Omkar's Portfolio Analysis and Discussion

Q&A: Questions & Answers Portfolio Q&A
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Cera Vs Astral
I am also doing some reading around building material segment though i am aware I have missed chance in this cycle and whatever efforts I put will only be helpful in the next cycle whenever that starts

As a long term investor whenever in doubt- I always think about transaction in terms of entire business than buying piece of the business

And therefore - the question I am trying to find out which strategy is better?

  1. Creating a brand and leverage that brand to enter multiple segments in building materials like astral
  2. Focus on the existing segments and try to go deeper by focusing on product design like cera

Cera always try to maintain their exposure to ‘projects’ business to around 35% and rest of the 65% business is focussed on consumers through their dealer network. Strategy is to build brand recall by focusing on product design and innovation. According to their claim new entrants in the sanity-ware and faucet-ware from “pipe industry” are focussing on “project” segment which mainly driven by pricing

On the other side Astral also claims that they are investing heavily in product studios especially for their faucetware and sanityware portfolio to target mind share of end customers. So far for their products the decision makers were - plumbers, contractors etc but not end customers

More I will study both companies in coming months, hopefully i can answer above question. My natural inclination is always towards companies embracing “focussed aggression” - be it ajanta, be it suprajit or vinati. Therefore my bias is towards owning Cera over Astral for next cycle. I will keep this thread updated as when I gain more insights

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I hold Astral and started tracking position in Cera. Recently attended Astral Call, and the promoter is saying to give them 10 years to fully get the benefit of a consistent compounder. Cera is going into adjacencies and becoming strong player and capturing the market share, slowly but permanently. Both are good and promising companies. About Cera, I am only concerned with current valuations, whether today is better to enter or wait for some.correction.

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Which adjacencies you mean?

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Faucetware ( already has established market share) , premium wall and floor tiles

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What are your views on valuations of Cera?

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My views on Asset Allocation

I believe there are two types of asset allocation - 1) Tactical asset allocation and 2) strategic asset allocation

Tactical asset allocation is used to diversify outside of equity asset class to manage volatility in returns while investor is on her long term journey. Each person is unique and has different tolerance to volatility. Investor usually get to know about her ‘accurate’ risk profile only in bear market

Strategic allocation is goal based. If financial goal is less than 3 year away then it doesn’t make much sense to invest in equity. Also, as one approaches closer to a goal which was attached to equity investment, one would like move away from equity to debt.

Personally for me, i am focussing more and more to improve my tolerance to volatility and thereby i dont have any tactical asset allocation. ( i know someone who saw 2008 must be nodding her head reading this but as I keep saying ‘Dil hai ki manta nahi’ ). I have 100% allocation to equity. I am hoping that risk tolerance will improve every passing cycle ( if I somehow survive ) and thereby improving allocation towards smallcaps

Strategic asset allocation is non negotiable. I will have to move some part to debt as I reach closer to any of the financial goal

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Abbott India
Abbott india, keeps proving me wrong. First half - 24 operational revenue growth is 11% ( ajanta H1 sales growth - 8%, Eris - 13%, Mankind - 15%, in that domestic business growth is 11% for mankind) and EPS growth is 28% ( ajanta H1 eps growth - 24%, Eris - flat, Mankind - 39%)

Most astonishing part remains cash flow generation. H1 CFO increased by whooping 83% to 683 Cr from 370 cr H1 last year . 2 years back their yearly CFO was 727 Cr ( for FY 21 )

The reason for lower allocation is inability to understand the leverage business model has. Every year I keep thinking margins and cash flows are peaked but company keeps proving me wrong. Fy24 ROE will be around 35%

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Also, from FY 14 to FY 23 - company has improved margins and working capital cycle every year except 1. And in all likelihood FY 24 will see improvement in both parameters over FY23. I am not sure any other company in the listed universe has achieved something like this

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I cant get over this point. To emphasise again - in last 10 years company has improved working capital cycle every year. Company has also improved ebidta margins every year in last 10 years except in FY17. I havent found any listed company who has done that. “Samaz main nahi aa raha hai - rear view mirror dekhu ya aage windshield dekhu”. The confusion arises yet again.
But I need to be honest with myself. I really dont understand the “what” has driven this achievement. What makes franchise so strong ? And therefore - cant go beyond 3-4% allocation

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Whats common between Pricol, varroc eng and Motherson???

Pricol divested their foreign subsidiaries which were loss making-
Pricol Espana S.L., Pricol Wiping Systems Czech s.r.o and Pricol Wiping Systems Mexico S.A. de C.V

Varroc Eng divested their foreign subsidiaries - 4 wheeler lighting operations in US and Europe which were loss making

Motherson carved out their india wiring harness business which has 40% ROE leaving behind international business with single digit roe and margins

All three created value by correcting their poor capital allocation in the past

Suprajit is doing exactly opposite- they are buying foreign assets and I am already scared

Having said that there are two fundamental differences according to me between Suprajit’s foreign operations viz a viz others which i will explain in next posts on some other day

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How I decide to hold average down when company is not performing as expected

Averaging down when only price goes down is much easier as compared when ‘bad news’ or ‘earning miss’ accompanies price movement. It becomes very challenging to take a judgement as there is a thin line between being ‘patient’ and being ‘wrong’. There are many examples where patience was not translated in desired IRR over investors horizon, at the same time there are also examples where investors have lost hope and investment idea becomes many ‘bagger’ in subsequent months. Therefore taking call on averaging down is never easy

My take -
In my view any for any manufacturing company valuation depends on assets on book + franchise value + growth value. Company franchise and growth give company valuations above book value. As an investor i have accepted the bug - Growth for the most of the businesses is non linear. That means I accept - earning up-down swings is feature and not a bug over my investment period. What decides my decision to average down or hold ( during company specific muted earning periods ) is - has the quality of franchise worsen or not. In my opinion broken franchise takes lot of time to comeback but growth comes back easily.

In my portfolio Suprajit eng being a drag from earnings point of view - i still think its franchise is as strong as before because of following reasons

  1. Mechanical cable franchise is the strongest in company’s history with global presence of manufacturing, engineering and business development
  2. Mechanical cable franchise is not impacted by EV with a diversified portfolio across market segments
  3. Company continues to gain market share from global competitors
  4. Only Hilex and Suprajit has global presence in mechanical cable space
  5. Cash generation has been very strong. Company keeps generating free cash flow even with depressed earnings
  6. ROE is still 12-13%

Coming to the earnings ‘Growth’ part. Why I think EPS Growth will swing back

  1. The current drag in earnings is because of the newly acquired - konsberg LDC entities
  2. Company has long history and track record of acquisition. Company has turned around each and every acquisition they had done in past albeit slight delay. In my book - definition of successful integration is 1)Bringing acquired company in 14-16% margin range and 2) scaling up operations. Last two acquisitions - Phoenix lamps is back to 13% margin and wescon clocked 14% margins last 2 years
  3. Jim Ryan who is heading global operations wad working as a head of acquired entities before
  4. Sales pipeline is very strong
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Some initial thoughts on new fund houses - Whiteoak and Helios

To start with, I believe its very difficult for a direct equity investor to be a good mutual fund investor because direct equity investor has strong prejudices. Any analysis on mutual fund portfolio/ strategy is almost always done through that prejudiced lens which many times do not appreciate the fact that equity market rewards multiple strategies/frameworks if executed well

With that disclaimer, following are my initial thoughts on both of these fund houses after going through factsheets and other material available on the website

Whiteoak
The key tenets of their strategy is not too much focus on particular style, sector and market cap because they believe constructing balanced portfolio with blend of these factors which can help improving consistency in the performance. if I look at their portfolio, following points stand out

  1. Large diversified portfolio. There are 108 stocks currently in flexi cap fund
  2. Having higher allocation to small mid cap as they believe it gives them allocation lot of sector which are not represented in NIFTY. Small mid cap allocation is around 40% which is way higher than category in flexi cap
  3. Entire portfolio construction, sectoral weights and small mid cap tilt is based on bottom up research. That means they view portfolio construction as a function of stock selection and not based on economy/market/sectoral cycle we are in
  4. Stock selection is biased towards buying high ROCE businesses with discount to intrinsic value which is defined by cash flows. I see less representation of PSU, defence and railway sectors etc. sectors which has low cash flow conversion

Initial judgment -
I really liked the portfolio construction approach, i also find communication about portfolio strategy very clear and something I can measure over cycle. I havent compared their strategy with other fund houses yet. I will keep this thread updated as and when I do that analysis

Helios
I personally did not understand what exactly is their portfolio strategy which they have termed as a “Bar-bell” strategy. To me, their is no unique attribute which stands out from their investment framework. Above all, I can not relate with their campaign ‘Har term ke liye’ which I am attaching below. I dont want fund manager to focus on near term returns because thats a job of financial advisor according to me ( my prejudice is already speaking :slight_smile: )

image
image1125×2169 511 KB

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Learning from Utpal Seth, trying to apply learnings to portfolio and Possible Sell of Abbott India

Last few days, I really enjoyed listening to Utpal Seth lectures to CFA Society and Flame University. Following are key highlights from his lecture he gave at Flame University. I will also share how I am applying those learnings to my portfolio. Thanks Mudit for sharing link of of Utpal Seth’s lecture on his forum which made me take interest and listen his 2.5 hrs lecture at Flame University and Thanks to Harsh for having these impromptu discussions which help in shaping up and sharpening my thought process

Here we go -

  1. Utpal Seth urges us to “realise the unrealised simplicity”. One of the way to do that is focusing on the Terminal Value of the business
  2. Terminal value is not a necessarily a mathematical value but its one’s vision of the business in future.
  3. Terminal value acts a ‘North Star’ in guiding investor - to build vision to buy, to exercise patience to hold and to find out failure of hypothesis or relative better opportunity which offers better terminal value
  4. What helps in building the picture of Terminal Value is - ‘’Differentiated Insight’’. Differentiated Insight does not necessarily mean ‘Differentiated Information’. It is the ability to notice something unique / enduring from the information which is can be known to everyon

Example -
HDFC Bank since the day it listed has always been expensive but what was the differentiated insight Utpal Seth had during that time?

Differentiated Insight 1 - HDFC Bank was a retail lender, was not doing mortgages, had a short duration asset book and short duration liability book - therefore was not vulnerable to interest rate risk and was still delivering 20% growth with 20% ROE and 20% capital adequacy. Because of this - it was the only bank which earned the ‘right’ to be valued at P/E basis rather than Pice to Book

Differentiated Insight 2 - HDFC Bank was not the most expensive bank in the world but it was the cheapest proxy to consumer stocks in india as it was a leverage play on the consumption because it was a granular retail book

With these 2 differentiated insights - one could have held HDFC Bank for 20 years!!!

My learning

To be honest, I was stunned by the simplicity of his insights. If you look at above two thoughts - they did not need any channel checks, complex models etc. According to me - what it needed were - Clam Mind to synthesise the information known to everyone, ability to introspect and off course experience. If I reach there, that will be a Nirvana but for a mortals like me - even if I can improve 1% towards that direction, I will be happy

How do I apply these learnings in my portfolio? To answer that question - I tried to see each of my company through Terminal Value lens. While doing that I realised how far I am in terms of my thinking abilities. Having said that following is my humble attempt for Abbott India and Vinati Organics. It has lot of scope for improvement but at least I know the direction now …

Abbott India
Abbott India were selling same power brands 10 years back. They are selling same power brands today and most likely they will be selling same power brands 10 years down the line. If you are doing same thing day after day, year after year, it is very likely that you will squeeze out last drop of efficiency. 10 year hence, Abbott India will sell same power brands more efficiently than today which translates to better margins and ROIC but not necessarily better volume growth

Vinati Organics
New products - butyl phenol and anti oxidants are margin dilutive but my TV analysis says - 1. Their seriousness of introducing ‘Speciality’ product was demonstrated with the fact that after ATBS, Vinati took 4-5 years to introduce new product 2. They make sure - they are integrated across value chain and finally 3. They come up with patented process. Therefore going beyond margin dilation due to new products, can Vinati come up with next IB/ATBS like product in next 10-15 years where they become dominant globally?

Therefore Vinati Organics offers better Terminal Value than Abbott India, albeit with less certainty, because I believe - if ROIC is above COC then it is better to trade off further ROIC expansion to higher growth. It is likely that Abbott becomes more and more efficient in selling their power brands while Vinati can possibly give at least one blockbuster product in next 10 years

I have done similar comparison of Abbott Vs Narayana which I will post some other day

Thank you

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Basket Approach in non-core holdings - Financials

I will continue with my plan with building basket approach in my non core holdings - financials ( 6-7% in each hdfc, kotak, icici, bajaj finserv) as stated earlier for following reasons

  1. The role of non - core holdings is to let me allow to hold my concentrated core positions as long as their terminal value or franchise value is intact
  2. I dont want to be too adventures in non-core holdings. Its job is to provide buffer and allow me to be aggressive in concentrated positions
  3. Basket approach enables to take large allocation in a diverse financial which has long runway of growth
  4. They also provide good exposure to amc, insurance and brokerage business from both the sides - agency and product
  5. In my judgement equal weighted basket of 6-7% in each - hdfc bank, kotak bank, icici bank and bajaj finserv provided similar risk reward over a long term to any other large cap lending or non lending financials with better diversification of revenue streams
  6. More importantly, it helps to stick with the plan on day like today.
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Pattern in my thinking - which I would like to probe/ introspect more

I have observed pattern in my thinking which I would like to introspect more and document

I have tendency to prefer “focused aggression” in manufacturing business but I prefer diversified models in the service sector.

In manufacturing -

I prefer Suprajit over minda

I prefer ajanta over laurus or alembic

I prefer Vinati over Navin Fluorine

I think ( i am not sure) prefer Cera over Astral

In services -

I prefer diversified financial business over only amc, only insurance or broking

I prefer HCL tech ( services + product + er&d) over tata elexi / kpit/ newgen

I prefer large hospitals ( apollo, narayana, kims, max) over kovai / KMS speciality

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I had very interesting conversation on this topic with Harsh Beria. Some interesting arguments which came out of that conversation as below

  1. Good investible business has to be scalable and scalability comes via market share gain. At the same time scalability is of no use if business model is not granular
  2. Therefore good capital allocators tries to achieve - 1) Higher gain in market share and 2) Better granularity in business - per unit of unit of capital employed
  3. Ajanta pharma is may be only global pharmaceutical company which focusses only on formulations. There is always a tendency to diversify in CRAMS or API or other segments. Ajanta Pharma decided to solely focus on formulations and extended that idea over 50 geographies which made their business model granular without entering in CRAMS or API saving per unit of capital employed
  4. Suprajit eng with just two products since inception managed to create granularity in their business model because of the versatility of the mechanical control cable, which finds application in two wheeler, 4 wheelers, tractors, CVs, outdoor power equipments, construction, aviation, defence, medical, marine and many more industries. Capex requirement for mechanical control cable is one of lowest in auto component industry and they have cracked the code to etch out 16% EBIDTA margin from the product as humble as cable. Therefore focussing on only one product - mechanical cable for almost 30 years ( from 1985 to 2015 ) helped Suprajit to achieve desired granularity with lower per unit capital employed
  5. Cera focussed on only sanity ware and bath ware but built consumer franchise unlike most of the building material companies ( more than 60% ) to achieve scale and granularity with lower per unit capital employed
  6. Almost 55- 60% of the Vinati’s Revenue comes from ATBS but ATBS is very diverse molecule and find application in various industries - water treatment, oil field, construction, textiles etc

Therefore focussed aggression does not mean business model is not diversified but it means - making business model granular by focussing on …… ( trying to find a right word :wink: )

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Initial Allocation in Vinati and thoughts on execution

Next week, I will be taking initial position of 2-3% in Vinati Organics

As mentioned in the the thread earlier, while investing my focus is on Terminal Value which is attributable more to franchise value than near term growth. Therefore my understanding of franchise value determines whether allocation will remain low or position becomes a concentrated position

In case of Vinati if I have to make it as a concentrated bet, i have to answer two questions - (1) how durable is Vinati’s spec chem franchise? and (2) what determines the longevity or durability of spec chem franchise? We all know Vinati has done all good things from process side but threat to its franchise can come from anywhere. For example - if someone cracks ATBS/ IBB code whats the impact when revenue is concentrated in these two products or concentrated portfolio is a trade off to maintain a speciality franchise because you can not introduce these products frequently

If I am able to get answers to above two questions, I would be ramping up position by averaging up or down irrespective of price and near term growth outlook

If I can not get these answers, i am open to play chemicals as IRR investor by focusing on mean reversion in valuation or growth. For this approach , i do not have to focus only on speciality chemicals but I dont mind looking bulk/commodity chemicals wherever I have comfort

Also Note - for zillionth time, i have changed my opinion on Abbott india. I wont be selling Abbott india to creat position in Vinati. It will be via fresh funds

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Documenting long term investing

Long term investing is tricky but it is easy to document as compared to high churn strategy. Despite it is easy to document, i dont think we have enough literature on the subject which talks about “practical” aspect than “theoretical” aspect. Thats why investor community has confusion over - what qualifies for long term, is it buy and hold, buy and forget, which companies are suitable for this strategy

I am really thankful to valuepickr team enabling investor community to document some aspects of long term investing

Through this thread, my humble attempt is to address following aspects

  1. How to manage long feedback loops in long term investing
  2. How to document emotions
  3. Whats my definition of long term investing - buy, hold and sell

I also hope, after few years reader will have definitive answer on - whether I am successful in implementing strategy? I am hoping it will be so obvious ( right or wrong ) that I do not have to publish my long term IRR to deduce that

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A friend of mine who is HNI, invested 2 Cr with Marcellus in 2021. RG - 1 Cr, CCP - 50 L and LCP - 50 L. He wanted sell 50% of the portfolio because of recent underperformance. Attaching the note I sent to him.
Marcellus - Query.docx (22.5 KB)

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That was very detailed and enlightening, thanks for sharing.

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