In Conversation with India Capital

I am Tamal Bandopadhyay with the India Capital team, Dan Tannebaum, Piyush Goyal, and Saqid Yadav. Welcome to the show.

Thank you for having us.

Okay, Dan, so I'll start with you, if it's okay with you. Tell me about your company. You just presume I don't know anything.

Sure. For the past three decades, we've invested just in Indian public equities. So single country, single asset class, single strategy.

We are, I guess, like that proverbial restaurant with just one item on the menu, but hopefully we make it well. What we do is constant, intensive research looking for great businesses and really trying to understand what makes them tick and whether they can grow and thrive along with India. The end result of that is owning a small number of them, usually very different ones that are in the index or that other Indian investment managers hold, and holding them for a very long time, sometimes many years.

Well, Dan, you said it's very interesting. You're a restaurant with one single menu, but you are running this restaurant for three decades, 31 years. So I'm sure it needs fine-tuning the menu because the people taste are changing.

So tell me, how have you seen these 31 years in India?

Yeah, so much has changed in that time. Three decades ago, average incomes were less than a dollar a day. India, the country, had less hotel rooms than the city of Orlando and maybe one in 300 Indian families owned a stock or mutual fund at all.

You flash forward to today, and of course, it's a totally different picture. It's a $4 trillion economy, but it's also now a $5 trillion equity market. There are 55 million mutual fund investors and hundreds of foreign investors as well, and that category has gone 100-fold.

So, so, so much has evolved, grown, changed, and yet our approach has, at its essence, remained constant, that that discipline of intensive research to identify great businesses that can thrive is as, in our view, distinctive and important as ever.

Yeah, Dan, you rightly said that, you know, market is becoming bigger and bigger and bigger. I don't want to repeat the numbers, but every second month, we're talking about the Demat accounts, number of Demat accounts, how they've been growing, mutual fund investment, competition between mutual fund and bank for funds and all. And the investors also, the community of investors also getting larger and larger.

But tell me, Dan, what makes you different? What is so unique about India Capital?

There is so much more participation in the market, so much more intermediation. There are something like 500 domestic fund managers. There are thousands of investing YouTube channels and Twitter handles.

And yet what we do is still distinctive. If you think about where this investment is coming from, some 80 percent of it is from domestic Indian mutual funds, typically associated with an investment bank or a brokerage or a wealth manager or sometimes all three of them. And their model is to launch fund after fund.

Typically they will have dozens or in some cases more than 100 funds, each of which oftentimes will hold 50 stocks, 100, 150 stocks that are traded frequently. And there's nothing inherently wrong with that. There are a lot of good ways to invest, but it is wholly different from what we do.

Similarly, even within our class, which is foreign institutional investors, some 8 and 10 of those investment dollars are held by institutions that are investing in India, but alongside every other emerging market or every other Asian country. And they're doing it from Singapore or London or San Francisco. And that implies a very different level of appetite and a very different capacity to do the kind of fundamental research that is our bread and butter.

And just to talk for a moment about what that is, we as a group hail from the length and breadth of India, and obviously in my case from outside of India, and we grew up speaking probably half a dozen different languages, and we have different educational backgrounds, different professional backgrounds, anywhere from private equity to consulting to entrepreneurship to journalism. And yet there is a common thread running through us that there is a passion and now a discipline that's involved in doing very, very intensive work seeking out how do businesses actually make money? What is it that makes them good?

Can that be defended against competitors? Will those advantages hold good as conditions evolve in the market changes? You cover financial institutions better and are more of an authority than anyone else.

In the time we've been investing, that industry has grown 30-fold. In some ways, what makes a bank excel, the factors are a little different. But as its core, probably the essentials remain the same.

And I would argue that's true for our approach. It is a lane that even today is relatively unoccupied by others and continues to be quite different.

Thanks, Dan. And correct me if I'm wrong, I think the key differentiator is the research, what you do, and probably others also do, but you are different from them. So let me ask you, any of you rather, take us through the research work.

Sure, maybe I could take that one. So the research at India Capital tends to cover a lot of ground. And of course, it starts with some of the basics where we are reading a company's historical financial statements, talking to the management teams, looking at the product catalogs, watching any interviews that the management might have given.

But that just tends to be the starting point. The heart of the research is when we really roll up our sleeves and go out there and see a business in action. In its end markets, talking to their customers, their competitors, oftentimes their line managers, you know, in their plants and factories, there are situations where we even talk to bureaucrats and policymakers if the industry so demands.

In fact, as a journalist yourself, Kamal, the process might be familiar to you since it's similar to how you approach a story where we're trying to bring in all sorts of perspectives and angles to understand what's really going on. And we've built a team around that idea as Dan was alluding to earlier. You know, as Dan said, we have a journalist, we have several colleagues who spend time in consulting and private equity, including myself.

So that inquiry-based toolkit to research comes in very handy doing this. And just to give you the full picture of the team, we have a colleague who spent a lot of years on a factory shop floor, so has a very intimate understanding of how manufacturing operation works. Saket here was a founder himself before he joined India Capital, so brings that perspective to bear.

And just all told, this allows us to really look at something in totality and brings a really rigorous research to bear, which wouldn't be possible had we just relied on third-party research or just Excel models and cranking the numbers sitting on our desks. So that's how the research typically looks like.

Yeah, I got it. So it's a sort of, you see through the prism of research, which is actually a 360-degree angle that gives you from A to Z about a company from different sources. And you said it, I think, in a positive sense, right, what the journalists do.

So typically, not always we get good words. So tell me, Piyush, after that, what? Research is over.

Then how do you move? Yeah, so that depends on what we really uncover. Over the course of this research exercise, which can last anywhere from four to six weeks, sometimes longer, we're essentially trying to get to a stage where we can understand the fundamental economics of a business.

Not just today, but three years from now, five years from now, sometimes seven years from now, because that's the time horizon for which we are investing. And sometimes the work leads to a conclusion to invest, sometimes it leads to a conclusion to invest, but not at the current price, because we don't like it. So we wait and watch for the right price.

And on certain occasions, in fact, a lot of occasions, the research on the company just doesn't meet the bar, the company is not good enough, and we move on to something else altogether.

Thanks, Piyush. Actually, you know, I'm tempted to ask you a question, but feel free, going by your policy, not to even answer. Give me an example.

One particular example of research where you actually, you know, come out with flying colors.

Sure. Maybe I'll talk about residential real estate, which is an area where the fund has made an investment. Although it's a very unusual company within real estate.

Just to give you some context. Name it. Yes, I will.

I'll show you.

Yes, I'll of course name it.

Otherwise, it doesn't make sense for us.

Yeah, the company is called Asiana Housing. That's the one the fund invested in. But just to give you some backstory and context, there are more than four dozen publicly traded real estate developers in India of all shapes and sizes, some small, large, some of national scale.

And one thing that's common across all of them is they're selling houses to young Indian families in top six to eight cities. Asiana is completely, is the only one that does something completely different. They sell houses to people above 60 years of age, to retirees.

And as I said, that's the company that the fund invested in. And why that's unusual is that if you think about the Indian business ecosystem, the entire conversation tends to be about young people and the young consumer. From everything that's getting funded, manufactured, like cars, mobile phones, cosmetics, jewelry, and certainly to homes, it's keeping the Gen Zs and the millennial customers in mind.

And rightly so. We are a famously young nation, median age of 28. It's a large market.

And not just the products and services. If you even read any new investor's pitch deck about India, if you read a column about India written by the Wall Street Journal, by economists, they'll talk about the opportunity that Indian youngster presents. You attend any conference and all they'll talk about is, you know, the young India.

It's a large market, of course, but it's also well served and very well understood. And in that backdrop, there was this developer who said, I'll make housing for retirees, for old people. Because I think they latched onto something that others didn't appreciate fully, which is India has 150 million old people.

That itself is a large number, but just to put it in context, it's larger than the entire population of Japan. It's larger than the entire population of Russia. So very large market, not very well served.

In case of real estate, barely served at all. The other thing that was unusual or stood out about Ashiana is that at the time the fund was making its investment, they had zero institutional shareholders on their roster. Certainly no foreign shareholders of our kind.

And again, probably has to do with their very niche business model, which is off the radar. But for us, that was an opportunity to do a lot of independent and original research. And lastly, I would say, what really caught our attention about Ashiana is that despite being in a space which others thought unattractive or others thought was too small a market, Ashiana was making the highest return on equity, highest margins versus any other developer in the publicly listed domain.

And that really got us curious.

Oh, that's damn interesting, Piyush. Actually, when we talk about India, it's young Indians, consumerism. But you are talking about 150 million old people.

I didn't know this. I didn't know this, honestly. And you know, the moment you spoke about real estate, I thought you were going to talk about Lodha or DLF, because they are the larger than picture in a positive sense.

No, I'm not demeaning them. It is a positive sense. I'm saying that.

But you're talking about one real estate developer who are into a very niche space for older generation.

Tell us more. Yeah. Tamal, actually, those are all good guesses in any regular circumstance, because those are the kind of developers that get all the attention.

There are billions and billions of dollars in market cap. They had a lot of capital flows, both domestically and foreign. They spend a lot of money on media and hence get all the attention, not just media attention, but analyst attention and capital flows and so on and so forth.

And as you said, nothing wrong about that. They are high quality businesses. But what they're doing is completely different from what Ashiana does, as I just described.

They are selling more expensive homes to families in places like Delhi, in places like Mumbai, in places like Bangalore, Hyderabad. Ashiana, on the other hand, not just sells to people above 60 years of age. They're selling at much lower price points and in much, much smaller cities.

So fairly distinct businesses.

Dan, I'm just picking up from what you left in your initial conversation about this running a restaurant for three decades. Speaking of from there, I think your colleague believes that proof of pudding lies in eating. So he tests and then invests.

So yeah, tell us more about this particular work. How did you find this company? What kind of work did you do?

Just through the micro thing, I think I'm sure they'll be very interesting.

It was almost literally, as you said, proof of the pudding is in the eating. In case of Ashiana, how we found the company was also unusual. We actually became owners of Ashiana apartment before it became India Capital Investment.

And it just so happened, I was out in the market with my father-in-law and mother-in-law looking for an apartment around 2020-21. And as part of that research process, we ran into one of Ashiana's senior housing communities. And when we saw the project, it differentiated itself in two respects versus general housing.

One was the physical design of the place itself. So just to give you a color, all Ashiana houses would have anti-skid flooring tiles. They would have an emergency alarm system in the house in case of a medical emergency.

The elevators in the building would be a lot bigger. The common walking areas would have stuff like handrails and so on. So all those things keeping that age cohort that they're targeting in mind.

The other thing that was really unique about the product was after the residents start living in these communities, they would be provided with additional amenities and services that are generally not available. Again, just to rattle off a few examples, they would have a large shared dining hall for people to eat on days they're not cooking at home. They would organize stuff like group meditation classes or hobby classes like gardening and so on that allowed them to give an incremental value proposition to their customers, just not the apartment itself.

Now if you think about it, all these additional facilities, amenities may not mean anything to most home buyers in India. You know, it won't mean anything if I'm buying a house. But to Ashiana's customers, it was a big deal.

You know, these are services that were tailor-made for people of that age group and so much so that it didn't take too long for my family to say, let's buy a house there. And only later did I bring it to India Capital as a potential investment idea.

Yeah, please tell me, yeah, from a customer's angle, I see the value proposition, right? I mean, absolutely. But from an investor's point of view, my question is this, isn't this a very niche kind of thing?

I mean, what is the possibility of, I don't know how big could be the market. That's the thing. I'm good as a customer, but as an investor, isn't that too niche an investment?

That was almost precisely the question I was asked by my colleagues when the idea came up. And I guess the rationale behind the question, which I'm guessing is your thought as well, is that there's a belief we all grew up with, which is Indian parents like to live with their children all their lives. We are really proud about it, almost wear it as a badge of honor.

So the question was, is there a large enough market? The other obvious question was, drawing from what I said earlier, was how is Ashiana finding a way to make so much more money when they have to spend this extra money on the construction, on these amenities? So over the course of next few weeks, I set out to answer that.

And Ashiana by then had already done six such projects. So I went from, all the way from Bhiwadi in North India, down to Kanchipuram in the South, to Talegaon, which is about 100 miles from where we are sitting currently on the West Coast. Just to speak to people who were actually residents of these Ashiana senior housing communities.

And over the next several days, I would knock on their doors. I would sit with them in these dining halls. I would sometimes politely stop them on their morning walks and say, can I take a few minutes of your time?

Why did you buy a house in Ashiana? Why did you move cities? In many cases, these were people who had traded their houses, much larger houses from places like Delhi and Jaipur and Chennai to move to Bhiwadi and Kanchipuram.

And over and over again, as I kept having those conversations, I got an overwhelming response that all of them really enjoyed living there for several reasons. But most importantly, they thought there was a developer who had really deeply thought about what this age group wants. They designed a space catering to their needs.

These amenities were really good. These people who were living in these communities, the residents did not feel alone. They thought they could pursue all these activities.

They were surrounded by like-minded people with similar challenges and similar excitements about life. So much so that back then in 2021, when I was doing this work, they were happy to pay six and a half, 7,000, 7,500 rupees square foot for a house in Bhiwadi and Kanchipuram when the going rate in nearby surrounding in that market was much lower, four and a half, 5,000. And if you flip it, as I did in my research, and think from the point of view of Ashana, the developer, buying land in Kanchipuram, buying land in Bhiwadi was much cheaper than doing in Chennai or Gurgaon.

The labor cost is cheaper. The approvals are faster. So it was also way more efficient for them to build versus some of the larger developers doing it in city centers.

So on one hand, you have this efficient construction cost. On the other hand, you have a customer who is willing to pay you a premium price. And taken together, both those things meant that they were making this much higher return in equity, much higher margins versus anybody else in their industry.

And now that the fund has been invested in Ashiana for about four years, in retrospect, the only way we were able to get so much conviction to back invest in this small company was because we took all this effort to go out there and do this research, meet these people, travel length and breadth of the country. Had we just relied on third party research, that wasn't possible. In case of Ashiana, that third party research didn't really exist at all in the first place.

Interesting Piyush. I wish that even going beyond investment, you would, you could have written a book, you know. Yeah, yeah.

It's very interesting. It's a compelling story. I mean, why people are going for this, their personal lives, etc.

On a more serious note, tell me when you are getting into the research work, you only aim, you only look at the niche markets or it's beyond?

Sure. Let me take that one. Not at all, Tamal.

A research-driven approach that we take, it's not just restricted to finding niche or undiscovered companies. In fact, mispricing we have found can exist anywhere, even in large caps worth billions of dollars. Take the example of life insurance.

It's a multi-trillion dollar market opportunity by many estimates. All the top carriers are massive businesses, tens of billions in market cap amongst the largest companies of India. Each of them is covered by dozens of analysts.

These are businesses you would expect to be extremely well-researched and well-understood. And yet, because life insurance is so technical and works so differently from most other sectors, a lot of the key nuances do get overlooked. And that's exactly what our research through both on-ground work and some detailed modeling in data analysis helped uncover.

To give you the full picture, the entire life insurance space is dominated by just the top five companies. But within that group of top companies, the one that was growing the fastest and ultimately delivered the highest profitability was also the one that most investors were largely ignoring till a few years ago. And it was trading at almost a 50% discount to its peers.

And on the surface, you could see why was that the case. Four of the top five companies share the usual traits that investors love. They were all privately owned, had articulate CEOs, sophisticated IR functions.

These are the companies that global investors naturally gravitate towards. The odd one in that group, the company we ultimately backed, was SPILife. It is majority owned by Government of India as a subsidiary of this 200-year-old bank which had all the classic traits of a slow-moving, bureaucratic institution.

SPILife was also different from all the other top players in another very fundamental way. All the other top insurers were focused primarily on selling to the top 1% affluent urban customer. SPILife, on the other hand, was playing a very different game.

They were targeting the mass market, trying to bring first-time buyers into the system. For every other top insurer, it was either Mumbai or Delhi which was their largest market. For SPILife, it was Uttar Pradesh, India's most populous and also one of its poorest state.

I could understand why a lot of investors were not so gung-ho about SPILife to begin with. Government-owned enterprises in India are not known for selling. You go to them with folded hands when you want something, they don't try and sell you anything at all.

If you have ever walked into a government enterprise office in India, Tamal, you would know the picture. There would be huge piles of files going halfway up to the ceiling, old calendars which would be half-torn, slow-moving fans which would be making weird noises. And when you're there, sometimes it's hard to differentiate who is the customer and who is the service provider because it's often the customer who's pleading their case.

And I've lived this personally. I come from a small town. Back in the day when we would go to a government bank branch, we would often carry a box of sweets with us, just to ensure that the branch manager helps us with our own account, just to speed things up a bit.

So the default assumption was, if a sale of a product depends on any kind of hustle, a government enterprise would not be able to do it. And that is even more of an issue when it comes to life insurance because it's a push product. No one wakes up thinking, hey, today I want to buy life insurance.

Even probably they should. Someone has to really explain the product to them, persuade them and guide them through it. And I think that is where the challenges and issues for SPI Life were.

And yet, for all those issues, for all those challenges, SPI the brand always had a lot of trust associated with it. For many of us from smaller towns, they are still the safest and the most recognisable financial institution in the country. So there's a lot of brand equity that was there, just that SPI was not doing anything with it and has never been known for salesmanship or innovation.

However, through our work, we were able to uncover things that were not visible in the numbers as yet, that there were changes happening inside the SPI ecosystem. They were finally starting to address some of those longstanding weaknesses around selling insurance and were starting to build on the brand and the trust advantage that they've always had. That gave us conviction to back it, a company that most investors were ignoring and one that was far from the obvious pick at that time.

Yeah, Saket, you spoke about the distribution network. I can understand that. But the point I'm saying is this, you know, the perception about any government owned company.

It's not a very, I would say, it's not a very pleasant here in India. And I would quote what Dr. Y.V. Reddy, RBI governor. I'm talking about two decades back, in one context, he spoke about the joint family approach.

It's in the context of between government and the government owned entities, you know. So the accounting and profitability, everything, you know, there's a government and government owned entities. So how do you get out of this perception?

What is so unique beyond this? What did you see in SBI life?

So, Tamal, you're right. Firstly, those perceptions exist for a reason. And in most cases, probably in eight out of 10 cases, those perceptions are indeed true.

But those same old perceptions also tend to create blind spots even amongst investors. And I think that's where deeper on ground research helps you overcome those perceptions, overcome those blind spots. And that was a major challenge, as you're rightly describing, for SBI life as well.

Even when SBI management said all the right things, no one really believed them. Because that's government sector baggage, the government sector narrative that you're talking about, Tamal, that had been around for decades. And that perception was very hard for the company to shake off and for investors to really look past.

So how did you get to the core of it? Like what your colleagues spoke about in that particular case of Asiana, that you went there, you met them, you walked in the park through them, you had tea with them and get their stories. But here, what?

Did you get into the people who are buying their, the customers who are buying their policies or getting into a branch network in their insurance branches without letting them know? How did you get this? How did you do the research?

I think probably all of what you said, but you're absolutely right. Much like Asiana, this was the case where you really, we really had to see it to believe it. To start with, we initially spoke to a few former SBI employees who indicated that things were genuinely changing at SBI, but we wanted to see this in action.

So over several weeks, we visited the branches of all the top insurers and not just here in Mumbai or in Delhi, but across smaller towns in multiple states like Uttar Pradesh or Rajasthan. We ourselves sat through policy pitches, watched how customers were being handled, spoke to bank staff about their incentives and their motivations. And very early on, we started seeing things that went against what the street perception was.

Across SBI branches that we went to, there was a very consistent pattern. If we asked them about routine stuff, like a new bank account or a loan inquiry, things would move at the usual SBI pace, as they say. But the moment we brought up life insurance, the response was very different.

It was a lot more proactive, a lot more attention would be paid, showing that selling insurance was clearly a priority for them now. Another small detail that I noticed, which I still recall, across SBI branches, the first 60 seconds of the pitch were almost identical, clearly from a training module that they had all been recently asked to attend. Now, none of this was dramatic, but these were clues and signs you would only notice if you actually visited a branch or sat through a policy pitch.

Another major contrast that stood out was in terms of the products that were being offered. In private sector branches, they offered policies which were large-ticket and complex, designed for affluent and financially savvy customers, essentially targeting people like you and me and all of us here. At SBI branches, on the other hand, they offered products which were a lot more affordable, simpler and easier to understand, far better suited for first-time buyers.

These were the kind of policies and products that genuinely fit the needs and requirements of the families that I grew up around from smaller towns. And I think that contrast also partially explained why many analysts were not paying much attention to SBI Life, because this was not the customer base they were used to analyzing on a day-in-day-out basis. However, SBI Life definitely had the right product fit for the segment that they were targeting.

And across city after city, branch after branch, we kept seeing the same signs and clues that to every SBI branch that we went to. The similar sounding pitch, the simpler products, the proactiveness when it came to insurance. And by the end of our visits, it was evident to us that this was not random and that SBI was approaching selling insurance in a very deliberate and structured way.

And that gave us confidence that things were indeed changing at SBI.

Yes, Saket, I understand the products are different. It's meant for relatively middle-class or lower middle-class people who are looking for insurance policies. I understand the products.

I understand also the UP and some of the uncharted territories they were exploring. But tell me, the popular, again, perception about many of the insurance companies are that mis-selling. How did you actually get to know that they were selling the right products to the right people?

Actually, that was one of the first concerns on my mind as well, even before we tried to look for the thesis in terms of what the growth prospects are. Because as you rightly said, Tamal, when you see a company selling financial products to lower-income, first-time buyers from the hinterland, the natural worry is, is this really good for them? Are they being sold something that they don't fully understand?

And I think two things helped us get comfort around this. First, the product itself. During our branch visits, the way SBI Life product was explained stood out.

It was simple and easy to follow. In fact, I was so impressed that during one of our research visits, I ended up buying a SBI Life policy myself that I still hold. I think second, and more importantly, there is hard data around this that you can actually go and verify.

By regulation, every insurer in India must report all consumer complaints to the regulator, IRDAI. And these disclosures are part of the public record, just that they don't make it to the But when we pulled out the data and analysed it, the findings were quite interesting. SBI Life has the lowest consumer complaint ratio in the entire industry, at about 0.02%. So 2 complaints for every 10,000 policies sold. Not too bad at all. And importantly, this number has been consistently coming down for the last 7 years. Versus this, for many of the well-known private players, the figure is almost 10 times as much.

That showed to us that clearly SBI Life was going about it in the right manner. And interestingly, in this case, the information and data was always there. One just had to look a little harder, connect the dots to come to the right answer.

So Saket, you bought SBI Life policy while doing your research, just to get a first-hand knowledge of what's happening there. Your colleague Piyush told me that he bought Asiana property. I mean, he meaning his father-in-law, a senior citizen and all.

So very interesting. Yeah, I can imagine that your research is very in-depth and all. But tell me, I'm just a little, you may sound funny, a government-owned entity, a proxy government-owned entity, because SBI is 55% government-owned and SBI is subsidiary, growing so fast.

I mean, in the financial sector, if you look at other streams, typically the public sector guys are not as aggressive as private sector. But here is one example.

It's far more aggressive when it comes to growth, right? So tell me, with the same intensity, did you see or have you seen the underwriting expertise of that entity?

You're right in your instinct. When you see a government enterprise outrunning nimble private sector players, immediately alarm bells start ringing, with thoughts being, is there something going on underneath the numbers that you don't fully understand, that we don't fully understand? Are they taking on excessive risk?

And in life insurance, that excessive risk usually sits within the actuarial assumptions, assumptions around mortality, persistency, etc., which basically determine how reliable today's reported profits really are. Because if those assumptions are too aggressive, the profits of today will eventually get revised down later. The challenge is this is extremely technical and hard to decipher.

Risk accounting in life insurance is quite opaque. Financial statements tell you almost nothing about risk. Put differently, they're normal businesses that we all intuitively understand.

Then you get to banks where the accounting is already a bit specialized and that's hard enough. And then you get to life insurance, where the accounting and the language changes completely. For most investors and analysts, that becomes a step too far.

And I feel that risk is an area which is still not paid enough attention to by the street. But we went down that rabbit hole. We actually broke down all the key assumptions line by line.

We consulted with actuaries and reinsurers to get their opinions. And finally, we benchmarked SPR Life not just against Indian peers, but also against large Asian insurers who had been through multiple cycles before. It took us a fair bit of time and effort, as you can imagine, but the findings were quite reassuring.

SPR Life, what we found was that SPR Life was the most conservative player, not just in India, but across Asian insurers that we had compared it to. In fact, it was so conservative that every year their actual experience and numbers kept coming in better than their own assumptions, which meant that every year they were revising their number upwards. So in this case, that made it clear that they were not taking any hidden or undue risk.

If anything, SPR Life was running one of the most conservatively written books in the entire region, while still, as you said, managing to grow faster than everyone else.

Well, I don't have the expertise to challenge your assumption, but tell me, you yourself are saying that accounting is so dense, so technical, so complex. Actuarial science, you know, it's too tough. I know one of my friend's son is doing pretty well.

He's in overseas, expertise in actuarial science. In fact, there was a time in India, there were not too many guys who knew actuarial science, right? So why get into this?

I'm sure there is no data pickable picks everywhere across India, right? So why do you focus despite that, where you need to put in so much of efforts? Aren't there good stocks elsewhere?

So let me assure you, this was not a case where we threw ourselves onto a complicated sector, but it was rather an outcome of a broad based research exercise that we undertook. To start with, insurance is a high growth sector in India. Penetration is still extremely low.

And this is one of the biggest long term opportunities in Indian financial services. India does not have a social security backstop. Pension coverage is almost non-existent and is in fact lower than many poorer emerging market peers like Pakistan.

So naturally, as incomes rise and discretionary spending picks up, a greater share of that would flow towards insurance. With that as backdrop, we actually mapped the entire ecosystem, not just life insurance. We also looked at auto and home insurance service providers, health insurers and even companies that provide back office services such as claims administration.

Looking at everything side by side gave us a much more holistic perspective. And from within that, life insurance stood out as the segment having the best competitive dynamics. It had high barriers to entry and only a handful of serious players who were cornering the entire market.

Versus this, most of the segments, whether it was auto insurance or health insurance, they were highly competitive. The barriers to entry were much lower and there was constant price pressure. So this was really an outcome of a six month long broad based research effort that ultimately pointed us towards life insurance as the most attractive sub-segment of the broader insurance landscape in India.

Tell me, you do your primary research, looking at the data and all, but a large part of the research, if I'm not mistaken, coming from you and your colleagues is this through conversation with people and all. Now, I mean, you think there could be a possibility where this conversation can actually color your views, distorts, you know, there could be a few sweet talkers and lead you to one particular segment, which later regret. And I'm just asking you this one part of this and can primary research act like this that you have done actually lead to a very, very meaningful, when I say meaningful, statistically meaningful insights?

I think it absolutely can. The work we did on a gas pipeline company is a great example of that. We were invested there.

My God, I mean, you are from one to another from from Asiana, which is a sort of real estate for seniors to SBI life to gas pipeline.

Absolutely. I think that's the joy of doing this job that we get to cover so many different segments.

We journalists, you know, we focus on one beat. And you started saying that the journalism, you work more like a journalist, but your beat is all over. I think more like a journal newspaper, not a business journalism.

Today politics, tomorrow flood, day after tomorrow drought.

But it helps us as well. I mean, you're right in a way we work like journalists in terms of going deep into a company. But we are all generalists over here.

And that helps us in a way we pick learnings from one sector and then get to apply that to another. But to come back to your response, the gas pipeline company that I was telling you about, which I think is a great example where primary research led to an exhaustive outcome or an exhaustive outlook that we were able to come up with. To give you a little bit of backdrop about that company, that company is based in the state of Gujarat, a gas pipeline operator, a solid business, a near monopoly in the region where it operated.

But unlike SBI Life, where the customer base ran into millions, this company only had a few dozen customers across five or six key segments. When we were doing our research, two or three conversations across each of those customer groups gave us a fairly solid understanding of nearly 80% of companies' total demand base. So Tamal, it works in different ways.

There are situations like SBI Life where primary research can help you validate or negate an existing narrative. And then there are cases like this company, this gas pipeline company, where you can literally build a comprehensive demand outlook almost entirely through primary research alone.

But tell me, I'm just curious to know, was this, I mean, it seems like a discovery for you, this company. So was it an entity not very well covered by the sell-side guys?

So firstly, we were already invested there. And to respond to your second question, it was actually quite well covered. But the approach differs quite significantly.

Many of the analysts tracking this company would be sitting outside of India, and they would be covering 30-odd companies in total across multiple countries. And many of those companies would be much bigger than this company in terms of market cap, given that the bandwidth of the analysts gets proportionately split between those 30 names. And for a mid-cap, they would use broad proxies like global gas prices to project volumes, building an assumption such that if gas prices fall, volumes will go up and vice versa.

And to be fair, that approach is not wrong. That gets you the rough direction broadly right on most cases. But for us, this is a singular focus.

When we were doing work on the company in those three to four weeks, this is all I did, day in, day out. And that gives us time and allows us to take a much more granular approach to the research we are undertaking and the companies we are evaluating. Tell me, ultimately, was your view very different from the street view?

In this case, it was. It was quite starkly different. While most of the analysts were projecting strong volume growth for the company, largely because global gas prices had come down.

Based on the discussions we had and what we saw on the ground, that suggested that volumes might at best stay flat or could even decline as some of the key customer segments were starting to pull back. And for sector-specific reasons which had nothing to do with where global gas prices were, to give you an example, power plants depended on domestic gas. And because domestic gas production itself was declining, their intake would go down regardless of where the gas prices were trending.

Customer by customer, as we pieced the picture together, it turned out that the ground reality was quite different from what the street was expecting. Based on that, we exited the company and luckily for us, that turned out to be the right call as volumes for the company stagnated pretty much soon after.

Well, tell me, I mean, any investor, you know, be it an investing fund or be it individual investors, we like to talk about success stories, you know. I'll tell you, I had invested in stock A 10 years back. This is how many times you've given me money.

In stock B 5 years back or even stock C in six weeks, I got this much of money and all. But do I talk about my failures? I don't.

I mean, you know, we hide it in the closet. So I'm sure there are some stories also you would not like to say. I mean, is there any story at all?

We like to talk about our failures too. And we've had some and I guess it falls to me to describe them. A lot of this conversation has been about using research to develop a view that's distinctive.

But being distinctive is not the same always as being right. And we've had our share of not being right. I'm thinking of maybe a decade ago on the basis of a lot of research, we came to the conclusion that media streaming was coming to India, which turned out to be correct.

And we further sought out which entity, which part of that value chain entertainment could most benefit. And we're able to identify a company that had been very successful in production for Bollywood and Indian television, and better yet, was looking to launch a streaming business, and even better, came in the form of a small cap, little followed stock in which we invested. What could possibly go wrong?

Plenty. Would you like to name the company? I won't name the company.

They've done fine and they're good people, but I will describe it in a way that it may ring some bells. Because what ultimately happened is not only did we conclude that media streaming should come to India, so too did Disney, which invested hundreds of millions of dollars through a joint venture. So too did Netflix, which you see their hoardings and billboards now here everywhere.

So too did Amazon, which all told has put, I don't know, five billion dollars in India. And if you look to today, those three are still here dominating the Indian streaming market. And our scrappy can-do small cap company has had to retreat since that time.

So that was definitely a mistake.

Well, tell me, but what is the learning from such mistakes?

We have a lot of opportunity to reflect on it. Fortunately, these situations are reasonably few and far between. And we try and think forensically.

I think in this case, we were able to understand really well the Indian context in Maloo in this particular company. We were not able to understand what these global entertainment conglomerates were doing and thinking and planning in Hollywood. And that's made us much more careful about choosing investment targets where the kind of research that we do well and which we excel, that they're amenable to that.

And it really helps us answer the critical investment questions and address what could be investment risks. More broadly, it is possible to do research very, very well, but ultimately it's important to try the right inferences from it and make the right decisions. And that doesn't happen in every single case, nor will it always.

Having said that, I think we spent a lot of time talking about research or any investment process from the standpoint of how it helps one find the great investments with spectacular returns. And of course, that's one part of the objective. But the other that's less frequently discussed is that in India, probably as in everywhere, there are potential landmines also.

There is a persistent problem of companies going out of business and investors losing all their money. They can be small companies, they can be big companies that are widely respected, that have articulate CEOs, polished investor relation functions, big four auditors, all the things you look for as proxies and signals of good investments. And yet the next year they've unraveled.

And there too, research has a role to play. And if you'll forgive one brag in the context of this conversations, this is something we've thought about a lot as well. And we look at all of our historical investment data so far back as we can go, there have been some investments that have been great, that we like to talk about.

There've been some that are so-so, and there've been some that are the mistakes and that haven't made money. And we think just about that category, the collective losses from all of them put together are about 8% of invested capital, which is nothing to celebrate per se, except that it means that research seems to have some utility in navigating around these bombs, which I think in the Indian context will always be very important.

Yeah, Dan, this particular example, I think you are more, you're not saying so, but it's more related to market inefficiency, right? So, but over a period of time, I think there's going to change with a greater market participation.

I think it's only changed in part. You know, if you think about today, there are not only so many more investors, but there are some 500-odd domestic fund managers specializing in all manner and all corners of the market. So I think one should be very suspicious if you hear someone in my seat saying, oh, I found this stock, no one even knows it exists.

Those days are no longer here. But the way people invest, I think still leaves broad swaths of market inefficiency. At the start, we were talking about the volume, the velocity that a lot of investment activity happens in, large managers owning hundreds of stocks at a time, trading them frequently.

And that's one way of thinking about it. You can also see it in outcomes, in data. In one way of thinking about efficiency is in a market like the United States, that with all the people looking at every individual stock, the gap between how much people think the company is going to earn and how much it actually earns is pretty narrow.

And consequently, it's kind of hard to make money by having your own view. In India, persistently, that gap between what consensus thinks a company is going to do this year, next year, is much wider. And that's true for small companies, but it's true for some very large companies also.

And as a result of that, probably, the gap between how companies perform, which normally should be sort of a smooth distribution in an efficient market with perfect information, is massive in India, between companies across sectors, between companies in the same sector. And I think that's just a function of different investors are trying to do different things. And that's left wide parts of the market researched in terms of activity, but maybe with a lot less research focus for the kinds of things that people like us care about, not what will the numbers look like next month, but how will this company fare versus competition, inverse substitutes and complements for many years to come.

So I would posit that that kind of efficiency is nowhere near here in India.

Thanks, Dan. And you know, Dan, you, Saket, and Piyush, all your colleagues, what you discuss. I think if I want to summarize in one word, it's an eight-letter word, research.

R-E-S-E-A-R-C H. That's what the main distribution factor, that what makes you different from other firms, and that's the cornerstone of your success. But now I'm asking you one question you may not like me asking, because every research guy is facing this, AI.

So it's a eight-letter word, now I'm getting into AI too later. And you, do you feel threatened? I mean, what I mean is this, the guys who do not have the research tools, which could not compete with you, be in your space and be as unique as you are, but they have AI.

And can AI actually substitute you? How do you keep on enjoying your uniqueness vis-a-vis others?

Maybe I can start and please pitch in. I think, Tamal, no, we do not feel threatened. If anything, we feel excited.

AI is extremely useful. It does help in improving the breadth of the research, but it helps in improving the breadth far more than depth. AI goes deep only in the narrow sense of summarizing everything that's there in the public domain.

But our research, our process, our edge has never been dependent on that. Our differentiated insights that we gather come from areas and things which AI cannot access, and not just today, probably tomorrow or ever. These are on-ground research, site visits, hard-to-get conversations.

Earlier, we were talking about the gas pipeline company. There, the inputs of finding how much gas would a small ceramic manufacturer based in Gujarat would use the next year, that information is not published anywhere. And that information, that conversation is not easy to get either, unless and until you're willing to spend a week trying to chase that person down.

But that was a critical input that went into the work we did on that gas pipeline company. Similarly, earlier we spoke about SBI Lives. Whether SBI Lives products are better suited for first-time buyers, you only develop that sense when you actually visit the branches.

If anything, we feel that AI may actually widen the share price dispersion. If tomorrow, everyone has access to the same information, the same analysis, and the same nudges, very soon their outcomes and their opinions may also start to look quite similar. And that may move market prices further away from the intrinsic value, which may actually create more opportunities for people like us.

Now, having said all of that, we are all heavy users of AI. I use AI on a daily basis on a variety of things. It does help improve speed, efficiency, analysis.

However, in no way, it's a substitute or it replaces those proprietary inputs that are only available through on-ground research, which we gather by rolling up our sleeves, getting on the ground, and speaking to people across the value chain, speaking to people who are on the ground.

I think Saket is being characteristically modest in describing the intensity of work sometimes involved in digging up this information. I'm thinking for this gas pipeline, when you talk about a ceramic manufacturer, that tends to conjure in the mind the image of a far-flung professional enterprise, whereas I think, in fact, in this case, what we're really discussing is 10 guys in a shack half a mile from the main road. Some of them may be on the rolls, some may not.

The compliance may be good, it may not. So when someone calls them on the phone looking to ask them questions, first thing they do is hang up. Not only are they not reporting data into any third-party database that a large language model can access, but they don't want to talk, period.

And I think, in these cases, you had to actually show up, spend time with them, persuade them that you are not part of any sort of tax raid, and only then could you gather useful inputs. That's a much greater depth of information than that is available to a large language model or to most market participants or investors in general.

Yeah, I got your point. I got your point, Dan and Zakir. AI is no threat.

I mean, at best, AI is a complementary. You'll get to know little more things which are already in public domain, but your work is essentially deep-dive research which AI cannot substitute. So good.

I must say, I got a good sense. Typically, you guys ask me questions and I tell you what I am, to the best of my understanding, which is not good enough always.

Is it okay if we ask you one today? We've been on the sharp end of this, which is only fair this time. Sure, Dan, go ahead.

We talked a lot about trying to understand what companies will do in the future of all types, real estate, insurance, gas pipelines. Often, we're talking to you about financial institutions or the central bank or finance ministry policy. In those kind of terms, how do you figure financial services industry, or let's say banking in particular, is going to be different in 5 years, 10 years from today?

Well, frankly, Dan, I don't have the foresight to talk about 5 years or 10 years, but I can talk about now. Indian financial system is pretty good health. I think the two key things to look at, one is capital.

All are well capitalized. In fact, they have capital more than they need because credit growth is not that great. And in terms of quality of assets, if you look at both net NPA and gross NPA, they are at historic low.

So there could not have been a better time than this. And corporate India also best of health. So 10 years back, we used to talk about the twin balance sheet problem.

Now it's the other way, both the balance sheets, both corporate India and banking system are pretty good. Macroeconomic scenario also pretty good, low inflation, high growth. Few things to look out for in next year.

Before the next budget, around that time, we'll get new series of GDP and new series of inflation, WPI. So that will have some kind of influence on the macroeconomic scenario, RBI policy, etc. Also the inflation targeting framework, which is 4% and 2% plus and minus, that is coming up for review, but we think that it will continue to be as it is.

If I can ask you this GDP growth that people like us are also excited about, and we talk about to our investors, is it real? The base needs to change. They're going to make some refinements to the tech.

Yes, yes. In fact, there have been debate and discussion, even in parliament questions on the real GDP versus nominal GDP, real GDP growth, which you get to know, which is 8% in the first two quarters average, but nominal GDP is going down. So it's a question of math looking at in a different ways.

But we need to wait till the new series kicks off, both the GDP as well as WPI inflation. And as far as AI is concerned, will it influence banking system? Definitely.

But if you look at India, both topography and demography, it's so vast and such a large population. So I don't think technology, it will be all tech in banking. When it comes to payment system, India is pretty advanced, in fact, more advanced than many of the developed countries.

But when it comes to banking, I think the tech and touch will continue in the next, you talk about five years and 10 years, definitely in the next five years. So finally, on the tech, I think tech also will influence the banking system. But those who are looking for like, we don't need any bankers, the techies can run Indian banks, I think they will be disappointed.

Because if you look at India, the vastness of the country, the topography and demography, all put together, I think technology will play a role, but the physical banking outlets will continue to remain relevant. I don't know about 10 years, but at least in next five years. And one more point is we need more banks.

The last set of banks came in mid last decade, 2015, set up two universal banks and set up payment bank and small finance bank. I think it's time now we get a few more new banks.

Well, that's a useful place and a way to end it coming back to where we started. I think for the kind of investing we do, the kind of research we do, it's not intended purely as an intellectual exercise. Mostly what we're trying to do is find high returning investments.

But the other aspect of it, I think when it's done well, is you're talking about the need for more banks in India. There are probably any number of obvious channels for growth and for development in the country that are great opportunities, but lack capital in some shape or form. And I think the other aspect of what this type of investing and research process does when done well, is it's able to uncover and reveal where some of those channels are, banking system included.

So thank you for giving us an opportunity to talk about it today.

Thanks, Dan and Piyush, Saket, three of you. I think it's a time well spent. Yes, I get to know the difference, what you bring to the table.

The research, yes, I used to know about this, how do you do it, but frankly I didn't know the depth of it. You know, the way you did like buying actually a property to get to know the real estate developer or buying a policy to get to know the insurance entity where you are putting your money.

It's, as I said, I'm just repeating myself, that proof of pudding lies in eating. You know that and you follow this philosophy. So, excellent, I mean, get to know this.

Initially, I was a bit apprehensive. We are sitting and talking in an ice factory. But after this one hour or whatever we discussed, I think, I feel very warm.

No? Glad to. Glad to hear that.

No, absolutely.

It's always fun to talk about the research story, something we all share a passion for. So, yeah. Thank you.

Thank you.