Omkar's Portfolio Analysis and Discussion

Q&A: Questions & Answers Portfolio Q&A
349

Here is the argument - why I have again turned positive on Abbott

Warren Buffet is his 2007 letter wrote about Great, Good and Gruesome business. We all know the definitions of Great, Good and Gruesome. Let’s see what Abbott and Ajanta has done from 2016 to 2022.

Pre tax earning for Abbott India by the end of 2017 was 436 cr. To generate these earnings, Abbott India’s capital employed was ( Capital Employed = Total Asset - Current Liabilities ) 1434 Cr. By end of 2022, Abbott’s pre tax earning was 1079 Cr and Capital Employed for same was 3021 Cr. That’s 147% earning increase came with corresponding 110% increase in capital employed. What’s extra ordinary is that if I exclude cash from these equations, 2017’s capital employed becomes = 344 Cr ( 1040 Cr Cash ) and 2022’s capital employed becomes 273 Cr ( 2748 Cr cash). That means business operation could increase earning by 2.47 times ( or 147% increase ) with only approx 80% of the capital required in 2016

Same numbers for Ajanta look like below

2017

Pre tax earning - 648 cr

CApital employed ex cash - 1544 Cr

2022

Pre tax earning - 909 Cr

Capital employed ex cash - 3197 Cr

261 Cr increase in pre tax earning came with corresponding 1653 cr increase in capital employed

There are more nuances to these numbers which I will write in next post

3 Likes
350

I am holding abbott from last 2 years. In between, when Mankind Pharma was giving hell of a competition for Duphaston, I became skeptical…but it regained the business share, …so i kept holding it till now. Your thread was instrumental in building the confidence. I am holding from 19,000 level and currently it crossed 22,000. I feel its a Pharma FMCG type , India centric company, which need not invest into R and D as its a blue eyed boy of a global parent. But currently, whether to increase the allocation at this 22k level, is I am not sure of. I also attended their AGMs virtually from last 2 years and saw that many shareholders are holding it from last 2 decades too. And rewarded handsomely. Sometimes attending AGMs and listening to 70+ years old shareholders make you think, why these guys are holding this company for so many years and then it builds your confidence too. Whats ur take on current valuations? I am sold on business of this company. It will remain viable for long long time.

1 Like
351

ROIC for product and platform business is my key parameter to track for HCL tech. If this number reaches closer to services ROIC, Hcl tech can create much more economic value with modest earning growth. Hcl tech’s track record instills confidence that they can do that over a longer term

image
image1382×720 187 KB

1 Like
352

Few more pointers from 2007 letter and how these concepts reflect in my investment thought process

**Some of the features of great business - **

1. A truly great business has must have an enduring moat that protects excellent return on invested capital

My argument -
The key question here is what are my abilities to find ‘’endurance’’ of the moat. I have no qualms to say that I lack that depth of thinking. Therefore more the risks have played out, better are my odd to judge ‘’endurance’’.

As Pulak prasad says in his recent article - Producing high return on capital employed (ROCE) or free cash flows or profitable revenue growth over long periods is a very expensive signal and we ignore it at our peril.

I believe Abbott has a long enough track record and seen competition and regulatory changes attacking its business castle. Despite that ROCE is maintained

2. Our criterion of “enduring” causes us to rule out companies in industries prone to rapid and continuous change.

I believe branded generics industry is a stable industry which I can understand to some extent. CDMO, I only understand there are three consonants and 1 vowel in the word. Nothing beyond that

3. Additionally, this criterion eliminates the business whose success depends on having a great manager.
This is very true for Abbott india. There were 2 ceo changes in recent years. I don’t even remember who is there current CEO. Even nestle india needed Suresh Narayanan. Abbott india has grown earnings without any star CEO

4. Long-term competitive advantage in a stable industry is what we seek in a business. If that comes with rapid organic growth, great. But even without organic growth, such a business is rewarding. We will simply take the lush earnings of the business and use them to buy similar businesses elsewhere. There’s no rule that you have to invest money where you’ve earned it. Indeed, it’s often a mistake to do so: Truly great businesses, earning huge returns on tangible assets, can’t for any extended period reinvest a large portion of their earnings internally at high rates of return.

Unfortunately I don’t have access to Abbott’s retained earnings as Berkshire has on their acquired company’s retained earnings. Even if I had, higher are the odds of investing that capital poorly. And therefore, going back to previous argument

2 Likes
353

[quote=“Mudit.Kushalvardhan, post:350, topic:53748”]
Whats ur take on current valuations? I am sold on business of this company
[/quote

With so much confusion, I will be comfortable buying more only at attractive starting valuation. Today it looks fairly priced

2 Likes
354

Really liked the way you dissected Abbott based on WB letters…like your note on endurance…

Good to see Abbott’s comparison with Nestle as that’s what I also did to decide few years back…not sure if my decision was right…

Regarding point on CEO …is it because it’s a great business or because most of the strings are pulled by its foreign parent? Also much less levers to pull in India except maybe just market and execute…strategic decisions are taken here or elsewhere…not sure… definitely point to think on…

356

As Axis MF communicated, there is a strong correlation between their performance and FII inflow. As can be seen below, they are topping charts for last 3 months when FIIs are back. 2022 was extraordinary FII selling which reflects in the performance of Axis, ASK and Marcellus. If FII continue buying like last 3 months for rest of the months - Axis, ASK and Marcellus will start outperforming again in my judgement
I am convinced on Axis delivering returns over long term. I also believe they execute better than ASK and Marcellus.

image
image1125×1543 204 KB

image
image1125×2436 285 KB

image
image1125×1532 193 KB

4 Likes
357

Buy and Hold

Before starting a post I would like to clarify

I don’t believe Buy and hold is the only way to make money but it is the approach which i find the most preferable based on my strengths and weaknesses

My weaknesses - not good at stock picking

My strength - patience to some extent

My definition of buy and hold

To me ‘buy and hold’ does not mean one buys and holds each and every position. Its more of an attitude and being mindful.

What this ‘mindfulness’ of the buy and hold drives - is the investment approach. The investment approach having a ‘business owner’ attitude which according me calls for - 1) being extremely selective while choosing new idea as though one is buying entire company and reminding yourself that ‘exit’ is not an easy option even though its just a click away 2) factoring in volatility in earnings beforehand 3) hold as long as franchise is strong and growing. Being ruthless about holding investment and not giving in to ‘Opportunity Cost’ or an ‘exit strategy’ 4) sell only when franchise is broken and not when growth is broken

I have written about each of the four points multiple times on this thread and those views are somewhat constant from the beginning of this thread

The core premise of my buy and hold approach is - promoters of well run company will make better returns than average secondary market investor. And if that promoter is fair with minority shareholders then the parity between promoter and investor reduces which increases odds of going right with having ‘business owner’ like attitude

Ajanta Pharma - Case for ‘hold’

Last 2-3 quarters earnings growth is clearly broken for Ajanta pharma but as per my judgement franchise is strong and humming because of following reasons

  1. Brand growth remains strong
  2. Cash flow generation (both operating and FCF) remains strong
  3. Though ebidta margins are lowest in last 10 years, ROE is still 18%
  4. As per my judgement, the margin pressure is transient and not structural

Eris Life and Abbott India - Case for ‘Sell’

At the same time I think, I would like to sell Eris life because I am not convinced with management in terms of their core strategy as written earlier in this thread. Its not a question whether I am right or wrong but the question of level of conviction I will have to ‘hold’ - when business will face severe cyclical headwinds in future

Reason for sell - not aligned with management business strategy and thats why taking right judgement on ‘hold’ in future will be difficult

Allocation < 1%

On abbott india i have thought a lot and those thoughts are documented. I am definitely going to sell Abbott India this year

Reason for sell - not 100% convinced on long term earnings growth will be more than 15% as reinvestment rate is very low

Allocation < 4%

To conclude,

I don’t believe- buy and hold is the only good long term strategy

Whether to adopt buy and hold or not depends on an individual’s strengths and weakness

Buy and hold does not mean one buys and holds each and every investment

Buy and hold is more of an ‘attitude’ investor has while choosing an investment to start with

6 Likes
358

Hi…Omkar…can you elaborate more on Abbott India decision and its re-investment rate…I am.invested in stock but not sure whether to hold…i expect it as india-oriented FMCG type pharma with good stability and stock returns around 15 to 20.
Also if possible , you can shed some light on its past re-investment rate, coz in past decade it has given stellar returns…so whether current re-investment rate has declined compared to earlier periods?

359

Why according to me “size” of aum will not impact performance?

May market participants believe size of aum as one of the negatives of mutual fund. And general belief is that if aum grows above 20,000 cr then its very difficult to create alpha because fund manager can not participate in small cap companies

I personally believe thats not the case. Indian equity market is just getting started, it will keep flourishing. After 10 years we may be surprised by its depth. SEBI defines small cap companies ranked from 251st position onwards

Following is chart I found from Tata mutual fund. The latest i checked on Screener - 251st company is CG consumer with market cap 17,386 cr

image
image880×455 80 KB

2 Likes
361

Hi @Surender @Mudit.Kushalvardhan

Thanks for your note earlier. As you mentioned Abbott has done exceptionally well over last 5-7 years with hardly any incremental capital. That’s why I termed it as a “great” business in the previous post few days back

The challenge I am facing is - since most of the value created in last 5-7 years is through margin expansion and crunching working capital, how to model next 5-7 years growth in margins and cashflows? I am finding it beyond my circle of competence

If we look at history, revenue growth profile is constant and therefore if I consider low teens revenue growth - how to take any judgment on margin expansion and cashflow growth? Your inputs will be helpful

363

Some more details on above point

Anoop bhaskar believes in keeping as many sector as possible in a portfolio. His argument is - fund manager should not go completely underweight on a particular sector because in markets sector outperforms when market participants are not expecting it. He encourages to find alpha within a sector - by small mid cap under researched idea. One can see from Bandhan Mf factsheet, fund manager has not gone underweight massively on any sector

image
image1125×787 121 KB

Within each sector one can see fund manager is looking to creat alpha by small mid cap idea. Thats why fund usually outperforms when small midcap do well. It also increases beta of the portfolio but thats what Anoop bhaskar cherishes. Contrary to other fund houses he wants to do exceedingly well in bull market while he doesn’t mind taking knock in bear market.

image
image1125×842 163 KB

Compare this to Axis, one can see pure play bottom up approach. I have highlighted the large difference with benchmark. The fact that they dont mention it in factsheet speaks about their “bottom up” approach. I had to do some number crunching to find the data

image
image2528×3772 2.53 MB

Being a DIY direct investor sometimes act as a hindrance for being good DIY mutual fund investors. It is very difficult to have faith in two contrasting “beliefs”. I will be completing 8 years this year on mutual fund investments. Even after 8 years I keep fighting with my ego to let fund managers run their strategies and I buy and hold funds through different cycles. This process has been rewarding so far. Next month will share details around IRR

2 Likes
364

This also to me shows -

Fund manager are not index huggers
First of all Anoop bhaskar proves hugging index is not a bad thing. And second axis despite large fund size has large divergence to benchmark

Also

As I have mentioned many times earlier, according to me - Number of stocks doesnt matter in a portfolio much. Your strategy and execution matters. Strtaegy decides - number of stocks

5 Likes
365

Going forward and starting now I will be giving annual earning updates and my general view on it as there is nothing to add much on qoq basis

FY 23 - Financials

Portfolio companies - HDFC Bank, Kotak Bank and Bajaj Finserv

According to me financials are easy trade if we act dumb. Following chart from hdfc bank ppt is the proof for that.

image
image1125×1351 205 KB

image
image1125×1114 101 KB

Its a consistent high teens earning growth story if lenders are prudent in good times. High teens earning, that too consistent and that too for long term, 10+ years - all this with excellent quality of growth: high teens ROE.I believe this is a high benchmark for even a micro cap company

Therefore, the idea is to go with obvious names but allocate as high as 30% (i am already thinking 35%) and hold across cycles. Over a long term, returns will mirror earnings and i expect high teens earnings growth from large financials. The only effort required is fighting FOMO in times like these when psu banks, micro finance lenders are showing excellent growth and more importantly your fellow colleagues have them in portfolio and you dont :grinning:.

FY 23 pat growth
Kotak bank - 23%
Bajaj finserv - 64%
Hdfc bank - 21%

5 Likes
366

Not only micro finance and PSU banks are adding to FOMO…even fast growing pvt banks too. In my case, i am fighting the urge of FOMO in IDFC First bank…

367

One other aspect of aum size (or winners curse) is that - the part of economic cycle we are in. When economic cycle is strong - like now - lot of sectors are participating and earnings growth is visible across the spectrum. Most of these sectors like manufacturing, power ancillaries, capital good ancillaries have many small mid cap companies as India has not done well historically in these areas. Therefore in strong economic cycle, if you have strong research team then aum size does not matter at all. Harsh tweeted some days back nippon amc outsources research part, that means they can practically research each and every small cap company. This argument can also be supported by, looking at Nippon’s small cap fund which is top performing fund across time periods and which also happens to have the largest aum size in the category

Nippon small cap

AUM size - 26,000 cr

Last 3 year return cagr - 48.5%

Last 1 year return cagr - 33.2%

Number of stocks - 172 ( i am not kidding and no wonder they outsource research )

But when economy growth will slow down in future, size will feel the pinch as few companies will have good earnings growth and thats why portfolio having companies across broader spectrum will suffer. But if we are optimist on India’s future - then essentially we are gunning for broad growth and thats why aum size constraint is less relevant

3 Likes
368

This also shows that position sizing and having 15 stocks in portfolio is not a requirement for good performance. You can have 50 to 100 stocks and still you can be number 1

1 Like
369

I think retail investor has constraint of research bandwidth but has advantage of portfolio size

At the same time - fund manager virtually has no research constraints but has to mange large portfolio size

2 Likes
370

Suprajit engineering - fy 23

Rev growth - 50%
Ebidta growth - 23%

Journey towards the box continues

Quoting - Jim Ryan (president, control division - Suprajit). One of the “differentiation” any manufacturing company can offer is “service” when products are commoditised (or I would say not so sexy product like control cable)

Suprajit’s newly formed Control’s division which has manufacturing, sales & development and R&D footprint across - americas, Europe and asia makes suprajit a formidable player with unmatched global presence. This acts as an advantage in following two ways

  1. Suprajit can now offer to supply from multiple locations to one location. Example OE in USA can be offered to supply from US, mexico, india, Hungry and China depending on price points and desired delivery ETA
  2. They can act as a strategic supplier for global platforms. OEM will not have to find different suppliers for different continents

In terms of content per share parameter, Suprajit has formed new division - Suprajit Electronics Division which will focus on digital clusters, electro mechanical actuators and rotary sensors in the first phase

Suprajit will start reporting performance of these two divisions from next quarter onwards which will help to judge progress towards the box effectively

2 Likes
371

IT- FY 23

HCL Tech

Rev growth - 18%

EBIT growth - 14%

IT continues to remain illusive sector to me in order to understand the “uniqueness” of company offerings but at the same time hard to ignore because of its track record,business and management quality. Therefore i will wait to ramp up position at right valuation. At current rate low teens eps growth and 3-4% dividend yield does not cut my threshold requirement of high teens earnings growth that is why allocation level remains low single digit

Pharma - FY 23

Ajanta pharma

Rev growth - 12%

Ebidta growth - (-16%)

Lowest ebidta margin in decade but ROE still 18% and 40% increase in CFO

Abbott india

Rev growth - 9%

Ebidta growth - 11%

Roe - 32%

Reinvestment rate - 4%

Ebidta Margins keeps creeping up. Now at 23%

Though pharma is not a flavour of market at present, I feel Ajanta pharma can deliver high teens earnings growth next 3-5 years. Abbott india, i am still monitoring. Either it will go to higher allocation or i will sell as mentioned before

Following is my watchlist

Narayana Hrudayala and Krishna Institute of medical science

Cera and astral

Poly modicure

Tube investments

I will update my views once I do some more work on these. Having said that, this is a prep for next cycle as I dont think current valuations give good risk reward in this cycle

2 Likes