Kunal Portfolio

Q&A: Questions & Answers Portfolio Q&A
1

Hi everyone,

I have benefited a lot from learning about the thought process and reasoning of fellow members who have shared their personal portfolio. In the same spirit, I invite comments which can help me to understand better my reasoning and investment rationale.

Arman Financial:

Excellent management, big opportunity, conservative lending practices and better valuations due to demonetization. It was a contrarian bet on micro-finance and given the last quarters results of various MFIs, I am bullish on the current opportunity.

Jindal Steel:

After the new steel policy, where the aim is to double the current products of 165 mt tonnes is nearly 300 mt, the sector will have a major boost. Only 5-6 players will have nearly 60% of the market. Jindal Steel, which went into JLF because of Rs. 45000 crore loan was an ugly-duckling. After its Angul facility, there is no further capex to be announced. Growing steel prices, potential order from Indian railways, stake sale of Oman plant and power plant to JSW Energy and environmental concerns in China are some growth drivers. Promoter bought warrants at nearly 145. They intend to bring strategic partners in few years which will reduce the debt further.

Alphageo:

I like businesses in unique segments. Seismic activity is a business which might not see high competition. Company has got big order from Indian government as they want to reduce the crude bill. Market feels that this business lacks potential to grow so it is giving a very low multiple to it. The cash from the current order will also reflect high dividend or bonus. The promoters have good domain knowledge.

Repro India:

I have two publishing stocks in my portfolio. I have bias for the industry as I work in a publishing firm. Print-on-demand, growth in e-commerce, proxy for online publishing market, low working capital are some of my reasons for investing in Repro.

Divis Labs/Sun Pharma/Lupin:

I invested in the Pharma basket. The valuations were very good, companies are generating FCF and have presence in multiple markets. After the plant approval, re-rating will happen. Speciality chemicals is a growth trigger which might happen in 2020-21. Also, I don’t think the share prices will go down any further. Infact, markets with a PE of nearly 27, does fall, these will be good defensive stocks to have to protect from downside.

TVS Srichakra:

The company from TVS group has very good presence in two/three wheeler market. They are focussing on branding and marketing with TVS Tyres now the sponsors for sport teams in pro-kabbadi. Highly competitive segment, but a captive customer is an advantage. More research needs to be done.

MPS:

This was a wrong investment. I thought that the CEO will be able to buy a company and turnaround. It has been a painful wait for the acquisition to happen. The 3% dividend yield was the trigger point but even that has stopped. Last quarter, they have given a specific timeline for acquisition. The lesson here was to be very skeptical when inorganic growth is being promised. I am still unable to make my mind on the next steps.

PTC India Fin:

High dividend yield, low valuations, better management team and reforms in power sector attracted me to this stock. Last two quarters have not been good for the company and the stock price has corrected and is in a range. Perhaps, the NCLT cases and the new bankruptcy laws will assist the company to recover dues and start the new credit cycle.

Tata Motors (D):

Low valuation, turnaround in Indian CV cycle, growth in passenger cycles and new products by JLR were my prime reasons for the investment. The electric variant(yet not disclosed) of JLR will give tough competition to Tesla. Also, Teslas crazy valuations was another point I had in mind. Again, painful wait, but still bullish.

Lakshmi Vilas:

Change in management, regional nature of the bank(closer to customer), cross-selling of products, improving casa ratio, good dividend yield were some of the reasons for my investment. I have also applied for the rights issue. Max as a potential promoter, NCLT cases and improving capital base might be the next triggers for the stock.

Sonata Software:

I invested mostly for dividend yield and low potential downside of the stock. The company is in niche verticals, mainly travel. I think their strategic approach of platformatisation is in the right direction. And the recent results have also been decent.

Tata Elxsi/Hero Motocorp/HDFC:

Grandfather’s gift :slight_smile:

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Hi Kunal,

I like your clarity of thought & subsequently clarity of writing, keep it up. The correlation of stocks in my stock universe & your universe is pretty low - only 2 (Arman & Sonata), so cant really comment on specific businesses.

Let me make following 2-3 points quickly ->

  • I also felt that Lupins of the world were coming down to low valuation but it seems reality of the sector is more R&D expenses, less blockbuster molecules, less pricing power. It would seem that consolidation, M&A shall be next step. So I would wait for positive signal from ground before jumping.

  • Another generic comment I would make is - there seems to be lack of high quality strong businesses which can compound for 10-20-30 years in your portfolio (apart from HDFC & Hero). I am also not a big business quality (BQ) guy but I am learning from VP seniors to have strong anchors in portfolio built around compounding businesses. This anchor becomes even more important if one is part time investor. You can try to compute 15-20 year CAGR of these companies (a la Kotak Bank, Pidilite, Asian Paints, HDFC, HDFC Bank, Godrej, Maruti etc.). & you will be surprised with the results. This is the portion which grows at 20-25% with minimal tracking, reading daily newspaper shall be enough. How much to allocate for this anchor depends on one’s temperament & risk appetite.

  • Last thing I would encourage you to look at some very good business discussions on VP - CCL Products/Shiva Texyarn/Shemaroo/PI Industries/Max India etc.

Best Wishes,
Rupesh

Disc - I may have position in the stocks mentioned above & hence my views are biased. This is not a buy/sell recommendations & I am not a SEBI registered analyst. Investors are advised to do their own due diligence before investing.

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The steel cycle is on an uptick. Promoters are issuing warrants and buying. Thing is you cannot truly value a steel company, its a cyclical commodity business with a poor balance sheet. There are non cyclical cos in cyclical industries. For eg: the explosives space, the refractory space etc. I would seriously consider looking at the refractory space. Its a wonderful space and there are high quality cos available there.

As far as long term compouding goes, you can consider holding large cap mfs in the long run.

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Thanks Rupesh for your comments. Sorry I could not get back to you earlier as I was travelling. I will surely check the ideas that you have posted. I also had good amount of anchor stocks in my portfolio ranging from HDFC Bank to IndusInd. But I am changing my investment approach to concentrated, small cap, high potential companies. But thanks for your comments. It gave me a good perspective.

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Thanks for your comments. I am not much aware of the refractory space. I will start some research here.

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Results of JSPL are out:

Clear signs of turnaround visible. Should be profitable in the next quarter.

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I have recently invest in Adlabs at an average price of Rs. 58. Here are my reasons:

  1. Major Capex already done
  2. Solid de-leveraging done by the company. The debt from approximately Rs. 1140 cr has come down to Rs. 670 cr.
  3. The promoter is planning to raise 100-150 cr and bring in PE partner.
  4. GST rates have fallen from 28% to 18%
  5. Company will reach cash breakeven this year and PAT breakeven next year
  6. Operating Leverage with possibilities of margins going up from 25% to 40%
  7. Possible growth in Advertising and F&B revenue
  8. High barriers to entry
  9. Low compeition
  10. Growth from tourist and nearby catchment areas like Gujarat
  11. Centrum has invested at 72 and Bennet Coleman at 95.
  12. The stock today will come out from T2T segment.
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I am also tracking this stock since last one year or so and some very good development has happened here due to walk the talk by the management. I also like the business but my main concerns are
1.Growth in footfall which has remained flattish for last many quarters(YoY).

  1. What will be the revenue impact after selling the hotel property?

  2. When will they be able to develop the residential project near Imagica, this will further reduce debt but when?

  3. Capex have been done but somewhere i have read that management want to change the existing rides with new one to remain attractive to everyone the new and the old customers.

These are my doubts hence i have not purchased it yet.
Further drop form here i mean to say 30% from here will be a value buy for me and i would like to add it then. I hope if market corrects we can see that price.:grinning:

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Hi Ravish,

Thanks for your views. Here are my thoughts:

  1. Although the growth in footfalls was flat for the last year, it was predominantly because of Demonitization and GST. This quarter, the footfall has grown by 14% and if you listen to the latest concall, you will have more confidence.

  2. The revenue impact should be in the range of 10-15% of total revenue. If you check the investor presentation, this quarter hotel revenue was 14%.

  3. The residential project will not happen as they have sold the property for a consideration of 150 cr. And the hotel is sold for 250 cr. So the total debt by the end of the year will be down by 35%. Just the lenders approval remains which should happen by couple of months. The savings in interest should be approximately 40 cr.

  4. Further capex is not going to happen. For new rides, management has said they will outsource it to third party. In this way, they incur no capex and get 25-30% revenue. In return, Imagica promises the vendor footfalls.

Frankly, with the deleveraging done, I do not think there will be a thirty percent drop. It is just that there is less awareness in the market of the current developments.

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Research Report on Adlabs Ent.
Buy Adlabs Entertainment; target of Rs 119: SPA Securities

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Is there any change in your portfolio,?

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Hi Kuldeep,

Thanks for asking the question.

I have added Jindal Stainless Hisar and IMFA. I am bullish on the metals cycle.

Jindal Stainless Hisar:

It is the biggest stainless steel producer in India. The company was part of Jindal Stainless Group and then was demerged. It has a plant in Hisar and the company has two subsidiary which it is planning to list in the future. Also, stainless steel demand, which earlier was in Utensil segment is now in Architecture, Automobile and Construction too where company has very good presence. The company has leadership in making steel strips and coins. The price has not deteriorated even in this bearish market.

IMFA:

I bought before the results and now the price has fallen a lot. IMFA makes ferrochromium and ferro alloys. It is a major raw material for stainless steel. Facor Alloy and Rohit Alloy are shutting down because of the debt and IMFA has given its bid for Facor Alloy. South Africa is a leader in ferro chromium and there is political unrest there too. Company has a complete integrated plant with captive power. Power is the biggest cost when it comes to making ferro alloys. They also have mines. Their plant had a shutdown recently, founder just died and Jay Panda(Founders son) has resigned from BJD so there is a big political risk. Also, chrome prices are very very volatile. The company has a strong balance sheet and domain experience.

Silly Monks:

This is my first SME investment. The company provides content on YouTube(it is called multi-channel network) and has now started to provide content on Amazon Prime(Gangster). It is into regional content which is a solid niche. Also, there is a massive tailwind in this sector where players like Amazon, Netflix, Reliance are pumping money. Even here, my investment was in 120 which was basically near the IPO price. This is a small invesment and very risky.

Overall, the portfolio has taken a beating in the bear cycle. I have not sold anything but might trim by selling loss making stocks.

Please do your own due diligence before investing.

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