Using 'Mean Reversion' in Indian Equities

Insights and Investment Framework from Jatin Khemani, CFA (Stalwart Advisors)

For the Savvy Indian Investor

June 2025

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Table of Contents

1 Introduction: Jatin Khemani & Stalwart 2 The Edge: Avoiding Landmines

Background, philosophy, and performance What Stalwart avoids to generate superior
highlights. outcomes.

3 Core Philosophy: Mean Reversion 4 Mean Reversion in Action: Case Studies

Understanding market cycles and reversion to the Real-world examples from Stalwart's portfolio.
mean.

5 Capital Allocation: The Game Changer 6 Live Case Study: JM Financial

Making or breaking groups through strategic Applying the mean reversion framework to a
capital deployment. current investment.

7 The Stalwart Investment Framework 8 Dispelling Myths & Key Takeaways

Business, Management, Valuation, and Exit Rethinking safety, resilience, and long-term
Triggers. investing.
 ! All we need is a slight edge for an outsized outcome.
- Jatin Khemani

Introduction: Jatin Khemani 2 / 50

A Conservative Investor's Journey

" Born & brought up in Delhi, modest background.
#
Early Influences
" Very conservative, prioritizes "capital protection first."
Discovered equity markets in MBA, influenced by a
" No F&O trading activated in his account. visiting faculty's "rags to riches story" and
exposure to investing legends like Peter Lynch,
" Higher education funded through scholarships. Philip Fisher, Warren Buffett, Charlie Munger.

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Stalwart Investment Advisors: Founding & Growth

The Entrepreneurial Journey

$ Floated Stalwart Investment Advisors in 2014.
%
Reality Check & Resilience
$ Among the first 50 SEBI-registered Investment
Advisors in India. Faced significant drawdowns (40% portfolio level)
between 2018-2020 (time correction, bad year,
$ Initial 3 years were a "dream run," with stocks COVID accident). Recovered with "dream run 2.0"
compounding 5x-10x. from 2021 onwards.

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Stalwart: Performance & PMS Launch

Compounding at 27% CAGR

'
Launching 'Wealth Guardian' PMS
& First decade (till 2023): Compound Annual Growth
Rate (CAGR) of 27%. Launched PMS (Portfolio Management Services)
once capital adequacy was met in 2023, aiming to
& Twice that of the broader market, attributing some to
offer features Khemani would desire as an investor.
"beginner's luck."
Crossed ₹100 Crores AUM (Assets Under Management)
in first two years, compounding at 20%+ in PMS.

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Stalwart PMS: Distinct Features

Client-Centric Approach
( Named 'Wealth Guardian' to emphasize capital safety
first.
)
Profession, Not a Business
( 100% customized deployment based on buy/hold/sell
ranges for each stock. Operates as a single scheme for best ideas, with a
simple, transparent structure. Focuses on acting as
( Skin in the game: Jatin Khemani is the largest investor
a fiduciary or trustee, prioritizing client interests.
in the fund.
"If you're running a restaurant but you're not eating at
( Performance-fee based model for alignment of your own restaurant, it's a problem right for your clients."
interest.
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The Investment Edge: A Slight Advantage

Lessons from Roger Federer

Roger Federer won 80% of his matches by winning just
54% of points (a 4% edge over his opponents). This
*
illustrates that a small, consistent advantage can lead to
Investing Parallels
significantly outsized outcomes.
In investing, this translates to focusing on "what not
"He shared that he played 1500+ singles, won 54% points but
to do" and avoiding "landmines." By losing less, one
80% of the matches... All we need is a slight edge for an
automatically gains more.
outsized outcome."
- Jatin Khemani

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Avoiding Landmines: Overvaluation at Entry

A Good Asset vs. A Good Investment

The foremost avoidance principle is not entering a stock
at overvaluation. A fundamentally strong company (good Asian Paints Example
asset) may not be a good investment if its price already
Asian Paints, an outstanding company, generated
reflects too much future growth. nil returns over the last 5 years despite a bull
"A constant reminder that a good asset may not be a good market, because it was already highly valued.
investment. And it's easier said than done."
- Jatin Khemani

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Overvaluation: Other Examples

+
The "No-Go" Zone for Returns Illustrative List (Nil to Low Single-Digit
Returns)
Many other "outstanding companies" have delivered nil to
low single-digit returns over the past 3-5 years, despite • Nestle
being great businesses. • Hindustan Unilever
"I have a long list of outstanding companies which have gone • Berger Paints
nowhere in last 3, four, five years." • Nerolac Paints
- Jatin Khemani • 3M India
• Whirlpool India

These are great companies, but were not great investments at

their entry valuations.

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Avoiding Landmines: Leverage in Balance Sheet

The Two-Edged Sword of Debt

High leverage is the single biggest factor for companies ,
going bankrupt globally. While debt can amplify returns
Capital Protection: Debt-Free Bias
in good times, it can be devastating in bad times.
Stalwart's conservative approach prioritizes capital
"If you don't owe any money to bank, they can't force you into
protection, hence a strong bias towards debt-free
bankruptcy."
companies in their portfolio.
- Jatin Khemani

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Avoiding Landmines: Outright Governance Issues

Fairness to Minority Shareholders

Stalwart avoids companies with a history of poor
-
governance, scrutinizing how management behaves in "Anything Multiplied by Zero is Zero"
bad times and treats minority shareholders. Even a great business at a cheap valuation is a "no-
go" if the management is untrustworthy, as they are
• Transparency
ultimately in control.
• Acceptance of mistakes
"No matter how great the businesses are, no matter how
• Related party transactions
cheap the valuation is, anything multiplied by zero is
• Capital allocation favoring promoters over minority
zero."

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Avoiding Landmines: Obsolete Sectors

Beyond Short-Term Cash Flows

Stalwart avoids "cigar butt" businesses, where the long-
term "terminal value" is likely zero. Even if such
businesses generate cash flows in the short term, the
.
absence of future value makes them unattractive. Long-Term Vision
"In any DCF analysis or in any valuation ultimately majority of The focus is on businesses with sustainable future
the value resides with the terminal value... and if that is zero value beyond just 5-10 year cash flows.
then for us it becomes a no-go area."
- Jatin Khemani

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Avoiding Landmines: B2G Businesses

Fragility in Government Dependency

Businesses primarily relying on state or central /
government as their major customer (B2G) are avoided
Protein GOV Example
due to the inherent fragility of their business model.
Protein GOV, a large PAN processor, lost half its
"While the going is good, these businesses look good, but only
cash flows after losing a key government bid in PAN
when something goes wrong, you realize how fragile the
2.0, demonstrating the high risk of contract-
business model was."
dependent models.
- Jatin Khemani

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Avoiding Landmines: Overly Regulated Sectors

Beyond Free Market Principles

/
Sectors with heavy regulatory interference, not just in
quality but also in pricing and commercial decision-
making, are avoided. These are considered "good
trades" but not "buy and hold" investments. Noida Tollbridge & Others
"The interference from regulator not just in how you conduct Noida Tollbridge lost its concession due to
your business... but even in terms of pricing... it's regulatory intervention. Similar risks apply to Tea,
mindboggling. And then you know after that you realize it's not Sugar, and Oil Marketing Companies (OMCs).
a free market."
- Jatin Khemani

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Avoiding Landmines: PSUs, IPOs, Startups

0 Most PSUs (Public Sector Undertakings) 2 Loss-Making Startups

Similar reasons to overly regulated sectors – lack of free Suitable for a VC basket approach where winners cover
market dynamics. losers. Too speculative for concentrated portfolios. True
consumer behavior and profitability unclear due to
subsidies.

1 IPOs (Initial Public Offerings)

Considered a "seller's market" with maximum juice
extracted, leaving little on the table. No listing history for
analysis. 3
Excluding 50% of the Universe
These exclusions eliminate almost half of the
investable universe for Stalwart, demonstrating their
disciplined approach.

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Investment Horizon & Market Cap

Rolling View: 3 to 5 Years

Market Cap Agnostic: Sweet Spot
Stalwart does not "buy for life." They form a 3 to 5-year
While open to 500 Cr to mega-cap companies, the
rolling view, continuously assessing the next phase of
"sweet spot" is 1,000-10,000 Cr market cap. This
business visibility. Long-term forecasting is difficult
segment offers companies not too small, yet not
given the rapid rate of disruption.
fully discovered or widely institutionally owned.
"A 3 to five year view is what we are trying to form does not "Most of our alpha most of our big winners have come
mean that we sell it on fourth or fifth year it's a rolling view." when we could enter something at 1,000 2,000 3,000
- Jatin Khemani crores market cap."

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Sector Bias & Portfolio Construction

Growth Over GDP Growth

Stalwart's bias is towards sectors growing faster than
4
GDP, and within those, companies that are gaining market Probabilistic Portfolio
share and growing even faster than their sector.
Investing is probabilistic; not all stock picks will be
• BFSI (Banking, Financial Services and Insurance) winners. Hence, a balanced portfolio of about 20
• Pharma & Chemicals stocks is maintained – neither too diversified nor too
• Agro-processing concentrated.
• Industrial Goods (FMIG - Fast Moving Industrial Goods) Average weightage per stock is 4-5% to 10%.

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Core Investment Philosophy: Mean Reversion

Catching the Good Cycles

Stalwart's core investment philosophy is "mean 5
reversion." This principle suggests that most things in life
No Shortage Without Glut
and business tend to revert to an average or mean over
time, offering opportunities to capitalize on cyclicality. This applies universally: after every shortage, a glut
follows (e.g., tomatoes, semiconductor chips). This
"Most things in life just go like this and there are there's a mean
cyclical pattern creates opportunities for mean
in between and you are trying to catch the good cycles."
reversion strategies.
- Jatin Khemani

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Mean Reversion: Real-World Examples

6 Tomato Cycles

8
When prices soar (e.g., ₹100-200/kg), farmers oversupply
next season, crashing prices to a few rupees, making it
uneconomical to harvest. This cycle repeats invariably.

Cyclicality in Business
These examples highlight that volatility and cycles
7 Semiconductor Chips are inherent in many businesses, creating
COVID-era chip shortages led to high prices (e.g., cars opportunities for those who understand mean
with only one key). Subsequently, oversupply caused reversion.
prices to drop, making even profitable companies loss-
making.

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Mean Reversion in Valuation: Colgate Palmolive

The Epitome of Stability

( Sells daily essentials: toothpaste, toothbrush.
9
( Simple, predictable, steady business, not dependent
on recession or appraisals. Quarterly EPS: Remarkably Steady
Colgate's quarterly EPS over the last 20 years
( Grown top & bottom line (EPS) at ~10% CAGR over
decades. shows remarkable consistency, a rarity in the
Indian listed space.
( 100% ROC business, pays 100% of earnings as
"It'll be very hard to find any other company which is this
dividend.
steady in Indian listed space."

( Consistent 50% market share for 10-20+ years.

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Colgate Palmolive: Valuation Volatility (P/E)

Market's Inconsistent Pricing

Despite its stable fundamentals, Colgate's P/E ratio has :
shown significant volatility, ranging from 20x at bottom to
Alpha from P/E Cycles
70x at peak, mostly trading between 35x-55x.
Buying Colgate at 35x and selling at 55x every two
"If markets are this volatile in terms of assigning a P to a
years, while earnings grow, can yield 60-70%
business like Colgate, imagine how volatile would it be for
returns annually, demonstrating mean reversion in
businesses where sales, margins, profit itself is very volatile."
valuations.
- Jatin Khemani

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Levels of Mean Reversion

Four Key Areas for Observation

; Sales Growth:Cyclicality in revenue expansion.

; Profit Margin:Fluctuations in profitability.

&
Stalwart's Unique Focus: Capital
; ROE (Return on Reversion in capital
Equity): efficiency.
Allocation Cycle
What is less talked about, and more unique to
; Valuation:P/E or other multiples reverting to historical
Stalwart, is participating in mean reversion at the
averages.
capital allocation cycle level.
The first three are widely discussed (e.g., "Capital Returns"
book, Kenneth Andrade).

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Capital Allocation: What It Means

Deployment of Profits
Capital allocation refers to what a business does with its
profits. Essentially, there are four key ways a company <
can deploy its earnings:
More Material Than It Seems
• Reinvesting in the core business.
This decision, while seemingly straightforward, is
• Diversifying into new businesses.
"extremely, extremely important" and can
• Acquiring other companies.
fundamentally "make or break groups."
• Returning capital to shareholders (dividends or
buybacks).
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Capital Allocation: Game Changers

Strategic Diversification =
Decisions to diversify into new areas can fundamentally Examples of Successful Allocation
change a company's trajectory, leading to significant
• Wipro: Originally Western India Vegetable
wealth creation.
Products (an oil company), its venture into IT
"That one decision made Wipro the largest market cap services transformed its future.
company in 2000 and Azim PMG the richest Indian."
• SRF: A significant CAPEX into specialty
- Jatin Khemani
chemicals changed the face of the company over
the last decade.

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Capital Allocation: Misallocation

The Downfall of Diversification

Conversely, poor capital allocation can destroy value,
>
even for businesses with strong economic moats. The Kingfisher's Strategic Blunder
Kingfisher Group serves as a stark example.
Despite having highly profitable liquor and brewery
"One capital misallocation decision... within seven years of businesses ("highest economic moat"), putting
starting airlines, the entire group hit the ground." capital into airlines led to the collapse of the entire
- Jatin Khemani group.

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Capital Allocation: Promoter-Level Issues & Impact

Impact Across the Group

Issues at the promoter level regarding capital allocation 3
can negatively impact all businesses within a group,
The Domino Effect
even the "crown jewels."
When a group faces a debt trap, valuable assets
"Issues at the promoter level are eventually going to impact all
are pledged, revoked, and eventually dumped in
their businesses because when they are in a debt trap it's the
the market by bankers, leading to significant losses
crown jewel which will get sold."
for shareholders.
- Jatin Khemani

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Case Study 1: Gujarat Ambuja Exports

Legacy Commodity Business

?
Historically, Gujarat Ambuja Exports was a low-margin,
The Hidden Gem: Maize Processing
low-ROC (Return on Capital) commodity business However, segment data revealed a high-margin
involved in oil processing, with little interest from "maize processing" business (starch derivatives like
investors. glucose, sorbitol) with steady margins and
impressive ROC.
"Historically a commodity business. They would process oil... no
history of value creation or doing stuff that adds value." Customers were Pharma & FMCG, for whom the
ingredient cost was tiny but quality was critical, leading to
high stickiness.

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Gujarat Ambuja Exports: Thesis & Outcome

Undervaluation & Growth Visibility (2017)

; Maize segment already 1300 Cr sales, 18% market
share (leader). Successful Investment
; Debt-free balance sheet, impressive past decade of Entry when profit was ~₹150 Cr; exited when profit
steady growth. was ~₹500 Cr. The core business got "discovered"
and rerated once the maize segment became
; Maize capacity to double-triple in 4-5 years, dominant.
becoming 100% of business.
"The poor business got again discovered and rerated."
; Market cap < 1500 Cr, single-digit P/E (during 2017
small-cap peak).
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Capital Allocation Decisions: Hindsight vs. Foresight

Knowing Beforehand
@
Assessing Odds
Can one predict good vs. bad capital allocation
beforehand, or is it always hindsight? For clear misallocations (e.g., Kingfisher's entry into
airlines), the odds are immediately against. For
"Is it something that one could know beforehand or you think we
positive diversifications (e.g., Wipro into IT), the new
have the advantage of hindsight here?"
business is observably better than the old.
- Jatin Khemani
"The odds were far higher in your side because the new
business was far better than the existing business."

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The Courage to Change: "Sunk Cost Fallacy"

Overcoming Inertia
Many promoters fall victim to the "sunk cost fallacy,"
continuing to pump money into underperforming
3
businesses rather than divesting. It requires immense Distinguishing from PI Industries
courage and short-term pain to change gears and Companies like PI Industries, already in a good
reallocate capital. business, are expanding into better opportunities
"It's some cause fallacy, right? You can't shut it. You have to to increase their Total Addressable Market (TAM),
continue running it... Very few capital allocators or which is a different scenario from moving out of a
managements have done that." bad business.
- Jatin Khemani

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Case Study 2: Suven Pharma

CDMO Excellence with a Drag A

Suven Pharma was a Contract Development and
The Loss-Making NCE Segment
Manufacturing Organization (CDMO) player with an
"economic moat," generating impressive gross margins Despite its strong core, the company was
(~70%), operating margins (~45%), and net profit margins undervalued (₹3500 Cr market cap, 16x P/E) due to
(~30%). a loss-making "New Chemical Entity (NCE)
research" segment, losing ~₹100 Cr annually on
"How many businesses in India make 70% gross margin... 45%
highly speculative Alzheimer's/Parkinson's
operating margins, 30% net profit margins?"
research.

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Suven Pharma: The Demerger & Rerating

Unlocking Value Through De-merger

B
Purely from Core Business Discovery
In 2019, Suven demerged its life sciences business,
The stock rose 9x in the subsequent three years,
separating the loss-making NCE segment from the
primarily due to the market's "discovery" and
profitable CDMO core. Stalwart entered at this point.
rerating of the profitable core business once the
"What they did they demerged life sciences business in 2019 loss-making segment was isolated.
that's when we entered."
"A good four five 6x move came purely from discovery of
the core business once the lossm business got
devoaged."

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Case Study 3: Usha Martin

Critical Applications & Consumables C

Usha Martin manufactures steel wires for critical
High Value-Add & Market Leadership
applications (elevators, bridges, mining, cranes). 80% of
sales are consumables, ensuring recurring revenue as High value-added converter (₹33,000 EBITDA per
approved vendors. ton vs. ₹4-5,000 for others). Market leader with
50% domestic, 6% global share (80-90% in port
"80% of their sales are consumables which means through wear
wires).
and tear the same customer every 3 months 6 months 1 year
keep coming back to you." Often sells by meter, indicating value-added product vs.
commodity (bought by weight, sold by unit).

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Usha Martin: Capital Misallocation & Resolution

The Steel Mill Blunder B

A decade earlier, Usha Martin borrowed ₹4,000 Cr to
Divestment & Rerating
backward integrate into steel manufacturing. The steel
downcycle (2017-18) almost led to bankruptcy. Solution: Sold the steel mill to Tata Steel for ₹4,200
Cr, became debt-free, and refocused on core steel
"The reason was a decade earlier they got over ambitious... wires. Stalwart entered when steel wire segment
steel mill and then 2017 2018 down cycle of steel almost
profit was ₹150 Cr (steel mill losing money).
brought them to bankruptcy."
Current profit ₹400-450 Cr, with significant rerating.

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Common Patterns of Mean Reversion

Core Strengths & Undervaluation

In all case studies (Gujarat Ambuja, Suven Pharma, Usha
Martin), the underlying pattern is a good or great core
D
business being undervalued due to specific issues. Solutions & Rerating
• Gujarat Ambuja: Legacy "oil company" perception Once these "capital misallocation" problems were
despite growing maize business. fixed (relative size, demerger, asset sale), the core
• Suven Pharma: Loss-making NCE research segment. business was "discovered" and rerated, leading to
• Usha Martin: High leverage from steel mill significant value unlocking.
misallocation.
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Repeatable Patterns: Skill Over Luck

Identifying Consistent Success

The goal is to identify repeatable patterns that indicate :
"more of skill and less of luck," similar to playing chess
Beyond Niche Companies
versus Ludo.
This pattern of capital reallocation and rerating is
"The attempt here is to try to see patterns that have worked for
not limited to niche companies; it also plays out in
us and are repeatable. And by repeatable, I mean they're more
large conglomerates.
of skill and less than less of luck."

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Conglomerates: Tata & M&M's Reorganization

E
Focusing on Core Competencies
Strategic Asset Divestment
Conglomerates like Tata and M&M (Mahindra & Mahindra)
In the last 5-10 years, both groups have focused on
initially faced capital misallocation issues in the 2000s
disposing of assets with low ROC and aiming for
due to global buying sprees.
18% group-level ROC. This has led to significant
"In 2005-08 they did a lot of capital misallocation they went out stock price performance.
on a buying spree globally bought assets which they could not
• Tata: Reorganized, e.g., Tata Consumer merged with
manage."
Tata Coffee, consolidating consumer businesses.
• M&M: Got rid of offshore/global assets, focusing on
core auto business.

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Conglomerates: Cautionary Tales

Spreading Too Thin

3
Difficult to Dislodge Leaders
Conversely, some conglomerates are currently
It's challenging to dislodge established leaders
expanding into multiple unrelated segments (e.g., wires,
(e.g., Asian Paints, Astral Pipes), and if not #1 or
paints, jewelry), potentially stretching themselves "too
#2, it's hard to capture profit share.
thin."
"If you're not number one number two you don't make
• Aditya Birla Group money you can get share of sales but it's very difficult to
• Adani Group (in last five years) get share of profits."

These may eventually offer mean reversion opportunities

when they begin fixing their capital allocation.

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Live Case Study: JM Financial

A Household Name in Finance F

JM Financial is a leading and one of the oldest investment The Undervaluation Puzzle
banks in India, akin to "our Nestle and Colgate" in the
Despite strong metrics and leadership, JM Financial
financial market.
was trading at Book Value (approx. ₹9500 Cr market
• Leaders in most segments they operate in. cap) when Stalwart invested in May last year.
• Made ₹700 Cr profit with 40% ROE last year. "Why would a service business which should ideally trade
on a P/E multiple... trade at book value?"

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JM Financial: The Problem

Capital Blocked in Low-Return Segments

Approximately 70% of JM Financial's capital was
blocked in two underperforming businesses, generating
minimal returns.
G
Heavy Lifting by Remaining Capital
• Wholesale Lending: Lending to builders. Difficult to
compete without CASA advantage, despite good All the "heavy lifting" (profit generation) was done
underwriting. by the remaining 30% of capital deployed in core
• ARC (Asset Reconstruction Company): Buying bad investment banking, leading to the overall book
debt (NPAs) from banks. Assets (e.g., Unitech's land) are value valuation.
strong, but recovery is slow, dragging down IRRs to
single digits.
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JM Financial: The Solution

Promoter's Strategic Shift

In May last year, JM Financial's promoter announced a
decisive shift: slowly phasing out the underperforming
H
wholesale lending and ARC businesses. Focus on Core Services
"Promoter said enough we've realized it's not working... We're The focus will now be on core services where their
going to slowly phase down phase out these businesses and money is not blocked and can generate better
release about 3-4,000 crores and make our balance sheet asset returns. This transition is already progressing at a
light." good pace.
- Jatin Khemani

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JM Financial: Future Outlook

Macro Tailwinds for Capital Markets

Potential for Profit Growth
Jatin Khemani believes the Indian capital markets are
With these tailwinds, the core capital markets
poised for a "golden decade," driven by significant
segment (broking, advisory) of JM Financial could
trends.
achieve ₹1200-1300 Cr net profit in the next 5-7
• Billions of dollars funding startups leading to IPOs. years, even if cyclically lumpy.
• Conglomerates demerging segments and listing them. "This segment can do about 1200, 1300 crores of net
• Increased M&A activity. profit."

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JM Financial: Optionalities & Triggers

Hidden Value Not Yet Priced In

Beyond the core business rerating, several optionalities
could contribute significantly to value for which Stalwart
is "not paying today."
I
• Affordable Housing Finance: Seeded organically in
Driving the "Delta"
2017, now ~₹2800 Cr AUM. Aiming to double and list in a
few years. These additional growth engines can provide a
• Wealth Management: ~₹1 Lakh Cr AUM, aiming for top "decent delta" and contribute substantially to the
3 in India. Recurring revenue business, works on float. company's overall intrinsic value.
• AMC (Asset Management Company): Revived after
2008 crash, now ~₹17,000 Cr AUM (MF + PMS). Breaking
even at ₹25,000 Cr.
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JM Financial: Risk-Reward Profile

Asymmetrical Bet
JM Financial is considered an "asymmetrical bet" due to
its favorable downside-to-upside ratio. Downside-to-Upside Ratio: 1:10
• Downside: Worst case, if nothing works, stock goes This suggests a potential upside of 150-250%
back to Book Value (approx. 15-20% downside). against a limited downside of 15-20%.
• Upside: If capital misallocation is fixed, intrinsic value "Our downside to upside ratio is 1 is to 10."
could double in 4-5 years at 15-20% CAGR. Initial target
intrinsic value post-transition is ~₹200.
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The Investment Framework

) J K
Management: The
Business: The Horse Valuation: The Odds
Jockey
"Business is the horse on which "Odds are how much do you
"Management is the jockey
you are betting." This refers to make when you're right? How
which is making sure he lives
the underlying strength and much do you lose when you're
up to the full potential." This
quality of the company's wrong?" This emphasizes the
highlights the crucial role of
operations and industry importance of entry price and
leadership in realizing the
position. margin of safety.
business's potential.

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Framework Application: Different Scenarios

3 L
Great Business, Bad Management
Great Business, Poor Valuation
"United Spirits was a great business and it was
"Great businesses... if you pay 130 for 100, you're
favorably valued but it was not run by a
not going to make money." This leads to stagnation
management which understood capital allocation.
or loss of capital.
So even this was a no-go for us."

"Most of our bets would fit in the third bucket where we are playing mean reversion with lot of valuation
!
comfort playing great if not great good businesses run by decent management teams."
- Jatin Khemani

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Management Assessment: Preferences & Indicators

Owner-Operator Bias
Stalwart prefers owner-operator businesses (70-75% of
portfolio), believing families running the business think
M
long-term and have significant wealth at stake.
Clean Governance Signals
Prefer stability of leadership team, no related party
• Best if first-generation entrepreneur.
transactions in the same line of business.
• "Golden period" for age bracket: 40-55 years (learned,
A good sign: Presence of a female from the promoter
energetic).
family on the board, indicating clean governance due to
• Skin in the game, no pledging, responsible capital
personal risk.
allocation.

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Exit Triggers: When to Sell

Multiple Reasons for Exiting

( Thesis Investment thesis materialized, good
Played Out: profits made. (Best case)

( Thesis Not Fundamental reason for investment

N
Played Out: did not materialize. Process Over Outcome
Exits are fundamentally driven; no technical stop-
( Time Stock not moving for 3-5 years despite
Stop- intact fundamentals (high opportunity cost). losses. Prioritize process over short-term
Loss: outcomes to avoid "accidents." Prefer liquidating
on the way up, rather than facing rapid declines.
( Better Found a higher conviction idea, replace
"Still be happy with the process and not the outcome is
Opportunity:lowest-ranked portfolio stock. what I'm saying."

( Valuation Market over-pricing the stock, pricing in

Discomfort: too much future growth.
48 / 50
Dispelling Myths: Large Caps are NOT Always Safe

Vanished Nifty Companies +

While large caps may exhibit lower volatility, they are not
Sources of True Safety & Resilience
inherently "safe." Many past Nifty 50 companies have
completely vanished or are on "ventilator." Safety and resilience come from:
• Strong business model (pricing power, market
"We often assume large caps are safe because they're less
leadership)
volatile... Some of them are barely on ventilator but mostly they
• Robust balance sheet
don't exist anymore and they were all index companies top 50
• Management comfort and integrity
companies in India."
These traits can be found in small, mid, or large-cap
- Jatin Khemani
companies. Avoid labels, focus on fundamentals.

49 / 50
Patience & Discipline in Competitive Markets
In increasingly competitive markets, generating alpha will be challenging.
Success requires looking where competition is low and adopting longer
investment horizons.

"One would have to look in ponds where there is not a lot of competition
! and one would have to have horizons which are not one quarter, one year,
two year but 3 to 5 years or longer."

- Jatin Khemani

Focus on Mean Reversion opportunities, prioritize capital protection,

critically assess management, and embrace a long-term,
fundamental-driven approach.
50 / 50