Yogesh's blue chip 10 Portfolio


(Yogesh Sane) #143

EPS has dropped to 430 in Sept 2017 as some of the automotive business is discontinued. company also bought back shares at high valuation. Company has average ROE of 16% so whatever moat company has is not reflected in profits. Overall Bosch is trading at 47 times earning so most of future growth is priced in. I don’t have visibility beyond what is priced on so not including Bosch.
Price has gone nowhere in 4 years because 4 year ago P/E ratio was 80. That’s the peril of paying a high price. In spite of growth in earnings, stock went nowhere as it was overvalued. During the Modi rally in 2013-14, stock went from 9000 to 28000 based purely on hope and expectations without much realizations.


(aceinvestor_75) #144

Hi Yogesh, Happy New Year. Wanted your thoughts on ICE maker, i read your write up, since then mk cap has moved 100%, how you see it valued now? Thank You.


(Susindar) #145

Hi Yogesh. What are your thoughts on ITC. What changed so much that price fell 30%. I think they have a bigger Moat than other FMCG stocks due to cigarettes as there is no Patanjali disruption. Do you see ITC heading back to 350 levels any time soon?


(Yogesh Sane) #146

@aceinvestor_75
Happy new year to you and all VP members.
Ice Make has rallied almost 100% from IPO price. Investors have priced in higher profits that will come from growth in next 2 years. Company is building even higher capacities so it will be able to grow even further beyond what is visible. Growth opportunities are there and company has demonstrated ability to capture those opportunities.
However, for manufacturing companies, growth is limited by capacity which cannot be added overnight. Markets always discounts certainty into the price. Only uncertain part of the future is not priced in. I will put intrinsic value of Ice Make at 90. That does not mean price will drop to 90. It only means I will be confidant that buying at 90 will reduce my chances of permanent loss of capital. At CMP, there is no room for error. company can still grow faster than expected and stock price can still go up without any any major pullback but buying at this price is risky but not speculative.

@susindar
When GST rates were finalized, effective taxes on ITC worked out to be lower than what ITC was paying which meant either ITC will pass on those taxes to consumers boosting volumes or retain those boosting margins. Either way it was beneficial to company and investors drove up the price higher. Govt quickly recognized this and plugged the loophole with additional cess on tobacco and the price fell. Overall, price hasn’t changed much in 2017. ITC has under performed Nifty 50 in 2017. It continues to be a cashflow story and FMCG play as a potential benefit that has been illusive for years. 350 is unlikely in 2018. This is a steady 15-18% story.


(GSApte) #147

Hi,

I would tend to agree with Yogesh on ITC story.

It basically spiked to 340 which was clear over valuation due to GST taxation being on lower side than earlier taxation. Now since this is corrected, it is a moderate to low growth story (probably in the range of 10%-12% EPS growth depending how taxation is done going forward.). There are chances that, Government would continue its stringent taxation policy on cigarette business thus keeping pressure on margins and volumes.

Earlier growth rates which have been there in MOSL Wealth Creation Report of Dec 2017 may not be seen in near future unless its FMCG business grows at faster rate of about +20%.

All in all, it looks like 10%-12% EPS CAGR story and Price CAGR of close to that or above depending on your purchase price.

It is a steady Dividend yielding Large Cap suitable for some investors.

Disc: Invested from below 195 levels with long term view with moderate expectations.


(Hamir Asher) #148

As per the DRHP ice maker capacity utilisation is appr 40%. Just for info … there could be sales growth without capacity addition for some time to come.

Not yet invested but actively tracking.


(aceinvestor_75) #149

Appreciate your reply .


(Prasad India) #150

@Yogesh_s, I truly admire your analyzing skills
Supported by analytics with numbers.
Learning is huge for me.
Thanks for being a part of this forum and educating us.
Wish you the best for 2018 and beyond.
Prasad.


(Susindar) #151

Hi Yogesh. Can you please share your views on IRB Infra? What is ailing this stock? It is quoting at single digit PE. Can it be considered as a blue chip or am I missing something?


(asvasanra) #152

Hi,

Did you follow any particular methodology for assigning the weights to individual scrips in the portfolio? Can you share on how you arrived at these weightages please.
Regards,


(Yogesh Sane) #153

A quick look at the segment data shows that while construction brings bulk of the sales, BOT business brings bulk of the PBIT. However, BOT business has large interest costs so I think after deducting debt servicing costs (interest + principal repayment), BOT business is not contributing much to the consolidated bottom line.

image
Source :2017 Annual Report

Construction businesses are typically not valued like an annuity businesses because road construction is not a repeat business. however, given the scarcity of infrastructure in India, road construction business will grow for many years. BOT business while being an annuity business, is not a perpetuity business as a typical toll collection concession period is between 10 to 30 years. That means at some point, toll revenue from existing assets will drop to 0 so it cannot be valued as a perpetuity business using PE ratio.
Overall, I prefer to value such businesses using book value after considering return on book value (ROE) and rate at which book value has gone up. Here are the stats:

image
Source: Capitaline

As you can see company has a book value of Rs 155/sh and it has grown at an average rate of about 12% over last few years. Growth rate as dropped in recent years as BOT business became larger part of the overall business. To me it looks like BOT business is weighing down on this company and that’s why they tried to monetize some of it by selling it to a trust using the new INV IT structure. However, I think it is not doing well going by the drop in price on NSE, which means company will have trouble monetizing more BOT assets.

Under the circumstances and given the low growth rate and heavy debt load, I would value the company at around 1.2 times book value or around 180 Rs/sh against current market price of 229.


(Yogesh Sane) #154

No methodology for weights. Undervalued companies get higher weights and fairly valued companies get lower weights. I generally assign weights between 8% to 16%.


(sarthak kumar) #155

Hello Yogesh,

Just wanted to know your thoughts on Lupin after Q3 results. Would it continue to have the same weight in your blue chip portfolio or do you propose any changes.

Thanks


(Susindar) #156

Hi Yogesh, what’s your thoughts on replacing Lupin with another pharma pick like Torrent Pharma.


(Yogesh Sane) #157

@sarthakkumar19_ @susindar

Lupin reported disappointing numbers. The troubles for the company are not over yet and end is not in sight. However, I think these are industry wide headwinds and anyone with substantial sales in Us will face this issue. For pharma, all roads lead to US so there is no escaping from it.

Having said that, pharma is down but not out. Value proposition is still intact. Indian generics are popular all over the world for their cost and quality. any country will want to reduce cost of medicines and India hasn’t lost its competitive advantages in making low cost quality drugs.

Industry including Lupin is going to a new normal of low margin, low growth business and market is adjusting to this new normal but for last several quarters market is redefining what this new normal is going to look like. Until that happens valuations will be volatile.

Lupin, Sun made big acquisitions at the top of the cycle and now they are saddled with compliance issues and debt. These issues are limiting their ability to invest in R&D which is how future sales is going to come from. All these factors have impact on valuations.

In a DCF model, most of the value come from terminal value so one or two bad quarters does not really change the math but it does redefine what the steady state growth and level will look like which has a larger bearing on the overall valuation.

My portfolio is a low maintenance portfolio so weights are adjusted only annually.

This portfolio invest only in Nifty 50 companies.


(Susindar) #158

Thanks Yogesh. What’s your thoughts on Vedanta. On a PE or DCF basis, this stock appears to be quoting very cheap. However as you have mentioned above for IRB, this stock maybe better valued on a P/B basis as the mines will have a finite life. Do you think this stock is currently undervalued?


(Chemist) #159

What is your opinion about Aurobindo for past several quarter they are posting good set of numbers, but it is not reflecting in the stock price?

Are we missing something which market knows and hence the stock price is subdued


(csteja) #160

Any idea why other cigarette companies like Godfrey Phillip got stuck in top line for years? I am bullish on this industry as I see many young people in my office smoke, drink daily. Also, I wonder why branded breweries and cigarette company top lines are not moving much when young has so much of disposable income and are spending on these stuff.


(csteja) #161

Part of your comparison is not appropriate. I am 26. Even I felt the same years back. But what we are missing out is the opportunity that external world is providing us today which doesn’t exists few years ago. I pondered upon the fact what am I doing all my school, college days only to realize that opportunity (internet, information) doesn’t exist those days. You are comparing with top b-school analysts of the past. I bet they would have done well in their generation. With whom you have to compare with is people of current generation. I make 4x of my fathers last day PSU retirement salary today. But If I compare that with my generation, I am just doing “ok”. I see many educated market retail participants (Buffet followers, value investors) and friends investing in MFs. I see markets are getting efficient day by day. Even though it appears like we are becoming absolutely rich on paper, relatively every one is on the same page. The problem to solve is, given that so much of information is available to everyone (internet), how can you generate returns way better than other participants? Otherwise, inflation eats up as every one will have same disposable income. I also feel MFs are extensively selling past data of 15-18% CAGR to new fund investors. Intuitively, I feel history will not repeat and India will follow US way (index funds returning better than MF) with markets participants getting smarter each passing day, efficient algo trades etc. Buffett is an early entrant into markets when there is no participation. RJ is one such. Today, stock markets are well known to many. If many becomes a billionaires, $1B will have no value. I kept lot of energies in markets during 2013-14 when hardly no one talked about it. Today, I became a passive investor when I see many people in my vicinity taking about balance sheets, mutual funds etc. I felt I should keep my energies in a field which is still not-priced-in despite being uncertain. For me, markets are like FD. I reserve money here. I don’t see myself getting super rich by investing in markets.


(1.5cr) #162

In that case markets in USA should be efficient, in which case prior to charging fees funds should also deliver index returns which they dont. Last year when everyone was in investing in the markets, mutual funds still delivered far better returns. Youre reasoning of inflation eating away return is false. If the nifty50 delivers 12% cagr that means the companies in the nifty 50 are delivering 12% a year on average in terms of growth in earnings. If inflation is above that then in that case corporate earnings in itself arent beating inflation. Salary increments will also not beat inflation. Then over time does the world descend into anarchy?
Same statement could be passed in 07 before the crisis. After that what happened?. If markets were efficient why were superb companies trading at 3-4 pe? what sense does that make? and this was around 5-6 years ago. Dont tell me markets have become effiicient in 5-6 years. Algo trading would tell you based on data that a company is not worth investing. What it wont tell you is that the same company could be making fundamental changes with a competent mgmt that could significantly boost roe, roce. Interpreting data is the key to being a better investor. Our economy is going to go from 2trillion to 5trillion, 3% of households invest in equitiesin India in the USA that number past 40%. Even in an educated market like the usa markets arent efficient. Look at the wealth companies like activision have made for investors. Activision were a shitty company that made movie video games. We all know of call of duty now, their crown jewel. Gamers knew of the strength of the call of the duty franchise 2 years before “analysts” started noticing that this could change the company completely. We all played the game as kids…alot! Had we/our parents intepreted that data differently Im sure many would have invested in activision. If markets are efficient why do we see such rich valutaions today? Especially in India, markets cannot be efficient for the next 30 years. Everybody had access mohnish pabrais research when rain was trading at 80 or 90 bucks why didnt people buy?
Auction driven markets cannot be efficient, as the combination of ease of transactions and liquidity with human emotion wont allow it. A few years ago we realised that psu banks and corporate banks cannot lend due to npas. And majority of the market was held by them. Opportunity was there for NBFCs to grow very fast. How many invested in bajaj?
MFs in India will continue to post 18-24% CAGR for the next decade+.
Naturally people will talk about markets, look at the rally weve had, everyone wants to be an investor as was the case in 07. The sudden drop in the markets over the last one week, and weve seen a huge drop in sms tips already.
Inflation is also very low in the USA. Indias inflation decreases so will our rates so net net there wont be an affect. 4x your fathers income would be alot of money. You should be making around 40-80 lakhs a year, in which case you must be among the wealthiest Indians today. So you are not just doing “ok” You cannot compare if you make that in USA for obvious reasons. Our Large cap index will compound at 12-14% a year. Assuming inflation to be out FD rates we will be beating inflation by atleast 4-6% a year. A smart large cap stock picker can itself pull 18% a year for next many many years. We are far far away from the USA. Again i reiterate, look at India and how far India has to go as a country to reach the levels of europe, usa and china. Markets are still not efficient in usa.
You have to discount the last two years. In 1999 everybody was buying equities then what happened? in 07 everyone was buying equities then what happened? Auction driven markets cannot be efficient until humans exist. Algo is not going come and tell you to that management of a company has to be given premium valuation. Algo is not going to tell you that exide had ditched replacement market giving amara raja a free hand back then. Algo wont tell you that Relaxo’s bottom line was being hit because of increase in asp and that was going to pay off in the future. Algo wont tell you these things. If a fund is going to charge you 2% fee off of aum and then take a massive incentive fee above a 10-15% hurdle rate then naturally it is not easy to beat the index.