Chins' Portfolio

Chins · June 2, 2021, 2:05pm

@sdc20, thanks for highlighting the recent order win. A few things to note:

This is a fairly large capacity order, after the 320MW plant which is to be commissioned in Q2FY23, and the 250MW plant at Ayana.
This is due to be commissioned after the other NTPC win and the GSECL projects.

They’ve completed one year in Odisha, and I quite like the media releases given on the company’s website. They were prepared for the cyclone and restored power quickly.

I also came across this news regarding their orders at Dholera. The first release they gave was a win for 100MW and 50MW, but in the most recent presentation, this has changed to a 250MW project and a 50MW project. I’m looking to confirm the right capacity.

Regarding the stock price, the run up to the 52 week high coincided with the largest volumes Tata Power has ever seen. I’m still trying to find out which fund bought out such high quantities in March. I’m not sure if the order book alone is going to aid a rally. Expecting a further clean up of their books through the divestments that were planned for later this year, along with their (IPO?) plans to substitute the debt reducing INVIT deal that fell through.

The longer it consolidates, the more time I have to add

Rushil · June 2, 2021, 2:28pm

Hey Chin,

Is the tata power thesis centered on the renewables portfolio completely akin to what happened in Adani Green or is there a fundamental change that they are doing

Chins · June 2, 2021, 4:58pm

I don’t understand the comparison. Adani’s businesses have grown through tremendous amounts of debt, allegedly illicit transactions and favourable policy outcomes (although the last one holds for almost any industrialist in the country at some period in time).

Here are two articles which highlight this:

Both are great reads, and the second one highlights the trail of the alleged fraud which ends in companies owned by the Adani family, based in Mauritius. Mauritius is a recurring theme, with four foreign investors being registered to the same address. Here are the holdings for one of them, and it’s suspect that they don’t hold any other listed companies:

Their website http://www.untrin.com/ is equally shady and doesn’t look anything like a fund holding a stake worth 33,000 crores.

In terms of valuations, how many years of growth has the market priced in?

Company	P/E	Price to Sales	P/B	Debt/Equity
Adani Enterprises	158	4.31	9.91	0.89
Adani Total Gas	360	102	89	0.24
Adani Green	967	65	92.4	10.8
Adani Transmission	140	17.2	19.2	2.89
Tata Power	24.5	1.06	1.55	1.42

I’d also like to leave this wonderful comment made by Hitesh sir in 2013:

Tata Power is trading at reasonable valuations; they’ve gradually ramped up the various offerings classified as renewables, and walked the talk of moving away from coal power and dealing with transmission and distribution. The investment thesis is not just the renewables portfolio, but also the increased efficiency in the utilities business (seen by the 25 year contracts across the Odisha DISCOMs and reduction in AT&C losses post takeover).

A secondary long run thesis revolves around charging technology, and Tata Power could be a dark horse in this regard. I want to point out that this has many IFs and cannot be the main reason one invests in the company. There is already a case for upgrading existing distribution systems in India due to high losses of 16-22% compared to the global average of ~2-5%. A report on the charging infrastructure highlighted how varying levels of EV adoption via home charging would put a higher amount of stress on the local grid. Tata Power has already worked on this through chargers in Mumbai, and are uniquely placed to take advantage of the ecosystem given their exposure to Tata Motors and the grid.

I don’t want to push the last paragraph as the primary investment thesis but rather an afterthought, given how early/forward looking it is. The risks are whether they’re able to continuously bring down the debt/equity (already down significantly from last year), what the Odisha picture looks like after a year of operations, whether they’re able to succesfully divest the legacy business, whether Mundra will continue to bleed, and whether they lose key contracts to the Adani group.

Malkd · June 3, 2021, 6:57am

Hey @Chins . I’m a huge fan of the Indepth manner you look at companies especially since you just began last year if Im not mistaken. Kudos. Your posts on ingrevia really made me question my thesis with all the companies I own regards how much we don’t know about the companies we own. That being said I wouldn’t write off ingrevia because of that…
Corporates have a list of priorities and are always prioritising their bottomline. Uptil now the Nira plant issues would have been on their list of low priority since they knew they were getting away with it. With the environmental clearance coming up in August 2022 I’m sure it will automatically go up their checklist and before we know it there’ll be an increased expense of a few crores in their balance sheet one quarter and the issues at nira plant will disappear.
Also, considering they’ve only recently demergered and a whole set of investors are now looking at their plants in detail these nira issues won’t be able to stay hidden for long and if they conduct Concalls I’m sure we ll learn a lot more over the next 4 quarters before the EC is due. Nira will hopefully finally take priority for them since there is a real chance now that it can hit their bottomline and ironically the same reason which caused them to ignore it will cause them to fix it.
If they were a small microcap under an unknown name I would run away but that isn’t the case here.
If one feels that these issues will get sorted but hates the company due to social injustice and environmental protection then that’s understandable and a full exit is warranted but tbh it’s just the ugly truth with most companies. Nestle is one of the most hated companies in the world, amazon has always been known for treating its labor badly… Yet these issues haven’t stopped them from remaining the darlings of investors.
Basically, I don’t agree with what ingrevia is doing… Its very cavalier and unjust too… But I wouldnt be suprised if they address it now that they are under the scrutiny of investors and the EC deadline and I’m banking on it being a non issue in a few quarters. Anyway I’ve mailed the CS and eagerly awaiting the Concall to see if the company is doing anything regards it. Hopefully we get clarity soon

Disc: one of the lucky investors at its lowest point ie 241.5 and hoping I never have to let go.

Chins · June 3, 2021, 9:02am

Thanks for the kind words, @Malkd. I did start last year to help make decisions to preserve the family portfolio, but I found that the market united my love for public policy and good ideas, and is also a way to express oneself, through conviction of the effects of a particular policy / business model. Valuepickr and portfolio threads like yours have gone a long way towards making me a better investor. My mom used to read Capital Markets, and wishes she had tools like Tijori / Screener in her early days. I don’t mind making mistakes and being wrong, but I’d rather be wrong after reading in depth rather than through laziness/negligence.

You’ve been right when I’ve expressed concerns before, and I’m sure you’re going to be right about Ingrevia.

I agree, and was having this conversation with my parents. Reliance is responsible for creating a lot of the single use plastic we use. Nestlé has been riddled with controversies since the 90s, from alleged child labour in their supply chain, to the horrifying story of baby milk powder in the African continent. I wouldn’t bet against either of them.

The problem I have with Ingrevia is that this looks to be a culture of we don’t care. Nira had the chemical leak around April 19^th 2019, and was shut down following this. I read through all the exchange filings between March 1^st 2019 and June 1^st 2019 to see what the company’s response was. Guess what? They didn’t disclose the chemical leak, plant closure, or any comments on preventing this from happening again. To me, this is the nightmare. The plant is so far away from us that we trust them to disclose developments as we would with a pharma company, and I don’t trust them. (They also received an OAI at the same time, but that’s Pharmova’s problem) Compare the response Shilpa Medicare gave after their OAI with the lack of disclosures made by the Jubilant group. Even in the concalls following the leak, there was not a single mention, and I don’t know why the analysts present on the call chose not to take it up.

With Gajraula, the report from the government board is equally damning. They drew groundwater without permission and its now classified as over-exploited. If you read through the various breaches listed in the report, they’re numerous and across the entire plant. (I highlighted how they don’t have any fire safety measures where they’re storing hazardous waste in the thread)

They’ll throw money at the NGT, and it’ll go away for a few years, but these are cultural issues which would be deeply problematic if they were dealing with any other governmental structure but ours. With covid, we’ve also forgotten how bad pollution was in Delhi. If pollution in China and subsequent plant closures lead to huge global tailwinds in various industries, why should we be lax about the very real possibility of our own industries being crippled by similar policies? (Especially if we’re going to see a large capex cycle in the next few years with infra + steel + chemicals…)

Here’s a really nice read on how carbon pricing is changing in Europe and would place incentives on industries to import from greener sources:

My first tranche of Ingrevia was at 260, and the difference between our holdings was the allocation. I allocated heavily for the same reasons you did, that we’re unlikely to see these prices again. This made Ingrevia my largest holding at 15%. The position size knowing the regulatory concerns was the reason for unease. Wouldn’t it be the same from your side if Ingrevia was as much of your portfolio as Laurus Labs / Deepak Nitrite? There’s a world of difference between the investment thesis / quality between these two and Ingrevia. I’ve brought down the position to ~5% now, and that’ll slowly reduce with my SIP.

As I said before, you’re certainly going to be right to continue holding. It’s likely that the stock will run up significantly, and even if the plant gets shut down, perhaps the correction in the stock in 2022 will still leave it higher than current prices. I just don’t like feeling uneasy and can’t trust the management on this front.

I had a chat with Harsh, and he pointed out that if we prioritised ESG metrics above all others, we’d have a stock universe of maybe 20 companies.

Malkd · June 3, 2021, 10:12am

I did bet big but not relative to Laurus/Deepak… I doubt il ever have the confidence to do what I did with them again with any pharma/Chemical company.
After the recent run up its now at 9 percent of my portfolio which is still relatively large compared to most other pfs I’ve seen and considering I have all my networth in equity it is a huge amount too but I get your point. That being said I would still tend to agree with Harsh.
The reason we buy at an MOS is to take care of these unknowns and at the prices we paid we definitely have an MOS at low single digit PEs.

In this situation you have brilliantly found something that would remain an unknown and hasn’t been picked up by even institutional investors and ironically your finding has increased my conviction even more since there is a clear monitarable to track now.

There will be a point when this issue comes to light and ingrevia has to deal with it… But considering the valuations of other spec Chem companies ie even 40 times(and we don’t know what the unknowns are there) I’m even happier I got ingrevia early and can now track this known unknown thanks to you. Would I add more at these levels or higher until the issue is resolved? No.
But il gladly attend the next 4 Concalls and see how the management handles this situation. We haven’t even heard from them once as the newly listed entity and neither have we heard from the institutional investors.

So I totally agree with you… You are a 100 percent right regards the company. But giving them a chance to correct this mistake at what could be a once in a lifetime entry price into a spec Chem company could make sense too.

Note: I dint realise you still had 5 percent in it and planned on holding :). I thought you’d given up totally and felt I had to atleast make you see another perspective of it after you helped me dissect ugro when my conviction was wavering (which has broken its 52 week high today :)). I also understand the sense of uneasiness holding a concentrated portfolio. At the end of the day whatever helps you sleep well at night is the right answer. Cheers.

Chins · June 3, 2021, 2:08pm

Congrats on your bets on Laurus and Deepak My first tranche of Deepak was at the 600 levels, and my mom was first to Laurus at around 230. In hindsight, I could have invested large allocations then, but two things prevented me from doing so. I was new to equities when Deepak was at those levels, and I lacked the experience to bet big. Over time, I got comfortable as the tranches grew larger. The second reason was that a significant portion of our net worth was already in the family portfolio, and we decided to keep my savings liquid / in FDs given the uncertainty surrounding the pandemic. My SIP takes care of this now as I move my net worth into equities over 2-3 years.

Should there be something like a Taleb black swan event again, I can accelerate the SIP and invest big, but I’m not counting on it, and learning to trust my conviction when the opportunity presents itself (SIS and Ugro recently).

Edit: If the valuations for an IPO like this one makes sense, I’d buy my lifetime’s allocation at one go:

I’m on the same page as you, and that’s why we’re both investors in Ingrevia . My mom bought the company too(and loads of Ugro), and we decided that she would continue holding while I booked some profits to hedge against regulatory risk.

That said, the advice she keeps repeating is that the market will always award an opportunity to enter for unpredictable reasons. In 2019, she bought more infosys when it fell 16% on accounts of some whistleblower claims which were cleared up 6 months later. She accumulated Mindtree last October after it fell 10% following weak Q2 results. In this regard, Valuepickr has expanded my universe to a great degree, and I’m following many companies that I hope to fit into the portfolio in the future.

As I write this, I realise Navin Fluorine is trading at similar valuations to Vinati, and I’ll investigate if switching makes any sense.

I’m actually comfortable with concentrated holdings despite what my portfolio looks like, and I’ve seen how allocations change over time through splits and bonuses. I’ve linked to a post earlier written by Harsh where he analyses how an equal weighted portfolio could lead to a disproportionate outcome over the years, and I’m hoping that’s what happens with mine. As long as my hit rate is fine, and I assemble a set of companies at the right valuations, I’ve done my part and can leave the rest to the market. I would never have guessed that Birlasoft would return more than Ingrevia this month, and I’m hoping that I can accumulate more SIS at these levels.

The point of this forum is that we can collaboratively arrive at an investment thesis, and you added much value to the Ugro discussion. Thank you for writing here regarding Ingrevia

On price action, I noticed that Ingrevia picks up high volumes close to the end of the day, and I attribute that to foreign investors buying.

Here’s the same observation from early May:

On Ugro, it’s also displaying a golden crossover as the 50DMA has coincided with the 200DMA. This happened for one day in April, but the 50 day average has been below the 200 day average since 2019. The other level that’s important is today’s high of 159.75, which coincides with the levels seen just before the fall due to covid in March 2020:

I think we got in at the right time

Chins · June 7, 2021, 12:55pm

@sdc20, new measures taken by the government in the power space:

Lots of proposed changes to the way DISCOMs get their power supply. The full draft is available in the article.

@nagesh_reddy, Digispice has rebranded Spice Telecom into a marketing automation company called https://www.koreroplatforms.com/. A lot of it is identical to their old CPaaS business, except they claim to now have 350+ customers across 11 countries. They say it’s sector agnostic, but they aim to provide marketing automation to the BFSI sector.

Chins · June 15, 2021, 12:00pm

I used to ignore IPOs that didn’t interest me, but I’ve realised that they cast a huge spotlight on listed peers and can’t be ignored if one is to exploit valuation gaps. This forum brought the gap between Jubilant Ingrevia and Laxmi Organics to light, and imagine my surprise when the same opportunity was presented between Godawari Power and Shyam Metallics (and Sarda Energy too) just as I had sold a majority of my Ingrevia shares.

I broke my rule of buying close to the 200DMA as it was down almost 5% on the 1^st of June, and was very close to its support line. Some fund must have become interested at the same time, as the volumes this week are the highest in seen five years, and it subsequently rallied almost 60%.

The other update is that I’ve added substantially to my position in SIS, it’s trading close to the cheapest it’s ever been. Will write a long form post on the full thesis and horizon, as well as post updates on the SIS thread concerning the latest annual report and old concerns regarding un-audited subsidiaries / high receivables.

Finally, I’ve added one tranche of RPPL to my smallcap portfolio, and wanted to thank @Tar and @sahil_vi for their discovery and detailed exposition. Learnt a lot from their threads, especially the insights into Strides and Saregama.

For clarity, the top 10 holdings in the family portfolio are as follows:

Company	Weightage
BAJAJ-AUTO	4.74%
BEL	5.76%
GRASIM	13.72%
ICICIBANK	4.68%
INFY	12.71%
LT	11.54%
RELIANCE	10.97%
TCS	23.31%
TATACONSUM	4.94%
ULTRACEMCO	7.64%

This should explain why you don’t see large / mega caps in my portfolio. The goal with this one is purely of capital protection, and a lot of @Investor_No_1’s writings resonate with the rationale behind the portfolio. All dividends obtained from these companies go into a separate midcap portfolio which comprises some of the names I’ve spoken about in the thread, and we’re restructuring a part of the holdings such as BEL and slowly replacing it with ITC/HDFC Bank.

Going forward, I’m not going to have much time for the market. I’m just going to keep my head down, continue the SIP, and keep reading in order to have my top wishlist for the next big re-jig.

SBIAMITAVA · June 16, 2021, 4:31pm

I wanna know your principle from exit of any stock

Chins · June 17, 2021, 9:22pm

Hard to give an answer to such a broad question, or box oneself in with a rigid principle.

The general idea is that I restrict myself to 15 companies. If I have a new idea, I only replace an existing company if valuations and forward multiples offer a better risk adjusted opportunity than existing holdings. Aside from this, exit decisions are based on individual circumstances. The portfolio is largely unchanged from the first post in this thread, and I’ve explained each exit higher up in the thread.

Chins · June 18, 2021, 9:43pm

For the benefit of anyone at this forum searching for information on Birlasoft, I’m sharing my notes on the Q4FY21 concall:

888 million dollars in deal wins.
50% renewals, 50% new deals, 95% of deals from existing clients!
Pruning tail accounts that are not strategic, pursuing higher value deals. Seen in lower $1 mil deal wins, increased $5 mil deal wins.
Key metric used by management is Days Sales Outstanding. Improved from 72 days to 56 days.
Cash in hand of 1000Cr.
Attrition rate down from 19% to 11.6% (how much of this is pandemic job security related?)
Key focus is on PaaS, cloud adoption (Microsoft/Oracle) and automation.
Big structural shift - deals are now multi service deals rather than single service, so we will cross sell and can’t say a deal belongs to one vertical.
Don’t want to go acquire something through M&A for the sake of growth. Very bullish on organic growth.

Niraj Shah is a treasure. He’s always on the ball, well prepared, and makes any interview much richer with really smart questions.

On a quick side note, Mr. Kapoor is a genius; he’s taken a picture of his living room clean and neat, and then used it as a virtual background on Zoom. Now he doesn’t have to worry about tidying it up before a call. 10/10 trick.

The first ten minutes are a rehash of the latest quarter’s results. Here are the interesting takeaways from the remaining twenty:

On work from home trends: made provisions and budgeted for travel costs. Will not affect bottomline. Careful and positive about keeping talent, seen in low attrition rate.
Mine the clients, cross sell and the deal sizes grew larger and larger.
Goal is to carve a niche in our verticals where we are better than the big players. We can’t solve every problem, but what we choose to solve, we can do much better than anyone else.
When we acquired KPIT, used to think 75 million dollar deal wins were a great target for a quarter. Today, 200 million dollars should be the average every quarter.
By 2025, we want to have 7500 Cr. of revenues (3500 Cr. today, implies 18% CAGR). We will do this by:
- Grow top 30 accounts by > 20%;
- Platform strategy: partnership with Azure / AWS to offer solutions across the value chain;
- New channel for sales; good partnerships already in place.

Q) What are you doing differently for your clients to drop existing providers for you? Are you lowering pricing?

Quality of service is the most important thing for us. Then, we make sure we offer the right solution to the problem. Only then do we look at pricing, but we don’t lose pricing power. If our solution is good, clients would be willing to pay a premium.

Q) So what will your margins look like to achieve this billion dollar target of yours? Will margins be better or worse?

Expecting profit CAGR to be much higher than revenue CAGR in the next 4 years. Profitability will grow. 3-4 quarters ago, this target of billion dollars was a dream. 2 quarters ago it became aspirational. Today, I’m far more optimisting and it’s looking like it can be a reality.
Absolutely no doubt that Mr. Kapoor and other top management will continue to work at Birlasoft until this goal is met. They’re motivated, excited, and handsomely incentivised to stay. We have our plans set in place for the next 3/4 years.
We want 20% of this billion dollar goal to come from inorganic acquisitions, but we aren’t going to do it for the sake of it. We aren’t a big company that can afford 10-15 failed ventures. Interested in a larger acquisition rather than a small distressed one. Company should add a lot of value to Birlasoft and vice versa. Will wait for the right candidate to come along.

Investor_No_1 · June 19, 2021, 4:50am

Thanks for the details…what a stellar run this small and now midcap IT firm had from 2020 lows!! Small/midcap IT run has been as and in many cases more ferocious than the pharma bull seen… individual companies in many other sectors have done well but when we talk about full sector, small/midcap IT has been more ferocious than pharma…but we keep hearing more about pharma everywhere…I think that’s good…lesser noise in IT is better…I missed birlasoft although just before the crash I noticed aggressive hiring of top talents at multiple levels!! A cue that I should have picked…as the company was prepared with right talent to meet the sector demand changes…

Nis · June 22, 2021, 4:03pm

Takeaways from Digispice’s earning call:

I’ll mostly comment on spicemoney vertical:

Although this is my first con-call, Dilip Modi’s honesty, transparency and eagerness to engage notable.
The focus for the next few quarters will still remain expansion of SMA network and increase overall transaction value. KPI’s the company tracks for expansion are here:
There is a 2.39x increase in the SMA’s since last FY as compared to 1.49x jump between FY20 to FY19. This can be largely because of the lockdowns and the benefit transfers done in the last year leading to demand for intermediaries.
AePS market share is also 13% now. Needs to be seen who the other players are.
GTV which is proportional to the commissions the company makes and hence part of the future profits also increased from 36,000 Cr to 82,000 Cr ie 2.27x as compared to 2.57x in the FY-FY before.
The GTV per adhikhari has remained largely stable. I guess the new services provided are offsetting the SMA’s that are going inactive.
Coming to services:
Banking, Ticketing and Billing are active.
mATM segment has growed 3x wherein users can use debit cards to get cash. This is bound to increase as debit card penetration increases in tier-ii/iii areas. I am optimistic about this product.
Enterprise Cash Management is also interesting where they plan to use SMA’s as collection deposit points for microfinance organizations. This allows the company to cash in into the microfinance industry and increase GTV, whereas also solve the cash supply problem at SMAs. Very smart.
Planned services include: Assisted shopping, ePharmacy, telemedicine, savings, insurance, credit etc.
all of these are poised to increase penetration in rural India over time.
They’ve introduced Khata as well which has interesting startups in the space. Khatabook (https://khatabook.com/) is value at Rs 4000 Cr with 8 million users whereas Digispice in itself ~1000 Cr (~0.5 million SMAs). But it makes sense for this to be the superapp for the Kiranas as compared to standalone Khata apps.
Depsite growing revenue - where is the profit? FY revenue has increased 131% YoY and is 578 Crore from 250 Cr last FY. QoQ, Q4 is largely same as Q3. Maybe revenue is linked to rural cash flow cycles and large government DBT transfer dates (PMKISAN)?
The company says Q4 FY21 EBITDA reflects investments made in customer acquisition (branding, zero entry and device fees, zero subs etc). The strategy is two folds: SMA acquisition and increasing revenue from said acquisitions.
Revenue is 578 Cr for a GTV of 82,000 Cr which means 0.7%. This is comparable to last year’s revenue to GTV ratio. This gives a good indication of what to expect in revenues vis-a-vis GTV.
At a point, SMA’s will stop increasing exponentially, in which case the GTV er Adhikari is the KPI of importance.

Key Risk:
SMAs are key asset of this company or companies like this. There is nothing stopping an SMA to leave for PayNearby or an SMA to be on multiple apps to maximize commissions based on micro-managing. I don’t know how the company plans to incentivize the SMAs to stick to SpiceMoney or increase retention. It’s not the same as Uber/Ola which they can retain by providing large ticket loans to buy the car etc. Plus, I am not sure if customers see brand loyalty value or have any visibility to that.

I guess I am going to stick around another quarter and see how the financials progress. The cos definitely seems to be the growth stage and will not and doesn’t plan to show profits in the near future.

No comments on the other 2 components of the Digispice business ie. CPaaS and Digital Telecom.

Link to presentation: https://www.digispice.com/documents/595328554_SEResultsPR.pdf
Transcript:

Disclosure: Invested. Still positive.

Chins · June 24, 2021, 3:50pm

Hi, welcome to Valuepickr.

Thanks for sharing your notes on the latest quarter.

I’ve personally set the snooze button on Digispice for a few quarters. I bought around 3% of my portfolio at 7-8 levels, sold partially between 70-100 levels, and have a 1% tracking position at the moment.

I personally can’t differentiate the benefit between this and using the Aadhar card. Currently, only 13% of SMAs have the mATM facility. I’m wondering how they stock these SMAs to ensure liquidity.

Especially since they’ve onboarded Bajaj Finserv and L&T Finserv. A lot of their offerings have synergies with many rural empowerment schemes that NBFCs are taking up. This leads me to believe the margins / profits will only come through tie-ins with such companies. Dilip Modi said something similar in a previous concall; their network / access to 500,000 SMAs and their community is the value add they bring in addition to solving rural digitisation problems.

You’ve highlighted the key risk and the lack of moat. The other concern I have is the composition of Spice Money’s revenues:

The largest piece of their pie doesn’t seem to be the financial offerings, but a transaction fee on mobile top-ups, etc. It’s gone from 50-50 in FY19 to 62% of the revenue in FY21. We’d want the service fees to be the larger shares going forward.

If their revenues are 578 Cr. with 576k SMAs, that amounts to a single SMA giving them a revenue of 10,000 per year. If their goal is 1 Cr. SMAs, the overall revenue would be 10,000 Cr. from Spice Money assuming the transactions stay constant.

Key triggers for me are partnerships like Bajaj Finserv, SMA milestones, etc. What’s nice is that they have negligible debt and some cash on hand to take on the zero cost onboarding, etc.

Chins · June 29, 2021, 10:17pm

I’ve identified the following weaknesses in my approach:

Tranche sizing: While I know exactly how much of a stock to buy, I’ve been sticking to my SIP in tranches. In the current market, this has resulted in averaging up constantly, and my returns are lower than if I finished my buying in a particular range.
Examples: I had conviction in Deepak Nitrite from 600 levels, Tata Power from 60 levels, yet my buy average is now much higher as I failed to properly capitalise on the conviction.

New framework:

Present Valuations	Future Valuations	Action
Cheap	Cheap	Buy 100% of required amount.
Fair	Cheap	Buy 50-75% of required amount, SIP remaining.
Expensive	Fair	SIP
Expensive	Expensive	Watchlist

Examples:

SIS is currently cheap at present valuations and even cheaper on future valuations. I’ve now bought my entire allocation.
Birlasoft is currently fairly valued and cheap on future valuations. Will accelerate my SIP at the next dip.
Hindustan Foods is giving me agony because it’s very expensive now, and there is no clarity from the management yet on its plans post FY23. In all honesty it should be in my watchlist until there is clarity.

The new framework is dynamic as the future valuations change based on quarterly earnings and management commentary. This brings me to weakness number 2:

Rigorous Valuation Framework - There’s no point talking about future valuations unless I work out the numbers for myself. Management commentary alone isn’t enough, and I realise peer valuation doesn’t make sense if one is honest about how different companies are to each other. I need a proper way to understand what Hindustan Foods can look like in a few years, and this is the clearly the next step in my journey as an investor. Thus, my plan for the next year is to learn from Prof. Damodaran’s lectures in my free time, and learn to use the various valuation models.
Listening to Noise (Internal demons too): The biggest mistake I’ve made in the last three months has been selling Lux due to notionally protective measures in the face of the second wave. I then watched it double from my entry. Going forward, if I can understand valuations better and enter based on my own valuations, the only thing to track is the earnings compounding, not the price.

Finally, I want the portfolio to be agnostic of the market cap of companies that I invest in. In the future, I’m not going to look exclusively in the midcap space but base it purely on opportunity and quality, and pick up what meets my criteria, whether it is an RPSG Ventures or a Unilever.

In other news, my imaginary wealth destruction portfolio has outperformed my portfolio and every single PMS, and has returned 51% in less than 4 weeks. I’m very annoyed.

sbuy210 · July 4, 2021, 3:00pm

Great post Chins. Regarding your last update, is there a thesis you follow to calculate the present valuation and future valuation of a stock. And how do you come up with an entry point for a particular stock?

Chins · July 4, 2021, 9:33pm

A lot of seniors on this forum have posted their key learnings and thoughts on valuations, some of which I’ve highlighted higher up in this thread.

The way I’ve been thinking about valuations so far is to look at the usual suspects: Price/Sales, P/E, Price/Book for financials and EV/EBITDA across peers. This usually tells me how much I’m paying for the business, and how much for market sentiment.

Some examples on this:

Company	Price/Sales	TTM Price/Earnings	Historical P/E	Price/Book
SIS	0.69	17.26	30	3.44
Tata Power	1.19	34.3	18	1.63
Birlasoft	3.10	34.35	8-10	5.81
Abbott	8.27	51.58	38	14.65
Hindustan Foods	3.06	116	40-50	18.9

SIS is currently trading well below its historical PE multiples, closest to the cheapest in its history. I know from management commentary that they have two goals going forward: to capitalise on the formalisation of the sector post covid, and to focus on their security solutions. They’re going to be even cheaper than today based on FY23 earnings.
Tata Power is getting more and more expensive on earnings, but on Price/Sales and P/B it looks quite attractive. This is an example of historic valuations not capturing changes in the underlying business. If I believe margins are set to expand going forward, and for the debt to come down, their FY23 earnings should start to bridge the gap to the low P/S.
Birlasoft went through a lot of changes in its business model since 2018. I’ve become complacent and started thinking its in line with the present bull market IT P/E multiples. However, the management has given a target of $1 billion in revenue by FY25. If we assume that the margins are to expand to around 20%, that translates to an earnings of 1500 Cr. compared to around 500 Cr. today. Assuming the management hits this target, and project forward your choice of tax rate, it’s trading at roughly 10-12 FY25 PE.
Abbott is an example of a company I’ve been reading about, and its PE chart reveals a lot of information. Being expensive historically isn’t a bad thing, and if that alone causes one to sell, you lose out to all re-rating opportunities. It looks expensive now, but the market has steadily given it higher valuations over the years, much like an Asian Paints.
Hindustan Foods is perhaps the hardest company to value in this list. The problem with it is that the P/E and P/B look absurdly expensive, while the P/S looks out of place compared to the other numbers. A lot of this has to do with the margins, with an extremely low net profit compared to their topline, and horrendous gross margins (compared to Galaxy Surfactants). If they manage to sort out their margins, it’ll rope in the P/E very quickly. Management commentary is to expect around 2000 Cr. in revenue at the end of FY22, and 3000 Cr. at the end of FY23. If margins don’t expand, it’s currently priced in until FY23, and one would need to be really bold to buy more at these levels.

On top of this, I’ve explained higher up in the thread why I like measuring buy decisions against the 200 and 50 DMAs.

After listening to a lot of Prof. Damodaran, I’m tempted to call the methods I’ve been using to think about valuations lazy, and the bull market’s momentum has allowed me to get away with it. What I want to do going forward is to think more about cash flows, addressable market size, and how we can quantify intangibles like brand value.

Also, I don’t have a proper framework in place for selling companies, and that’s something we keep discussing with the family portfolio. Making decisions to get out of a company when its up 50 - 60% doesn’t have the same opportunity cost as when one is sitting on a 15 - 20x return and have to think about where we go from there. I relate to a lot of @Investor_No_1’s writings, and I’m trying to understand a good framework for this question.

Cheers

Nis · July 5, 2021, 12:55pm

Probably targetting different customer segments within the tier-ii/iii and rural setup.

I agree; though I am assuming a new user will first get accustomed to using the top-ups first and then start using the SMA for more financial services. It should be as you said more financial services over time given that is where we will be seeing better margins.

I think 1 Cr SMAs is too lofty a goal and I doubt that’s going to come. I think the key would be more revenue per SMA than to increase the number of SMAs 20x the current value.

It definitely is an exciting growth cos but I guess will need to track some of these KPIs over a few quarters to see where it is headed. The cos could be amazing in its impact but may not mean the same for its shareholders.

The other two verticals of the cos are added bonuses which could drive up the overall valuation of the company but too early to call anything for their CPaaS business. Not really an expert in that business but I wonder if their telecom partnerships and experience gives them an edge here as compared to other incumbent CPaaS solution providers.

Also - the price goes and up and down, but I’ve not been able to see much mature discussion online on this business apart from this thread which atleast makes me nervous. On that point, should we make a dedicated thread for this company. I guess you did the groundwork in your OG post and it would be fair if you could copy that, or I could with your permission, into maybe a new thread?

sbuy210 · July 5, 2021, 3:18pm

Thank you so much for wonderful explanation. I guess I will have to read more about valuation models to better better gauge entry points. I know you have been few changes to your PF, how much has your core portfolio changed from the time you started? Also, how long do you plan to DCA into them?