Current Portfolio and Q3 views

Q&A: Questions & Answers
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Disclosure

:

I'd like to kickstart this discussion with no presumptions about portfolio performance or as a platform for pontification. Rather, I see this as a tool for:

a) sharing sector/macro views; especially without institutional/market-flow access (for investors like myself) and

b) spotting some interesting stock ideas (not all of us can post on all stocks we own).

If this idea is interesting, might I recommend a thread in the asset allocation framework for sharing macro views (beta can sometimes destroy generated alpha - over a very short time frame) ?


Interesting observations

:

The size of alpha from one position (Wockhardt in my case) brings me back to Donald's excellent post on a capital allocation framework. I will post a separate note on the stock - my view is it's still fundamentally good for another 20-30% move from current levels despite the run-up (the stock is still trading at 10x FY13 P/E vs. the sector at 18x).

Portfolio positioning:
My current positioning is largely defensives plus cash - I hedge by shorting Nifty futures in times of nervousness. I do own some non defensives (esp Smartlink, MCX and Essar Ports on a stock specific basis). RIL was a bad pick and I'm waiting for an acceptable price level or my stoploss to be triggered to exit.

H2 (Jul-Dec) Macro Views:
I don't think India is cheap on a historical P/E basis as a fundamental de-rating is yet to happen (stagflationary environment, twin deficits and slowing corporate profit growth). I don't expect a July rate cut by the RBI given their hawkish stance and latest CPI prints (today's PMI is still showing double digit input price increases). Flexible OMOs are more likely (as and when needed) and a CRR cut is really not needed - credit growth exceeds deposit growth which is the banking industry's problem today.

That said, I am tactically long the index now on the back of a global beta rally, market expectations of ECB/China/RBI rate cuts and NDA policy reform expectations (emphasis on expectations for policy reforms). It's unlikely that I will carry this position over till the RBI decision date.

Globally, Eurozone woes will continue to haunt the market as the only fix to keep the Euro is a "United States of Europe" ie. shared sovereign liability and ECB money printing - which won't happen anytime soon or that easily.

The US fiscal cliff will rear its head in Q4 and congress will likely postpone the problem to 2013 (post presidential elections) though the only long-term fix is to let the tax and spending cuts happen. Global market correlations will go to 1.0 as they always have.

Either way, the USD currency printing presses will be running overtime as macro data prints will continue to be disappointing.

We will likely see global crude demand destruction but, on balance, QE3 along with supply shocks (especially with Iran; no one knows how that will turn out) and an OPEC supply cut (most OPEC members need $100 crude to balance their budgets) should keep a floor on crude - all bad for India's current account.

Portfolio (as of Jun 30th 2012):

Stock
 Entry Date
 % of Portfolio
AVT Natural Products
01/01/2012 1.7%
Bajaj Finserv
 01/01/2012 1.1%
Bajaj Holdings
 01/01/2012 1.3%
Chettinad Cement
 01/01/2012 3.9%
Essar Ports
 01/01/2012 2.9%
Essar Shipping
 01/01/2012 0.2%
ITC 09/05/2012 2.4%
Max India
 01/01/2012 0.8%
MCX 22/03/2012 4.1%
Pidilite 01/01/2012 4.2%
Reliance Industries
 01/01/2012 7.0%
Smartlink 14/03/2012 6.1%
Sterling Biotech
 20/04/2012 0.1%
Wockhardt 01/01/2012 12.9
Investable Cash
 35.6%
Capital for F&O
 15.7%
Total 100%

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Voila! We have our first Public Portfolio:)

Excellent initiative Raja. Hope more senior ValuePickrs will take the initiative to share. Many more will be encouraged to critique and share insights!

And newbies/Learners - this is also a chance to learn from Seniors and ask for help:)

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Dont see any comment on the two folio that has been updated here??

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hi raja,

I would begin by pointing out that over the years it has been futile to project market directions as its very difficult to get these things right even for the best of investors.

Coming to mcx, pidilite, itc and wockhardt all these seem to be good bets.

Reliance would be the proverbial market performer.

smartlink and chettinad seem like special situations.

essar group i usually dont touch even with a barge pole.

Rest of the stocks dont occupy significant percent of the portfolio to make any significant difference.

My suggestion would be to increase the bets on stocks with high conviction.

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Hi Hitesh.

Thanks for the inputs; I agree my portfolio weights are not in-line with my conviction levels but that’s because I am looking at capital protection now, plus have taken profits off the table in H1. A rebalancing is due this month, especially on the smaller bets.

Re: market direction, I broadly agree with you but I believe the US fiscal cliff is the one single event that can drive us into a deep global recession; Europe only compounds the problem. The scale we are talking is unprecendented and the timing is round the corner. It would be prudent to prepare for armageddon.

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Stock
 Entry date
 % of Portfolio
Chettinad Cement
 01/01/2012 3.4%
ITC 05/09/2012 2.3%
Pidilite 01/01/2012 5.3%
RIL
 01/01/2012 6.7%
Smartlink 03/14/2012 8.7%
Sterling Biotech
 04/20/2012 0.1%
Wockhardt 01/01/2012 27.3%
Cash 31.8%



Total 100%
As of
 02/20/2013


Portfolio positioning and exits:

I have exited some of the smaller conviction ideas and now have a 6 stock portfolio. The core ideas haven't changed and I am still @ 50% cash.

A core exit was MCX a few days back when it broke through its 200DMA again - that's twice in a 6 month period its done that. Last time it did, it went down to 800 levels which appears to be a possibility again given the overhangs (STT on commodities, bearish patterns on commodities/gold and the MCX-SX hype worn off).

Wockhardt:

This is still my largest holding (27% of the portfolio due to capital appreciation). I have seen a few fellow members watching this stock. Based on the 3Q numbers, the stock appears on track to deliver Rs 140-150 EPS for this FY, giving a current PE of 12.7X. This compares to a sector PE of 25X.

Regarding targets, I think 2400/- (15X on 160/- FY14 EPS) is a fair value though we know how stocks can overshoot or undershoot these targets when momentum is so strong.

Given my capital gain at risk is too high, I have a trailing stoploss. The 100DMA has been an excellent support level in the last one year (that is my trailing stoploss) which stands at 1592/- as of today). This could also be buy levels for someone looking to entering the name now (15% correction from current levels).

As the recovery theme is now complete, I believe Wockhardt is in its last stage of multiple expansion which will be driven by

  1. Institutional/sellside interest in the stock. Wockhardt is now a $4bn market cap stock with daily liquidity of $4mm (100% delivery). Many funds would wait for the CDR exit to be formally completed before investing. This should happen soon formally though for all practical purposes, it's done. More sellside houses should start covering the name on similar grounds.
  2. Traded volumes on exit from T2T. Wockhardt is currently in the T2T segment and surprisingly, volumes did not fall off a cliff as many thought. A T2T exit (rumoured this month) should take liquidity above that $10mm threshold which funds eye keenly.


Smartlink:

I have already penned my thoughts on Smartlink in the stock thread. The promoter acquisitions have started 2 days back (they had a 2 week cool period ahead of the earnings release) and their holdings stand at 74.10% today.

Watchlist: BHEL, Opto circuits

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Addition: 12.5% of the portfolio is F&O capital

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Hi Janakiraman,

Great to read your views on the different picks.

BHEL looks interesting to me too. At 7.2 times you get a high OPM business with no debt and ROE above 20% and that too after 40% of last year sales received as advance.

India cannot do without power sector picking up steam and we already see revival happening in the central gov lead power sector investments. With more than 2 times sales as order book it could have enough time for the new orders to pickup without huge decline in sales. Last time it had a P/E less than 15 the order book and OPM were worse than it is now. Looks like a good contra bet.

What really is the issue with Opto Circuit? Why has it got hammered like this?

Would Wockhardt get a P/E of 15 with so much of pledging and debt? The dividend payout may not happen any time soon either.

Cheers

Vinod

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Wockhardt: I believe the debt is manageable, they are at 0.5X Net Debt/Equity and raking in Rs 200Cr of FCF per quarter. I would expect (and prefer) ongoing debt reduction through FCF instead of dividends. I agree the high promoter pledging is a concern.

http://alphaideas.in/2013/02/21/investor-presentationwockhardt/

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BHEL: I penned some thoughts on BHEL in the contra bets thread. My thoughts are the same (bottom picking as a contrarian bet) but, as I said there, BHEL did trough at 5X P/E in 2002 so there is downside risk here, in addition to price weakness from the upcoming OFS (I intend to buy at that point).

Opto: A lot has been discussed in threads here, and in a separate thread by Hitesh Patel as well.

The market has lost faith in their corporate governance, in addition to acquisition led growth affecting their working capital and credit ratings. The promoter warrants issued at 140 was the last line of price defense that failed. I suspect they would also explore convertible structures (like KFA) to convert existing debt into equity (to reduce their debt burden meaning minority shareholders get diluted).

Technically the stock is very weak now and the balance sheet is beyond broken, because of CSC (see below).

Cardiac Sciences Corp, the US acquisition that they bought (for $7mm or so) is the biggest drain on working capital (approx 70% of their consolidated working cap needs). I see 3 long-term fixes for CSC:

a) Capital infusion via debt/equity. Possibility is extremely unlikely given current debt ratings and share price weakness.

b) Sale/Write-off/Bankruptcy: Purge the balance sheet by selling CSC or filing for Chapter-11. This will be a big cash charge (inventory and working cap write down) that the market is pricing in now.

c) Stabilise the working capital requirements by negotiating with customers (which happens to be the US govt) and suppliers. They say they have been doing this for 2 years. I fear by the time this is achieved, Opto could be a single digit stock.

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what makes you invest in RIL - i have been in this one for more than 3 years now - they pay out dividend only once every year and the capital has depreciated in 3 years. last bonus was in Oct-2009 and i don’t see any bonus visibility for next 5 years

till such time that the Oil & Gas sale price is not hiked, which is doubtful considering the possibility of a populist budget - RIL stock price will always be in 3 digits

and the moment it crosses 1000 mark - a huge sell-off is bound to be triggered,which will in turn reduce possibility of any major capital gains

I am really disappointed with the way RIL has performed after May 2008 (nearly 5 years)

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Hi, I will continue the BHEL discussion is the BHEL thread so that others can also pitch in. pls respond there.

Cheers

Vinod

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I’ve admitted in my first post that RIL was a bad pick. KG gas output will be the key driver for the price to cross 1000/- and that seems a few quarters away. We could see some price action once their telecom plans are out - at least the cash pile is being put to use.

I augment my income on RIL by selling deep OTM calls every month (covered call strategy). In the long term, cycles aside, RIL and SBI would be the perennial market performers.