Growth + Value Portfolio Part- 2

Hi All

I havetaken up a responsibility to manage a portfolio of someone else.

Risk appetite is decently high as is required for small cap investing. But the issue is that I do not plan to very actively trade on this portfolio except maybe during quartely results if required. The reason is that I have enough headache andsleeploss managing my own portfolio which is much larger -:(.But thenIdont want to be lazy enough to allocate to’safe’ compounders ( Page, Lupin, HDFC, ITC, Gruh, Hawkins, ) of the world.

I have allocated about equally to 11 names that I think have very good growth prospects but relatively lesser number of variables especially if I am ready to bet on Modi’s performance rather then non-performance!!).

Investments -

)- Logistics/ Packaging/Housing/ Domesticthemes-Mold Tek, Kesar, NBCC,Finolex, Shakti

-Being Lazy-High Quality Names well discussed in VP-Cera, Kaveri, Shriram City, Mayur, Shilpa, Tata Elxsi

Could other VPs comment on the portfolio keeping in view the portfolio objectives.

Just 2 clarifications- its Finolex Industries (not cables). Also Mold Tek packaging (not Technologies)

Hi Gaurav,

Please find my humble view on this. And hopeful that there are other VPs would share great views and inputs on the same.

andsleeploss larger…

Hope the stocks you’ve picked for someone else PF is already part of your core PF; It is good to keep that in your circle (your PF) to avoid more analysis and taking pressure to deliver differently. Again what is the time duration of PF you’re investing on behalf-of one.Secondly if you’re convinced with the business and valuations justification, would suggest to take good sleep and more learning/reading (have the conviction to buy and hold).

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Have the analysis and preparation to bet based on the management who runs the business, performance and moats! Modi’s performance again for overall India INC growth! But Individual PF performance will be broadly decided by the business and management we’re investing/part of it.

)- Logistics/ Packaging/Housing/ Domesticthemes-Mold Tek, Kesar, NBCC,Finolex, Shakti

Finolex industries is having good potential and lots of possibilities to have 30% CAGR for next 2 to 3 years and good margin expansion possibilities in reaching the value funnel up (fittings). They’re having 700cr land value can be unlocked. But it had its good run-up recently. Shakti, NBCC – Had its v.good run up as well. What is the allocation you’ve given.

-Being Lazy-High VP-Cera,

Good business but not sure about the allocation you’ve done for this bucket vs. above. Try having housing finance stuffs like Gruh / Repco home finance (may be above bucket).

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Hi Muthu, many thanks for your time and detailed feedback. Answers to some of your questions

)- I have allocated equally to the 11 stocks at current market prices. Hence half of the portfolio ( 6 stocks ~ 55%) is on very good businesses and about other half ( 5 stocks ~ 45%) is on opportunistic bets which are still good to ok businesses.

)- Only 2 stocks, Kaveri and Shilpa form part of my own portfolio. The reason is that I have significant profits on my stocks and as I have invested on most around Jan- Feb 2014, the tax consideration ( 15 % tax short term gains) is an important consideration in my own portfolio. I do not expect huge returns within 2-3 months on many of my stocks, but will still be better off holding them for some more time as I dont have to pay taxes. This doesnt mean I am bearish on them, but am not shifting to some others where I expect to get a bit more returns.

)- Time duration isnt fixed, but can safely say it is long term. 3-5 years isnt going to be a problem at all. The question is that would it make better sense to have larger caps which are long term compounders for the entire portfolio. I have never got enough conviction on some of these due to valuations, which never seem to be reasonable let alone cheap (35 times, 40 times PE, 10 times Book).

Hi Gaurav,

I have interacted with you previously in the case of Granules and your ideas definitely sounded very logical. In case of Kaveri I feel that it’s a hold even at current levels and even good to accumulate at current levels. With the spillover of sales expected to happen in the next quarter this can provide the trigger the stakeholders are looking forward to.

HI Rajarashi, Granules has indeed performed above expectations. Its hold for me now as existing business and slightly expanding margins are priced in. Major appreciation from here needs more clarity in Auctus and Omnichem businesses.

As you said, Kaveri seems good opportunity at this point. I expect FY2015 EPS around 45+, which means its trading much cheaper compared to Monsanto, while reverse was the case sometime back. Seemsthere isnt much downside from here.

I findSwaraj Engines, SCUF, Kaveri, Finolex Ind, Finolex Cables as very good bets at current prices. Mold-Tek Packaging, Kesar Terminals, Shakti Pumpsseem interesting ideas forfurther exploration and maybe some allocation as starter.

I have holded on to the portfolio posted at _http://www.valuepickr.com/forum/portfolio-q-a/989232347/conversation_view?b_start:int=30&-C_= . Avanti and Granules had a great run especially considering the weights in the portfolio. Also Kitex is on steroids as Hitesh mentioned somewhere. Others have also done well.

Hi Gaurav,

Thanks for the great response with related points. Great to learn a lot from the same. Adding few follow-up queries/views on the same.

1). 55%:45% break-up and investing looks to be good. All very good business are great ones. In opportunistic bets – Really interested/exploring on finolex industries where potentials are looking to be great.

2). Kaveri – Very expected quarter of sales/margin are seeming to be priced already in June’14. Are we seeing more sales / growth in Sep’14 since historically this seems to be week one. Out of FY15 EPS of 45, it has already hit 34. If we’re assigning 25PE, then it translates to 1000 (25% higher from current levels). What would be the valuation you may assign for this based on EPS of 45.

3). Large cap space – Seeing the IT space is looking to provide good scope to provide good returns. Are you studying on this one (Liking Persistent systems considering it is portfolio and very focus on top growth segment of SMAC – Social, Mobile, Analytics, and Cloud and product development/investment in good start-ups).

4). Any study/exploration on Defence space.

-Muthu

Hi Gaurav,

Granules has had a spectacular run up .Though I am holding as of now if Auctus does not turn profit making or to be precise records same volume of losses in the subsequent quarter it would be prudent to convert the positions into Shilpa where the actual triggers are yet to start. USFDA approvals are going to happen in the coming 18 months which can lead to significant upsides.

Yeah I do not have any doubt that Kaveri deserves a better rating than what it’s having now.It needs a trigger either in the form of a great quarter or an interim dividend payout. I expect the next quarter to be good. I tried digging for any info that I could get from the last AGM but did not find anything publicly available.

Avanti looks great from here on as well. The biggest risk was EMS but measures that have been taken by MPEDA and the aqua/aquafeed industry has prevented it.If you read the chairman’s speech available in the company website he has clearly mentioned the capex plans which has already been completed & some in progress. Q2 & subsequent quarters will reflect the expansion benefits and lowering of soyabean prices.

Repco is another counter which looks very attractive and can be added. With all the talk going around of the extreme shortage of homes/housing and with Namo at the helm I feel some reforms for this sector is on the cards. This has not participated at all in the NAMO rally where as other NBFCs have ruled the roost. It has a niche category even if you compare with Canfin & other NBFCs.This has limited downsides at current levels.

Regards,

Rajarshi

1).

Finolexis a significant player spread across india as far as its pipe business is concern. Sales have nt grown in last few years, and thats why it is trading at low valuations, but last 2 quarters were good. Most important is its dividend payout. (They paid Rs 7 dividend for EPS of 13.71). I think they can easily post 20+ EPS in FY15, and hence trading at 16 PE on forward basis.

2).

Management has indicated that there was spill over of sales to 2ndquarter due to delay in monsoon. I could turn out to be wrong, but looking at the management’s track record of very pessimistic projections, Rs 5 in Q2 and another Rs 6 in the remaining2 quarters doesnt seem difficult at all.

25 TTM should be about ‘fair’ valuation. So assuming normal market conditions, I expect 45*25 = Rs 1125 around April-May next year when it declares Q4 result ( 33 % upsides from here in 7 months).

3).

I do not get conviction to buy IT stocks somehow, and have very limited knowledge to guide you

4).

I feelmost investments/ technology tie ups will go to large players such as L&T, Tatas ( already a news there with honeywell) etc. Some small players can benefit but is very difficult to predict. They are already trading at hefty valuations. But please let me know if you have more knowledge in the area, i would love to study this space.

-Muthu

Hi Gaurav,

Finolex Industries – PE range we may think based on FY15 20EPS. Again they’re improving the ROE/ROCE aspects and reducing the debt aspects as well in over next 2 years. Would this get for PE re-rating? Considering the improvements in ROCE + very good dividend payout policy, downside would be limited from here.

Defence Space – I was reading from rossell india, dynamatic technologies, bharat forge (very good returns in last 1+ year and already in large cap space). Dynamatic related link is here -http://economictimes.indiatimes.com/industry/transportation/airlines-/-aviation/Dynamatic-Technologies-set-for-a-lift-on-orders-for-aircraft-parts/articleshow/38825240.cms. It is having O&M aspects mainly. Rossell india – I am holiding but revenue contribution is < 10% as of now.

Other space which are looking good are housing finance – Gruh, Repo, Can Fin homes… Already holding later two, and working to include Gruh as well. May want to check this space as well.

-Muthu