Dinesh Sairam's Portfolio: Requesting Feedback


(Amit Jain) #41

I could be wrong… but one talks about employing large amounts of capital, efficiently, then it would only be possible with increasing sales. With stagnant sales how would it be incremental?

Sure, you are right when you point of that Goodyear has the best CRR and valuation too, but is slowest in growth of sales. However, you do not find the growth in sales important. And that is the point of contention.

I am confident that, five years down the line, TVS Srichakra and Ceat will give returns better than Goodyear only because the latter has muted growth plans in the near future.

By better returns I mean Earning Yield for us as investors. Return on per rupee invested. However, Goodyear may still have the best CRR and EV/Ebidta and zero debt.

This is also apparent by their Capital expenditure in last five years.

Capex (Crores) in last five years:
Goodyear: 200
Tvs : 530
Ceat: 1860


(Dinesh Sairam) #42

CapEx does not equal more Sales. It could simply mean renewing existing machinery to support existing volumes. My entire reason for the investment hinges on the fact that Goodyear will be able to invest its additional cash to fulfill the upcoming demand for tractor tyres. I don’t understand how looking at historical Sales, Profit or CapEx figures helps determine that. Ratios should only be used to filter bad stocks. They hardly ever help in identifying good stocks.

Also, a request. We’ve talked enough about Goodyear India, I feel. For further comments, I’d very much like to hear about my reasons for investing in the other stocks or my general strategy for investing in stocks. Thank you.


(Amit Jain) #43

Sure. End of discussion. There is plenty to say, like, a good portion of capex is usually for new capacities which translates into increased sales and if the management is astute, then this should translate into increased profits. Nevertheless, since this is getting argumentative, lets just end this.


(Matt1985) #44

Good analysis Amit based on PEG value. Just wondering, where can we get the screen which you have enclosed. Its seems like screener, but i was not able to find it ?

I would like to make PEG a critical factor before my future buy decisions. Many thanks…!!

Cheers,
Matt


(Amit Jain) #45

Glad to be of help.

Yes it is https://www.screener.in

Type in the company name and select Peer.


(Matt1985) #46

Thanks Amit for the prompt reply. I typed the company name, then the peers will automatically appear (no need for ‘select peer’)

But I was not able to find the PEG ratio? Is it by customizing the column under ‘customize column’? Apologies for asking.

Thanks
Matt


(Matt1985) #47

Hi Dinesh - I learnt a lot from this thread and in particular the discussion relating to Goodyear as i am still in my early days of investing. If possible, could I ask you, are you still holding on to Goodyear or managed to add more during the correction as it seems that current level is a good entry point (250 off from recent peak) to add. I am conscious of rising crude prices which may impact the margins and just thought of getting your thoughts on Goodyear as such.

Other than a tracking position in Goodyear, I hold HDFC from your portfolio stocks. Reading of Ion exchange at the moment

Thanks as always.

Cheers,
Matt


(Dinesh Sairam) #48

Hi Matt! I am currently vetting to buy other stocks and couldn’t actually add any of the existing ones during the correction. But yes, almost all the stocks in my portfolio currently offer a decent entry level.

About Crude prices or Rubber prices, Goodyear’s management is hell bent on maintaining the company’s margins. They’ve explicitly stated it in MDA and have also followed through (If you look at the financials, that is). I have no reason to worry on that front. My conviction, as already stated, is that the management will be able to reinvest the bulk of their existing FCF to capture the future surge in demand for Tractors. It shouldn’t be hard for them, because they’re the market leaders.


(Matt1985) #49

Thank you Dinesh for coming back quickly on my question. It really helps to do further research and build my conviction. Please let us know your new picks, if possible (hopefully, I am not asking more from your end)

Additionally, could you let me know how you generate a screen (similar to the one in post 34 of this thread) with PGSG, Cash return ratio ratio, EV/ EBITDA, as time permits.

Cheers,
Matt


(Dinesh Sairam) #51

I would update the first post and mention it in a comment once I make a new purchase or modify existing stocks.

Regarding Screens, I would rather not point to a specific set of Ratios or a Screen itself, as it would be a really biased opinion. I will give you the general framework of how I go about filtering stocks.

  1. Identifying Pricing Power: Pricing Power is often the first frontier to identify a possible Moat. You can either look at consistent or slightly increasing OPM. There is no magic number for OPM, but it depends on whether the industry is in a near-perfect competition, an oligopoly or a near-monopoly. Lower, but stable OPM is acceptable for industries like, say, FMCG or Auto. But note that companies like Eicher Motors are actually in the Auto industry, but cater to a niche segment in the Auto industry, so the company should ideally behave as if it operates in a near-monopoly. Stability in NPM is also a factor, but I don’t think historic NPM data is available in Screener. Either a low Debt/Equity (<1) or a higher (>3) Interest Coverage could also be used here.

  2. Quality of Management: Determining the quality of a management team through financials sounds funny, but there are aspects which can be touched upon. Things like regular dividends, low other income as a percentage of total income etc can be considered. Dividend Coverage Ratio is also something you can manually create. Pledged Percentage and/or Change in Promoter holding is also something you can consider. But that would depend upon your own Risk-bearing tendencies.

  3. Compounding Possibilities: The generic RoE, RoCE check and minimal Sales/Profit growth. I often use PGSG Ratio (Mentioned above) and the Cash-to-Capex Ratio as well. But I do not use them in the screens, but separately while reviewing individual companies from the Screen. The SGR is also something to look at. If a company grows at SGR, it maximizes value. If SGR < EPS Growth, then the company is not allocating its capital properly. If SGR > EPS, then that EPS Growth is not sustainable. Of course, don’t use SGR = EPS Growth, because it’s impossible for that to happen. You can probably keep it handy in order for comparison.

  4. Valuation Comfort: I don’t believe in anchors like the PE or PEG Ratio to signify value. However, you do need a disciplined approach to investing. So consider using anything ranging from the PE, the PEG (I have a manually calculated PEGY - PEG with Dividend Yield included in the denominator), the P/B, the P/CF or the EV/EBITDA as a mechanical limit. But don’t be stringent. For ex: If I were to use the PE (I don’t), I would even go so far as 40 PE. Putting a downside limit would be advisable, however. Say, if a company is trading at 3 PE or 1 PB, there’s obviously something wrong with it. It could also be a wonderful value buy, but weight of reason would tell you to rather just avoid them. A perfect example would be Lycos Internet. It’s trading at ridiculously low valuation multiples, even when its financials are wonderful. The reason? The stock is highly manipulated and the management quality leaves a lot of be desired. These type of stocks could be avoided by using a lower valuation limit.

Note on Non BFSI Screens: I have separate screens for BFSI and non-BFSI companies. You can easily filter for BFSI companies by using a D/E > 4 or 5. But Ratios such as RoCE or OPM don’t work all that well for BFSI companies, because of Accounting practices. You could use Asset Turnover (Needs to be manually calculated) instead of OPM, PB for the valuation limit and RoA instead of RoCE.

Others: I use manually calculated Cash Conversion Cycle (Quality of Management), Expected Price (Valuation Comfort), Return on Investments (Compounding Possibilities), Owner’s Earnings (Warren Buffet fame), Working Capital Turnover (Quality of Management) etc., as well as an add-on display. But I have never used them to Screen stocks.

And with all the Ratios, I would say, consider using short or long term averages whenever available, as they weed out the noise. Religiously ignore using single-period Ratios. If Screener could implement calculating long term averages for all the financials, that would be wonderful. Unfortunately, that is not an option with many of the important Ratios to be honest. I’m not complaining, but that improvement would make my Screening process way more efficient.

As a final note, the acid test for a good screen, in my opinion is that it should list companies which are already identified as wonderful companies if you tweak around the valuation ratios and maybe loosen the limits on some of your other ratios. For Ex: If I do that on my Non-BFSI Screen, I get companies like Symphony, MRF and HCL Tech, so I know that my Screen is somewhat useful is eliminating the waste.

No Screen is perfect, but if your screen hits somewhere close to the companies which are already great, you can modify your search criteria to find that one specific company among the lot which the market has somehow missed. From, you can proceed with research and valuation.


Investing Basics - Feel free to ask the most basic questions
Investing Basics - Feel free to ask the most basic questions
(Matt1985) #52

Hi Dinesh – Thanks for taking time to share this much of details so quickly. You are truly amazing…!!

In fact, the above ratios are great set of pointers for all and more importantly novice investors / beginners. Really appreciate the detailed explanation of SGR (which I admit as haven’t hard so far) and valuable insights on the other ratios you consider for stock selection.I agree with your approach of having two screens to categorize BFSI and the rest of the stocks.

In summary, what I understand is that already identified stories should be a good starting point and they could be good compounders to the extent they could demonstrate growth (even at lower pace).

Again, I really appreciate your passion for investing and also imparting knowledge. Hats-off…!! you have a great mindset…!!

Cheers,
Matt


(Dinesh Sairam) #53

A few things.

  1. Growth, Investment (CapEx) and Leverage (Debt) are interlinked. They’re all part of a company’s value. You can think of them as the Valuation trifecta. Growth cannot normally come without CapEx or Leverage. Any extraordinary growth apart from this cannot be determined from the financials. Say, if everyone just up and starts buying a lot of cigarettes (For no reason at all), ITC’s EPS will grow like crazy. But could you foresee that kind of growth from the financials? Of course not. You will have to build you conviction, build a story and convert that story into an acceptable purchase price for the stock. I would point towards the following lecture as a wonderful guidance:
  1. Continuing from the above point, a Screen only filters out bad companies. It does not identify a good company or even good value. But that is a great place to begin. As Charlie Munger would put it “Tell me where I will die, so that I will not go there.” What I meant to say earlier was that, if you tweak around your Screening criteria and you happen upon 4-5 already good companies, it will show you that your Screen is useful. But post-Screening, you will still have to do Bottom-up research and valuation on any company you want to consider buying. Remember, a good company is not always a good stock.

  2. Something else I forgot to mention was, checking out companies that are not part of your Screen. Goodyear and Ion Exchange, for example, were never part of my Screens at any point. I heard about them from different sources and decided to check them out. So here’s where having a handful of ‘Quick Ratio Lookup’ Dashboard could come in handy. I am attaching a screenshot of Goodyear India, just to show you what I mean. Once again, there are no specific Ratios to put there. It depends on what you’d like to find out about a company in a single glance.


(Amit Jain) #54

In the above picture of Goodyear, which ratios do you find are noteworthy, that make goodyear a worthy investment. Pls inform.


(initin) #55

Hi Dinesh

Sorry to ask this silly question but how are you evaluating Margin Of Safety ?, can you share your rationale/formula for the same ?

Thanks


(hussain_tamboli) #56

I am not able to see those ratios for adding it to my screener


(Dinesh Sairam) #57

@initin Margin of Safety is just 1/PB Ratio. It’s not something I use to Screen stocks, but it’s just an item in my Dashboard.

@hussain_tamboli As I mentioned before, I have calculated many of these Ratios manually by myself. They are not readily available in Screener. That is why I have given the broad framework I use when Screening stocks, not individual Ratios/Screens themselves.


(Dinesh Sairam) #58

Kindly read the bolded part a few sentences above the picture. I use Ratios only to Screen stocks, not for investment decision-making. That largely involves further research and valuation, which I think has been discussed between us to a stalemate.


(Dinesh Sairam) #59

My portfolio has been updated recently. So just leaving it here (I’m unable to edit the original post. Can anyone help me understand why? Thank you):

I switched out HDFC Bank in favor of Kitex Garments a few weeks back, which was available at a decent discount to my calculated value and contains some very good moats. HDFC Bank had given a wonderful CAGR of close to 50% for the time that I held it (Almost 2 years). Goodyear India is inching close to 40% of my portfolio, so I’m most definitely considering reallocation.


(VP_amit) #60

Hi Dinesh

Really admire your analytical skills and the conviction level to be able to hold only 5 stocks, really great to see that.

My question is on DHFL - mostly the commentary on HFCs/NBFCs is negative as of now. With the stocks in this space already having moved up a lot and the probability of interest rates going up - why do you think it is still a good bet?

Thanks


(phreak) #61

@dineshssairam - I think the primary difference between your picks and in general what VPers fancy is that VPers are willing to pay the price for growth and typically hold stocks for 2-3 years when growth peaks. This helps generate very good PF returns in smallcaps.

Your picks are more old-fashioned and slow-burn and you don’t seem to be bothered about how market views them in the next 2 years, focusing more on value, letting long-term prospects take care of themselves. This I think is the primary difference. There is an opportunity cost to your approach which you seem to be comfortable with.

Your approach is interesting so please do keep posting and let’s track how things go here. Good luck!