Hitesh portfolio

[amitbansal01]

Dear Hitesh ji,

Thank you so much for your patience and generosity in sharing your knowledge. Really appreciate your clarity of thought and willingness to help the investor community.

My question is not specific stock related, but your outlook how long term investors should tread in today’s uncertain time (specifically as we stand in beginning July 2020) and further to your response to @gautham1 . Today, the world is completely affected by the pandemic. However some pockets of the world / economy are gradually opening up in a cautious manner. In the absence of any definative medical breakthrough, there is a lot of uncertainty in the near term. A shutdown again is not beyond the realm of possibility once travel restrictions are opened up. Markets obviously are doing their own thing of inching up every day after the sharp fall in March. People sitting in the sidelines are feeling left out of the rally. While the fear of economic crisis in case the pandemic is not controlled is a real fear, the liquidity being pumped in globally will ensure that there is adequate support if the markets falls. In short no one has any clue as to what the future will hold.

So the limited question is what % of equity portfolio in your mind is that we should keep for any dips (dry powder). As you have previously advised I have used the rally to get off from weaker stocks that were accumulated over time. Say 80% invested and 20% in cash after booking losses in low conviction stocks and mistakes. Do you think we should deploy now or wait for any further correction - or any strategy how to deploy funds. I completely understand that the level of markets may not correspond to the stock level and good stocks can be purchased if there is valuation comfort especially for long term investment. However wanted to hear your thoughts in a more general sense about cash component and strategy to start deploying esp after this brisk run up.

Thanks!

[Mukundks]

Hitesh bhai,

Can you please give your views on RVNL from a long term perspective with the recent push for privatisation in railways announced by the govt

[hitesh2710]

@amitbansal01

One thing I have realised over the past few months is that its difficult and futile to try and predict the market direction especially in the short to medium term timeframes. If someone were to say in March during the bloodbath that markets would be above 10500 by july, there would be very few takers for that sort of logic. So in effect no one had any clue about where markets are headed now that we can see in the rear view mirror limited to few weeks back. I myself tried to use elliot wave pattern to figure out where markets are headed and the markets had a different direction to what I expected.

But after a point, I figured out that if you can’t beat them join them. But since I was scared to invest in a lot of sectors fearing poor growth for next few months and uknown impacts of corona virus, I zeroed down on few companies where I felt that even if Corona virus pandemic were to continue, these companies will not be impacted too negatively. So once I was confident about these companies (pharma, chemicals etc ) I had the confidence to gradually build positioins in some select companies from the sector.

What I cannot come to terms with is the kind of run up I have seen in a lot of small and midcaps where I cannot see too much clarity on earnings visibility in the backdrop of the pandemic. The kind of run up I have seen in these names has caught me by surprise. But even with good chart patterns in these names, I cannot bring myself to bet big on these kind of names. So for me the focus area was always companies where I could bet sufficiently without getting too worried about market direction.

About liquidity, its anybody’s guess how long and how much liquidity will continue in the markets. But if anyone is not too confident about the markets it makes sense to stay in cash to the levels where they have a comfortable sleep. That level will be different for different people and one can take an individual call on that.

@Mukundks I dont track rvnl anymore.

[sujay85]

@hitesh2710 ji,

As you have opined the export oriented pharma companies have the tailwind, and domestic oriented pharma companies are supposed to show weaker results in the coming few quarters.

But, if we look at the longer term, which kind of companies may compound money in a more sustainable way?

I have a few export facing pharma companies in satellite portfolio to make use of the tailwind, but should I keep holding domestic focused Abbott (bought early 2019) in core portfolio?

[Jaisish_Mohanty]

I feel companies manufacturing APIs will benefit a lot. Most APIs come from China and due to supply chain issues, these companies will benefit.

[A_shah]

Hi Hitesh bhai,
Considering that crams and api are on a roll , Whats your view on syngene ?
Thanks

[vrs]

Hitesh bhai

My observations on market - Liquidity fuelling market rise. Here onwards, mid/small cap might outperform. This might be a sharp rally taking out 12000 (can be double top or even cross 12000). I might be wrong but considering majority is negative on market, it will surprise on upside. Fed is ready to flush the markets considering election year. Some PSU are available at bargain if investor is buying the hope that they will be disinvested with strategic sale.

[vrs]

Hitesh bhai

What is your view on Future retail? Even if Reliance buys, whether it will be favourable ratio for Future retail investors atleast whether they will be valued with market cap/sales = 1 (currently huge discount to sales).

[hitesh2710]

@sujay85

Among the pharma pack, I think companies with a balanced portfolio but with a lot of strength in domestic portfolio will outperform. In domestic market, sun, drl, lupin, etc are strong but they have a big portfolio of exports as well. And that keeps on fluctuating based on individual molecule opportunities. So for these companies there will be the one offs for a few quarters every few years.

One company which I like but have not bought as of now is alkem. It has shown consistent growth both in domestic and export portfolios. But it is a domestic heavy portfolio with 70% domestic revenues (which has been growing consistently above market growth rates) but the good part is that the rest of the 30% is ramping up fast. Management also comes across as competent in their concalls. But for the near future they probably are going to suffer due to washout months of April and May during q1 fy 21. But for the very long term it can compound effectively. It has corrected from highs in range of 2800 plus to current levels of 2300-2350 and has been consolidating above its 200 dema.

@A_shah I don track syngene but think most pure play bulk drug manufacturers and crams players would outperform. In fact they already are. I am invested in laurus where I am bullish.

@vrs I dont track future retail. But if you are bullish on reliance its better to buy reliance itself than go for these complex calculations.

[vishal_lehar]

@hitesh2710 Bhai, whats your view on mid-sized IT companies…valuation wise these looks quite attractive… Q4 results also not that bad compare to other Industries…

[vrs]

Ok Hitesh bhai. Since reliance has already run up a lot, thought of investing in Future retail since if the swap ratio is atleast 1 time Future retail sales, then there will be good upside.

[Manoos]

@hitesh2710

I am invested in laurus where I am bullish.

@hitesh2710 sir
Kindly do not take this on a wrong note, I would like to just get the perspective of a veteran value investor for my learning purposes.

Laurus Labs has quite some issues when i looked at the stock for my PF

-Low Promoter Holding
-Pledging of shares
-High Debtor Days
-High D/P

If you don’t mind can you outline your rationale for this stock pick ?

[hitesh2710]

@Manoos

I will explain my thought process in investing in laurus.

Laurus labs has had low promoter holding since a long time. There has not been a major reduction in the promoter holding over that period. I too was worried about the first two points you had raised. But after a long hard think, I felt like giving the benefit of doubt regarding these matters.

Promoter Dr Chhava is a technocrat. And has set up the business as a first generation entrepreneur. It often happens that when you try to set up businesses on your own from scratch, you need growth capital, and hence have to give stake to PE guys/other investors because you yourself don’t have the resources and at the beginning of your journey, banks/nbfcs will not lend or atleast not on favourable terms. Another thing to note is FII holding from dec 18 levels of 8-9% has gone up to 35-36% as of March 2020. (As per screener.in)

The company underwent massive capex in past few qtrs and promoters pledging was probably to provide security against the loans taken.

The bulk drugs business is a business with high receivables when you are growing and establishing yourself. But receivables in pharma sector usually dont end up being bad debts and write offs because the relationships between the company and its clients are multi year and hence there is a lot of inter dependence.

High debt has been due to capex. Till now the worry was if capex did not provide any returns because of teething problems or whatever other reasons. But that fear has been allayed by results improvement since past 3 qtrs.

Finally what tilts the balance is the scorching pace of growth and comparative valuations. Company did sales of 2800 crores net profit of 255 crores for fy 20. But q4 fy 20 quarter had sales of 830 crores and net profit of 110 crores. If q4 fy 20 was a quarter which can be repeated or bettered during fy 21, we can be looking at sales equalling or exceeding 3200-3300 crores and net profit equalling or exceeding 440-450 crores.

Here you can have a scenario of profits shooting from 255 crores in fy 20 to 440 crores in fy 21. That’s a growth of more than 50% in an environment where such growth is not visible in other sectors due to macro, corona or whatever other reasons. In such situations, where say fy 21 eps exceeds 40 per share, I had thought that at around 430-450 the risk reward was very favourable for me.

Even market fancy wise, most bulk drugs producers and crams players like aarti drugs, solara, suven, syngene etc are hitting life time highs (or fresh 52 week highs) . So that too is a thing going for the company.

So I am.banking on what affects the stock price most consistently in most cases… earnings, earnings, earnings… (as lynch taught in his book)

@vishal_lehar I don’t track any mid cap IT company too closely but some of them are forming good charts.

[Manoos]

Thank you sir . Appreciate your insight

[yourraj]

@hitesh2710 Hitesh Sir , I am learning and really amazed by the knowledge you have and you are open heartedly sharing with the community .I am really Lucky to be part of this forum . Sir,while undergoing screener data since March 2014 to mar 2020 about Lauras i just have come across some points .

• Low tax paying
• Despite of capex the manufacturing cost , Employee cost ( factor they might require specialised manpower ) , other costs are on rising so instead of indirect and direct cost going down it is on rising trend
• Reserve 8x from 281 to 1658 ( What is this reserve reserve for ? they can very well offset the interest cost but not doing so . )
• Borrowing 2x i.e 543 to 1057
• Gross block approx 4x i.e 622 to 2388 -> Where the supply of the capital from ?
• Trade payable is 3x i.e 227 to 616 —> Doesn’t It seems the detoriating connection with suppliers ?
• Trade receivable is 4x i.e 195 to 791 —> isn’t the collection is not efficient ?
• We can’ just make the sale and forget to collect .Sir Isn’t this is blocking capital ?
• taking out more money under the cover of depreciation the capex in Balance sheet different than in Cash Flow statements.

Regards
Disc : I had not invested in Laurus , This is not any recommendation of buy sell or hold . The data set taken may be small and my observation may be faulty . Please study before investing .

[troll]

@hitesh2710

Another thing to note is FII holding from dec 18 levels of 8-9% has gone up to 35-36% as of March 2020

I think this is mostly because of changing of Bluewater Investment Ltd. from DII to FII.

[hitesh2710]

@yourraj

I have mentioned before also that I am not too much of a numbers guy. I like to look at the bigger picture which I have described earlier. I am afraid you will have to look for the answers to these numerical questions yourself.

One suggestion I can make is to consider things like receivables etc in terms of percentage of sales.

[A_shah]

Hitesh bhai,
What’s your view on pi inds ? Can pi inds get back to high growth path due to agro thrust or be considered a stable compounder at best ?
Also what’s your view on divis lab in present scenario of insider trading allegations but stock has corrected too and with recent api tailwind ? Many thanks

[Mukundks]

Hitesh sir,

Could you pls provide your outlook on ERIS Lifesciences , Top line and bottom line growth has been steady over the years and the current PE levels seems to suggest it would be good bet at CMP.

Is its domestic only focus a thing to worry about for next few quarters?

[gautham1]

Hi @hitesh2710. If you observe nifty 50 index, (over the last few weeks) there is some pattern. Every day, randomly a few stocks will go up. Then ‘experts’ will give some reason for it. How does one read this? . It looks like, the only thing that matters is % fall from the old highs and then revert. Regardless of valuation and future earnings.
(If you look at the US, only tech related companies seem to be rallying. Although I am not justifying it ( because it will impact every company and the valuation was high to begin with), at least there is some logic there. But here in India, it seems to be some random companies)