Concentrated Portfolio Feedback

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

Hello everyone!
This is my first post on VP Forum.
I’m relatively new to investing. Started in Jan’20 without any knowledge or idea about investing. Read some books in the beginning, was convinced to not do intraday trading or F&O. I used to see the financials of the company to take decisions. But I lacked the conviction to hold stocks for longer period of time because I didn’t know the business of the companies in detail. I remember buying alkyl amines at Rs.1100 and selling at Rs.1400 (pre split) or buying affle india at Rs.1000 (pre split) and selling at loss.
I have recently created a portfolio of 12 stocks. I have gone through the business of these companies in much more details and I hope to hold these companies for next few years. The name of the companies, my investment thesis and the percentage allocation are as follows:

  1. Tanla platforms (13.5%): Bought this one expecting the earnings to grow in a similar way it is growing now. The company has done some good acquisitions resulting in increased ROE. The new platform Wisely looks promising considering the enthusiasm of the management.

  2. Balaji Amines (11.6%): Bought this one as the company belongs to an oligopolistic industry with some entry barriers. The valuations of Alkyl Amines wasn’t comforting to me so I went with Balaji. The capital allocation of Balaji is I think the reason for the lower PE. But I thought the capital allocated towards the hotel business is less than 1 percent and they have shut down the CFL Business.

  3. Borosil renewables (11.2%): Because of it being the sole Indian Manufacturer of solar glass and the Govt focus on renewable energy.

  4. Laurus Labs (11%): Company shifting from ARV APIs. The synthesis and Biologics business is expected to increase.

  5. Divi’s Laboratories (10.6%): The extraordinary track record of the company. The company is doing a lot of backward integration which is evident from increasing margins. Humongous capex of more than 1000 cr over the next few years gives assurance of growth.

  6. TCS (9%): Bought this one as a stalwart IT play. Most of the growth IT companies are trading at crazy valuations. Plus, I found understanding the IT business a little difficult. TCS being a big fish in the IT sector is expected to continue growing its business.

  7. Shivalik Bimetals and Controls Ltd. (7.1%): Liked the products and the areas of application. Financials are solid and growth is visible. Since the company is not doing concalls, reluctant to increase allocation.

  8. Saregama (6.9%): Really like the music industry which is asset light. Reluctant to increase allocation because of valuations.

  9. Apcotex Industries (5.8%): Added a few days ago. Liked the business. Still studying. Will increase allocation after getting conviction.

  10. Tatva Chintan (5.1%): Added after reading a bit about business. New capacity not coming for the next few quarters. Valuations seem high.

  11. EKC (4.9%): A leader in steel cylinders. Not increasing allocation because the foreign subsidiaries have always been a source of risk.

  12. Jash Engineering (2.5%): Read a bit and liked the business. Have initiated tracking postion. Still reading about the company.

Views and suggestions are welcome.

Regards.

5 Likes
2

Do not get me wrong, but in my view one should not start with a concentrated portfolio by putting large sum of money in few scripts, it should be an outcome of some years of outperformance of a set of stocks and elimination of other duds/underperformers. The risk with starting a big concentrated positions are high, even some percentage point drops convert into big sum in absolute number. Also when you carry a large position any negative news make you more nervous and uneasy unlike when that position has become big over period of time because then you are better aware about the companies you hold and have higher conviction, additionally you may be losing some part of profit unlike capital in prior case. Just to give you example my current portfolio value is 85% in 11 stocks and remaining a long tail which are like ideas i have, which i will add up to if they perform. All the best !

6 Likes
3

About Balaji Amines: I think one more reason for lower valuation is their Cash flow from operations is way below their PAT.

image
image1157×430 69.1 KB

image
image1243×259 48.4 KB

Disclosure: Not invested in Balaji Amines.

1 Like
4

Thanks for your feedback. Agree with your point that a concentrated portfolio comes with a risk. But if you look at the concentration of the portfolio, the highest allocation is just above 13% which will come down once I invest in the companies I’m still reading or unsure about. My aim is to keep the allocation not more than 10-11% in any company.
Though I liked your idea of investing 85% in 11 stocks and rest in different ideas.

1 Like
5

Thanks for the reply.
If we take cumulative CFO vs PAT for the last 10 years, CFO is actually higher. For FY21, the CFO does look a lot less than PAT. Will try to find out the reason.
Thanks for pointing it out.

6

Hello, a concentrated portfolio and long term investing is perhaps the best way for superior returns over a period of time.

If you have the knack for picking up likely winners, go for it. It has more risk naturally - but generally risk-reward go hand in hand.

Personally, I am firm believer in concentration, and willing to work with 4-5 stocks at a time, with 7-8 as upper limit. Finally it comes down to your comfort level. Don’t do something with which you are not comfortable.

3 Likes