Hitesh portfolio

Q&A: Questions & Answers Portfolio Q&A
5119

Hi Hitesh bhai ,
Pls dont thank as in fact I thank you wholeheartedly in fact for all the insightful practical learning in this beginning stage that has made the learning curve steep and reduced mistakes ( though lot still keep on happening due to switching stocks or early selling etc ) :pray:and besides I have just summarized your earlier view which perspective I gained by reading your insightful replies

Great insight this . Never thought this.

Hitesh bhai,
How can one gain confidence that earlier usfda mistakes wont be repeated by our indian pharma companies like dr reddy , alembic etc ?
Besides how to identify when pharma cycle is coming to an end ? What parameters you look at ? One of the major mistakes I keep committing is selling very early and eg sold aarti drugs at 1500 pretty early. It doubled in fraction of a time than my holding period when it increased 40 percent . What do you suggest to ride the wave longer as I often feel that whether stock is in overvalued territory?
There is lot of talks continuously on how pharma is hot and people are talking of alternate contra investments like auto anc etc but generally contrarian bets take long to fructufy mostly if at all they fructify. So as you always say and I too believe , itā€™s right not to question market but how to know when to get off without losing most of the rally ?

Many thanks

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5120

@A_shah

USFDA audits is always going to be a constant source of worry while investing in a company exporting to US. But the better companies will have a better compliance record. E.g alembic. Over all these years, it has a fantastic track record of usfda audits. When we met them in February, we got to know that they employ ex usfda/domain specialist foreigners and conduct mock audits. The employees do know whether the audit is a mock one or the real one. This kind of preparedness gives confidence that its unlikely that these kind of companies will have problems too frequently. Plus in the near term, say a few months, due to the pandemic, there are not likely to be any audits.

Frontline pharma stocks like sun have hardly moved much . Although sun has crossed its perennial resistance of 500-510, and consolidating above it. Some like drl and cipla are in all time high territory and after their respective breakout post ATH are consolidating. I think these will move up once the consolidation is over. Why? Because even in consolidation, there is hardly any price damage. So its only time correction. Once these move hard and unlikely targets are bandied about, we need to be careful. Meanwhile the party is in small and midcaps in pharma space and more specifically in API/CRAMS space wherever strong earnings are reported and expected going ahead too.

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.

So overall the rally looks scary and everyone has since a long time been expecting market correction, but it fails to come around. Thatā€™s the nature of the markets. The unexpected happens and the expected happens rarely. But still, some kind of social media froth is visible with a lot of action on WhatsApp groups with loads of recommendations and then ā€œi told you soā€ reminders when these stocks move. So I consider these as initial signs of froth. But one cannot take these in isolation, but be on the lookout for further signs of impending trouble.

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@hitesh2710
Sir are you tracking Aurobindo Pharma. Company is reducing debt aggressively d/e is .08 ANDA pipeline looks healthy infact top among indian company. EPS is increasing consistent

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Hitesh Bhai any reasons for unprecedented highs being made by amine stocks. If you see their results vis-a-vis those of few midcap pharma stocks which posted excellent results, its top line has been mainly flat or slightly down (Balaji/ALkyl). Anything structurally changing here as in the case of APIs for some pharma cos or is it merely a rally where everyone wants to ride.

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@hitesh2710 sir, I have seen from the earlier posts on your thread that you held a lot of multibaggers like astral, PI, mayur, etc. have you been able to assess how much the tails have driven the portfolio performance over your investing period? How much of the portfolio returns (either in yours or other investorsā€™) would you ascribe to the stocks where you got it absolutely right with a massive multibagger?

How does the role that the tails have play into your stock picking strategy and how you make your exit calls? We donā€™t really see many of those kind of opportunities you have talked about in your earlier posts in 2011-13 (companies growing at 25-30% CAGR and available at 5-6 PE and massive re-rating potential). Should investors be moderating our expectations of how much the tails will drive portfolio returns too and therefore focus more on increasing the hit rate of our stocks picks? Your thoughts on this would be hugely helpful.

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5126

Hitesh sir your view on Fermenta biotech. As per my understanding company is catering 80% of domestic Vitamin D3 requirement and due to covid demand has increase many fold.

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While the question is rightly meant for Dr Hiteshā€¦ goes without saying he is the right manā€¦
But to the best of my knowledgeā€¦
(1) Vitamin D3 can be obtained naturally from sunlight if you expose your bodyā€¦Many people are becoming deficient because of 9 to 5 office work.
(2) Also vitamin D is available naturally from dietary sources ā€¦ Oily fish, eggs, Cod liver oilā€¦
(3) I donā€™t find a need for supplement unless one is tested and found to be deficientā€¦
(4) There is no sufficient data to show that vitamin D gives protection against covid19, though some data indicated some Covid19 positive patients had Vit D deficiencyā€¦
(5) Nevertheless, there is always a demand for vitamin D ā€¦as people become deficient due to people not following the natural source ā€¦and due to 9 to 5 desk workā€¦
Also many people are afraid of exposing body in the sun due to fear of skin cancer

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Hitesh bhai. I suppose you meant employees donā€™t know whether the audit is a real one or a mock one?

Also, Alembic hasnā€™t moved up much despite reporting good numbers in Q1. In all likelihood this is because the market seems to be worried about the huge capex that the company will be incurring over the next 2-3 yrs. This in turn will result in lower fcf.

As investors should we even bother about FCF although earnings are growing well? CFO over the last 3 yrs has been decent as well.

The other thing that could be holding down the price could be that Alembic doesnā€™t have tail winds from API like Laurus or Aarti, a segment of pharma, which is currently in market fancy.

Another reason could be lack of growth visibility once Sartans opportunity loses steam.

Are these the only 3 factors? Or perhaps something else?

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@ram1984

The rally in amines stocks I think partly is due to duopoly nature of the business. Only two major players namely alkyl and balaji amines. And amines I think are basic building blocks for a lot of other speciality chemical, pharma and maybe agro chem type of companies and hence probably are having strong tailwinds.

And part could be the froth in small and midcaps. Price moves tend to move the narratives. :grinning:

@tripathimk Some major players in biologics are biocon, dr reddy, and some othe rmajor frontline pharma companies too. I think lupin too has some biologics. In domestic markets, torrent pharma markets biologics. Two players coming up with biologics/biosimilar facilities, maybe for outsourcing are shilpa medicare and strides.

@Nibin_Issac I dont track aurobindo.

@Jinal I think the major revenues and profitability for fermenta comes from feed grade vitamin D. The price of the end product keeps fluctuating. But the advantage fermenta has is that there is some kind of ban on vit d3 manufactring that does not use cholesterol. Fermenta produces cholesterol and vit d3 from it and hence is better placed. I dont track it too closely but read the above news related to the company.

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@ashkrithik

For me the major returns which have moved the needle to a large extent have come from big winners. Starting from some poor quality companies like lakshmi energy, parekh aluminex (which were two big winners for me and a part of beginnerā€™s luck ) some other big winners have been ajanta, mayur, pi inds, canfin homes, astral, manjushree, kaveri, avanti, vst tillers, atul auto, bajaj finance (enjoyed only a 2 x ride once), and now laurus. The biggest percentage returns to the portfolio because of decent allocation and higher individual stock returns have been because of stocks like ajanta, avanti, kaveri, canfin, etc and now riding laurus with decent allocation.

I think for someone not too dependent on stock market money for day to day and even retirement plans, aggressive allocation does play a crucial role in making good portfolio returns over a prolonged period of time. The best returns for me have been from the quick multibaggers. i.e Stocks that have gone up 2x, 3x or some like canfin which had gone up 12x or ajanta 18 x (individual stocks have gone up much more but these are the kind of returns I had enjoyed while riding them) in a short period of time. E.g canfin went up 12 X in around 3 years while ajanta went up 18 X for me in 4 years. The thing that helped me was the conviction to hold on through a large part of the ride and decent initial allocation. Buying on the way up is something I have done of late.

Over the years, compounders have not been a big part of my portfolio, maybe because of my mindset or because of the quest for quick multibaggers. That strategy has often backfired with little returns over 2-3 years but the next big one makes up for it especially if allocation is right. I have been very very lucky in the markets with my winners and the allocations therein. Kaveri at one point of time was 65% of my portfolio after its run up and I was a bit scared and ended up selling with a 4 x kind of returns. The inital allocation in these winners matters. Avanti with heavy allocations went up 2.5 times for me but then I exited after which it went up another 5X.

I have mentioned about Laurus earlier. I bought at around 360, before Covid, saw it go up to 440-450 and booked partial profits, and it went down along with Covid and I chickened out with flat to no profits around 340-360. But once its q4 results were above expectations and a lot of inputs from VP friends closely tracking the company, I was able to buy amid the selling by Warburg at around 430 and kept adding on the way up till around 530. After the pheonomenal run up in short period of time, it has done a great job of jacking up portfolio returns. (I had also written about my investment arguments in laurus with a note of around 10-12 points)

I have often got good returns from my peripheral bets like LT foods, Everest Kanto cylinders, Kamat hotels, Genus power (examples of poor quality companies contributing to PF returns) etc during the heady days of 2017-2018. Recently these kind of peripheral bets include polyplex and cosmo (exited both with quick returns ) Lt foods again, dalmia sugar, tvs shrichakra etc. These are techno funda bets which I expect to ride quickly and exit at opportune times.

Contrary to popular belief that we do not have opportunities now as compared to earlier, I think there are always opportunities. Only thing is we have to keep looking out for them and keep working on them and if we have conviction and if the chips are loaded in our favour, be aggressive in allocation.

So to sum it up, if you do not have to depend too much on your portfolio and have other avenues of income and clear visibility in that income stream, one can be aggressive in portfolio allocation and if lucky to land up with winners, ride them. Big quick multibaggers make huge difference to portoflio returns.

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Great Indeed. Thank you so much sir.
Hiteshbhai, how you do your stock research? The veteran investor whose word you trust or follow? etcā€¦
If you can through light on your free timeā€¦

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5132

Hello sir,
I have been following you after some very illuminating back of the hand calculations you mentioned in couple of threads.

I am commenting here since you mentioned about aggressive allocation. Interestingly, I have, on my own, gravitated towards what you call as aggressive allocation. This seems to suite my mentality and the fact that I do not depend on stocks for my income for my core responsibilities for my family. I gravitated towards this after reading ā€œZurich axiomsā€ by Max Gunther. I noticed that when I have say more than 7-10 stocks in my portfolio, I am unable to track biz and my mind splits to as many stocks as I have without any proper attention to any one of them.

In Zurich Axioms, what you describe as aggressive allocation, he refers to ā€œAlways play meaningful stakesā€.

"The only way to beat the system is to play for meaningful stakes. This doesnā€™t mean
you should bet amounts whose loss would bankrupt you. Youā€™ve got to pay the rent
and feed the kids, after all. But it does mean you must get over the fear of being
*hurt. " - Max Gunther

Thanks for all your inputs. I find them simple, but not simpler, ways of measuring the worth of a stock.
Since this is your portfolio pageā€¦ I think I must end with a question :slight_smile: . Should one diversify into another group of stocks that are long term? I find that no matter how big a company (even asian paints), I can never put my money and forget it.

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Hiteshbhai
Please share ur views on MAS financial from 3to 5 years perspective.

Thanks

5134

Hii mr hitesh, what you mentioned about promoters not being as interested in money as we think they are, changes so many hard held notions for me and other investors.

based on past experiences we only associate fraud and thuggery with companies with low promoter holding.

and so in the past I have always ignored companies with low promoter holding and pledging (I used to classify them in the chor category)
I used to try my best to invest only in companies with 60% promoter holding and zero pledging,and net zero debt.

Now I will atleast dig deeper before dismissing ideas outright based on promoter holding

and not automatically assume that low promoter holding (below 50%) with or without pledging is a sign of low integrity.

a big thank you

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5135

Hi Hitesh,
Wanted your views on Cadila on the kind of products they make, innovation capabilities and the kind of people they have. Since its a Gujarat based company you might have some views based on word of mouth through friends/acquaintances. I initially got interested when they announced a drug for non alcoholic fatty liver disease. I know this disease is quite prevalent in Kerala and there was no medicine for it.I did not follow up on how successful that drug was.But atleast there was an attempt in an unexplored territory. Similar is the case with the covid vaccine, One needs greater research to find if these are authentic attempts or attention grabbing stuff,
Another question is related to medicine. Branded generics are what are prescribed by a doctor and is commonly available at a pharmacy. Will a pharmacy give a medicine just based on generic name say omeprazole. Are there effective options/market for unbranded generics . Do patients opt for it if it gives cost advantage, I have seen pharmacies in Kerala which give generic medicines. Can there be a major disruption here?

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Hi Hitesh,

Can I please request to share your views on power sector from 5-10 years perspective. Any potential strategies that one can invest in this sector (if at all worth :))

Thanks,
Manohar

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@barathmukhi

Yes its a typo error. employees donā€™t know whether the inspection is real or mock one.

Alembic stock price seems sideways and there could be many reasons for that. Some we may guess and others we may not know about. Could be a big fund house selling.

Alembic has a strong API business but a lot of the API produced are consumed inhouse. And some is sold to others.

We have to remember that not all stocks move in tandem. There will be times when out of a 10 stock portoflio, 2-3 will move fast and rest will be slow to move. Some months/weeks later, situation may be reversed. Its very difficult to predict in the short term what is going to move first and what is going to go up later. Hence the portfolio approach. Buying a bunch of companies, all of them having fundamental tailwinds and good charts increases chances of good returns.

Sartans overdependence story has been going on ad nauseum in case of alembic. I think one has to think beyond this story and try to figure out other growth triggers. Recently due to ban on ranitidine by USFDA, famotidine has taken the place of ranitidine and Alembic is a strong player in that, having an approval in hand and facilities to produce the drug. Other molecules like venlafexine, theophylline, modafinil etc continue to do well. And as far as my scuttlebutt goes, Sartans continues to do well.

Till some time back, debt was a worry, With qip out of the way, debt is not an issue and now people come up with worry about fcf. There is always something or other to worry about in stock market and a company in particular. How seriously we need to take those things is something we need to figure out. Taking only one parameter in isolation doesnā€™t serve a useful purpose. We have to see the company as a whole and then consider the picture.

For me, it remains a reasonably good risk reward opportunity even after the run up from 750 to 1000. Once the domestic portfolio starts performing, it can be another trigger. We already know about the umbralisib opportunity, Only question is about the time line. They have a good approved ANDA list and filing rate is also good. So US business should keep chugging along. Exports to geographies other than US, especially Europe has been doing well. So all in all, seems a good wicket for alembic to bat on.

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5138

Hello Hitesh bhai, What is your view Aarti drugs, whether the kind of profits/valuations sustain ahead given many companies are on the expansion mode and China disruption was temporary due to covid. Management capitalized right time by giving virtual bonus shares which in fact added nil fundamental value though they could have used the reserve to reduce debt or for expansion.As I have heard the scale of operation matters in API can a player like Aarti Drugs can command Divis kind of valuations? If a price erosion starts in the generic Formulation can effect APIā€™s in the end after all itā€™s a commodity. At present juncture what sort of valuation metrix we can use for APIā€™s companies?.thanks in advance.

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Agreed, Hitesh bhai. Was just trying to think from the perspective of other market players and wondering if there was some kind of a blind spot in my thesis.

Sorry about this being such a lengthy post. But I am hoping this post adds value to forum members.

Wrt Alembic, not worried about FCF at all. For example, Pantaloons was a co. whose stock price went up by more than 100x between 2003 & 2008, before tanking. It was diluting equity, high on debt and growing rather recklessly, resulting in a lack of FCF.

In the same era, Trent Westside was producing FCF but not growing and the stock came nowhere near to Pantaloons in terms of the returns it had provided. So a lack of FCF in the case of Alembic shouldnā€™t be a worry.

As your rightly said, thereā€™s always one thing or another to worry about.

This is a summary of concerns investors had based on the 900+ posts on the Ajanta thread. The emotional roller coaster that investors were experiencing was nothing short of a suspense thriller :smiley:

ā€¢ Will they be successful in the US market?
ā€¢ Pricing Power risk
ā€¢ Approvals wonā€™t translate in sales & profits for Ajanta. For eg. Shilpa had approvals but hadnā€™t been able to monetize those approvals for 2 years
ā€¢ Aggressive Capex & R&D putting pressure on near term margins
ā€¢ Higher working capital requirements (North of 25% of sales)
ā€¢ Forex risk due to a USD/INR fluctuation
o Re-rating is over at 11 PE. 15 PE is high (and might have been a reasonable assumption back then)
o Income Tax raid due to R&D exp that fell in a grey area
o Operator manipulation
ā€¢ Unichem was a comparable opportunity to Ajanta, but went nowhere
ā€¢ Promoters pledging shares
ā€¢ Delivery volumes less than 20%
ā€¢ Stock is too volatileā€¦ Too many 20% plus drops. A 40% correctionā€¦ Would have been difficult to hold
ā€¢ Already missed the bus. It has already gone up so much. How much more can it possibly go? This was in Oct 2013, much before it went up even more.
ā€¢ Will the high margins sustain?
ā€¢ Promoter integrity issues - First generation promoters of Ajanta had a lot of question marks about their integrity and corporate governance.
ā€¢ Numbers are so good. Could they be fake?
ā€¢ Growth slowed down. Is the slow down temporary or permanent? Will previous high growth rates ever come back? May 2017
ā€¢ Return ratios dropping
ā€¢ Promoters reduced stake
ā€¢ Not all ANDA approvals are commercialized. For Ajanta Pharma, only 30-40% of approvals turned out to be economically viable
ā€¢ Africa business took a hit because WHO stopped bidding. NGOs stopped funding WHO and WHO stopped buying medicines for Africa from Ajanta Pharma
o Reduction in African tender business due to 15-20% price erosion and stoppage of procurement from some countries
o US business fell by 63% due to consolidation of buyers
ā€¢ Margins dropped from 36% to 26%, due to stagnant sales and increasing expenses
ā€¢ Marketing unapproved drugs manufactured by another company

The above analysis of Ajantaā€™s (which was a 60 bagger between 2010 & 2017) thread helped me realize, well thatā€™s life for a Pharma investor.

Thanks for the insight on Famotidine. As always, helps.

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Thanks for providing these excellent inputs on Alembic.

I have a question pertaining to making use of technical indicators for appropriate entrance once the fundamental understanding is clearā€¦you have provided a nice description about this usage sometime earlier

As per the data from screener.in for Alembic Pharma, 50 DMA curve crossed the 200 DMA curve around November 2019, this indicates a rapid upswing most of the time and in most casesā€¦it has happened over here too with price going from 500 to 1000

Under these circumstances, how does one go about buying?..possibly it may go much higher or can correct rapidly before next upswing which will be based on q2/3 results and performance of domestic portfolio as you mentionedā€¦of course there might be other technical indicators over here, but which i do not understandā€¦essentially does it make sense to consider technical indicators over here?