Nav_1996 portfolio - Suggestions needed


#1

Hi,

I would like to have suggestion of fellow boarders about my portfolio. I have been at it for last 10 years but have been able to form a focused portfolio in last 5 years.

Themes

  1. Long term holding with low churn.
  2. Management quality if of paramount importance.
  3. No ability to do scuttlebutt.
  4. Not a very detailed financial approach. I can read BS/P&L but I believe numbers only tell so much.
  5. Belief that financials, Consumer goods and Pharma basket have ability to beat other sectors over long term.
  6. An eye for moat.
  7. Wealth preservation is key as 90% of my assets are in stock PF except of my house which I live in.

(Hitesh Patel) #3

Good PF nav_1966.

Most of the companies are well established players in their segments. But the only problem I see is that for some of them size will be a deterrent.And most of them are near fair valuations.

I think companies like titan, itc, lupin, dr reddys are those which are facing strong headwinds at individual levels. Biocon has not done too much by wealth creation over the years inspite of holding out a lot of promise.

I think some high quality companies where expectations are low because of lower than expected couple of quarterly results would merit a serious look to fit into this PF. Just to give an example I feel gruh can deliver much better returns over next 2-3 years as compared to HDFC Ltd and this can work without compromising on quality of business. (this is a personal opinion and I could go horribly wrong in this one but the example has been given to drive home the point.:slightly_smiling: )

If the aim of the PF is first and foremost to avoid capital loss albeit with a lower rate of return then it seems okay.


#4

Thanks a ton for your valuable inputs Hitesh bhai @hitesh2710 .

Yes capital preservation with higher than FD return is key to portfolio construct.

Regarding Pharma companies, these were chosen about 4 years back to have a basket of US, domestic/developing world, innovation and biosimilar play. I have pretty much stuck to that. Dues to complexity of business I don’t want to make any changes unless I am convinced about better story.

ITC - Again old holding. I have been getting in and out based on valuations.

Titan - Urban consumer. Betting on their smart watch foray. Difficult but you never know.

I will definitely look at Gruh. Had bought it but got out as I could not justify valuation. So trying to stick to HDFC and Repco for now. Will look at switching HDFC to Gruh at some appropriate time.


(varun jain) #5

Hi Hitesh

Not being able to understand how a Gruh finance can justify the valuation parameters over others in the portfolio. I agree it may have the best of parameters and growth outlook but at certain price point its also a return trap to me. Beyond any scope of justification and if there is any value in buying right now then I have a lot to learn.


(Hitesh Patel) #6

varun,

You have to consider the sector and quality of the business and thats where instead of HDFC, I prefer gruh. Both being HFCs I feel gruh could provide better returns. And read the things written in bracket too.:slightly_smiling:


(kailasp4u) #7

Hi !
In my opinion, weightages would be the key!
Given a chance,
I would sell HDFC & deploy the amount in Cholamandalam & Repco.
Sell AgroTech, Marico, ITC & deploy in Glaxo Consumer & Nestle.
Sell Biocon & Titan and deploy into EClerx or SQS BFSI.
Sell Cipla & deploy into Lupin at lower levels.
Sell Glenmark & deploy into Dr. Reddy.

This is my personal view, which may or may not suit you. It depends on your comfort levels.


#8

Hi @kailasp4u . Thanks for your feedback. Can you please share brief reasoning for changes you have suggest?


(Shan) #9

Something to ponder on: if wealth preservation is the primary goal how has this performed against a 70/30 (or some other similar distribution) of etf and debt over long term?

I mean so you have to pick individual stocks if all you want to do is beat inflation?

Just wondering because I keep my ‘preservation’ amount in nifty Jr etf which has easily beaten inflation and index over the past many many years


#10

Hi @theashworld, To be frank I have not done that calculation. But broadly it seems to have done better than sensex.

Idea is to own good companies over long period. I know I may underperform if there is bull run in infrastructure, PSU banks etc…

I know comparison leads me to chase things which I am not comfortable holding and have lost money in past.


(kailasp4u) #11

Hi @nav_1996 !
My thinking behind the shuffles is as below:

  1. HDFC is good stock, but due to size (marketcap) the chances of appreciation would be less compared to Cholamandalam & Repco.
  2. Agrotech hasnt shown intent of growth, ITC has issue of size as well as govt interference, Among GlaxoConsumer, Nestle & Marico, predictability for former 2 is more + Nestle is going through bad phase so available at such price.
  3. Biocon hasnt shown the intent & promise, Titan is now vulnerable to govt interference! Suggested Eclerx or SQS is because they are quite stable businesses. SQS has recently acquired additional floor space to cater to upcoming demand, means management is seeing more business in pipeline.
  4. Cipla is stable but lower margin and Lupin has more scalability and recent bad patch is opportunity to acquire at lower prices.
  5. Glenmark & Dr Reddy is same as above + Glenmark promoter intent is in doubt for me from information read through various sources.
    Suggested changes may concentrate risk but more possibility of better returns in my opinion.
    Anyway, stock selection & changes is a game of possibilities, which keep changing in market. Do your own homework before taking decision.
    Regards,

(Srinivasan Sundaram) #12

Some of the analysts echo Hitesh views on Gruh

Will Gruh Finance’s premium valuations sustain?
Healthy EPS CAGR of 17% over FY15-18, strong parentage and significant potential in sector should support its premium valuation
Sheetal Agarwal | Mumbai
March 21, 2016 Last Updated at 17:57 IST

Affordable housing company, Gruh Finance (Gruh)'s stock occupies the top slot in the valuation table of India’s leading banking and NBFC names. Of the 61 banking and financials’ stocks listed in the S&P BSE 500 stocks universe, Gruh trades at 7.8 times FY17 estimated book value (P/BV).

This is not only more than double that of peers such as Repco Home finance (3.3 times), Can Fin Homes (2.6 times) and Indiabulls Housing Finance (2.2 times), it is also visibly higher than the 4.7 P/BV multiple (standalone) that Gruh’s 58.6% parent, HDFC commands.

Trading at 4.4 times FY17 estimated book, Kotak Mahindra Bank figures at the number three slot in this list, followed by Bajaj Finance at 4 times FY17 estimated P/BV. The top names in this list suggest that the street is rewarding companies with healthier asset quality and high potential to grow their businesses as well as earnings.

But, Gruh has been the highest valued stock in Indian financials space for FY15 and FY16 as well. Strong earnings growth of 28% in the past three years, along with healthy return ratios has led to a sharp re-rating of the Gruh stock. Notably, its one-year forward price to book ratio has leapfrogged from 3 times in FY11 to current levels of about 8 times.

Gruh is largely focussed on the affordable housing loan segment in western India with average ticket size of its loans (the smallest among peers) at just about Rs 8 lakhs. It has a well-diversified client mix, with over 60% loans given to the employed class. The company has penetrated over 90% talukas in Maharashtra and Gujarat and is now looking to replicate this penetration in other markets as well.

The key question, however, is whether Gruh’s premium valuations are sustainable? Analysts seem to believe so. Sunesh Khanna, financials analyst at Motilal Oswal Securities says, “We expect Gruh Finance to continue to trade at premium multiples due to track record of financial/operating performance, immense potential of scalability due to massive opportunity in the affordable housing segment, strong parentage of HDFC, best-in-class return ratios, efficient use of capital (no dilution in the last 10 years) and healthy asset quality.”

Bunty Chawal, analyst at Axis Direct, too, echoes this view. “Due to consistent growth prospects, higher return on asset / equity, healthy margins and well managed asset quality, we believe that the stock would continue to trade at a premium multiple,” he wrote in a recent note on the company.

Given the smaller base and the huge growth potential, it is not surprising that most analysts expect the company’s loan book to grow at a healthy clip of 25% over the next two-three years. While one may contest this looking at the dismal growth in the unsold inventories in the larger housing space, which has forced builders/developers to go slow on new launches a fact that is partly reflecting in the numbers of building material players (plywood and sanitaryware), analysts say the affordable housing segment remains an exception. A key reason for this is the incentives in terms of tax sops, including interest rate subsidy, provided by the central government as well as significantly low penetration.

For instance, under Pradhan Mantri Awas Yojana (PMAY) - Housing for All by 2022 scheme, the government is has set a target of providing housing for all by CY2022 with an aim to construct three million houses per year over the next seven years for the urban poor. Even if half of it is achieved, it would still mean a significant jump as compared to the 0.9 million houses constructed during the 10 years of Jawaharlal Nehru National Urban Renewal Mission. Then, there are individual states that have various schemes to promote affordable housing.

In a report titled, ‘Housing finance: Small is the next big’, analysts at Antique Broking say, “Small ticket housing would be the big theme for next five years given the huge latent demand and the measures taken by the government and the Regulator to fulfil it.” Gruh Finance and Repco Home Finance, they believe, are well placed to benefit from this and continue to remain their favourite bets in the housing space.

Rising competition from existing as well as new peers, small finance bank, amongst others would be a key monitorable. While Gruh’s consistent track-record and strong parentage (which comes handy in terms of best business practices) provides some comfort on this front, analysts believe the company’s net interest margins (NIMs) could soften as it tries to compete efficiently.

Analysts on an average expect this metric to remain between 4-4.3% going forward, as compared to 4.2% currently. The other risk is if the company falters on growth expectations, which could hurt valuations significantly. For now, most analysts remain positive on Gruh and expect the stock to deliver about 17% returns from current levels.


GRUH Finance - mini HDFC
(varun jain) #13

Hi

I don’t want to put water on your dreams but a near consensus of everyone on the valuations sustaining is itself a sign of a prolong time wise correction or decent decline in stock price. Two things will happen in some time to come - either Gruh will drop to 4-5 times book value ,multiples in a slow grinding fashion or other housing finance companies will re rate sharply. The latter looks like unlikely excluding DHFL and Indiabulls housing finance.

I have observed when slue of brokerage reports (specially initiating coverage report highlighting just positives) comes out on a stock which has outperformed over a period of time then its a sure shot sign of providing a safe exit to big investors.

Although I may be proved wrong but above is strictly my view point.


#14

@varvp14

Good to see your alternate view and I don’t disagree with you.

I personally don’t let noise (market expectations) interfere much with my investing. The maximum premium I may give to a HOT stock is probably 15-20% over comparable company or my expected fair multiple


(MHS) #15

Good read on Gruh - though Old one

It should give some clarification y it is valued so much in comparison to any finance stock - refer point no.5


(Shailesh) #16

First Asset allocation

I will never advocate 90% in equity . One needs to have debt funds/ cash / FD of about Min 20% @ all time to capture opportunities .

I follow thumb rule if Current Nifty

PE : 11-14 : Equity : Debt = 85 : 15 ,
PE : 15 - 20 : Equity : Debt = 75 : 25
PE > 20 : Equity : Debt = 50 : 50

Stock Selection : ** Lack of Diversification**

Diversification is based on geography , interest sensitiveness and inflation sensitivity . Different stocks do well in different business cycle .

Last 5 - 7 years , India was in high inflation and high interest rate cycle . Most of your stocks have low volume gr , near zero debt and high cap utilisation . This works in high inflation scenario when gr is achieved by price increases and high cash on hand also earn better interest as interest rates are high . So both operating and non operating income is high .This reverses when inflation drops and interest rates are lower .

So your portfolio should have some stocks that when cycle reverse . Have some stocks which has some room for both operating and financial leverage .

Wish you all the best …


(Nikhil Jain) #17

@kb_snn
Hello Shailesh,

what debt instruments do you generally invest in? What are the top instruments at present according to you?


#18

Thanks Sailesh @kb_snn , I am working on these two important aspects and will be making these changes gradually.


(Shailesh) #19

Depends upon your tax rate , other income income flows and risk appetite

If you are below 30 and employed then in above decided debt allocation you can divide it as follows

  1. Long dated tax free AAA bonds : 50%
  2. Liquid funds : 50%

Liquid funds to be used to convert to cash when market PE is trending lower and tax free bonds will provide additional interest income for occasional needs for which you need not sell equity at wrong time .


(Nikhil Jain) #20

Actually I’m almost always fully invested in equity, since I believe one can find a bargain most of the times (even at present).

I just wanted to know if there is any good alternative. Please inform if you know any specific alternative.

Thanks


#21

Posting my updated portfolio. Changes:

  1. Added Castrol - Play on economy
  2. Added Tata Investment around 520 - Valuation was compelling for a MF like portfolio
  3. Added Infosys and Persistent as contrarian bet
  4. Slightly reduced Cipla & Dr Reddy