Dear seniors and my fellow forum members,
Thank you for welcoming me into your esteemed forum. I would like to be part of this growing forum by learning about markets and also enrich the discussions with my knowledge, whatever little that I have.
Let’s get straight into my portfolio:
I like my portfolio to be concentrated because:
- I have to understand the sectors that I’m invested in. The factors like what stage of growth the sector is in, what tailwinds the sector has, the future of the sector if this can be predicted to a fair degree etc.
- I cannot understand more than 5 different stocks at a time plus a few other stocks (2 to 3) that will be in radar for investment making it 7 to 8 stocks for review.
- I’m looking for 25-30% returns per year and I believe any further diversification will lead to dilution in returns.
- I have the stomach to digest the market swings. I do not usually lose sleep over falling stocks as after all it’s about money. I lose sleep over well being of my family and myself!
- My portfolio has major influence of valuepickr and theequitydesk forums. I value the research done by fellow members and I deeply respect them for the passion they bring in to stock evaluation process.
The rationale behind my stock picks:
All my above portfolio stocks have been discussed at length, so I will keep the rationale crisp and clear.
Repco Home and GRUH Finance
Basic sector story: My inspiration comes from observing other markets, especially the US markets. The story of Fannie Mae and Freddie Mac is being relived here in India with a lag of about 20 years. Houses or rather homes for low income groups is a very important area for political progress. The votes for the politicians come from the root levels. The progress of a political party depends on the progress of the weaker sections to a larger extent. For a sector to develop, it not only requires administrative and entrepreneur will but also political will. I do not mean political will is necessary but it will fasten the progress.
Growth potential: It is a well known data that the housing need is under penetrated for the low income group economy. If India’s overall GDP grows at 8% I strongly believe the economy at low income group grows at much faster rate. So, invariably the companies depending on this sector will grow that much faster. It is easier for people earning 10000 per month to graduate to 15000 per month when compared to the one earning 100000 per month graduate to 150000 per month.
Who does not love to borrow money for his benefit? Which company (bank/NBFC) does not love to lend money for its benefit of growth? Lending money to credit hungry developing markets is very easy while getting the money back is difficult. Whichever company can also get back the money will be the ultimate winner. So, here comes into the picture the RoEs, NPAs, Book Value (ca n we trust the book value?), NIMs. Only after this comes into picture the Revenue growth and Profit growth. The revenue and profit growth are certainly very important to me but not at the cost of RoE and NPAs.
Now that the opportunity size is huge, the sector having tailwind, government is benign towards the sector it all comes to the companies which have better metrics and management pedigree that will win my heart. REPCO and GRUH made it to my shortlist and so they are in my portfolio with my full conviction.
Risks: Any government regulations in capping the NIMs just to be super benign to the lower income people, risks in terms of NPAs, prolonged slow down in economy are the major risks that I envisage. I do not foresee any of the above for now and strongly believe the economy is on the uptick. We just need a dose of patience.
I will continue to monitor the the above metrics and will sell out only at bubble valuations. It is anybody’s guess when will it come. But hopefully, I will have my eyes open during that time.
I do not bother too much about the valuations as that is for the markets to decide, I only bother about how the business is doing and would likely do in future? I only bother about BUBBLE valuations. As Lynch says on similar lines, when my driver or maid talks about stocks, I will sell out my portfolio. Seriously, this is my indicator.
The above rational stays the same for both REPCO and GRUH. I’m aware that GRUH trades at cloud 9 valuations but it pays regular dividend to the tune of 30% at least, so you actually need to increase the book value by 30% when compared to the ones that do not pay dividend at all and then compare the RoE. In my opinion, RoE is the most important metric for any company.
Basic sector story: Very simple. Buffet’s Gillette philosophy influenced me here. People have to wear inner wears and also buy leisure wear. An industry like food has many variables as each person has different taste. So, scaling up and maintaining the standards as per people tastes is difficult. Standardisation of taste is difficult. But for underwear, it’s simple, a comfortable cotton cloth at a reasonable price is all that is needed. Here for PAGE, the input is a commodity (cotton) while the output is an UNDER WEAR? No, it is WRONG. For PAGE, the input is a commodity while the output is a BRAND. PAGE worked very hard to reach this level. Any company that has a commodity as input and makes a brand out of it will have super moat, high financial metrics like RoE and RoCE. Once this stage is reached, it is fairly a simple business but not easy.
Growth potential: I have read some where that during the initial stages of an economy upturn, the inner wears will do well first! During a prolonged economy slow down all that a company with a brand has to do is accept there realities and works towards strengthening its brand during the slowdown so that it will be in an enviable position when the economy turns up. THIS IS EXACTLY WHAT PAGE HAS DONE. I was very happy when page was limiting its EBIDTA margins at 21% and spending the rest on productive advertising. Page has a long way to go before its heady growth comes down. Of course there will be outlier quarters where growth will slow down but you just need to keep this in mind to observe the trend. If the company is continuing what it is doing, there is no need to worry on the business front. Please do not confuse between business growth and stock growth. Stock growth sometimes will lunge ahead of business growth because of SUSTAINABILITY and PREDICTABILITY of business. You just have to wait for few quarters for the stock to catch up. This is what I do. Switching on and off will veer you away form the mission. The new categories of business and women’s category will play an important role in Page’s success story from here on. The high RoE, RoCE, dividend payout are the quantitative metrics to be kept an eye on along with of course sales growth and profit growth.
Risks: Again prolonged economy slowdown which I think may not happen, promoters do something funny with the business which I think is a very remote outside chance. Any removal of TUFS scheme by government may be a small hiccup but should be manageable.
I have taken a position very recently based on the below factors so my knowledge is not very high on the sector. I have been reading about this for the past 2 months on and off. Once I have the conviction, will increase the allocation to 20% - this is my present thinking which is liable to change anytime.
- India’s consumption of pesticides is very less when compared to developed nations and it will only go up from here.
- With increasing middle class, demand for high quality food will go up along with the quantity required to achieve self sufficiency in terms of food security.
- Pesticides/Herbicides/Fungicides are need to
- Reduce man power required during sowing etc (input phase of agriculture) which in turn reduce costs of agriculture
- Increase output as well as productivity as well as quality of the output
- A bet on Salil Singhal’s vision. High integrity and wants to make it a billion dollar revenue company which I believe can be attained over the next 2-3 years.
- Growth in CSM business: Icing on the cake. I will have to further understand this business though have a starting knowledge.
**I’m looking for 25% to 30% annual returns in my above portfolio for the next 3 years, that is until 2018. I cannot predict businesses for more than 3 years ahead with high degree of certainty.
Am I on the right track in my portfolio selection, thesis, return expectations?
Any tweaks required?
Seniors and fellow members, kindly help!
The above are entirely my personal views which are of course biased as I own all the above stocks in my personal portfolio. I’m not a SEBI certified research analyst. I may sell, switch, buy on my discretion even on the next day of putting my views based on my requirements and views. Kindly do your own due diligence while buying/selling stocks or consult any professionally qualified person for advice, certainly not me!