Brief Summary
Rajesh Kothari of Alpha Accurate Advisors shares his insights on the current market scenario, investment strategies, and risk management. He discusses the 3M framework for stock selection (Market size, Market share, Margin of safety), the importance of exit strategies, and ideal asset allocation. He also touches upon sectors to avoid and offers advice for young investors.
- Current market crash is different from COVID crash, more of a human-made crisis.
- 3M framework: Market Size, Market Share, Margin of Safety.
- Exit strategy is crucial; sell when valuations are too high, growth slows, or assumptions are invalid.
- For young investors, prioritize equity and minimize gold.
Trailer & Introduction
Kushal Lodha introduces Rajesh Kothari, who manages ₹4,500 crore at Alpha Accurate Advisors. Over 16 years, they've delivered 19% compounded returns for their multi-cap strategy and 25% for their mid and small-cap strategy. Kothari will explain his 3M framework for stock selection, focusing on market size, market share, and margin of safety.
Current Crash Similarity with the COVID
Rajesh Kothari says the current market situation isn't similar to the COVID crash. The COVID crisis was "God-made" with lockdowns and widespread disruption, while the current situation is a "human-made crisis" due to war. He suggests comparing the current situation to past war-related events like the Russia-Ukraine war or conflicts in the Middle East.
War, Market Gains and Opportunities
Historically, markets have shown gains two years after war events. Kothari believes now is a good time to invest, citing India's nominal GDP growth of 10-11%. He notes that while the Nifty was down 10.5% during the Russia-Ukraine war (from January 31, 2022, to June 15, 2022), current valuations are cheaper. He estimates a limited downside of about 5% based on fundamentals.
Forward Earnings Growth Deep Dive
Kothari explains that the Nifty is trading at an 18.5 PE multiple on FY27 earnings, cheaper than the 18.8 PE in June 2022. This is based on an estimated 15-16% EPS growth for FY27. He emphasizes that risk-reward is in favor of investors, with India's macro conditions being favorable due to lower inflation compared to the US.
Reasons why the Market Crashed?
Kothari clarifies that a 10% correction isn't a crash but a healthy correction. He attributes the recent market dip to geopolitical reasons and India's crude oil dependence. However, he points out that crude oil prices are lower than during the Russia-Ukraine war. He believes the potential for loss is low, while the upside for long-term investment is strong.
Stock Selection Framework
Alpha Accurate Advisors started in 2009 and manages ₹4,500 crore. Their USP is delivering returns with peace of mind by protecting capital and creating wealth. Kothari emphasizes understanding risk before upside.
3M Framework Deep Dive
Kothari details the 3M framework:
- Market Size: Size of the opportunity. Bigger is better.
- Market Share: Company's market share within the industry. Important in competitive markets like India. Limited players lead to oligopolies/monopolies, less borrowing, higher earnings, and high Return on Capital Employed (ROCE).
- Margin of Safety: Valuation at which you purchase the business. Fair and reasonable valuation is crucial.
Companies Example
Kothari provides examples of companies fitting the 3M criteria, starting with HVDC (High Voltage Direct Current) transformers. The market size is large due to the growing renewable energy sector. Only three companies globally dominate this space: Hitachi Energy, Siemens, and Vernov, creating an oligopoly. He also mentions shock absorber companies like Gabriel, Munjal Showa, and Endurance as examples of oligopolies. Airbags is another example, with only 3-4 players and a growth rate of 18% compared to the car industry's 7%.
Small Cap Getting Missed Out?
Kothari explains that focusing on oligopolies ensures sustainable growth. While wealth can be created in other companies, it requires frequent trading. He uses commodity companies as an example, where increased prices attract competition, reducing ROCE. He emphasizes that businesses without entry barriers lack pricing power and become commodities.
Pricing Power Example Deep Dive
Kothari says the key question to ask when evaluating a business is whether it has pricing power. Can the business increase prices by 5% due to rising crude oil costs and have customers absorb it? He mentions Mercedes-Benz announcing price increases, knowing customers will still buy due to the brand's premium status.
Picking Multiple Stocks in same Industry?
Kothari generally prefers selecting one company per sector, but may consider two if the industry has strong tailwinds. He mentions that they only invested in Safari in the luggage industry, monitoring it for 10 years before investing when it became a top-three player.
Trent Stock Deep Dive
Kothari discusses Trent, a retail company, noting the large size of the Indian retail industry, with organized retail making up only 20%. Trent is the largest organized player. He highlights Trent's addition of 2 million square feet through Zudio. He emphasizes that a brand needs to be both aspirational and affordable.
V2 Retail Deep Dive
V2 Retail, a smaller company, sells aspirational products in tier 3 and 4 cities. Kothari notes that retail isn't pure manufacturing and has low entry barriers. The biggest barrier is execution, including design, innovation, and customer profiling.
Growth at Reasonable Price Framework
Kothari explains that determining a company's growth potential requires expertise and deep research. He suggests looking at the relative PEG (Price/Earnings to Growth) ratio instead of just the PE ratio. He uses Nifty as an example, trading at roughly 1.6 times PEG with a 12% long-term growth rate. A company with 25% growth can trade at a PE of 40. Anything above a PEG of 3 is dangerous.
How Exit is Decided?
Kothari says knowing when to sell is more important than knowing what to buy. He details three reasons for exiting a stock:
- Too Fast Too Soon: Valuations become too expensive.
- Growth Slows: Company transitions from high growth to slow growth.
- Underlying Assumptions Invalid: The initial reasons for investing are no longer valid.
He uses a "3R process": Review, Repair, and Reset. He emphasizes that assumptions are important and must be constantly checked.
Sectors to Avoid
Kothari avoids primary commodities and companies that claim to be special but lack pricing power and ROCE.
Right Time to Invest in Gold?
Kothari doesn't believe now is necessarily the right time to invest in gold due to global uncertainty. He notes that gold has become more volatile, questioning its status as a safe asset. He says gold investment depends on individual asset allocation and risk appetite. He prefers investing in corporate India, where growth is more predictable.
Ideal Asset Allocation Deep Dive
For a 22-23 year old just starting their career, Kothari suggests a zero proportion to gold. He recommends having enough fixed deposits to cover monthly expenses and job-related uncertainties. The surplus should be invested in equity, potentially up to 80%.
Ideal Portfolio Diversification
For a 21-year-old investor, Kothari recommends 75-80% allocation to mid-cap stocks through mutual funds. He advises against direct investment and derivatives. He suggests a long-term horizon of over 5 years.
Biggest Mistakes and Failures
Kothari shares an example of investing in a forging company in December 2024, expecting it to benefit from defense privatization. However, when tariffs were announced in February 2025, they sold the stock. He emphasizes that the cost of purchase isn't important; it's about forward-looking decisions.
Views on Startups and New Age Companies
Kothari applies the same principles to new-age companies: market size, market share, growth cycle, and PEG valuation. He mentions Policybazaar as a holding, noting the huge market size and 40% growth in the digital insurance industry.
What Would Mr. Rajesh Ask Himself?
If Kothari were interviewing himself, he would ask if he enjoyed the interaction.
One Quote He Lives By
Kothari's guiding quote is Warren Buffett's "Rule number one: Don't lose money. Rule number two: Never forget rule number one." He believes equity market is all about risk management. He advises being fundamental-driven, not momentum-driven or narrative-driven.
Conclusion
Kushal Lodha thanks Rajesh Kothari for sharing his insights.
Outro
Kushal Lodha thanks the sponsor and asks viewers for feedback.
