My richdreamz portfolio - visit my portfolio to learn together!


(richdreamz) #22

Yes, HF exposure is high and I’m working to bring this down. Recent adjustments made as indicated earlier in this thread are my increased exposure to PI Industries and MPS and since I do not have any extra money, I have moved some money off HFCs into PI and MPS. I will update the PF once I’m done with the adjustments. But Repco will have highest allocation in my PF at least for next 2 years.

No Pharma as I do not understand the products (for example, Torrent has this Abilify recently, but not sure what raw materials go into making it, what is the demand, how to find the next product company will make etc.) though broadly I very well understand what the Indian businesses do (APIs/Formulations/CRAMS etc). But Pharma is a very big opportunity unfortunately I will have to give it a pass. As Buffett says, I do not have to make money off every opportunity, I’m fine with what I understand. But if I can gain enough conviction on a pharma company, I will surely buy into it.

Exactly for the reason you have mentioned, I have invested into MPS for that ALPHA. My PF is a bit large, so safety is prime importance and then comes Alpha, though recently I’m trying to be a bit brave for Alpha.

Thanks and please do visit my PF once in a while for your suggestions.


(richdreamz) #23

I have recently entered Cupid Ltd. Very small portion of the portfolio, may increase with my conviction. I have no fresh cash, so these are just portfolio adjustments.

I have explained in a small post the rationale behind the entry. I think, we have enough revenue visibility for next 2 years with positive order wins as we go along, margin expansion will kick in, promoter pledge coming down, dividend started coming in from the company. All signs of a typical TURN AROUND in place. Not much capex, so free cash flow over next 2-3 years unless company wants to invest big in new product lines that that company is talking about.


(kanvgarg123) #24

Just to play devil’s advocate, Speedo’s swimwear is the most expensive swim wear in Indian Markets. I agree that people want to learn swimming but one speedo swimming shorts for men cost around Rs.1000 (Bangalore Price) vs other qualities coming anywhere between 40-80% of Speedo’s price. Recently I have seen people using Chromosome brand for men’s underwear. Personally I am a loyal Jockey customer but how long people will remain that we will know in future only. I am not invested here because I think it trades at a very premium valuations and in the past I have been able to save myself from sudden pe de-rating.
I want to understand from you just one thing about PI.
Do you see any risk from government intervening in agricultural companies profit? Recent compulsory price reduction in genetically modified cotton seed by government has suddenly impacted the business of Kaveri Seed.Can similar thing happen here?

I am only invested in Gruh Finance from 5 companies you have mentioned.

Thanks


(richdreamz) #25

@kanvgarg123

First to answer on PI -

I too had that doubt before I initiated my position here, however my line of thinking is below -

  • Agri input has 3 main components
  1. Seeds: From where the plants grow. This is the fundamental input for agriculture sector. Farmer depends on seed prices, seed quality for his acreage. The more he seeds the more acreage. So, government cannot have the prices of seeds grow as per the whims and fancies of seed producers. Agriculture still occupies major share of our GDP. So, government will interfere from time to time. Their own political success largely depends on how well farmers do!

  2. Fertilisers: These are the chemicals that plans need to grow faster. The basic nutrients that nature provides for plants are oxygen, hydrogen etc but if provided with further nutrients like phosphorous, nitrogen plans will grow better. Here too I believe government intervention is there.

So, Seeds + Fertilisers make the basic requirements for agriculture. Fundamental requirements.

  1. Pesticides/Herbicides etc.: This, in my opinion, is value added product. Farmers use it or not is entirely on their discretion. Pesticides as the name suggests are used to KILL pests. This is like downside protection which is discretionary in nature but very important. Since this is not a fundamental aspect of agriculture (though very critical), government would not like to interfere in its pricing. As such the pesticide usage is very low and we lose anywhere around 28-30% of the crops to weeds, pests, rodents, fungus etc. so any farmer education in terms of its usage will protect their downside.

My basic argument is, seeds and fertiliser are the basic ingredients without which no agriculture production itself can happen while pesticides are for downside protection and productivity improvement. An example, Any company goes for productivity improvement is left for its discretion but for its business to grow it needs to recruit employees. Here employees are seeds while productivity improvement tools are pesticides. Government can freely interfere in basic things of a business not on a value added product used to protect downside of a business.

Not sure if my examples makes sense or not or whether I have been able to explain what’s in my mind.

Another side to PI is, seed penetration is 100%, in a sense, I mean every agri land which has some plant grown on it has a seed, right? But that very agri land which has a seed in it does not have pesticide yet. In fact, we are at the bottom of the ladder in pesticide usage and for us to achieve food security, plant protection and better quality seeds are inevitable.

Yet another investment angle is, agri inputs only form 40% of the PI revenues while CSM form 60% where the high margins are there along with good order book! Sorry, I have explained in far more lengthy manner and bore you.

Page: yes, the valuations are on higher side, but Page would have earned them. But I’m not sure how long will they sustain if there is any slippage in revenue growth. Mostly might see time correction after the initial sell off (IF at all). Speedo, I’m happy to know that the prices are on higher side. It brings the aspirational value to it. If economy were to grow at 8+ for 3 years straight, you will find many middle class families affording these prices. Anyway, it forms a very small part of revenues as of now. Having been bullish on Page in different threads, I have added MPS and Cupid at the cost of Page and Gruh (though little tweaks only).


(kanvgarg123) #26

I really appreciate the pain you took in trying to make me understand the business. My simple argument is, can’t farmers use normal seeds instead of GMS if GMS are expensive? Because GMS is better and has better yield, farmers want to use that and hence government is imposing price controls. Similarly, pesticides helps in improving yield of the crop. Now if government says that farmers are dying and are unable to earn much per acre as their crop yield is low then they will further go to pesticides. I agree that government as of now has reached till level 2 but who knows if they start going to level 3 ?

Gruh forms a good portion of my porfolio simply because of loan growth rate of >25%, nil NPAs and under penetrated market.


(richdreamz) #27

hmm, actually not very sure, but the answer to your question may not be company specific but investment process specific. My approach is,

it really does not matter, we will never have clarity on all issues in all businesses and by the time the clarity emerges, the stock price would have gone up. Companies where there is clarity, like Page few years back, are rare to find and when we get such opportunities many will be found sucking the thumb.

In PI case, there are two options, govt. will interfere and govt. will not. By the time we are sure that govt. will interfere, price would have gone up 5 times and then since govt. is interfering the price would fall by 40% but even then you would have made 3 times the original. Now, if the govt. does not interfere, you are left with 5 bagger and still to go…

The above is how I’m thinking…


(kanvgarg123) #28

Just a query, how long do you think it would take PI to become a 5 bagger from current levels? I think PE is already at its peak so only growth in EPS would take the price higher.


(richdreamz) #29

Management is looking at 1 billion USD revenue by FY 2020 and I believe they can! Assuming debt levels, RoE etc do not deteriorate and in fact margins should improve from here due to CSM contribution increase, we can give the company a market cap of 5-6 times sales conservatively. You can do the math approximately. Once market fully realises the CSM potential, a slight PE re-rating is actually possible even from here.


(richdreamz) #30

I have entered into CCL Products this week. I’m done with my portfolio adjustments by introducing new companies for that ALPHA. There will NOT be any new entrants into my portfolio. Only re-alignments of the weights going forward.

Weightage: The stocks which are introduced for that ALPHA will be capped at 20-25% of the total portfolio.

PORTFOLIO


Stocks introduced for ALPHA: MPS, CUPID, CCL Products. (cap at 25%).
Core stocks: Repco, Gruh, PI Industries, Page industries. (cap at 75%).


Rationale for CCL Products (I have already explained the rationale for MPS, Cupid:

  1. Improving RoE/RoCE until FY18 where we have certain visibility.
  2. Reduction of debt and probably settle around 0.1 D/E or Zero debt by FY18.
  3. Super visibility of free cash flows
  4. Increasing dividend as a %ge of net profit with increasing cashflows
  5. Vietnam plant at 75% utilisation by FY 17 and then increase the Vietnam capacity to 20000 MT by capex of about 20 million USD funded entirely by internal accruals. No tax on Vietnam revenues for next 3 years and later 50% tax - effective tax rate is going to be low for foreseeable future.
  6. Immediate revenue visibility of 25% for FY 16 and 30+ EPS growth. (mostly built into current price, still scope of surprise exists)
  7. No recent history of equity dilution, ethical management, promoter holding increased from 3-4 years back and stabilised around 44%.
  8. Upside due to new big European client and probable entry into Japanese markets (very sticky market where long term revenue visibility would be high and management sounded positive on this new business).
  9. This is NOT a commodity business and also NOT a real estate intensive (no plantations). I really liked that they do the RAW MATERIAL purchase as per JIT (Just In Time) policy so they are completely insulated from coffee prices though realisations could vary by 7-8% in case of fluctuations as per management.
  10. Own brand retail foray: Very difficult preposition. Nescafe and Bru has SUPER mindshare of customers and breaking this could be difficult. However, the coffee is priced less than 50% the price of Nescafe for same quality - now beat this. Management only has to make people realise this. Difficult though.
  11. I’m from Hyderabad and CONTINENTAL COFFEE has a shelf space beside Nescafe and Bru in Vijetha Super market. I took both the bottles and compared the price, packaging, bought home both of them and tasted. ( I will put my observations in CCL thread).
  12. Better late than never even though the valuations are a bit high and IF all the above story plays out well, there WILL be a PE re-rating as we cannot have a company growing at 25% plus, with near zero debt levels, with RoE and RoCE levels above 30, increasing dividend, free cash flows at 24 PE. Retail foray success (IF) will provide even further PE expansion.
  13. Coffee Day IPO will bring certain interest among coffee stocks and if Coffee day, Tata Coffee, CCL Products are evaluated based on current and next 2-3 years financial metrics/ratios then am sure CCL Products will come out on top whether it’s RoE/RoCE, profitability etc. I agree all the three cannot be compared as the businesses and business models are different (retail chain, plantations heavy, coffee processor respectively), but there are no similar listed businesses on exchanges.
  14. Opportunity Size? Just do not ask me, it’s COFFEE, the second MOST traded commodity after OIL and people have been consuming COFFEE since eternity and simply NOT possible to change people tastes on Coffee and preference. If world growth and particularly the ASEAN countries GDP were to increase going forward, coffee consumption will look up.
  15. In a way, isn’t Coffee like an addiction? So demand will be there.
  16. Unexplored market opportunity in USA which is the biggest market for coffee.
  17. The plant in Switzerland seems to be a very strategic decision to serve EU clients and the company gets to trade its coffee as “MADE IN SWITZERLAND” coffee. I liked it. But demand in EU may not leap but just snail about.

Request forum members to provide feedback on my portfolio. Criticism of stock selection is welcome. Many thanks!!


CCL Products
(CommonStocks) #31

Your core portfolio looks good and the only thing you need to do is sit on it.

Cupid seems to be a good except that it is a micro cap and I generally avoid micro caps. MPS appears to me as a bet on the fund manager and not the business. Somehow it looks like a Piramal/Holding company bet and I would prefer to bet on a business instead.

I need to study CCL so can’t comment on it yet.


(Raj) #32

Could you please elaborate a bit on your statement. I am not clear on what you meant.
I have never been able to buy a company where management is uninspiring.
Obviously, MPS is part of my core portfolio.
Regards,
Raj


(CommonStocks) #33

I understand MPS management is highly accomplished and has a good track record. However what they seem to be doing is raising money and investing them on businesses that can be turned around. Nothing wrong with this, just that my preference is to be invested in direct businesses and not in business which manage investments (even though they buy them with a long term view). To put it in simple words I prefer Intelligent Fanatics over Serial Acquirers.


(Raj) #34

Thanks for your clarification.
By the way one of the so-called intelligent fanatics Symphony did de-risk their business model by acquiring a company called Impco in 2008.


(Manoj) #35

Did you consider CARE ? With Amtek Auto debacle beating CARE stock price down to 52W low, I feel CARE is cheaper now and more attractive compared to many others. Your take ?


(richdreamz) #36

@manoj I did not care (pun intended) to buy into CARE because,

  1. There is this conflict of interest with rating agencies all the time. It is behaviourally difficult to downgrade a company’s bond etc. when that company is paying you and when that company is a source of your revenues. I read few books related to 2009 financial crisis and was fascinated by how these rating agencies work. Fascinated here in a sarcastic way. This is like investment banks. An investment bank will find it difficult to issue a SELL research report and at the same time advise the same company on an M&A business etc and get 2% commission (huge source of revenues for IBs). That’s why some research reports do not directly term “SELL” in the reports, they say “REDUCE”. So much for being diplomatic.

  2. It’s difficult to rate a company because it is difficult to know practically ALL the details of a company and one fine day some issue sees the light of the day and the rating company which rated it so far will be thrashed.

  3. It is for this reason I did not invest in rating agencies and the reason showed up itself in Amtek for example. This is not the first one and the last one, you will see many such instances in corporate India as our economy leaps in the coming years.

  4. In way, these are like aviation companies. Once in a while a plane crashes which could be due to manufacturer fault or the airlines but more than manufacturer’s stock the airlines stock is hammered. See what happened to Malaysian airlines. Bad example, eh?

  5. HOWEVER, I think the BOND market itself is so HUGE that opportunities to grow in this field are AMPLE, just that a black swan event could pull you down by 2-3 years in terms of stock price. So, why buy when there are other opportunities.

  6. I won’t invest 2-3% in a stock, it should be around 10% at least and I’m not comfortable investing 10% YET.

  7. Stock hitting 52 week low due to ‘so and so’ reason which is beyond companies hands should never be a REASON to buy it.

This is my thinking and I could be entirely wrong.


(Manoj) #37

Thanks for your detailed notes. Totally answers my question.


(Suneel) #38

I too am from Hyderabad. Would like to get in touch , to share and discuss ideas. Let me know if you have some time. My mail id is [email protected]


(Amitayu) #39

hi, can you let us know about the source of that info of PI Industries?


(richdreamz) #40

here you go…

In fact this was key in building up my position aggressively.


(richdreamz) #41

Well, since my PF re-allocation in this market correction is over and now is my sitting time (boring too) unless there are really negative surprises, I’m going on looking at my investments from broader picture and overall sense as this give me vision to hold on during blips if the story is intact still. This may sound crazy, but I save the photos of the below top guns in my tracker, you could call it conviction building or face reading - crazy?

I also know that there are at least 3-4 other excellent stocks that I did not invest in. I did not because they will probably give as much return as my existing stocks and too many stocks will lead to concentration dilution both in my brain and PF. However, if any of the below were to disappoint me, I will look at these buffer stocks.

Interesting aspects,

  • Majority are family run
  • Almost equally split between domestic and export revenues (protection during both INR appreciation or depreciation?)
  • 6 different sectors (good diversification? - not intentionally done though)
  • Stock selection is bottoms up and not top down. Top down involves macro study, being sector expert, sector tailwind etc.

Something missing feeling within me:

  • The fact that I do not have any stocks from Pharma even though I realise from broader perspective that few stocks from this sector could give good returns. As indicated earlier, I’m unable to understand what molecules will give revenue visibility what do not, the whole process of USFDA etc etc.

Virat Crane Industries Limited (VCIL)