Omkar's Portfolio Analysis and Discussion

Q&A: Questions & Answers Portfolio Q&A
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8 years of buy and hold in IDFC tax advantage fund and some thoughts on behaviour premium

I will be completing 8 years of SIP in IDFC tax advantage fund and my IRR is 18.14% as on today

Interestingly fund’s CAGR from 14th July 2015 - the day when I started SIP - till now is 14.4%. Therefore this difference of 400 bps which is the difference between fund’s cagr and my irr - I would like to quantify as a behaviour premium. This behaviour premium was possible because of two things

  1. Discipline of SIP
  2. Not jumping out of the fund but buying more in times like below. This also needs little bit of analytical homework to figure out if style is gone out of favour or whether style is broken

I believe mutual funds are one of the best set of instruments for extracting behaviour premium. I also believe advisors or MFD has role to play in maximising behaviour premium for their clients.

Also last 3 year cagr of the fund is 36%. It will be crime to extrapolate these returns for next 5 - 7 years. I believe fund can deliver mid to high teens long term returns and it remains to be seen how much behavioural premium I can garner over base fund returns.

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Do you envisage such a strategy, where due to high valuations, you get into cash currently and then wait for favourable risk reward ratio to enter at appropriate levels?

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Hi

In my current framework, i am giving more and more stress on starting valuations. Thanks to Harsh who dont miss to stress this point whenever we discuss

Also, I find Nalanda Capital’s thought process very similar to mine. If you read Pulak Prasad’s recent book and my thread, you will find striking similarities but off course, his thought process is way more polished. Even they stress on “asymmetrical risk reward”. They invest when there is extreme panic in markets and rest of the time they just stay quiet

to conclude - my current thinking is that - starting valuation is extremely important but i am willing to give long rope for a portfolio company which has rerated where i entered at low valuation

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In current market, i do not find any small mid cap in my universe at good starting valuation. Therefore i will invest in large cap companies where valuations are comforting - example- large private banks. And when market mood reverses then - if i will start thinking about small mid cap investments

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There are many tools available to quantify market wide mood. Company specific bad news - like incase of IEX now - is hard to decipher. But market wide panic is easy to judge, all you need is courage

ICICI mf publishes equity valuation index in their monthly factsheets which i find very useful

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Yes I read about Pulak Prasad’s book. Their strategy is similar to you in the sense that ,once they purchase some company, they TRY TO NEVER SELL. About buying, if they are buying only in stressful and covid type situations, then such drawdown are very few in decades. In general, any normal investor’s investing lifetime is more or less 4 to 5 decades, if he starts from 30 and hang his boots on 70 or 80…If there are only 4 or 5 such instances where he gets extreme comditions to enter, then may be he wont be able to deploy his capital properly and specially when he has regular income, most of his money will be in cash form or debt. Such opportunity cost of staying out of market in search of such rare opportunities…is it worthwhile?

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378

Hi Mudit,

Fair point. ‘Its worth or not’ - I really dont know. Hopefully i can answer through this thread over a period of time

Just to clarify - i am not staying out of the market but mostly buying large cap stocks post mar 2020. Suprajit and ajanta pharma - which are small-mid caps - still form around 40 - 45% of the portfolio. Most of these positions were built in the last cycle as mentioned in the thread earlier.

I will post latest portfolio details in next few days to give clear picture on current allocations

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379

Today after thinking for many months, i have finally bitten the bullet. Added more Ajanta Pharma because of following reasons

  1. High comfort level with promoters by observing them over cycles.
  2. High odds that we are somewhere at the bottom of the margin cycle.if margins revert then eps can be 20-25% for next few years
  3. Increased focus on branded generics as communicated can result in better better Working Capital cycle and hence better ROCEs and cash conversion
  4. US FDA inspection is completed very recently. Higher odds of Us generic cycle bottoming out
Suprajit eng 26.7%
Ajanta Pharma 15.95%
Kotak bank 9.07%
Bajaj finserv 3.81%
Abbott india 3.57%
HCL tech 2.66%
Hdfc bank 0.69%
Axis Long term equity 21.47%
Bandhan tax advantage less 15.96%
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380

Narayana Health and Cera and the top of my watchlist and I will look to add them at right valuations and you will hear more about them on this thread as and when I develop insights on business

In terms of allocation, the important aspect which I consider - apart from business, management and valuation ( which are all forward looking)- is : whats the maturity of historic data in terms of giving quality signal

More the matured data, I believe better is the quality and that’s why I am comfortable with larger allocations. I think - auto ancs, branded pharma and building materials have higher maturity of past data and thats why portfolio allocations will be higher

Hospitals - past data is not yet matured to my comfort and thats why allocation will be at max high single digit

What improves the maturity of historic data in my view

  1. Higher the number of past business cycles for the sector
  2. Larger number of listed players in the sector
  3. Sectors having large cap listed companies

The drawback of this thinking is - i have to let go all upcoming sunrise sectors like - defence, electronics manufacturing etc. - which leads to extremely large level of FOMO

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381

Hospitals have entered in my ‘Investible Universe’ once I could see “proof” of high ROCE in numbers. Off-course, there are many smart investors who were invested since last 3-4 years and they were rewarded with handsome returns for being ahead of the curve in terms of identifying the ‘change’ in the ROCE profile. Playing for a ‘change’ is not my forte as I am not confident of successfully executing it repeatedly in future. Infact, it may give me success in one/two of odd ideas setting up a ‘honeytrap’ for capital loss in future. Thats why I prefer to play for longevity once the business model is proven ( ‘proven’ in my perception )

I am finding increasing confidence in terms of sustainability of high ROCE business model for Hospitals

I am currently in the information gathering phase. I found following video series very useful, especially episodes - 4, 5 and 6

Next step is building investment thesis. At the same time i am also thinking for an educational purpose if I have 20,000 cr and i have to buy only one business among three for 100% stake, which one I will buy - branded pharma - ajanta pharma, hospitals - narayana health or diagnostic - dr lal path labs

Thank you

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382

Chemical Sector
I tried to read multiple reports, few conference calls and also gone through few spaces but unfortunately I dont think I will ever understand any “chemistry” even if I read and reread the available material on the topic

Having said that when sector going through down cycle, there are lot more nuances I am learning - lot more easily as compared to times when going was good.

I am willing to replicate the same approach I followed in pharma where even without granular knowledge on the core subject by just focusing on broader strategy, qualitative aspects and sticking to the simplest segment - i could build descent allocation.

Vinati Organics -
Even without knowing “chemistry”, I believe Vinati Organics is tested enough by market to prove its a ‘niche’ or a ‘speciality’ chemical play. The historic data maturity to give quality signal is high and I believe data maturity will further increase over next year or two as industry navigates through a slowdown. This I believe can improve decision quality for an investor who does not have expertise in the subject. Once I settled on my limitation then the biggest stumbling block in the process of wealth creation remains - handling FOMO.
There are higher odds that other names like - Gujrat Fluoro will do well in future but the question I will keep reminding myself - Do I deserve those returns if even after reading multiple times - I don’t have grip over subject? This questioning helped me a lot to manage Laurus Lab FOMO

Coming back to Vinati, earlier i rejected Vinati’s management because I thought vinati saraf has tendency to over promise. But I am willing to put more work on management to gain comfort and more conviction so that i can able to hold investment across cycles in future

Thank you

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383

I hold 4 chemical stocks.
Deepak Nitrite, Alkyl amines, P.I.Industries and SRF…What are your views about them?
Specially among Deepak and Alkyl amines, which one is a more secular growth story? Product wise, Deepak has more diversity compared to Alkyl, but its a commodity products …I am planning to sell one of those two, to reduce number of stocks in portfolio.

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Hi Mudit

May be you can find answers in the link i am attaching.
I found it useful to understand some other aspects

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385

Yes. I saw it. It gave me reasons to hold my both stocks deepak as well as Alkyl …Rather I am adding now…But as this sector is cyclical…i will sell both in the next upside of chemical sector. Thanks

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Update on Axis Fund House after Jinesh Gopani’s exit

Background

For those who are not aware, Jinesh Gopani - Head of Equity for the Axis mutual fund left the fund house couple of months back. Gopani was instrumental in defining and executing ‘Growth + Quality’ investment philosophy at Axis. This departure comes after underperformance which started in late 2021 and got exacerbated in 2022. Shreyas Devalkar who joined Axis in 2016 is in charge of managing the fund and also promoted to Head of equity now

With these events, I think its a good time to revisit the thesis

I would like to divide this post in 5 parts

Part 1 - My thoughts on strategy canvas

Part 2 - whats the best combination for portfolio. My thoughts

Part 3 - why Axis over other options within same strategy

Part 4 - changes in portfolio strategy at Axis in last 6 months and its implications

Part 1 - My thoughts on MF investment strategy canvas.
Please note - i like to invest in categories where fund manager has complete freedom to implement strategy across market segments. Therefore small and mid cap funds are not part of this discussion

Axis, MOSL, UTI FLEXI CAP, DSP FLEXI CAP

buy high roe and high growth companies (compared to benchmark) even at higher price. Very high focus on Management capabilities and integrity. Usually fund comprises large and larger mid cap companies with above average concentration in allocations. Stock selection is bottom up with very less overlap with benchmark

PPFAS, Mirae

Buying high ROE companies at reasonable price usually when there are some issues around company or sector. PPFAS prefers compact portfolio while Mirae prefers large diversified portfolios. Inclination is towards large cap companies.

HDFC and ICICI

Taking top down sectoral bets based on macro/ cycle/ valuations. Focus on relative position across ongoing cycles and subsequent mean reversion.

BANDHAN

Stick to benchmark for sector allocation. Bottom up selection of stocks within each sector. Usually individual allocations are capped. Large sector diversification and smaller allocations makes natural inclination towards small mid cap

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Part 2 - What’s the best combination for the mutual fund portfolio - My take
**Part A : Why Bandhan MF is no brainer in my framework **

To keep it simple, I would like to construct a portfolio of funds which has a low beta component to provide stability during market drawdown and a high beta component to provide higher upside in a bull market. All the competition - Axis, ppfas and hdfc etc - is in the low beta part. For High beta there is no competition. As explained earlier in this thread very few fund managers cherish beta in the portfolio. A unique combination of high sector overlap with benchmark, large diversification and small mid cap heavy portfolio give High Beta characteristics to bandhan’s strategy

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Part B - Which is a better low beta strategy - ppfas or Axis. To be continued…

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388

I dont think any amount of time spent from my side will increase my circle of competence in following ideas. I will have to rely on - past track record and past management actions to invest in these companies which gives me some idea of risk played out. Its very difficult to predict any future growth where I dont “critically”understand core subject.

Chemistry

For me - it is very difficult to understand any chemistry and make future predictions using it. No amount of hard work can change this position which arises out of core incompetency. Only company falls in my investment universe is Vinati Organics purely based on past track record

CDMO

From late 2020, suddenly my timeline was flooded with these 4 letters. Life was peaceful before that. I am inclined towards - easy to understand branded plays : branded generics and hospitals. So far results are ok

ER&D and small mid cap IT companies

Can not crack uniqueness in business model for different IT companies. The only way i can play IT sector is through dividend yield of large cap names. 5-6% dividend yield is my entry point

Any sun rise sector - electronic manufacturing, defence, renewables etc

Will invest in future when track record is established

Companies showing only p and l growth without commensurate cash flow growth for whatever reasons

Trying to build FOMO buffers. I am inclined to give up short term gains for the uture benefit. The problem for me is including these companies may make funnel wide open which will increase chances of getting Calital Loss candidate included along with future multi bagger candidate. Better to look at these companies in bear market

Diversified groups

Can not align with them. No regrets on missing out

Any Lenders including tier 1 banks

Cant go beyond Basket of tier 1 financials.

Change in business models or management

Will invest in future when track record is established

Special situations

Will invest in future when track record is established

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389

Portfolio Update

As discussed earlier in this thread, i am looking to build large allocation ( 25-30%) to Tier 1 financials. Building large concentrated sectoral allocation in banks has following odds in favour according to my judgement

  1. Potential to grow earnings at high teens percentage and that too consistently. These 2 factors - high teens earnings growth and consistency - align well with my long term portfolio return expectations of high teen to twenty % with buy and hold approach
  2. Valuations are comfortable and higher odds of bottoming of derating cycle
  3. Improves the large cap allocation of the portfolio which further improves the ability to ‘hold’ small mid cap positions
  4. Not trying to be adventurous in financials because - usually in financials down cycle leaves so much ‘scarring’ that investor becomes reluctant to allocate any money to financials in future cycles thereby missing high teens long term easy compounding story
  5. Overall I believe this trade has descent risk reward and not asymmetric risk reward which is ok because for my abilities and temperament current environment is not a wicket to hit fours and sixes
  6. Eventual allocation will have equal weights of around 6-8% to - hdfc bank, icici bank, kotak bank and bajaj finserv

Current portfolio

Suprajit 20.96%
Ajanta pharma 20.17%
Kotak bank 7.53%
Hdfc bank 3.60%
Bajaj finserv 3.40%
Abbott india 3.18%
ICICI bank 3.03%
HCL Tech 2.64%
Mutual funds 35.4%
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390

Tagging the first note on this topic mentioned on the thread

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Hospitals -
Disclosure :
Hospitals entered my investment universe currently with improvement of ROIC at the company level across the board mainly because of the increase in “mature cohort” as compared to the “new cohort”. Off course I missed large wealth creation opportunity when ROIC moved from single digit to ~ 25% but as I keep mentioning on this thread, that’s not my playing field. I believe the runway for growth is large and if I enter at right valuations, i can find a suitable long term investment candidate
Also, i find this sector easy to analyse as compared to other sectors where I can apply my mind and curate my own investments thesis from large amount of material already available on the topic
Having said that, i am not looking to take any positions in near term but be ready with my thesis if opportunity comes in future

Chapter 1 - The Starting Point
To understand the business strategy across various hospital chains I was looking for a starting point which is simple yet very powerful to accommodate all nuances of the business. Something very fundamental where I can feed all information I read at one end and formulate investment thesis from the other end. Thanks to Jana Vembunarayan (author of the blog - Seeking Wisdom), i think I have found a starting point which I can use to understand business strategy across listed universe. My starting point is a group of 3 formula which are at the heart of the hospital business

  1. ROIC =

( ARPOB/ Cost per Operating bed) * ( Profit per operating bed / ARPOB )

  1. Operational REVENUE =

ARPOB * No of beds * utilisation

  1. ARPOB = f ( price, patient profile, case mix, throughout/ALOS )

In the next part, I will expand on these 3 equations and try to detail my thoughts on the strategy of one of the hospitals using them. Also, in coming days, i am planning to go through transcripts of all listed hospitals and see if I can build any meaningful investment thesisx keeping these 3 anchors

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