Gurjot Portfolio

gurjota · January 16, 2021, 9:26am

It’s a base case assumption that I have stated. If you look at the last 10 year sales growth it is a very impressive 18% CAGR. But if you look at the last 5 years, the sales growth compounding has come down to 12% but the PAT growth is far superior at 21% with significant OPM improvement from 14% to 22% (last couple of quarters). It is hard to predict till what level the margins can improve as the company doesn’t do any investor concalls or share presentations. However, the company has been steadily launching 10-20 products every year and I would assume most of these are margin accretive driving the OPM improvement. With a gradually slowing sales growth, I would assume 9-10% sales growth for the next 10 years and potentially few % points worth of margin improvement given the track record. That should drive 11-12% type CAGR earnings compounding. Stronger than expected product launches and margin improvement can provide an additional kicker of course, but I’d much rather like to err on the conservative side when making any investment decisions.

Now coming to the second driver of returns, the price multiple. At ~45x earnings multiple, I see limited scope for PE expansion. I also don’t see much risk of a de-rating given the superb track record, excellent return ratios, good growth outlook and there are lots of other consumer plays quoting at similar multiples with equivalent or lower growth. If markets decide to give it a much higher multiple at these levels of growth, I’m obviously not complaining.

gurjota · February 26, 2021, 4:04pm

As the good gains of 2020 seem to be continuing this year as well, I needed something sobering and wanted to get as objective with my portfolio performance as I can. And that meant, doing a self audit of my portfolio performance till as far back as possible.

I opened my Zerodha account towards the end of 2014 (started investing 2nd half of 2013) and after many many hours of excel reconciliations, was finally able to come up with this graph comparing my portfolio with the key benchmarks over the last 6+ years up to today (end of Feb 2021).

Returns do not include either dividends or transaction costs (DP charges, AMC, Bank transfer charges, etc.). Given I generally hold a PF with div yield of 1+% at most times, the returns would ideally be higher by 0.5-0.75% net of charges. Also, today’s market melt-down has lowered CAGR by ~200 bps across portfolios and benchmarks

So let me try to summarize my performance in the last 6 years in the form of some highlights and lowlights:

Key Highlights

To have outperformed all the major benchmark indices over a 6 year period is a great source of satisfaction especially as most of these years have also been my formative years in the market
Even though my portfolio CAGR performance is better than Nifty, I would strive to rather have Nifty’s lower volatility consistent returns across all periods at the expense of 1-2% higher returns. However, neither my 11.8% CAGR or Nifty’s 9.6% CAGR is my targeted returns. I have a minimum 15% CAGR threshold to reach my goal of financial freedom in the next decade
In line with the above, especially gratified with having discovered the holy grail to a sound investment strategy i.e. Coffee Can methodology proposed by Marcellus team. Very much reflected in the returns of 2020 as well and quietly confident of achieving 15%+ CAGR in the next 10-20 years
Lots of good market lessons learnt in the past 6 years. Till 2017, making money in markets seemed as easy as shelling peas but then the mid/small cap bubble burst and reality struck hard. If not for that brutal bear market, I might have remained ignorant of my poor investment methodology for far too long and probably never discovered the Coffee Can method

Key Lowlights

Ticking time-bomb portfolio - Not grasping the concept of leverage and running a 50% portfolio with leveraged financials including names such as Yes Bank, Indiabulls Housing, Edelweiss, Piramal, Motilal across 2018 to early 2020. In hindsight, easy to blame the gains of 2017 across these names which seduced me no end. Also not understanding portfolio construction that well.
Averaging and throwing good money after bad - Averaging as a concept has been one of the hardest lessons for me. I’ve literally lost lakhs of rupees averaging both up and down. Foolishly seduced by the stocks price and high-level metrics trailing P/E, Profit, etc. but never going fully into the quality of business, management, cash flows. This is still a big work-in-progress area for me, however I believe the filters which I apply now before investing into any business are much stronger which should prevent large capital erosion except for few punts on nano/micro cap stocks
Not grasping the concept of Great, Good and Gruesome Businesses - This is the single biggest factor which will decide the investment journey for most investors. And applying coffee can filters is the best way to filter out 99% of the gruesome businesses. If I look back at my investments over 2014-2019, almost 90% of the businesses I held would be in either Good or Gruesome category. And these type of businesses will always get significantly affected by economic cycles and downturns. Now, I just blindly avoid any gruesome business (PSU management, commodity, power, etc.) no matter how much it seduces me over the short term. Not averse to small punts in the satellite portfolio though.

To conclude, let me say I embraced the compounding power of equities very quickly and very early on which means this portfolio is close to 80-90% of my net worth. Compounding 80-90% of net worth at close to 12% CAGR, whilst not the greatest, is still head and shoulders above 7-9% of fixed income assets. Also it is way better than compounding only 25-30% of net worth in equities at much higher 15-18% CAGR. In fact, this is where I feel the Valuepickr forum can be way better for most rookies by having some broad high level portfolio construction guidelines pinned at the top which could benefit most new investors. Also, most people on VP get too busy in individual business analysis and picking the next 5-10 bagger whilst handling the backseat to portfolio construction and asset allocation. Nobody reaches financial freedom by putting 5% of equity PF in a 10 bagger where equity allocation for the person was 20% of overall networth.

I know there are many wonderful investors on the forum who would have fabulous returns, way better than me at least. And I would love to see more people on VP getting more focused on portfolio and net worth CAGR rather than individual stocks. Very few people will achieve financial freedom through 1 big 20-30 bagger.

PS: In terms of market opportunities going ahead, from the graph (CY 2020 and 2021 YTD returns) it is becoming clear how mid and small caps have been outperforming the Nifty over the past year and a bit after the brutal fall in 2018 and 2019. Despite the fabulous performance in 2020, the 3 year CAGR is negative for the small cap index. Just goes to show how volatile that part of the market is. Anyway, I expect the outperformance to continue for the next year or so at least and something which I had called out many moons ago. Will share another post on the portfolio updates, been plenty of them as I run down the opportunistic bets in satellite portfolio.

Investor_No_1 · February 26, 2021, 5:25pm

Abbott India - or rather few MNC pharma picks like Sanofi, Pfizer etc. - We compare them to FMCG/essentials etc.(including myself) and I had also entered these with same opinion of FMCG style business.(currently exited all Pharma except P&G Health) Thought deeper on moat…no advertising, no stores with items on display to see and compare etc…mostly works on doctor’s first prescription in case of chronics…this can go long, I target to keep my doubt short…
Thyronorm, one of block buster drug for chronics from Abbott used to be an area dominated by another MNC decade or two back (and this was an almost 4 decades long domination)…suddenly in a span of 2-3 years that MNC lost its edge COMPLETELY and here came Thyronorm from Abbott…how? …some marketing techniques…what techniques? I dont know clearly…but for sure I know few ppl only taking Thyronorm because that was first medicine given by doctor…
This fate can happen with any of MNC pharma + gov regulations + emerging generics etc. make me believe that these are great companies but would have a lumpy ride as compared to a much more stable FMCG. The lumpiness in ride can be worrisome if one of their block buster drug faces stiff competition with no traditional FMCG ways to protect their turf…

In above case, as a long term investor, valuations apart, why would I chose an Abbott over a Nestle …is something I am thinking on. Thoughts welcome!

gurjota · February 26, 2021, 6:02pm

I think if you’re comparing Nestle with an Abbott, I’m not sure if that’s an apples to apples comparison.

An all foods FMCG company like Nestle can’t be put in the same category of essentials as a pharma company. The stability and growth in demand for foods and consumer staples cannot be matched in pharma. In any crisis, quality FMCG food companies should do better than pharma companies because of the tendency of humans to stock up essentials such as food way more. You’d not stock up on medicines like you would on food.

And in the Indian context, Nestle becomes an even better business due to government regulations and controls. Nestle has almost zilch competition in infant milk powder. Government has banned advertisement of infant milk powder and thus no new player can really establish their presence in this category.

Meanwhile, government has regulated the prices of many essential drugs which Abbott makes, Digene antacid and Limcee (Vitamin C). And risk of more medicines coming under the essential medicine category can always dent Abbott further.

However, given the current valuations, innovation track record and execution of management - believe can get higher returns from Abbott than Nestle. But Nestle is hands down the better business in current context.

Aniesh7 · February 27, 2021, 4:10am

Hi Gujrot

Most stocks in your coffee can portfolio match with my portfolio and are quality compounders .
Number of stocks you hold is entirely your choice n comfort

But overlapping should be noticed . Eg. u hold kotak , icici and hdfc . Initially Even I made my portfolio this way but Later I opted to Stay with leaders and consistent performers in that sector.

I read about your mistakes and losses, but all are hard learned lessons .
At present You made a quality portfolio with good stocks. Irrespective of their their valuations.From Satellite Portfolio I only hold laurus and gmm so can’t comment much

This market has turned for growth investment and at present value investment is side tracked . I personally feel people go for low valued stocks and get into value trap .

If the company is growing and future outlook is positive it will continue to be highly valued.its P/E is high for a reason

on this it’s a well written article

Hope you will cover all your losses in future . All the best .

sarthakkumar19_ · February 27, 2021, 6:36am

Hello Gurjot,

I think you have made a really good and often neglected point.

One question I wanted to ask was what gives you the confidence that you’d be able to do better than say PPFAS Long term value fund given that they do this full time and you’d have a regular job in addition to managing your portfolio. I am not doubting your ability in the least, just wanted to know if there is any edge that we amateurs hold over full time investors. In case we don’t have an edge over PPFAS or let’s say the newly launched UTI momentum fund, wouldn’t it make sense to get out of direct stock picking and focus on asset allocation, since we get most of the benefits of equity at a fraction of the effort.

sarthakkumar19_ · February 27, 2021, 6:41am

I’ve heard this argument a number of times but I doubt it given the increasing role of ecommerce and new entrants in food businees. What would stop TATAs from launching their own infant formula and putting it on top of search results in Big basket. Or a new entrant spending of increasing ranks of its infant formula in google search. And it’s not that competition isn’t present. There Similac (Abbot), Enfanil (Mead Johnson), Amulspray and many new launches.
I think how governments are responding to facebook and google regarding news revenue is a lesson that no moat is permanent and if a business becomes too profitable, capitalism dictates that the attacks on the moats of that business would become more fierce.

Jaisish_Mohanty · February 27, 2021, 6:53am

Hi,

Even I had made some mistakes early in 2017 by investing in leveraged companies which were going up…But I did a type of shudhi of those stocks and I am sticking more to companies which generate good growth based on earnings growth…I built a PF of consistent compounders having 20% plus ROE and ROCE in last 10 years…it had 26% earnings growth and 28% retruns growth in last 10 years…I have made around 25-30% CAGR in last 2.5 years which is above par for me I suppose (with PF target of 16-18% returns) and continue to hold these stocks for long term…you can check my PF and let me know your comments too…

gurjota · February 27, 2021, 7:36am

Thanks for sharing and that’s a great CAGR performance. Just glanced through your PF and I think you have a superb portfolio with almost all proven quality businesses. The only thing I’d be a little wary of is the returns going forward for some of them like Asian Paints, Pidilite, Relaxo (desperately want to get in as well) having frothy valuations. These businesses will not correct much but could face time corrections.

Overall, I’m pretty confident you should achieve your target of 15-16%+ CAGR having good growth stories in digital, banking, insurance, etc. All the best!

gurjota · February 27, 2021, 8:00am

Extremely fair and valid point. Something which I believe most retail participants don’t think often about. Everyone likes to believe they can beat the market as well as the leading MFs. I have addressed this point earlier.

I believe the lessons over the last few years in the market and having a better appreciation for the kind of businesses which do well over the long term should hold me in good stead in the next 2-3 years. This has meant changing my PF style to a Core (Coffee Can) and Satellite method and the results over the last year and a bit have been pretty good. However, if after 4-5 years - my performance still lags the average performance of top 3-4 MFs, will gladly shift everything there

Few things to note - I don’t track Nestle closely as of now, so cannot comment much on the potential threats you’ve highlighted. My comments were in the context of current environment and how these businesses are operating. Would like to agree with you that no moats are permanent. But even if any moat exists for 40-50 years, that’s pretty much the entire investing journey of most individuals.

Investor_No_1 · February 27, 2021, 8:56am

Its a pity that similac is not a part of listed Abbott in India.

Aniesh7 · February 27, 2021, 9:22am

Absolutely true even I follow similar strategy plus applying quality ipo . High. P/ E stocks are part of my PF .
But at the same time i got into quality Smallcaps like Apollo tricot, Shivalik rasayan, ION exchange , HLE glasscoat , KEI which delivered big . And some pre listing ipo bets like Rossaria , Happiest mind, Affle, route, polycab as well . IRCTC ipo allotment All these took 2 years PF returns 71% to date.

gurjota · March 31, 2021, 6:27pm

The last portfolio update was at the end of Feb and I was thinking about the regularity at which I should share the portfolio performance and updates. Without any scientific reasoning, I feel a monthly update is a decent rhythm in this high-octane market especially when I have a reasonably high portfolio churn as of now.

Before, I delve into the last month performance and portfolio changes - I had these thoughts go through my head, what is my portfolio objective or how would I describe my PF goal?

Portfolio Objective - Generate a minimum 15% compounded portfolio return starting 1st Jan 2021 for a decade with low volatility minimizing the depth of PF drawdowns.

With the above in mind, let me share the ytd Q1CY21 PF performance (along with key benchmark indices):

If I come back to my PF objective now, let me address the second part of the objective first “low volatility minimizing the depth of PF drawdowns” and will come to the 15% compounding part later.

Now there is no better measure of volatility than beta defined as “systematic risk—of a security or portfolio compared to the market as a whole” (Wikipedia).

I’ve been tracking my daily portfolio % change over the past 10 months and based on that data when compared with the Nifty, my PF Beta is 0.78 as of now. Given that I’ve had a rapidly changing portfolio in the past year throwing out lots of leveraged financials and other high beta names, I expect a more reliable measurement of my PF Beta early next year. However, Beta of 0.78 does mean I expect the volatility of my PF to be at ~80% of the market volatility. My target PF Beta would be around 0.50 whilst also not compromising on returns objective.

However, I do want to highlight that the objective here is to minimize PF drawdowns in market downswings along with reasonable participation in market upside.

The above chart shows the YTD daily PF performance (orange worm) overlayed on top of all the key benchmark indices. Here we can see the objective I’ve described above being met in terms of the portfolio performance, lower drawdowns and reasonable participation in the upside. The caveat here is the very small time period of observation. Will look to share the PF Beta and the daily performance chart on a quarterly basis to observe how the portfolio is shaping up and whether it is on track to meet defined objectives.

Now coming to the first and most critical part of the objective i.e. getting 15% compounded returns. This requires having a very strong PF focus on growth oriented businesses with good managements may be mixed with a few significantly undervalued businesses with potential future growth. This has led me to making quite a few PF changes off-late and also forcing me to re-think my philosophy of Coffee Can approach.

Portfolio Mindset Change - The time period between Dec-Feb has made me understand the importance of being able to sit on cash irrespective of the market movement leading to FOMO and feeling of last chance saloon. The key difficulty I faced during December - February timeframe was worthy opportunities where I could deploy cash and also meet my portfolio objectives of 15% compounding for 10 years. So while business like Britannia, Abbott, etc. were correcting and offering good min. potential returns of 10-12% over the long term, I realized these businesses still didn’t offer enough MoS to be confident of achieving the 15% return objective. And hence the realization to get out of any such businesses where the conviction of meeting my objective does not stand anymore.

Also, whilst the Coffee Can approach is the best way to identify and select great businesses, I may not be able to sit idle and not take any action for a 10 year timeframe especially if some of the businesses deliver 5/10 year expected returns within a year itself. Hence, have a Core portfolio approach (invest using Coffee Can filters and sell using multiple criteria of recent business performance, valuation re/derating, expected future changes in business / environment, management changes, etc.)

Portfolio Updates over the past quarter

Core Portfolio Exits -

Alkyl Amines (4.5 bagger in 11 months and life high crazy OPMs, valuations)

Chola Finance (90% returns in 1 year, 5x book value and 7x leverage) - In just a year, I’ve seen my investment go down by 65% and then come back up 4.5x from lows to give overall 90% returns). Way too much volatility for me to handle, also reflected in the stock beta of more than 1.75

Berger Paints, Marico - Outcome of the portfolio mindset change. Given me 50-70% returns in the last 1 year somewhat underperforming the Nifty (a clear indicator of the rich valuations these businesses already trade at). Will be exiting all in next few days to lock in LTCG

Abbott India, Britannia - Were recent investments and covered above mostly. Happy to be a buyer of Britannia at 2500 and Abbott at 10-11k levels which gives me MoS for 15% type of compounding. Not that these businesses still won’t do that, but just that I don’t foresee it and don’t want to bet on it

Core Portfolio Entry - I’m still building positions in most of them as they don’t fall a lot even on the worst days

Syngene - Strong industry tailwinds, one of the fastest growing listed businesses in the market with solid execution track record and consistent growth capex over the past 5-7 years expected to continue at least for 1-2 decades.

Valiant Organics - Excellent management track record Aarti group company, industry tailwinds, very good profitability metrics, very strong growth capex expected to come onstream in the next couple of years

Fine Organics - India#1 amongst top 6 global players in a good growing industry with strong tailwinds, strong business growth and management execution track record with excellent return ratios, 75% promoter holding and all leading MF small cap funds invested. Also covered in a recent interview by Saurabh Mukherjea

CAMS - Market leader superb profitability metrics. Best way to play financialization of savings in MF industry. Delivered mid-teens topline growth over the past decade and management guidance of 10-12% growth over next few years as well along with new revenue levers opening up

SBI Life - I think a 100 times before entering any PSU business given the wealth destruction track record. However, SBI Life appears to be amongst the fastest growing LI businesses, have inherent advantage of network distribution via SBI branches, has the lowest opex ratio in the industry and effective Price to EV of 2.6-2.7x on FY21 embedded value growing at 18%+ past few years.

REITs - I have entered in all the 3 REITs now given the tax free nature of significant portion of distributions and huge potential yield in latest listing Brookfield. Given the extremely favorable demographics we have (65% population below 35) and many million youngsters to be added to the workforce every year, I see India as one of the few bright spots for commercial RE in the next decade at least. Would have been happier if I waited a bit more and got the additional 8-10% discount on Embassy REIT currently offered by the market. This is now a very significant allocation ~12% for me, will be trimming to 10% as a little overexposed to Embassy.

Increased allocation - Indian Energy Exchange and ICICI Pru Life

Satellite Portfolio - Exits

Spandana, Indiabulls - 2 leveraged businesses (booked 40% gains and booked 50% loss). One with potential severe crisis in microfinance portfolio and other with honest / clean management and tarnished market reputation.

Airtel - Exited at no profit no loss. Seeing the competitive intensity in the telecom space and never ending capex such as 5G auctions, time to kick this one out as the positive and negatives seemed to be cancelling each other out. Would much rather hold a business with simple books of account and industry tailwinds.

Satellite Portfolio - Entry

Chemcrux - Replaced with Indiabulls holding. Excellent limited business performance, appears honest managemant with well articulated annual reports and management growth vision. Plant closure overhang has stayed longer than expected, good to see the disclosure today on the same and also approval for capex.

Icemake - See huge scope for this business and industry, cold supply chain storage and solutions. Management track record is pretty decent in terms of growth and also given strong growth guidance for next couple of years as well. This can grow multi-multi fold if executed well by the management. Next quarter should be interesting as it’s the best one seasonally and management has guided for normalcy in margins, will contemplate exiting if management doesn’t deliver somewhere near guidance without any major business hindrances.

Jubilant Ingrevia - Given the industry tailwinds of specialty chemicals and pharma, seems an interesting business with good growth guidance and very modest valuations. Management execution should lead to re-rating

Nazara Tech - Hyper growth business in an industry getting strong tailwinds with Covid, No listed peers and digital platform business should get premium multiples once business execution track record is established and recurring revenues. Key risk of very brief product lifecycle for most games.

Allocation Change - Significantly upped allocation in RACL Geartech and Goldiam with super strong business performance and momentum. Don’t like averaging up 3x-4x of buy price but see similar potential even from the current market cap.

Watchlist - Bajaj Healthcare, Indigrid (hoping it corrects 20-25%)

Concluding Thoughts - I want to crush market risk without compromising on returns in order to sleep peacefully every night. Having an all-weather portfolio with a bullet proof core helps achieve that.

PS: Hopefully, next month’s update will be a lot shorter

gurjota · April 30, 2021, 5:09pm

Monthly Portfolio Note - April 2021

Portfolio Commentary
Reasonably good month and well on target to achieve 15% CAGR for the year despite the fact that 10% of my PF was invested in Office REITs this year whose DPUs are not included in the above numbers. I thought we were in for a decent correction with Covid 2nd wave, however Mr. Market is quite smart and didn’t repeat it’s folly from last year’s vertical decline. Basically, Covid is not an unknown unknown for the market anymore. Anyway, I’ve have been adding on all dips through April and trying to increase my exposure to some high beta top notch financials as they’re available at reasonable valuations. However, also meant having to exit some positions I may rather have not, details below.

Poly Medicure (minor profit booking at 4.5x levels), CAMS, Fine / Valiant Organics and ICICI Pru Life seem to have driven majority of PF gains this month.

Exits

Beta Drugs - Sold with 100%+ profits. NSE SME listed pharma company operating in unregulated markets. Nothing wrong with the business as such except a SME company is relatively hard to track and get good insights on with 6 monthly results and bare minimum visibility via annual report / AGM. And I was looking to raise cash to avail of opportunities during the 2nd wave Covid decline in mid-April. Big mistake!!!
In terms of stock performance, it had been in the same range for almost 4-5 months now and almost as if the stock was waiting for me to “GET OUT”, I KID YOU NOT - the stock hit 10 consecutive upper circuits from the next day onwards to become almost 3.5x from my 2x - 75% opportunity loss!

Don’t believe me, see this!

Selling is definitely not my forte yet

Pidilite - Booked out at 50% gains, very very small position from Mar 2020 and same line of thinking as Marico, Britannia, earlier - do not foresee 15% CAGR on long term 10 yr basis at current valuations. Happy to re-enter any of these businesses at lower valuations if ever…
Sun TV / Huhtamaki - Booked minor 15-30% gains, opportunistic bets in satellite portfolio. Wanted to reallocate cash to higher conviction bets

Entry / Increased Allocation

Muthoot Finance - New position, 2point2capital’s letter really caught my eye and I started thinking about the gold loan business. Read through latest concalls, annual reports, watched management interviews and came to the conclusion that this is a fail-safe business as long as the world lusts for gold. There can be intermittent periods of volatility in value of gold prices but there are very very strong barriers to protect the business model. Just this 1 number blew me away from the management - ever since the company got listed, not a single rupee of regulatory reported NPA has resulted in actual losses as the physical gold has been auctioned which more than covers the loan amount at 70-75% LTV incl. making charges. Although management has admitted banks / other NBFCs have also started hunting in this ocean, there are ample opportunities for growth for the foreseeable future. Also gold prices have a double tailwind - precious metal which is limited supply and long term USD INR depreciation
Bata India - New position, has to be looked at from a long term perspective. Footwear is an essential product just like clothes. And I was thinking about all the last few global / economic crisis of any kind. 2008 financial crisis, 2001 IT bust, 1992 Harshad Mehta scam - none of these crisis would have any major impact on Bata’s business. So whatever the next crisis will be, I’m pretty confident it will have limited or no impact on Bata unlike Covid. Now, Bata’s brand has a very strong recall and the company has been aggressively investing in growing their reach by doubling/tripling store count over the past 1-2 years. This can be a 1 lakh crore market cap company in my view over 10+ years.
HDFC Bank / Kotak Mahindra Bank / MAS Financial - Increased allocation, I’m very bullish on select financials to keep on accumulating market share and consolidate the very very large Indian FS market over the next few years. But need to be very selective in leveraged names. Bandhan Bank is a great lesson for me in terms of the difference in business models across banks (MFI unsecured book vs semi-secure mortgaged books of HL/AL, etc.)

Since the number of PF stocks are more than 70, sharing a pie-chart of the holdings across sectors which helps me better understand my weightages and exposures:

See you next month!

sujay85 · April 30, 2021, 5:59pm

Interesting! Can you link it?

gurjota · April 30, 2021, 6:09pm

Here you go

sujay85 · April 30, 2021, 6:23pm

Recently I switched from Bata to Relaxo. The later is richly valued but I believed for genuine reasons. Bata has good brand recall and a collection of good brands, like Hush Puppies, and recently they’ve changed their strategy and is now aiming to premiumize their portfolio. I used to think that this strategy is good but later realized that in the premium segment there is a steep competition from global brands like Adidas, Puma, Reebok etc., which resonate more with the younger populace, while Bata has more brand recall among the older populace.

Relaxo on the other hand is more in the budget segment, where they have successfully created a brand out of commoditized chappal / slipper category. Bata used to have presence in that segment in the past, but they have exited from that segment altogether. Relaxo also manage the inventory better to make good returns on capital from this budget segment. They have presence in mass premium segment too via Sparx.

You must know the merits of Relaxo well through the writings of Saurabh Mukherjea. It took me a while to realize this merit as the ‘Brand moat’ illusion of Bata was clouding my opinion. Recently I realized that brand may not actually a no moat in a highly competitive segment where there are more similar/better good brands.

Bata also has a good moat in terms of a large number of brand shops. People love to try out their shoes before buying and I always thought Bata will get benefitted in the long run due to this. However, with more ease of returns in online shopping and Covid induced habit change may in the long run eliminate this benefit of Bata too.

gurjota · April 30, 2021, 7:31pm

Let me address Bata first - they’re not competing with the sporty brands in majority of the categories such as school children, leather/office wear, casual wear (Puma, Adidas, Nike, etc have no presence in first 2 and generally have limited casual wear). Also these foreign companies target segments is relatively niche upper middle class and above, maybe 10-15% of India at max where as if you look at recent Bata store openings, they’re predominantly targeting Tier 2 and Tier 3 cities i.e. lower middle class and above.

The brand recall with older populace is correct to an extent which is why Bata has been roping in young stars like Kriti Sanon and Kartik Aryan to change that image. And if you see the performance over FY16-20, the average age of their customers has come down a couple of years which means more younger people are recognizing and adopting Bata.

These are extraordinary times which have been prevailing for 14 months+ and who knows how long this may continue. But I still think that is clouding your judgment on how 90%+ (my guess) people would generally buy shoes.

Think of it this way - human beings are not born in assembly lines. We are biological evolutionary creatures.

Your size 10 feet and my size 10 feet can be extraordinarily different - narrow width, average width and broad width. So 2 people with the same size feet can find a shoe loose/tight depending upon the width of the feet. Plus, some people are flat footed vs some have normal shaped feet. So many biological differences in humans means - most people will end up buying a shoe at the store whenever this ends
Every brand seems to have a different size even if they both say size 11. Some are UK, some are US, etc. and unless they are Nike, Puma, etc. there can be big differences in size for local manufacturers and actual size of the product. Again, leads to people wanting to try it out in the store

Now coming to Relaxo - it’s undoubtedly a fantastic business and unbelievable performance even in this pandemic. However the valuations really don’t offer much margin of safety and I’ve been trying to get in but it just refuses to correct beyond 6-8% and keeps moving higher and higher.

I can buy at these valuations as well if you can tell me the addressable size of market and potentially Relaxo’s share in it.

Relaxo sold 18 crore pairs last year i.e. to put it simply it is like 1 out of every 8 Indians bought one pair of Relaxo!

If I take a very very optimistic scenario and Relaxo can start selling 100 crore pairs in the next 10 years, that is 5.5x growth from current levels.

Do I think Relaxo will quote at 80-90 P/E after 10 years. Probably not! Even if I take 50x earnings multiple the returns come down to 3x using very aggressive assumptions.

I think it has a low probability of meeting my 15% CAGR returns target from current levels over 10 years. Yea, there could be other growth levers such as margin expansion and exports but I rather err on the conservative side than hope for an even brighter future when the past has been so scorchingly great already.

PS: Let me also add, if I was an existing investor in Relaxo from much lower levels there is no way I’d be selling out given the growth potential going ahead. As they say “keep your eyes wide open before marriage and half-shut thereafter”

Investor_No_1 · May 1, 2021, 9:02am

Excellently put points by both you and @sujay85 on bata vs relaxo…I am just thinking on above thought you make… interesting one but why would you not buy relaxo today if you can keep holding it if bought at lower level? I understand that most probably this thought is coming from the very often used terminology “margin of safety” but holding today if bought at any levels is same as buying today at today’s level…and MoS is same for both persons… although optically greater for someone bought at lower levels but it’s today’s money which counts and what we can do of it today and MoS as on today. Hope I was able to convey my thought properly in words…would be good to know yours as well…for me…there is nothing called as MoS…it’s an illusion

gurjota · May 1, 2021, 2:32pm

Fair point. However, if I talk in terms of broker reports - there are 3 types of actions - Buy, Sell and Hold. I’m referring to “Hold” action above. There is no exact science in what I’m saying, but just sharing my thoughts and how I approach my investment ideas.

If I’ve been invested in Relaxo for 5-7 years and already sitting on 25%+ compounded returns from earnings growth and re-rating in a business with still relatively large growth opportunities, I shouldn’t sell out just assuming that the multiples have gone up way too much as I’m fairly confident that the earnings growth will keep on compounding for a long time to come albeit at a gradually lower pace. However, I don’t know whether multiples will contract or remain the same as markets can continue to give premium valuations to select businesses. Just look at D-Mart - even after the doubler on listing, it is up another 5x from those levels and been consistently trading at 100x+ multiples due to the extremely large growth opportunity. So if markets give the same multiples, I continue to compound my money in Relaxo!

However, if markets derate the multiples then I may not make much money for 2-3 years till the earnings catch up and then the compounding cycle begins again at a somewhat slower pace. My 25% compounded could turn into 18-20% CAGR through all this time by when growth starts diminishing. However, I’d still be very happy with a 18-20% CAGR over a 10-15 year period. This is with a caveat that I don’t find any other 25%+ compounding opportunities else it would be a no-brainer to reallocate to a better idea.

But when it comes to fresh investments - I don’t want to take that risk of multiple derating unless the growth rates are very high and sustainable for long periods. This is where the MoS comes in from valuation perspective, if the company continues to deliver good performance - I expect markets to reward it rather than think it’s already in the price.

Ex: Some of my 4-5x investments like Poly Medicure, Indiamart, APL Apollo are all Hold positions now and neither Buy/Sell. Depending upon future business performance, this will obviously change.