Following are snippets from SageOne Oct Newsletter
We have seen earnings growth picking up for our portfolio. Almost half of our concentrated
(SCP) portfolio allocation is towards export-oriented companies who would be net
beneficiaries of the INR depreciation. These are companies in which we have invested before
the INR depreciation started and they have been growing above our targeted rate since then
and are not dependent on INR benefits. Most of these companies are constrained by capacity
and not by demand.
Unless forced by regulations, there is no reason for an investor to be restricted by market cap.
Of course, liquidity has to be a consideration. Our mandate is to optimize returns, and that
can be done by finding the companies with best long-term earnings growth prospects and
buying them at reasonable prices. Given that our endeavor is to achieve earnings growth of
25% at the portfolio level, many of the large companies never fit the criteria due to their
large base. It’s improbable that companies such as TCS, HUL or an Infosys which tend to grow
earnings in single digits will ever be part of the portfolio, even if in the short run there is a
possibility of enhanced returns due to valuations getting rerated. We don’t like to rely on
valuation rerating for returns.
large companies never fit the criteria
We completely believe in investing in high quality stocks, but it has to be accompanied by
high earnings growth, which generally is possible where the base is relatively small and the
companies can keep gaining market share from the competition. My observation has been
that these kind of companies sustainably outperform not only the indices and the large cap
quality companies but also deliver higher absolute returns albeit with higher volatility
compared to large quality companies. If I had built a passive portfolio of such companies, the
earnings growth over the past 8 years as well as 4 years would have been around 18-19%.
Again because of the rerating, the returns would have been double of that.
RoC > 15
The above table is for a passive portfolio of about 25 stocks which also includes some of the
companies we have held in our portfolio in the past such as Bajaj Finance, Page Industries,
Amara Raja Batteries, PI Industries, etc. The key difference between this and the large cap
portfolio is the average size, which in this case was around INR 6,000-10,000 crs, if you had
invested in these 3-4 years ago. We find this to be an optimal average size which provides
enough liquidity and good earnings growth potential. Accordingly, our portfolio average
company size falls in this range as it’s positioned from a 3-5 year perspective.
In the long run, the earnings growth of these companies would continue to be 6-7% higher
than similar large company universe and we all know what compounding can do to your
wealth with such superior returns.
Market Capitalization 3000Cr - 12000 Cr
What would be best Screener filter for his thesis?
Following search returns 93 companies, I find only Auto ancillaries and pharma which are export-oriented companies in this list.
Return on capital employed > 15 AND
Market Capitalization > 3000 AND
Market Capitalization < 12000 AND
Sales growth 3Years > 6