My portfolio updates and investment journey

joinjp2003 · January 2, 2024, 4:36am

As I have already notes for CleanScience, posting that too for reference.

Source: screener.in

Summary rationale: There are less than 20 listed businesses which boast a combination of 5-year OPM > 40%, 3-year ROCE of 20% and 3-year free cash flow positive. Clean Science is the only chemical sector company in the list, few are from pharma and IT sector while 8 were finance companies.

With such fantastic numbers can I ignore this company saying it’s just another chemical company? Or I should say this is a great business going through difficult time?

Clean Science is a capex fruition and my hope of margin mean reversion play. Company envisaged capex plan of 300-500 crores in FY2023 which as per management shall result in ~1500 crores of revenues in 3 to 4 years. This means company can almost double the revenues over the next 3 to 4 years.

I hope margin mean revert but there is increased competition in MEHQ and HALS products. Company’s first mover advantage and already large scale (#1 or #2 in world or India) shall provide some support. In addition, company’s new products (HALS, TBHQ, and DCC) have started contributing 25% to total revenues. This showcases company’s ability to innovate, and diversify away from flagship products (MEHQ, Guaiacol, and 4-MAP). Hence, I am betting on management to continue to launch newer products through innovation and cost advantages to protect margins.

Last 5-year EBITDA (OPM) margins are in the range of 30%-50% and last two quarters margins were 40%. The question is do margins go back to 30% or they go to 45%.

Lets build a scenario:

So based on above table return expectation in best outcome is 34% CAGR (i.e. market cap shall more than double) and worst outcome is 8% negative CAGR (i.e. absolute loss of about 30%).

Generally, I would like to buy when even worst case is a positive result. However, in this case I am taking a leap of faith (on management).

Right to win:

Ranked globally either 1 or 2 in most of the products in terms of market share
Innovation and new product launches - non-flagship products now contribute 25% of volumes
Backward integration – Most of Anisole is produced for captive consumption

Risks:

Increasing competition in HALS and MEHQ products which can pressurise margins
Maturity of flagship products
Regulatory risks

Competition: Camline Fine, Vinati Organics, and MNCs.

Thanks
Disclaimer: I am not a financial advisor and nor a SEBI registered Analyst. The content shared here is only for learning purpose. All the names mentioned here are for example purpose. I may buy more, exit or partly sell the stock/bonds without any prior intimation.

Ballaji_Vijayan · January 4, 2024, 7:03am

Good summary, thank you. I am a bit concerned about the over dependence on china/ revenue from China due to economic and geopolitical risk. Although company is stating that this will come down, there is not a meaningful change yet. What do you think about this risk?

joinjp2003 · January 5, 2024, 8:52am

@Ballaji_Vijayan thanks for commenting. Any Indian company supplying to China should be seen very positively. No one sells cheaper than China and if some company is able to do that then it means cost efficiency. I was shocked few years back when i saw permanent magnets also exporting to China. With this logic I simply bought it.

In a chemical company the bigger risk is that some new player comes and starts dumping that product. Hence, bigger risk is that some Chinese player is able to produce it and supply it locally. That will be bigger risk.

Ballaji_Vijayan · January 5, 2024, 9:21am

Good view point and hopefully company can keep ahead of Chinese suppliers. It is also interesting that they have good margin products selling to China so obviously got some moat but I felt that China risk was high for me personally.

I will keep following the stock and good luck!

thakurvi · January 5, 2024, 2:34pm

Valuation of clean science is still not giving the comfort. I think it is the bull market that is keeping the share price elevated otherwise market do not spare such company’ with very high valuation along with headwinds in sector.

sko5prasad · January 6, 2024, 11:41am

Which platform you use to scout for the lucrative opportunities in bond platform. Zerodha only offers T bills/G-secs and SDL’s.

joinjp2003 · January 6, 2024, 11:55am

I use paytm money and icicidirect… I have given more information here My portfolio updates and investment journey - #39 by joinjp2003

lloydom · January 8, 2024, 6:01am

@joinjp2003 What are your thoughts on Yash Chemex, seems to be under the radar and revenue is improving, but is the company management dependable?

joinjp2003 · January 13, 2024, 6:20am

Hi @lloydom , apologies for delay. I noted company has several related party transactions. I dont understand why it went for ipo for its subsidiary yasons chemex care. Also this is a nano cap. I stay away from such profies.

Shakti_Srivastava · January 13, 2024, 4:05pm

Jaiprakash ji, your views are full of wisdom and your clear thinking regarding your picks is quite a learning.

Wanted to know, after exiting any stock do you ever think to buy it again…like Danlaw Technologies is doing good, will you buy it again.

joinjp2003 · January 16, 2024, 5:22am

@Shakti_Srivastava, thanks a lot for your kind words. This motivates me.

I just went and checked my transactions in Danlaw, bought at ~80 rs in 2021 and sold within 8 to 9 months at ~250rs. current price is over 1600.

I remember when I was working on it, it was very difficult to make a case for it. Especially understanding its subsidiaries, parent (Danlaw Inc.) relationship .One thing which I knew was use of telematics (data logger) by insurance companies was gaining traction. I went in past to read annual reports of 5 to 10 years back. Generally I dont do it. The main reason to do all the hardwork was to increase my allocation but I was never able to do it. So ultimately I sold it.

One positive happenned since then is now Danlaw Inc. holds some stake in it. However, i think real cream is still at Danlaw Inc. Danlaw Inc. seems to do much more attractive work due to its data (on ADAS), software and closer to customer advantage. However, Danlaw (india listed company) shall benefit from making hardware for Danlaw Inc. Nevertheless, I still would like to see Danlaw Inc. and Danlaw India merge so I dont have any fear of oversell and potential related party issues.

I have not followed the company in the last couple of years so I dont have much of view on it. However, any day if parent is reverse merged to India company then I shall think of reading on this again. Having said that its an interesting company and should keep eye on it. Some of the additional things which i note in annual report since my last read is that they are now talking about predictive maintenance, IOT related data etc. which shall increase the hardware demand (they manufacure).

Thanks for putting this back on my radar

joinjp2003 · January 16, 2024, 7:06am

Hi @Shakti_Srivastava on your question on whether i enter stock post complete sell, it happens very rarely. One instance i remember is Permanent magnets (PML) which i discussed here: My portfolio updates and investment journey - #26 by joinjp2003

Rentry is based on substantial change. So in case of PML, it was their move to go up value chain which can result in 3 to 5x revenue jump. I dont remember any other business. But i will add it here if i remember anything.

Krishna19 · January 18, 2024, 2:28am

Sir, Any stock in ur radar for Electronic based and in semiconductor.

Krishna19 · January 22, 2024, 9:19am

Sir, what is ur criteria to select a stocks and how to decide valuation of any stock.
I’m selected stock zen technology, RVNL, Fedral bank,CDSL, plectra green but buy very small quantity due to fear.
Sir how to overcome with this fear pls guide.

joinjp2003 · January 22, 2024, 2:09pm

@Krishna19 apologies for delay in responding. On EMS I was invested in Dixon from i think from 2019/2020 to 2022/23. Then I entered Syrma from IPO period (2022) and exited few months back. Both became expensive for my comfort so sold them. Dixon seem to be mistake as I exited around 3500.

None of the EMS seems reasonable to me now. However, I have found similar trend at reasonable price in telecom products.

In semiconductor I dont have any exposure. Only Ami Org has some portion of semi-conductor chemical play in my portfolio. I am not able to find anything at reasonable levels in the field.

joinjp2003 · January 22, 2024, 2:21pm

@Krishna19 let me tell you on outset, fear is good. The thing you know kills not the one you dont know. Basically confidence/overconfidence kills not the doubt. When I was learning to drive I was scared but chance of collission was low as I used to drive slow.

So be fearful and focus on diversification and asset allocation. I had fears so I increased my cash/bonds to 50% of my portfolio. I have 20+ stocks. I continue to compare earnings growth with valuations. So I will not buy anything where PEG seems above 2x. PEG is PE multiplied by growth. So in case expected growth is 20% for next 2-3 years then I dont pay more than 40PE.

This is generic gyaan, but it is all situation/personal. My higher cash levels reflect my personal situation also. If I have job or secured about job then my cash levels might have been only 20-30%.

If you are young and energetic you can be slightly bold, keeping in mind your dependence on money and your loved one’s dependence on you. Please balance.

Please note that I am not a financial advisor. Please consult your advisor for close and in-depth consultation.

Manoj_Dhanauri · January 22, 2024, 3:46pm

Hello sir
Don’t you think 20 stocks is more because people who make money in market they have 2/3 stocks only which they have maximum exposure.thank you

joinjp2003 · January 23, 2024, 8:27am

Hi @Manoj_Dhanauri thanks for your comments.

In general, people who make money from 2/3 stocks with maximum exposure is a output/outcome rather than a input.

People who become reach with 1 stock are generally the founders/promoters. While rich investors’ 2/3 stock become big out of 100s they bet at different time through the life. For example our own late RJ sir bet on 100s of stock in his life time, Titan was one of them. Its not number of stocks but power of holding (buoyed by business and key drivers understanding) has made it big for him/his family.

I have never heard of any large successful investor who has become successful with less than 5 stocks. Nick Sleep is the only one who is close to it.

My portfolio has many small caps (59% of portfolio value) and midcaps (34% of value) hence i need to own more to save myself from stock specific risks and my overconfidence. My largest holding Rategain is 16% of portfolio as of today, top 5 -45% and top 10 - 71%.

Having said that, investing is personal and situational. I am planning to share a bigger post on number of stocks can be in a portfolio through one’s journey.

Disclaimer: I am not a financial advisor and nor a SEBI registered Analyst. The content shared here is only for learning purpose. All the names mentioned here are for example purpose. I may buy more, exit or partly sell the stock/bonds without any prior intimation.

Cshar · January 23, 2024, 11:13am

Mohnish Pabrai is a investor who takes bet on less than 5 stocks, just heard that his top two bets are 85% of his PF rightnow.

joinjp2003 · January 23, 2024, 1:51pm

Hi @Cshar thanks for contributing.
I just did a quick search and from various sources I found Mr. Pabrai has 9 stocks. 3 in US (worth 1400 crores), 3 in India (1200 crores) and 3 in Turkey (I beleive over 2000 crores). Total value of his investements in equity seems to be ~5000 crores.

However, point to note is that his networth as per investopedia is about 16000 crores. What does this mean? He has invested only one third of his networth in stocks. His largest investment seems to be in Alpha metalurgical resources of USD114 million i.e. about 1000 crores. So just to put in context this is 20% of his total equity portfolio and 6% of his networth.

So understanding the context is very important. If I have a stock with 20% allocation and it is 50% of my networth or is it 6% of my networth. If its 50% of my networth following someone else’s 20% equity portfolio then may be its not right. However, if its 6% of my networth with even higher 60-80% of equity portfolio then I dont care much and also no one else should.

In 2014 when late RJ sir bought shares of Spicejet every friend of mine was trying to jumpin to follow him. However, my friends were putting high % of their networth in SpiceJet vs. sir’s less than 0.5% (13.4 crores from his networth of ~10000 crores).

So we should not follow the ones we dont know much about.