We like Mohnish here at CVI, not least in part because he seems like he’s one of the happiest people we have ever seen.
In typical Buffett-cloning fashion, Mohnish just gave a talk in California to a group of visiting students from Peking University.
Here are some of our notes:
How do you manage your time running an $800 million investment fund? Basically clone what Buffett did. Open yourself to investors for as much Q&A as they want…for one day of the year. That way, they are “trained” to not bother you during booming/horrible markets, because they know they have to wait for that special day of the year!
Mastercard versus…Sunteck Realty??? Mohnish discusses a bet with his good friend Guy Spier, who owns Mastercard. Mohnish acknowledges it is a great business (extremely high margins and returns on capital, is part of of an oligopoly in the cards payment industry, has a great manager) but is trading at 42x earnings – eerily close to Coca Cola multiple during the ~2000-01 market peak that Buffett admits was probably a mistake not to sell it then. So could Sunteck Realty, an unsexy and ordinary real estate developer in India, be a better investment?
Sunteck and demonetization: About 3 years ago, the India government made certain currency notes illegal to quash the underground economy. Pre-demonetization, people used to pay for properties partially in cash and cheque. With demonetization, it became impossible to pay for properties in cash. This resulted in many property developer stocks getting crushed.
Sunteck was one of the companies that never dealt in cash. Pre-demonetization, this was a disadvantage. After demonetization, and combined with GST and the Real Estate Regulation and Development Act, ~90% of property developers disappeared. Sunteck’s market cap at the time was ~$200 million. Mohnish estimated one of its projects (60 finished apartments in Mumbai) was worth $500 million, and the company had no debt. And Sunteck had another 24 projects!
Mohnish is up ~5x, so he’s winning the bet so far. And you could argue Mastercard has some technology disruption risks on the horizon – “in China, no Mastercard. The payment systems in China are way more advanced than Mastercard, and the frictional costs are much lower. Mastercard gets 2% on every transaction. In 2030, I don’t know whether they will get 2%!”
Motherson Sumi: Probably the best auto supplier in the world. The founder started the business with his mother (“Motherson”), and Sumitomo was a partner (“Sumi”). Motherson Sumi makes auto parts, but what makes this business unique?
Over the last ~25 years, Motherson Sumi has acquired “maybe 30 or 40 businesses around the world. China, India, everywhere. But, Chaand, the owner and CEO says we never call a company and tell them we want to buy them. And if some company calls us and says please buy us, we also don’t do that….
…instead, BMW will call them and say ‘I have a rear view mirror part maker. The guy is losing $2 million a month, and I think they’re going to go out of business, and my 7-Series BMW line is going to come to a stop if that guy goes out of business. Chaand! Can you buy that business?’
Chaand says ‘Don’t worry, I’ll take care of it.’ So in 2 days he looks at the business and says ‘You are right, this business is losing $2 million a month, and it’s a worthless business. So, Mr. BMW, here’s what you’re going to do. You’re going to write me a check for $100 million to cover my losses for 4 years, and you’re going to give me a contract to buy my product”
So, because BMW does not want its production line to grind to a halt, they write Motherson Sumi that check, meaning their acquisition “cost” is -$100 million.
Chaand “only makes 2 or 3 changes. First, whoever was running that plant is fired. Second, he looks within the organization and finds a person no more than 35 years old, and tells the person you are now the new plant manager. If they buy a plant in Austria, they only look at the people in that plant in Austria. The person may be maybe 4 levels below the CEO – they don’t care. Third, in about 3 months the plant stops losing money, and after 1 year it is solidly profitable.”
Motherson Sumi also does some other unique things. They have never relocated a plant to save on labour. They also never force any accounting or software system onto the acquired businesses. Then they just get all these young CEOs to meet every 6 months or so, and share ideas.
Rain Industries: The CEO borrowed $1.5 billion in the US high-yield market, non-recourse, to buy 2 businesses. So without putting in any equity, Rain would get all the upside and no downside. And the first transaction was 10x the size of the company at the time!
Company is currently spending $75 million on a project, and expects to get $45 million pre-tax; great return on equity. But the CEO does not like talking to investors – but if his track record continues to build, will he eventually be known as an elite manager that commands a 30x PE multiple then?