Seven Intelligent Fanatics from India..

October 2008 was a great time to invest, and it was not surprising that this stock was selling below cash. Those “few other things” included a small, insignificant motorcycle manufacturing business.

Let’s examine these intelligent fanatics through the lens of integrity, energy and intelligence.

1.

Siddhartha Lal is # 1. This guy is crazy about touring bikes. So he takes an almost bankrupt company called Royal Enfield which has been making the iconic Bullet motorcycles in India for more than 90 years and turns it from nothing to a business worth $9 billion in seven years. That’s just $3 billion short of Harley Davidson’s. Oh, and incidentally in 2014, he overtook Harley in terms of bikes sold.

Sid’s operation is extraordinarily profitable as the chart shows. The business employs no debt, has a ROE of 58%. Earnings have grown at a rapid pace over the last 5 years and the stock’s an 18-bagger in 5 years.

But here’s the thing that really drew my attention. In 2008, he did a JV with Volvo which required him to sell 13% of his stake in the business to Volvo. That transaction too place at Rs 691 per share which the stock was languishing at Rs 200. Sid structured a buyback transaction which offered the opportunity to minority investors to sell 13% of their stake at the same price he got. He was under no legal obligation to do this. But he did. It was very unusual.

2.

This is Ramesh Dua who is #2 on the list. He is the founder of Relaxo — the Havaianas of India. Relaxo makes good quality, affordable branded footwear for India’s masses just like Havaianas did for Brazilians 30 years ago. It uses popular movie stars to endorse its brands and boy does that work!

 

Last year, Relaxo sold more than 110 million pairs of footwear for less than $2 a pair and made a ROE of 47% without employing significant debt. Incidentally, the cheapest pair of flip flops sold by Havaianas cost $18.

The company owns three very popular brands to attract customers. These brands deliver pricing power to the business, which creates scale effects such as a low cost advantage over existing and potential competitors. When the prices of rubber and oil — the company uses EVA, an oil derivative — soared, Relaxo increases prices. When they fell, they did not reduce prices. And people who love their movie starts don’t mind paying a little extra to feel close to them. People are suckers for brands.

The money spent on advertising creates strong entry barriers for Relaxo just like it does for GEICO.

But here’s the thing. Originally The most important asset of the business — the brands — did not belong to the company. They belonged to Ramesh Dua and his family. But investors had a trust and A very high degree of confidence in the integrity of the management. There was no evidence of abuse of minority stockholders (excessive royalty for brand usage, excessive executive compensation, and unfair terms of related party transactions). 

Later Ramesh Dua transferred the Relaxo brand to the company. He virtually gave it away for almost nothing. That tells you something about his integrity.

3. 

The # 3 intelligent fanatic is Sabu Jacob.

Sabu runs one the most profitable infant garment manufacturing companies in the world called Kitex Garments which has no net debt, earns a ROE of 63% and yet sells garments to giants like Carter’s, Gerber, ToysRUs, Wal-Mart, Mother Care, and The Children’s Place.

How can someone who sells to Wal-Mart earn so much? One answer is that a Wal-Mart or a Gerber or a Carter’s or a CHildren’s Place don’t ever again want their customers to see images like this, right next to the labels of their garments.

The stock’s been a 29-bagger in 5 years.

Sabu is a very good human being. He employs 4,000 workers, pays them above market wages, and houses them in dorms. He provides them with nutritious food, an air-conditioned garment factory which satisfies the most stringent quality and social compliance standards of the western world.

 His garments use the best quality materials and yet he an sell them to his clients at an average price of less than $1. There are only 12 companies in the world which have the capability Kitex has and Sabu is determined to become #1. Right now, he is at #3 position.

Sabu uses his personal money (not the company’s money) to do a lot of charitable work in his community which includes construction of subsidised homes, sale of kitchen appliances, and groceries at 50% discount to market prices for poor people. He’s like a cult hero in his community.

4. 

#4 intelligent fanatic is Achal Bakeri runs the world’s largest air cooler company called Symphony. But in 2004,

Symphony was in bankruptcy. Why? Lots of reasons. He was leveraged. He was into asset heavy manufacturing.

But another key reason what that he wasn’t focused. He was making air coolers, air conditioners, water heaters, water purifiers, and washing machines.

Today’s his focus is on air coolers. He got out of manufacturing and instead focused on product design, R&D, branding, marketing and distribution. He has eight vendors who make coolers for him. He bought Impco in a fire sale. That’s the company in Mexico that invented industrial cooling. He is now exporting air coolers to more than 60 countries including the United States. His market is not just India — it’s wherever in the world is heat, low humidity and a middle class which finds air conditioning too expensive. That’s quite a big part of the world.

His has his task laid out: To become the dominant air cooler company in every market.

 Symphony is one of India’s most profitable companies. It has a debt-free balance sheet. It earns a pre-tax ROE of 90%. And the growth has been very rapid.

5. 

Intelligent fanatic # 5 is Ajit Isaac.

Ajit is one of founders of temporary staffing industry in India. He sold his earlier company to Adecco of Switzerland. Now he runs a company called Quess. His previous partner — a private equity fund— sold a 74% stake in Quess to Thomas Cook India, which is now controlled by Fairfax Financial of Canada run by Prem Watsa. Thomas Cook paid $47 million to acquire a 74% stake in 2013, implying a market value of $63 million. In 5 years, It won’t be surprising if the aggregate value of Quess is at least $1 billion. Ajit is a key reason why Thomas Cook India’s stock price has increased so much over the last two years.

6. 

Intelligent fanatic # 6 is Sandeep Engineer.

Sandeep’s company Astral Polytechnic makes plumbing pipes using resin acquired from Lubrizol — a Berkshire Hathaway company. He is totally focused on pipes and ancillary products. Sandeep has transformed something as boring as a B2B plumbing pipe business into an iconic B2C consumer brand, thanks to clever product placement in movies and also by hiring a brand ambassador.

The stock’s been a 12-bagger in 5 years.

The # 7 intelligent fanatic on our list is Kewalchand Jain —the founder of Kewal Kiran Clothing — a company which owns the most profitable branded jeans company in India. It makes more money than Levis, Lee, Wrangler and Pepe Jeans.  He is first going to small cities and towns and getting scale there. You won’t find him in the expensive malls where everyone else has gone and where the rents are so high that most stores don’t make any money.

The stock’s been a six-bagger in 5 years. The business has no debt. And earns an astonishing ROE of 69%.