Rudra’s PF and Information attic

Q&A: Questions & Answers Portfolio Q&A
21

Portfolio updates:

Sold off positions in Cera and Atul Auto. Booked small profits, plan to enter again at lower levels. Both started correcting.

Added more of Ajanta (370), Dishman(94) and Amara Raja(219) levels in the last week. Let’s see how Whirlpool returns pan out today.

Opto Circuits is becoming a bigger pain, March-2013 is the hard stop. Already booked losses in Opto in brother’s portfolio. Still have faith in the management, will give two more quarters before booking losses finally.

This should act as a stronger lesson for future. More lessons from Prof. Bakshi’s blog on this,

“…If you donât take losses which are going to be the occasional but inevitable outcomes of even good investment process,** you wonât last very long in this game**…”

“…A stock may have fallen 50 percent from its all-time peak in a market crash, may have gone below its 52-week low price, may have fallen below the price at which its shares were offered in a hot IPO, or may have fallen below par value. None of these things mean that the stock is cheap. A stock is cheap only if its price has fallen well below than what the company is rationally worth on a per-share basis…”

Points noted…and do not chase a falling knife.

22

Any reason for selling Atul Auto?

23

With weakening auto sales, smaller players like Atul are bound to correct more than sector average as small caps are punished always.

Should provide good entry at sub 90 levels. Sold earlier positions between 115-117.

24

Added CEBBCO, GRP, Balkrishna and Supreme industries.

Good run up in Amara Raja post results, although this kind of 15%+ jumps are more worrying than comforting. Would much prefer a gradual rise.

Ajanta seems weak, however holding on till there is further clarity on the tax front as business wise it is on a solid footing.

25

Finally decided to move on the stock switch and swapped Hawkins for Whirlpool.

The way I am looking at this opportunity is based on a 110-120 EPS over the next 4 quarters coupled with a 50 Rs dividend, the stock should yield 3050 ( 25x fwd on 120 Rs EPS + Rs 50 dividend). Hence, based on current market price of Rs 2090 gives an opportunity to earn 45%+ returns.

Completely agree with Hiteshji, that it is not wise to follow the herd mentality, but the combination of (most ethical promoters + superb product demand + established brands + robust RoE/RoCE + strong cash flows + scalability + high dividend payout + high growth ahead ) is rare to find in Indian markets. Hence, don’t want to give it a miss.

Already have this in brother’s protfolio from 1300 levels, where it is a no brainer HOLD.

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Hi Rudra,

Technically CEBBCO looks awesome. Seems like some kind of value buying are going on (occasional huge spike in volume without much price volatility). You should post the link of your blog, and create a separate thread for nice discussion on it.

Posting link of the blog posts for others benefit:-

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Hi Subash,

There’s an existing thread on CEBBCO already.

http://www.valuepickr.com/forum/untested-worth-a-look/722779333#323815341 Link: …/…/…/untested-worth-a-look/722779333#323815341

Added CEBBCO, GRP, Balkrishna and Supreme industries.

Good run up in Amara Raja post results, although this kind of 15%+ jumps are more worrying than comforting. Would much prefer a gradual rise.

Ajanta seems weak, however holding on till there is further clarity on the tax front as business wise it is on a solid footing.

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A relevant article in ET today cementing this Link: http://economictimes.indiatimes.com/news/news-by-industry/cons-products/durables/better-days-ahead-for-hawkins/articleshow/17157633.cms ,

_"…Hawkins Cookers’ growth over the last two years stagnated due to various issues such as labour strike at all its three plants. Besides this, the company also faced objection from Punjab pollution control board for one of its factory. However, the company has resolved all these issues and will eneter a high growth phase now. _

_Hawkins has very strong brand equity in the cooker segment. Earlier the company said that there is a huge demand for its product but was unable to meet it due to supply side issues. Despite one of its plants being non operational. the company posted a 38% revenue growth quarter on quarter basis in the latest September quarter and 15% growth year on year. _

The recent no objection certificate for its plant in Punjab, the company’s output will increase by more than 50%, leading to better days ahead for Hawkins. The company’s earnings are also likely to grow at a 50% for the next one year. At the current market price of Rs 2100 , the company’s stock is trading FY14 expected earnings of 15, which is quite attractive…"

__

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Converted Techno Electric and Supreme Industries into Hawkins Cooker.

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Rudra, You seem to be loading up the truck with Hawkins… To what % of your portfolio do you indent to take it up? Have you done any channel checks to see the restoration of supply ??

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All my top holdings will remain untouched ( Amara Raja, Mayur, Kaveri, Ajanta, Unichem)

Converting a few small holdings to Hawkins. Altogether plan is to take it to max 10-11% levels. Beyond that the percentage allocation will be market driven (through appreciation)

No matter how exciting a stock opportunity might be, we should be cautious enough to not go overboard. God forbid there’s a fire / labor unrest / natural calamity in any plant it can dent your portfolio big time.

Regarding channel checks, although mostly secondary, reactions are very positive. However, this again is biased, since North India is a strong Hawkins bastion similar to southern markets for TTK Prestige.

1 Like
32

Added Oriental Carbon @140. After the correction, the risk:reward seems favorable for an entry.

33

Did some scuttlebutt on Hawkins.
@ Big Bazar, Ambience Mall, Gurgaon.

Talked with the guy at the pressure cooker and cookware counter. He said they had received huge supplies from Hawkins since the start of November till the day before Dhanteras. A peep in the store behind shelves and I saw huge bunches of Hawkins boxes stacked up.

BUT key negatives, most of the display and shelf space is still occupied by Prestige. Don’t know what kind of incentives are paid by Prestige for those.

And the guy said, Hawkins supplies has completely stopped since Dhanteras. No more supplies has been received till today.

Being on call with Subash and we were discussing La Opala. Did some questioning on this too. The guy said for loose items melamine is mostly in demand. Bone china hardly sells.

La Opala has very good traction in dinner sets. Financials, prima facie looks decent. Need to look into this stock in details.

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Looking for patterns to avoid regarding cases like Opto Circuits, I came to one trend.

Increasing trend in Working Capital to Sales ratio. I have added this ratio to sceener.in so that this can be used in filtering screens.

Among the portfolio companies, what I observed is typically export oriented players have very high WC/Sales ratio. names like Opto Circuits, Balkrishna, Oriental Carbon.

On the other hand companies catering to domestic demand has low WC/Sales ratio like Hawkins, Mayur etc.

While Mayur has managed WC very well till now, with increase in exports over the next few years this ratio should be a key monitorable. Without the presence of brand moat managing working capital with long WC cycle could become a challenge.

One alarming sign is for BKT. With a possible demand slump, coupled with high debt, excess capacity and long WC cycle we can have another potential disaster (Opto like scenario)in the making. Although the company has managed execution very well till this point, the finance director souned really cautious in the concall yesterday. Was thinking of adding BKT earlier at this price, but now I am contemplatingexit booking a minor loss.

35

Added Unichem, oriental carbon.

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Hi Rudra,

Yes, working capital is a very important parameter to keep track on. I don’t think WC is very high for OCCL. Though the debtors have been increasing (perhaps to push sales) but otherwise things have been okay for this co.

Yes, demand scenario is not good for BKT and things are concerning for next couple of qtrs. Though the CFO sounded cautious but he also maintained that they should be able to maintain current turnover rates and they do have that much of order book…Lets see how they handle this tough time.

Ayush

1 Like
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Added Astral today. Have been waiting for a while now to enter with price correction. Took a smaller position. Will be adding on dips.

Planning to make the top 5-6 stocks contribute 70% of portfolio. The allocations will be changed accordingly with additional capital.

Regarding OCCL, have updated my comments in the company thread. The OCCL position is very small and I do believe OCCL merits very limited allocation in one’s portfolio.

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On relative merit basis, among the four stocks currently in discussion - Atul Auto / Kajaria / La Opala / Granules - Atul looks better.

https://www.edelweiss.in/market/compfundcomp.aspx?co_code=14817,1129,4939,12632

For La Opala, with capacity expansion, depreciation will increase and also one needs to ascertain the capex funding (debt:equity mix) to get an idea on impact of debt post capacity expansion. Can’t find the 2012 AR.

La Opala is operating at historically highest margins aided by continually lowering debt and depreciation, hence when both increases profit margings might get hit.

Regarding Kajaria, a great story and seldom you find companies adopting clever strategies boosting asset turnover and margins at the same time thereby boosting RoE.

Kajaria is taking 51% stake in JVs against outright buy, thereby controlling the quality of production and adding incremental capacity at a fraction of cost (as compared against a greenfield expansion) and all this production from subsidiaries and JVs are sold under the brand Kajaria thereby boosting margins. But the price has already ran up so much.

It is a great business now but the price may not be right at this point of time.

Regarding Granules, looks like a good story in the making however things will remain subdued for a few quarters at least. Mainly a FY14 onwards story as the growth unfolds. Since I am invested in Dishman at this point, not looking at adding another similar business. Might be a good switching candidate from Dishman to Granules if both prices support (Dishman on a upside and Granules on a downside :))

On a relative merit basis, Atul Auto looks best. Given the long term growth (beyond 5 years) is not a given, still there is enough opportunity and scope to ride in the medium term. The company has the best debt position among the four, cash flows are robust, working capital management is by far the best and chances of positive surprises are more.

**Added Atul Auto. **Will add more on dips.

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Hi Rudra,

You forgot to mention Poly Medicure, which again seems to be another good stock to add for long term.

Recent report by Credit Suisse has expected a 40% upside at CMP for Kajaria Ceramics. May turn out to be a “self fulfilling prophecy”.

As far as Granules is concerned, I doubt whether you can get Granules as cheap as today after 3-6 month (stock quoting 20% lower than the peak price).

If you think a little, “La Opala” seems to be have similar story like Hawkins (same consumption story, same expansion story, high ROE 20+, similar supply side constrain) with added advantage of reducing debt with each passing qtrs, and a cheap valuation.

And don’t you think Atul auto’s stock price have rose to fast, and bit high. Won’t you think you can get a better entry point in future at a lower price point ??

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Hi Rudra,

Good observation on Kajaria. I was going through the recent investor presentation’s and AR and was quite surprised by so many 51% stake JV’s. You helped to put it in right perspective.