Omkar's Portfolio Analysis and Discussion

[OmkarT]

@OmkarT

Mechanical cable is a non glamourous product but finds its use in multiple functions and not dependent on any platform whether EV, ICE or hybrid. Example of some of the applications – door latch opening, seat movement, mirror adjustment, hood and bonnet opening etc. When most of the auto ancs player are busy investing for new technologies or to increase kit value, Suprajit’s focus is to become global major in existing product portfolio. Mechanical cables, being non glamourous, tend to be ‘’Legacy’’ products in the age of e-mobility. Since Suprajit is able to ache out margins which are more than new age products for most of the companies (Export 20%+, Domestic – 16%+), they can maintain their focus on core portfolio and at the same time buy assets at incredibly low prices.

Very interestig to compare the capital allocation decisions. There is nothing good or bad here. Each company is playing based on their strategy

Strategy 1 - Be really good at the basic product and use that as an advatage to acquire competitor cheaply (this is my judgement). Try to be a global champion in something really basic as cable

Strategy 2 - Build up the future capabilities. Front load cost now. If my product clicks - I will reap the benefits.

	Suprajit	Endurance
Target Company	Konsberg - LDC	Maxwell Energy
Business	Mechanical Cables + Electro Mechanical Actuators	Battery Management system
Deal	~315 Cr - 100% stake	135 Cr - 50% Stake (That’s 270 Cr for 100%)
Revenue of Target company	~750 Cr	20 Cr
EBIDTA	10%	Not mentioned. May be Ebidta negative
Key aspects of deal	Penetrating global supply chain	Future play on EV demand
Bonus	Electro Mechanical Actuators business which is 15% of the target company business. Supplying Tesla	Can not find as of now

[OmkarT]

@OmkarT

I have SIPs + additional SIPs i started since Jan (since I believe this underperformance is BAU) … what I have decided as of now is - just to stop additional SIPs

I am going to revisit this decision of stopping additional SIPs as the dust over front running case slowly settles. If my judgement is right, I want to capitalize on the period of underperformance of the fund so that my returns are better than fund’s returns. I am keen to restart these booster SIPs till fund continues to underperform

[OmkarT]

@OmkarT

Axis MF, attributes this to heavy FII selling as mentioned below in their last month’s factsheet

#unnecessary data analysis

In Last one month FIIs are back and guess whos back

Axis long term equity performance -

Overall mood/behaviour meter - Green

What I am feeling about front running scam - forgotten
What I am feeling about underperformance - very comfortable. Convinced that XIRRs will improve

[OmkarT]

I was thinking about the way to replicate my ‘live’ psyche so that over a longer term rather than just documenting output of the ‘’Action’’, I will get opportunity to document how did I ‘’reach’’ to the point which caused me to take that action. For example - in my investing journey I have observed that my change in opinion from High Conviction to a loss of conviction is gradual than sudden. Therefore rather than documenting the reason for ‘Sell’ which is the end output of the journey from High Conviction to losing all the conviction, it will be better to document the ‘’journey’’ itself ( No , I am not drunk ). This becomes even more important with my investing framework of having minimal to zero churn which focusses on sitting ‘tight’ through the periods of short term loss of business momentum or buying ‘right’ by not succumbing to FOMO. The judgement on gauging short term business momentum or identifying what is ‘right’ is very personal and depends on lot of other factors which needs separate discussion

Introducing two new scales which attempt to highlight this journey of change in conviction and degree of FOMO. The idea is to document the ‘’change’’ in conviction levels and FOMO whenever it happens and the trigger for the same.

Portfolio update and Q1FY 23 report card will be published along with above scales for each and every holding in the portfolio

Thank you

[OmkarT]

@OmkarT

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.’

Quoted above is the excerpt from my very first post on this thread. After thinking over more than two years, I have finally reached to conclusion which fundamentally changes the way I view above argument

I always believed in the Mutual Funds but confusion was – 1) what is their role in the portfolio? 2) should mutual fund portfolio and direct equity portfolio influence each other in terms of strategy like mentioned in the above argument or should they be independent in terms of strategy/risk management and finally 3) should I sell all the mutual funds and maintain only direct equity portfolio

Role of mutual funds in the portfolio

Mutual funds are very effective in managing behaviour and imbibing discipline and that is why it is a powerful tool in personal finance. I have realized, for me, attaching FInancial Goal to Mutual Fund SIP is incredibly easy than attaching Personal Finance goals to direct equity portfolio. I am reaching that point in life where I am starting to see medium term financial goals on the horizon unlike few years back when I just had only one thoughtless goal – FIRE

SO…., with above thoughts following are the key decisions

I will not sell mutual fund portfolio and go for 100% direct equity. The allocation of the mutual funds in the portfolio will be influenced by medium term financial goals

I will look Mutual fund portfolio and Direct stock portfolio independently rather than trying to find synergies. That means unlike mentioned in the quoted argument above I will try to construct Direct Equity portfolio having its own risk management rather than depending on Mutual fund portfolio for the risk management

[Investor_No_1]

@OmkarT

I have realized, for me, attaching FInancial Goal to Mutual Fund SIP is incredibly easy than attaching Personal Finance goals to direct equity portfolio

I think you are now thinking on right track. Above is a “Bingo” realisation. Biggest issue with long term stock investing is if and when you need to sell for any medium term goals. Unless we have a strategy for that, we would be more often wrong in sell decisions which will impact long term CAGR badly. Even if we have a strategy in place, we would know only in hindsight about its flaws and it will take multiple medium term goals to refine the sell strategy. IMO one of most difficult test and kills purpose of long term investing…

So MF wins big time here…I also have this task of readjusting allocation between direct equity and MF as per medium term goals target as currently my MF allocation is way below some near/medium term goals…most difficult task at hand I feel as I have been mostly wrong on all my prior sell decisions, baring few exceptions…hence have been delaying this readjustment…can’t say if and how I do it …

[Mudit.Kushalvardhan]

Good that you revisited your earlier thoughts. When i started following your thread, i always wished , you will come back to it later with updated thoughts.
My few observations:

1. mutual fund investment makes you less emotional about investment and start to look at them , more as an instrument/vehicle to fulfill different financial goals. You lose attachment with them. So if i need money for some personal purpose, i can easily sell uints of mutual funds without any hangover of emotions. But same is not true if you tell me to sell some shares of my any core holdings like Deepak nitrite or bajaj finance. I will feel like i m losing part of my own business. Its difficult to sell.

2. If you really give it a deep thought, then frankly our mutual fund portfolio actually allows us to enjoy life and live a luxurious life as we can actually spend them as and when we want. But equity portfolio are like a legacy which we may not enjoy for ourselves at all…may be our children will enjoy that. So frankly sometimes i wonder…if i purely think for myself, then does it really make a practical sense? I want to enjoy my life with my hearts content and may be want to leave behind a little…But certaintly not to compromise for the sake of next generation.

3. There can be a strategy of mixed risk management of stocks portfolio with mutual funds portfolio.
   Just for an example…pharma is not your competence area and dont want to keep any pharma stock in portfolio…then you can manage this risk of zero exposure to pharma by putting some percentages in pharma sectoral mutual fund.

4. since i m not yet able to decide on the proportion of allocation between stocks portfolio and mutual fund portfolio…every month when i have surplus amount to invest, it difficult to decide between the two…rather difficult to invest into mutual funds as my stock bets tempt me to increase their sizes , instead of purchasing more units of mutual funds

[Investor_No_1]

@Mudit.Kushalvardhan

…rather difficult to invest into mutual funds as my stock bets tempt me to increase their sizes , instead of purchasing more units of mutual funds

One another strange thing I experience and it looks more psychology related…when I buy stocks I know the exact price I am triggering the order…say stock x is down 10% today and was down 5% yesterday so I buy it at real time price…however for MF, price is not real time…I know daily fluctuations do not matter in long term but even if I am ok to buy at closing price…that also I get confused as there is some cut off time like 11 am or 1 pm, post which you get next day’s NAV…so if I buy at say 10 am, I don’t know what happens rest of the day if market plunges or goes up 3%…and if I buy at 2pm…I have two day’s uncertainty to handle and if in those two days market cumulatively up 6%, then that’s a lot to loose from perspective of MF

So there is a mental block while buying and proper strategy devising becomes difficult if you are a disciplined slow buyer…It might work with bulk buyers who wait for extreme pessimism and only then buy or even for extremely passive SIP investors…for middle men like me, it seems very difficult…

Thoughts welcome!

[OmkarT]

@Mudit.Kushalvardhan

So frankly sometimes i wonder…if i purely think for myself, then does it really make a practical sense? I want to enjoy my life with my hearts content

Hello
Nice comments. Agree with the most of them except above as “enjoyment” is subjective. Lot of peers on this forum enjoy process and doing research which clearly shows in their work.
I also personally enjoy research but i am still not fully confident to translate that enjoyment in decision making

[OmkarT]

@Investor_No_1

I have two day’s uncertainty to handle and if in those two days market cumulatively up 6%, then that’s a lot to loose from perspective of MF

I believe, same can happen other way also. If you miss 6% this time, you will gain in some other month.
SIP is powerful because it removes this dilemma. You gain some, you lose some. Over a period you will do fine

[OmkarT]

3 year IRR of IDFC tax advantage fund which I am holding is 23% but 3 year SIP IRR is 30%. You can see over a period you will do fine by buying NAV on a pre decided date irrespective of market conditions

[OmkarT]

Details to follow in few days

[Mudit.Kushalvardhan]

Bajaj finserve is a combination of consumer finance (through bajaj finance) , life insurance and general insurance. Out of these 3 verticles, bajaj finance is awesome compounder while in life insurance and general insurance we have much better options like HDFC life and ICICI Lombard respectively. So one can invest in bajaj finance for sure…but what must be your rationale in investing bajaj finserve ( combination of these 3 businesses)???

[OmkarT]

Hi - We have discussed this before

@Mudit.Kushalvardhan

If you are thinking of Just Financials, then it makes sense to invest into Bajaj Finance instead of Bajaj Finserve. because Bajaj Finserve has Life insurance as well as general insurance business along with bajaj finance as embedded together. If Insurance is required then in general insurance ICICI lombard and in Life insurance HDFC life are more suitable candidates. But for pure financial play, Bajaj Finance is enough…Your views Please

[OmkarT]

Plan is to own - Kotak bank + HDFC bank + Bajaj finserv - around 10% each

[OmkarT]

Hello

My investing philosophy at present remains bottom up. My current thought process is that once I decide to partner with management over a long term, I believe its management’s headache to manage tough macro conditions or industry headwinds than me worrying about the same. My job is - making sure I select right managements and then periodically review management/business is on track. The question – 1) how to make sure at the time of investing that selection of management is right and 2) what should be the review period?

Following is my current thought process –

1. Invest in companies which are constantly de-risking their business model while growing their business so that they are making business model stronger after each passing cycle

2. Therefore rather than too much worrying about quarter on quarter numbers, the key parameter which I monitor is how management is pivoting business model to manage business/industry risk. As change of business model takes time, it is good to review progress over a period of 2-3 years which naturally becomes frequency of ‘’review’’ than reviewing business every quarter

How do portfolio companies fair in this assessment ?

Suprajit engineering –

Rather than me worrying about next auto down turn, I believed in management to do that and I think they have done decently well

Ajanta Pharma

Rather than me worrying about GOI policy mandating doctors to prescribe generic medicines, I trusted management to take care any geography specific regulatory risk and to my opinion, they have fairly insulated business model which takes care of such risks. Also as you can see, rather than me worrying about Institutional business which is tender based and lumpy, management was mindful about that as they de-risked their business model which I believe now, is much stronger than 2018

	2018	2022
India – Branded generics	30%	30%
Asia – Branded generics	24%	25%
Africa – Branded generics	17%	18%
Africa – Institutional	19%	6%
USA	9%	21%

Kotak Bank, bajaj finserv and HDFC/HDFC Bank

As mentioned before, My inclination is towards buying diversified financial group than just a lender or an amc or an Insurance company.

Abbott – No change in the risk profile over last 3 – 4 years and that is why it will not get same allocation as Ajanta pharma

HCL Tech – Even though market is favouring niche companies, I would like to invest in companies which has traditional IT component as well along with ER&D which makes more diversified revenue streams and hence superior business model in my view

Next company I am looking to add – PI Industries

To conclude, rather than being reactive to any risk, I prefer to consider as many risks as I can in the beginning. Also, I don’t wish to spend any time on forensics as that is not my strong area and hence I don’t generally compromise on management ‘’perception’’.

[OmkarT]

@OmkarT

Reason for portfolio addition
Earlier my plan was to allocate 8-9% to Abbott india. Abbott and Eris, I believe have a similar growth and returns profile plus they complement each other as Abbott being acute focussed and Eris being chronic focussed. Both have known risks of price control and market share loss in power brands. I believe, Team - abbott + eris, will achieve same returns profile with better risk management. Better risk management will help me to hold on and even add when there is bad news or growth goes off for few quarters

From 8-9% allocation (4% each) I expect low to mid teens returns but extremely high longevity with robust ROEs.

This is not going ahead as planned as I yet to build confidence on Eris’s managemet.

@OmkarT

Second key decision of 2022 is to start building some sort of ‘panic’ fund.

Could not exceute this because of some other commitments. No plans for future

@OmkarT

I am going to revisit this decision of stopping additional SIPs

No plans to start additional SIPs as of now as current MF portfolio is enough of any medium term goals

@OmkarT

Dilemma 3 - mutual fund (cautious side) or direct equity (aggressive aside)

Winner - Tie

answered

[Investor_No_1]

@OmkarT

HCL Tech

What are your thoughts on promoter and management here, considering their group company HCL infosystem has fallen from grace to almost was on verge of collapse from what it was once…a sound and also high dividend yield company. Why they could not save this company? Was it lack of intention or lack of capabilty or anything else? I think those who give top priority to management/promoters, including me, need to delve deeper into this. Views welcome!

Disc: invested as small position in HCL tech. One of reason for not ramping up position was the HCL info story from same stable at back of mind.
Above thoughts only academic and I can be wrong in all my assessments.

[Mudit.Kushalvardhan]

About Abbott India…
I was also scared about competition from generics and also from National List…And also it was corrected more than 30%. I thought i have made a mistake. Also in Abbott thread of Valuepickr, reading all those posts shook my confidence. But fortunately i didnot jump to conclusion
But then i read the annual report, and saw that they are doing quite good inspite of all these problems. If a brand value is good and management is also at par, they manage to sail through these problems. I stayed invested. And stock price also bounced back.
My learning - we should not overkill with studies. And should trust management and also economy. Things dont go from good to bad in india so fast. If we do all this microscopic worries then, i dont think there is a single company that we can buy and hold. All have problem. Be it Asian paints, be it HDFC bank, be it Pidilite, be it TCS, Be it Infosys…All have some or the other issues to handle. Nothing is pristine. We just need to put them on autopilot and just sit back and relax. Let them do the things…Otherwise whats the point of investing…Its better to start a business and manage it.

[OmkarT]

@Investor_No_1

I think those who give top priority to management/promoters, including me, need to delve deeper into this. Views welcome!

Hi - thanks for pointing out. I havent done much work there. What i have observed, i create these mental frameworks but then i tend to give some leeways as everything is not black or white. These frameworks become guiding principals than business checklist.At this stage my opinion is - i am ready to ignore this