Concentrated stock portfolio that could return big with low risk in 3 years


(1.5cr) #1

KCP ltd. 25% at cmp 120

Capacite infra 20% at cmp 417

JKIL 10% at cmp 300

Orient refractories 15% at cmp 160

Exide industries 10% at cmp 200

Dilip buildcon 5% cmp 980

Edelweiss 5% cmp 280

TBZ 5% cmp 120

Virinchi 5%cmp 120

This is a super aggressive portfolio that make alot of money in the next 3 years. Downside on each position will be capped at 20%. I will be constantly reviewing this portfolio through this thread. I have similar scrips but I dont have the above weightages.


(Alphin) #2

Do you anticipate rapid growth due to reasons specific to company? Please share the details if so.

I am invested in Virinchi and I believe that Virinchi is going to ramp up the bed utilization in the coming 3 years which is going to contribute directly to the bottom line without much additional expenses.

Any other insights on your picks would make the thread more interesting…


(1.5cr) #3

I cant type the entire thesis for each of them.
KCP ltd. Undervalued huge growth coming in. Capex for sugar business vietnam is coming on stream. New capacity for cement is coming on stream FY19. Strong mgmt. earnings should double over next 3 years.
Capacite. Rapid growth coming in, Strong clientele, strong mgmt, big order book, flush with cash post IPO, can grow very very quickly, masters of execution.
JKIL solid infra story, can grow super fast just like capacite. Reasonable valuations, good at execution, specialists in metro work.
Orient ref. Fundamentally superb company, ride the steel upcycle, managed to grow even during down cycle so that gives us protection, RHI is the parent and exporting via RHI network is a massive trigger, RHI is the worlds largest refractory producer, they are taking India very seriously through orient, strong cash balance of some 100cr, oligopolistic industry.
Exide industries. Dirt cheap valautions for a company like exide, regaining of market share, earnings will grow, E-rickshaw market leader, fully capitalised insurance biz, low downside, will ride the imminent EV boom, may not perform in the short term but over 3 year period should give satisfactory returns.
Virinchi. Hospital play, completely undervalued as growth shows markets perception of mgmts ethics should change and drive up valuation. risky bet considering hospital space is competitive in banjara hills. Although everything seems to be priced in at cmp, can easily double from here over the next 3 years.
Edelweiss. Strong financial services company, earnings growth should sustain the valuation, market will talk about insurance biz being capitalised post 2019 which will sustain the multiple if not boost it slightly.


(Manohar T. Patil) #4

Hi,

For KCP, how would you look at not so good performance of engineering & hydel power segment in recent past. I mean - are you anticipating any uptick in these segments basis some indicators?

On Orient Refractory - “RHI is the parent and exporting via RHI network is a massive trigger” - Do you have some numbers on the opportunity size for Orient Refractory globally & in india. Has management confirmed about the export thru. RHI is an opportunity for incremental revenue. I am not challenging the information you have provided. Just trying to understand more about these businesses.

I liked your approach, a bit risky but might be rewarding as well & the stocks you have chosen are largely have not run up to quite high valuations which provide some cushion on downside.

All the best!

Decl- Own Capacite & Edelweiss in my portfolio


(1.5cr) #5

Hi,

So KCP engineering biz doesnt contribute anything to the company. Infact it will break even only at 85-100cr in revenue. I have assigned zero value to engineering biz and hotel biz. Dont even take into account the Vietnam Sugar biz. Only the cement business in itself is undervalued. This vietnam sugar business produces a 100cr in net profits annulay and has capex coming on stream for which bulk of the investment is done. Most of KCP power is used for cement plant itself. Sales of surplus power struggled due to run up in coal prices. That is input cost and out of control of the company. It is also why margins slipped on cement slightly If im not mistaken. Just go through the con call transcript for details on this.
The hotel business continues to be a drag but these are all minor components and dont matter to the thesis.

Yes RHI have asked for shareholder approval to increase RPT to 126cr for FY18 and 40% a year thereafter. In FY17 they did around 70cr in RPT. So you can see the opportunity here. RHI are taking Orient very seriously and see India as a big opportuntiy. You can see the intention via their annual reports. Orient have of course got all the top clients. See you must understand that a refractor cost 2% in steel production. But one small delay in the supply of refractories can cause a long delay in the manufacturing of steel. So Steel cos will not change suppliers. Refractors are consumables used in the process. They have capex of 17cr coming on board as well in FY18. They can go in further capex if needed as they have a strong cash balance.

I dont see more than 20% risk on each position. Especially capacite and JKIL. Orient could derate but that is a low probability given earnings potential not only for them but all of the above scrips. Exide might be a slower compounder, but that is compensated by the low downside risk in the investment. The 5% weightages in edel and virinchi should give us some good returns while minimising our risk through the weights. This should also compensate for exide should exide dampen returns in the short run or even in the long run. Should thesis play out, exide could easily touch the 25% CAGR mark. Worst case they may give us a measly return of 12-15%. This is the bottom in my view for exide. They have decent triggers for earnings growth.
If you want to get into details on risk and sectoiral risk of the portfolio, like those book smart analysts will tell, we have a 75% weightage in infra. But that is all nonsense, we have bought quality companies capable of quick growth. If they dissapoint we take a 20% hit and move on. Infra is the sector in play and why shouldnt we capitalise on good companies with growth…


(paraa) #6

I hold 4 of the 7 scripts(Capacite,JKIL,Virinchi and Edelweiss) you are talking about and i have added pretty aggresively each of these counters but they are also risky counters and i believe it needs to be stressed.

Capacite infra-The valuations look stretched at this point of time and their FY18 Q1 was below expectations.They need to sustain very good growth to sustain these valuations.
JKIL-Have had a very turbluent recent history(Blacklisting by Sebi,fines by MMRDA etc)This is more of a bet on future execution on their large order book.Recent quarter results have not been great and its more of a bet on major improvement in their Mumbai Metro execution in coming quarters.
Virinchi-It needs an upmove in their occupancy ratio which looks challenging at this point of time while the comforting factor is low valuation
Edelweiss-This is my most convincing bet eventhough their valuations are high.I believe their ARC business has great potential in current scenario


(1.5cr) #7

Valuations are stretched in Capacite this is true. But earnings on this company could grow at 50-60% and markets chase growth. If growth comes in on stream this quarter we can see this stock trade at 40 times earnings as well. I think they will do 200cr net by FY2020 this is a long term story. If growth does not come on board next quarter we will exit slowly towards 7% and then completely exit should the following quarter dissappoint. We will take a 20% hit maximum on the position and move on.

JKIL had an issue with sebi and it was a mistake on the part of sebi. So no worries there as that issue has been corrected. It was the shell company issue. They classified JKIL as a shell company by mistake. They did get inot issues with MMRDA and that was because they subcontracted some work. That was no executed properly. Mgmt has adressed this issue and has categorically ruled out any sub contracting in the future. Once market sees their execution capabilities you will see the order book discounted rapidly. They will show bumper growth going into the next year. JKIL traded at these valuations even without showing any growth so again if growth does not show next two quarters we may exit and move on with a maximum 20% hit.

Virinchi is undervalued because of perception of the mgmt being crooks. Occupancy has improving rapidly and promoters have issued themselves warrants. It is very cheap and has big growth via the hospital. I have given them a small weightage of 5% due to the risk factor alone.

Edelweiss has been given low weightage because of valuations. They are a play on amc for me. Valuations will sustain on this counter because of new insurance vertical and strong mgmt. Edelweiss may trade between 30-35 times earnings for the next 7-10 years.

Every investment has risk built in. We wont see more than a 20% hit on the portfolio should every single scrip fail which is a low probability. You must understand that Capacite and JKIL can grow earnings at 40% plus for next 3 years. We have bought growth at a reasonable price. The Katyals arent wiping off debt with their IPO money, they are focussing on growth and that in itself says that these guys are serious about scaling up the business. They are flush with cash at the moment, a flawless execution record and strong mgmt. JKIL is a pure infra play and I think they will grow quickly. KCP will be a wonderful story in this portfolio.


(Susindar) #8

Edelweiss is a cyclical business. There is a good chance to get this stock much cheaper in a bear market


(1.5cr) #9

There are only a handful of companies on the planet that you can hold for life. Infra is also a cyclical industry. If you are going to buy cyclical companies during their respective downcycles, then what sense does that make? Essentiallly you are saying buy unitech at cmp and not during the 03 bull run(not the best example but you understand the point). I see edelweiss playing a big theme in the future via their amc. I see that as a strong theme in India going forward. “Financialisation of savings” as they say. Edelweiss have a strong mgmt as well and that should reflect in valuation.
Coming to a bear market. Markets could even double from current levels before crashing. Or they could even correct 20-30% tomorrow. We never know. What we do know is that we are here to minimise risk while making a strong return. I dont see any company that will grow at 25%+ trading at a 50% discount at 10-15 times earnings. If you find such an opportunity today then you can bet your whole portfolio on it. Sit on some cash but also remember to make hay while the sun shines. If story doesnt sustain or there are better opportunities or you see a bear phase kicking in, just take a 20-25% hit on the position and buy into attractively valued companies at that point. Index went up 4x in 7 years during our 08 run. RE we all know the story. While consumer and pharma went up only 3x. The bear phase that followed saw consumer and pharma go up multifold. Cera going up 70x. So its better to invest in companies that have strong growth potential. Markets chase growth, every investment banker chases only growth.
There is so much liquidity in the market today. The govt. will have to come out with reforms to make asset classes attractive.