Divyanshu's Portfolio

Q&A: Questions & Answers Portfolio Q&A
84

Thanks for details, as I can see over long and very long term - one can excel/do well in the style one is most comfortable with and which resonates with oneself. Wearing multiple hats is not easy, although FOMO drives us to do that on many occasions but the question we need to ask us time and again is - Is wearing multiple hats really needed? As I can see from your stupendous success in the one hat which resonates with yourself - It is not really needed…You may very well edit the first post that this is now Your very own portfolio and your very own style (and not just for your father’s portfolio) - This is what you are and what you have become as an investor now…i.e. if you wish to do that :slight_smile:

lastly, just a small thought, you may ignore above and this one also, … I think gradually it would make more sense for you to track the combined allocation for yourself and your father as primarily both of you own the same set of stocks with just allocation difference. The growth, risk, monitorable etc. does not exist in isolation but is combined for you as a family and CAGR in isolation maybe the last thing you would want to track when holding/buying such quality…Cheers!

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85

Moving out from Ajanta, back to Bandhan. Reason:

  1. The recent result was really bad, but the stock price is showing strength instead of falling. This gives credibility to management’s commentary of there being no more future negative surprises.

  2. The Ajanta trade was fomo. I am not tracking it, and just wanted to get in on the pharma rally. It seems I am late, and its better to bet my money on business I am actually tracking.

Have updated the excel accordingly.

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86

I can see dmart in your portfolio…

Dont you think Dmart is highly overvalued ?

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My definition of under or over valuation differs from what most people mean. Mostly people mean PE or PB ratio, few also use DCF valuation which requires lots of assumption. For me a stock is overvalued if it generates worse CAGR than index over a sufficiently long period (say 5-10 years). As such I don’t know, and for that matter, nobody knows whether Dmart is overvalued, because nobody knows future prices and we are all just guessing.

What I do know about Dmart:

  • It has very well managed logistics which enables it to extract discount from suppliers which it passes on to customers while keeping a part as its profits. Low cost serves as a moat against competition.
  • It is able to reinvest all its profits back into business for high returns.
  • It owns its stores, and in the process of expanding its business it is acquiring real estate.

These qualitative factors are hard to capture numerically. Many business with high PE end up outperforming index over long term because they had similar qualitative factors. So there can be undervalued stocks with high PE. My bet - Dmart is one such stock. I bought it when I started the portfolio, with a long term view, and selling it just because it has gone up a lot would be indulging in short term trading. So far, Dmart has outperformed nifty, proving that it was undervalued when I picked it. It is a winner for me, and I intend to let my winners run, except unless I feel market is irrationally euphoric and decide to exit all equities completely.

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88

It makes sense you bought Dmart long back when it was undervalued …
But as of now for me valuations looks very high…
Business model of Dmart is very good and management as well ,its always on my watch list for investing but price looks very high .
Same example goes with nykaa too

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He purchased DMart at nearly 97 PE which is not undervalued. My take is dmart will be always expensive atleast for 4-5 years trading at 100 PE.

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PE ratio is determined by number of factors. Some are business specific like competitive advantages (low cost in this case), management’s execution, promoter’s credibility. Dmart deserves a premium valuation on these factors. Another factor is that Dmart is able to deploy all its profit back into buying land and building stores. It has huge opportunity available to deploy its capital for high returns. In addition, the land it has to buy is an appreciating asset.

Then there are macroeconomic factors which affect the PE ratio, the most important being interest rates and fiat liquidity. If FED becomes serious about raising interest rates to fight inflation, all stock markets will fall. A recession will also be bad for Dmart’s business and we can expect PE ratios to deflate across all shares including Dmart and ‘low’ PE ratio stocks. I see such a fall as an opportunity and always keep some spare cash to take advantages of it.

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Portfolio Update: My allocation to Bandhan bank is a mistake. I got carried away by the narrative that the bank is helping millions of poor people by giving them access to finance. While the narrative may be true, my job as an investor is to generate superior returns while taking acceptable risks. Not only is the bank geographically concentrated in east, it is catering to politically sensitive population. I feel that the risks I am taking here were much higher than my other investments. I will remove my exposure to Bandhan bank and add more to Dmart (I already did that with my personal portfolio, but since I have not announced it here, I will make the change in excel on 1st August)

I also want to reduce my exposure to Infoedge and add more to Nykaa. Reason being I feel Nykaa is more focused, while Infoedge is Naukri + a VC fund, and the VC business can suffer a lot more in case of recession.

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92

Nykaa is a great choice, a growth stock, well managed flow of cash and pretty much has leadership, no competition as such, except fragmented ones… But at these valuations I want to wait.

Last fund raising happened at a mcap of 6000Cr (will confirm this figure) around 2 yrs back.

93

The conversations on Valuepickr will improve if we have a better understanding of the term “valuation”. A company is under valued if over the long term, say ten years, it gives much better return than index. Similarly it is over valued if it performs badly when compared to index. Performance over long term is the key because, at the end of day, that is what an investor earns.

But, except for time travelers, nobody knows the future returns of the stock. Instead we use various heuristics to determine whether the stock is over or under valued. PE ratio is just one such heuristic. Mostly when people say a stock is overvalued, what they meant is stock has high PE ratio. I don’t believe it is a good heuristic. In general, it is unlikely that an easily computable metric like PE ratio will give an edge in market. People who still use PE ratio, should backtest it to see if it works.

Understanding that PE ratio is just a heuristic, frees your mind to consider other possible heuristics. In particular, you begin to look for value in good quality companies, which you would have otherwise ignored due to their high PE ratio. Wlamart in 1974 was a good example.

Wal-Mart’s 1974 Annual Report: Sometimes You Get What You Pay For | PHILOSOPHICAL ECONOMICS

It traded at twice the PE of index, but its long term returns were much superior to index. The most important takeaway is that for Walmart to be fairly valued, its PE should have been around 600. That’s an astronomical figure, especially in the era where index PE was just 6.9.

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95

If PE, Price to Sales, Price to book, etc are not good heuristic for valuation, then is there a better method to find under valued stocks?
I believe that the price behavior of under valued stocks could give away telltale sign. Like how does the stock behave to bad news or bear market. An undervalued stock may not fall on bad news, and could keep rallying even during bear markets.

On the other hand if the stock is not going up on good news, then it may no longer be undervalued. That is where I find myself with Pidilite and 3M.They have given good results, especially Pidilite, but it seems to be already priced in.

On the other hand is Fine Organic. Its weekly chart shows an unbroken rally since inception as if no bear market ever came.

FineOrganicWeekly
FineOrganicWeekly1834×899 56.8 KB

The additives are critical to performance of the product, but are a small part of overall cost. This makes manufacturers stick to trusted producer for additive even if it is slightly costly compared to competition. Having a competitive advantage, Fine Organic will demand a high PE multiple. Furthermore results have been great (profit increased 4 times YOY), and the stock went up over 15% on the news. I believe it is an undervalued stock, and regret not taking action before the results.

Portfolio update: Halved the position in Pidilite and 3M, allocated to Fine Organic.

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I wish to suggest the opposite - It is actually less risky to buy the stock which has done well, pricewise, in last one year. The stocks that have done well are likely to continue doing well. I have an active trading algorithm whose edge is based on this idea. But it only works in Indian market, not in US stocks, probably because trading in US is much more competitive, and I fully expect this edge to disappear as indian markets grows to become more competitive too.

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My thoughts were never a doubt but more of a point to ponder as you were having doubts about it and sold Pidilite having asked that will it do well for next 5 years…I may have misunderstood it.

For me, I am clear and have no doubts …but do not generalise this as have not developed art of trading yet…Thanks

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I see. I agree with your point about Pidilite, which is why I have only halved my position and not made a complete exit. I have reduced Pidilite allocation because I feel there is better opportunity in Fine Organic, atleast over next couple of years.

My current portfolio allocation:

COMPANY_NAME WEIGHT
Avenue Supermarts Ltd 19.38%
Page Industries Limited 10.82%
Asian Paints Ltd 12.78%
Pidilite Industries Limited 5.90%
3M India Ltd 2.60%
Info Edge (India) Ltd 6.73%
HDFC Bank Limited 3.59%
Kotak Mahindra Bank Ltd Fully Paid Ord. Shrs 3.48%
Nestle India Limited 9.94%
Bajaj Finance Ltd 6.82%
Fsn E-Commerce Ventures Ltd 9.72%
Fine Organic Industries Ltd 8.23%
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99

Excellent portfolio Divyanshu. How did I miss your thread!

The key observation is well balanced high growth portfolio.

Your DMart + Page + Nykaa is ~ 40% of your PF, while mine is above this.

At some point I have held every stock in your PF except Fine Organics. Could not understand chemical sector much, so conviction is lacking and so drawdowns made me nervous because I could not figure if the stock drawdown is in sync with market wide drawdown or stock specific drawdown and if it’s the latter the stock would not go up when the market recovers.

I hope you will not take offence to my unsolicited opinion/ observations on your portfolio because at one point I went through the almost similar portfolio stocks and sold a few of them for the reasons below, so you may or may not find them useful, but take it as a data point.

3M India, Nestle: Long term growth is really low, relatively, but great franchises. So, no further chances of PE re-rating, I believe. The returns would be in sync with earnings growth. Since you are a full time investor/ trader and so have sufficient time to track, did you think of consolidating this in a high growth quality franchise? Positive: These 2 will provide stability to your whole portfolio.

Info Edge: I could not understand how big is the market opportunity for job market? I believe only Naukri is worth discussing while the rest of the businesses like real estate, matrimony are not billion dollar revenue generating opportunities, at least as of now. Even in US real estate related internet businesses could not make much headway despite the boom there, example $RDFN. 10% stake on Z, PB would not give much to the valuations of Infoedge. Example was, Yahoo could not get much in its market cap with its huge holding in Alibaba. Market ignored the holding. In future when Indian markets are as big, we would also get similar yardsticks. While I built some conviction in Zomato & Policy Bazaar and thought are better opportunities. PB results this quarter are excellent actually, while the media headlines only provide first level thinking.

HDFC Bank: Would like to know why would you not consolidate this into Kotak bank fully? That frees up some monitoring time and Kotak is better in almost any metric you take. Is it due to diversification within a sector?

Fine Organics: I see you are a systemic trader, so my comments here may not add much value to you but since you entered now, hasn’t the stock gone parabola which lends itself to either sharp drawdown or consolidation? Which by the way is OK as long as your entry has built in this already?

Have you looked at Eicher motors? If so, why did you not invest? I could not see it as 50 billion USD market cap because of the industry dynamics, so sold it. While the management is fantastic.

As a side note, Page results have been fantastic. It’s ability to maintain margins & high growth, rain or shine, along with RoE, RoCE>55%, 50% EPS as dividends is unheard of in Indian markets. The management con call is informative too with some hyperboles on luxury segment being witnessing high demand, but let me not go too gung go about it yet.

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101

Thanks for the detailed inputs.

My trading is separate from the investing portfolio shared here. I prefer to maintain my wealth in assets which are protected against inflation. Part of my trading income goes into this portfolio of stocks with the aim of long term wealth preservation. As you said, 3M, Nestle is there to give stability to the portfolio and they are ideal stocks for wealth preservation.

That is a good suggestion. Both HDFC and Kotak are good lenders in my view and I couldn’t decide on cutting one completely from the portfolio.

No Fine Organics was not generated by my system. My investments are completely discretionary. Though my system also generates entries in stocks already gone parabola and it works. The case of Fine organic seems to be of bad entry now.

No. I have not studied auto sector. I feel that with the advances in technology, particularly self driving, the market will move away from ownership to rent model. Besides, can an auto company create competitive moats?

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102

Great portfolio! I have some of these stocks. Good luck!

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Hi @Divyanshu_Bagga: Any plans to refresh the thread with latest portfolio and evolved thoughts? Looking forward to read your current thoughts. Thanks.