Portfolio Re-Structuring/25% CAGR quality-growth for next 2-3 years

[Donald]

PKumar,

Please address me as Donald. No one here at VP deserves to be Sir-d, as none of us are matured products - we all have a long way to go. We are making mistakes, and learning all the time.

You are right. Some FMCG businesses in India can easily find themselves a place in any Portfolio. And I would think the best place to slot them in would be the steady compounder category - businesses like Nestle, Colgate, Pidilite - which enjoy high mindshare (brand with pricing power) and consequent marketshare should get more preference as compared to perhaps HUL like which do not have pricing power, but are competently run businesses.

Personally - even in the steady compounder category - all things being equal (characteristics like longevity, sustainability, predictability) I prefer including businesses in Industries which still have huge headroom to grow in India - penetration is still low - thus preference for an HDFC Bank, or Housing Finance. Asian Paints would belong more here than in FMCG like. CRISIL like could again be here.

[Shivkumar]

you should have NESCO and Indian Hume Pipes. Relevant threads says it all.

shiv kumar

[Donald]

@Shivkumar
Thanks. Will look at NESCO again.
Indian Hume Pipes - Business momentum/transition looks good at the moment. Financials are still iffy. Nature of business does not attract me. Can’t count on performance consistency. Let me know if you have variant views on this part.

[Donald]

Let’s dwell more on the poser at the end of this post
Read more at:
http://economictimes.indiatimes.com/articleshow/55537992.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

What is it that you are telling your clients right now? How should one position ourselves for say the next one year because you still do not know the quantum of the damage because the currency demonetisation is going to persist in the economy? What sectors do we stay away from? Where do we look at buying opportunities?

The advice we have been giving over last year and pretty similar to the advice we are giving now is we are asking clients to look through the damage, look through the pain because there is very little we can do about the damage. Yes Q3 numbers both on the economy and on corporate earnings will be pounded. There is very little investors can do about it. What we need to look out is a year out, year-and-a-half out and say who are the big winners out of this and our unequivocal take is the winners out of this are sector market leaders.

_Whether it is an electrical, whether it is in sanitary ware, whether it is in the financial services, the sector market leaders will win as the informal sector shrinks and dies away. So with my friends, with my colleagues, relatives and friends, we have been discussing extensively over the past three or four months as to how a lots of SMEs plan to shut down their businesses over the next year or two because they saying that if we pay full tax, we simply would not make any money. Hence, might as well wind up our business. As we go through that process of that informal sector winding up, you will see the formal sector market leaders gaining market share and my reckoning is from Q4 results onwards, this talk will gain momentum of market share gains by leading franchises in the listed world. _

_We are pushing our clients towards those franchises, buy them maybe 5% to 10% lower than where they are today but what is unquestionable is we have to build an Indian portfolio out of sector market leaders rather than trying to play second rung, third rung names or names with broken balance sheets. _

_What pockets out there because if I just look at informal versus formal, they exist in the distribution space, they exist maybe in gems and jewellery, they exist in the brokerage names, they exist at multiple pockets. What are the favourite themes? _

The one distinction we are drawing is we want to look at sectors which overall do not get structurally damaged by the attack on black money. So for example, our take is that there is a good chance the real estate sector does get structurally damaged by the attack on black money.

_It is logically not possible for the real estate sector in our country to continue at 2% rental yield. It makes no sense at all. So even though in real estate as well, there will be sector market leaders who will gain market share, we would rather steer clear of that. _

In something like kitchenware sector, you have got a couple of companies which dominate the sector. As the informal part of the kitchenware industry dies away, the market leadership will consolidate around that. Ditto in electrical. You have got two to three companies who dominate the electrical sector in India and again as the informal sector whose market share is as much as 50-60%, dies away, the formal sector market leaders will gain market share.

---

While there are possibly good opportunities in Sectoral Leaders, aren’t there more interesting opportunities, in sectoral followers ??

[Donald]

Was having a very interesting discussion with @aveekmitra on above.
Inviting him to expound more. If I understood correctly, a more refined thesis on less-cash economy could be:

1. As a buyer if you looked at 5-6 players in such sectors, and actually compared product specs, checked out the products physically, you might not find too much of a difference. New Introductions have a way of catching up. Most guys source from the same places, et al.

2. Yet, if you look at the numbers, there is a wide variance in the quality of reported earnings

3. While there is no gainsaying, quality of management, and efficiency of operations and such things make a significant difference, it does not account for the astonishing differences in (gross) margins and the like

4. Which can point to one thing. If the Cash economy shrinks in a big way (necessarily coupled with the GST push), the sectoral followers may not have much leeway in NOT showing much improved quality of earnings??

And is that the REAL Opportunity??

[hrfacebuk]

I wanted to start building some position in IT product companies. I wasn’t sure about when would business start looking good number wise for couple of them and hence wanted to try to buy them at a decent correction from their tops so that can get some bounce from the lows which gives some returns during the waiting period.

Bought Quickheal, Majesco and Intellect Design Arena. Majesco and Intellect maybe qualify more as or close to cash plus buys. Wanted to buy them low as I also find it difficult to carry more than couple of non-performers as I don’t feel comfortable owning more than 12 odd stocks upto a maximum of 15 at most.

These are mostly starter positions and will scale Quickheal upto 5% to begin with. Lots of work to do on Quickheal front as find it interesting but lot of unanswered questions. Will try to initiate a thread on this even if have limited information.

Cheers.

[hrfacebuk]

@Donald

Which can point to one thing. If the Cash economy shrinks in a big way (necessarily coupled with the GST push), the sectoral followers may not have much leeway in NOT showing much improved quality of earnings??

And is that the REAL Opportunity??

1. But how easy would it be for us to trust these management’s with our money?
2. And, how difficult would it be for such management’s to come up with some other workarounds, even if they report (out of compulsion) improved quality of earnings for couple of or few quarters?
3. Should we just assess them and take a dip on the basis of the quality of earnings reported by them going ahead, or are there any other parameters on the basis of which we can assess them?

Can’t think of an answer to question 3 immediately at this moment.

Also, would a better opportunity lie in considering sectoral followers with better management quality and focus, now that the runway for organised players gets lengthened and playing field gets leveled? UNIPLY is one such sectoral follower that comes to mind.

Discl: Already invested in Uniply.

[Shivkumar]

IHP management prefers to work with borrowed working capital. Rajas Doshi said as much during past AGMs. Net profit margins vary from 2.5 to 6 per cent. Company also depends entirely on orders from state governments. In the run up to the bifurcation of Telengana from Andhra Pradesh, company was in slowdown mode as bulk of the irrigation orders come from these two states. Point to note is that company didn’t go into loss during the slow down and continued to pay dividend. Company is also getting orders from Tamil Nadu and Maharashtra which are getting aggressive on irrigation.

Now company is moving into high-value water-related infra projects but in a very cautious manner. Margins are much better here but management has indicated that they are not looking to compete with companies like VA Tech Wabag. They seem to be comfortable working with low-margin orders though they admit that competition is less in the high-margin projects business.

Monetisation of land parcels will happen slowly and should only be treated as icing on the cake.

One cannot predict performance of a company like this since we do not know when a state government will stop investing in irrigation. But management has indicated that many of the pipes laid 50-60 years ago are due to be replaced and there is a big opportunity here.

[spatel]

@Donald

4.Which can point to one thing. If the Cash economy shrinks in a big way (necessarily coupled with the GST push), the sectoral followers may not have much leeway in NOT showing much improved quality of earnings??

And is that the REAL Opportunity??

A transit advantage I fear (until new loopholes are found).

Appears interesting and challenging times ahead in next couple quarters. Say a company report sudden improvement in earnings in Q3 and/or Q4 FY17. Head scratching moment - is it because of a) bad-to-good practice transition (point 4 above) OR b) good-to-efficient operation transition (usual hunting ground)? Our antennas are tuned to look for type b). Now will have to tune radar to differentiate type a) and b) going forward. Transit v/s sustainable.

My 2 cents. Cheers.

[chandreshs]

Can GOCL, be looked upon as real estate play ? Pls Advice

Regards
Chandresh Shah

[csteja]

Hi, is it Donald’s portfolio or VP’s public portfolio ? Can some one answer.

[Donald]

Its neither.

The example Portfolio (of a friend) was cited for having many common entities and being modelled after Long-Term and Opportunistic bets categories of the erstwhile VP Portfolio.

The purpose is to have a meaningful discussion going on Portfolio Restructuring on a continual basis - which we think is relevant for every (aspiring) practitioner. Some seniors would say - structuring is more important - than individual picks - as long as you get most of the basics right.

Proof of the pudding will be in the performance. It should not matter if it is xyz portfolio or mirrors abc portfolio.

[aveekmitra]

@Donald

What I am trying to follow are few concurrent trends based on my interaction with several companies for last few months …

a) There is a compulsion to convert to “cleaner” business practises due to GST and other measures which are being implemented for last 4 - 5 years and getting momentum now.

b) Many promoters have seen how their competing businesses who are relatively clean (not necessarily professionally managed) have increased their market market capitalization and market perception … It is obvious to many that getting enriched by higher MCAP is a respectable way to get enriched than by not so respectable and dubious ways. ANd since the chances of the later is getting constricted, they would be willing or forced or adopt to the former.

c) In many companies second generation younger “overseas educated” folks are gradually taking over their family businesses. In many cases these guys have seen cleaner business practises and associated social respectability and hence trying to transform their own practises.

d) In few cases, promoters who look for outside market capital to grow are realizing, in order to survive and grow, they need a cleaner way of doing things … Else the tap of QIP, Preferential placement or even bank loan would be difficult in future.

Now some changes are permanent and some changes are transient … It’s too early to say and we need to wait and watch their performances. But the clear shift in intent is apparent to me. Problem in India is there are sectors where even your intent is good, you can’t be sure of success as external factors sometime overwhelms the intent.

Coming to specifics, I am seeing a few opportunities in areas of building materials, oil and gas exploration, industrial & automotive lubricants, real estate which can be studied for further understanding and insight like Asian Granito, Ion Exchange, Sri Kalahasti Pipes, GP Petroleum, Kolte Patil developers, Deep Industries and few others. All these needs further review for understanding their business priorities and real abilities to transform.

Disclosure: Author is a SEBI Registered Investment Advisor. The stocks named here are only for discussion and not a buy, sell, hold recommendation. We are having vested interest in few of the stocks discussed. Do your own due diligence before investing or seek help of your investment advisor.

[Vulture]

It is unfair to recommend such small cap stocks without any basis and analysis. Some of them are also low on corporate governance. We should restrict ourselves in naming stocks without proper analysis.

[Donald]

Guys/@Vulture

Its good to be a little patient/tolerant of posts that you may not agree with (not saying that you are right in the specific case :))

Else we run the risk of making VP a very boring place that impedes spontaneous free-flowing discussions with too much accent on deep-dive value-addition. Think about that. That is not everyone’s cup of tea

Also please think twice whether the context in which something is being quoted makes sense, or doesn’t? What about the INTENT? And then feel free to take/post a considered view.

Ideation - that can be actionable (for further analysis) - is one of the main planks that folks come to places like VP for. We are hopeful of releasing the VP TopContributor evaluation/selection criteria this week for public consumption. That will give everyone much better feel for what is valued by the community and what is not, and in what priority. There will be a place to discuss that again free-flowing basis.

Request everyone to please hold your horses. Will be good if we do not respond to this message and clutter-up this thread. Thanks

[Donald]

Segregated the Candidates Ideation part to a sub-thread

Let’s hope to see Portfolio structuring discussion categories or Opportunity-Sets, and/or a fully categorised all-weather portfolio (could be completely fresh categorisations) submission here. Caadidates/reasoning can shift to the sub-thread

[Donald]

Re:opening this crucial discussion piece, with help from another friend generous enough to share his Portfolio Reconstruction strategies/learnings over last 6 years - from Jan 2011 onwards - heavily influenced by VP Model Portfolios/forum discussions

[Donald]

While this may seem impressive, the ICICI Portfolio tracker readjusts sell transactions automatically to re:adjust unit cost prices (over-estimates). Also Value at Cost (actual as derived from sell-buy transactions) is different from actual funds flow.

Funds flow shared by him looks something like this

Can also be corroborated by the Tradebook shared by him from Jan1, 2011 till date attached 85000XXXX_TradeBook_1Jan2011-14Apr2017.xlsx (64.8 KB)

The tradebook buy/sell transactions will show portfolio reconstruction strategy/philosophy followed diligently over the last 6 years - e.g. lot of businesses shed in 2011, while buying into more sustainable growth businesses progressively. Should be illustrative for all practitioners of the craft.

[Donald]

There are many lessons that can be drawn from here, by the diligent student of Investing craft.

First and foremost is the Returns picture

This kind of returns are achievable, and being achieved by many friends. Every diligent student can aspire for such returns. There IS a method to the madness. But the Focus should be MORE on Business Performance, and LESS on Market Returns. Ability to be “greedy” when others are fearful, and “fearful” when others are turning greedy, is key.

If we bring the focus back ALWAYS on Business Performance, Competitive Strategy/Position of the Business in question becoming stronger or weaker, we should get better at establishing the dependability and sustainability of Value, and by consequence better at the Skill vs Luck Quotient.

Time now therefore to again discuss how to restructure this Portfolio in these “getting-to-be-frothy” times. Not get lulled into complacence - start selling a little where valuations are rich and shift more to where there is good Value - not an easy task, but hey, that’s what we are here for, take a stand, and learn from the exercise - either way!

Invite comments from VP Practitioners. Invite more scrutiny of the restructuring decisions made - all of us can learn from such a continuing exercise.