Hi Friends ,
I have recently started building my portfolio for the long term. As i work for living my criteria is to invest in -
- sustainable businesses - Have some kind of strong moat.
- Long runway ahead - Relatively small compared to market opportunity in future like 10 -15 yrs down the road.
- Can be run by Idiot management - Learned this from Mohnish Pabrai.
- Available at right price.
My investment in companies for long term -
- BSE LTD (15% of portfolio) - Average price @805
- CARE LTD (10 % of portfolio) - Average price @1248
- IEX (10% of portfolio) - Average price @1650
- SGB 2.5% yield - 5% of portfolio.
- Shri Ram Transport finance bond 9.5% yield - 5% of portfolio.
- ELSS M.Fs - 5% of portfolio.
- Tax saving FD yielding 8-9% (about to mature ) - 5% of portfolio.
- Liquid Funds - Rest 45% of portfolio ( this i am looking to deploy in equity over time - at most in 4-5 stocks 10% each )
Would love to know views of friends here .
PS: BSE has been bought more from a angle of Dividend play, need some cash flow from equity portfolio as well.
Thanks,
Amit.
2 Likes
Hi Amit, good criterion (except maybe the idiot management, which I guess means a straightforward business). I’m not sure your portfolio reflects the idiot management criterion though - BSE, IEX are exchanges which are enormously complex regulated entities to manage and CARE is in a similar position - credit ratings are a pretty involved and closely monitored activity. IEX and BSE look expensive considering heavy competition from large competitors and good, but not supernormal, growth.
BSE currently yielding 4% dividend + 5 % earning yield and at least revenue should grow 7% CAGR over next 10-15 years as the financial participation in equity going to grow, considering same market share 4% in equity trading ( it will not go lower) . Rest of its segments are immune to competition.
Also 26% stake in CDSL which will continue to grow in absolute Mcap / CDSL dividend.
IEX is like a baby today considering just 3% of total power trading happens in it. Its like a HDFC in 1996 or Airtel in 2002-03 , Although they were trading expensive after IPO they created huge wealth due to great scope for growth.
In developed countries short term power demand trading happens around 30% of total power market, In india is 10% today. Of this 10% IEX accounts for 30%. So, there is lots lots of scope for growth i don’t see any competition as 99% of the exchange trading happens in it although NSE power exchange is there, Exchange is a winner takes all market.
Thanks for inputs.
PS: Idiot management is the term used by Mohnish Pabrai many times, don’t take it literally. Also, I copied my investment looking at his portfolio both CARE and IEX.
Thanks for the crisp and clear investment rationale of bse,care and IEX.
Since bse is fully dependant on equity markets(and we most probably at the end of long bull cycle,or atleast half way through), how would a company like bse perform in down periods?
I feel care can be easily available at much lower pe multiples when credit offtake cycle has peaked and in a rising interest cycle /bear market.
Also,it would be great if you could elaborate more on the down side risks for IEX.
I agree with its huge future potential and low current market share, but apart from a general slowing economy do you foresee any business specific risks?
Disclosure : looking to enter IEX if market provides a chance for lower entry.
First of all what makes u think markets don’t know what you know about the cycles ? and why you think it’s not priced in already.
BSE is trading may be 20 - 22 Cyclically adjusted PE.
And only 40% of rev depends on the market volume.
Anyways, corporate credit cycle is at all time low. It never had uptick.
What’s made you think credit uptick has already happened and down cycle going to start ?
Whatever credit growth we saw due to low interest rates were on the retail side evident from Growth of NBFCs , HFCs and retail Oriented banks. Retailers are not rated by rating agencies.
Now if corporate credit has to revive where they going to take credit from ? Considering PSUs are in doll drum and as you pointed out cycle is on the up.
Only cheapest way out is the bond market.
IEX - right now they charge 2 paisa per unit to each buyer and seller. This is quiet high , as they become big regulators going to ask them to cut it.
Nothing else major I see. We will see once they become big.
You many want to look at Private Sector Banks that are currently troubled by NPA’s trading close to book value with good management and also pharma companies that have focus beyond generic business.You can also add healthcare related stocks that could be into healthcare insurance or hospitals.Those could give you better return than the index.
Hi @AmitContrarian,
My main intention for the post was to understand the linkage BSE may have with a down-cycle in the equity market (eg AMC business is extremely correlated with the ups & downs of the equity market cycle). (Also, my understanding of the BSE itself is quite limited… 
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I may be completely wrong in my understanding of where we stand in the bull run , but this was just to better understand the extent to which the market has priced its moat, earnings runway/sustainability etc.
Yes, the credit offtake cycle has been in the doldrums for sometime now . Would you agree with me that the interest rate cycle has bottomed out ? I am not sure whether they will remain flat or rise quickly ,but reasonably sure they will not fall much further. Given this context, there could be scenarios where credit offtake itself continues to remain so. But I do not claim it is going down. I just wanted to understand the behaviour of care in the past down cycles.
IEX : So the main risk is the regulator risk ? If this is the only major risk, then indeed, IEX looks like a good candidate for your portfolio !
A common factor which I notice in all the three companies you hold was that all these are quite complex business models to understand (so many moving parts)!
Regards,
Abhijit.
Fair enough. All your picks are high quality businesses with stable, cash rich businesses in a 2/3 person duopolies in rapid growth markets, which alone is more than enough reason to make them long term compounders. I don’t think I’m misunderstanding idiot management though, if it means a straightforward business with such a key product that its effectively in a monopoly / duopolistic situation , and is robust to management mistakes.
Your picks are highly sensitive to their complex underlying market and definitely depend on strong, informed and futuristic management - which is a perfectly good moat in my books, so this is not a bad thing. I think its complex for an investor to keep pace with developments in these markets to understand the risks to their holdings - I’m personally comfortable with BSE and CARE, but am admittedly quite ignorant of the power sector, and am put off by what I perceive as a market which is opaque and sensitive to political interests. Conversely this is a good place for an informed investor to exploit strong information asymmetry. Good luck, do keep us updated on your future picks.
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