Dhwanil's Portfolio


(Dhwanil Desai) #1

Hi,

I amsharing my portfolio details. It would be great to receive views from the active members of the community on various aspects such asmerits/demerits of the pick, balance in the portfolio and capital allocation strategy. I am relatively new to the field of value investing and hence trying out various strategies to test out which one fits the best with my style of investing. Hence, currently my portfolio consists of higher number of stocks with lower % allocation.Eventually, I wouldwant to move towards more concentrated portfolio of maybe 10-11 stocks.In some of the companies, I am still scratching the surface. Some of the stocks are long term plays, some value buys and some purely tactical.

**Long Term Plays **

Company name % Allocation

Piramal Healthcare12%

Mayur Uniquoter12%

Cera Sanitaryware13%

Amara Raja Batteries 5%

Atul Auto 5%

Swaraj Engines5%

Shriram Transport Finance5%

Gujarat Reclaim8%

Hindustan Zinc 6%

Value Buy

JB Chemicals7%

Mazda Limited3%

Tactical

Narmada Gelatines 5%

Scraching the Surface

Fluidomat 3%

Cash11%


(GreyFool) #2

What is your rationale for picking STFC ? Do you think it can grow at the pace it has in the past ? My reading was that it is now mirroring other financials as far as growth in a high interest environment goes. This was not the case in the past 2 economic cycles when it was largely unaffected(possibly due to a smaller base ?). If rates do not come down in a hurry(quite likely given huge fiscal deficit & inflation) why do you think it can outperform other financials ?

Disclosure: STFC is on my watchlist currently. Used to hold it earlier back in 2009-2010 period.


(Nadakarni) #3

Dhwanil,

STFC is trading at ~2+ times the BV while Muthoot is at <1). Isn’t Muthoot capital a bit undervalued when compared to STFC?

Regards


(Subash Nayak) #4

Hi Nadakarni,

Pardon me for my ignorance, but isn’t Muthoot group’s promoter have not-so-nice track record, especially in their gold loan venture, because of which RBI has to come-in and intervene. How much do you rate the promoter in term of ethics in a scale of 1-10.

<1). Isn’t Muthoot capital a bit undervalued when compared to STFC?

Regards


(Rohit) #5

Looks like a well diversified portfolio with many great companies. More like betting wisely on great capital allocators. I hope you have them at comfortable valuations as well.

Have you thought about replacing STFC with SCUF? Of course a STFC at sub-500 looked better than SCUF at 650, but I think SCUF will outpace STFC in the years to come, thus generating higher returns.

Also, wondering why Swaraj Engines isnt under value buy :slight_smile:

Best,

Rohit

Hi,

I amsharing asmerits/demerits wouldwant stocks.In

**Long Term Plays **

Healthcare12%

Mayur Uniquoter12%

Cera Sanitaryware13%

Engines5%

Shriram Transport Finance5%

Gujarat Reclaim8%

Value Buy

JB Chemicals7%

Mazda Limited3%

Tactical

Scraching the Surface

Fluidomat 3%

Cash11%


(Dhwanil Desai) #6

Hi,

In my opinion, STFC is a quality stock that one can buy and hold for a long time due to some of its attributes which makes it a compelling buy. However let me say that I had bought STFC in my portfolio at average price of 450. so one has to keep that perspective in mind.

Now coming down to business, it definitely is a niche business where company’s target market is single truck owners which largely deal in used HCV/LCV. For a long time this section of the market was catered to by only private financiers and access to capital was limited and costly. STFC has changed the game by providing access to capital at reasonable rates (compared to private financiers). They have build the system (risk assessment) and reach slowly and painstakingly. Over last many years, STFC has built a name and trust and across the country.

Secondly, they are one of the most conservative and system oriented financiers (just look at the management statements in AR, conference call transcripts which unequivocal about sacrficing growth for the sake of conservative lending practices). I think, it goes a long way in remaining conservative while opeating in lending business (e.g. HDFC Bank vs. Rest of the banks).Barring last year, their NPA has remained much below industy average inspite of financing a section of society which other financiers considered “riskier”

Top class management is anotherasset of STFC.You just read AR, conference call treanscripts and their disclosures, they are top notch. No mincing of words. very realistic about growth and forecasts. Even for a small issued raised by some FII advisory, management took pains to clear their point of view with elaborate and credibleanswer.

In last two years company has started building Automalls providing platform for truck operators and dealers to auction their second hand vehicles. Not only they gain fee from these auctions, they get a chance to finance these transactions. They also have started refurbishement business called “new look”. I think these are unique initiatives and builds onto the customer base and trust that STFC has created. Moreover this is a scalable business as well which can generate substaintial fee based income, offsetting NIM risks. They have also entered into construction equipment/machinery business which again is doing well.

Financial ratios are decent even in the most testing environment, i.e. slow down and near peak interest rate cycle. I think, company is on its way to building “seamless web of deserved trust” as defined by warren buffet and charlie munger.

In my opinion, STFC is a simple, scalable andeconomically attractivebusiness run by competent and ethical management. For the complete analysis, you can visit my blog for STFC analysis.

Best Regards

Dhwanil Desai


(Dhwanil Desai) #7

<1). Isn’t Muthoot capital a bit undervalued when compared to STFC?

Regards

Hi,

In my opinion, Muthoot is a nascent business while STFC is a mature business. I have had an opportunity to stay in Kerala and Muthoot group was visible almost everywhere. Moreover, their name was taken with some honour and pride. However, I would like to understand more on how muthoot capital grows its business as they will face competition from two wheeler finance companies (bajaj finace etc) and banks too! They have been only 2 years old in vehicle financing business so I would wait and watch how they handle lending, NPA and return ratios.

As compared to that, STFC is a niche and mature business. May be they will not grow at 30% + rate but decent 20-25% rateover a longer time frame. They have strong management bandwidth as most of the senior managementhave rose within the company and many of them have served the group for more than 25 years and hence know business inside out. They are innovatively leveraging the existing customer base, which shows competence of the management. Highly ethical group. In short, it has all the ingradients of becoming a steady compounder without taking too much of risk. A long term play for me.

Best Regards

Dhwanil Desai


(Dhwanil Desai) #8

:))

Best,

Rohit

Hi,

I amsharing my portfolio details. It would be great to receive views from the active members of the community on various aspects such asmerits/demerits of the pick, balance in the portfolio and capital allocation strategy. I am relatively new to the field of value investing and hence trying out various strategies to test out which one fits the best with my style of investing. Hence, currently my portfolio consists of higher number of stocks with lower % allocation.Eventually, I wouldwant to move towards more concentrated portfolio of maybe 10-11 stocks.In some of the companies, I am still scratching the surface. Some of the stocks are long term plays, some value buys and some purely tactical.

**Long Term Plays **

Company name % Allocation

Piramal Healthcare12%

Mayur Uniquoter12%

Cera Sanitaryware13%

Amara Raja Batteries 5%

Atul Auto 5%

Swaraj Engines5%

Shriram Transport Finance5%

Gujarat Reclaim8%

Hindustan Zinc 6%

Value Buy

JB Chemicals7%

Mazda Limited3%

Tactical

Narmada Gelatines 5%

Scraching the Surface

Fluidomat 3%

Cash11%

Hi Rohit,

I should have also given buy values to be more transparent.I will do so in a day or two. For, SCUF, frankly I have not looked at it so will not be able to comment. However, will take a look as any company from Shriram Group is of interest as atleast “management quality” part is generally taken care of. With respect to Swaraj engines, the whole portfolio is a “value buy” in that sense! But yes, Swaraj engines is trading at very decent valuations, and I also intend to hold it for a longer term, if company continues to perform.


(Dhwanil Desai) #9

Hi Donald/Ayush/Hitesh/Subhash,

It would be interesting to know yourviews/critique of the picks and % allocation as well.

Best Regards

Dhwanil Desai


(Rudra Chowdhury) #10

Hi Dhwanil,

Would like to know from your perspective what all can seriously go wrong in Cera and Amara Raja.

I have read and re-read the positives but need to really really focus on the risks and concerns. I have taken a starter position in both.


(Hitesh Patel) #11

dhwanil,

coming to ur portfolio it looks like a good selection of stocks.

piramal can be considered to be an indian version of berkshire and needs to be seen how ajay piramal steers the ship.

regarding the other valuepickr favorites like mayur, cera, amarraja, mayur, grp etc I dont need to say anything more.

among others personally i dont go for value picks bcos I am not ready to incur opportunity costs. So no swaraj engines, jb chem , mazda etc for me.

STFC I think the best may be behind them. Now onwards they will grow at the usual 15% cagr growth. How much is captured into current valuations needs to be seen.

Hind zinc is the best place to go in case of rebound in metal/cyclicals.

Overall a good list of stock picks.

I dont know what your risk profile is but having read your blog and appreciating your analytical skills, I think a person like you should aim for a higher concentration and aim to generate very high returns for your portfolio.

best of luck and regards

hitesh.


(Hitesh Patel) #12

dhwanil,

coming to ur portfolio it looks like a good selection of stocks.

piramal can be considered to be an indian version of berkshire and needs to be seen how ajay piramal steers the ship.

regarding the other valuepickr favorites like mayur, cera, amarraja, mayur, grp etc I dont need to say anything more.

among others personally i dont go for value picks bcos I am not ready to incur opportunity costs. So no swaraj engines, jb chem , mazda etc for me.

STFC I think the best may be behind them. Now onwards they will grow at the usual 15% cagr growth. How much is captured into current valuations needs to be seen.

Hind zinc is the best place to go in case of rebound in metal/cyclicals.

Overall a good list of stock picks.

I dont know what your risk profile is but having read your blog and appreciating your analytical skills, I think a person like you should aim for a higher concentration and aim to generate very high returns for your portfolio.

best of luck and regards

hitesh.


(Subash Nayak) #13

Hi Dhwanil,

Yarr, I am not in the league of other folks you mentioned here. I am just a toddler when compared to the rest of them. I have less than a year of experience in equity investing.

Hitesh has already commented about the stocks. So I don’t feel there is any need for further commenting.

One thing I learned by own experience, is that concentrated portfolio, have power to give better return as compared to a diversified one (assuming you choose a bunch of good stock !!!). It also save your research effort per stock. As a thumb rule one should target 8-10 stocks, with portfolio allocation % directly proportional to one’s conviction and expected return from a stock.

I personally has quite less patience, and hence not suited for the world of value investing. Therefore I play on growth, and turn-around stories.

These days, seeing the pharma bull run, I feel one can try to increase his bet in pharma sector in a staggered manner in some growth stock like Ajanta/Alembic, and some turn-around story like Unichem, Granule, Dishman, Hikal. Pharma stocks are considered bit safe also.

Regards,

-Subash

yourviews/critique


(Dhwanil Desai) #14

Hi Hitesh,

Thanks for your prompt response. Yes, I do agree with you that I should move towards concentrated portfoliio and eventually that is what I want to do. However, as i mentioned before, currently I am in a mode where I want to understand how various methodologies in value investing work for me and hence some of the picks are my “test scenarios”. Eventually, I hope to find my comfort zone in terms of risk appetite, patience and return/risk trade off.

I do agree that Piramal is a very long term play, however, I feel that given the track record of Mr.Piramal, if he is able to pull it off, it can make investors fabulously rich over next 10 years.

I am also slowly coming to conclusion (though it is bit early to say this as I am just 1 year old in deep value investing)that investment ingreat business at reasonable price may fare better as compared to average business at a great price over a longer period of time.

Best Regards

Dhwanil Desai


(Dhwanil Desai) #15

Hi Donald/Ayush/Hitesh/Subhash,

It would be interesting to know yourviews/critique of the picks and % allocation as well.

Best Regards

Dhwanil Desai

Hi Subhash,

for me, It does not matter how many years one has been involved in investing but how one is able to think clearly and wholistically. I have enough confidence on valuepickr admin/donald as they have publicly appreciated your skills in taking an idea forward and getting to the gist of the idea and tweaking it to suit your style. I appreciate you sharing your views.

Best Regards

Dhwanil Desai


(Dhwanil Desai) #16

Hi Rudra,

For Cera following are the risk factors that can be thought of.

)- Sustaining superior margin/return ratios in increasingly competitve environment is going to test management’s competence. It will largely depend on whether Cera is able to carry itself to the next level to get in line with HSIL in terms of brand recognition and reach (in terms of reach I think they are almost there).

)- Management bandwidth is another thing to worry about. I have had an opportunity to intereact with Cera officials in their factory and the feel that I got is, even a small investment decision (very small actually say 5-10 lakhs) also needs to be approved by Mr. Somany. It clearly shows that power is still not delegated as one would like for a scalable and growing business.

In terms of Amara Raja, frankly, I have been actively looking for risk/concern areas and till now am not able to find something substantial. I often read Mr. Jaydev galla’s entry into politics as key risk factor, however, I do not pereceive it as risk for now. Secondly, increase in lead price which is not paased on to customers in the longer term if exide decides to live with lower margin, is a risk. However, i assign very low probability to this.

Best Regards

Dhwanil Desai


(Rudra Chowdhury) #17

Hi Dhwanil,

Coming back to the concerns let us completely focus on the risks and concerns for Cera and Amara Raja.

Since Cera is your highest allocation I am assuming very high conviction in this from your side. Will be great to have your detailed take on these points.

Cera : Risks & Concerns

First and foremost is of course the succession course with the the assignment of the retired CEO more of an interim measure. Without a strong leadership charted out how will growth fare ahead ?

  1. Unorganized and local players pose the main risk to the sanitary ware segment. Unorganized sanitary ware manufacturers enjoy the benefit of nil excise duty and sales tax and, hence, their products are ~70% cheaper than the organized sectorâs products. The increase in excise duty, from 8% to 10% and further to 12%, will make products from organized players more expensive.

  2. The advent of foreign brands in India also poses a threat because people are shifting to better, bigger brands, with increasing purchasing power.

[Jaguar and other local and foreign brands are trying their hands at Indian Sanitary ware market. Jaguar has a very strong brand identity and distribution network. It could come across as a major competitor to the established players.]

3)** Lower-than-expected volume growth** may result in lower profitability for the
company, especially threat from low cost Chinese imports and other well established
international and domestic brands.

  1. Any drastic changes in government policy related to housing construction and
    imports, among others, is bound to impact the industry.

  2. Any increase in the price of brass, the main raw material for faucets, may dent
    EBITDA margin.

  3. Slowdown in the housing sector could also result in lower-than-expected volume
    growth for the company, as in India the major demand for sanitary ware is fresh demand. The sales of Bath fittings is directly proportional to growth in real estate as replacement demand commands a very small share.

  4. The company faces stiff competition in the higher segment from international brands. Demand from institutional clients remained very strong with names like Rustamjee and Gundecha in Mumbai. But in faucetware, acceptance level of Ceraâs product is very low.

  5. The unfavorable movement of the rupee-dollar may adversely affect profitability of
    the company, which the company may not be able to pass on its end consumer.

  6. Delays in capacity expansion could result in lower than expected revenue
    contribution from the manufacturing segment. Further, higher-than-expected capex
    would lead to higher funding requirement and increase interest cost.

  7. The company is looking for Acquisitions in Italy. If completed successfully, this would be their first acquisition outside India. Being not so experienced with foreign acquisitions, there are obvious acquisition risks.

Amara Raja

Frankly speaking apart from the ones you mentioned there’s hardly anything. Is this that good ? What all can go wrong apart from these ? How sustainable is the business to disruptive change in introduction of newer technologies in battery manufacturing ( of course Jhonson Control is at the forefront of battery R&D in the world still)

The known ones

  1. Higher lead imports Vs competitors

  2. Depreciation of INR.

  3. **Increase in lead prices **: Though ARBL enjoys âlead pass through agreementsâ with OEMs, thereâs a certain degree of delay before the company is able to pass on the hike to the customers and thus in a year with a sharp increase in prices of lead, the margins of the company can come under pressure.

  4. Mr. Jayadev Galla, the Managing Director of ARBL evinced interest in joining
    politics and this may turn out to be a bigger area of concern.

At this point Amara Raja seems to be a better bet vis-a-vis Cera, kindly share apart from the low cost price (assuming you bought at very very low levels) what else is prompting you to maintain 13% in Cera and 5% allocation to Amara Raja ?


(Excel Monkey) #18

Hi Dhawnil what is your email id?

I think I might have answer to your GSFC riddle


(Dhwanil Desai) #19

Cera : Risks & Concerns

** Unorganized segment. ** sectorâs ** The brands **

3)Lower-than-expected volume growth lower profitability ** Any policy ** ** Any brass, **** Slowdown sector ** ** the demand. ** ** replacement share. **** in Ceraâs ** low.

  1. The ** rupee-dollar ** Delays in capacity expansion

Amara Raja ** Increase : âlead pass through agreementsâ with OEMs, thereâs

Hi Rudra,

Let me take the easy one first! Apparently, it seems you are able to read my mind! Well, on ARBL front, I am getting more and more convinced and hence actively thinking of increasing portfolio weight. However, I am still evaluating it with my current portfolio stocks to do the rebalancing. So, In spite of my efforts, I am not able to poke holes into ARBL story and conviction level is pretty high. Risks that you have mentioned, I can only say that on business front, company has been able to manage these risks and have come out with flying colors. So unless lead prices move up substantially or excide decides to do something silly, I am comfortable on business front. On the management side, if one reads about Galla family background, disclosures and transparency in the report, I would not consider Mr. Galla entering politics as big risk for the company.

So now moving on to Cera, I would like to share my views point wise for greater clarity.

Unorganized market: Indian sanitaryware industry has been slowly moving to a stage where brand/quality does play an important role in buying decision of sanitaryware products for increasingly larger segment (upper middle class, middle class and upper class). Benefits that you have mentioned are there for years and Cera and other organized players have grown despite the competition. Market share of unorganized players has been decreasing in the overall pie and has gone down from 70% to 50%. While l was moving around in Ahmedabad looking to buy new house, almost all newschemes had branded sanitaryware as feature. I think it does provide a pointer to general aspirational level!

Foriegn Players: In my opinion Cera is “value for money” brand andis not competing with Grohe, Kohler, American Standards for that matter. To give you an example, if you go to kohler website, you will find product similar to that of Cera available at 50-60% premium. For typical wall mounted EWC, average price for Cera is 13-14,000 while for Kohler it is roughly 19-20,000. Same for American Standards. Yes, Cera is planning to move up value chain, however their philosophy is deeply rooted in value for money and will remain so for a long time because that is their core strength. However, I do see Jaguar denting market share of Cera/Parryware/HSIL because its price points are comparable, it has good brand equity and well spread out distribution network. They have entered into the market recently hence, I would be curious to know how it affects the competitve landscape.

**Government Policy Change: **I am not sure what is the concern here, as imports are allowed in the sector and most of the companies import 30-40% of products from china. In terms of housing sector, I have not seen any government which has come out with policy that restricts housing sector in the entire country. So over a longer period, I see good prospects for indian housing sector, if India continues to grow at healthy rate of even 5-6%

**Slowdown in Housing Sector: **Yes, in short term, one may be staring at slow down however, on a longer term basis I do not see any structural slow down in Indian housing sector. Whatever projections that I have come across for indian sanitaryware industry’s growth, it is projected to grow at 13-15% for next few years.

**Faucetware: **Yes, i too see this as threat especially if they go for large scale expansion. Jaguar is too strong a brand to compete as it has huge brand equity. I was going through the faucetwares products of both Cera and Jaguar and apparently, Cera’s most of the offerings in the premium range are comparable to that of Jaguar. How far Cera will be able to compete with Jaguar remains to be seen. In the longer term, Cera’s vision is to become home soultion provider which may also lead it to enter into new products which it may not be able to capitalize on.

Delay in capacity expansion: Typically, Cera’s track record in execution is decent. Moreover, the expansions are gradual and capital outlay is not too large as compared to their cashflows. Secondly, most of these projects are not very complex to execute and hence likelihood of inordinate delay are limited.

**Acquisition: **Nothing has come through on this front inspite of management indicating about such deal for last one year. Secondly, post the demise of Mr.Vidush Somany, management may not be keen to pursue inorganic growth immidiately. However that said, if Cera indeed goes for large ticket acquisition (compared to its size), it will be a risk as 70% of acquisitions fail to add value and as you rightly pointed out it will the first one for Cera so odds will be stacked against Cera.

Now coming back to why I hold Cera, I believe that brand equity with distribution reach is the right way to build moat. However, currently Cera has limited moat but I see a possibility of such moat extending if they are able to leverage brand equity while increasing its reach and maintaing its “value for money” appeal. Coming to valuation part, at current price, most of the upside is captured. However, I am still not able to find very many companies which have a strong possibility of building long term moat due to good business and having decent management available at decent valuation. I still see company steadily growing at 20% rate for next few years which is not bad at all in current scenario. Moreover, if Cera is able to build the moat over next 5 years by smart positioning, it is likely to result into a good long term play.

Hope it covers most the points raised by you and clarifies on my thought process.

Best Regards

Dhwanil Desai

**


(Dhwanil Desai) #20

Hi Excel,

You can mail me at [email protected] Link: mailto:[email protected]

Best Regards

Dhwanil Desai