Chins' Portfolio

Q&A: Questions & Answers Portfolio Q&A
83

Thanks for the excellent questions :slight_smile:

From my scuttlebutt, employees are happy, pay is competitive and the job comes with bonuses.

  • The average salary varies from post to post, and is between Rs. 16,500 - 20,000 in towns, and between Rs. 9,000 - 12,000 in villages.

  • Employees are covered by insurance and get bonuses from time to time.

  • If they’ve worked at the company for over a few years, the company takes care of them by giving out emergency loans.

  • Largest competition in this space isn’t from Quess / Teamlease but from G4S.

  • It’s also amazing how the internet aggregates voices that would otherwise not talk to each other. There’s an entire security guard community, and they share their experiences on Youtube, and I check on what they’re saying from time to time.

On your point of independence, from speaking to people who worked with Urban Clap, they prefer to form their own contacts and then leave due to the exceedingly high commissions UC charges. With SIS, they serve as a single point of contact for companies that have a multi-city presence, and it’s difficult for guards to breakaway and offer their own services particularly because most of the staffers are not from the state that they work in, but have moved across the country to work there.

Something else I’m keeping tabs on is their employee count in the India Security Staffing segment, and per employee revenue. Both of these have been steadily improving over the years:

India Security FY21 FY20 FY19 FY18
Revenue 3487 Cr. 3528 Cr. 2712 Cr. 2150 Cr.
Employees 1,55,028 1,57,590 1,44,257 1,07,000
Revenue/Employee 2249 2240 1879 2009

I don’t find Teamlease as interesting as they have EBITDA margins between 1-2%. As you said, Quess is in the white collar staffing space and are beneficiaries of the same labour law reforms, but they’ve made bizarre investment decisions in the past, such as the debacle over the football club. Aside from wanting to be in the essential services category, SIS is trading at more attractive valuations.

However, Quess’ cash flows are really good, and should it drop to a more attractive price, I wouldn’t mind playing both sides of the labour market.

SIS is different from the companies you mentioned as they’re not in the business of selling devices alone, but the entire management that ties into their other verticals.

They’re already amongst the top 3 e-surveillance companies in India, and offer CCTV/alarm monitoring and response, drone based monitoring in Australia, body worn cameras, etc. So I think the end market differs from people who just want the device, and those who want the full suite of solutions.

The point is also that they’re either the market leaders or in the top 2-3 of every single vertical, so if the labour market formalises, they’re the direct beneficiaries.

Please let me know your comments :slight_smile:

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84

Please do not use my portfolio as investment advice! My buy/sell decisions are based on my convictions, and can change at any time.

There’s a legitimate bear thesis for all the three companies that you’ve mentioned.

Caplin Point has found success in using its LatAm business as a cash cow to create new verticals in CRO and sterile injectables. However, it’s done so by avoiding the big fish and playing the molecules in regions others aren’t interested in. At a certain point in time, unless it can compete on gross margins, growth will taper off as it enters riskier markets or competition heats up.

Birlasoft is at peak trailing valuations, and should anything go wrong in the quarterly performance, the stock will be punished. My buy averages for both Birlasoft and Caplin leave me with a 50% downside margin of safety.

We’ve discussed SIS here, but the key risk is that they have working capital for exactly 5 weeks at a time, and this is why they need debt. If key accounts default, or they don’t get their payments, they will be in trouble. 5% margins also don’t give them much room to breathe should people not want to spend on labour over the years. (Something brokerages point out may be the trajectory for all companies like Quess/Teamlease).

Please assess for yourself what the margins of safety you have, and make decisions only if you can live with drawdowns, especially if you’ve borrowed conviction. The individual threads for the companies I’ve got in my portfolio offer an unbiased take on the risk/reward, and I would suggest reading those. :slight_smile:

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85

Thanks for your kind words and again in depth responses! According to me above is good news. If employees look upto SIS, work is more than half done…

Agree this is a major risk of B2C model in blue collar jobs as if we deeply think, all of these men are artist or owners of unique skills which normal people cannot replicate. Once they know their true worth and become scare, like in developed world, they can demand premium and work independently even better than IT engineers at times…

Thanks, your reasons for teamlease look good. Enough for me not to look at it for now. Quess is something maybe I would try to explore when have time…

From what I read, end market is indeed entirely different. The companies I named would mostly develop products for normal retail individual houses while SIS seem to make product/solutions for bigger set ups who would think to either substitute few guards for automation or make them work symbiotically…

Wow this is very interesting…do they offer remote monitoring of CCTV… meaning they have people remotely constantly watching the cctvs?

Thanks for a nice discussion :blush:

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86

Thank you for providing the bear thesis for the picks. I have been reading your and the individual threads which formed the level of conviction I have for these stocks. I will continue to do so before adding any money.

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87

Some thoughts on the week behind us:

  • We’ve seen the small and midcaps run much higher than their 50/200 DMA in the last three months, and the last two days have made the valuations in many names a lot more reasonable.

  • It’s amazing how quickly sentiment has changed in names that were perceived to be quality (and still are) - from Alembic where the sartan situation has been documented for a while, to Neuland’s fall after the results.

  • Initiated a position in SeQuent, definitely think it was oversold today.

  • Continued an SIP in all positions. Trent at 860, Caplin at 820, etc.

  • Strides has polarised the forum. The two questions to answer in Strides is whether one trusts the management, and what one thinks of the new strategy. If the guidance for FY23 is unchanged, this is the same opportunity but cheaper. If the guidance disappears as Alembic’s did, there is a significantly higher risk to reward. Overall, I’m happy to wait until H2FY22 to take a call. Bought some more, position size will settle at 7-8% after all cash is deployed.

  • Initiated a tracking position in Navkar Corporation, which looks like a very interesting logistics play, at reasonable valuations and near term triggers. Also picked up a tranche of Prime Fresh in the SME category for the family portfolio.

  • Sold half of my GPIL at 1600 and bought SAIL with the same amount, splitting my basket. This has been a wonderful lesson in cyclicals, and GPIL is the first thing I want to buy significant amounts of during the next downcycle.

  • Hoping that Natco posts a tepid quarter tomorrow. Will buy in should there be a correction.

So at the end of this exercise, my pharma basket will comprise of:

Company Subsector/Play
Caplin Point RoW markets
Laurus Labs 2 x CDMO verticals, FDF, ARV API
Natco Pharma FTF / Para - IV strategy, API, Crop health
Sequent Animal Pharma / API
Strides / Stelis Biologics CDMO, Unknown new US ANDA model

Currently working on charting data for every single molecule produced by these companies to understand overlap and aggregated production amounts across my portfolio.

I could be wrong on every single purchase, this isn’t investment advice.

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88

@Chins thank you for coming up with prime fresh.interesting company with big opportunity.

I would love to hear your views regarding trigger for Navkar corporation . It is Inland container depot(ICD tumb)?. And why low asset turnover.

Also like to hear your view about prime fresh.thank you

89

The cash flow shows that most of the cash is stuck in receivables increasing the debtor days steadily after its ipo in 2017.
Is it normal for young company?

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90

  • PAT is significantly affected by high tax rates. They’re moving to a new 80IA concession scheme for ten years starting from next year. This alone should lower FY23+ PE to single digits.

  • Covid affected margins due to diesel costs and difference in manpower costs. Management has guided margin expansion to ~26% this year. Key monitorable is whether they can go back to EBITDA margins of 2018.

  • Other information is given in their investor presentation.

As I said, this is a tracking position as I learn more about the company. Will post in detail after completing my thesis.

Prime fresh is also a tracking position at the moment. Management bootstrapped the business until the IPO in 2017, there are a few interviews with the management from November 2020 on YouTube which are a nice resource to understand the business, aside from their DRHP.

Management had given guidance in the DRHP to expect receivables to be high as they scale. In recent years, it was due to covid. AR20 explains receivables would have been down by 1-2 crores without the lockdowns. All of them are expected within 6 months and are considered good. We’ll know the disclosures for FY21 when the annual report is out.

In general, I don’t expect a company of this size to have stable cash flow generation, but the profit from operations has seen a healthy increase almost every single year since inception. Will write a detailed post soon.

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91

Charting out my earnings expectations was long overdue, and I intend to carry out this exercise every quarter.

For fairness, I’ve taken the base year as either FY21 or FY20, whichever had the better June quarter.

Company Q1FY22 Revenue (YoY) Q1FY22 EBITDA (YoY) Average returns Minimum earnings CAGR Expectations (FY23+)
Birlasoft 3.27% 33.62% 83.98% 16-18%
Caplin Point 25% 29.16% 69.64% 20%
Deepak Nitrite 20.5% (CAGR from FY20) 33.4% (CAGR from FY20) 66.33% 18-22%
Infosys 17.87% 21.41% 13.2% (20 year CAGR) 12-15%
Laurus Labs 31.21% 42.08% 54.26% 25%
SIS India 9.78% 0% 11.92% 1.5-2x GDP growth.
Strides -12% Loss -6% Was 30%, now 10-15% for FY22, 35-40% for FY23. Discounting all contribution from Stelis.
Tata Power 13.29% (CAGR from FY20) 33.09% (CAGR from FY20) 57.19% 25-35%
Trent -21.58% Loss 27.33% 10-15% in FY22, 20-25% in FY23.

Looking forward to learning many things from the investing conclave.

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92

It’s been a wonderful learning experience in the 3 months since the last update.

  • Lesson - All sectors, even seemingly secular stories, have components that are cyclical, and the turns of these cycles harm/benefit different players within the industry. In some cases, it’s harder to know when head/tailwinds are structural, and when they’re temporary. Even after knowing that US generics companies have no pricing power, I invested in Strides, believing that their pipeline would be enough to stay on the treadmill, and we’d have clarity on the Stelis demerger. Management were confident of meeting their targets, but as @gurjota has recently written about, guidance given by these companies have been revised/withdrawn almost immediately.
Actions

  1. Diversification across sectors doesn’t guarantee that cyclicity will be averaged over. Example: raw material inflation (temporary or otherwise) has impacted multiple sectors in Q2. Diversification then should be between those that are harmed from raw material inflation, and those that benefit / can still deliver in these conditions.

  2. I’m now amending my allocation framework and weighting conviction by my own projections for forward numbers. These are based on management guidance/ industry landscape and I try to assign probabilities for scenarios. Following on from 1), well executed diversification shouldn’t see multiple portfolio companies turn bearish or lower base case probability from the same headwinds.

Current Portfolio

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I have reduced the number of companies from 15 to 11.

  • Sold Tata Power for two reasons: 1) forward multiples are quite expensive, market is pricing in a lot of growth. 2) after deploying cash, position size fell to around 2.5%. Returns from the first tranche were 4.48x.

  • Sold Trent for similar reasons, and I’m finding it difficult to gauge value in companies that are given premium multiples. Companies like Astral, Trent, BajFin, Aavas fall into this basket, and this is something I’m going to work on for the next year.

  • Sold Caplin Point as there are two theses: 1) they’re incredibly small fish, going after molecules other people won’t want to compete in; 2) they’re doing this to generate cash, building stronger businesses over time. With their aim of entering the US markets, I’m not confident in projecting their margins at 30%.

  • Sold RPSG Ventures. The only time we’ll get a detailed view of the subsidiaries is during the annual report. For a company of this size, would prefer concalls or detailed disclosures quarterly. Still on my watchlist and will pick it up if the holding company discount to FSL widens.

  • Ugro has the highest earnings potential in my coverage universe, and after the last two concalls, I’m very confident of them being able to scale successfully. The monthly updates from the business helps tremendously in following execution.This is reflected in the allocations, and I’m happy to continue buying more.

  • I’m lucky that despite being punished in Strides, it’s come after a relentless run, where the position in Strides was built out of profits in the first place, and my portfolio was up over 100% in the last year. (I’m sure everyone has seen similar returns during this run) Lesson learnt on how quickly a cycle can turn. The US generics business has hit the bottom, I don’t think there’s much downside from here, but it’s hard to predict upside since management has pushed guidance, and other companies should outperform. Will wait for concrete news on the demerger.

  • Still have a small tracking position in Sequent, will revisit the basket of pharma companies when I find time.

Want to thank everyone at this forum for constantly sharing their domain expertise, and their own frameworks, especially @harsh.beria93, @gurjota, @OmkarT and @Investor_No_1 . (There are so many more to name)

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93

I thought you held Birlasoft but neither see it in your current portfolio nor sold stocks. I remember you created its thread. Any reason for not investing/selling it?

94

Are you comfortable with single stock having 27% weightage of your portfolio?

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95

I sold Birlasoft today, and this had more to do with portfolio management than reasons linked with Birlasoft.

  1. After deploying cash, allocations dropped, and I’m more confident in other ideas providing better risk/reward rather than averaging up at this price. Gurjota’s diversification style has made so much sense to me in this context:
  1. I had a long conversation with my family, and since Infosys and TCS make up a large part of the family portfolio, I don’t feel like I’m missing out by selling Birlasoft/IT right now. Perhaps if attrition gets out of hand, or there’s a revision in forward multiples, I’ll get back in with much higher allocations.

Where I find comfort in high allocation to Ugro:

A lot of things have happened together for me to make this decision:

  1. Ambitious management guidance is backed by the numbers. They have set a target of 20,000 Cr. of AUM by 2025. Here’s what the picture looked like when I first invested:

image

During the next wave of covid, management almost halted new disbursals completely and acted very prudently in Q1. Fast forward past a few earnings calls and crucial business updates to today, and here’s what the picture looks like:

image
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At the present run rate, monthly disbursals are 320 Cr., and management is expecting monthly disbursals to reach 600 Cr. by March 2022, meaning Q1FY23’s quarterly disbursal will be today’s AUM. They’re currently far outpacing the run rate needed for their targets.

  1. The Q2 earnings conference has given me confidence that they have the infrastructure in place to scale, and that there’s plenty of liquidity on the liability side to meet their goals. The industry view is also attractive, with a lot of large banks also talking about the same credit gap that Ugro’s management is targeting. Recent onboarding of SBI as a part of their co-lending model further affirms that the management is walking the talk.
  1. I have a lot of valuation comfort right now, with my buy average being close to 130, well below the book value based on FY21 numbers. Despite the recent run up, the company is still overwhelmingly cheap on forward numbers, and I’m happy to add on more whenever I deploy cash. Furthermore, as SEBI has now mandated monthly business updates, the data available to track how the thesis is playing out gives me comfort, rather than having to wait for updates every three months.

There’s a lot more to be said about the company, but most of the questions people have prima facie, such as promoter holding, what NIMs will look like, why they’re confident of asset quality being good, etc. have been answered masterfully in the Q2 earnings call, and I would ask interested readers to watch the presentation.

Cheers :slight_smile:

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96

Thanks a lot for the kinds words @Chins. Just want to share that with each new business in your portfolio the time demand on you for portfolio monitoring and analysis keeps going up and up. So, like with all things in life - there is a fine “balance” which would need to be maintained. I’m learning this the hard way and starting to cut multiple positions especially now that a lot of my investee pharma/spec. chem is offering chances to double up. Anyway, you don’t even have 15 stocks in the portfolio, so you should be absolutely fine I think :smiley:

Btw, looking at your top position and allocation surely makes me feel I need to read up a lot more on this company and potentially scale it up myself if you’re betting on the right jockey and horse.

Anyway, congratulations on a great performance over the past year and all the best for the future!

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97

Hi, I just wanted to understand more on this. So I think they are targeting small market size drugs for the US market. As the market size is small, they will face very limited competition and should have pricing power right? Could you please elaborate on why you think they will not be able to maintain margins? I am really curious. Thanks!

98

Wow it’s great to have just couple stocks cover 50x annual expenses. It must be a visionary step to buy these and hold on to them since years. If you could share since how many years your family has held on to these?

I read up to revisit your family portfolio and see that significant percentage lies with the 'then" new age business i.e. IT services.

Would be interesting to know if these were bought at expensive valuation and what percentage of portfolio they formed at cost.

Rest large holdings like Grasim, RIL, L&T are of stalwart categories since many years.

Something to learn from your family portfolio is to have a significant weightage to new age businesses as well…

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99

I haven’t done this exercise for the entire set of holdings, but Grasim was held from the late 80s (and birthed Ultratech), TCS was bought in 2005 (CAGR of ~20% for 17 years without considering dividends), Infosys was bought in 2000 (CAGR of ~13% due to the higher valuations at the time), Reliance and ICICI Bank in 2008, Tata Consumer in '95.

The list isn’t only winners, but they outnumbered lots of losers: cyclicals held for over a decade (Tata Steel, bought in 2010, lead to a CAGR of 3.2%) companies that stopped existing or went bust (Opto Circuits).

I’ve heard of how easy it is to have data on companies right now compared to decades ago, and I think their philosophy was to just buy bluechips of the time, and probably make one transaction every few years.

I know my portfolio has churn, but this is a consequence of learning more, and I think my portfolio is stronger than what it was at the start of the thread.

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100

Any updates to your portfolio?

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Portfolio updates:

Company Allocation Average Buy Loss/Gain
Ugro Capital 40% 155.35 42.39%
PDS Multifashions 9.7% 1330.34 34.58%
Deepak Fertilizer 9.3% 378.38 35.39%
AB Capital 8.9% 99.68 23.7%
Laurus Labs 7.9% 426.6 12.76%
Deepak Nitrite 6.8% 1764 41.78%
SIS 6.5% 449.69 15.11%
Sandhar Technologies 5.7% 275.97 -13.03%
Neuland Labs 2.8% 1552 0
Infosys 2.4% - -
Krsnaa Diagnostics <1% 682 -

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Will shortly write detailed notes on all holdings, rationale, expectations, and changes.

Trailing returns:

1 month: 9.38%
Since last update: 12.95%
6 months: 25.74%

This is not investment advice, please do your own due dilligence.

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102

I am really excited to hear about

don’t know I have kept it in watchlist from long time and still not able to build conviction. Definitely your thoughts will help me out and really want to thank you for Ugro cap (first time I noticed in your folio), though I entered it late but feels good how story is getting played

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