Akshada's portfolio: Views are welcome

Q&A: Questions & Answers Portfolio Q&A
22

In the short term, there are too many variables and it is impossible to predict demand. It makes it very hard for the supply chain management at an OEM and if we talk to them, they will tell us how much stress they are in.

However if we look at the longer term, it all looks very easy to predict a ballpark. The mean growth for the industry has always been at 6% levels at the top and 3% at the bottom.

An investor in auto stocks may need to have a longer term viewpoint to be able to hold the stock during downturn.

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VIP Industries

From your portfolio, I would say VIP Industries certainly has some near term risks, especially in the form of the Chinese wage inflation. In my blog post, I had assumed that the management will be able to shift all production to Bangladesh (Currently ~10%), but the commentary in the last Concall makes it clear that there are labor and integration issues there.

There is an evident trend of companies shifting production out of China in large swaths. So I would say, make peace with whether VIP will be able to either continue to pay low wages in China (I sincerely doubt that) or shift production out without any issues. Seeing as how low cost production is kind of VIP’s niche, I believe this will be a big focus area to consider. I am not saying it’s a black swan, but it’s certainly worth additional attention.

Secondly, it was actually Mrs. Radhika Piramal who was spearhearing change and innovation at VIP for the last couple of years. Most importantly, she introduced Skybags and Caprese, opening up a whole new lines of business for VIP. Unfortunately, she’s moved to London since last year for personal reasons. She is still being paid a salary, but her involvement in the business is nowhere close to what it was half a decade back.

There’s no doubt that VIP Industries is an excellent enterprise, with a proven decades-long track record. But I think management succession is crucial, because the bags business is in many ways going to be the company’s future. Will Mrs. Radhika Piramal get back to her active role in the management of the company? I think that is also a question worth asking.

Finally, tracking activity by Samsonite and Safari is also essential. The new kids (Not so ‘new’ anymore, really) on the block have managed to wrestle a respectable market share from VIP for themselves. If you haven’t already read it, do read this wonderful research report on the luggage industry in India.

Dabur and GCPL

I don’t understand why Dabur and GCPL have the ‘same story’. They are both FMCG firms. But Dabur is more FMCG than GCPL. GCPL is, for lack of better phrasing, a MMCG.

A close comparison to GCPL would actually be Marico. Both of these firms are trying to reinvest / extend their brands into men’s grooming. Marico has recently acquired Beardo and GCPL has started the Cinthol line of men’s grooming range. I personally think men’s grooming has a lot of potential in India (And only a ~2% penetration). I am more inclined towards GCPL, because they are also into hair care, which is another huge industry all by itself.

But my point is, make sure you understand what you are getting into. GCPL is not like Dabur or Britannia. GCPL and Marico (If they continue with their vision) are getting into new ventures by themselves. So, there is a considerable risk that comes along with it.

Maruti and Minda

I have no qualms here. These are two great companies. But if you believe the Auto industry is indeed going through a temporary downtrend, and it seems to be a bad one at that, why not just bet on the OEM (i.e. Maruti Suzuki)? Certainly, you don’t make better returns by betting on two similar ideas, so why not concentrate your energy on just the one? You already have enough companies in your PF, with some cash to boot, so you don’t need diversification too. Just a thought, but nothing to write home about.

Ion Exchange

I’m most interested in hearing about why you think Ion Exchange would make a good investment. Clearly, you don’t have to convince me. It’s the second-largest holding in my PF. But I would love to hear you out anyway.

All the best for your investment journey.

5 Likes
24

VIP Industries

Yes I am aware of the risks you mentioned, as well as Radhika Piramal leaving for London.

One of the criterias during investing, is that I have to look at volume traded due to the sheer size, which is where Safari fails. Also, from March 2012, VIP has successfully brought down its material cost from 56% of sales to 49%. Safari failed to do so and has increased the same cost.
Another criteria for investment, is if the company will be the last one standing in a carnage, and VIP supersedes Safari.

VIP’s return ratios combined with valuations (although I would like to buy it cheaper), are more favourable to me.

Divya chawla’s report on luggage industry is very thorough.

The fact that VIP has many brands in different categories also provides more comfort.

I recently bought a safari luggage instead to test out the competition. This is how the supply chain in luggage works like:
The e-commerce brands will place the order to the nearest wholesale distributor and it becomes the distributor’s job to pass it through. I received no updates for 15 days. Suddenly the luggage was brought to the address, with the e-commerce company not knowing about this delivery for another 15 days.
Another reason that I chose safari’s luggage was because I found it at a much greater discount. It was good to know that VIP was not offering that aggressive of a discount.
Of course this is more anecdotal, but I was able to meet a distributor in Bhiwandi and he confirmed the same.

He said as I paid only 20% of the list price, he was sure that I paid what would have been the cost to the company. Wild!

I like that VIP will stop production at a certain plant, if the cost becomes more than desired. It is better than enduring it till they find a better bargain.

For management succession, that is something that still lingers.

In the end the biggest question is if they can revive their sales growth again. So will need to wait and watch.

Dabur and GCPL

By same story I meant, that I bought them when they were near their 52 week low, and by valuation perspective.
Your description for both their description is bang on.

Maruti and Minda

I would prefer to buy Minda rather than Maruti, because it is still growing 1.5x of industry growth. But according to the rules in the portfolio, I can’t put in any more cash in them. Hence both of them.

Ion Exchange

I was looking at B2B opportunities is when Ion Exchange came in the light. Reason that it is in the watchlist is because a good friend has been persistent in me checking the stock out, plus it giving a positive return in a bearish market.

Thank you for taking the time out to give feedback in this much detail.

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25

Couple of questions:

  1. How have you decided to diversify in small/mid caps and large caps, percentage allocation?

  2. You mentioned that you have exit rules. Could you specify?

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  1. There are no rules to % allocation in small or large cap. The companies I have selected simply come due to valuation and growth perspective.

  2. I do have exit rules. My portfolio is new hence some exit rules are different than other portfolios.

  • I compare my portfolio with nifty, and individual stocks with their respective indices. So when RBL went so down so quick, and the Bank nifty index hadn’t even moved, that was the first step to pay very close attention to the price action.
  • when the stock price becomes 2/3rd of the initial buying price, I need to exit and re-evaluate. the only exception is when the index has gone down as much. RBL Bank hit both criterias and I had to sell it.
  • For Bajaj Finance, the run up made it 30% of my portfolio, so I had to take a call if I wanted to trim the holding or sell it. I decided to sell it as I want to add more small/mid cap ideas.
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27

Invest the remaining cash into sectors that have crashed. Not necessarily Small and Mid Caps, but stocks like Bajaj Auto, BEL, IHP, ITD Cementation, Balkrishna, Godrej Properties or other ideas. My point is not justifying these names, but it is to say that their charts will show you the correction.

Picking GMM or Bajaj Finance or PGHC is not going to help since these are big names and have run up quite a bit.

Adding names that will lower the beta of your portfolio are IMP to add.

KKP Investor

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GMM, yes has gone up quite a bit, but is still a relatively smaller company. If I get an opportunity to buy it at a cheaper price, I will.
Bajaj Finance is another name that I’ll buy when it falls to at least 2300 levels. I’ll be patient till then.

Godrej Properties is already on my watchlist, and I have started to add this.

I intend to do what you said, companies that have corrected and are having value.

Thank you for your feedback.

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image

Update:
Bought Godrej Properties and United Spirits, and bought remainder of Godrej CP to make it equal weight with the rest.

Have changed the weight style to add cash as a component as it clears the confusion.

31

Hi,
Why are you preferring Dabur & ITC over consistent outperformers like Marico, GCPL, Britannia or Nestle?

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Valuation. Out of the names you asked, I like nestle a lot, but unless it comes at a comfortable valuation, I won’t invest.

33

I like most of the companies you hold. How do view the current valuations of Minda and Vinati ?

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Vinati

It is expensive currently due to its margins being the highest they ever were and the market sees it not going down anytime soon. However when I account it for normalisation to 25% (currently 41%) of its margins, and I see that their product mix is better and difficult to replicate, as well as the fact that they are a cash flow generating company. The pain that can come when Vinati will normalise the profits overtime, it will still have a lot of value.

Minda Industries-

The product mix is such that engine of the car doesn’t matter. Also as we move towards getting more and more hi-tech, switches, very sexy alloy wheels, and powerful lights are the way to go, which is what Minda is in. I believe the horn segment will grow with their getting more customers, or customers making new launches.

Minda is one of the auto ancillary which did not give a y-o-y degrowth in sales, even if they had to give it on credit. Due to JV’s and associates now getting merged in the parent entity the margins are much better and they will stay so.

Giving an example, Minda had CFO of 413 for fy19, whereas Bosch had cfo of 630. Bosch is valued more than 5 times Minda. Also market de-rated bosch and it has a P/E of 26 now, whereas Minda still quotes on a P/E of 31. It can be argued that it is highly likely that minda will correct soon. But I believe it has already corrected.
It used to quote at a P/E greater than 40, and the fact that being a small cap company it can hold its valuations while the giant is unable to, shows strength. This particular point is something I learnt from a trader.

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35

Interesting! I understand that valuation is subjective. Still I would like to know your methodology. :slight_smile:

Personally, I have a very rough qualitative way of looking at valuations: Backward looking (price/sales, EV/EDITDA, Price/cash flow), forward looking (PEG). In all the aspects Dabur seems to me overvalued compared to the names I suggested, except Nestle, unless it starts growing in high teens. Nestle on the other hand has a better portfolio, better pricing power, and increasing aggressiveness.

Disc. I own Dabur too as well as the other 4 names. My rationale is that Dabur has the most diversified portfolio among all the names and its new management could become more aggressive under Amit Burman who has a history of creating Real juice portfolio from scratch. However, other that its Ayurveda portfolio it doesn’t seem to have a great pricing power.

36

Thanks and I do concur with your views. Vinati management did indicate in a channel interview that the margins will contract but still be good.
Minda is stable as it has diverse client in terms of both 2-Wheeler and Cars. I have been waiting to enter it sub 20 PE but it never came there.

I could not understand “Giving an example, Minda had CFO of 413 for fy19, whereas Bosch had cfo of 630.”

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Minda Industries.

The management is confident and smart. Confident because it is able to generate a consistent growth in its Net Profit uninterruptedly over the years, except for a serious dip in 2014. And smart because it diluted its equity by three times when the stock price was at its all time high. No. of Equity Shares went from 87041155 to 262216965.

The management has this tendency, it diluted the equity in 2011, 2012, 2017, 2018 and by three times, which is the highest, in 2019.

My expectation with this stock is that:

  • With the slow down in the auto sector, and considering that this is a smaller company in comparison with Bosch and Motherson,

  • Sizeable equity dilution in 2019

there should be a very good buying opportunity in the near term.

1 Like
38

Cash flow. Bosch is a much bigger company than Minda, however Minda is spitting great cash in comparison to Bosch. 30000 cr company and 600 cr cash flow or 8000 cr company and 400 Cr cash flow?

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I believe that management has become more aggressive.

I’d like to refer back to the time, that when I bought Dabur, it was at its 52 week low, gave a decent result, and the conference call was showing that management is aggressively expanding its geography.

I think valuation perspective of everyone depends on the size of their portfolio.
A big portfolio will need valuation in a very different perspective than a portfolio which wants to make aggressive capital gains.

A bigger portfolio (100 cr + managing partner money) will have capital preservation as their main motto even if they don’t get returns.

So in my portfolio, capital preservation being very important, the price of entry will also matter.

If you are asking me about core valuation, the I like to see margin of safety as the key parameter. I view margin of safety as what could be the point of no growth and how will it be valued then. Taking time as 5 years from now. If the calculations then are in the similar ballpark then I can buy with more conviction.

But then there are some like ITC, which is trading at multi year low P/E of 25, and there is no need for further valuation.

1 Like
40

Let me give some more background about myself.

Last year I started managing partner money: 2 clients both brothers.

One brother wanted as low risk as possible in equity portfolio. Lets call him A
The other brother wanted a medium to high risk portfolio. Lets call him B

I was 20 at the time and this is what I did:

For brother A I divided his money this way.
6 equity stocks, and one Bajaj Finance FD.
The six equity stocks were:
HDFC Bank, Asian Paints, Bajaj Finance, Titan, Page Industries and TCS. From May 2018 till today, they gave a return of 20% +ve, in a bear market. Bajaj finance FD was at 9.5% interest rate.

For Brother B I was actively searching for the mid and small cap opportunity and this is how I invested that money:
Minda Industries, Jamna Auto, The hi-Tech gears, Hester Biosciences, Borosil, Sterlite Technology, Maithan Alloys, Deepak Nitrite and Bajaj Finance. On April 2019, the portfolio hit a stoploss of 40% capital.

This combined gave a -21% return in the market.

I learnt a lot from this. This is why my current portfolio is now tilted towards more large cap than small cap. However a good company is a good company.

I was asked to combine the new portfolio, and the -21% capital was funded by the brothers to make the portfolio size same as before.

Hence my view on valuation changed so drastically.

9 Likes
41

In large caps, returns are limited to 10% over the very long term. However, mid/small caps can give twice as much as they entail more risk, a lot of risk. They swing wider. Mid Cap Index has considerably crashed, but the most scrips on my radar are still slightly expensive or just normal as per their historical valuations. Does it mean that these scrips will correct another 30%… well, I am counting on it.

For ex. Page was happily trading in 30 to 35 PE pre-2014 time, then what is the compelling reason for me to pay a 50 or a 70 PE now in 2019. Considering that the moat has not improved all that much, in fact it might have slightly worn-off.

Point being, I was in favour of Large Caps, but now I find myself tilted towards good quality Mid Caps but would like more comfortable valuations.

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Very true. I have more conviction and more direction on what to do when the companies I like go either way.
Broader market falling has corrected most stocks but the darling stocks are still left. will buy into them if and when it happens.