Omkar's Portfolio Analysis and Discussion

[OmkarT]

Hello fellow investors,

After procrastinating for almost a year, I am attempting to write this post on my investment journey so far, my current status of the portfolio and my thought process. The idea is to keep this forum as a running diary and try to learn from you all with your comments and inputs.

About myself

I am a typical engineer + MBA guy from Mumbai who finds himself in the bell curve’s average range in the IT industry. With some luck and persistence, I managed to harvest currency arbitrage opportunities. Currently, I am in the UK with my wife and do not have any complaints about my work life. I started investing in the year 2014 post my MBA. After seven years, I can say with some confidence that ‘Equity Investing’ is something that interests me. Hopefully, I will persist with this “side hustle” over the coming years (and hopefully decades!)

A brief overview of my Journey from 2014 till now

You guessed it right; I was drawn to the stock market in the raging small-cap bull market of 2014 with the belief that the best way to invest is to concentrate on the next small-cap multi-bagger idea. Having convinced with my abilities to identify a so-called multi-bagger, I started building a concentrated position in one idea from 2014. I was euphoric about the company’s prospect and expecting many X returns in the next 2 to 3 years. The plot was set where Mr Market was ready to ambush a newbie, and it did not disappoint. The bear cycle in the broader market from 2018 – 2020, followed by the deadly Mar 2020 crash, challenged my temperament and thought process. The bear cycle’s emotional impact was magnified because of my concentrated position, which made me question my approach. It made me introspect about how I should think about my risk appetite and how should I attune my risk/return knobs.

You all must be wondering (or rather judged already!) - Did I lose my capital in the concentrated bet? Did I make a horrendous mistake by believing Warren Buffet’s famous quote – “All you need is three investments in your entire life”?

Hold on to your thoughts, you will know that by the end of this post, but before that, I would like to share some of my important learnings about myself, my skills and my temperament.

Lessons learnt

Some of the important aspects which I learnt about myself and investing are -

1. Concentrated bet makes me overdo business analysis. Over-analysis increases anxiety and does not give breathing space to hold a company for a very long term.

2. To make the right judgment on any business is very difficult as there are a lot of “unknown unknowns” and moving parts. These unknown unknowns become evident in the bear cycle. Example – liability issues in NBFCs, US market down cycle for pharma etc. With this inability to make a sound judgment, I also allude to the way I did my school, engineering studies, and even the MBA program. As a student in the Indian education system, I could score well in an exam by simply remembering the concepts without developing any ability of critical thinking. Therefore, the tendency to believe that “I understand the concept completely” is very high only by reading about that concept (and not reading between the lines). It worked well for me to get degrees, but it exposed my decision-making abilities in investing. I understood the world is more dynamic, and the concept of “circle of competence” is non-existent for me.

3. My ability to construct a portfolio is not better than (even as good as) a fund manager. If I am going to construct a portfolio, it is very difficult to earn higher returns on a net worth by myself compared to a fund manager.

4. What makes sticking to the process in equity investing difficult is the market cycle and its changing texture. The market cycle at a time usually favours only one particular style of investing, followed by a different style at the start of the next cycle. This is stark different from FD or RD, where FD in one bank gives me the same return as FD in another bank. The same equity market cycle can give varying returns for two portfolios depending on the investment style. It is important to recognize that a portfolio’s underperformance due to style going out of favour is more than a norm.

To summarize, lessons learnt were contradictory in nature. First, a Concentrated portfolio makes me anxious or over analyse the business. Still, at the same time, my ability to construct a portfolio is limited (or I must say inferior to the options available in the market). Second, how should I improve my ability to hold the investment for a long time by objectively weighing the under-performance? (In business or MF performance)

Implementing my learning in portfolio construction

1. Diversify a portfolio to allow each position to run for the longest time possible and avoid over thinking about a particular business. Use mutual fund to construct a “portfolio”. Even if I happen to outperform average mutual fund returns, the low to mid-teens kind of a return by mutual fund without using much of your intellectual bandwidth, just by focusing on behavioural aspect was alluring because of two reasons. (1) If selected right, mutual funds can create desired compounding effect with a good process in place which can absorb larger capital as well (2) It leaves your intellectual bandwidth and time free to focus on ‘something else’ and that ‘something else’ in my case is - ‘Investing in two or three wonderful businesses in my circle of competence.’

2. Hold your position across market cycles and do not get bog down by the 2-3 (or even 5 in some cases) years of under-performance. This can be further nuanced depending on whether you are investing in a mutual fund or direct stocks

a. Direct stock investing –

In direct stock investing, I started thinking like an owner of a business than as an investor. This simple change in thought process enabled me to take a very long term view of a business. Whenever I want to judge a business, looking from the owner’s lens helps to stick with the company for a very long time.

I agree with your point that, for a retail investor, thinking as an “owner” is only possible in a utopian world. The idea is to invest in a company where promoters try to make money for themselves as well as for their fellow shareholders. Again, this is a qualitative judgment, but historical data indicates the promoter’s integrity. I will try to elaborate in an individual stock thesis, which data points I used to decide the promoter’s integrity.

b. Mutual Fund

Each mutual fund house has a style of investing, and under-performance of a style is a norm. Therefore understanding whether the underperformance is because of style is out of favour or because the process is broken is important. It is common for a style to be out of favour for 3-4 years. An investor needs to stick to the same mutual fund in a period when it is under-performing to gather more and more units.

My current portfolio

That brings me to the last point of the post - my current portfolio construction and the answer to the question – What did I do with my concentrated bet? Well, I still hold that concentrated bet with the same enthusiasm and bullishness that I used have 5 years back. When I speak about a company’s investment thesis, I will discuss how did I think through the bear cycle.

My current portfolio has two sections –

1. Mutual Fund (around 50%)

a. Axis long term equity – Started SIP in Dec 15. Ongoing (XIRR – 17.9%)

b. IDFC tax advantage elss – Started SIP in Jul 15. Ongoing (XIRR – 17.39%)

I know you will have a question on why both funds are Tax schemes. It’s more of a coincidental, and I will try to explain about Mutual Fund selection process in the follow-up posts

2. Concentrated Bets (Around 50%)

a. Suprajit engineering – holding since 2014. Averaged up and down from 2014 till Feb 2020. Average cost price/share ~ 250

b. Ajanta Pharma – Holding since 2017. Averaging up and down from 2017 till to date. Average cost price/share ~ 1400

c. Kotak Mahindra Bank – Started building position in the second half last year. I will use this whole year to build a position

I will explain in detail the investment thesis of each idea in upcoming posts. Also, please note that I don’t try to time market. I invest a predefined amount of monthly savings on the 1st of each month

Note – I am trying to see if I can use Saurabh Mukherjee’s ‘Consistent Compounder template to create a diversified portfolio with minimum time and effort, which will take care of the diversification aspect. I haven’t made much progress on this; it is still a work in progress.

[imvp]

Liked your openness to share your story in detail , Just want to assure you, many of us are on same boat. It takes minimum a decade with continous learning to have bare minimum understanding of the market. It is important to develop your investment philosphy , with which you want to continue rest of your investment journey. Keep learning & one day J curve will take off & you will be astonished with the outcome, but till then survival is key. All the best & good luck.

[gaurav_vimal]

I think for a good investor, one has to be conscious about how much he is paying. The idea of monthly SIP in quality business more of seems to me speculation, on the idea of that market will keep continue to give you high valuation.(quoting ben graham speculation theory)
Even I am myself into a concentrated portfolio. But my idea of a concentrated portfolio is a little different. What I do is, I start a recurring account and then started to look for opportunities. After finding the desired opportunity I fully invest in a single company. I also wanted to mention, I never forget the valuation and always try to pay for the discounted valuation.
When the next month comes what usually happens is, you have an extra amount to invest: But, either the share run-up, or it falls further. If it falls further I buy more, if its price already run up I started to look for more opportunities.
Now, I am having five companies in my portfolio, but I always ask myself why I am having this or that. The reason for this is it helps me to not fall in love with any company. Contrary to this I am having in my mind that I wouldn’t be selling it ever. So whenever I buy the company I buy in huge quantity.
I know in the future I might be ending up with lots of companies, but I will be buying only once or twice a year to counter this problem. So in ten years if I will be having 10 more company I have no problem. Everything will be in a deep discount.

[gaurav_vimal]

I also think you are doing amazing with your mutual fund picking technique 17% is no joke. Plus, I find Saurabh more of a speculator. I am not saying this in a derogatory or in any bad way. But, he has to show consistent performance to his investor but you don’t have to. So, i don’t think retail investor has to go for momentum speculation style investing. Its not that tough to find okay value if not deep. so i prefer that… happy investing bro.

[OmkarT]

@imvp @gaurav_vimal Thanks for your inputs

@gaurav_vimal Point well taken on valuations. For me I agree that valuation framework is lose. Usually I do back of the envelope calculation to check Market Cap / Operating (or free) cash flow to take a judgment. I also keep track of PE and PB ratio compared to historical value. Beyond that from the chatter in social media we know obvious names of companies with high valuations. I try to keep track of that. But I agree to your point on valuations.

[OmkarT]

Investment Thesis: Suprajit Engineering. (Post 1/N – Auto ancillary business model)

I will divide the investment thesis of Suprajit into multiple posts (to buy me more time J). In this post, I will try to put my views on the auto ancillary industry.

Kit value – At the heart of the business model

In most cases, auto ancillary business is focussed on the “Kit Value”. Usually business model revolves around the argument, how the auto ancillary player can increase the kit value for a four-wheeler or a two-wheeler to grow faster than the industry. The kit value can be increased horizontally by adding more products or it can be increased vertically by introducing a more advanced version of the same product (example – conventional lighting to LED lighting). This results in a larger share of business with OEM and a larger scale of the business.

With the ‘’Kit Value’’ being the bedrock of the business model, I would like to discuss what are the strengths and weaknesses of the business at the industry level.

Strength 1: High entry barrier

The single most important strength of any auto ancillary company according to me is the high entry barriers in the business. If OEM has to change the supplier for the specific part or a platform then it’s a long process and usually takes more than 2 years. Thus I believe auto ancillary businesses have a reasonably strong moat imbibed in their business models

Strength 2: High quality of debtors

OEMs - the customers of auto ancillary business – usually have a very stable financial profile. It is very rare for an OEM to default on the payment. That is why auto ancillary players have a very high quality of debtors and debtor write-off is very rare.

Weakness 1: Margin squeeze

Auto ancillary business does not have much pricing power. The prices are usually decided by the OEMs and passing on the cost pressures is a challenge because there is always competition ready to undercut the price. Margins are further squeezed during the cyclical downturn when there is a low demand for the products. Following is the margin profile for the top auto ancillary players. Some players (like Minda Ind, Endurance) are trying to improve margins by playing the ‘’premiumization’’ trend

Company Name	Market Cap	Lowest Margin is last 10 years	Highest Margin is last 10 years
Motherson	Large	6.49% - FY 13	9.84% - FY 17
Bosch	Large	15.2% - FY 20	21.23% - FY 17
Amara Raja	Mid	14.04% - FY 19	17.86% - FY 16
Endurance	Mid	6.26% - FY 12	16.35% - FY 20
Minda Industries	Mid	4.56% - FY 14	12.49 – FY 20
Minda Corp	Small	5.01% – FY 13	10.74% - FY 18
Suprajit	Small	14% - FY 20	16.94% - FY 17

Weakness 2: Shorter product life cycle and inability to scale beyond Indian shores

The recent disruptions in the auto industry like BS IV to BS VI transformation and shift from IC engines to Electric engines resulted in shorter product cycles. This is coupled with the fact that barring few players, for most of the players; the market size is limited only to India. This results in the need for introducing more and more products to grow better than Industry

Weakness 3: Cyclicality

I believe cyclicality is one of the deciding factors which keeps investors away from the auto ancillary business. The fate of auto ancillary players is decided by the cyclicality of the auto demand. Some of the antidotes to automotive demand cyclicality of the business are – aftermarket business, exports or global business, and non-automotive business. But since the business model is focused highly on OEM to improve kit value, when a new product is introduced it is always to impress OEMs without giving much consideration about if that product has aftermarket or non-automotive business. Following is the revenue profile of auto ancillary players as per 2020 data.

Company name	Market cap	% Revenue from global business	% Revenue from aftermarket	% Revenue from non-automotive
Motherson	Large	>90%	–	–
Bosch	Large	–	20%	15%
Amara Raja	Mid	10%	45%	30%
Endurance	Mid	30%	5%	–
Minda Industries	Mid	17%	14%	–
Minda Corp	Small	14%	17%	–
Suprajit	Small	40%	25%	20%

Having discussed some of the important parameters of business in the next post I will try to discuss how Suprajit’s business model is an outlier compared to other auto ancillary players. I will try to post both – positives and negatives – of the business model

[OmkarT]

Investment Thesis: Suprajit Engineering. (Post 2/N – The outlier)

According to me, the most important factor which separates Suprajit from the other auto ancillary business is its ‘product selection’. For selecting a product in its portfolio Suprajit has the following criteria – (1) A product should be propriety in nature (2) it should be used across different types of automobiles – two-wheeler, three-wheeler, Four-wheeler and commercial vehicle (3) it should have aftermarket business (4) It should also have a non-automotive business and (5) Finally, it should have export opportunities.

Suprajit currently has 2 major products - mechanical cables and halogen lamps and operates 3 brand strategy: Suprajit for automotive cables, Wescon for non-automotive cables, and Phoenix for halogen lamps

With this, Suprajit’s business model counters all the weaknesses of the auto ancillary business while maintaining its strength. Let’s see that from the reference to the previous post

Weakness 1: Margin squeeze – propriety product helps to etch out superior margins

Suprajit is very choosy about the product selection and selects only propriety product in the portfolio. A propriety product is the one that has its own/industry specifications, own market, and which is not designed by the OEM. This helps Suprajit to be a cost worrier and run down the costs in different processes compared to process-oriented products like forging and casting etc. or OEM designed products like lighting panel etc. where OEM has more control over the processes (Source – One of the conference calls of Suprajit. May need to verify)

I would like to note here that, Suprajit’s margin is in the guided range of 14%-16% from 2003 which was the oldest annual report I have seen for the company

Weakness 2: Shorter product life cycle and inability to scale beyond

Indian shores – Product selection criteria give more legs. Export business – Jewel in the crown

Since the avenues for the single product are multiple (because of conscious selection), it gives the ability to Suprajit to become ‘King’ of a product rather than becoming ‘Jack’ of multiple products. From 1985 till today, Suprajit’s product portfolio has only two major products – mechanical cables and halogen lamps.

Another peculiar characteristic of Suprajit’s business is the nature of its global business. In most cases, for an auto ancillary company, global business is not an ‘Export’ business. Manufacturing units are set up closer to OE manufacturing units to become part of the global supply chain. In the case of Suprajit, again because of the conscious product selection, most of the global business is export business. Suprajit front ends with OE customers from tech centers in the US and Europe, mass manufactures back in India, and stock the orders in the warehouses located closer to OE units. This business model is highly profitable and scalable. The automotive export strategy is the most profitable among all businesses of Suprajit

Weakness 3: Cyclicality – Global, aftermarket, and non-auto business to rescue

Because of its product selection criteria, the current revenue profile of Suprajit is – 26% aftermarket business, 21% non-automotive business, 18% automotive business, and 35% two-wheelers. With just two products, Suprajit is catering to the Indian auto sector, global auto sector, Indian aftermarket, global aftermarket, non-auto sectors like outdoor power equipment, agriculture, construction, and power sports vehicle, etc. They are also contract manufacturing for other labels like Osram, Lumiled, Mannetti Marreli, etc. Suprajit also supplies OEM’s aftermarket channel which is currently included in 35% of the two-wheeler business. (Example – control cable in Hero pouch as a Hero Genuine Parts rather than Suprajit pouch). In the automotive business, despite a global slowdown, Suprajit is increasing its business with global OEMs like VW and BMW because of market share gains. All these factors make Suprajit’s revenue fairly steady along with steady margins. In fact, Suprajit does not have any customers with more than 10% of the overall business. (1CX10 is already achieved what say motherson shareholders?)

Having discussed the positive aspects of the business model let’s look at the negative side of the model

Chinks in the armor – Less focus on technology and R&D

With all the benefits of the product selection criteria, it invites one of the significant disadvantages of not having technologically superior products in the portfolio. Both the products – mechanical cables and halogen lamps are Class B products (lower in the overall cost of the vehicle) and not cutting edge products. With the kind of disruption happening today, the risk to a business model which is based on ‘efficient manufacturing’ but not on ‘technology’ can come from nowhere.

Having said that, the company is taking steps towards making itself a ‘Technology’ company than just a “frugal manufacturer” having a sharp focus on a client. I am happy to discuss the business model in more detail if required.

I would end Suprajit’s discussion in the next post where I will give my thoughts halogen lamp business. You will have to wait till next week for that . Have a nice week ahead!

[OmkarT]

I got bored of writing about one company continuously therefore in this post I am going to take the liberty to digress from the natural flow of explaining my portfolio and try to discuss how I go about judging management quality. I will try to give some examples to make the discussion interesting and live rather than just dry theoretical ‘gyan’. I will also try to give negative examples to keep the discussion genuine. I do not mean to demean any entrepreneur or its shareholder when I am citing a negative example. This is purely from a learning point of view and I respect opposite views on my argument.

Following are some of the points which I focus on to judge a management quality

Capital Allocation Skills: past 10 years ROCE - The Holy Grail

The tool I use – Stockshatra 10 year X-ray scanner Sample

I believe the Return on Capital Employed for the last 10 – 15 years is the definitive data point to judge the capital allocation skills of management. In 10 – 15 years, the business usually goes through at least one negative cycle or challenging macro pressures. ROCE during the negative cycle of the business or during challenging times gives you clear identification of capital allocation skills.

This criterion helps me to reduce the error of ‘’commission’’ because I am choosing companies with a good track record which is even more important when you are running a concentrated portfolio. But it increases the error of ‘’omission’’. The classic example is Laurus Lab. Till 2019, the ROE of Laurus Lab was below par and that’s why I did not even give a thought to read about the company and you know what I missed. To be honest I am at peace with myself missing the bus. You win some and you lose some. First of all my ability to judge any business (and that too pharma!) is poor and added to that the Laurus did not have any past track record till 2019. If I am thinking that - In 2019 if I would have made the right judgment on Laurus Lab by reading annual reports and conference calls, etc. then I am not honest to myself about my intellectual capabilities.

I would also like to highlight that this criterion does not filter only large-cap businesses. In India, we have a reasonable number of small and mid-caps which clear this criterion. These companies are usually ‘Large Caps’ in their niche.

Management Guidance Tone – Reveals a lot about business

I think management’s tone in guidance reveals a lot about the quality of management and even that about business. I have observed that the management of companies that need continuous external capital tends to be over-optimistic in the tone. Higher stock price gives more money per share sold in QIP. If the business is churning free cash year after year and growth is taken care of by internal cash then Stock Price becomes irrelevant and that’s why guidance is usually conservative

Some of the examples of bullish tone according to me are Motherson and Granules India. Motherson’s five-year plan is very aggressive and they need external capital to fulfill that. It becomes a self-fulfilling prophecy where you give aggressive guidance and try to keep the share price elevated because you need capital from the market to deliver on those expectations. Similarly Granules India, till last year whatever capital allocation goof ups they had in the past, needed a lot of external capital to fund capex and that’s why they end up giving very aggressive guidance.

But on the other hand, if you see companies like Ajanta Pharma which were very meticulous in their capital allocation they usually give conservative guidance ( Example - low teen growth and high twenty margins in 2020) but end up delivering much better than that.

Focussed aggression – Needs the patience to build dominant niche

Rajiv Bajaj is his recent interview made a statement – ‘’I believe that most manufacturers are a 20% EBIDATA company but the reason the industry typically averages at 8-12% is because they do lots of stuff that they should not be doing where they don’t have pricing power, where they either have to either directly or indirectly discount and that is what then hits their bottom line’’

Focused aggression needs a lot of patience and eventually serendipity kicks in after years of hard work. Focused aggression by nature demands long-term thinking by accepting short-term challenges. I believe the auto component industry is the best industry to highlight this point. If you compare the margins and return ratios of diversified companies like Valeo, Minda, Motherson Vs Focussed companies like Osram, Brembo, Amara Raja, Suprajit numbers clearly show the benefits of focused aggression

Managements who don’t give FU%^& about Analysts

A lot of managements focus too much on making shiny annual reports and presentations and speak what ‘’Analyst’’ would like to hear in the conference call. Sometimes even capital allocation decisions are driven by what the ‘’Analyst’’ thinks. Endurance announcing capex for Tyres and withdrawing that subsequently next day because so-called ‘’Analyst’’ took the stock down 10% in a day is the classic example. Analysts (Including me) bother about the shorter-term horizon of 3 to 5 years but running a business is a long-term game of decades. Therefore thinking too much about what so-called analysts are thinking is saying ‘’as a management, I am also thinking short term’’.

These are some of the points I keep in mind when I read annual reports and conference calls. Let me know if you guys focus on any other qualitative or quantitative parameters to judge management apart from obvious ones like salary and third-party transactions etc. I want to stress again that I respect all the managements and its shareholders. Running a business successfully is not a joke. Negative examples are just for educational purposes to highlight my thought process and not to demean any management.

Cheers

[OmkarT]

Hi All, in this post I am going to explain my take on Phoenix Lamps Division of Suprajit. I would like to give my thoughts on threat from LED. I am trying a new way to present thesis. Hope you will enjoy it. This will be the last set of info on Suprajit

cheers

[OmkarT]

[OmkarT]

[OmkarT]

[OmkarT]

[OmkarT]

Before going to analysis on Ajanta Pharma, I want to reproduce notes of one of the Prof. Bakshi lecture I attended. With the kind of uncertainty, health, and macro challenges we face, I feel that the lecture by Prof is the most relevant today. The lecture was on the mental model - ‘’Occum’s Razor’’. I hope you will find it useful in these tough times. Pardon me for my language errors, I am just retyping handwritten notes over here

Occam’s Razor

A problem solving method that makes fewest assumptions. This mental model can be applied in equity market to reduce ‘’noise’’ from actual ‘’Signal’’

How to apply Occam’s Razor

By ignoring macro or political news and focussing on ‘’Internal Compounding’’. [Showed illustration on how money invested in S&P has grown at healthy rate even though there were string of bad news throughout the history]

Internal Compounding of Earning Retention

Thought experiment

	Company A	Company B	Company C	Company D
Initial Investment (INR)	100	100	100	100
ROE	6%	6%	20%	20%
Management fees as % of earning	20%	20%	20%	20%
Dividend pay-out	0%	100%	0%	100%
Prevailing Interest rate – 10%

Learnings

• A & B are bad businesses but B is owner oriented management. Therefore even though A & B are will trade at discount to initial investment, B will sell at premium to A. A & B both are value destructors
• C & D both will sell at premium to INR 100 but D will sell cheaper to C because D does not have scalability (As it is returning entire retained earnings)
• Try to find, buy and hold of companies like type C
• There are companies of type E which don’t need capital to grow and they are very rare
• Valuation and entry price for type C – As India is growing economy, what looks expensive is not expensive when we look back. Gave example of Asian Paints. Even on the larger base by taking 3 year rolling period, it can be proved that Type C creates incremental value and hence eventual increase in market cap
• The only scenario in which the concept of ‘’Internal Compounding’’ will not be rewarding to shareholders is in case of bad governance

EPS and Internal Compounding

EPS =

(A) Net Income / Sales X (B) Sales / Asset X © Asset / Net-worth X (D) Networth / Sales Outstanding

(A), (B) and © have limits up to which it can be improved but (D) does not have any limit. ‘’Maximum you can lose is 100% but there is no limit gains in investing’’

My type C companies – Suprajit, Ajanta pharma and Kotak Mahindra

Stay safe people, Cheers

[OmkarT]

Portfolio selection of a pharma stock - An Armature Take

Before starting this note on how I included Ajanta Pharma, I will be honest to you to say that I do not know even ‘P’ of pharma, still Ajanta forms a significant part of portfolio. Let me explain how I made selection and then build conviction over last 4 years.

Even though pharma sector is difficult to comprehend for an average retail investors like me it is the only sector according to me which can give you earnings growth in recession years (FY 2020 is the most recent example). Therefore it is hard to ignore this sector. Also if you do little bit of research then you will realise this sector has gone through at least two down cycles in last two decades and because of that ‘’Risks’’ are widely known (at least most of them). I again repeat, risks are widely known. This is a significant advantage to retail investors because if you know most of the risks then the quality of decision making is better

The Filter

Let’s understand what these risks are. This is no rocket science and widely available information.

• US FDA risk of banning export if best practices are not followed
• Pricing pressures in generic market due to higher competition
• Price controls in Indian markets

I used this information along with general filters like past track record and management quality to zero down on a company. It pretty armature model but never the less that’s what I used

What I like – Diversified business model

Ajanta pharma, according to me has de-risked its business model. With that I think Ajanta can withstand any risks while maintaining its franchise. Growth may get hampered for year or 2 (which I don’t mid) but franchise will be intact

Region Wise De-risk as of FY 20

Region	% of Revenue
India	30%
USA	20%
Africa	24%
Rest of Asia	26%

Business wise De-risk as of FY 20

Region	% of Revenue
Branded generic - India	~30%
Branded generic - Asia	~28%
Branded generic - Africa	~14%
Africa Institution	~18%

How I built my position and thought through underperformance

Green indicates growth and red indicates de-growth. I started building a position in Ajanta from somewhere in FY 17. As you can see, From Q1 FY 18 to Q4 FY 19 the performance was patchy because of multiple reasons – (1) US pricing pressures (2) Costs of new facilities were added in P&L but they were not generating revenues (3) De-growth in Derma in Indian business and (4) De-growth in Africa and Asia branded generic business. Most of these issues were industry-related or macro issues. Therefore I was confident that the franchise is intact though growth is broken. I held on with my existing position though I could not add more as I was waiting for management to deliver on US business. And when they did, starting Q1 FY 20, I kept on increasing allocation. 70% of my current allocation is added after Q1 FY 20

Focussed Aggression

Following points highlight focussed aggression of management according to me

• Sticking to only 4 therapeutic segments in India business – Cardio, Opthal, Derma and Pain. Pain was added recently
• Consolidating branded generic business in rest of Asia and Africa
• Only 7 – 8 ANDA filings per year
• Focussing all energy in US and not diversifying in Europe

Conservative guidance

Source – ICICI Direct reports on quarterly updates on Trendlyne. All along FY 20 and 21, Ajanta usually gave very conservative guidance of 10-12% growth in branded generic and flat growth in Institutional business along with 28 – 29% EBIDTA. Starting Q1 FY 20 they are delivering much more than that

Things I don’t like and I am ignoring still being vigilant

Pledge shares – 15-17%

FOMO

I must admit, I did feel FOMO when Alembic Pharma and Laurus Lab gained massively in short period of time. But then Question I asked to myself – ‘’Will Agrawals sell all their stake in Ajanta to buy stake in Alembic and Laurus?’’ and I got my answer

Cheers, have a nice weekend

[OmkarT]

Apologies, my second table is wrong. Posting data again correctly

Business wise De-risk as of FY 20

Region	% of Revenue
Branded generic - India	~30%
Branded generic - Asia	~28%
Branded generic - Africa	~14%
Generic – USA	~20%
Africa Institution	~8%

[ishan]

This post is very interesting @OmkarT

It is correct that Ajanta Pharma has not seen any US FDA issues in the past. And that can be attributed to low exposure to US markets in the past. But the exposure to US markets is increasing for Ajanta Pharma. Therefore cannot rule out the possibility of US FDA issues in the future. The impact of US FDA alert or ban on Ajanta Pharma would be significant due to increased exposure. It might sound improbable today as we are not hearing about US FDA issues very frequently. But the impact of an improbable event is worth considering to create a robust portfolio.

From a different point of view, the companies which have successfully handled USFDA issues in the past might be a better pick as the management is aware and build know-how to handle such situations if one arises in the future and things to take care of so that such situation never arises.

One downside of a diversified business model is on management focus and too many moving parts. For example, in the case of Ajanta Pharma, it is branded and generic business, different geographies and different strategies, etc. Compared to that, management focused on Indian markets with a diverse product portfolio such as Abbott India might get better management focus and devise better long-term strategies.

Overall the posts are very nice and interesting. I enjoyed going through them.

[OmkarT]

Point well noted Ishan. I am closely tracking Abbott India which has less moving parts and better ROEs. The recent underperformance can provide good opportunity to allocate. Going slow.

One of the downside of Abbott India I felt is that its revenue is heavily dependent on power brands. In recent quarters, impact on just one brand - Duphaston is causing drag on overall revenue. I am sure management will introduce better version of the product to fight back competition and this is in fact is a very good opportunity to include in company the portfolio.( Good news and good price never come together)

I am still not 100% convinced whether - Business model which is driven mainly by power brands (according to me) is better business model compared to more granular distribution of revenue over multiple products and geographies incase of Ajanta

[OmkarT]

In this post, I am going to talk about my ‘Sell’ decisions so far and losses (if any)

Before going to the topic, I would like to highlight two points that weigh heavily on my sell approach.

First - Who makes more money – promoter or institutions or a retail investor?

As Mr. Ramdeo Agrawal has said - out of promoters, retail investors, and institutions; the largest wealth is created by promoters over the long term. Why because – They don’t sell stake in their companies and switch to other companies when their own company is underperforming or ‘valuation’ has breached the red zone. They stick with their own companies in all seasons and their reasons for selling stakes are completely different than what investors think when they trim or sell companies in portfolio completely

Second – Reinvestment risk and portfolio management

This sounds counterintuitive but I don’t consider myself as a good portfolio manager but a naïve retail investor. Portfolio management I feel is a science and it is a way to manage your risk. I am managing that risk with a slightly different mechanism where I am paying a fund manager to manage my portfolio and trying to understand few good companies where I have comfort. And that’s why Reinvestment risk is real when I am selling one company and buying a new company. I can go wrong at two places – (1) selling existing and (2) buying new which reduces chances of success.

Considering these points and keeping my quest to keep a promoter-like attitude, I rarely sell companies and if I sell, I jump out of ship completely. I have never ‘trimmed’ my position. To date, in the last 7 years – I have pressed the sell button only twice

Granules India – Exited with minor gains (2016)

The reason I sold Granules India was that I was not happy with following capital allocation decisions.

1. Entire Omnichem JV saga where they were going cater only one client and that client retracted leaving JV in losses
2. Entering and exiting in Biocause JV
3. US pharma deal. I was getting a sense that they were trying too many things at the same time
4. All these decisions impacted their cash flows and return ratios (Franchise was impacted in my opinion)

Talwalkar’s – Exited with minor loss (2016) luckily

I think I was drunk when I bought Talwalkars no other reason can justify that. These were the early days and the day when I realized the mistake, next day I pressed the sell button and came out with a minor loss. My cost price per share was around 310 and I sold at 280 / share. The absolute loss was in 4 digits. One look at the cash flow statement was enough to take that decision

These are the Sells so far, other than that in direct investing and also in MF, I have stuck to what I have bought and added moreover years.

[harsh.beria93]

Hey! I have enjoyed reading your thoughts about businesses and capital allocation. Thanks for sharing them and I hope to learn more from your experiences and improve my own processes.

@OmkarT

Considering these points and keeping my quest to keep a promoter-like attitude, I rarely sell companies and if I sell, I jump out of ship completely. I have never ‘trimmed’ my position. To date, in the last 7 years – I have pressed the sell button only twice

Does this mean that in the last 7-years, you have bought 5 businesses (Kotak, Suprajit, Ajanta, Granules and Talkwalkars)? It seems that you are interested in buying structurally good companies with industry tailwinds and reasonable management. If that’s the case, how could you only identify these 5 businesses in India in the last 7-years? Or to put it in another way, are these the only 5 businesses available that meet your criteria?

Looking forward to reading your thoughts! Again thanks for your time