I genuinely believe this! And it’s also a massive bugbear of mine when I see so many VP folks discouraging others who have very diversified portfolios. Let me be the first to put my hand up and say - it’s much easier to maintain and monitor a relatively concentrated portfolio of 15-20 good businesses than 40-50+ stock portfolio let alone 70+. However, that doesn’t mean it’s the only way to generate wealth in markets. I find this lack of acceptance for other methods highly annoying and it can be quite damaging especially for those who’re just starting out in markets. They need to chart their own journey and go through the process of self-realization about their personality, risk appetite, temperament, etc. before finalizing any portfolio approach.
Btw, why I personally end up in so many businesses is that I have a certain % of cash coming in every month (salary) which I can deploy in markets owing to limited personal expenses. And I don’t like sitting on cash just waiting for my 15-20 businesses to come in my valuation range especially if I find there are good risk-reward opportunities elsewhere.
Hence, I don’t think about concentration or diversification - every single business I invest, I’m having certain profit / cash flow growth or rerating expectation at a minimum 15%+ CAGR for fresh capital. For redeploying capital where I’ve booked handsome profits, look at minimum 12%+ to relatively safely compound profit and still ensure overall CAGR of 15%+.
However, if I don’t have a monthly cash inflow I’d probably have a lot more concentrated portfolio for a variety of different reasons
a) I basically need to manage the same amount of capital, hence chances of number of companies increasing are low and as I would need to cash out / redeploy same capital
b) My risk taking ability would also go down as I won’t get any fresh capital at the end of the month and would not invest in a lot of nano cap SME businesses. Right now, I think of the salary as insurance, that the risky investment is worth x month(s) of salary even if it goes to zero
c) I would take more cash calls to be prepared for adverse events as I don’t have the monthly salary to take advantage of such events. Hence, would again result in being more concentrated and skip some lower conviction investments
If we take the upper end of revenue guidance from management at 1800 cr, PAT could be 180+cr and then we need to give it an appropriate multiple, so you could be right in terms of potential growth / re-rating if management executes well. However, the margin expansion seen in FY21 from 12% to 21% is unlikely to sustain in the next year and I’ve assumed a gradual improvement in operating performance over next few years to sustain 15% EBITDA levels. Also, I’m being conservative here in terms of my expectations going forward, 2x in 5 years is 15% CAGR, which is good enough for me - based on management execution the story can play out much better as well.