Malkd's Core Portfolio

Q&A: Questions & Answers Portfolio Q&A
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Thanks for the eye opener @rshankv
In a nutshell I’ve realised why I stay away from IT and need to spend a lot more time studying it. I’ve stayed away from it for a reason and now I know why… I understand pharma, chemical, FMCG, manufacturing, banks/nbfcs but there is a lot for me to learn in IT since there are so many moving parts. Il stick to my guns for a few quarters since at least there still could be some upside especially if management does what they say they’ll do but you’ve made me realise that maybe I need to look at this from a wider lens. I do have a few follow up questions though

  1. Part of my thesis was that dev and testing should be seperated to improve efficiency and you’ve confirmed that. Do you see that being a fixed trend long term?
  2. Being in the IT sector have you heard of expleo before and do they have some sort of a name in the inner circles of IT or are they just an also ran?
  3. In the bfsi sector would SAP etc be enough? would nt new software to improve npas, collections etc(for eg to filter good customers with good credit ratings vs bad for eg) be needed over and above what the standard software does? Bfsi seems a bit different than the usual sectors and hence why I assumed specialty testing would be needed.

In short the lack of knowledge about this field scares me now since I just fell for RPA/AI etc and just assumed they’d be better lol.
The usual metrics regards valuations and tracking growth seems to not apply here so I may just look elsewhere until I’ve studied the sector and its moving parts in its entirety else just bet on a biggie like HCL and do prima facie tracking

PS… you’ve got your points across perfectly well. And I wouldn’t call it verbal diarrhoea. Brilliantly explained

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@Malkd Always ready to help YOU and the boarders .Because of u r thorough analysis and your conviction I reentered pharma and got good gains on Laurel and DeepakNitrite, I started following ValuePickr forum(after a gap of 6 years) in end of April 2020 and caught hold of u r recommendations at the right time, so happy to learn from your expertise and this is my way of returning back the favor, please look at my response inline.

Part of my thesis was that dev and testing should be separated to improve efficiency and you’ve confirmed that. Do you see that being a fixed trend long term?
Ravi: Yes, if testing and development are with different vendors, the overall quality of the product/solution will improve and this is true for project works(when i say projects, the solution work is outsourced to third part vendors/service based IT companies) . But for most of the FinTech/Product based companies like amzon/bigbasket/flipkart/Oracle Fin/SAP/Infosys Finacle they do their own development and testing and they would rarely outsource one or the other and that is how it should be.

Being in the IT sector have you heard of expleo before and do they have some sort of a name in the inner circles of IT or are they just an also ran?
Ravi: No, I have not heard abt Expleo ,after seeing u r interest, i did a cursor look at its profile and i didn’t find anything great abt it

In the bfsi sector would SAP etc be enough? would nt new software to improve npas, collections etc(for eg to filter good customers with good credit ratings vs bad for eg) be needed over and above what the standard software does? Bfsi seems a bit different than the usual sectors and hence why I assumed specialty testing would be needed.
Ravi: If you ask me, the world has already moved away from SAP based bulky solutions , now(atleast since a decade) everything is based out of cloud ,even SAP is moving to cloud but it is too late. and they are loosing business to more agile companies like salesforce which are in SaaS model (Software as a service), The big old bank-Goliaths might still use SAP to be on the safer side but the new entrants-Davids’s are all for SaaS, bcos they dont have to spend millions of dollars to setup their solutions.

We do business with major US companies and all our solution is in amazon cloud , the transaction per second is close to 6000 hits per second during peak seasons for few of our client and we are able to manage that volume.

Deriving reports as good credit and bad is just a click of button in the new salesforce age through advanced Business Intelligence plugins

(https://axxis-consulting.com/salesforce-vs-sap-2020-comparison/#:~:text=Salesforce%20has%20been%20dominating%20the,it%20for%20a%20different%20system.)

(https://www.bloombergquint.com/gadfly/sap-s-failure-to-adapt-just-cost-it-38-billion-in-stock-rout)

Certainly the future is AI/ML , but how many companies are able to reap its benefits other than FAANG(facebook, amazon, apple, netflix, google).

You are right the usually financial metrics might not be applicable for IT/FinTech , the key is are these companies bellwethers, the answer is an emphatic NO

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Thank you so much @rshankv
Your knowledge regards IT makes me realise that even if I study it for years il never be comfortable investing considering the ground reality will always be an evolving picture. I will stick to what works for me ie the sectors I do understand(though I’ve got a lot of fomo for IT/Tech) and just take a few opportunistic technical low valuation medium term bets like the one I’ve taken on expleo and just track growth/management commentary but accept the fact that I have no idea what I’m actually doing and move onto SIPing in safer companies later when I under stand them a bit better.
The amount I don’t know scares me however so il be sitting with the exit button ready at a moment’s notice.
Thanks again.
Btw considering your domain knowledge which companies in the IT space should a noob like me consider an SIP in?
Would HCL technologies be anywhere near the top of your list? Or would sticking to Infosys/TCS be the best bets? Any other like LTTS/LTI/Tata elxsi/Oracle Finserv be worth SIPing in long term? I did have a company called KPIT on my list but considering the amount I’ve realised I don’t know I think I’d prefer sticking to the mid/large caps and just zombie SIPing in them instead

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@Malkd I believe HCL has a lot of room to grow, they are pursing their products aggressively and their sales are growing sequentially . the valuation is attractive. given this combination i will always chose HCL over TCS, Infosys, Wipro or other.

HCL is not a cost player like TCS or premium player like infosys , they are middle in that spectrum ,HCL may not have the same brand recall as that of other major IT services based companies, but that will change.

And HCL is the only IT company that i am holding :slight_smile:

we can have small bets on KPITs or Expelos, but as I mentioned they don’t have any special leverage.

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Small correction - Solutions like SAP and Oracle still have their own might in various industries & business processes. SAP was never a major player in BFSI and Salesforce is just a small area of entire business process of any big organization. Oracle Fusion & SAP HANA are very much in the digital game and next few decades may very well belong to them in their own areas.
BFSI have their own product makers - TCS, Infy, Oracle etc. have major products here.

I wanted to know how the testing and maintenance/support happens for these BFSI products.

Also, one more point - a product maker never decides who would be testing its products. The implementation advisor advices the Clients on this matter and the final decision rests with the Client and never the Product maker. Thanks

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@Investor_No_1 When a product gets implemented the product will not be tested functionally again. only the customized aspect and end to end scenarios will be tested and the system testing is conducted by the customer buying it and usually it will be their inhouse team which does the end to end testing which is supported by the vendor. But once it is implemented the further development and testing will be very minimal just restricted to further custom changes,

hotfix and upgrades. and if the maintenance is outsourced to a third party service provider other the original product company , this is just the lowest rung of the jobs that one would like to work for or support and doesn’t carry any premium

Yes you are right the if the product is to the scale of SAP or Oracle fin, then the implementation advisor/consultants, provides the requirement at a high level and based on that requirement the RFPs will be called wherein all the channel partners will respond to that RFP and then the approach and pricing will be evaluated

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@Dev_S
Just finished with the concall of expleo. Literally all your re rating triggers got activated :slight_smile:

  1. Overall and especially North America pipeline buildup:
    Expleo bagged the biggest deal in the life time of expleo ie a mega global deal covering various geographies including US , Europe, Australia, Asia & india from a Financial MNC. Many more similar deals expected too and demand is currently huge

  2. Pricing pressure coming off:
    Q4 is already set to better than Q3. They are targetting doubling revenues over the next 3 years and seem confident about it and have said margins will improve from next quarter. Safe to assume pricing pressure is coming off now

  3. Continuing hiring of digital skills for deployment:
    They are hiring around 120 people just for that deal above! They are already hiring for development

  4. Extending india contribution to other industry verticals and digital solutions:
    I dint even know it was possible but they’ve managed deals in non BFSI segments in the auto industry!

Next few quarters will be interesting to see if management walks the talk and deploys their 140 cr cash ably and manages the growth they are talking about. If they do walk the talk they’ll be growing EPS at 33 percent per year which even if they pull half of it off is unbelievable for a company valued in single digits currently(with 140 crores in hand no less). Thanks for giving me a checklist to tick.
I may not understand this sector too well but I now have a few years to study it in peace while I wait for this story to unfold. Thanks to everyone on here especially @rshankv for your inputs :slight_smile:

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Good to hear that @Malkd, credit to you to dig this one out and being persistent at prodding and lively collaboration among VPers.

Zensar is one of the story which has evolved and successfully built on Testing services at core initially( now may be broader range), there could be some parallels in journey.

One additional point to keep in mind would be that testing companies will benefit with some time lag for all the digital transformation tsunami that covid has triggered in FY20.

If they execute well this opportunity could be a gold mine for testing specialist as well - Development world is more crowded than niche testing services. If one deal results in 120 folks joining them, there would be many like that up for grabs in coming quarters.

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Yes it’s true Change in Management, sectoral tailwind , business improvement can be a positive sign for a particular stock.

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Did a review of my portfolio today and I think the time has come to de risk my portfolio a little bit

Currently allocation is in this order:
Laurus Labs
Deepak Nitrite
Alembic Pharma
Granules
Kaveri*
Borosil Renewables
Racl geartech
Expleo
Muthoot Capital Services

Firstly, Even though I hate churning I think I may need to take a break from Kaveri and re-enter at some point in the future since the market seems to be seeing something I can’t see yet and it scares me a bit.
Also, agriculture may not be the ideal sector to target with so many other sectors and options.

Secondly, With work coming back in full flow researching companies is now on the back burner so I will not be studying any more companies and start investing in companies that I’ve already studied and am comfortable with.

So With my cash flow situation improving il be zombie SIPing every month into the following mid/large cap companies in the following sectors that I’m bullish on long term and that I feel still has some sort of yet to be priced in growth drivers/are slightly undervalued depending on which one falls the most:

  1. ITC (FMCG)

  2. HCL (IT) (probably the only sector I don’t really understand)

  3. Polycab (wires/Fmeg)

  4. Icici Lombard (Insurance)

  5. Vaibhav Global (Retail)

  6. Muthoot finance (NBFC- gold loans)
    ( note: idfc first Bank was my first choice for financials but considering my portfolio has a lot of turnaround stories I’ve decided to play it safe with Muthoot here)

Will keep SIPing until I’ve managed to make my total weightage in these companies approx 33 percent of my portfolio in order for me to reduce risk regards being overweight in pharma/small and micro caps.
Long term, This would give me a portfolio of 14 companies spread out across sectors and market caps and ideally I want to keep that number under 15

If I get any one of the companies below at an unreasonable price il be adding them as my 15th company:

Rites, Apollo Tricoat

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Did the same with my portfolio. Removed a bunch of names and even bought a few Dec expiry put options as insurance against market risk. Will keep on adding to only existing positions in my portfolio.

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Yes @Tar
We seem to have reached a very tricky point in this bull run. Many companies are perfectly priced and hence why they need perfect results.
All these 80 to 100+ PE companies can’t afford even a bad result or two else people will jump off board and move to the momentum stock that does continue producing good results(which will lead to huge wealth creation in some of these stocks… which ones is the tricky but)
Personally, I’m banking on good businesses which aren’t overvalued. If they have a shock or two results wise they may consolidate but won’t have much downside.
If they produce upward surprises in their results the momentum chasers will follow.
At the end the price will follow earnings no matter if the market crashes or not. So I think more than an overall bubble bursting we ll see individual company bubbles bursting…
Was considering placing a hedge bet for december but finding comfort in low valuations/good business models/sectors with clear runways(pharma) at the moment instead.
That being said it’s hard sitting with a company that’s not in the markets favor currently but I’m banking on it being worth it in the medium/long term

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Hello,
Could you please check Rajratan global(Automobile sector)Bead wire(Used in Tyre Manufacturing)maker. Posted good results with expansion planned in near future.
Other Company with similar story but different sector is Acrysil.
Do let me know your comments.

Thanks in Advance.

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Hey ankit. I’ve only seen mention of rajratan in the forum. Never really looked into the company. The best way to play the auto sector could be tyres though since electric vehicles or not… tyres will always be in demand. I had a furtive look at acrysil lately but it suddenly ran into upper circuits and I dint have time to delve deeper. Il be just concentrating on investing in the companies I own /in my watchlist above for some time so I won’t be looking into them for a while.

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Update:
Took the opportunity to sell kaveri yesterday when it ran up to 540. Pained me doing it but I can’t help but feel there’s something I dunno. I may consider entering again post a couple quarter( I am considering astec life sciences as my agri play instead… however, I am nowhere near comfortable investing in it currently. May take a while to build conviction and hoping valuations ease of a bit)

Started SIPing in ITC yesterday during the dip. Will be spending majority of my cash building my position here in the medium term on dips. FMCG others margins continues to improve and now it’s only a matter of when instead of if they’ll perform FMCG others wise. Their cigarette business, though slowing down, managed to survive tax hikes/bans etc in this horrible period so most of my worries here have now abated.

2 results came out yesterday along with one fantastic interview and some fantastic news:

Borosil renewables proved their story is strong. 12 months from today their EPS could be around 9+ making it relatively cheap even now considering they can double capacity for some time and renewables as a sector is still in the nascent phase… so there is a loooong runway for growth. Hoping the market gives me a chance to add more around 200 but I doubt will happen.

Deepak Nitrite continued its stellar results… the thesis of it countering cyclicality with its product mix and performing specialty chemicals wise too continues.
If given a chance to buy at lower levels I will not hesitate to load up even though I have a big position here already.

Alembic pharma has as good as got approval for its injectables unit. Now all guidance regards muted eps could have gone out the window. Quality company that continues being undervalued

Dr. Chavas interview was fantastic and … I just have no words left for laurus Labs any more. I have most of my networth in this one company and il be holding strong for the foreseeable… I just cant see a bigger wealth creator over the next 5 years+ .

Note:

Just wanted add that I have been a huge admirer of RITES for a while now. Asset light cash rich company in a sector with huge growth with the only negative being they get majority payments from the government. They’ve had a poor Q3 which has led to the stock price collapsing near my buying range of 230 to 240. Considering how most of the companies I want to invest in have run up and RITES is still available at comfortable valuations(considering their cash in hand/asset light/high margin/monopolyish model) il be building a position here over the next few months on dips alongside ITC.
It may not grow at a scorching pace since at the end of the day it is owned by the government… but the growth potential long term is huge and this is a safe haven with lots of upside possible and a generous dividend model. Hoping I get to deploy my capital here at fair prices over the next 6 months(hoping for a muted Q4) before what should be a good Q1 FY 22. Infact, I’m hoping both RITES and ITC stay stagnant or dip further for 6 months and keeping my fingers crossed that by then the rest of the market has cooled down valuations wise too so I can invest in the other companies in my watchlist which seem to be too richly valued at present.
In short it’s another heads I win, tails I don’t lose much bet that I’m finding comfort in currently

Disc: not a sebi advisor.

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No doubt rites is a quality stock but don’t u think if u wan to play railways growth theme
Then IRCTC is a better choice?

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@Aniesh7
At current valuations there is no way I’d even think of irctc. Even assuming covid hadn’t hit and it was valued assuming 600 crores TTM it was already priced above perfection.
It may be a good business but there is no way I can possibly justify investing in it. If they clocked 1500 crores PAT per year I may have been interested… or if I could have bought it around 10000 MCAP.
Right now some companies are being valued at near impossible valuations and hence why I’m sticking to the heads I win, tail I don’t lose much mentality.
I would’ve loved to own a lot of companies(Dixon, indigo paints, irctc, infoedge etc) but something has to give and while the businesses will continue doing well I can’t see new investors benefitting from this in the mid/long run. I know il be waiting for each quarter result hoping for overperformance which is just equivalent to gambling for me.
In short: If I bought companies like irctc I’d just be worrying about the stock price falling even when the fundamentals are fine since the valuations are so high. With fairly priced companies like rites I can concentrate on the business performance and trust that there’ll be a correlation between business and stock price hence filtering all the noise and keeping my conviction on track(and giving me clear indicators on when to sell too) and I can allowing the companies to make temporary mistakes and miss earnings projections in the short term and keep a patient eye on the long term.

Basically, during this raging bull market I’d rather sit with a company with green shoots that could lead towards a re rating(and consolidation rather than crashing if not) than a company that has re rated to crazy levels and has a higher chance of a derating than getting re rated further(though the market is a crazy place so who knows).
If there is a crash in the future and valuations reach justified levels il probably consider investing in those companies but not before.

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True. Valuations r very high. N it’s good to buy at current levels if u r a very long Term investor. Say 15-20 yrs outlook

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If I’m over paying for a company for a 15 - 20 years time period I’d rather stick with the likes of asian paints, Reliance, Hdfc etc… holding is easier said than done through the various cycles over a 15/20 year period when it comes to smaller companies.
I plan on holding my companies for a decade+ too but since they aren’t blue chips like the above 3 names I want to buy a company at a fair price and grow with it so that I give them a fair chance to let their stories play out and keep investing in them as their stories improve.

When you buy them cheap you can keep a track of long term growth drivers/promoter integrity and capital allocation etc… when you buy them expensive I know il end up keeping a track of the stock price more than those aspects and il never know when to average up or if I need to average down since I won’t know if it’s just valautions or fundamentals that are the issue lol. I like cheering upside surprises without worrying that they are already priced in too :slight_smile:

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Well said! Would like to know your thoughts what approach you’d take if you buy cheap but rerating has shot the price to astronomical levels? Like Alkyl, Dixon, may be Deepak too, etc. Now fundamentals have stayed good and constant but current price is far beyond what fundamentals can justify. Do you sell, do you hold, do you average up?

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