Harsh's Coffee Can Portfolio: Views Invited

[Harsh1]

Hello @Investor_No_1

@Investor_No_1

Not sure since when you would be holding Abbott, but I am amused by fact that many investors, including myself, have realized the prowess of this beast in last 2-3 years or so

I started investing somewhere in 2015, and bought Abbott in 2017 and then in 2018 and 2019 (might as well buy in 2020 if valuation cools down). i have been holding it for 4 years of my 6 years Investment journey so far

@Investor_No_1

I am bit curious why is that so? Is it because of domestic pharma facing FDA issue or overall market paying for quality or Abbott doing some things right which it was not doing earlier or just that these investors following price action (What goes up and has been going up is a beast as long as it is going up)

In my limited wisdom i think its FDA issue to a bit extent and paying up for Quality to most extent. Its a FMCG company masked in the garb of Pharma Company. The Markets just came to terms with it.

Let me show you something. The figures in below table have been sourced from respective Annual Report.

I prefer Net Cash Flow from Operating Activity because it takes care of investment in Working Capital and CashFlow from Financing Activity doesnt matter because its a debt free company with no dilution of Equity

The Operating Cash flow has increased every year (except for 2018 when there was huge Income Tax outgo) and the speed has been ever increasing and Capex to achieve this increase has been minimal and minuscle

To make long story short, here is short and sweet story

In 6 years , Abbott has managed to increase its operating cash flow by 470 Crores on net cumulative investment of 63 crores!!!. you surely have a beast in your hands and markets have taken cognizant of that. Now you dont get a company which multiplies its cash profit 4 times in a span of 6 years everyday.

@Investor_No_1

Now regarding Honeywell, can you mention why are you so upbeat that you want to further increase allocation when you have significant already? I am aware some investors had concerns on sister unlisted companies of Honeywell.

My bet on Honeywell is on similar lines and maybe in a day or 2 i’ll put together my thoughts over it. As regards to Unlisted Subsidiaries , i guess we’ll have to live with that (not that i like it).

To be honest , i dont understand “Story” behind a stock much and have bare minimum numerical literacy to put 2+2=4. so my discussion revolves around numbers more then business (and that too very basic). I have little understanding of business behind those numbers.

Thanks
Harsh

[Investor_No_1]

Thank you for a very direct, quantitative answer. From your answer, I feel that apart from paying for quality, Abbott really did things different in last 5-6 years or so to make it a cash generating machine. Did its capex end close to the beginning of this stupendous cash generating cycle? Pls not I am asking these questions to understand if Abbott’s upward journey is sustainable or it was a once in multi year cycle because of capex or what the company does etc. Thanks again, I admire your strength with basic numbers.

[Himanshu_Nigam]

Harsh, since you mentioned numbers, and also that you are looking to add on to your existing holding, what price point do you think would be a good entry point for Abbot next? As it is a substantial holding in my portfolio now(I purchased last at 13200 in March), I am also looking but it looks very tough to decide(for me).

And if you have any other similar entry points in mind for your other holdings, especially Nestle, HDFC AMC and Relaxo(as they just came out with slightly weak numbers which resulted in a drop).

Thanks for taking the time for the detailed replies. Appreciate the effort, and it helps a lot of people like me.

[ranjan_r]

Hi Harsh , excellent intrinsic value get created through (reinvestment x ROCE ). Abbott is paying hefty dividend instead of reinvestment .
Paying dividend is absolutely fine but better value creation always done by reinvestment and generating better return on incremental capital.
What is your thought on this?

[Harsh1]

Hello @Investor_No_1, @Himanshu_Nigam , @ranjan_r ,

Thank you guys for dropping in and keeping me engaged.

First let me start with disclaimer. I am no authority on Abbott or for that matter any company. It just happened to me and was lucky break. I didnt unearth it and it is not a product of any system or process at my end. And when i bought it i didnt have foresight either that it would become this big , just like i dont know where Abbott or any of my investee companies will go in future

@Investor_No_1

I feel that apart from paying for quality, Abbott really did things different in last 5-6 years or so to make it a cash generating machine

Many , if numbers were to tell the story, the increase in Sales and Operating margin every year indicate either new products, or pricing power , volume growth or better sales mix, The Annual report does keep mentioning of new products, but being from non pharma background I dont understand it.

@Investor_No_1

Did its capex end close to the beginning of this stupendous cash generating cycle?

The screener has data from 2007 and i have gone through annual report from 2014. There has been never huge Capex. And even the Capex is purchase of Intangible like Trade name and all. Its primarily a trading company (selling products either sourced from related party or other companies under its brand name) in my opinion.

@ranjan_r

excellent intrinsic value get created through (reinvestment x ROCE )

True

@ranjan_r

Paying dividend is absolutely fine but better value creation always done by reinvestment and generating better return on incremental capital.

The business from what i understand doesn’t require huge Capex in Fixed Assets (you can refer numbers and discussion in above posts), though every year it does automatically invest in working capital (increase in debtors and inventory).

Now you dont have much room for reinvestment , but where Abbot scores is increasing Pre Tax ROCE by wide margin on existing capital base and minuscule new investment in Fixed Asset and working capital. Last year the Pre Tax ROCE from Core Business was 83% and these year its 150%

@Harsh1

The Core ROCE is 83% and should be higher for current FY !!!

@Harsh1

Now comes the best part

Pre Tax ROCE of 150% !!!, Now how many companies have you seen like this ?

I subtract Interest income from EBIT for calculation of ROCE from core business because whether you or i or Abbott does Fixed Deposit, we get the same interest rate and has no meaning at all as the income aint business related

@ranjan_r

intrinsic value get created through (reinvestment x ROCE )

To sum it up , the reinvestment rate aint great, but ROCE is too great and increasing

@ranjan_r

Abbott is paying hefty dividend instead of reinvestment .

Its not only Abbott but all MNC’s. There is change in Dividend Tax laws. Earlier there was DDT Tax regime (Dividend Distribution Tax Regime) where the tax on dividend was directly paid by company. so Foreign Holding companies couldn’t claim Tax credit in their home countries and has to pay tax on Dividend too. leading to multiple Tax of same income. So the MNC’s kept cash on their books. Now from this year, its recipient who has to pay tax on dividend and Foreign holding companies can claim credit of Tax paid in India in their home countries. And i hope this trend to continue and its time to load up Cash Rich MNC’s

@Himanshu_Nigam

what price point do you think would be a good entry point for Abbot next? As it is a substantial holding in my portfolio now(I purchased last at 13200 in March), I am also looking but it looks very tough to decide(for me).

Its difficult for me too and it already forms a large part of my portfolio too. I am loading up on VST Industries and Procter and Gamble Health to shoulder some weight of portfolio for now. And hopefully they will do the heavy lifting in future

@Himanshu_Nigam

And if you have any other similar entry points in mind for your other holdings

I am not good on valuation but have basic valuation tool in my mind (which may not make sense to you at all). If you see i like and have companies which may in all possibility become dividend plays in future when growth comes off (like Abbott, Sanofi, VST, Nestle, HDFC AMC) and some companies only and only for Growth(Like HDFC Bank, Relaxo, Bajaj Finance, WhirlPool, 3M, Honeywell). That way i can have best of both world of Dividend and Growth Investing. On my First Abbot share which i bought at 4k i am currently having 5.5 % dividend yield (ofcourse there is special Dividend in it).

For Future Dividend play i run a mental calculation at what price the Dividend Yield on original cost will be near or exceed Risk Free Rate in next 4-5 years. Current Risk Free rate is around 6% , and there are lot of if’s and but’s in calculation (more of a optimist assumptions)

Say Vst Industry is around 3% yield as of today, do i see it getting at 6 % in next 4-5 years?

Overall I have a aim of generating 12% return (3% from Dividend and 9% from Capital Gains )post Tax and without much Churning and being engaged from a decent portfolio of Dividend Growth Stocks and Growth Stocks in next decade. The GDP growth rate even in Pre Covid world for India was 4% and that too was doubtfull. Overall it looks difficult, but lets see

@Investor_No_1

Thanks again, I admire your strength with basic numbers.

Thank @Investor_No_1

@Himanshu_Nigam

Thanks for taking the time for the detailed replies. Appreciate the effort, and it helps a lot of people like me.

Thanks @Himanshu_Nigam

Its my pleasure to engage in discussion as it made me to think clearly and as they say you cant be great investor untill you think clearly

Thank you all
Harsh

[Investor_No_1]

@Harsh1

I am loading up on VST Industries and Procter and Gamble Health to shoulder some weight of portfolio for now.

Is that P&G Health or P&G Health & Hygiene? P&G Health have decent products which are OTC /Vitamins mostly…P&G Hygiene - I was looking at this sometime back. Difficult to understand what products P&G would introduce as part of this listed entity in future…

[Harsh1]

Procter and Gamble Health (earstwhile Merck). P&GHH has maybe only 3 products, Whisper ,Vicks and and Old Spice. I dont think PGHH will issue any new product through listed arm. Thats the only reason i am not keen on owning it

[Himanshu_Nigam]

Thanks for the reply. Can you give more background behind picking P&G Health?

[sujay85]

@Harsh1
P&G doesn’t have much experience on OTC medicine front, except Vicks (under P&G Hygiene). And there also they were successful mainly on the ointment, spray, inhaler and candy category, but were not successful with tablets or syrup category. The reason I can fathom is the lack of doctors’ connect through (MR route) as people usually take tablets or syrup after consulting with doctors. Now P&G Health products are mostly tablets & syrups. So, there is a possibility of less success here too unless they mobilize a MR team.

The main strength of P&G has always been excellent branding & distribution, and I hope the acquired Merck’s portfolio will benefit from that. However, branding and distribution can take you only upto a scale after which you’ll need more products in your stable to keep growing at a good pace. Now, I am sceptical about P&G’s competence on becoming successful at launching new OTC medicines and make them popular like the original Merck’s brands.

Also I suspect their willingness to launch a potential good product through listed companies given that they haven’t launched any new products under their already existing companies. Also they have a sufficient product overlap across the listed companies. For example: Nasivion is a Nasal Decongestant under P&G Health whereas Vicks has Sinex Decongestant that serves the same purpose. I suspect that P&G may become less aggressive on one or both the products to avoid cannibalization. There are many such products overlap in the listed companies which always puts me off.

You can also read the following reply to Ranvir’s portfolio thread.

Ranvir's Portfolio

Yes, [2020-03-25_184039] Via Motilal Oswal’s initiating Coverage report In P&G Hygiene, I’m confident about the Sanitary Napkin business but not sure about Vicks & Old Spice. The problem with P&G India’s different listed businesses is that there are uncomfortable overlaps between them, so the Parent maybe willing to tame aggression in some to avoid cannibalization. For example, Old Spice in P&G Hygiene & Gillette in Gillette India are both male grooming brands, and so P&G can’t go all ou…

Also read this

P&G Hygiene & Health Care - long term buy?

Given their track record I don’t expect any more addition. They could’ve launched Pampers but they launched it through an unlisted arm. P&G India has a clumsy way of allocating products to its 3 listed arms. What is Old Spice, a male grooming brand doing in a Health & Hygiene focused company! And, why Merck portfolio wasn’t merged with PGHH when there was so much theme overlap. Look at HUL: GSK consumer has been merged with HUL itself! Also, Oral B is a dental care brand which could again fit…

[Harsh1]

Hello @sujay85 @Himanshu_Nigam

Please pardon my delayed reply.

Trust me, Your insights has been delight to read and knowledge for me. My investment rational was based same on good old numbers, Increasing sales, profits, margins, Good Roce and Great Balance Sheet and so on and so forth and Slump Sale of biopharma, performance materials and life science (BPL) business to Merck which is capital intensive.

@sujay85

Ideally, P&G India should’ve kept Pampers & Whisper under P&G Hygiene and Healthcare ; Merge Vicks with P&G health ; and Merge Old Spice & Gillette under Gillette India . Or best, keep P&G Health, Vicks, Pampers & Whisper under the Hygene & Healthcare arm .

@sujay85

And, why Merck portfolio wasn’t merged with PGHH when there was so much theme overlap. Look at HUL: GSK consumer has been merged with HUL itself!

I agree to your line of thinking and there should have been simplification of Products and listed entities.
But each company has had different history and different minority shareholders. Indian Shaving products Ltd became Gillette India in 1984 and P&G (US) acquired Gillette in 2005. Also erstwhile Merck became P&G Health. When all is said and done, i agree that Corporate structure and Prducts should be simplified . .

[Himanshu_Nigam]

Hi Harsh, Had really liked the post of yours and your understanding about the AMC business. Wanted to check a couple of additional points about the same.

What is your view on the long term sustainability/performance of a company like HDFC AMC, when it comes to 3 factors - 1) Underperformance of the Equity Schemes, which might lead to slowing AUM and revenue 2) Will there be a reduction in AUMs of Debt funds with lowering interest rates(which might remain low for a considerable time), and 3) Effect of Increasing awareness for ETFs/Index Funds and increase in people investing directly in equities.

Thanks for your views.

[Harsh1]

Hello Everyone,

Apologies, i have been on and off with this thread, hope to be more consistent going forward,

Below is snapshot of my current portfolio

Below is my learning over the years, and I may change my Opinion as I wisen up and mature. Please bear with me and I don’t want to sound like preaching sermon.

Never Sell :
This one looks like No Brainer, but I feel its most important attribute and single deciding factor whether or investor makes it large. Frankly and honestly I am blessed with “Hoarder/collector” Genes as is evident from my portfolio which has little changes and mostly addition. Churning, kicking out loser, switching to better position is fine but never empty your Dmat account and move to Cash, Be it Covid or Brexit or IL&FS. Hold your position!

Let your Winner’s run :
Again a No Brainer but last thing you would do with your winners is to tweak them them/Sell out/Rebalance (as long as story remains intact and number supports your thesis)
From whatever I have read about Great Investors (and from my personal experience for whatever its worth) is that they had very few Winners which they let them run uninterrupted and it made all the difference.
The way I look at it is the probability of you finding that one stock that makes material impact on your Net Worth is 50 % or less (similar to calling out coin toss) and if you have got it then leaving it to its own devices may be the best course of action

Bull Market will Never announce itself:
I started investing 6 Years ago and this is my first Bull Market- on- Steroids experience. Never did I imagine that ill be in the biggest bull market of my life after covid crash. Never time the markets!

Good Wealth is made in Bull Market:
Needs no explanation, the velocity with which you Multiply your wealth in a Bull Market is unprecedented. Its magical to wake up every morning and be bit more wealthier then you slept ( akin to be bit smarter every morning then a day before)

Being out and out Warren Buffett fan, rightly or wrongly I feel that him seeing many Bull Markets (and calling out top and going to cash in overheated market in late 1960’s and 1987 Crash) made him Warren Buffett he is today

Be more open to other strategies :
It makes more sense to open to all strategies as markets are dynamic and fluid. And no single strategies works all time and every strategy will work some time.
I still remain Buy-and-hold and Coffee Can Investor but am trying Momentum investing. LTI, LTTS and Tata Elxi are more of Momentum Picks

Position Sizing Matters and probably the most:
Probably the most important learning and I am still yet to get it right and still learning

Let me put in Layman’s term, If You are going to bet then bet big or don’t bet at all, Bet to change your Networth/Balance sheet Size. Go Big or Go home.

It doesn’t mean betting 50 % in a single stock but a 15 – 20 Stock well diversified portfolio and but each position with reasonable allocation weight and absolute numbers is must if you want to make it big.1% or 2% allocation doesn’t move needle.

Buy Companies making ALL TIME HIGH:
Now this one may be controversial for “Value Investors” but stocks don’t make All Time High for nothing and more so if every stock in that sector is making all time high. There is something that markets knows that you don’t and Markets like “fresh” stories. The other way to look at it is if good part of portfolio is making new All Time Highs, then you are on right course.
Surely I don’t mean buy every stocks hitting life time high, you still make those mandatory screening and checks, but is a good place to start
a) Market itself is filtering new ideas and serving on plate
b) There is natural tailwind

Always Average up and Never average down:

I read somewhere that only losers average losers. Averaging up winners and adding to them when your thesis is playing is something that differentiates Men’s from boys.

Only wine gets better with age ??

Ahh, a well Aged portfolio is equally good if not better then a well aged wine

[jamit05]

Hi Harsh.

I agree with letting winners run. But, what do u think about selling ones that have run way too much.

For ex. Tata Elxsi can be sold and proceeds be redirected to say Divis lab around 4000.

This solves the problem of “float”.

I guess, I am in favour of of trimming profits when the stock has run way too much.

[Iamsantosh]

I often do that trimming down or booking partial profits, over the time i realized i missed the compounding factor and my average price shooted up when i buy the same stock later based on future potential.

However am still in dilemma which is the best practise.

Live example - When CDSL ran its first bull run few months ago to 1500+ i was enjoying only to realize it fell to almost 1100…Didn’t sell any share

When IEX ran to 515+ i sold in panic because of CDSL experience. I regret now as i can’t buy IEX again at this price n still regret for my decision

Note - Rookie in investing, started 9 months ago

[Investor_No_1]

@Harsh1

Never Sell :
This one looks like No Brainer, but I feel its most important attribute and single deciding factor whether or investor makes it large.

@Harsh1

Being out and out Warren Buffett fan, rightly or wrongly I feel that him seeing many Bull Markets (and calling out top and going to cash in overheated market in late 1960’s and 1987 Crash) made him Warren Buffett he is today

Pls correct me if wrong, above two statements seem to follow slightly different ideologies. If I understood correctly, WB sold out in 1960 and 1987 crash which is contradicting to never selling and also somewhat timing the market…

@Harsh1

I still remain Buy-and-hold and Coffee Can Investor but am trying Momentum investing. LTI, LTTS and Tata Elxi are more of Momentum Picks

Excellent! I prefer to somehow remain near to my core competence of coffee can style. It is precisely why I do not buy for momentum. One day or other some stocks in my portfolio will be part of momentum sectors anyway. To which @akash_das had beautifully explained once how he utilizes this fact by topping on to those sectors within the same coffee can part. I am yet to try that as well…

Incidentally my IT basket has all three names you mentioned, but I intend to hold them in the coffee can even if there is a 50% dip. I would add on to the flavor then happily.

Also, if you buy something for momentum, what are your cues that momentum has stopped now or taken a turn? For eg. what will be your sell triggers in these three IT names?

@Harsh1

a) Market itself is filtering new ideas and serving on plate
b) There is natural tailwind

This is a good way of explaining. I like it.

@Harsh1

I read somewhere that only losers average losers. Averaging up winners and adding to them when your thesis is playing is something that differentiates Men’s from boys.

Again this maybe true for momentum investors and in a bull run. Although, it is always better to average up, we should not completely rule out averaging down. In case of stagnant or bear markets, if we know exactly why we are buying a story, it can be Ok to average down - but if this is a case in one’s every story then maybe need to reconsider if the stocks we chose are worthy.

@Harsh1

Only wine gets better with age ??

Ahh, a well Aged portfolio is equally good if not better then a well aged wine

Beautifully put and Congratulations for gaining on your own style and the confidence you have built up on it!

[Harsh1]

Hi @jamit05 ,

@jamit05

I agree with letting winners run. But, what do u think about selling ones that have run way too much.

I have 2 points to explain my thought process.

1- I am incompetent/incapable of making Sell decision and just like to hold on and cling on. Dont know but maybe i am designed in that way. The though of selling just doesnt occur to me. Might be thats the reason i am still holding Chola Finance share, I didnt intend to sell when the price crashed to some 120 Rs in Covid crash, nor i am willing to sell when its some 550-600 bucks now.

And it always isnt rosy. I get the opportunity cost part. For eg i have significant allocation to HDFC bank and more or less i think it has underperformed the market or the other stocks i have for sure

I’ll work sometime in future on selling decision, but for now i am content in Buy and Hold unless the Quarterly Results are consistently poor

2 - I do have Benjamin Graham quote engraved in my mind “The investor’s chief problem, and even his worst enemy, is likely to be himself” and do consider markets as supreme and dont like to second guess markets

Thanks
Harsh Shah

[Harsh1]

@Iamsantosh

However am still in dilemma which is the best practise.

@Iamsantosh

Note - Rookie in investing, started 9 months ago

Hi,

Like you said that you are new to investing, and it will take time for you to develop your flair and style. No harm in trying in several styles and adopt the one which you are comfortable most with

While selling, the point to ponder on will be whether the long term story is still intact and Quarterly results are in line with your expectations. Whether the investee company is cyclical and if yes then where is it in current cycle or if you have better opportunity to deploy.

[Harsh1]

@Investor_No_1

Pls correct me if wrong, above two statements seem to follow slightly different ideologies. If I understood correctly, WB sold out in 1960 and 1987 crash which is contradicting to never selling and also somewhat timing the market…

Hi @Investor_No_1
Warren Buffett is warren Buffett for a reason. He could sense the over heated market and get out of it.
He shut his partnership at peak of Bull Market and bought washington Post in ensuing bear market, and bought coca cola after 1987 crash. Both investments were defining and career best.

I like mentioned in above post can smell heated markets like now we are having but cant get out/dont want to get out.

@Investor_No_1

Incidentally my IT basket has all three names you mentioned, but I intend to hold them in the coffee can even if there is a 50% dip. I would add on to the flavor then happily.

I hold one more i.e Honeywell Automation. And id like them to hold on as long as they are delivering good results. They more or less tick most of my checks like Debt free, Net Cash balance sheet, High ROCE , Free Cashflow and so on and so forth. I still havent gone too far from my usual stocks i like to hold.

@Investor_No_1

Beautifully put and Congratulations for gaining on your own style and the confidence you have built up on it!

Thanks a lot !