Nirmal portfolio-Request advice

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

Long time follower of this wonderful community, posting for the first time.

Was a mutual fund guy starting 2010 till 2018 and am gradually shifting to stock thereafter. I continuously invested in the then popular MF schemes only to have received sub optimal return later. Started a little bit of stock research myself with my limited knowledge and gradually enhanced my understanding, trying to learn regularly from the experts .

Would request feedback/criticism/suggestion on my portfolio.

Company ==> Portfolio Percentage

  1. HDFC Bank => 14.93
  2. TCS => 9.23
  3. Bajaj Finance => 7.74
  4. Asian Paints => 7.04
  5. L&T => 5.9
  6. Vinati Organics => 5.88
  7. Aarti Industries => 5.43
  8. Bajaj Auto => 5.22
  9. HCL Tech => 5.15
  10. Pidilite => 4.85
  11. Relaxo => 4.47
  12. Berger => 4.33
  13. Nestle => 3.86
  14. ITC => 2.66
  15. PI Industries => 2.54
  16. HDFC AMC => 2.22
  17. Kotak Mahindra => 2.02
  18. Maruti => 1.85
  19. Amara Raja => 1.69
  20. Marico => 1.51
  21. Titan Company => 1.47

I took the opportunity of the recent market crash to buy many of the above stocks and will add more in this downturn. I am building this portfolio with a minimum 10 years view in mind and would like to concentrate on not more than 25 stocks (15-16 would be ideal). Having a full time day job, I fail to spend much time on stock research and analysis on a regular basis, hence trying to choose only high quality franchises. Have read in this forum and in many other places that it’s more difficult to decide to sell a stock than buying it - so I would try minimum churn in portfolio. Having said that, I am not emotionally attached to any of my holdings and would not hesitate to get out, if need be.

Can I add few small/micro caps in my portfolio (heard that, if only a single stock becomes multi-bagger I would make a fortune)? If so, appreciate some names from experts for long term.

Thanks

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2

I like the selection of companies as well as how you have invested with conviction in companies you believe in. I would like to know your thought process behind stock selection and weightage you have given to them. But, very solid portfolio overall.

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Hi,

Good to see yourself graduating from MFs to direct equities. Also sounds got lucky to have invested during the recent market crash. My views on your portfolio are:

  1. You have a full time day job, then how do you plan to keep a track of 21 stocks for next 10 years? Too many stocks, you need to cut down to 10 high quality names.
  2. I would be a bit cautious on the financial names and autos.
  3. Portfolio lacks pharma name.
  4. VP platform has so many small/micro names, but again the question is do you really have time to track these? if no, just stay away and stick to the high quality names only.

All the best.

4

Continuing the discussion from Nirmal portfolio-Request advice:

why do you say MF returned sub optimal returns? I see mirae asset emerging bluechip has generated ~19% CAGR which is more than any large cap stock could generate ( HDFC 17% CAGR in last 10 years).

I do buy direct stocks but my long term investments are geared towards MF’s because we the retail investors are at the bottom end of the pyramid. Any structural changes in industry, head winds or tail winds , corporate governance issues we will be last one to get to know.

Till few months back no one was interested in pharma but now everyone wants piece of it.

This is my personal opinion may be i am wrong. Just that i wanted to buy but i am waiting for now.

  1. HDFC: Head winds for now. If market slides further then we may see further correction due to anticipated NPA’s.
  2. TCS: May have head winds from demand side because most of the clients want to minimize their IT spend and reduce expenses.
  3. Bajaj Finance: Same as HDFC.
  4. Asian Paints: Great company but very high PEG.
    5.L&T : Last 10 years returns very dismal.
  5. Vinati Organics: Great company, Great ratios but They have limited product mix. They have 4 products all of them have very high market share. Now they are foraying into IP which is low margin product so blended OPM would continue to slide further. Still a great company, I am waiting for it to correct further to accumulate. Considering future growth for me it is not right price.
    7.Aarti Industries : In my portfolio. Overvalued now. would add more when it is fairly valued
  6. Bajaj Auto : Auto industry down turn, demand slow down , may take time for the industry to turn around.
  7. HCL Tech : I will just stick to TCS. Industry leader

Rest all i didn’t evaluate so may be they are good companies though may be bit higher valuations but these are quality companies which might give you decent returns but how next few months will turn out would be key. CRISIL predicted -5% GDP growth which is not a good news. best of luck!

5

Thanks @sameernics for your feedback.

1. Agreed with your point, I plan to reduce the number to probably 15-16. I saw this investopedia article on diversification to reduce the risk in an concentrated portfolio. Although this article was written with US market in mind, but it seems to be applicable to Indian market as well

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2. Chosen the high quality finance names as on today. Most likely, these names will not get bankrupt and will not disappoint in the long run.
Understand now that Auto is cyclical, thus not adding any further position. Got them at fair price, so not selling them at the moment - will dispose off when market revives.

3. Correctly identified. Honestly speaking, I do not understand even a fair bit of Pharma. Tried to google it, but always got confused with the jargon like CRAMS, API, Generics, Branded Generics, US FD approval, ANDA approval and many more.
Moreover, always got overwhelmed with a plethora of names (e.g. Sun, Lupin, Cipla, GSK, Aurobinda, Ajanta, Divis etc.) .

That’s the reason, I consoled myself saying that I perhaps do not need to have any Pharma name given I have zero knowledge on this sector.

Recently, I was checking a small cap name Caplin Point only on the basis on return ratios and it appeared to me as fairly valued (could not analyse other fundamentals because of lack of knowledge).

4. Yes, VP members are really active in analyzing small/micro cap. In fact, I got 10-15 names in this forum. I can stomach 10% allocation to quality small/micro cap.

However, if the company turns out to be a crap, I will probably be the last one to know that and that too after loosing 90-100% value. Given the multibagger kind of potential, I have a desire to invest in 4-5 small/micro caps. Please suggest if you have some names in mind.

Thanks
Nirmal

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Thanks @lokeshreddy2007for your response.

I did not have Mirae fund :smiley: Had the then popular names (e.g. HDCF Top 100, HDCF Midcap, HDCF Equity, ICICI Val Disc, Quantum Long, ICICI Dynamic etc). The only fund which gave more than benchmark was Axis Long Term. Gave these funds sufficient time to perform, but got disappointed. The most costly mistake I did was not to track the portfolio regularly. Had I have done so, I would get rid of the under-performers long back.

Still have a significant portion of my portfolio in MF (2X in MF, X in stocks, 0.5X Cash) and would like to gradually shift to direct stocks.

I have gained a bit of knowledge on analyzing stocks, and most likely the stock portfolio will be able to deliver 14-15% CAGR over long term, given I do not make a big blunder. Totally agreed that in case of corporate governance issue, we will be the last person to know that - and that too after the stock corrects by 90-100% - that’s why tried to diversify to minimize the risk.

Like you, I have hold cash for now and waiting for any correction. But, even if no correction, I will still accumulate in a staggered manner.

HDFC Bank, Kotak, Bajaj Finance => High quality names which are unlikely to go bankrupt, that is my rationale. Will most likely give decent return in long term given finance is the pillar of an economy.

Asian Paints and Berger=> Growth is good so far. Not sure how COVID will treat these stocks. My perception is that not many people will be in a position to paint their houses given the cash crunch due to job-loss. Furthermore, won’t we be reluctant to invite paint labours in our house with the fear of getting the infection?

L&T ==> Bought long back (2015) when I knew only the full form of the company and nothing else. Will dispose it of when the market revives.

Vinati ==> Points well taken, Will monitor the performance. Do they have moat around the limited number of products ?

Aarti ==> Was expecting a fall after Q4 result, but it did not correct much.
Few points:
-Debt to equity is reducing but still more than 0.6
-Promoter stake is decreasing in almost every quarter
-ROCE decreased a little
-Sales and Profit growth decreased in FY19-20.
Not sure whether these are red flags yet, please share yours thoughts.

Bajaj Auto and Maruti => Will dispose of when the auto cycle revives.

HCL Tech => Point well taken. The growth in better than TCS, that’s why thought of taking position. Will monitor this.

Thanks
Nirmal

7

Vinati Organics: ATBS - contributes to 50% of revenue and they have 65% market share.
IBB - 45% market share.
IB - Only manufacturer in India, Raw material for ATBS. So they are fully backward
integrated.
IP: New product. Only manufacturer in India. Low margin product.
PAP: raw material for paracetamol. went back to lab.
So they have significant market share with very high OPM for their top 2 products.Their competitor Lubrizol exited hence there was significant increase in OPM which may normalize going forward.
Ms. Vinati Saraf guided 15% growth instead of 25% hence the feeling that it is overvalued at the current price.
Aarti ==> Was expecting a fall after Q4 result, but it did not correct much.
Few points:
-Debt to equity is reducing but still more than 0.6 – It was well over 1 but reduced now. Management wants to keep it below 1 but they don’t have any goal of making it debt free company
-Promoter stake is decreasing in almost every quarter - They did QIP of 6%. One of the promoter died so they executed his will. Aarti has 44 promoters so it is bit complex. I am bit worried about this trend as well. But big chunk of reduction is due to QIP. Rest 1-2% sold by promoters in open market.
-ROCE decreased a little - Ok, I am not sure of this. But i guess it is still over 20
-Sales and Profit growth decreased in FY19-20. - Aarti has formula based pricing. When crude prices go down their sales go down as well because they pass on the benefit to customer but crude goes up their sales go up as well. So sales is not the right way to track the business. Profit growth is the right parameter to evaluate aarti industries. So according to company there was significant slow down in agro chemicals, automobiles and textiles which impacted demand side and the shortage of nitric acid (Deepak nitrate couldn’t supply nitric acid) impacted supply side. Higher expenses due to commissioning of plants for long term contracts and commissioning of R&D center in Mumbai led to increased expenses in Q4. so net net it was tough year for aarti but they did deliver moderate results.