12 months by any way from the
companies mentioned in the report.
Aurum Capital, or its representatives do not have more than 1% of the company’s total shareholding. Ownership of the stock:
may own/may have recommended to clients. Served as a director / employee of mentioned companies in report: No. Any
material conflict of interest at the time of publishing report: No
The views expressed in this post accurately reflect the author’s personal views about any and all of the subject securities or
issuers; and no part of the compensations, if any was, is or will be, directly indirectly, related to specific recommendation or
views expressed in the report.

Aurum Capital is a SEBI registered Research Analyst (SEBI Registration No:
INH000008118) and Investment Advisory (SEBI Registration No: INA000011024)
services company. Started by Jiten Parmar and Niteen S Dharmawat, who together
have more than 4 decades of experience investing in equities and guiding and
mentoring fellow investors.
This rich industry background helps us understand companies, complexities of
business and tipping points that make or break a company. Our approach is not
limited to just number crunching but going beyond. We focus on the business,
strategic direction, the competitive landscape, the governance process, the
background of the promoters, turnarounds, to name a few. Often these are more
critical items than just numbers. Jiten and Niteen have successfully waded through
multiple bear and bull market cycles.

Buying the Pessimism Twitter - @niteen_india
Buying the pessimism
4
Agenda…
 What is pessimism?
 Problem of plenty while buying optimism
 Correction types and impact
 Price correction
 time correction
 time and price correction
 Braveheart
 During buoyancy or during decline
 Importance of human behaviour
 Margin of errors
 Framework for Buying the Pessimism: Debt/ Management actions/Understanding sector v/s Understanding company during pessimism
 Case studies
 Paper Stocks in 2020-21
 Capital Goods in 2020-21
 Rush for Gold: NASDAQ 2020-2022
 IT companies in 2017
 USFDA Ban on a pharma company
 COVID wave
 Hotel/Tourism sector in Apr-2021 (2nd wave peak in India)
 Video Communications company in Oct-2020 (3rd wave peak in the USA)
 Power sector crashed in 2009: should I go for the Windmill company?
 My mistakes
 Home work
 Summary

What is pessimism?
5
Background…
A tendency to see the worst aspect of things or
believe that the worst will happen.
Examples
 End of markets when corrections happen
 End of sectors when darling sector collapse
 End of a company when events happen
• Evaluate each case
independently/ rationally

Buying the Pessimism Twitter - @niteen_india 6
Pessimism in the market
How does it look like and how to navigate?

What is pessimism?
7
The news headline will look like this…
23 Mar 2020

What is pessimism?
8
23 Mar 2020
Non-market
& you get to read this

What is pessimism?
9
23 Mar 2020
Hugo Erken, Senior
economist & country
analyst for North
America, Mexico and
India, Robobank
FinTwit account with 400k+ followers asking to
stop short selling: 18 Mar 2020

What is pessimism?
10
Background…
There is no tomorrow v/s there is no tomorrow
Extreme thinking
During buoyancy v/s During collapse
Fear of missing out v/s fear of crashed out
Panic Selling
Panic Buying
Pessimism
Optimism
“The market is a pendulum that forever swings between unsustainable
optimism (which makes stocks too expensive) and unjustified
pessimism (which makes them too cheap). The Intelligent Investor is a
realist who sells to optimists and buys from pessimists.”:
Jason Zweig, The Intelligent Investor

Buying the pessimism?
11
Meaning…
 Buying when there is a carnage
 Apply mind and not emotions: Think rationally than emotionally
 Have a view to hold the business for the next few years without significant returns
 Keep expectations to minimum
 Expect the underperformance
 Even if we can’t control our emotions, we can control the attention we give to our emotions
 WhatsApp/Telegram groups/Social media
 Media (eMedia, print media)
 Distracted by emotions, list three activities that you can busy yourself in, e.g., for me
 Act of random gratitude, Meditation, Reading books

Correction types and impact
12
Meme stock… Time correction
5 Year stagnation

Time Correction
13
Meme stock… but prior 10 years
10 years: 6.6X
CAGR: 21% in 10 years + Dividends
5 years stagnation
5 year: 4X+Dividend

Price corrections: permanently dead
14
Infra stocks… post 2009 carnage
Punj Lloyd, JP Associates, GMR, IVRCL: Lost 95-98%
(1 Lac became 2k or 5k)
It's only when the tide
goes out you know
who's swimming naked:
Warren Buffett

Winner-Takes-All
15
Infra stocks… post 2009 carnage
Price correction
by 50%+
Price correction
by almost 50%+

Braveheart?
16
During buoyancy or during decline
Should I consider buying
in this sector here?
Or here? Returns: 56X

Importance of human behaviour
17
To win over Algo trades there is only one way: Control your emotions.
 Your biggest enemy, when investing, is within yourself.
 Success will only come when you learn to control your emotions.
 Apparently, one of the easiest ones but the most difficult to follow.

Buying the Pessimism
Important parameters to consider

Framework for Buying the Pessimism
19
Parameters
(buying the pessimism)
Survivability test
Permanent
disruption
Sector/
company out
of favour
• No one wants to talk about it
• Hesitation to post about the
company/sector as people may laugh
• Valuations at historically low
End
Yes
Yes
Not manageable
Debt
level
No
How high is “high”
No
Cashflows of 5
“good” years
Manageable
(Low/No debt)
Reconsider/Wait
Healthy
Few
survivors?
Mgmt buying shares
Cost reduction
Consolidation
Low capacity utilization
Demand improving
...
Yes
Yes
Go-ahead
No
Corporate Governance
Large
seller?
No
No
Yes

Case study: Paper sector in 2020-21
(Cyclical and multiple parameters affecting it)

Paper Stocks
21
Headwinds & Tailwinds
Source: screener, publically available data
• Stocks were down by ~60-70% in a year and a half between 2018 –2020
• Stock were already coming down before COVID-19
• Sector was facing headwinds
• No one wanted to publically own this sector
• “Experts” were sighting lack of demand and deteriorating pricing power as a possible reasons for the “death” of the sector
• Difficult period did help companies put their acts together and there will come “external” unknown reasons to rebound
• Now when mojo is back everyone is on another extreme and counting on the “global shortfall”, “multi year bull run” and
“uninterrupted paper demand” and huge growth!!!
• There are certain things that never change

Paper Stocks
22
West Coast Paper Mills & JK Paper
This is a case study and not a recommendation
Recommended stock to our clients, we own it too. We may exit too without any notice.
2018-2020 & 2020-2022
625
• Our estimate: in good times it could achieve
800-1000Crs EBITDA while it came to 261Crs in FY21
• Our estimate: in good times it could achieve
1200-1400Crs EBITDA while it came to 563Crs in FY21
Recommended on
02-Sep-2020 @185.
Still in coverage
Recommended on
22-Feb-2021 @137
Not under coverage anymore

Paper Stock
23
West Coast Paper Mills
It is a recommended stock to our clients, we own it too. We may exit too without any notice

Paper Stock
24
West Coast Paper Mills

Paper Stocks
25
JK Paper
It was a recommended stock to our clients, we own it too. We may exit too without any notice

Paper Stocks
26
JK Paper
It was a recommended stock to our clients, we own it too. We may exit too without any notice

Case study: Capital Goods 2020-2021
[Multiyear issues, tired (read “dead”) investors ]

Capital Goods sector
28
Headwinds, Headwinds and only Headwinds
Source:
IBEF Presentation 2019, Engineering & Capital Goods
Care Report, Capital goods sector Aug 2020
• Capital Goods industry is often called the ‘mother of all
manufacturing industry’.
• By definition, any good (plant, machinery, equipment) that
is used to manufacture other products (either directly or
indirectly) is called a Capital Good.
• The Capital Goods industry contributes ~2% of GDP in
India. In China it is 4.1%, in Germany 3.4%, and in South
Korea 2.8%.
• The performance of capital goods sector is directly linked
to the overall manufacturing sector.
• While the exports were stagnant during 8 years, the capex
in domestic economy was almost stagnant
• One of the major contributor in Engineering exports is Iron
and Steel & products made of Iron and Steel. If remove
this contribution then Capital Good sectors should have a
negative demand
• This sector has the highest number of stocks
recommended put together in in our two research services

29
Headwinds, Headwinds and only Headwinds
While imports were rising and expected to rise further
Titbit
• The country meets almost 40%
of its demand of Capital Goods
through imports.
Source:

30
Negative CAGR for a 6 year period & Stagnant Utilization
Source:

31
TD Power Systems Ltd
?

32
Zero debt; cash positive
No equity dilution; buy-back

33
IPO @ ₹261 on
Aug 26, 2011
Recommended here on 10-Feb-2021 @150
Source: Google, publically available data

34
?

35
Q3FY21 results declared on 04-Feb-2021
Recommended on 10-Feb-2021 @150

36
Apar Industries Ltd

37
Apar Industries Ltd
Q3FY21 results declared on 04-Feb-2021
Recommended on 21-May-2021 @524

38
Apar Industries Ltd
Recommended here on 21-Ma-2021 @524
1321.05

Case study: NASDAQ & Rush for Gold

South Sea Company Stock
40
Rush for the Gold…
Sir Isaac Newton lost fortunes and
went almost bankrupt to speculation in
The South Sea Company stock.
He is also quoted as stating:
"I can calculate the movement of the
stars, but not the madness of men”.

NASDAQ
41
Rush for the Gold post Covid…

NASDAQ
42

NASDAQ
43

International Funds & Equity Funds with overseas investments… from India
44
Source: - Returns, publically available data
This is a case study and
not a recommendation
• Out of total 89 fund analyzed
• 56 launched between 1998-2020 (67%)
• 33 Launched between 2020-2022(33%)
• Out of 33 funds launched between 2020-2022
• 21 are negative
• 11 are positive
• Out 11 positive
• Only 1 has beaten the benchmark index
in the last one year
• During this period, we have got several investor
enquires asking if we can provide research on
the NASDAQ listed company.
• In fact one investor showed us how to open
account and trade in the US market.
• None asked post carnage

Case study: IT companies in 2017
(Everyone is saying IT sector is dead now as we do only menial job)

IT companies in 2017…
46
All around negativity….
Source: Publically available data
By Ex JPMorgan& HDFCSec, Economist, MBA Finance,
Ranked in Asiamoney
Media
Media
Fund Manager

People say Covid helped
47
But Infosys doubled before Covid from 2017 bottom
• The stock was down by 33% in a year from 2016-17
• Covid did help get the Mojo but even before Covid it was
already up 90% when there was negativity around the
sector between 2017-2019
• No one wanted to publically own this sector
• “Experts” were sighting lack of innovation and no product
focus as a possible “death” of the sector
• We may not be in product space as strong as we could, but
overall our echo system in IT is strong and adds significant
value to the client
• Difficult period did help companies put their acts together
and rebound
• Now when mojo is back everyone is on another extreme
and counting on the “digital revolution” and huge growth!!!
2017-2022
1953.00

48
But Infosys doubled before Covid from 2017 bottom
• This set the tone for the market
participants
• Price drives the perception
• Reasoning takes back seat when
emotions are on the forefront
• During the next two years, the
stock was up almost 100%, what
was changed?

49
TCS also almost doubled before Covid from 2017 bottom
• Same was the case with TCS
• The stock was down by 20% in a year from
2016-17
• So was the case with entire IT pack
2017-2022

50
But TCS almost doubled before Covid from 2017 bottom
• This set the tone for the market
participants
• Price drives the perception
• Reasoning takes back seat when
emotions are on the forefront
• During the next two years, the
stock was up almost 91%, what
was changed?

Case study: IPCA Labs
• 4.4X returns
• 40%+ XIRR
• 4.5 years

IPCA Labs
52
Brief profile
• Incorporated in 1949.
• Incorporated under the name The Indian Pharmaceutical Combine
Association (IPCA).
• Fully-integrated manufactures over 350 formulations and 80 APIs for
various therapeutic segments
• One of the 20 largest formulation companies in India
• Business segments:
• API Business (30% revenue):
• produces over 80 APIs at 12 production facilities
• Export of 79% of the APIs and Intermediates business to 70
countries
• Focus on backward integration, superior supply chain reliability
and cost competitiveness
• Formulations (70% revenue):
• Manufactures over 350 formulations
• Leaders in Pain, Rheumatology, Antimalarials, and Haircare
therapies
• Co's leading brands include Zerodol, Hydroxychloroquine Sulfate,
and Solvin.
• Three manufacturing sites still under US FDA import alert
• Geographical Mix – FY21: Europe -28%, Africa -20%, America – 21%,
Asia – 17%, CIS – 7%, Australia – 7%
2009-2014
• Post 2009 crash
• 15X in 5 years

Ban, Ban, Ban…
53
Test the patience…
• Outperforming pharma during last 5 years, peak in 2014
• IPCA peaked at ~450
• US FDA bans imports from IPCA Labs plant in MP: 2015
• US FDA issues import alert to 2 plants of IPCA Labs: 2015
• Bought 10% of quantity in 2015 @310
Peak of pharma sector in 2014
IPCA peaked at ~450
Price adjusted to split in the ratio of 2:1
2013-2015
2016-2018
• Brexit impacted
• Anti-malarial drug Hydroxychloroquine banned by WHO
• USA-China trade issues
• Chinese raw material supply/price issue
• 90% quantity between 2016-2018

IPCA Labs
54
Profit & Loss…
Topline: 2X
Bottomline: 2.33X
Stock price: 15X
Topline: 1.64X
Bottomline: 2.37X
How about buying the
pessimism?
Stock price: 2X Stock price: 4.4X
40%+ XIRR

IPCA Labs
55
Balance Sheet…

IPCA Labs
56
Cash Flows

IPCA Labs
57
Corporate actions
2016 ₹ 0.00

Patience, Patience, Patience…
58
Slow and steady accumulation helps…
• USFDA issue did not get resolve
• Operations in other countries started showing
results
• COVID happened in 2020: game changer
• Got special approval to ship Hydroxychloroquine
in the USA market
• Stock touched a peak of ~1250
• Peak revenue, peak profit, peak share price
• Fully exited in Oct 2020. Overall:
• 4.4X returns
• 40%+ XIRR
• Total duration ~4.5 years from start till end
• Did we consider recommending it to our clients?
• Yes at 425. But missed it: Why?
Overall
• 4.4X returns
• 40%+ XIRR
• 4.5 years (avg duration)

Case study: COVID wave
(should I invest in Hotel/Tourism sector in Apr-2021 (2nd wave peak in India)
• Negatively impacted sector
• Survival was in question

India’s 10 Hotels v/s IPCA
60
Buying The Pessimism
IPCA 27,500
During Corona 2nd Wave Peak
(Mar-Apr 2021)
No Company
Market cap
(in crores)
1 Indian Hotels 7,735
2 EIH Ltd 3,306
3 Chalet Hotels 3,160
4 Delta Corp 1,674
5 Lemon Tree 1,264
6 Wonderla 638
7 TajGVK 585
8 EIH Associated Hotels 552
9 Advani Hotels 139
10 Sinclairs Hotel 78
Total market cap 19,131
Total debt ~ 10,000
55,000 rooms + Restaurants + Iconic brands
available at a Market Cap of 19k + Debt 10k (EV 29K)
<<
ARR < INR 3500
Occupancy < 20-30%
No one wanted to talk about this sector publically

India’s Top 10 Hotels v/s IPCA
61
Buying The Pessimism
No Company
Market cap
(in crores)
1 Indian Hotels 38,860
2 EIH Ltd 10,040
3 Chalet Hotels 6,780
4 Delta Corp 5,640
5 Lemon Tree 5,510
6 Wonderla 1,910
7 TajGVK 1,118
8 EIH Associated Hotels 1,058
9 Advani Hotels 376
10 Sinclairs Hotel 282
Total market cap 71,574
IPCA 23,200
Today
• 1.4 year and basket is up 3.7X+ from bottom
• Even if bought staggered it is 1.5-2X
>>
ARR > INR 8000+
Occupancy > 70-75%
(Rooms not available at Leisure locations)
Everyone wants to own a hotel stock/book a hotel

Some of the Hotel properties
62
Pessimism gives the best price but it comes at the cost of patience

Some of the tweets on Hotel industry
63

Some of the tweets on Hotel industry
64

Case study: COVID wave
(should I invest in Video Communications company in Oct-2020 (3rd wave peak in the USA)
• Positively
impacted sector

Zoom in – Zoom out
66
How about Selling the Optimism?
Oct-Dec 2020
1st wave 2nd wave 3rd wave
No of cases Peak price
Stock down 83%

My Mistakes

Errors of Omission v/s Errors of Commission
68
I have made both…
• Omission is less costly v/s Commission where real loss of
hard cash
• I have made both on several occasions
• Lessons:
• Mistakes are unavoidable and a part of life
• Try to avoid repeating esp. Errors of Commission
• Avoid mistakes that can take you off the market on a
permanent basis

Importance of connecting the dots
69
Case study 1
• Made an investment in MCX in 2012 post IPO
• Approached by brokers to invest in “guaranteed FDs” of National Spot Exchange (NSEL)
• Questions asked on viability of high returns
• Avoided NSEL and could sense trouble brewing
• Failed to connect the dots

In search of the “Next”… 2014
70
Case study 2
• IDFC Ltd was going through a difficult phase due to loans in infra sector
• IDFC Limited got banking license in April 2014
• Invested in IDFC Ltd in Jul 2014
• Banking license
• New vigour to handle crisis
• Banking license to give access to “easy” money
• “Professional” team
• Thought it to be the next…
• Mistakes:
Underestimated
• the liabilities of IDFC’s previous avatar
• the complexities of setting up a bank
• regulatory requirements of IDFC AMC business: demerger/merger…
• Not taking exit when merger with Shriram Transport announced
• overestimating the competency of the management
Learnings
• Correct the mistakes early
• Focus on headwinds
• Do not underestimate complexities

Summary
71
 It is mostly rewarding to be positive during pessimism
 Avoid companies with Corp Governance issues
 Like fall right after IT raids. This could be a trap esp in companies with poor Corp Governance history
 Focus on business, health of the organization, balance sheet strength, cash flows
 Check survivability of the company
 Set clearly defined milestones and measure the performance against that. If things not moving as per
expectations then reconsider
 Do not get perturbed when others making money in different sectors. “Aapka time aayega”
 Patience, patience and patience

Aurum Capital is a SEBI registered Research Analyst (SEBI Registration No:
INH000008118) and Investment Advisory (SEBI Registration No: INA000011024)
services company. Started by Jiten Parmar and Niteen Dharmawat, who together
have more than 4 decades of experience investing in equities and guiding and
mentoring fellow investors.
This rich industry background helps us understand companies, complexities of
business and tipping points that make or break a company. Our approach is not
limited to just number crunching but going beyond. We focus on the business,
strategic direction, the competitive landscape, the governance process, the
background of the promoters, turnarounds, to name a few. Often these are more
critical items than just numbers. Jiten and Niteen have successfully waded through
multiple bear and bull market cycles.

Thank you
Email: info@aurumcapital.in
Twitter: @niteen_india
@CapitalAurum
73

IMPORTANT DISCLAIMER:
The information herein is used as per the available sources of bseindia.com/nseindia.com/brokers websites, company’s annual
reports & other public/private database sources. Aurum Capital is not responsible for any discrepancy in the above mentioned
data. Investors should seek advice of their independent financial advisor prior to taking any investment decision based on this
report or for necessary explanation of its contents.
Future estimates mentioned herein are personal opinions & views of the analyst. Analyst Name – Niteen S Dharmawat. For
queries / grievances – support@aurumcapital.in. SEBI registration No: INH000008118
Readers are responsible for all outcomes arising of buying / selling particular scrip/ scrips mentioned here in. This report
indicates opinion of the author to understand the company and its business operations and it is not a recommendation to buy
or sell securities. Aurum Capital & its representatives have vested interest in above mentioned securities at the time of this
publication, and its partners / company have positions / financial interest in the securities mentioned above.
Aurum Capital, or its associates are not paid or compensated at any point of time, in last 12 months by any way from the
companies mentioned in the report.
Aurum Capital, or its representatives do not have more than 1% of the company’s total shareholding. Ownership of the stock:
yes. Recommendation to client: this stock is not recommended to clients so far. Served as a director / employee of mentioned
companies in report: No. Any material conflict of interest at the time of publishing report: No
The views expressed in this post accurately reflect the author’s personal views about any and all of the subject securities or
issuers; and no part of the compensations, if any was, is or will be, directly indirectly, related to specific recommendation or
views expressed in the report.

Buying the pessimism: 27 Aug 2022 CFA Institute

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