Divyanshu's Portfolio

Q&A: Questions & Answers Portfolio Q&A
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I finally managed to convince my father to move a part of his real-estate investments to equity. So I am trying to build a portfolio for him which has low volatility and yet gives decent return (inflation + 7-10%)

The criteria for selecting stocks in the portfolio is

  1. There should be huge opportunity size available to business for growth.

  2. It must have sustainable competitive advantage to ensure that large opportunity is captured in its bottomline.

  3. Management integrity is not questionable.

Such a stock, if well discovered, will trade at high earning multiple, carrying only valuation risk, as there is no management quality or business quality risk. Hence we plan to buy the stocks in the portfolio in a staggered manner, investing a fixed amount every month.

Following is the portfolio:

Stock Weightage
Dmart 10%
Bandhan Bank 10%
Page Industries 10%
Asian Paints 10%
Pidilite 10%
3M India 10%
Info edge 10%
Hdfc bank 10%
Nestle 5%
HUL 5%
Drreddy 5%
Bajaj finance 5%

I intend to hold all stock until

  • Its competitive advantage starts eroding away.

  • I find a better opportunity

Hence I am actively looking for pointers which suggests the competitive moat may be weakening in my stock picks or suggestions to replace my pick with idea having better prospects will lesser risk.

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I have the least conviction in Pharma picks, as i do not understand the sector well but wanted to capture this opportunity. This is followed by FMCG picks - that is because in the long run i see their moat weakening. The competitive advantage of Nestle and HUL comes from their brands and distribution strength, but I see their value migrating towards e-commerce and retail chains like Dmart, as they can provide the same quality assurance and distribution to their competitors.

Indeed that is why I have greatest expectations from Dmart, despite it quoting at high valuations, followed by Bandhan Bank. If not for the high valuations, I might have allocated them larger share.

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I like your portfolio. It consists of solid businesses with proven track record. Best of luck.

Regards
SJ

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In the process of convincing him, you must hv promised him a PF which would be somewhat as rock-solid as his real-estate. In which case, I would like to speak my mind, with the only intention to do some learning for myself.

The primary criteria is, and should be, low volatility, and secondary criteria is appreciation as such is the expectation of a real estate investor. Therefore, you should invest only in Large Caps. They may not be multi-baggers, but capital safety is guaranteed, and 12 to 15% CAGR are also possible depending on how one manages.

Large Cap Investments I would recommend right now:

Hero Honda
M&M
Cadilla
Ongc
Coal
cipla (@400)

These are trading at reasonable prices. Absolutely no point paying high for anything ever, unless you have a very good idea about a company and clearly see stable future earnings.

If it were up to me, I’d invest the entire sum in tata bonds for next two years giving 9% types returns. And wait for correction. I am comfortable with taking that gamble.

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Hi Amit,

Thanks for your inputs. You are right, low drawdowns is the primary criteria as he is not used to the idea of his investments depreciating in value. Which is why I have kept ideas like Mangalam Organics, GMM Pfaudler, etc, in which I am invested, away. However, I do have reasons for not selecting the suggested stocks.

Ongc, Coal India: Encouraging government owned business is against the philosophy of capitalism, in which I believe strongly

Cipla, Cadilla: I do not want to allocate more than 10% to pharma as I don’t have a good grasp of this sector. At present, I don’t have a reason to prefer Cipla or Cadilla over Drreddy. Natco is a calculated risk, it will increase the volatility, but due to its small size, it is also fast growing one and the current valuations were attractive.

Hero Honda, M&M: I have steered clear of the automobile sector as it is facing disruption from electric vehicles, growing trend of using uber and rented vehicles like from zoomcar as opposed to personal ownership of vehicles. IMO, Hero Honda and M&M do not have any competitive advantage over small new entrants in the EV space, and since the smaller companies are more nimble, they are more likely to gain from this disruption. For now, I will wait for more clarity to emerge on the scope of disruption we may be facing.

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A low volatility pf is one in which stocks are unlikely to show drawdowns. Although, your stocks are good businesses, but currently at rich prices, any negative news will quickly show you a 30% DD.

The best of the lot, Asian HDFC correct around 30% once couple of years. A long term investor ought to be opportunistic. @Uservijay
I would not mind losing some upward gains and wait for some respite.

I don’t mean to nitpick, but pidilite is a small stock which can give big swings. At 70PE goodness is factored in. It’s current TTM is 18.38, which is less than Mar18 EPS of 18.95, one very strong reason for a down swing.

I guess I am laying too much emphasis on the concept of circle of competence. This is all the more important when the overall market is richly valued. If the market was to show a down swing and if you don’t understand the midcaps stocks fully well, then one gets worried to the point of changing his strategy and PF (from stocks to FDs perhaps)

Bandhan Bank also great. But lot of new things are happening there. Even after a year of IPO listing it is still near its opening price. It is a little scary to allocate 10% right at the start of a PF in one shot.

Its on everybody’s minds lately: buy a good company no matter what the valuation. 3M, a great company, but the stock? Not so sure. For 10%ish growth, how high must you pay. 3M may not show a deep correction but it may go side ways for a very long time; is the investor ok with that has he checked out all the other options.

Infoedge has consistent growth in sales but it’s EPS growth is very patchy. I hope that this stock is completely in your circle of competence for having a located 10% to it.

The top order Pharma Companies are undergoing a turmoil due to their business with USA. therefore investing in Pharma Companies that do most of the business locally feels sensible right now, because this industry too I don’t understand well enough. Cipla is a stable stock, has given 10%ish returns for ever.

HH and MM are safe bets. At 15PE these large caps are harmless, with an upside. They are on the EV wagon. They are leaders.

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Yes, but they correct much less often than other stocks. We cannot eliminate drawdown completely, and as for using such corrections opportunistically requires much more active involvement. I want a portfolio of stocks that I can SIP into for years without much change. Not to mention, I am not good at timing the market even if I was willing to put the effort.

Its IPO price was 375, and at CMP of 545 it has given sufficient upside, and that is despite the pressure on promoters to sell the stake by RBI. Besides we are not going to invest in one shot. Owing to overall market valuation concern, we plan to get invested in a staggered manner, investing a fixed amount every month. We will get fully invested in three years time

We do not pay high PE for high growth alone, the longevity of the competitive advantage period (CAP) in which high growth can be sustained also matters. It helps to think of the stock price as the stream of discounted future earning. A large CAP implies a longer stream of significant discounted earnings, and that is why we obtain a high PE multiple for such companies, as long as their moats remain intact. 3M has more than 70000 products out which 3M India distributes 10000, many of which are innovations for which there is no competition. The same applies to pidilite, its almost a monopoly with long CAP.

Looking at the consolidated EPS is not the right approach for Info edge as that will imply a negative value to a lot of its businesses and investments which are making losses. The right way is to look at the EBITDA of naukri.com, which has grown consistently at a 5 year cagr if 17%, with additional (positive) value coming from its remaining business (99acres, jeevansathi, and investments in zomato, policybazaar)

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Can u pls let us know which are these small EV companies? Any significant EV company in 2 Wheelers?

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It is a speculation, I expect small new entrants to emerge. Don’t know much about the ones that already have. Ather is one such company in which Hero is invested. I did however read today about Olectra Greentech which seems to becoming a major player in e-buses segment.

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I think you have adopted a good approach. Quality of business and management is of prine importance. The inevitable drawdowns if and when they happen will be taken care of by staggered buying.

Since portfolio is being built for long term, it makes sense to build it up over a period of 2-3 years by a disciplined approach.

Rather then pharma names i would prefer companies like bata, bajaj finance where runway is long and somewhat predictable.

Having said all this one has to keep monitoring the strength of the company’s competitive advantage and act accordingly.

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I have been keeping eye on auto specially 2 Wheelers for 6 months or so and have now started to look more deeply…would be great to know your views on Hero vs Bajaj auto and also on 2 Wheelers vs 4…thanks!

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Firstly the disruption in two wheelers and four wheelers is still distant, well at least in India. Charging the vehicle is still an issue which doesn’t have an efficient solution.

I have read about some ways but none appear feasible. Charging stations like petrol pumps, personal charging kits, battery swaps, long lasting batteries etc. But, no solution appears to be practical as yet. Primarily because LPG and CNG still make so much sense. There isn’t a pressing need for a better alternative.

I feel there must be better infra for CNG LPG availability, instead of Battery Charging.

In the same breathe, the prospects of Tata Motors worry me. EV disruption in the west, Brexit are going to hugely affect JLR sales. TaMo is going to post a losing year.

With disruption out of the picture I am bullish about the the two wheeler and four wheeler demand in India. Therefore I find it sensible to invest in market leaders, Hero, Bajaj, TVS, Maruti, MM, when at attractive prices.

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Looks like we are in for exciting disruptive phase for two wheelers. Came across this which is in line with what you have mentioned. Good idea to stay away.

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Thank you Hitesh sir. Your guidance has been very valuable.

I am also looking for some good company to replace the pharma names. While it is easy to find business where opportunity size is huge, the trouble lies in identifying the competitive advantage company enjoys, that will ensure that huge opportunity will eventually be captured in its bottomline. If I can’t identify the competitive advantage, I can’t monitor whether it remains strong or is weakening.

For example, I have studied bajaj finance. But I could not figure out what competitive advantage it has over banks, which have lower cost of funding. In theory, banks should be able to offer everything that bajaj finance offers, in practice however bajaj finance outperforms as most of the consumer durables loans appear to be financed by them. If only I knew the reason for this outperformance.

Similarly with bata , I do not know what competitive advantage it has over emerging brands like Khadim.

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Bandhan is a perfect embodiment of how capitalism can lead to welfare of all parties involved: the lender. the borrower, and of course, the investor. It makes finance available to the underbanked, the segment of population which can move up rapidly with little support. India cannot progress without enabling its rural masses, and that is what Bandhan is doing. The profitable relationship it has formed with rural masses is also the source of its competitive advantage. (In the same way as knowledge of credit history is to a lender)

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Hi Divyanshu,

“I have studied bajaj finance. But I could not figure out what competitive advantage it has over banks, which have a lower cost of funding. In theory, banks should be able to offer everything that bajaj finance offers, in practice however bajaj finance outperforms as most of the consumer durables loans appear to be financed by them. If only I knew the reason for this outperformance.”

The reason Bajaj FInance is outperforming is very self-evident if you look deeper. Compared to Bajaj Finance, most Banks do not have the right kind:

Resources: This includes People, Culture, Technology (software & Hardware), Product, Information (Big Data), Relationship with Vendors.

Processes: This includes Employee training. How the company staff interact, communicate & coordinate within the company, with vendors and with clients.

Priorities: Only select Banks (Eg: IDFC first bank) have consumer durable finance & personal loans as a priority. For most companies, their priority (especially at the lower management levels) is mostly ‘how they make money now’ and not ‘how they should be making money in the future’.

Also, keep in mind that the regulatory Framework makes Banks less Nimble than NBFCs. So keeping in mind that the Consumer durable finance is a Huge and ever growing market, it is reasonable to think that Bajaj Finance will keep outperforming most banks for many more years to come.

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The day everyone figures out what competitive advantage BF has it will stop outperforming :grinning:

It begins with the jockey, the processes and culture he has laid out, the scale and expertise the company has achieved and the reach it has at most retail locations.

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Hi Naveen,

You do have a point there. Banks do not have the right priority for consumer durables and personal finance which is why they may be lacking in resources and processes to deal with it. The regulatory framework also makes them less nimble. Perhaps that is why, HDFC bank has its own NBFC subsidiary, HDB Financial Services, to focus on this segment. Would you consider HDB to be a threat to Bajaj Finance?

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I think the pie is huge for many players, hero and bajaj can buy out smaller ones unless have strong PE backing…these are companies which built credibility in motorcycles from scooters and competed with MNCs … disruption is welcome!

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I was checking Bajaj and hero charts…one thing that bothers me in case of Bajaj is its huge fall in recession 2008 09 vs a relatively stable hero stock at that time. As I just started tracking auto…can you or anyone suggest why Bajaj was battered so badly while hero was not? Thanks