The following article is extracted from the Bamboo Innovator Insight weekly column blog related to the context and thought leadership behind the stock idea generation process of Asian wide-moat businesses that are featured in the monthly entitled The Moat Report Asia. Fellow value investors get to go behind the scene to learn thought-provoking timely insights on key macro and industry trends in Asia, as well as benefit from the occasional discussion of potential red flags, misgovernance or fraud-detection trails ahead of time to enhance the critical-thinking skill about the myriad pitfalls of investing in Asia at the microstructure- and firm-level.
The weekly Bamboo Innovator Insight series brings to you:
- How to Live In a Grey World with Black-and-White Values? Musings on the Indian Accounting Standards 18, “Willful Defaulters”, Frugal Innovations and Avalokiteśvara, Dec 2, 2013 (Moat Report Asia, BeyondProxy)
How to Live In a Grey World with Black-and-White Values? Musings on the Indian Accounting Standards 18, “Willful Defaulters”, Frugal Innovations and Avalokiteśvara
“Mr Murthy, if we have black-and-white values like yourself, how can we live in the real world that is grey?” This brilliant question to Infosys Chairman Narayana Murthy was posed by Hemant Amin, the Singapore-based value investor who compounded his investment in Infosys by 60-folds, amongst his other concentrated portfolio holdings in his multi-million single family office. Last Thursday was the second time that the Bamboo Innovator has met over lunch with Hemant, also the head of the BRKets (www.brkets.com), after our rendezvous at the Singapore Cricket Club on 7 Nov. We also wanted to catch up before the Bamboo Innovator flies over to India on a work trip from 7 to 17 December.
The Bamboo Innovator is grateful to have the experience to have met with people from all walks of life during the past decade plus in the Asian capital jungles. They range from competent pioneering intra-preneurs such as Tong Chong Heong who nurtured Singapore’s Keppel FELS (KEP SP, MV $16.3B); gritty entrepreneurs such as Lim Hock Chee who built Singapore’s supermarket chain Sheng Siong (SSG SP, MV $672M) against the odds of competing with the Davids of state-owned FairPrice and giant Jardine Group’s Dairy Farm, China’s natural gas pipeline and equipment baron Wang Yusuo of ENN Energy (2688 HK, $7.6B) and spinoff Enric (3899 HK, MV $3.2B) and many more; kind and wise professors from the School of Accounting at Singapore Management University; to exposing the accounting frauds of billionaire imposters such as Eddy Groves of Australia’s ABC Learning and the “extractor” CEOs of S-chips and P-chips. Perhaps the Bamboo has acquired some sensitivity in differentiating between the “Compounders” and the “Extractors” in a harsh and cruel world over the years. Hence, we are always excited to meet with a super value investor or/and outstanding entrepreneur with upright values and Hemant is amongst them.
The answer by Narayana Murthy was equally brilliant and profound. “You have to be able to live with the consequences of your values system. You have to be comfortable under your own skin.” An example would be how Murthy would rather acquire plots of land to expand his business at three times the price than he would otherwise pay for if he had gone through the “grey market” of middlemen who would most probably bully and rape the rural poor residents and force them into “illegal” eviction.
Besides Infosys, another concentrated compounding bets that returned multiple-fold for Hemant include HDFC (HDFC IN, MV $20.6B) and its subsidiary spinoff GRUH Finance (GRHF IN, MV $671M). As Asia slows down, many tycoons have been considering spinoffs as part of their corporate restructuring efforts to battle sluggishness and improve managerial efficiency. As explained in our earlier articles, not all spinoffs are value-creating opportunities. Heavily-indebted firms are in deleveraging mode to dispose highly-geared businesses to investors in spinoffs. The upcoming spinoff events in Asia need to be examined carefully for their business fundamentals (whether they have a wide moat and a unique scalable business model) and their motivation. In India, one of the more useful accounting clues to separate the Compounders vs the Extractors in India has been the Indian Accounting Standards 18 (IAS 18), which we will elaborate after understanding the (hidden) debt problem in India and Asia.
Despite the entrenched problems in India, both Hemant and the Bamboo Innovator share the same investment insight that India is a unique vibrant and versatile hub for “frugal innovations”: cost-effective and affordable solutions of various varieties that cater to price-sensitive consumers. Like the three sources of wide-moat in Bamboo Innovators to separate the resilient compounders vs the extractors, India’s Frugal Innovators are those with the:
1) Indestructible intangible know-how in proprietary know-how in the system to scale up or know-how in unique products or trust and support in the community of customers and suppliers, such as Tata Consultancy Services TCS; NBFCs such as HDFC and its subsidiary GRUH with their accumulated knowledge base in assessing the credit quality of its borrowers which cultivates and snowballs trust and support from its customer base; the “unique” products of Bosch India, Pidilite Industries, Britannia, Jyothy, Eicher, Emami;
2) Core-periphery network with the strong touch-points and periphery network eg Asian Paints, Godrej Consumer, Mahindra & Mahindra;
3) Open innovation in co-creating value with external partners, such as the MNCs Nestle India etc, Amara Raja vs Exide, Hero Motocorp.
One prominent Buddhist story according to Mahāyāna doctrine tells of Avalokiteśvara (Sanskrit: अवलोकितेश्वर lit. “Lord who looks down”), the bodhisattva vowing never to rest until he had freed all sentient beings from samsara. Despite strenuous effort, he realizes that still many unhappy beings were yet to be saved. After struggling to comprehend the needs of so many, his head splits into eleven pieces. Amitabha Buddha, seeing his plight, gives him eleven heads with which to hear the cries of the suffering. Upon hearing these cries and comprehending them, Avalokiteśvara attempts to reach out to all those who needed aid, but found that his two arms shattered into pieces. Once more, Amitabha Buddha comes to his aid and invests him with a thousand arms with which to aid the suffering multitudes. The Chinese name of Avalokiteśvara is Guanyin (观音菩萨), which means “Observing the Sounds or Cries of the World”. The Goddess of Mercy goes all out to hear and see the pains and sorrows and negative things to help with her thousand hands and eyes (“即发誓言，若我当来堪能利益安乐一切众生者，令我即时身千手千眼具足.” 《千手千眼观世音菩萨广大圆满无碍大悲心陀罗尼经》). In their own ways, Frugal Innovators attempt to design cost-effective, “good enough” solutions that can reach out to meet the aspirations and solve the problems of millions of consumers with the indestructible intangible asset in the form of their first-hand knowledge of the ground situation of targeted customer group. Seeking to hear and see the negative things and acknowledging sadness and failures is perhaps the first step to becoming a Bamboo Innovator and resilient compounder.
The Bamboo Innovator will be away to India on a work trip from 7 to 17 December and will resume the weekly Bamboo Innovator Insight article in the last week of December. We are grateful for your support and understanding all this while.
