Malkd's Core Portfolio

raku · January 19, 2021, 4:05pm

Do you think they will be able to achieve the 60 eps target last few years q3 results have always been 20 to 30% higher then q4 results, eps for 3 quarters comes out to be 47.4 they need similar earnings as q3 in q4 to walk the talk ,still new to pharma but i like the managment and always like companies with low debt who spend on Rand D which this company does as it has the highest anda filings planning to add to add more if it comes at 900 levels

Also would like you to look and give your feedback about everest organics(your pharma expertise and way of explaining makes it easier to understand )i like there growth story plus insider buying and recent capex could be a multibagger.

Malkd · January 19, 2021, 5:35pm

@raku Expecting Q4 to be similar to Q3. Wrote my thoughts below in the next post.

Regards everest… I did go through a couple of threads on smaller cap pharma companies like everest etc but since I’m over weight on pharma I dint delve deeper even though all I want to do is invest in pharma of late. Personally with pharma I tend to go with small to mid cap companies and have tried to avoid smaller companies under 3000 crore since it’s such a regulated sector. If a plant gets shut down or usfda notice hits a small company it can take years to get back on track due to overdependance on few plants/molecules as compared to bigger companies. so I find them too risky. Especially during an upcycle I wouldn’t want something like that going wrong since the years during an upcycle is when these companies make a lot of cash so wouldn’t want to risk being left out of it due to an fda/plant issue. So I’ve stuck to granules/alembic and laurus only ie clean companies regards usfda etc who can handle hits with a plant/product or two without too much difficulty. I don’t have an issue with smaller caps in other sectors… However, with pharma it’s a scary thought and I’d rather not have too much cash exposed especially since I go with large concentrated bets and Id be worried more than excited even if the returns end up being high. Just a personal preference though.

Malkd · January 19, 2021, 8:26pm

My thoughts(dint want to post this in the alembic thread):

There’s something big brewing here but patience will be needed. Debt repayments and capex will hit the P&L next 2 years but there will be an inflection point and by FY 24 we could see more than double the profits when
major capex and repayments go down, capex kicks in and R&D reduces on percentage basis thereby improving margins and FCF(what PE rating would you assign to a company like this )
There could be a case to wait until FY 22 is done with to invest but markets are always forward looking and may take this huge surge jn profits in consideration much earlier than FY 23/24 so staying invested for the next 5+ years looks prudent and adding more in dips if there’s consolidation could be a good move over the next year. A doubler based on earnings growth alone over 3 years may sound boring considering the current bullish market but I’m more than happy with that and would take that return gladly anytime. A rerating is something one can’t predict but it could take it to much higher returns too considering it’s currently near half pharma valuations. Very confident and bullish management about the medium term and very realistic about the short term(definitely blue chip management for me).

Disc: Not a sebi advisor. Invested

Malkd · January 20, 2021, 11:38am

Have spent most of the last week studying Muthoot capital services. Finally done today and in a comfortable enough position now to begin investing in tranches

Muthoot capital services:
Finances the underbanked and deals in 2W, used cars, secured business loans.
Currently available at just 1.3 times book value and there are plenty of reasons why. Market valued it highly up until mid 2018. Bank had begun expansion process out of the south and growth was rapid. Then the Kerala floods hit… then nbfcs in general got hit… and then the auto cycle slowed down… and finally covid… Usually I’d say a good business makes its own luck but here im willing to give them the benefit of the doubt. Let’s see how they handled these crisis’ though

Revenue: Revenue has increased continually even through the downturn. Infact it’s doubled since 2017 and has been going upwards in one direction since 2009 without stagnation. However, profits are everything and for a bank that means controlling losses and maintaining a good nim.
Npas: in 2016/2017 npas went up with growth. this was primarily due to expansion in new regions and a few bad corporate loans along with a change in accounting. They managed to bring npas down in 2018 and 2019 even with the kerala floods, downturn etc. While the npas aren’t industry beating level yet the products they deal in are smaller ticket items ie 2W and used cars(avg. Ticket size 2.15 lacs) so even if their target market is the unbanked they don’t tend to lose too much per customer. Corporate loans take a small chunk of the portfolio and isn’t a growth driver. NIM is high… Partly due to decreasing borrowing cost and partly due to high interest charge… if they can get net npas down to under 2 over the next few years and maintain growth the sky is the limit. Capital adequacy is higher than peers at 28 percent. And bank is very conservative… currently 8.8 percent provisions provided for 4.4 percent net npas and for the coming quarter when hell could break loose. Cash in hand is solid and nonreliance on a few corporate clients so there isn’t a danger of total collapse. Infact their figures like Roa and roe etc are very impressive all things considered.
2W dependance: as the 2W cycle moves upwards so will the banks profits. The upcycle will help the bank get through what’s going to be a tough phase and set them up well over the next few years. I’m hoping that the next time the auto cycle slows down they’d have got all their pieces in place.
Growth drivers: the company is still in a huge growth phase but apart from expansion pan India and increasing market share for its main product ie 2W(with tailwinds), they now have used cars too and they’ll be launching another low ticket item ie consumer durables soon. Cross selling with fincorp seems to be giving dividends too.
Moat: The moat is a double edged sword. In the south they have their parents brand to carry them but in the newer areas they don’t really have that. What they do have is the ability to offer loans to customers even without proof of income and offer loans to people that banks and other players are scared of due to npas. This will increase npas but considering the nim and growth it could be worth it. There are other nbfcs targetting this market but the market is big enough for them to chip away
Promoters: this is what finalised it for me. The presentations given every quarter for investors are a site to behold. The openness via the concalls is beautiful. Their growth plans are well laid out. Thier conservative nature makes everything feel a lot more secure. more than anything these are the reasons I want to invest. At near book value I’m getting in near the ground floor and I get to be a part of this long and exciting journey with them. Icing on the cake is The promoters have the backing of thr parent Muthoot Company (not Muthoot finance). They did have issues early 2000s with the ipo and they stopped gold loans(small percentage) in 2011 but overall they’ve been very open based on the concalls I’ve listened to. I couldn’t for the life of me believe this was a under 1000 mcap company with all the info so readily available from the company.

I’m planning 5 tranches… 1 now and the balance as the story unfolds quarter by quarter. This is a company that knows what it’s doing , where it’s going and how it’s going to reach there. 2018 to 2020 provided a nice speed bump to allow and opportunity to enter now. This is going to be a long story though so not expecting any miracles in the short/medium term(though considering their revenues during last 2 quarters I won’t be surprised by a breakout quarter this time with 180+ crores considering collections were above 90 percent as per concall)

Note: Low volumes, lack of coverage, the main forum in cobwebs makes this a bit risky since it’s a very lonely voyage for now lol.

Disc: not a sebi investor

PraveenKG · January 20, 2021, 7:02pm

Its first time I went through a thread in detail from the beginning…Your way of thinking and clear writing made me go through fully…
I too have Alembic in wife’s portfolio from 740 level and entered ITC last week at 202
Have u ever checked delta corp? Any thoughts on it as online gaming is becoming more popular these days apart from their casinos which will be back to their 100% business at least by mid of 2021
As a disclosure it’s one of biggest holding in my PF
Thanks

Malkd · January 20, 2021, 7:43pm

@PraveenKG … thanks
Regards delta… Id posted a longer reply but decided it’s better I don’t on public forum so I’ve edited to the below. I stay less than 3 kms away from their boats on the mandovi river and have friends who work on them so I know the business side of it pretty well. Il never invest though since… let’s just say there’s a lot of friction between the general public in goa and casinos. I’d never hear the end of it from my family and friends if I did. My major criteria when investing is when I love and align with promoters and their business plans/goals and I don’t want a long term relationship here. Since it’s your largest position my advice to you is scrutinize every number/commentary etc and do your own due diligence. They’ve literally become too big to fail here and odds on(literally lol) their business will continue to do well, but just ensure that as they get wealthy so do you and you as an investor dont get left behind. Good luck.
Not a sebi advisor

Southern_Cross · January 20, 2021, 9:57pm

Hi,

Impressed with your way of extracting information and completely agree with your understanding here.
This is a case where promoter is good, long term business potential is good but in the short term there have been head winds. The other good thing about MCS is its transparency and discipline with respect to revenue figures. They consistently grew their sales for 10 years at a stretch. However, as they tried to expand sales in other states away from their comfort zone(Kerala), they are facing some problems.

During ILFS crisis, when there was serious liquidity crunch, they were able to get some capital through securitizations. This would have affected their cost of capital, it being a small NBFC and in turn reduction in net profit. Good thing is, they were able to run the show and became more resilient. It also offers FD at the rate of 7.5 to 9% so that they can reduce their cost of capital. Its market cap is 674 cr and it has 2596 cr as assets under management. They have sales touch-points around 4000 branches.

Basically, if we know a stock that will stay in business, consistently showing sales uptick, having a good promoter within a big opportunity size sector, then most of the work is done. We can weave around this certainty by adding in dips when the market provides opportunities. For a long-term investor, it looks a good bet.

Disclosure - Invested at high valuation in 2018 and averaged at sub 300 levels in 2020. Portfolio - Southern_Cross's Portfolio - #16 by Southern_Cross

Malkd · January 21, 2021, 3:45am

Hey @Southern_Cross
Glad that I have another boarder invested in Muthoot capital to talk to. Their cost of borrowing has been decreasing steadily and no. Of fds increasing so things definitely looking for the better. I admire your resolution in holding through the tough period since 2018 and following your coffee can method to the tee.
One question… are you expecting their npas to decrease over the next few years? Or do you feel the cost of growth for a small company in this competitive field are npas which can’t be helped atleast in this initial phase when growing in new territories? I’m hoping for the following:

They are masters at increasing revenue… hoping it continues to increase at current run rate with expansion
FDs increase and cost of borrowing comes down improving nims and profits
Gross npas start decreasing as they get more well versed with new states(west was hit the worst at18 percent gross npa last quarter) and at some point we reach the gold standard of sub 1 net npas without too much provisioning needed
Let’s hope they can do it over the next few years. Cheers.

Edit: Bought my first tranche of a planned 5 tranches today at 409. Expecting high revenues but higher provisions too this quarter so not expecting profit to pick up buy wary that the stock may run which would have annoyed me after all this research lol. Technically it’s near 200 dma and has built nice support in this region. Unless Q3 is horrible I can’t see investors selling their positions after sitting with it for the past 6 months in this range and based on the concall in Q2 and the festive season last quarter I can’t see a bad result. Will buy the 2nd post Q4 when npa matters regards moratorium etc are settled and full picture of book emerges. Once this position is built il buy the remaining 3 tranches as the story develops in normal times and I get a clear picture of npas vs growth over the next year or two.

metallica.kyoto · January 21, 2021, 5:51am

I have a query here.
Although revenues are increasing but their margins are in consistent downtrend

manoopatil · January 21, 2021, 5:54am

Very Good Analysis and Thanks for sharing! You are very detailed and honest in expressing your views. I always look forward to read the posts on this thread.

One quick point on Muthoot - Quite a few banks are entering in Gold based financing likes of Federal and I guess even SBI. How do you see Muthoot’s ability to perform superior in the midst of heightened competition

Thanks
-Manohar

Malkd · January 21, 2021, 6:33am

@metallica.kyoto Margins have been affected due to increased borrowing costs and the problems with expansion into new territories outside of the south. Hence why it’s available so cheap though. If the margins were stable this would be at 3x book value. I’m banking on FDs increasing and borrowing costs decreasing over the next few years. Expansion outside of the south was a bit too quick… they’ll be concentrating on cost control and asset quality outside the south next few quarters. Again, banking on the quality and conservative nature of the management to improve this. Unfortunately one can only try to understand the business and promoter quality now and make predictions regards the future and then check if those predictions occur. Incase npas continue to rise and margins continue to worsen it would mean my thesis an prediction was wrong ans hence why I’m building up my position slowly. At this price I feel that I’m getting thr negative side priced in and as the company improves on these fronts I don’t mind paying a higher price per share in the future.

@manoopatil Muthoot finance are the ones into gold loans. Muthoot fincorp is linked to Muthoot capital and apart from some cross selling MCS is geared towards 2W and used car financing(and consumer durables in a couple quarters). Considering their target market is the market that banks ignore especially in rural areas I can see the pie being big enough even for them even with the competition. Their growth outside the south is what il be looking at closely since that will be the true test of their competitiveness. Il be looking closely every quarter to see growth and if they can gain market share in the east/west/north. The presentations and concalls are so lucid that it will be easy enough to track all of this in the future. Again, il only be adding to my position as the story improves and I get insights on margin growth, asset quality and market share improves.

Tbh I’m more excited about following the company’s story with skin in the game and seeing and being part of their growth over the next few years than I am about returns etc in the short term here. The number of things I need to track and the beautiful way the information is presented makes this a challenge I want to put myself through and see if I can handle the swings and roundabouts of seeing a small NBFC become a large one over the next few years (Also, the market looks so over valued right now that I’m finding comfort in low valuation bets and the usual pharma etc in my portfolio above)

Southern_Cross · January 21, 2021, 7:33am

I think we did not see the after effects of Covid completely. Based on my understanding, the NPAs may not come down so soon. However, the comfort I see is the reduction in cost of capital. At a high level, I think they have their framework ready and also have tie-ups with different dealers and been in this business from 1998. The only thing remaining is a good underwriting skills and identifying right customers. As per the CRISIL rating delivered in Nov-20, the financial profile is still in good shape. We should not forget that they have the backing of promoter which helps in damage control in this risky NBFC business. I don’t expect a turn around soon.

Malkd · January 21, 2021, 8:01am

Agreed. Once they get through this tough period and things normalise next year we ll get a true reflection of how they handle npas with expansion and by then hopefully they’ve got their ducks in a row after this horrid 3 year learning experience for them. Just 3 years ago the market were valuing it at 5+ times book value. since then there’s been no corporate governance issues or permanent setbacks… just temporary yet harsh setbacks in the overall landscape and not the company individually… so the market should like MCS if/when they get back on track in the future. Cheers.

Malkd · January 22, 2021, 4:53am

Got a couple queries regards my reliance on pharma and my concentrated portfolio and whether that will change.

Investing is a continuous process and I have my portfolio shortlisted for the future already. Over the next few years my portfolio will diversify and cover all the sectors that I am comfortable with. Right now I’m invested in the sectors I saw visibility in during covid and will be adding the rest as and when in cash.

Pharma:
Alembic Pharma
Granules
Laurus Labs

Currently very exposed here with 65+ percent of my portfolio. Will slow down investing here until I’ve increased exposure to other sectors.

Chemicals:
Deepak Nitrite

Currently fills up 15 percent on one company alone in my portfolio so will invest more only when I’ve increased exposure in other sectors. Re rating due to specialty chem has already begun so not comfortable buying more anyway at these levels.

Agriculture:
Kaveri seeds

Doubt il be investing more here since I don’t want to be too exposed to agri. I dunno where the company will head after 5 years either and there’s still a nagging doubt in my head about the past so wouldn’t be comfortable adding more currently.

Renewable energy:
Borosil Renewables

Has huge potential for the next decade. Planning on investing more as and when the story improves and gets confirmed every quarter.

Financials/Auto:
Muthoot capital
Racl geartech

Heads I win, tail I don’t lose bet. Will increase holdings as their stories improves and hopefully doesn’t hit a wall of npas and regulations and the uncertainty regards cyclicality of auto

Retail:
Vaibhav global

Will start adding at cheaper valuations. Fantastic company but too rich for my blood currently.

Monthly SIPs:
Large companies with relatively less risk in sectors that I foresee huge growth in the next decade that il be SIPing into every month on dips especially when the companies above aren’t available at discounts. Will add some stability to my portfolio

ITC (FMCG)
ICICI Lombard (General insurance)
HTC Tech (IT)
Polycab (Fmeg/Cables)
Idfc first (Banking)

So a few years from now we ll have a sectorally diverse (yet concentrated portfolio) spread out well over small/mid/large caps.

Malkd · January 28, 2021, 11:23am

All 3 Pharma companies I own results are out and they are as good as I’d hoped. Growth visibility in this sector looks fantastic and no other sector currently gives me as much confidence as pharma (currently 70 percent of my portfolio)

Laurus labs continued its fantastic growth and managed to beat it’s fantastic Q2 by 30 crores. Waiting for the concall so I can get a clear idea about future plans and growth drivers since I’m still abut unclear as to what happens over the next 5 years and what exactly to track but in the short/mid term what this company has done is nothing short of fantastic and if they really have set a new base then this story has a lot of steam in it
Granules managed to meet their huge guidance. While not as explosive as laurus they have set a nice new base and guidance for the next 5+ years looks good and I can clearly see where its going and what it wants to do.
Alembic pharma had good results too and while their next year’s projections don’t look explosive Visibility until FY 23/24 is fantastic and will get a huge boost if sterile plant Approval is completed.

Overall very bullish on pharma for the next 5 or so years. Will post concall updates for laurus and granules post attending

Shankar · January 28, 2021, 11:46am

Within the 3 players in the Pharma space, how is your allocation among the three ?

I have equal allocation among Laurus and Alembic. My conviction is strong in Laurus. The expectation of flat FY22 for alembic is making me think if sticking to this one would lead to some opportunity cost

Malkd · January 28, 2021, 11:48am

Currently between the 3 laurus has 60 percent and alembic and granules have 20 each.
Will be using the next year or so of possible flat returns in alembic to increase my allocation in it as and when in cash though. Considering my horizon is a minimum of 5 years I don’t mind when which one runs up in the short term and will add whenever they go into consolidation/dips etc.
Btw @Shankar … flat next year for almebic pharma is only cause their p&l will be hit by 450 crores. Revenues will continue increasing. Also, if their sterile plant gets approval due to drug shortages theat guidance could change too

ankit95 · January 28, 2021, 4:32pm

Does the decreasing guidance of Granules concern you? Earlier they had said 80% PAT growth in FY21. Then few months back they said 70%. And now they are saying 60-70%.

Malkd · January 28, 2021, 5:30pm

@ankit95
When management said 60 to 70 percent I was a bit stunned since that equates to just about 72 crores to 100 crores in Q4.
However, I think management just underestimated covid and got a bit of a shock when their supply chain got affected so badly. These supply chain issues(raw material, containers, delays) are all one offs and wont be issues long term and in a few years their dependancy on China will be even less so some good will come out of this.
Back at the end of Q2 it looks like they did not foresee things getting so bad and hence the initial 80 percent forecast.
However, it’s just one quarter of pain either way(maybe a few more if things don’t normalise soon) and il forgive the management their overoptimism since covid is a one off(Q4 may well end up good and this is just them being cautious)
What we have got from their concall and presentation and recent quarters was visible growth for 5 years+ via Mups and then their capex plan uptil FY24 and succession issue seems to be sorted too… those were my main issues with granules back when I began my position.
I couldn’t see visibility past FY 22 and now I can so if anything my conviction is stronger now…
Regards the stock price… one of two things will happen according to Me

Investors will be happy regards the long term plans and the stock price will go up over the next few months 2. The share price will be under pressure for the next few months and once the bad quarter is out of the way it will rise in anticipation of the following few years.

I, unfortunately, cannot predict the market… and whether the price goes up or down could end up being a coin toss… so all i will do is stay invested.
However, What I will be doing is saving up on cash so I can buy as much as I can if the stock gets pummeled next few months… especially on Q4 result day if PAT does end up being double digits (hopefully shocking investors into selling at low prices ).
It’s the same with alembic pharma for eg… Use consolidation and dips during these moments to inject cash since cash comes in spurts via salaries and profits and not in a lumpsum and long term your returns will be even better.

Hopefully in the future management just lets the numbers do the talking. These predictions etc always end up backfiring unless underpromised

Edit: just listened to the concall again. Around 23 minutes Mr Krishna Prasad clearly says current level of revenue and profitability will be maintained even with all the issues they are facing and literally says that “things can’t get worse than this”. When asked about guidance around 30 minutes he answered that he wants to be a little cautious here and then mentioned 60 to 70 percent. I think all that’s happened is he has been told about the negatives of overpromising regards guidance and is now underpromising …

At the end of the day there is nothing like listening to a concall on your own rather than looking at notes since somebody else’s notes won’t capture everything and especially doesn’t capture the tone of management during a concall.

would love it(and honestly upon relistening I wouldn’t be surprised) if we end up hitting 125 to 150 crores in Q4 now and expecting the worst of under 100 crores anyway and I much prefer being In this situation rather than waiting in tension for bullish targets to hit.

Disc: invested. Not a sebi advisor. Not a buy/sell reco

Malkd · February 5, 2021, 8:52am

I had resigned myself to missing out on the IT/Tech rally since most have run up to tremendous valuations. I also am not in a position to valuate them since there are just so many moving parts and I’d resigned my self to settling for a safe blue chip like HCL. To my luck I came across a company called expleo solutions a few days ago thanks to this forum. What I like about it

Promoters: Management has changed over the past decade and they are now probably the cheapest valued mnc company in india. The new management gave clear guidance at the end of Q1… next 2 quarters things will come back to pre covid levels and then Q4 will accelerate and next 3 to 4 years they should double thier profits. As far as walking the talk things are working out exactly as planned after the latest result ie a combo of slight degrowth and back to pre covid levels. Annual report has no red flags either.
Return ratios and financials: apart from increase in receivables due to covid their cash flow is healthy. They have no debt. They have a healthy amount of cash. Their returns on capital have been excellent. Operating margins are very high (admittedly higher this year due to WFH but still respectable even when that benefit goes away). Balance sheet looks clean and healthy
Runway for growth: The listed entity deals with bfsi only. They basically handle the testing and consultancy for bfsi clients who are moving into digitization. Personally can see a huge runway for growth here but the projects won’t be sticky and long term like usual IT companies so it will never be an Infosys etc but has huge potential for growth. US and UK subsidiaries should show growth soon and Asian, Middle east are already showing growth. The theme of digitisation of banking, insurance, financial services looks strong and can see a lot of tailwinds here as companies accelerate digitisation post covid.
Valuations: currently trading at single digit PE. For an IT/Tech company that’s almost unheard of. And though it may never trade at the high valuations of those companies there seems to be an MOS here. Downside looks priced in if the next 2 quarters are subdued but the upside could be huge. Technically it hits all the right Notes ie 200 DMA, RSI oversold at cmp too.

In short: I feel I’ve finally found an IT/Tech ckmpany in a niche that I can understand and track and have taken a position today as technical and fundamental bet. Will exit in 2 quarters if the story doesn’t play out and will eat humble pie. If it does play out il sit tight for the foreseeable. Will not be adding more here since my conviction isn’t strong enough to average at lower levels and neither is it high enough yet to add at much higher levels if the story plays out over 2 quarters. Note that There is also a safety net of potential Buybacks/dividends

Disc: Invested approx 4 percent of my portfolio at cmp 460. HCL tech will have to stay on the backburner (though I will run to it if this fails). Not a sebi advisor