Bajaj's Family Portfolio

Q&A: Questions & Answers Portfolio Q&A
1

Hi,

I got a good amount of one time money from one of family member who wanted it to be invested in direct stocks than mutual funds. The return expectation are moderate, ~12%-15%, but drawdown in case of adverse events is also expected to be low. The money needs to remain invested for 5-10 years.

Personally, like others on the forum, I have got good returns from growth oriented mid & small caps, over the past 10-12 years, for my family , I have gone into large caps.
The back testing has been done at a portfolio level, for one Nifty high to again when the same high has been touched post a correction ( Jan 2008 to Oct 2010; Oct 10 to Jan 13, March 15 to Jan 18, etc… Also when Nifty has crashed, say from Jan 2018 to March/April 2020 and similar instances in the past.

Barring last 15-16 months, the portfolio has seen consistent revenue and profit growth at a good RoE. The companies here have proven that the same can survive over business cycles ( at least short cycles so far ).

The purpose of portfolio is to take care education and marriage needs of kids in family. So, stability is more important than very high returns, However, the last 15+ years, the backtest, rolling returns have been in the range of 15%-30%, higher than minimum expectations.

The stocks are : ( from 12% of allocation to 5% in descending order)

  1. HDFC Bank
  2. Pidilite
  3. Asian paints
  4. Bajaj Finance
  5. Kotak Mahindra Bank
  6. HDFC
  7. Honeywell Automation
  8. DMart
  9. Nestle
  10. Reliance Industries
  11. Abbott Laboratories
  12. Info-Edge
  13. Hindustan Unilever

There is slightly high allocation in Financials ( 35%) and low in Technology. The bias has been towards historic consistency of revenue and profit growth than recent rise in price of Technology stocks. Also that financials & FMCG are currently out of favour so if market cycle changes, over 5-10 years , these can do somewhat better. Relative PEs may be higher but I am betting on these not going down much in case of a market crash.

Need your kind thoughts if this PF can get 12%-15% in future, compared to ~25% in the past.

My personal Portfolio is mid/small cap around consistently fast growing stocks that have been discussed to death on social media so will publish that separately.

Kindly opine. :pray: :pray: as this is for family and not me.

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2

Index funds all the way.
This is not my but Mr Buffets suggestion. :slight_smile:

Not an IA though. Just a thought

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3

I tend to agree with you Sir but Nifty returns in crashes, even small , have been pathetic. Covid-19 events have also changed the perception of family.
Say from Jan 2018 to March 2020, Nifty 50 drawdown is -18% but this portfolio hase given a cumulative return of ~50%.
Similarly, from March 1st 2015 ( ~Nifty high ) to Oct 2018, Cumulative returns
Nifty - 15%
PF - 70% excluding Bajaj Finance, 100% including Bajaj Finance.
Similar is for Jan 2008 to Oct 2010. But just based on the past, I cannot predict the future so requesting seniors here.

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4

-Would prefer Infy in place of HUL

  • One speciality chemical like Deepak/ PI or any of Amines in place of one bank
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5

You are tight Sir. Thanks.

6

Hi, This is a good portfolio, I can’t predict the return potential though, here is how I would do if I have to invest for long term.

While back testing is great, we can’t rely too much on it (more so in this decade of disruption !)

I would stay away from financials in my long term portfolio. Out of the top 4 private banks, 2 had faced troubles in the last decade. In financials, one greedy guy could do a great damage to the institution !

Same with new age tech start-ups as well, they disrupt & also get disrupted !

I wouldn’t count much on FMCG as well, they have gone through 50-100% PE rerating in the last decade. Even if the PE sustains, new age organised retailers(Reliance, Flipkart, Bigbasket, Amazon etc) are going to squeeze them on margins in this decade.

Lots of high quality companies (VC funded new age entrepreneurs) are going to be listed in this decade, so many of the last decade bluechips may not enjoy the premium valuations in this decade (time correction mostly).

  1. Reliance Industries (will be split into at least 3 large new age businesses, so high weightage is fine)
  2. ITC
  3. Pidilite
  4. Nestle India
  5. TITAN
  6. Abbott India (I assume you meant this when you say Abbott laboratories)
  7. Syngene
  8. PGHH (the one with Vicks & whisper)
    One of the below 2 financial baskets
  9. Basket approach to the banks/HFC if you strongly want to invest in banks (HDFC, ICICI, Axis) OR
  10. Basket approach to life insurance companies (HDFC Life, Max Fin, ICICI Prudential - the above 3 banks are share holders in these companies)
  11. Healthcare basket (HCG, Max Healthcare, Apollo)
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7

Thank you. A good set of insights. :pray:

8

The family is keen to have a guess, that in the future, whether the portfolio as a whole can get at least 10%-12% of CAGR over the next 5 years.
Hence this posting.

9

I am not sure, if direct equity investing should be tagged to any kind of goals, because on a retail level, we cannot track many companies, so a basket approach of mutual funds will be a better choice, although the overall return has been coming down slowly.

A lot could happen in 5 years in a company, or nothing could happen depending on the nature of the business it does.

In finance companies, with the emergence of fintech, I don’t know how would the business models change in the coming 5 years and if the big names would still enjoy the premium they have been assigned. Technology is ever changing. If new type of businesses emerge the safe haven FMCG sector may loose its sheen.

My limited point is that, if need be, one should extend the investment tenure, as unexpected high return may happen or the price goes down or does not move, owning to a myriad of reasons.

The PF looks strong, and if you are an active investor, you can follow the updates and see if the stocks can deliver your expected return.

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10

The idea that new age retailers will somehow squeeze the FMCGs on margins significantly will be truer in a scenario where there are a few dominant retailers and they have the capability to have their own brands at huge scale. But in India the Retail industry is still in the phase of growth and disorganised and that there are many retailers, and most of which local, that any one retailer will not have the capacity to squeeze the FMCGs beyond a certain point. For example if I do not find my regular toothpaste with one retailer, then I will go to another one or buy the same from Amazon. There is no way my wife will compromise on detergent and substitute Ariel or SurfExcel with a home brand.

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11

I completely agree with your premise on consumer preference but don’t agree with the conclusion that FMCG companies will have continue to have the same levels of pricing power of last decade for following reasons.

  1. Reliance/Flipkart/Amazon are not simply retailers, they are all going heavy on distribution. The Kiranas are getting digitised rapidly backed by these big new age retailers. Many FMCG companies already get high single digit revenue from e-commerce channels but when you include the distribution angle to it, the volume exposure to big retailer/distributor is going to be sizeable in this decade.

  2. All these companies are building private labels with excellent price/quality proposition. While this may not dampen the demand for big FMCG brands, it will dampen the pricing power of the big FMCGs(Personal care category may be an exception here though !).

Exclusive dealings with a specific retailer doesn’t work for FMCGs as the volumes are too big to exclude any single big retailer/distributor. So in essence, all the brands are going to be available from all the channels.

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12

Nice post, just one thought here - RIL may or may not take the split (demerger) route. It can very well do an IPO and result in eventual holding discount in parent RIL. RIL is always in need of money from investors and hence IPO suits their approach so far. Would be nice to know your thoughts…

13

when a company loses pricing power somewhere, it always has an option of gaining it somewhere else. Your post shows you think deeply and are right on pointing out a risk to FMCG. I would request you to continue that deep thinking on the opportunities that FMCG would get from ecommerce and also how they can very well protect and even increase their margins…at least the smart ones…OR what other out of box options they have…or even within the box options of moving well ahead of any private label etc…I am sure you will get your answers…

14

Not sure about returns over any particular timeframe but I see no reason to sell any of these shares. Personally I like to stay away from NBFC and have limited exposure to Banks but your names are top quality ones so I cannot comment anything negative for any…returns in individual companies is lumpy but over long term it seems these companies should continue to do well…

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15

It will be interesting to read AMBI PARAMESWARAN’s article in
Business Standard today on Rural consumers’ brand adoption.
Brands may have a large untapped market ahead.
“Two key influences migration has on consumption of branded products. The first is what they call the “Economic Remittance”; this is easy to explain. The migrant labour transfer economic prosperity to their homes in the village. The second transfer is what they call “Social Remittance”. The migrant labour, when they move back to the village, take with them the social knowledge of brands and how they save time and effort.”

16

No doubt that FMCG companies have a very long way, my primary concern is on valuations & growth, not demand (Growth & demand are different things).

Stock price grows by eps growth and/or PE expansion. With already a very high PE values, I don’t see much scope for PE expansion. Earnings grow by either margin expansion and/or top line growth with sustained margins. I see many FMCGs struggling with both these issues in this decade.

Having said that, i may very well be wrong & FMCGs may continue their stellar performance in this decade as well.

Disc : Invested in Nestle & ITC.

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17

I would recommend a look at Tata Consumer in place of HUL. Prospects look better for this decade.

18

Thank you for your suggestion/help.

19

This should not matter much to a long term investor. Let’s analyse the worst case scenario where RIL is a purely holding company with 3 listed subsidiaries.

Earnings growth should be in 15-20% for each of the 3 new age businesses. i.e +(15-20)%
Lets assume the holding company discount doubles over next 10 years (0.93^10=~0.5). i.e -7%
& PE doubles for the subsidiaries on account of being focussed new age businesses(1.07^10=~2) i.e +7%

The approximate returns should be sum of these 3 params which is ~(15-20)% . Trust me there are very few companies which can offer you 15-20% CAGR over long durations in this age of rapid disruption.

I don’t think RIL is mindlessly raising funds. Dilution affects the promoters equally !

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