Idea Brunch with Amit Mantri of 2Point2 Capital
A guide to investing in Indian markets and exposing frauds
Welcome to Sunday’s Idea Brunch, your interview series with underfollowed investors and emerging managers. We are very excited to interview Amit Mantri!
Amit is currently a fund manager at 2Point2 Capital, a concentrated India equities investment firm he co-founded in March 2016. Before launching 2Point2 Capital, Amit was a Vice President at Hornbill Capital and a Vice President at Zephyr Peacock India. Since its inception in 2016, 2Point2 has a cumulative return of 145%, or 16.2% annualized, compared to a cumulative return of 100% for the NIFTY 500 Index. Amit earned widespread admiration in India for publicly exposing accounting irregularities at various companies.
(Last time we interviewed Tim Staermose of Global Value Hunter and our next interview comes out Sunday, September 4.)
Amit, thanks for doing Sunday’s Idea Brunch! Can you please tell readers a little more about your background, why you decided to launch 2Point2 Capital, and your passion for investing in high-quality companies in India?
I am a computer science engineer from the Indian Institute of Technology (IIT) Kharagpur and went to business school at the Indian Institute of Management Bangalore. Even as a student I had fallen in love with the world of finance and investing. I had become a Buffett/Munger devotee and ended up reading everything I could on value investing.
I started my professional career in the investing world by working with a few private equity and hedge funds that invested in Indian businesses. That was when I grew the most as an investor — I made several mistakes as a young analyst and learned from them. I became aware of how weak the corporate governance standards were in Indian companies and how little you could trust reported audited numbers and management commentary.
In 2016, I co-founded 2Point2 Capital, a public market focused fund, with my engineering college hostel-mate Savi Jain. Our view was that if we followed a value investing approach coupled with a deep, on-ground research-oriented process that seeks to minimize blunders we would be able to deliver reasonable alpha to our investors over the long term. We now manage an AUM of ~$80 million under a single portfolio strategy that is concentrated, market-cap agnostic and sector agnostic. We invest in businesses that have a long track record of creating economic value and available at a reasonable price. We have used our forensic and on-ground research capabilities to highlight many frauds that have later rocked the Indian capital markets. These capabilities have helped us avoid major blunders and, in a few cases, find interesting ideas to invest in.
In December 2016, you wrote an incredible report on accounting irregularities at Manpasand Beverages. Two and a half years later the management was arrested for fraud and the stock ultimately filed for bankruptcy. Can you tell us a little more about your experience publicly exposing problems at Manpasand Beverages and the state of corporate governance in India?
The entire Manpasand Beverages episode was an interesting experience for us. We had started looking at the company from an investment point of view – the company was reporting great numbers, giving strong guidance, and had a reputed investor base. But even basic channel checks clearly showed that the numbers reported by the company didn’t match with the on-ground reality. Red flags kept piling up as we dug deeper. We tried to highlight all the major red flags in our report. However, our report was largely ignored and the stock kept hitting new highs. An investment bank that had led the capital raising exercise for Manpasand wrote a weak rebuttal that chose to question our experience/pedigree rather than the merits of our report.
Our expectation was that our report would force investors to take a closer and independent look at the business rather than blindly relying on management assertions and company reported financials. Little of that happened. There was a raging bull market in India at that time (particularly in small and midcap stocks). Before 2018, corporate governance issues were not considered a material risk worth worrying about by most investors.
In 2018, the Manpasand stock collapsed after the auditor refused to sign off on the financials. Most investors now realized that this was not a real business. A year later, the management was arrested for invoice fraud. Manpasand’s fall coincided with the small and midcap crash in 2018-19 when a large number of companies went bust after governance issues emerged. Several other companies we had written about saw value erosion of 80%+ in this period and have not recovered.
The 2018-19 small and midcap crash has resulted in a higher focus on corporate governance standards by investors in India. However, fraud continues to be endemic in corporate India. It is still far too easy for companies to cook books, spin a growth narrative and attract unsuspecting investors.
What are the necessary skills to be a successful investor in India? What should investors focus on? And what are some of the common traits you find in your successful investments?
The investing skills required to succeed in India would not be very different from other large markets. While strong analytical capabilities are necessary, a sound temperament and patience are probably the most critical requirements.
Most of the companies in the Indian market are majority owned and controlled by promoters. The number of companies that have diverse shareholding and are run by independent Boards is low compared to the US markets. So unlike in the US markets where Boards/managements need to act in the best interest of shareholders or risk being replaced by activist campaigns, in India there is little room for shareholder activism. Indian promoters often take actions that are detrimental to minority shareholders, and minority shareholders have little recourse in such situations.
This dynamic makes it important for long-term investors to focus on not just the quality of the business and the price of the stock but also on the ethics and integrity of the majority owners. Many good businesses have turned out to be terrible stock investments because the majority owners have used their controlling power to enrich themselves and not share the value created with minority shareholders. Successful investors need to focus on corporate governance far more in India than in other developed markets.