Divyanshu's Portfolio

Q&A: Questions & Answers Portfolio Q&A
23

I agree that if I buy an automobile, I will much rather buy a 2 wheeler than a 4 wheeler. India have a massive advantage in this. Every other country do not specialise in cheap motor cycles. So there is no risk of international competition. Also, the market is huge in African and Asian countries which prefer cheap bikes much like India and do not have a local producer for their needs. Whereas with a four wheeler, every international company is looking for an Indian presence. And it also gets more complicated with emission control, safety, electric and what not.

However, we have to agree that automobile is a cyclical which needs a lot of patience. While hero motors looks mouth watering at these levels, we have to consider their growth rate, future without honda’s R&D capability and consumer’s preference. If any other player has a super hit like a pulsar, market share could totally change. How comfortable are you to bet in an industry where it is very difficult to predict the next fashion?

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He should have said "Blockchain based AI enabled with crypto currency support and iOT automation. "

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25

Replaced Natco with Bajaj finance. Will allocate more, by replacing Drreddy, as I develop more conviction. Alternatively I am thinking of studying Titan and HDFC standard Life as possible candidates in place of Drreddy.

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Hi @Divyanshu_Bagga,
I couldn’t stop appreciating your portfolio.Nicely crafted.
The moat in BAJFIN is the quick ability to sanction a loan—for the customer.
The ability to maintain low NPA in spite of challenges—for the investor.
Overall the costs are maintained low with increasing AUM. A killing combination.
The way I understand. I truly don’t know how long this will last.
Consumer names like BATA and TITAN who are market leaders in their own style may be considered, if you like their valuations. :innocent::grinning:

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27

I have decided to track the performance of this portfolio, assuming lumpsum investment on 1st Apr, 2019. So it has been exactly four months, and the portfolio is down 4.57% as against around 6% decline in index. It is extremely rare for one to invest at bottom and be profitable from the get go. There will always be an initial period of being in loss before the profits start building up, provided the underlying business are doing well. The question, of course, is how wrong the timing of initial entry is, which will determine how deep the loss can go before recovery.

Portfolio update: I have decided to remove HUL (5% weightage) and instead increase Nestle (from 5% to 10%). Though, both HUL and Nestle are profitable positions, I am concerned about the distribution moat of HUL weakening as people change their consumption habits and online retail grows. See-


In comparison, Nestle products like Nescafe and Maggi, have customer stickiness, and can command some premium even over online retail. (Additional benefit: one less business to track)

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Agree over hul vs Nestle…but still feel hul is not a business to be sold once acquired … they can work on distribution and also on premiumisation can buy brands etc. …any other stock which can be replaced by adding nestle? Just a thought

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Good point. I had mentally boxed HUL and Nestle together. Nestle was a play on increasing urban consumption due to its brands while HUL was a play on increasing rural consumption where distribution strength matters. So they formed a complementary pair.

If I were to freely choose among other stocks to replace, I will probably pick Drreddy, as that is where my understanding is least and hence the least conviction. However, for some time, I am already contemplating replacing it with Bajaj finance. The more I learn about the business, they more I like it. They are growing fast and yet conservative with risk. Their fast approval process is indeed a competitive advantage, but the question I can’t answer is what if HDFC Bank does the same. HDFC certainly seems to be paying attention here. Another questions is of timing of switching, as we are seeing discretionary consumption slowdown at present.

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30

Thanks to the format shared by @Ferrari1976, I created the following sheet to track the performance of my initial portfolio dynamically and track it against benchmark.

This will help see whether the further activity is adding any value or not.

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My view in Godrej Consumer’s brand as moat:

The fact that they are market leader in household insecticides segment gives rise to the possibility of a moat. But concluding whether there is one isn’t so simple and requires deeper study of the underlying model. A moat is a sustainable competitive advantage which protects profit margins and market share from competition. So one need to ask what exactly stops its competitors from taking away its market share? It could be its brand which offers a quality assurance to the customers. A competitor will have to incur significant advertising expenses to establish the same sense of quality assurance from their brand. But if all a brand offers is quality assurance then it is a weak moat, it can be easily penetrated by names already associated with quality, like Amazon or D-Mart. I am not sure how it will protect its market share ones the likes Amazon and D-mart decide to leverage their distribution channels to supply their own brands of household insecticides, as an example.

But if there is more to its brands, which gives customer stickiness like Maggie and Nescafe of Nestle, then it can be said to have a strong moat, which gives a greater assurance of future profits, and hence will justify a higher PE.

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32

responses to your queries

1 GCPL is a dominant player in household insecticides segment with a major market share ( which was about 50 percent in 2016 ) in domestic market .
2 They have a strong brand recall value even today with the first name coming to mind of Good night when one thinks of household insecticides and so is HIT . They are making In roads into African market ( there is very high opportunity size there as insects menace is quite high in Africa )and other markets
3 Besides another area of moat is their strong history of innovation which they did by introducing new products like good night fabric roll on , good night fast card etc, hair dye shampoo and godrej protekt magic powder which just needs to be added in 200 ml of water to form soap liquid and is quite cheaper and cost effective
4 They also are market leaders in hair dye and hair colour and have purchased niche African brand on hair solutions in Africa . They are expanding geographically here too
5 Had read somewhere that Its the second largest soap player in India

Disc - I am an amateur investor and not a sebi registered analyst. Pls do your own due diligence before investing

Second query response

A moat is a sustainable competitive advantage which protects profit margins and market share from competition. So one need to ask what exactly stops its competitors from taking away its market share? It could be its brand which offers a quality assurance to the customers. A competitor will have to incur significant advertising expenses to establish the same sense of quality assurance from their brand.

I agree. But quality beyond a point is uniform whether its Godrej or Jyothy labs . What matters beyond a point (quality is standard in all renowned companies ) is brand recall and “perception of quality”

Divyanshu_Bagga:

But if all a brand offers is quality assurance then it is a weak moat, it can be easily penetrated by names already associated with quality, like Amazon or D-Mart. I am not sure how it will protect its market share ones the likes Amazon and D-mart decide to leverage their distribution channels to supply their own brands of household insecticides, as an example.

This is debatable as many foreign in house retail brands havent been able to break the monopoly of locally renowned brands like Gillette , nescafeetc or some such other brands renowned since many years and having mind share in the minds of the consumer . Its very difficult to dislodge such brands .Dmart offers its own brand of coffee but still that wouldnt affect a Nescafe or a Bru . What at best it can do , is increase the market of coffee but its very difficult to dislodge Nescafe or a Bru as they are focussed players and as soon as they see some issue of sales declining ( a very rare probability although nothing is impossible ) , they would start focussed celebrity advertisements and also do advertisements in awareness programmes of some charity work etc

Divyanshu_Bagga:

But if there is more to its brands, which gives customer stickiness like Maggie and Nescafe of Nestle, then it can be said to have a strong moat, which gives a greater assurance of future profits, and hence will justify a higher PE.

i believe Maggi is more sticky due to it being more personal however more important factor for pe is due to stickiness and importance and essential nature of product in daily life . In Nestle case , the more bigger moat is its baby food and powder very it has very high market share of 97 percent and 68 percent and its very sticky as no one would try to change their baby powder they are using as cost differential is minimal compared to the “perceived” risk in changing . This perception is created over the years due to brand awareness and trust and is extremely difficult to change psychologically . Evev if similar product is brought out by Dmart or Amazon, one would think twice before making the change as cost is a very small proportion of ones monthly income. Similarly , although good night isnt as significant as baby powder , they are extremely essential . And with their innovations, they have brought out baby roll on etc which is labelled safe for use. So a mother would think twice before using other brands due to perceived safety and years of building of market share . Besides the household insecticides mind share , they have various other categories where they are performing as i wrote earlier and moat could be a reason of several products doing well in a company as stated earlier , it could also stem from innovation and trust .

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33

Hi
Nice to see a quality portfolio and I hold most companies similar to your portfolio. Even I am a believer of holding max 10-12 stocks
However just two queries
1 HUL might be a slow grower compared to Nestle and any reason you allocated to both instead of adding more to Nestle
Marcellus newsletter compares Nestle with HUL


2 I too held page for a long time but now I feel it wouldn’t see growth rates as high that were seen in the past . I believe it has positioned itself between essential and aspirational and entered new product range wherein it may face more competition. Personally I have seen quality also not like earlier . So I discarded it some time back and instead added Titan which is a great aspirational brand and might see better growth although a lot depends on gold prices .
These are my views. Would love to know your views
Disclosure-
I am an amateur investor and not a sebi registered analyst . This is not investment advice . Pls do your own due diligence before investing.

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I think this is one of the most solid portfolios possible in the Indian investment scene.

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35

My rationale for having both HUL and Nestle as stated above-

Later in August, I updated my portfolio to replace HUL with Nestle.

As for retaining allocation to Page is the belief in continuing shift to formal innerwear from informal innerwear. The consumption of branded innerwear still has a long way to go.

That said, we cannot expect the shift to happen with steady growth rate. There seems to be cyclicity in the underlying market, as the economy has slowed, the overall volume growth has actually turned negative, leading to low revenue growth.

The volume growth used to be in the double digits, and I expect the same to return once the economy recovers. Any reason to believe that won’t be the case?

Titan is a great brand. In my view, a luxury brand which commands premium is another example of strong moat. That said, I am a gold bug and prefer holding gold over debt. Since gold is a hard money, with highest stock to flow ratio of all commodities, its value will continue to rise relative to fiat, especially in a period of easy monetary policy. Unless the economy, and hence the purchasing power of consumer, grows faster than gold price, it will be a negative for Titan. With the current economic policies (high taxes to fund loss making PSUs, no labour or land reform), I do not expect purchasing power to grow faster in near future, and hence staying away from Titan.

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36

Firstly must appreciate your portfolio and clarity of thought with which you seen to have chosen the picks. Some pointers - Bandhan Bank at present does not look at same league as rest stocks in your portfolio. It has lot to prove yet. Info edge also has been good so far in the PE way of doing business but the uncertainty is little more than rest I feel here. Dr reddy also may not be best pick in pharma. Having said above, I myself am stuck with some average companies and average businesses and learning how to avoid them.

Now, about allocation, I see you are converting real estate for your father to equity. Are you not looking for more safer, although less return, investments to ensure capital protection like liquid funds or tax free bonds or even equity mutual funds

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37

Thanks.

True. It is intentional, don’t want to have entire allocation to defensive bets like Asian Paints and Pidilite. Bandhan Bank and Infoedge are enterprising bets of the portfolio. However there is no compromise on management integrity (to the best of my knowledge). They also have moats, Bandhan Bank with its reach and loyal base among the otherwise unbanked. Infoedge with its collection of internet platforms where network effects acts as moat.

One usually gains more understanding of the underlying business while holding the stock and listening to regular quarterly updates. However I am still as clueless about the pharma sector as I was in the beginning. So planning to replace Drreddy with Bajaj finance, just waiting for the right timing.

Liquid funds are ideal to keep cash you may need in short run. I do not trust fiat or debt to preserve purchasing power in the long run. My grandfather learnt that hard way by not investing in gold or real estate. My father, on other hand, has maintained most of his wealth in real estate, besides having PPF and some savings in bank FD’s. I am helping him diversify part of it into equity and gold.

A retail investor can build a concentrated portfolio (10-12 stocks) in his high conviction picks. An equity fund cannot as a concentrated portfolio can diverge greatly from index and they will have hard time retaining investors in period of underperformance. Since a retail investor does not have to justify short term performance, he/she can exploit their edge to achieve better long term returns, provided they pick their stocks with long term mindset. Therefore I will always prefer direct equity investing over any holding in equity mutual fund.

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True, do you also have your own portfolio, will be good to know what you would pick for yourself. If at al you would chose debt, other than longer lock ins like PPF…what would that be for long term say 5 to 10 years. You mention liquid funds are good for short term however I see them performing same as dynamic debt or gilt funds and sometimes even better in long term. Also, if capital protection is the only criteria, would you suggest debt funds (which ones among liquid, shirt term, dynamic or gilt) or direct tax free bonds or plain bank FD s…thanks!

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Want to chip-in my two cents. Feel free to skip the reading.

A real-estate converted to Equity must ensure similar comfort. The PF is far from it. The stocks held, although reputed, are midcaps and purchased at high prices. We know that Midcaps swing far more than large caps. And, usually, this is not palatable which is why Large Caps are the preferred choice for aam-investor; for their relative stability.

So far, the condition of the PF is still not rattling on the nerves. However, should the market decide to show us its dark side, most of these stocks could fall 30 to 50%, inspite of them being good stocks. Such is the nature of MidCaps. This outcome needs to be addressed, because it is not that outlandish. It is well within the realm of near term possibilities.

Would your family be fine with such a situation?

One may justify that these stocks are good businesses and any downturn would only be temporary. But, historically we have seen that the market can remain unreasonable beyond ones capacity withstand.

Just giving you a heads-up.

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The thing with real-estate is that you don’t even get to know the valuation at a certain location with reasonable certainty. That combined with the fact that real-estate investments are yet to become liquid, i.e. sellable by a click of button, makes the task of long-term investing easier. So, that is the only comfort factor with real-estate investing.

I believe if one can invest in companies with reasonable good prospects, albeit at a bit over-valuation, and can acquire the wisdom and patience to switch off from market fluctuations, then I find no reason why equity investing even in good mid-caps should be any less comfortable.

P.S: I agree this is easier said than done. :smiley:

He should better avoid mentioning that. The family members by virtue of having experiences of investing in real-estate must not be equipped with enquiring valuations regularly.

That is a must. :crossed_fingers:

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41

Well I am still in the process of finding the investment style that suits me. So I have, not one, but three portfolios. I refer to them as Quality, value, and momentum portfolio. Quality portfolio has the same stocks listed here (except Drreddy), but more weight given to those with higher conviction and opportunity to buy at price falls. For example I bought Dmart aggressively when it fell to 1100-1200 levels. Similarly I bought Gruh (after merger with Bandhan) aggressively around 200-230 range. Thanks to that it has managed even better returns than the equally distributed portfolio I have shared here.

Value portfolio was my attempt to buy good business with sound management, but not necessarily having a moat, and facing sharp correction in price. That hasn’t worked out well, with loss at one point between 10-15%, and still in loss despite some recovery. The annualized XIRR of this portfolio is now -24%. In most cases, earnings deteriorated significantly after price has corrected. So perhaps my approach was wrong as I was giving too much weightage to past results (which was the only information available to me). Now I feel I don’t have any edge over market analysts in this approach as it requires lot of quantitative analysis of business as well as industry, need constant evaluation and making buy sell decisions quickly over short term developments.

Momentum portfolio was my attempt at technofunda analysis. The idea was to filter and study business showing price strength (using technical analysis), and if there are good fundamental developments taking place in the underlying business with the expectations of earnings acceleration, then to buy them with strict stop loss. It did better than value approach but underperformed quality portfolio which requires much less effort in comparison. So now I am tilting towards doing qualitative analysis of the underlying business from long term perspective as my style of investing

Earlier I used to hold money in liquid funds and bank FD for capital protection. That was when I used to consider gold as a useless metal and a bubble. But studying Austrian economics changed my view. Gold is an excellent preserve of value - it does not deteriorates with time and its fresh supply relative to existing stock is least among all commodities. That makes it an ideal money, and other currencies debasement (referred as inflation) should be judged by change in their value against gold. The ten years returns of gold ETF have been around 8.2%, you have earned real interest over your debt investment only if their return was higher than 8.2%. That explains my view of debt instruments. If I have to preserve money, and I don’t need it in short term, I will buy gold ETF, or maybe gold bonds.

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My father is a businessman who had to, at one point of time, rebuild his business from scratch. In comparison, a temporary drawdown of 50% to a portion of his savings is nothing. Besides he is treating it like real estate investments and doesn’t bother to enquire about the returns unless I inform him.

I would rather worry about myself as I am now maximally (70%) into equities. I am holding the remaining 30%, in gold and liquid funds, for such a 30-50% fall. The question is whether I will be able to hold and buy if such times come. That said I am very confident of the long term prospects of these stocks, and so, I should be able to weather such a storm.

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