Here is the update on portfoliio 1:
As the weight of Edelweiss increased beyond 20%, I cut the position and shifted the proceeds to IIFL which is in similar businesses. In fact, I feel as a business, IIFL has lower risk profile compared to Edelweiss (for IIFL,most of the lending business is towards retail, IIFL wealth is undisputed leader with strong operating leverage while Edelweiss lending book is still 70% structured credit+Wholesale business while their leadership in ARC exposes them to lending again). Again the idea to de-risk to an extent while taking advantage of the same tailwinds for the industry. Between Edelweiss and IIFL it still constitutes around 22% of my portfolio
Most of the other positions remain as it is in the same.
In portfolio 2:
Exited Alembic - reasoning is it is incurring huge capex and spending disproportionate amount on R&D while the industry dynamics is worsening. Moreover, unlike torrent, they do not have well diversified portfolio across geography that protects them from adverse market dynamics in US.
Added two new positions
TD Power systems - 5% position- Average price 210- TD Power has gone through a very bad downcycle in the business- where their steam generator business in India has eroded more than 70% in last 4-5 years. However, they have maintained the market share which essentially suggests that the industry has shrunk by 70% (they cater to industrial/captive power plants which has come to a stand still for last 4-5 years as there is hardly any new capacity creation across industries). However, what is interesting to me are few points as below
They have used these 5 years to broad base their product base and developing new markets. and product portfolio(generators). They have developed products in hydro power,gas engines and most recently traction generators (locomotives). Not only that, what really counts is the pedigree of customer base. They have been supplying these products to Voith (leader in hydro power turbines), ABB/Siemens/Alstom (Gas engine leaders) and GE (70% market share in traction market in US and they have their own traction generators). Thus, they have prepared a decent base for themselves to move to next trajectory..irrespective of the revival of Indian market.
Most interesting part is that GE which is undisputed leader in locomotives market in US and has its own traction generators has sourced traction generators for US market in last couple of years..first the test quantity and then commercial order. This speaks volume about TD's capability in traction generator segment. Now both GE and Alstom are putting up huge (around 1000 locomotives each if my memory serves me right) and there is local sourcing norms of 70%. I am not aware of any other traction generator manufacture from India. If GE is sourcing traction generator for US market, wouldn't it make sense to do so for Indian set up?
Thirdly, the way they have maintained their balance sheet in this time. One would have imagined a completely decimated balance sheet when the whole industry shrunk by 70%. Guess what, even in these times, there is hardly any working capital requirement, zero debt and 200+ crore of cash. They operate at 55% capacity utilization and according to management, with current capacity they can reach 750-800 Crore of sales.
So at 700 Crore market cap one is paying 500 Crore net of cash and even in current scenario it generates 400 odd crore of sales - at 6-7% margin (while their peak margins in product business was 14-15%).
Sasken Communication- 5% Allocation- Average buying price-420 - Again a company that has gone through very rough patch in last 5-6 years as it lost some of its key clients - over last 6 years they have struggled to bridge the lost revenue. While talking to various folks in the industry, I understood that their core capability of semiconductors/product development remains intact (and there are not many companies in India who can match their skill/experience). Last year, they received around USD 45 million in 2016 from one of its customers for breach of IP (which proves the value that resides in IP created by them through patents).
They have focused on combination of product engineering/digital platform development skills to focus on futuristic areas such as in car infotainment systems/driver less cars, Industrial automation, semiconductor business and consumer appliances through IoT. All these are very futuristic areas with large potential and unlike many of its competitors who have software/digital platform, Sasken can provide product engineering and hardware too. I feel this can be significant differentiation. They count Auto OEM, Semiconductor companies such Intel/AMD; Smart phone maufacturers (Hitachi, Nokia) as their client base.
They have utilized these proceeds judiciously- to buyback their own shares and distributed some as dividend. So as it stood when at my buying price, at 750 Crore market cap- they had 400 odd crore of cash and 450 Crore of revenue. More improtantly, management has said they want to increase revenue from USD 70 million to 200 million in next 5 years(30%+CAGR). Even if we discount this and assume 15% CAGR- and operating leverage kicking in- you are getting growth for free at this price (if you do simple math- you will get pleasantly surprised). To support this growth they have hired chief marketing officer from Persistent (I have heard very good things about him) so seems like they are sincerely trying to achieve what they are saying.
On the other hand, Sasken management has not been one of the best executors as they ventured into IT services business couple of years ago and then realized that it did not match with inherent DNA of product engineering company.They wound up these efforts after 2 years.
In short, I am betting on limited downside, while if the story plays our as they expect, one can get asymmetric returns.
One small suggestion- Though there is nothing wrong in cloning- please do your own due diligence and get comfort/conviction in the story as I may change my views and exit without updating here. As we know the portfolio posted here is not static and may change with business dynamics and/or available opportunity set.
Dislosure: I am not a registered Investment advisor/research analyst and views posted here are not recommendations to buy/sell. Please do your own due diligence before making an investment decision and/or consult an Investment advisor.