Hitesh portfolio

[MHS]

@hitesh2710

Any views on Action Construction Equipment and their Management quality.
Decent Q2 results and very bullish commentary in the Q2 concall from H2 onwards of this year and continues market buying from the promoter and continuesly reducing debt and want to debt free.

Do u see any signs/green shots in Construction/Agri and industrial/capitalgoods sectors or its only pentup demand of Covid.

Refer attached Q2 concall, Q2 results, Market purchases and ICICIDIRECT research q2 update.

Transcript-concall-ACE-9nov2020.pdf

a8bc82f5-83d6-4110-a6ec-8cd1d126e1fc.pdf

https://www.bseindia.com/stock-share-price/disclosures/sast/532762/

http://content.icicidirect.com/mailimages/IDirect_ActionCons_CoUpdate_Nov20.pdf

[hitesh2710]

@dhrumesh

Gland pharma post its IPO seems to be the flavour of the season. But at mcap of 34000 crores at current prices and sales of fy 20 being around 2630 cr and net profit at 773 crores, I find it a tad expensive. Especially if I compare it with well run companies with a long track record like Dr Reddys, Cipla. etc. It is usually the case that post IPO investors get excited by prospects of companies and it is akin to froth. But after some time things tend to settle down and after a couple of quarters post IPO, markets tend to value the company in a more sensible manner. I have nothing for or against gland pharma except the valuations. I would like to observe it for another quarter or two before taking a call on it.

Fermenta is dependent on price swings of vit d 3 and the market mood swings according to that. One has to constantly keep track of its product prices as it is a company with few products and hence its fortunes are linked to these products.

@MHS I dont track ACE but feel that since the infra structure segment has been a big laggard in this rally, it too might join the rally.

Another segment of markets that seems to be heating up is metals, commodities and cyclicals. One can look at good companies in these sectors if so inclined to do short to medium term trading.

[Investor_No_1]

Hiteshji, wanted to know you expert thoughts on some allocation doubts that I am having. In past I have had a high exposure to an NBFC and had paid price (not extreme as it was one of good NBFC so still made decent CAGR but phenomenal CAGR was lost as was late to sell). The peak exposure was around 20% to the company.

Gradually I have moved to Life Insurance space as a Financial pick for my long term portfolio and this time I have chosen the best leader with current 12% exposure to the leader (HDFC) and 17% to the overall Life insurance sector. What are your thoughts on this high percent exposure to this sector for say next decade? Is this exposure too high and am I on verge of repeating my mistake in the Financial sector?
Secondly, I have around 16% exposure to the same group (HDFC) in finance sector. Again, is such high allocation to any single group in Finance sector (be it the leader itself) good for a long term portfolio with a coffee can investing style?

I know NBFC risk was way much higher than a Life Insurance sector risk but being Finance sector I am concerned. Had these exposure levels been in FMCG sector, it would not have triggered a thought process. Also, cannot think of leaving Finance sector alone as it is one of the largest and longest growth providing sector. Have chosen Life Insurance and not Banks to form major chunk of my Finance sector allocation because all known rots in Finance sector like NPAs, corporate defaults, asset - liability mismatch etc. affect Life insurance least.

Known is fine, Concern is of the Unknown, would be great to know your thoughts

[topdog]

Hitesh , i have struggled with the chemical sector as they are so diverse and difficult to understand . I hols Aarti Industries , NOCIL, Vikas , etc but my portfolio is so scattered. could you help me try to put some order in this sector

[hitesh2710]

@Investor_No_1

In the financial sector and especially in the sector of lending, the preference is always for trusted names and players with a solid track record. In that aspect HDFC group stands quite tall. Even in the aspect of wealth creation, there are a handful of other companies that have created so much wealth for their investors with so little heartburn.

So even if one has to buy for an emerging sector, if I have to choose, my preference would be for a company which comes from a stable as good as HDFC stable. And in that aspect, HDFC Life fits the bill.

Regarding allocation to financials, if one were to think of the really long term of say 10 years or more (as in your case) there are few sectors and companies which have created lasting wealth. The sectors that come immediately to mind are financials, IT, FMCG, consumer durables and in some instances unsung companies like atul ltd, srf, navin fluorine etc. Another sector which people consider cyclical but within which are companies like shree cem is worth keeping in mind. So if one has to find out investment worthy companies for next decade these are the usual sectors to look at.

I am often taken aback at some questions in some whatsapp groups and in personal interactions related to sectors like metals and sugar etc. Some people ask if tata steel is good for long term. Especially when the cycle is more than halfway up or even closer to top. Thankfully those who have read investment books atleast have some idea what is for long term and what is not.

Risks in financial sector are quite well known and its easy to filter out companies that are worth considering. The real acid test for financials came during demonetisaiton, NBFC crisis, Corona etc at different times in last 3-5 years. Companies that have come out unscathed and in fact smiling are the ones we need to focus on. I wont go into too much details and go about naming them, but even a cursory look at results of these companies will give an idea.

[hitesh2710]

@topdog

Chemical sector is currently the sector in favor with the markets. And it seems if the China plus one theory plays out, this sector can throw up winners even from current elevated levels.

If one wants to have a top down look at chemicals, then basically there are two types of companies … First are the commodity companies which produce few products but these are basic chemicals for most other chemical companies. e.g IGPL, thirumalai chem which are mainly into phthalic and maleic anhydride, Supreme petro which is into styrenes and polystyrenes, Bodal chem, kiri inds, bhageria etc which are into dyes and dyestuffs etc. These have their typical cycles and one has to learn to ride them.

The other group is diversified companies which began as commodity companies but due to management smarts and experience over the years became into behemoths. e.g atul ltd , aarti inds, etc which have a wide portfolio of products. Deepak Nitrite seems to be a company which is gaining market perception as a company which is moving from a limited product typical commodity company to a wider product niche chemical company.

And another smaller group is companies which enjoy smaller niches. e.g Vinati organics which is mainly into ATBS, IBB etc., Alkyl amines and balaji amines, which are mainly into amines and derivatives, Nocil which is into tyre chemicals, Oriental carbon which is into sulphur, etc. If these type of companies can produce good results, they can catch fancy valautions.

Once we get these basic classifications in our mind right, it might make sense to have a detailed look into specific companies and take if from there.

My suggestion would be to read annual reports/presentations of well run chemical companies, like atul ltd, aarti, deepak nitrite, etc to get an idea about the sector. Then go into individual company AR, concall etc.

[Investor_No_1]

@hitesh2710

Risks in financial sector are quite well known and its easy to filter out companies that are worth considering. The real acid test for financials came during demonetisaiton, NBFC crisis, Corona etc at different times in last 3-5 years. Companies that have come out unscathed and in fact smiling are the ones we need to focus on.

Thanks for your thoughts. As always, they are very helpful!

[ankit_tripathi]

Hello Hitesh Sir. I have a question i invest in a company based on it’s future plan and based on current P/E i expect it to triple in 3 years. Now that expected price comes within 2 years at this stage what shall an investor do ?
Scenario 1: Company stagnates at the expected price.
Scenario 2: Market rerate the company based on it’s performance and Price doubles from expected price(Overall 5x).
When shall a person exit in above scenario ?
TIA

[hitesh2710]

@ankit_tripathi

I am not too good at these kind of cryptic multiple choice questions. The ideal thing for long term investors to do would be to monitor the business and prospects of the company and keep a track of all possible triggers. Most important parameter for long term investors is profitable growth and cash flows. If there is strong visibility for such growth and cash flows for next few years then it makes sense to sit tight and ride the business momentum.

Re rating is something that can happen from one extreme to another and even more. So its futile to predict how much re rating can happen in any particular company. I feel that is something that is not in our control and hence we should not try to make projections about it.

On the other hand, we can have a rough idea about the company’s growth and keep track of its prospects by various means of tracking a company. So as long as growth visibility is there and company keeps delivering, one can keep holding.

[amit_dalmia]

Hi Hitesh Sir,

What is your view on the current market sentiment.
Everyone is saying market should correct but market is moving strongly on FII slows. But past has taught that this rally won’t last and market would come in line with the economy.

Should one start trimming its position in the market

[hitesh2710]

@amit_dalmia

Predicting market direction especially in the short to medium term is a difficult job. Its much easier to follow the current trend and act accordingly. Having said that, the post Covid correction rally has been a breathtaking rally and the feeling is of riding a tiger. Difficult and often impossible to get off.

But as you mentioned, at some point of time most parties do come to an end. The current moves in small and midcaps might lead us to conclude that there is a lot of froth in markets and hence we are due for a correction. But one has to look at this rally in the context of the correction in small and midcaps from Jan 2018. Ever since that correction, and continuing into the Covid correction till maybe March-May 2020, the small and midcaps based broader markets has been beaten out of shape. So as usually happens there is bound to be a strong catch up on any rebound. And that is exactly what we are seeing.

On ground checks with some industrialist friends suggest very strong demand scenario across industries. Guys who are involved with industries like manufacturing, building products, cement, paints, steel etc are all giving feedback that they never seen such strong demand in the foreseeable past. And they have no clue from where this demand is emanating. So that is another side of the equation. And we need to see the same story being reflected in numbers in next atleast couple of quarters.

Historically Jan-March period of any year is usually a good time to look out for a major top or a bottom, usually a top. A technical analyst Vivek Patil who used to write Elliot Wave newsletter in icicidirect and which I used to read, mentioned this time period and used to provide examples dating back several years. So that is something we need to look out for.

In the past I have seen that one sign of impending trouble is that the small and midcaps space stops moving at all and often starts correcting much before the indices like nifty and sensex. That usually leads to market corrections. Till date I have not seen such a thing happening in the markets and hence I am cautiously optimistic. But in trading positions if there are quick gains I am on the look out for booking profits and thus remaining on some cash.

The correciton we saw on Monday was a big bar reversal and in the past has led to short term 2-4 week correction, more sideways than down. Even if we see the weekly charts, bull market rallies last for 6-8 weeks and then counter trend correciton last 2-4 weeks. Last week was the seventh week of rally and hence we should be on the lookout for signs of an exhaustion in the rally. Lets see how it goes.

[ANXIOUSINVESTOR]

Sir,
Can we know examples of some companies with good management, across various sectors, like Hdfc bank and Atul Ltd which are consistent compounders.
Thanks in advance.

[vibhor_vaish]

Sir,
I have a question regarding Atul Ltd .
This company has so many subsidiaries that I find it impossible to keep track of the standalone situation of all of them. It has brilliant ratios and has consistently compounded , but it is wise to put money into this blindly just because of cumulative performance when one will not be able to track the individual performances ?

[hitesh2710]

@ANXIOUSINVESTOR

There are many examples of companies with good managements across various sectors.

Companies i can immediately recollect are

Fmcg…nestle, hul, dabur, Colgate, proctor and gamble

Consumer durables like havells, whirlpool, Johnson Hitachi, blue star, voltas,

Building products…kajaria, cera ,

Paints and allied… asian paints, berger, pidilite

Footwear…bata, relaxo

Cement…shree cem, ramco cem

Chemicals and speciality chem… atul, navin fluorine, aarti inds,

Agrochem… pi inds, bayer crop

Pharma… drl, cipla, ajanta, divis, alembic, sun, lupin

Nbfc…bajaj fin, chola, sundaram fin

Banks…hdfc bk, kotak

IT…info, tcs, hcl tech, wipro

There will be many more.

[hitesh2710]

@vibhor_vaish

Atul is almost like hdfc bk of chemicals sector. It remains a class apart. While looking at the company, because it has a lot of divisions and products, we need to look at broader picture and monitor the company. As in case of hdfc bk, we don’t go into too much details of each and every division but monitor the loan book growth, net income, npa, roe etc., similarly we can look at atul ltd.

There are some cos where its not possible to know each and every thing about the company, but as long as management delivers on broad guidelines, it should be ok.

[ANXIOUSINVESTOR]

Thanks for the detailed reply sir.

[Deven]

Hello Dr. Hiteshbhai,

Is it fair to compare fmcg with IT? If so why there is vast difference in PE?
As an example; Infy Vs HUL.
HUL Mkt cap is a bit higher than Infy, however
Sales: Infy 82 k vs 39 k
Growth: Sales @ 5 yrs Infy 11% Vs 4.5% for HUL.
Profit: 15 k vs 6 k. Profit growth of HUL is higher 13 vs 6 for HUL.

Infy and in that cases all IT companies are better in growth and CFO vs FMCG, why can’t they trade equal to FMCG?

ROCE and ROE of HUL higher, does this makes so much different in PE?
Thanks.

[hitesh2710]

@Deven

Comparing fmcg to IT is not an apple to apple comparision.

First of all IT is a B2B business. Whereas FMCG is a B2C business. FMCG companies have strong brands and loyal customers. IT sector cannot boast of brands. Though some amount of track record can help them in higher realisations.

The other important factor is variables involved in the businesses. While IT is exposed to currency, govt (international regulations linked to visa and nationalistic policies hampering outsourcing etc), FMCG is not exposed to such vagaries.

The third factor is the perceived runway for growth. Markets are usually absolutely clear in perceiving the continuous demand for fmcg products like soaps, shampoos, toothpastes and so on and so forth. Not so for It sector.

Most FMCG cos work on negative working capital and its not so for IT sector.

There can be more factors of differentiaion also but basically these kind of equations will always have an impact on valuations fetched by FMCG cos vs IT cos.

[attaluri]

Hi Hitesh Sir, please guide me on

1. i see everyday one or many stocks touching 20% circuit. how to identify,entry ,exit strategy for these stocks.
2. how to identify stock distribution or accumulation .please describe this in both technical and fundamental perspective.

[Deven]

Thanks Hiteshbhai for articulating it beautifully. Got it. Best wishes for 2021.