We Have Attained Success Because Of The Mindset Of Our First Leaders: Gaurav Dalmia, Chairman, Dalmia Group

Gaurav Dalmia is the Chairman of Dalmia Group Holdings, a holding company for business and financial assets. It invests in private equity, real estate, public markets, structured debt and fixed income. He is also the founder and Chairman of Landmark Holdings, a real estate investment firm, which has invested in more than 40 housing projects. He started his business career in the family cement business, before building his fast-growing diversified investment business. His co-investors include several leading institutional investors and high net worth families. He was selected as a Global Leader for Tomorrow by the World Economic Forum in 2000. Gaurav Dalmia received an MBA with Beta Gamma Sigma honors from Columbia Business School. BW Businessworld did an exclusive interaction with him in order to understand his business philosophy better.

Edited excerpts:

Your family was associated with the freedom movement and was one of the top families then. How has the evolution been from the time of independence till today? How have the various verticals shaped up?
When I look back into what my grandfather and that generation did, those were very idealistic times. Part of idealism was fuelled by the passion of the freedom movement. There was very little of the "us vs them" mindset. "We are one" was more in the foreground despite differences amongst people. I think this must have been quite heady. I would have loved to be in those times. There was a larger sense of responsibility that business leaders had. A businessman was not thinking just about creating more shareholder wealth, which is the current trend. It was also about doing something for the country. One can debate whether that is the best philosophy, but there is a strong appeal and motivation to overcome challenges when one has a greater mission. We have attained success because of the mindset of our first generation leaders.

In spite of tremendous success, many people from that generation were very simple people. They lived a life which was very Gandhian and much below the living standards they could have had. That was driven by the fact that material goods were not the important variables. The most important variable was the mission. Everything else was in the background. Many of us take life for granted today but if one sees the hand that was dealt to us post-independence - not enough food to eat as a country, rising wave of communism and dictatorships across Asia and minimal investible surplus to grow the economy -  the leaders pulled off a "mission impossible".

Since then, India has evolved in a great way. Business and society as a whole has moved forward in leaps and bounds. We are in far more comfortable and prosperous times. We are more "men of that world" in that sense than that generation was. We are more individualistic, which has its plus points. We are less idealistic and more pragmatic.

Though we have been shaped by a different world in front of us, as a family, we are trying to keep that fire of passion alive. And if we were to do a self-assessment, we are succeeding reasonably well. If you look at it from the family business perspective, I am a third generation businessman. There is a saying that if you can keep your head on your shoulders for three generations, you get an empire; and if you can keep your head on your shoulders for five generations, you get a dynasty. Taking a cue from that, and with due humility, I do think that our family businesses are a decent so-called "empire". We have done quite well on the first step. The challenge in front of us is to keep this thriving, stay hungry, and work towards the second step, which is that two generations from now, have a dynasty. We have our heart and mind into it. We are not chilling, we're burning! Its an extraordinarily long marathon and time will tell which families have the stamina.

Why do you think the larger mission is missing and business leaders are more interested in the stock prices and the profit motive?
Today we don’t have those many existential challenges in front of us. So we are back to our basic animal instincts. One should not hold it against the present generation of inheritors, that there was something great going on then and fewer people have that kind of mindset today. I think there is a section of people today who are doing remarkable work beyond a narrow definition of life. For example, only last week I was talking to a CEO of a multinational firm, who in his personal capacity, is donating Rs 2 crore to charity every year. I think if you segment the business community, self-made people have a greater drive for social change because they themselves come from less privileged backgrounds and have led less sheltered lives. People have this spark, which comes at certain age and a certain stage in your life. It's easy to be nostalgic about the past, because there is a survivorship bias in the stories that get transmitted. I'm optimistic there are enough agents of change in the people around us.

From your perspective and also from the vantage point of the Indian industry, what were the landmark reforms in the evolution of Indian economy?
We have not witnessed all those landmark moments of the past seventy years, obviously. For me, the big "aha" moment was the reforms started by the Narasimha Rao government. We underplay it today. But there were such intense debates whether Indian business was ready to prosper in an open economy. We were in the midst of a Schumpeterian shock. There was the so-called Bombay Club airing its doubts. FICCI used to have this body called ‘The Wednesday Group’, where a group of 20-odd members met on the first Wednesday of every month and debated issues.  I was 26 years old and was I invited to be a member of this group. These discussions were about real dilemmas and not politically motivated rhetoric or vested interests masquerading as values.

History's verdict has been quite good. Twenty-five years later, the same businesses that were feeling very vulnerable then, have come out very strong. If those reforms had not happened, many of those businesses would have been less prosperous. In addition, new industries have been created. Some of this has happened inevitably because of the progress of the world, such as the information technology revolution. For example, Infosys would have happened regardless, though it might have been less of a global icon. But some companies have been created because of reforms. Without reforms, I don’t know whether private banks would have happened. There would have been a big delta between what we have today, say an HDFC Bank, which by the way, is more valuable than Goldman Sachs and Deutsche Bank, and what we might have seen if the inward-looking government policies had continued. I don’t know whether private telecom would have happened without the reform mindset, because these have historically been mandated as government-owned companies. It's worth pointing out that telecom penetration has been a force of productivity improvement and economic growth. So the ripple effect would have been less on our growth trajectory.

Reforms were not just about capitalism. It was not elitist. It was about the common man. It was about the quality of products and services. Today, one can go to Kotak Bank and the services one can get, a public sector bank cannot match with any consistency and reliability. So, forget as a businessman, but also as a consumer, one is better off because of Kotak Bank. Middle-class India is happier because of the affordability of cars and motorcycles. Consumers are decidedly better off because of Jio and Airtel as compared to the old MTNL or BSNL. Those companies have been so marginalised that kids today won't even relate to those names.

The second landmark event in my life was the Vajpayee era. There was a fear in the minds of many that the BJP was about the "temple" and higher order needs rather than the common man's problems. The Vajpayee government proved to be mainstream and put the BJP centre stage as a long-term political option. Reforms went to the next level. We saw privatization and better geopolitical linkages. In spite of their surprise loss, I think the BJP became a real sustainable force from then on.


My generation has been fortunate. This kind of big events happen once in a generation. We have seen macro transformations twice already in the past 25 years. We have been in extraordinary times indeed.  

How do you look at the two terms of Dr Manmohan Singh with the last four years of Mr. Modi?
I tell people if one has relatively moderate expectations, one won’t be disappointed. One of our problems is that we have way too much expectation that politics will deliver A or B or C. I don’t necessarily agree with that. In terms of the economy, if you look at what our natural fighting weight is, if we grow at 7.5% for twenty years, we are actually doing very well. I'll explain how I come to this number in a minute. But the benchmark for comparison is not 9%, which is what many aspire to and complain about. Therefore, if you take economic growth as an indicator, I think both the governments have delivered a decent outcome.

Manmohan Singh and Narendra Modi are a study in contrasts. One is a Rhodes Scholar. The other is a man from the street, a let's call him a "Roads Scholar". One was driven by his intellect. The other is driven by passion. One was a consensus man. The other is a man in a hurry. Manmohan Singh was like a chief operating officer of a mature business. Narendra Modi is like the founder of a startup. Manmohan Singh was a desk man. Narendra Modi is a salesman. Manmohan Singh was a trained bureaucrat, and it showed. Narendra Modi was a social activist, and it shows. Manmohan Singh was quiet and thoughtful. Narendra Modi is energetic and driven. You may find one or the other appealing, depending on your perspective. It's like comparing apples and oranges. It's difficult but the electorate has to do it.

If one looks at the Manmohan Singh government, in later years, it seemed somewhat of an anarchy, as if the leadership had abdicated the throne. Inevitably, there were scandals. The grasp that was needed for effective governance was lacking. I guess that happened because there was too much diffusion of power. That power vacuum led to Modi's stunning victory. The Modi administration is in control of the agenda. The government interface has clearly improved. They are attempting to solve beyond-the-horizon problems. In many ways, this is a thankless task in a five-year electoral cycle. If you look at agricultural insurance or goods and services tax, it may not pay off in the near term, but in the long term, it will reap dividends. If you look at the banking reforms, it is hard and painful. There are vested interests. There are unintended consequences in a complex economic world, where benefits in one area will lead to problems in another. The stopping of evergreening of loans is hurting credit availability, the capital expenditure cycle, and employment generation. There is uncertainty as to when the benefits might accrue. But it is like a surgery. Some blood will be lost. There will be a process of discovery. Not everything will go smoothly. But in the end, the good doctor - and in this case, the good administrator - will prevail.

Coming back to the economy, If we compound ourselves that 7-8% real economic growth over the long term, in some years we may get 9%, and some years we will get 5%. To borrow a line from Rudyard Kipling, we have to treat those two imposters just the same. That is the mindset we use and that is what drives our thinking about business and society.

On the political side, I am a believer in British historian Archie Brown's school of thought, which is well articulated in the book "The Myth of the Strong Leader". Essentially, we mistakenly attribute a lot of things to our political leaders. It's not intuitive, but leaders, individually and on their own, make less of a difference to a country's outcomes in Institutions make the most difference. To argue whether Manmohan Singh was good or bad is a subset of the larger picture. To judge whether Mr Modi is good or bad is a subset of a similar institutional superstructure. I think one should look at the administration as a whole and the institutions they have been able to maintain and create. And this is a far more complicated exercise. But the good news is, not counting outlier events, there are far fewer swings in reality because of political bosses than we attribute. At the risk of oversimplifying, may I state that our destiny is our demographics and our geography in the long term, oil and monsoons in the short term, not so much Modi or Manmohan or Mamta. So, irrespective of our political taste, let's not get worked up.

So can we say that India will grow by 7.5% despite the politics of the day?
We have trained ourselves to evaluate the world in terms of scenarios and outcome probabilities. I think the most probable scenario is that we will grow at this rate of 7.5% and fluctuate around it. Economic theory over long periods of time will turn out to be correct. This has been proven empirically around the world. The theory is straightforward: economic growth is investment rate divided by the incremental capital-output ratio. Investment rate is directly dependent on the savings rate, and is about 30%, and fluctuates by a per cent or two up and down. It is sticky because it is cultural. It is dependent on our dependency ratio, which has reduced.  Because of a high dependency ratio, our savings rate which used to be about 15% in 1960s, has gone to about 30%. now. It's not surprising that in the same time frame, our growth also doubled from the 3% or so "Hindu rate of growth" than to more than 7% now.  So that numerator is one number. The denominator is the incremental capital-output ratio which is a function of the mix of the economy. India's incremental output ratio is 4 and inching upwards. So you divide 30 by 4, our natural fighting weight in the global economic boxing championship is 7.5%. Over long periods of time, therefore, this is the benchmark and we will swing around this. When I discuss this with my business peers, they often point to China's remarkable growth story and ask why India cannot do it. China hovered around 10% economic growth for two decades because its savings rate was about 45% and its incremental capital-output ratio was around 5. But, years of continuing sub-optimal investments and the debt binge has resulted in this denominator increasing to over 7 and it's growth rate falling to 6.5%. It's quite deterministic actually.

Coming to governance, good politics can change this growth number by half a percentage point to one percentage point. By comparison, I think global economic cycles can change the same growth rate number by more than what politics can. So, somehow we get confused between the different variables. Low oil doesn’t mean a better government. High oil doesn’t mean a worse government. But oil will obviously affect economic growth and we will attribute it to the government.

This is not to say that governments are redundant. A few months ago, I was talking to Shamika Ravi, a noted economist, who is also on the Prime Minister's Economic Advisory Council, and she mentioned some startling facts: in the early 90's, 48% of Uttar Pradesh's population and 44% of Andhra Pradesh's population were below the poverty line. Both were amongst the worst performing states. Twenty years later, UP's number was at 29%, AP's showed a remarkable decline to 9%. Political entrepreneurship clearly works! It's just that on the whole, the government is just one of many wheels driving the economy. It's more likely a back wheel in a front wheel drive car. And so we need to take a more holistic view.

Is it fair to say that you are deeply inspired by Warren Buffet?
If you look at Warren Buffet, he is an idol to many. To me, he is a guru because he has been to take simple concepts and make them work. He is not doing the heavy lifting, as he himself says. Berkshire Hathaway's Vice Chairman Charlie Munger hits the nail on his head when he says: "Many people are trying to be brilliant. we are just trying to be rational". Berkshire is not trying to reinvent the world. Berkshire follows simple, and what many might call even boring principles, that anyone can adopt. And they have created one of the world’s largest businesses. If I remember right, the company has $110 billion of cash in hand, not counting additional borrowing ability. Yet, Buffett is an awfully simple man. I met him first in a chance encounter in 1989 at the Columbia University subway stop. He had come to give a talk at Columbia and was taking a subway back to his hotel.


My son wrote a book on Buffet when he was thirteen. When Buffet was here in India seven years ago, my son met him. My son gave him a copy of his book and also a cheque of Rs25,000 from the royalty of his book for the Bill and Melinda Gates Foundation. In his hectic travel, Buffet misplaced the cheque. He actually contacted my son from America, asking that since he had misplaced the cheque, the old cheque should be cancelled and that a new one is sent to him. In his hectic schedule, he could easily have forgotten this small detour of meeting my son. But that is the common touch he has.

In the world of business, how do you measure success? By wealth? If so, Buffett has compounded money at 23% for fifty years. He is one of the world’s richest and self-made men. So, for a moment, even if his values do not necessarily appeal to someone, one can ignore that. But one cannot ignore that he has empirically shown that his formula works. On a lighter vein, I'm proud to be a copycat. I try and emulate Buffett from a distance. I try and follow Ashish Dhawan in our own backyard. I would love to copy Jack Ma, whose game is so different from ours that we could pick up some cool new tricks. It's a fascinating and eye-opening journey, and who knows, it might work for me too!

So if I ask you over the last 25 years, how much wealth have you generated?
(Smiles) A lot less than Buffet, of course. And I must share a fun fact I discovered: money is far more exciting than anything it buys!

Would you like to quantify it?
Those are private numbers. Why quantify it? From what we see around us, I believe we are a top quartile performer overall. Not quite top decile yet. Hopefully, we'll get there.

What makes you select sectors like real estate, consumer goods, finance etc.?
We use many filters. One of the filters is how is that industry growing. Obviously, we want to back growing industries. Secondly, how predictable is the industry. You don’t want a commodity cycle. For example, steel or oil may be growing but these sectors are very cyclical and not our cup of tea. In the boom commodity cycle eight years ago, fuelled by "bubble bravery", we tried a few things, but the results were quite disastrous. Thirdly, just because the industry is growing, it doesn’t mean it is creating wealth. For instance, the airline Industry globally is growing very well and has changed the world, but it ranks very low in terms of long-term wealth creation overall. To me, infrastructure in India has the same story. It's transformative for the economy, but a marginal wealth creator. For long-term investors such as ourselves, all this makes investing a strategy oriented endeavour rather than a financial exercise: What are the barriers to entry in the industry? What is the bargaining power of the players' vis a vis their suppliers and customers? What is the economics of the industry.? What is the return of capital employed for the average participant? All this is more important than the p-e ratio or market timing or stock history. The fourth screen we use is the hierarchy of the industry in question. If the hierarchy is already set and you are a second-tier player, you are not going to make as much money as the top rung players. If the hierarchy of the industry is not set and you are a tier two player, you can aspire to move into the top tier. So you have a chance of disproportionate growth. Typically, we want to back market leaders, or at least nice leaders. Fifth, we focus on the management, their track record, game plan, motivation, strengths and weaknesses, level of complacency, and versatility.

On the basis of these, we have been fortunate to have invested with some very savvy businessmen, who have scaled very well. As expected, once we build expertise in a sector, investment underwriting becomes easier. Just within financials, for example, we were seed level investors in India Bulls and Avendus, way back. At a higher risk level, three years ago, Rajan Anandan of Google, Pramod Bhasin, Accel Partners and we backed serial entrepreneur Alok Mittal in the fintech company Indifi, an online loan originator and manager for online merchants, which we also thought was a proxy on e-commerce growth. This was tangential to our core strategy but domain knowledge helped us cross the line. We backed InCred, a small business lending platform last year in the first round of funding. Shortly thereafter, we put money behind Arpwood's acquisition and intended turnaround of Karvy's non-bank finance company. Recently, we invested in another all-cash NBFC, which Shachindra Nath bought at a valuation below cash in hand, which was quite extraordinary in an otherwise frothy market. Over the last fifteen years, we have done mid-stage investments in three more. And public market exposure in financial companies is additional. Financials fit into our strategic view of sectors and we have built considerable domain knowledge. This approach is a pattern for us. We have repeated this in real estate and are trying to do the same in the fast-moving consumer goods sector. Of course, in addition, we also look at investment propositions opportunistically as well.

On the whole, one is the top-down view, but we give more emphasis to the bottoms up view. And we have learnt to ignore the plethora of marginal information out there, which is really noisy, which can give some advantage in the near term but not quite over the long term.

For a new-age investor, according to you, which are the sunrise industries?
When you are in an economy like India's, there are several sunrise industries. I would argue that banking is a sunrise industry. When did Kotak start? In the late 90s. Look at its growth. It resembles a sunrise industry. Fintech, a new buzzword, which includes unicorns like PayTM, is a sunrise industry, which is a different manifestation of the same financial sector where banks are playing. At the other end of the spectrum, automotive is growing so fast in India. One may think of it as a very boring industry. But in India, it is a very exciting industry, even though there is no Tesla type disruption. If you add Tesla and Uber to it, it will become even more exciting in the years to come. The current value chain analysis of the industry is akin to "car by Toyota, powered by Intel". But the value added is moving such that in the future, the industry would resemble a "carby Intel, powered by Toyota" mantra. Companies and investors who can capture this shift will see an upside similar to those whose consumer internet bets go right.

Overall, in a country like India, where, on a marginal basis, disposable income is growing rapidly at 25% plus for millions of people, even though nominal wage growth is 10-11%, what is exciting will be very different from what is exciting in America or Europe, where wage growth is quite stagnant. And that is why I am a long-term bull, and will remain so even when the chips are down on a cyclical basis in India.

We believe you have plans to invest around Rs. 500-1000 crore annually across various strategies - private equity, real estate, structured credit and public markets. What is your game plan for investing in the near term?
It is correct that our aim is to invest between Rs. 500 to Rs. 1000 crore every year in different asset classes. The choice of asset classes will be based on what our tactical view of the world at that point is. We may even stay in cash if we don't find anything compelling that fits into our worldview. So, some years we may undershoot and some years we may overshoot how much we invest.

Being a value investor, you continue to stay out of the internet economy. Any particular reason behind that?
I think start-ups are a very potent force for the economic growth of the country.  But we personally don’t have a taste for disruption. That is outside our temperament and our circle of competence. We stay away from concept risks. However, we are happy to back startups in existing industries. For example, we invested in a company called InCred, which is a mundane NBFC. They have identified their niches. It's strategy-light and implementation-heavy. The company will have process related to innovation and will gain market share or earn superior margins.  On the other hand, if someone were to say that they will deploy some rocket science-driven technology, we will not be able to appreciate it. Plus, even if we get it, living with it might be tough for us, because such disruptions face too much volatility, and we would not have the stomach for it when we need it the most. Why try and play rugby if we are doing well with our soccer?

Your investments are built on the bedrock of what principles?
We are in the business of long-term capital gains.  We are not in the business of income. That is our first principle. If we can’t find sufficient long-term capital gains opportunities, we will move to income.  Our second principle is that we invest with a point of view of 5-10 years. That simplifies a lot of things for us. We can cut to the chase. Third, we don’t want to diversify too much. We are reasonably concentrated in the number of bets we make. Fourth, our hurdle is 15% annualized return. That is one threshold benchmark for us. And the logic for that is fairly simple. India’s economy is growing at 7.5% which I think is our long-term average. Let’s assume that to be correct for a second. You add to it 5% inflation, so nominal growth is 12.5%.  In an economy that is growing at 12.5% nominally, earnings growth of the listed universe of companies should also be about the same. That, in turn, should translate into an average of 12.5% stock price growth over time. We should at least get 250 basis points better than what the random market does. Hence the first hurdle of 15%. Additionally, if you look at what one would have made if one had invested in the stock market index ten years ago, long-term returns are also in the range of 14-15% per year. So it correlates. And one can do this passively. Now, we don’t really compare ourselves with an index like Nifty. We compare ourselves with the Nifty Quality Index. The Nifty is a representative sample of the whole of the Indian economy. The Nifty Quality Index takes only the high return on capital employed type businesses. That itself gives 300 basis points better return than Nifty. So, our second and more realistic hurdle is the Nifty Quality Index, which about 17-18% annualized return, and which is more comparable to the type of investments we make. Then, we look at 22-23%returns, which are empirically the long-term median returns for top quartile private equity investors. If one looks at top decile benchmarks, returns are 27% or even more. We are happy to make bets seeking returns up and down that range depending on our views at any point in time.

How has real estate, which is your firm’s biggest exposure, been positively impacted because of RERA and other reforms?
I think RERA is an absolute necessity. If corporate India wanted to take a public deposit, they have to abide by a set of regulations. For real estate companies to take advances from customers, there were no regulations on what they did with that money. It was a complete party going on and the money was being misused. therefore, RERA was inevitable, just to level the playing field between the corporate sector and real estate and for consumer protection. The implications of RERA will manifold. One, the real estate industry will consolidate, as many fly-by-night operators will not be able to cope with it. Two, real estate will become more capital intensive because developers won’t be able to divert capital from Project A to Project B because they will have to maintain RERA type of reserves and escrows. Thirdly, the good thing will be customers will be satisfied and more protected. A lot of the problems of the past will not repeat themselves where there are inordinate delays in deliveries. The confidence in the real estate developers will come back because of RERA. And as the current inventory gets liquidated, new project launches under RERA are likely to be fairly strong. So I think in the long term, it is good for the industry.  It's baptism by fire.

What are the reasons behind your focus on structured debt? What is the rate of returns on that?
We are deep value investors in our mindset. So if we use the different thresholds of 15%, 18%, 23% and 27%, the question we ask is: what is the probability that you will compound at a minimum of 15% in the stock market over the next few years?? My own assessment is, in public markets, given the rally that has happened and given that earnings growth is still lagging, there is limited upside. There is way too much excitement in the stock market and valuations reflect that, thereby capping upside potential. On a relative basis, therefore, structured credit looks better, where one can make 15-20% annualised with some bells and whistles.

Guess what? Unfortunately, we had a same view about the stock market two years ago, and it was dead wrong. If you look at the rally that has happened over the last two years, it is just extraordinary. But nonetheless, that was our view and we have been more biased towards structured debt. Live and learn!

We move capital on a relative value basis. In structured credit, we try to get in the range of plus minus 18%. We are also focused on private equity but on a special situation basis. As a corollary to our view on general stock market valuations, we are doing less later stage private equity, whose valuations tend to be correlated to public market valuations, and are biased towards building platforms from scratch or looking at temporary dislocations. As Warren Buffet says, we don't have to swing our bat often to make superior long-term returns in equity related bets. So we play very selectively. And when we miss a rally, we learn to live with envy!

Can you discuss some of the new investments that you might be interested in making in the near future?
At any point of time, we are looking 3-4 specific opportunities seriously. Right now, we are looking at an insurance play. We are evaluating a bunch of real estates structured credit transactions. Last month, we did a small last mile funding for a housing project in Thane in Bombay. We are looking at a structured deal for a rights issue financing for a healthcare company. We are looking at an investment vehicle where we may get in at a valuation a lot lower than the stated marked-to-market value, because of an institutional and regulatory imperative. There is a lot of excitement every day. But only a few investments finally!

You also have a lot of exposure to overseas investments. So what are your company’s medium to long-term plans for that?
The bulk of our capital is in India. Some of our capital is offshore, which we are investing mostly passively in top-tier funds. We have exposure to a few private equity funds, some venture funds, a few structured credit funds, some rental yield type assets and some direct investments in private equity. Just last week, we made a small investment in a private placement of a Chinese real estate lending platform. A few months ago, we participated in the convertible preferred equity instrument of a business process outsourcing company acquisition. I would like to point out that we are more bullish on pure technology and venture capital offshore, which has more upside than venture capital here in India, because the addressable market is so much larger there and scaling is so much faster. However, on a more systematic basis, we will stay with private equity, rental yield and structured credit. As we expand internationally, we are learning new things every day. Next step: call Jack Ma!