Chins' Portfolio

Chins · January 29, 2022, 8:29pm

On weekends, I usually spend my time reading about new companies. However, I think a fair journal should also include the numerous companies that don’t make it to the portfolio.

Here’s one such name that made it to the discard pile:

Vivo Biotech:

Here’s a 100 Cr. company that’s made margins of >20% for the last few years, and has steadily grown its bottom line. A quick glance at the annual report would capture the attention of anyone who’s invested in pharma:

Exciting right? A micro-micro-microcap that’s present all the right themes, making margins of over 40%! Here’s where it starts to unwind:

Is a sister company to Virinchi Limited:

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To those readers that are out of the loop, fellow members at Valuepickr have urged caution regarding this group:

Some former Virinchi Hospital management now work for Vivo Biotech.

Inviting comments from those that have studied this further

Vineetjain111 · January 31, 2022, 9:26am

Yours is one of the most non-conventional portfolios on VP @Chins. Massive respect for the truly independent thinking, and the concentration you are able to go with in your conviction. I am curious on how you assess the portfolio level risk with this approach, and your thoughts on portfolio construction and management in general.

Also please do consider starting a thread on PDS Multifashions, given that it is a sizable position for you.

Chins · January 31, 2022, 9:50am

Thanks for the kind words

I’ll write up a longer response to your questions after work.

I did write a thread last year, come join in the discussion!

Vineetjain111 · January 31, 2022, 9:54am

Thanks for the link - not sure why I wasn’t able to find it.

Looking forward to your longer response

Chins · January 31, 2022, 9:53pm

Thank you for reading my posts

When I first created this thread, I used to have a separate microcap portfolio which served as a gateway to learning about new sectors with skin in the game. Over time, I realised a few things about myself through my investments:

I had a positive bias to new sectors / new ideas and would end up buying new companies after learning something new about an industry, and running a screener to apply that learning.
Due to having a basket of 25 companies, a lot of good ideas went to waste, because they did not have a high enough allocation. Some of the largest winners from CY2021 formed <1% of the portfolio. GRM Overseas was a 10 bagger (30x today if I hadn’t sold anything), RPSG Ventures and Birlasoft were both in single digit allocations.
Conviction to me is a function of information. I need atleast a quarter to build conviction, and this market does not give one time.

Some time last year, I tried to reformulate my approach, and include a projection of revenue/profits for every company I own, and every company I study! This may sound like an incredibly obvious thing to do in hindsight, but the exercise taught me that I was underweight on some of the companies with highest earnings expectations.

My portfolio today is an attempt to address these learnings. While my portfolio may seem unconventional, most of my companies have a common theme between them: cheap starting valuations, strong earnings growth over the next few years, and a likeable management. Sandhar, for example, is at an FY24E PE of 7.24, assuming a topline increase of 22%. PDS is at 0.6x TTM sales (for a 40% RoCE company which delivered ~40% YoY growth). If Ugro’s execution is successful, it’s the cheapest stock in the listed universe.

Now on concentration. If my entire portfolio consists of ideas that have potential for wealth creation through earnings growth and a possible valuation re-rating, my allocation is a function of how much I know about the company, and how large the opportunity is according to my valuations. There hasn’t been a single company that has captured my interest as much as Ugro. Here too, the allocation would have been in single digits if management wasn’t as forthcoming with disclosures, we didn’t have nearly constant media engagement/business updates, and if co-lending was not a part of their model. As it’s 40% of my portfolio, I spend 40% of my time reading everything I can about it, its peers and potential anti-thesis pointers. I have the opportunity to scale down my position if I change my mind, but I may not have the opportunity to buy it below FY21 book ever again.

I have got things wrong: I believe we are/were both investors in Strides (price looks very attractive now), and I wish I had watched more of Khemka before investing. I also thought GPIL would have a poor Q3 and may present a buying opportunity tomorrow.

In summary: I try to manage risk by having companies that are attractive today, and depending on execution, are even more attractive as time goes on. I then have two avenues for my margin of safety: mean reversion/valuation expansion, and earnings growth. I’m trying to be sector agnostic, and also agnostic of an investment horizon. As long as I’m a better investor in Q4FY22 than I am now, I’m happy

Malhar_Manek · February 1, 2022, 2:54am

Sir, I couldn’t find Prime Fresh here. Have you exited it? If so, could you please share your reasons for exiting?

screener.in says PDS RoCE is 16.9%. Am I missing something?

Sir, could you please also share your thoughts on- a) your sources for idea generation? How do you arrive at potential names to study? b) as a rough guesstimate, how much of your time/energy do you spend on studying new companies v/s tracking updates and researching further on existing holdings?

Thank you so much for your knowledgeable posts!

Chins · February 1, 2022, 11:34am

Hi Malhar

No, there’s still a tracking position in the family portfolio.

I believe Screener’s calculations for book value and RoCE are based on FY21 numbers, (PE / Price to Sales change live on TTM data) and will only be updated after Q4FY22. If you visit the PDS thread, you’ll find that their RoCE has improved from 17%.

On idea generation, it’s the usual suspects: a mix of screeners, interesting reports that aren’t linked to a specific company, threads here on VP, many of the wonderful webinars on YouTube. The Indian Investing Conclave is another excellent resource for presentations over many years.

There are enough resources here on VP to have case studies of many different types of theses, with unique triggers. The collaborators corner in particular, posts from suru27’s blog are great for industry landscapes, and numerous examples of triggers.

Once you learn something new, often that concept can be applied in ways you don’t immediately expect. A part of the thesis for PDS came from a key learning from an Aditya Khemka seminar funnily enough.

Aside from the resources mentioned above, I try to listen/read concalls in general to learn more.

It’s really nice to see you taking the initiative to talk to management, and write about different companies. I didn’t have any handle on anything related to business and finance when I was your age. Please keep writing here on VP and on your blog. Even if you find a company and decide not to invest in it, the reasons for rejecting something are valuable and important, and we can all learn from it.

Looking forward to your next post.

Chins · February 9, 2022, 7:40am

Short updates this week:

Raised weight in Krsnaa to ~5%.
Trimmed SIS, growth from here will be in mid teens. For this growth, an HDFC Bank, or other large caps like Infosys / HDFC Ltd. offers a better risk reward profile. Will wait to see if new ease of doing business norms will aid market share capture. So far, we haven’t really seen any consolidation in the industry post covid reflected in the numbers. Drop in OCF/EBITDA is concerning, and other income has made the bottom line look better in the last 2 quarters.
Bought Filatex worth ~5% of the portfolio at 120. Inlcuding a short write up below. This is purely for disclosures as I’ll be writing on the Filatex thread this week.

Filatex is a company that produces polyester. They’ve produced a commodity, and as a result have had commodity cyclical valuations. Margins have historically been in single digits, and they’ve never enjoyed any pricing power.

Five years ago, they decided to move into more value add products, and slowly transformed their entire product mix:

This had a notable effect on margins:

Balance sheet also reflects strong cash flows:

The investment theses has four parts:

They’re currently piloting production of recycled polyester (rPET), which has a much higher margin profile than their current value add products. Margins could be >30%, and they have limited competition in India. rPET is expected to see a large uptake in the next few years, as almost all fast fashion companies have signed on agreements to switch to recycled polyester by 2025-30.

This is a company that’s expected to do well when crude prices are elevated. This will bring some more diversity to my portfolio’s cash flows. Crude prices are forecast to stay elevated through 2022.
By my calculations, steady state margins should be between 13-15%, before any rPET comes onstream and provides a significant upside risk. Market is currently pricing this as though the steady state margins are 10%.
They’re expected to generate some 800 Cr. of free cash flow in the next two years ( market cap is 3x this ), and will put up a greenfield plant, spending some 1200 Cr., almost doubling current capacities. If rPET project is successful, it replaces their normal RM using waste, and they can produce rPET fibres with existing yarn machines.

Will write a longer post on the company’s thread, writing about the entire value chain and lanscape of opportunity.

sougataG · February 9, 2022, 8:04am

Good write up by Dr. Vijay Malik on Filatex, if you are interested.

Chins · February 9, 2022, 8:36am

Thanks for the link, I’ve seen this before on the company thread

Chins · March 6, 2022, 10:04am

What a wild month of volatility! Portfolio saw a peak drawdown of ~20%, and is currently down 15% from all time high. I have used this as an opportunity to add fresh cash to the portfolio, and my strategy is to trim positions that I expect will see a weaker Q4 YoY, and raise weight in companies that should see a strong few quarters ahead. With this in mind, I’ve made the following changes:

Bought more Infosys for the first time in almost a year. Infy and TCS have seen strong high double digit earnings growth in FY22, and have been rated their highest multiples in over a decade by the market. It remains to be seen whether trailing multiples will drop back to the range of 24-27 once growth reverts to the mean. With RM inflation affecting margins in different sectors and the possibility of a few quarters of elevated crude, one also wonders if IT will be back in fancy during the next sector rotation.
Have been adding Deepak Nitrite slowly through an SIP. Valuations have cooled, but Q4FY21 was their best quarter in 3 years. I’d be surprised if they manage to beat the EBITDA margins from last March, and I think one will get a better opportunity to add after quarterly results. However, at an FY22E PE of 24.7, valuations are very reasonable, and I’m happy to add slowly on falls.
Have trimmed Sandhar at 245. I expect them to de-grow about 15% YoY, and the thesis here is contingent on scale up of the 5 new plants. One was commissioned in December, but the remaining are yet to be commissioned. Street expectations were for the semiconductor pressures to ease in June 2022, but we’re yet to see if this will be affected by sanctions on Russian neon.
Was stopped out of Filatex at cost. Re-entered at 110, with 2% of the portfolio. They benefit from a high crude environment, but since the thesis is dependent on a successful rPET model, I’ll scale slowly once the pilot runs are complete.
Krsnaa hit a stoploss at 629. Recovered losses by re-entering at 550. At this price, it’s now at 16x FY23E PE. I’ve raised allocations from 4% to 6.2%, and will add more on execution.
Raised weight in AB Capital. I didn’t think I’d see it at 100 again, and they’re on track to deliver their FY24 targets ahead of schedule. RoA and RoE have steadily been improving, and should be at ~15% by the end of FY23.
I was tempted by Ugro’s fall to add more, but they’re now moving to quarterly disclosures. I’m happy with my allocation.
Cash forms about 10% of the portfolio. A part of that has been kept aside for Sandhar and more Deepak Nitrite, but a number of companies outside the portfolio are looking attractive. I’m currently studying Piramal, revisiting Lux, and one spoken about below.

I’ve initiated a tracking position in a company that completely baffles me: SJS Enterprises. It’s largely an auto-anc, but not really an auto-anc, since it produces dials and logos that go onto vehicles and consumer durables.

Zygo23554’s wonderful post on Suprajit and auto-ancs got me interested.

Very few auto-ancs command high EBITDA margins, and RoCEs of above 15%. Sona Comstar looks to be the best in the bracket, with margins of 30% and peak RoCEs of 30%. RACL has also delivered margins of 20% and similar return ratios.

With this in mind, SJS immediately stands out as not belonging to the average auto anc basket:

What’s more impressive is that they’ve managed to keep margins high through the downcycle starting in 2018. Their standalone business delivered 30% margins through FY22, through the RM inflation and tough environment others have reported. How have they managed to do this while producing parts that have no right to command 30% margins prima facie…

What’s even more impressive is their RoCE profile:

This looks to have taken a beating following 2018, but we’ve seen the margin profile remain robust in the same period. A quick glance at the balance sheet shows us why the RoCE has fallen:

The reason for the ratios falling in 2019 onwards is due to their fixed assets going from 36 Cr. → 158 Cr., where they moved to a new facility outside of Bangalore.

What am I missing? How are they able to command such high margins through various macro settings?

I’ll eventually write a post on the forum after I go through its red herring.

Malhar_Manek · April 23, 2022, 4:38am

One of the reasons is complexity- e.g. optical plastics have to be fingerprint-resistant, glare-resistant etc. Though even I am yet to fully figure it out.

From a long-term perspective of 5 to 10 years, I think mix of consumer durables, sanitaryware and medical devices (‘non-auto’) should rise, and thus I personally view it not as an ‘auto ancillary’ company but as an aesthetic components company

Disc- have a tracking position in SJS

Chins · April 23, 2022, 8:29am

@valorem please don’t call me sir. I should update the thread more often.

Current portfolio:

I want to summarise my current investment framework. I like companies that have reasonable valuations, and have various triggers for growth and re-rating. I go over weight/underweight depending on how near these triggers are to playing out, relative to valuations.

Some examples in case those reading this thread haven’t heard of some of these companies before.

PDSL: Had a loss making subsidiary that was at an inflection point 6 months ago. This is reflected in the change in bottomline between FY21 and FY22, and the RoCE improving from 17% in FY21 to ~38% in FY22. Business is unique in the listed space, keen to see how perception changes after the RoCE improvement shows up on Screeners.

AB Capital: Market is valuing the company by the sub-par RoAs/RoEs of 2018/19, while metrics have significantly improved, and PAT growth in FY22 is ~50%. Share price doesn’t reflect this growth. Most of the financial companies I track are reporting higher disbursals, lower provisions and better NPAs. Yet, financials have been beaten down by the market.

Sandhar: I’m currently underweight on Sandhar as it’s going to have a weaker Q4 than last year. While valuations are cheap, the triggers for growth are the commissioning of three plants that haven’t been reported to the exchange. I added to my position in March, but will add more between Q4 and Q1. The discovery of SJS made me want to split allocations between the two, as SJS today is the company Sandhar wants to be in 5 years.

I’m also studying companies where there is a lot of pessimism (prices/valuations are cheap), and RoCE/margins are well below historic means. From this, I have a watchlist of companies I would like to study to understand if this is structural or transitory, and have candidates to buy in the near future. Some of the candidates are:

Avanti Feeds: Company’s margins are at the lowest in a decade, on account of higher RM costs and the insane shipping prices seen in the last 6 months. PAT margins of 3-4% has to be the business bottom, I’m studying the company to understand the business and triggers better.

Granules: Tushar Bohra’s presentation at IIC had me interested in Granules, and the potential they have to replicate their leadership in other molecules. Currently, margins are depressed, and prima facie looks like the next two quarters will be weak. As with Avanti Feeds, I’m studying the business to understand triggers.

I haven’t bought any Deepak Fertilizer in the last four months, the position size has organically increased due to price action. I’m wary of the earnings peaking until the ammonia capex comes onstream, but I have an argument to make about the business and the gross margin mix. I’ll share on the company thread later.

Currently, I’m sitting on ~10-12% in cash, as I expect a number of companies in my coverage universe to post a weak Q4. Price movement in a lot of names does not show this is priced in, and perhaps we’ll see the market punish select pharma/chemical names as it has IT.

Overall, I think FY23 is going to challenge our stock picking

I’ll write a short note on my earnings expectations from my companies soon.

Chins · April 25, 2022, 7:53pm

@valorem

I have written about it six months ago, but it’s worth sharing a high level introduction to the thesis again in case anyone reading has never heard of the company before.

A whopping 30% of India’s GDP comes from the MSME sector. They constantly need working capital to function, and yet don’t have access to loans from banks. A part of this is due to the difficulty in lending to the MSME sector; it’s notoriously hard. They don’t have predictable revenues and banks have a hard time separating risky businesses from potentially good loans. This is the tip of the MSME financing iceberg.

As a consequence of this, there is an enormous credit gap: a demand of 20,00,000 Cr. of loans that MSMEs do not have access to. The RBI in 2018 introduced a framework to address this gap, called co-lending. This is where Ugro comes into the story.

NBFCs usually have better access to customers (including MSMEs) than banks, a better way of assessing risks in smaller businesses than banks, but they also don’t have the money that banks do. NBFCs make money by borrowing from banks at 7-10% and lend to customers at 17-20%, profiting on the spreads.

Co - lending allows NBFCs to pick good customers to lend to, and “sells” 80% of these loans to the larger banks, charging a fee on these loans. In this way, everyone’s happy. MSMEs get loans, banks reach a crucial untapped market, NBFCs profit as important middlemen.

Ugro is one of these middlemen that offers lending as a service. They (claim to) have a smart way of differentiating good MSMEs from bad ones, and also have built their entire model around co-lending, wanting about 40% of their loans to be done through it.

So if you step back and look at this business, it has an enormous addressable market. The jockey and management team comprises quality not usually seen in a 1000 Cr. market cap company, and they are a data driven fintech firm. This is what one likes. On the flip side, MSME financing is the hardest nut to crack. If they grow too fast with an imperfect underwriting model, bad loans will wreck the company. They also were incorporated in 2018, and don’t have a proven track record. (management is incredibly experienced)

If you’re interested in the MSME sector, MAS Fin is a company that has the same addressable market, has a proven track record over ten years, and also has 20% of its balance sheet in co-lending. I’d recommend studying that before Ugro as I think it’s a lower risk play.

Sharing some links on this:

I shared some thoughts on co-lending below

There was also a nice piece written on the IIFL thread

I’m always happy to discuss Ugro, co-lending and the sector. There is so much more to say, but I’ll leave it as an introduction.

Chins · May 4, 2022, 10:19pm

I don’t think this is enough value add to write to the main company thread, but CRISIL recently wrote a rating report on Ugro. It offers a good balanced view of the thesis, and interestingly for me, corroborates rumours that we’ve been hearing.

So they’ve got four co-lending partners, and management has said in passing that they’re close to onboarding 12-13 more. Formally, the stance is that these are in the works, and nothing is confirmed. It’s nice to see CRISIL acknowledge this, and make a stronger statement regarding the timeline.

We’re expecting a fundraise in FY23, and CRISIL nods with an amount.

Have 50+ partners in supply chain financing, 15 OEMs for machinery loans.

Opex has remained high as they’ve expanded from 8 branches to 100 in the span of a year. There looks to be another year of expansion ahead, until they reach 200-250 branches. I think the senior management would disagree with CRISIL, some of them were paid paltry sums

Current run rate is ~400 Cr., management targets are to ramp up to 700-800 Cr. by the end of FY23, and subsequently make the leap to 1000 Cr. monthly in order to hit their targets for FY25. CRISIL agrees that this is about execution going forward.

There is consensus on what parts of the story one has to track actively:

Can Ugro borrow at <10.5% consistently while they grow?
Can they grow the loan book while keeping NPAs down?
Can they maintain NPAs over multiple economic cycles?

Questions 1. and 2. can be tracked monthly/quarterly by data, question 3 bears all the risk in the investment.

Vineetjain111 · May 5, 2022, 9:30am

I am with you on this @Chins , it baffled me too initially. SJS seems to tick all boxes of robust unit economics, long (and quick) runway for growth and immediate triggers for topline and margin expansion. However, I am still not convinced with the fact that Mr Joseph sold off 25% of his personal holding in the OFS. I understand that Evergraph would want to lock in gains, and the business doesn’t need a lot of additional capital for growth, but to see the lead promotor walk away with 90cr after spending 30 years growing the business makes me a bit skeptical about him still having the hunger and fire in the belly to take advantage of this massive opportunity ahead.
I’m not sure if you view this as a risk or not, curious to know your thoughts.

Disclosure: Have a very small tracking position (0.4% of PF). Evaluating. Love the business.

Chins · May 5, 2022, 10:18am

I have been thinking about this

Hard to also know what personal goals/reasons are behind selling, but I would too if I were in that situation. Three years of a two wheeler downcycle, and then a bull market offering an opportunity to exit at upcycle valuations… I think a majority of IPOs last year were offers for sale.

I don’t see it as a risk yet as he still has 15% stake in the firm, and it’s been 35 years in making. What we do have is key man risks with the management. The quality/experience reminds me a lot of Ugro, and there are some similarities: both have lost a high profile CFO, who has decided to pursue opportunities elsewhere.

We’d see lack of fire reflect in the numbers over time, but they’ve just moved to the new facility in Bangalore, they’re inviting analysts over (IDBI sent their interns whose take away on visiting a professional firm was that it was neat and clean), and they’ve just made an acquisition. This doesn’t point to a sleepy management.

I’m currently watchful to see who the replacement CFO is, and whether they’re able to keep senior management on board.

Leading_Nowhere · May 5, 2022, 2:36pm

Just a note - in India, we follow an “issuer pays” model for credit ratings. The information in the report is likely provided by the company as part of the rating exercise. Hence, credit reports are perhaps not the appropriate place to corroborate, though you can certainly check for consistency. Sometimes, credit reports will provide some extra information, which would also be supplied by the company itself. One exception is commentary on industry trends, which would be generic and supported by the agency’s own or reliable third party data.

Chins · May 5, 2022, 2:52pm

Thanks for calling it out. Very valid rebuttal, I should have looked at this as a consistency check. Point was that this is the first source we have of onboarding 12-15 more co-lending partners.

Leading_Nowhere · May 5, 2022, 2:57pm

Yes, so that’s the occasional bits of new information you can often get from credit reports.

The qualitative forward guidance (this instance, for example) in any credit report is probably procured via a questionnaire, so if you ask the right question, the management will sometimes give information it hasn’t specifically stated elsewhere. Or it could just be intentional to provide some additional data to the agency. Rating is an important metric for an NBFC.