Hitesh portfolio

hitesh2710 · August 31, 2020, 2:54am

@ram1984

The low free float theory might work in smaller companies for shorter duration of time. Demand supply equation comes into play in short term movements and cause asymmetric upmoves in stock prices. But in longer term, the well recognised triggers like earnings growth, balance sheet strength, management pedigree etc play a crucial role in trajectory of stock prices.

There will be plenty of arguments on both sides of the theory, but in overall scheme of things, these things are at best secondary considerations while deciding on long term investments.

hitesh2710 · August 31, 2020, 3:30am

@VIMAL_AGRAWAL

Momentum investing and value investing usually don’t go hand in hand. Its that rare instance when stocks making all time highs, or 52 week highs even after the run ups appear attractive on most valuation parameters. Same thing applies to stocks that go down to all time lows or 52 week lows. They have gone down for a reason and can appear attractive for long periods of time all throughout their way down.

I think one way to get around these biases (difficult to change mindset overnight but over period of time, one can try to find solutions) is to study the business of the company in question in details. And try to figure out what is the best case and worst case scenario we can see from where we are placed. Personally speaking, I find it very difficult to buy more of a stock when it goes down a lot from my original price unless I have very valid and clear reasons to buy more.

I have seen in my experience that buying on the way down requires a special mindset and temperament to hold through difficult and turbulent times. So I am not too sure if I would be the right person to advise on value investing as it is conventionally defined, where people bottom fish near low prices. I am more of a growth/trigger driven investor and hence avoid cheap stocks mostly fearing value traps. In the process I often miss some very decent businesses, but for me the base rate of getting success out of bottom fishing does not appear attractive.

So at best if I have bought something and it keeps going down, I tend to keep holding rather than adding more unless I have compelling reasons to do so. I prefer to place elephant sized bets if I feel chips are loaded in my favour. But different investors have different comfort levels in various style of investments and one has to figure out whats suits oneself.

ram1984 · August 31, 2020, 10:00am

@hitesh2710
Hitesh Bhai, thanks for the wonderful insights and for taking time to answer us. I wanted to know your thought process when it comes to adding positions to a stock that you own. When do you become super bullish on a growth story?. If we take 2 examples (not a reco) of Alembic and laurus, both have started doing well around quarter ending September 2019 onwards and then each quarter was stronger than the earlier ones (mainly the case with Laurus).

Now the story seems to have unfolded to a large extent as we can see the buying from Mutual Funds and the stocks being in news. So is it the right approach to load up more at this point, when there is certainty and visibility that the business will do good and management commentary is also positive or this ought to have been done in the early quarters itself, when there were early triggers of performance?

For example, there may be some hints like the management completing capex and talking about translation of the same into sales by increased capacity, the new ANDA filings which will result in additional sales etc. or let the management walk to talk first, show the money and then its time to take a call. Thanks

ram1984 · September 1, 2020, 7:16am

@hitesh2710
Hitesh Bhai, wanted to know one more aspect on the borrowings by cos like Alembic, Laurus and Alkem vis-a-vis that of Divis labs. The cos have been consistently borrowing for capex, which has materialized to some extent by increased topline and margin expansion on account of scale.

However, if we see the data on borrowings of Divis laboratories starting from 2009 till date, the borrowings have been very minimal. Maximum being not more than 50 crores at any given point of time. How did this company manage to expand the business, scale up facilities without any borrowings? Did the company do capex on internal accruals, which does not seem to be the case as internal accruals can be generated over a period and not in the early years. Am i missing something fundamentally here?

hitesh2710 · September 1, 2020, 8:42am

@ram1984

In case of investing in any company, the younger you catch it, higher the chances of making bigger returns. This is the holy grail of fundamental investors. They latch on to subtle changes seen in companies and can make a case for big returns. I have seen Ayush pointing out about small parts of narratives in avanti feeds annual reports many years back because of which he got the conviction to buy avanti when no one was looking at it.

But one cannot get it all right all the time. Sometimes you miss out on a story when it is supposed to be caught on to. But its always to join the party better late then never. (provided there is enough valuation comfort).

For those interested in Laurus history and journey, I Found this link on whatsapp. I can see a couple of lines I wrote on VP (in reply to someone) in the article.

If we are invested in a company, we should have a rough estimate of what kind of earnings we are expecting in the near term, say 1-2 years atleast. Beyond that, one can have a guess at the general trajectory of earnings but even approximate estimates are difficult bcos things can change a lot in this ever changing world.

So for me, I try to listen to concall, go through AR, presentations and try to make a guess how latest quarter results have been and whether that performance can be repeated or bettered. In both alembic and laurus, I get a sense that the q1 numbers are repeatable or can be bettered.

In case of laurus, Dr Chhava has been confident about business prospects and order book and there are strong tailwinds for the business, besides new emerging engines for growth.

In alembic, the domestic portfolio which was not matching up to export portfolio should start firing sooner rather than later. Only a 5% decline in q1 in domestic portfolio growth , especially in a quarter where footfalls in hospitals were largely curtailed by lockdown, was very encouraging data point for me. Besides, this, the sartans traction continues (and alembic has the advantage of being fully integrated in sartans right from api to formulations), and other exports base business also remains strong. Besides this, even post the run up from all time high of 790 to 1100 and now around 920-930, valuations look attractive. Yet another optionality lies in rhizen where alembic has 50% stake. Rhizen is entitled to milestone payments on completion of certain milestones ( filing and approval being one of the milestone and this will trigger milestone payment in near future), royalty on sales and probable manufacturing contracts. Besides it continues to get lucky breaks, the lastest one being famotidine windfall. So for me, it becomes a very attractive proposition.

About debt being present in alembic and laurus and alkem and not much in divis, we have to figure out why debt was taken . If it was taken to invest in same line of business and is within reasonable limits, it is a non issue. Digging too much into these things is like “baal ki khaal nikalna.”

So in both cases adding at current levels also could be easy but I don’t have too much space to add these two because of portfolio allocation constraints.

Vijay_Kiran · September 1, 2020, 8:54am

Hitesh Bhai, more often than not when experience speaks than academician take a back seat. The author might be here in VP for chori chori chupke chupke items. Nonetheless your outlook and analysis on pharma sector is kind a gyan ka sagar here in VP. After reading and researching thereafter taken exposure in both the companies mentioned above apart from earlier take like Natco and Divis in my PF. Many thanks for your valuable time in guiding us here.

ram1984 · September 1, 2020, 9:08am

"He (Chava) could have been happy with a ₹500 crore company churning out ₹50-60 crore in profit every year, but he’s shown that his eyes are set on the big prize.”

@barathmukhi immediately told me these are your lines

hitesh2710 · September 1, 2020, 2:25pm

@kuldeepjadeja

I don’t know where you got the idea that companies like alembic can in the future fetch the kind of valuations currently enjoyed by mnc pharma companies. Even if alembic gets half the valuations, I will be happy.

I can hardly claim to see 10 years down the line in most companies I have invested in. If I am confident about a company’s growth for 3 years, I am pretty happy. And PE is a function of market valuing a company, which involves a lot of factors which themselves change from time to time.

And do not go by what I say or write if you are going to invest in a company. I only discuss what I feel about the company and its prospects. You have to read up on the company, listen to the concall, go through annual report, maybe even read the relevant thread on VP and have an informed opinion. Then maybe take a call based on risk reward involved.

I don’t have a crystal ball to gaze into the future and make predictions (as you make it sound).

I can quickly change my mind if facts and data points change, and I can be wrong in my views and inferences too. So be careful about what I or any other investor/advisors say about investment. Whatever we invest is our own hard earned money and we should feel responsible for its safety when we invest it.

Kuldeepjadeja · September 1, 2020, 4:02pm

It’s purely based on ur kind words on Alembic.
It was currently trading at exactly half valuations of MNCs.

Thats only true words in all circumstances…

Vijayalakshmi · September 2, 2020, 1:23am

Hello Hitesh,
I have a question about asset allocation.

The stable stocks are always emphasized in the portfolio ( Asian Paints/HUL/ PI/ HDFC family/ Bata etc) . But why do we even need them when the great run in the stocks has been done with? All we get are the remnants as in better returns than FD.

Shouldn’t the portfolio have the flavor of the season having diversification within it?
So, when we need to have a diversified portfolio does it mean Pharma/Chemicals/(whatever sector is playing out) having variations ( API/ CRAMS /speciality chem etc ) or a portfolio having Finance, FMCG, etc along with a greater allocation to Pharma ?

Your insights please on asset allocation.

barathmukhi · September 2, 2020, 7:20am

From this article - This has resulted in opportunities for Laurus, which over the last year has increased its vendor base to start making intermediates in India. (It still imports the key starting material from China.)

Hitesh bhai, Given our current stand-off with China at the borders, how much of an impact will this have on Laurus and any other companies importing raw materials from China, should a trade war emerge?

hitesh2710 · September 2, 2020, 9:10am

@Vijayalakshmi

Portfolio allocation depends upon the kind of time frame one has while investing. If its a coffee can type of buy and forget kind of pf, then one should have stalwarts like asian paints, hul, hdfc bk, bata, pidilite, etc.

For others, one can have a core portfolio of above type of compounder companies and a satellite portofolio where one can experiment with the flavour of the season type of companies. Or go for cyclicals, turnarounds, or anything where they feel they have got the expertise to invest.

Personally I try to be in sectors with tailwinds and hence currently heavily tilted towards pharma. But would keep an eye on good companies which have been affected by Covid situation. The latter situation is temporary in nature and can extend maybe a few months beyond our expectations, but ultimately things should start to normalise going forward.

Investor_No_1 · September 2, 2020, 9:47am

Dear Hitesh, do you also follow a core and satellite portfolio approach or when you see strong tailwinds in sectors such as now, then allocate fully to satellite? Thanks

Ajjugattu · September 2, 2020, 9:56am

What is your view in general about some companies where there is no earnings but business model seems to be good. For example repro India.

Do you also try to invest in those kind of companies?

hitesh2710 · September 3, 2020, 5:22am

@Investor_No_1

I do often follow the core and satellite approach where initially its all segregated but once it becomes clear where market leadership is, I tend to start allocating more towards it. But often the situation in the sectoral fancy is that a subsegment of the sector assumes higher market fancy and sometimes higher allocation to that sector provides better returns.

In case of pharma, I also mentioned somewhere in my earlier post that API/CRAMS/Bulk drug producers were looking much stronger within the pharma pack followed by export dominant companies. I got into Laurus but did not be aggressive in other api players like divis, aarti drugs, solara, neuland etc. So sometimes these kind of learnings are important to follow in future if we can figure out some other sector with market fancy.

While the pharma sector seems to be having resilience, the large cap pack in pharma seems to be dragging its feet while moving up. If and when it does start moving, it will validate the theory about market fancy for pharma companies.

@ajjugattu,
Good business models also at some point of time have to start delivering numbers. Repro does not satisfy that criteria. Besides, I am not too interested in such companies where I feel the business model and hence the prospects are glorified by markets. I remember people were gung ho about repro because of entry of Vijay Kedia. At some point of time in future, it may go up but one needs a lot of patience to hold on to these kind of stories.

nav_1996 · September 3, 2020, 8:50am

Just to add to Hitesh sir, Repro biz model may have been interesting a couple of years back. But printing was a shrinking industry globally and same should accelerate in India also.

With digitization, I don’t seem to have received a physical copy of AR since last couple of years. Most of reading has shifted to kindle. Even government is going digital

Investor_No_1 · September 3, 2020, 12:44pm

Dear Hitesh, thanks for explaining in details of your approach. I agree the large caps have been moving inline with most other sectors (except the ones drastically affected by Covid situation). Although, they have doubled from their lows (which is very decent performance in large caps) but yes they need to break their all time highs with vigour. I think eventually they will as they all have decent API sub segment, US has been good in terms of new approvals and they learnt their lessons well in last 5 years and now have decent exposure to chronics/acute segment in domestic markets as well. I feel as long as US and other export market continues to be good (which provide them the real fillip in earnings), they will cross all time highs pretty soon, at least ones I am tracking.
Disc: Hold tracking positions in Cipla, Dr Reddy and Alkem.

ram1984 · September 3, 2020, 6:36pm

@hitesh2710
Hitesh Bhai. Every form of investing approach has its own risk associated with it. But since you are picker of growth stocks, can you please help us with which are the areas where you find one has to be more vigilant. The areas which you focus the most and keep an eye on when you add stocks as and when they hit highs.

Secondly, can you please help us with a few bets of yours big or small, where you failed to notice somethings, which were otherwise avoidable and the things that you learnt from them.

My apologies if you have already answered this anywhere long back in the thread.

A_shah · September 4, 2020, 5:39am

Putting below Hitesh bhai’s relevant post that have been answered earlier

hitesh2710:

Regarding when a particular sector loses market fancy, we have to watch previous instances of sectoral excesses by both companies and investors to have an inkling of froth building up in a sector. In the current market, the frontline pharma stocks are taking a pause and all and sundry beaten down companies are giving reactive bounces after being down for too long.

Small and midcaps are making a move after almost 2.5 years. After jan 2018, these were in hibernation and some companies were beaten out of shape. These are now bouncing back. Whether this trend is sustainable or not needs to be seen. But companies with good business prospects irrespective of Covid fallout will outperform and they will make themselves conspicuous by their price moves. These are the trains to board.

You can also refer to the 52 week high thread and in that there are lots of insights by Hitesh bhai and others

hitesh2710:

Coming to the blunders I committed, the mind tends to forget the painful memories and hence difficult to recall them. Convenient way to limit listing one’s mistakes.

The first blunder I recall was investing without any knowledge. Back in Harshad Mehta era when I didnt know about investing I recall having invested in companies like RPPL (and RPEL I thinik its twin ILU-PILU as they were then called. ) Orkay Silk Mills was another one.

Another one I recall is investing on some “wise friends” tips. I have some share certificates still with me to prove the follies. Things like MS Shoes, Mideast Steel, Soncal Cosmetics, Redex Protech.

Later on once I read some investing books first of which was One Up on Wall Street, I did invest with some semblance of half baked knowledge. Thats where two stocks came up – Lakshmi Energy and Parekh Aluminex. I had only a two stock portfolio at that time back in the carnage of 2008. Luckily I did not have enough money to lose because I had purchased a new house beyond my means in 2006 and used up all my savings to put into house. That probably saved me. Beginners’ Luck I guess. But with what little money I had, I started investing in the above two stocks and kept buying it till near bottom prices. Both turned out to be 2-3 baggers for me and I was again lucky enough to sell near tops.

Then came the equitydesk and VP phase. Post this phase the mistakes were those of a partially read investor.

The biggest mistake was about not riding winners for the full journey. Too many ideas led to these mistakes. I exited stocks like TTK Prestige, Ajanta, Kaveri, Tata elxsi etc (many more but these were the first that came to my mind) etc too early. That problem often persists still now but to a lesser extent. In ajanta I corrected the mistake to some extent by buying it back at a price 50% higher than where I sold off and with 50% higher allocation. That to some extent lessened the pain.

The other mistake was not being able to differentiate long term from short term ideas. Often I mistook short term trading bets as good long term ideas. Since past 3-4 years I have made my criteria for long and short term very stringent. The short term bets if they go wrong are thrown out very quickly and I often exit with minor losses only to see the stock rebound and go on a strong uptrend. But I have learned to live with these things.

Another mistake that often tends to happen is to keep holding long term stocks irrespective of valuation froths. But again thats something I have learned to live with.

Lack of patience with some companies is often a mistake. Nowadays I tend to give my long term companies plenty of time to perform inspite of a few lacklustre quarters. But sometimes things get too much and I often sell out only to see these stocks go up. But this usually happens when there is some better idea around.

Another mistake is of not working hard enough on new ideas. I tend to reject ideas much faster due to one or other reason these days and often there are errors of missing winners. But if the overall portfolio returns are okay then these things dont matter too much.

Most important aspects of investing are stock selection and capital allocation. And patience and temperament. The first two are now easy to do but last two are very difficult even at this stage of my investing career.

These are the first offhand things that came to my mind and have jotted them down. Would recount more things when I have more meaningful stuff to write and more time to write.

arpans · September 4, 2020, 5:51am

Hitesh Sir, do you have a view on Vodafone Idea and Bharti Airtel? Can they be good bets for the next 5 years?