Omkar's Portfolio Analysis and Discussion

[OmkarT]

Updates on Top Holdings

Suprajit Eng

I can write about Suprajit Eng for next 30 days without repeating the content. Sometimes I am scared how much of its unjustified bias. Some of my investor friends in my close circle have warned me multiple times to cut down the allocation but I am very adamant on my opinion. I try to be as rational as possible but with that high allocation seldomly anyone can remain unbiased

Lets find out what story I have to cook this time

This time I want to back to following version of the story. Lets see how it has progressed

Posted on - Apr 22

@OmkarT

My reflection on the news - Varroc News: Varroc looking to sell global lighting business for up to $650 million - The Economic Times (indiatimes.com)

Progress Today

Some other notable points

1. Unlike other players new products are being launched without any technology JV. This has allowed Suprajit to think indigenously. Example of which is creating products like mechanical disc brakes
2. The principles of ‘’Frugal’’ manufacturing are evident in numbers. Electronics division which is dominated by clusters is already making 11-12% EBIDTA with just 23 Cr quarterly sales. Pricol which is also in clusters is making those margins with 2000 Cr sales

Ajanta Pharma

Visiting back what I want through while holding Ajanta as mentioned below. Ajanta outperformed all the names mentioned below over last 3 years - Alembic, Abbott and Laurus. God knows how I managed to stay away from Alembic and Laurus during those days!!! Not sure next time I can manage to pull this off

@OmkarT

Demons so far in ajanta pharma which I successfully tackled and the ones in progress

1. Company has lost focus, its branded generics business in africa and asia is not growing
2. Management is not interested in company as they sold 3% stake to SBI mf at 1500
3. US generics business of company is a drag on a overall business
4. India focussed branded generic companies are better than Ajanta
5. Abbott is a cash machine, coffee can stock. Sell ajanta buy abbott
6. Alembic pharma’s earnings are way better than ajanta pharma. Alembic is investing 15% in R&D vis a vis 5% of ajanta pharma. Sell ajanta buy alembic pharma
7. CDMO has better unit economics than Ajanta. Sell ajanta buy cdmo( demon in progress. Hopefully i dont succumb to it. This does not mean CDMO is not a good business) - Demon Closed Mentally
8. Laurus lab , Dr chhava is a visionary. Sell ajanta buy Laurus (demon in progress. Have huge respect for Dr Chhava) - Demon Closed Mentally
   9.New demon -*
9. Some boredom creeping in because of no or sideways price movement. Last 5 years price CAGR (point to point) - 2.4%

[Harsh04]

Why has suprajit Operating margin reduced from 16-17% to 10-12 % ?

[hardik_shah1]

On Suprajit.

How have you developed such patience to hold onto something which has not moved high over last few years. This is both share price as well as net profit. While Ebidta has increased because of top line, OPM margins have reduced and debt increased.

How does non performance on share value affect/does not affect you.

More of a question to understand emotional phychology rather than this specific stock since i have not tracked it all.

[OmkarT]

Hi Hardik - Short answers is bias, long answer below. Since you have asked my response on general thinking I have replied accordingly. I am happy to have discussion on investment thesis / antithesis as well once you get chance to read about company

Franchise Value - The True North in my investing framework

Over last 1.5 cycles of thinking, introspecting, 3 years of writing on this forum and interacting with other investors has helped me to sharpen my thoughts on my investment framework. It was always a “long term investing” since the beginning of my investment journey but contours of framework were pretty vague. Over the course, thinking evolved and I think today - it has reached to a point where I can document my framework more clearly than before without complicating too many things. Off-course - it will keep evolving but at this point of time this is what I have.

What to exploit
The beauty of stock market is multiple strategy can co-exist. The success lies in how effectively investor can execute the strategy well. Through long term investing - my attempt is to exploit what is not discounted 5 years ahead. I dont think - we can predict accounting profit growth after 5 years because not only accounting profits are cyclical but also it depends on account keeping practices of the company. Aggressive accounting keeping will always show faster growth than someone who is conservative in their practices. Therefore - thinking beyond 5 years need something which a) does not change that frequently and b) which is hard to manipulate.

Franchise value helps to address these issues for an investor who is having investing time horizon more than 5 years

What is Franchise Value
To put it simply according to me ‘Franchise’ enables organisation to earn ROE above cost of capital. Franchise value can be measured in multiple ways (1) Market cap - replacement value (2) ROE - cost of capital.

Franchise value - if identified correctly - takes care of point a) as franchise’s real worth does not change qoq, yoy. Competition has to sweat real hard to break in to good franchise. But it does not take care of point b) something which is hard to manipulate. Without naming any companies, current bull market has lot of companies where ROE/ ROCE is above COC but cash generation remains poor which can be attributed to aggressive P&L accounting. To address this issue of aggressive accounting, I consider additional criteria to ‘assess’ the the strength franchise - that is, does franchise “consistently” generate cash from its accounting profit

Therefore, In my opinion franchise value can act as a ‘True North’ to guide long term investors in their journey if they have understanding on - 1) what are the building blocks of the franchise 2) and what is durability is the franchise

When to Buy
I try to buy companies where I believe I have some understanding on the building blocks of the franchise and attributes which makes franchise durable. Investing is so wild and confusing that you need to have some markers which help you in your journey especially when the feedback loops are long. Therefore I have decided, in the first two - three cycles of my investment career I am planning to buy companies only where proof of solid franchise is in numbers. For me the proof of franchise lies in three numbers - ROCE, market share trend and cash generations. I am not interested in companies where franchise is not reflecting in numbers even though max IRR can be generated in cases where investor identifies emerging franchise which is not reflecting in numbers. That will be probably 3rd or 4th cycle onwards. ( “First two cycles wicket pe datte rehhna hai” )

When to Hold
Once you have some markers, life get easier to decide whether strength of franchise is improved or weaken or not changed. I will hold my investment till the time franchise is not broken. According to me - growth is easy to come back but franchise once broken is very difficult to come back

Incase of Suprajit, I would like to believe that franchise is not broken but in fact its strengthen

[hardik_shah1]

Thanks for articulating your thought process.

I agree with you at a certain level.

But where I would differ at a top-level thinking is Franchise Value in an Auto Tier 1 supplier. No doubt you can have consistent compounders here but its far more unlikely for various reasons which you no doubt are aware of.

ROCE / ROE and OPM will always be constrained as pricing benefits always have to be passed on.

Only way you have value add is if you are a consistent next generation tech provider like a Bosch or a Continental or even a Sona BLW now who innovates at the frontline and hence owns the IP stack. Even they struggle when winter sets in. No Tier 1 supplier in India owns tech first IP and are rather fast followers.

Again, this is not on Suprajit but overall Indian tier-1 story. Nothing wrong with owning it and making returns but none of them provide enduring consistent returns above ROCE on a CAGR basis.

[OmkarT]

Hi Hardik - Point well noted. But look at the last 10 year ROE, EBIDTA and NP margins for different companies in their India business or companies with india dominated business and then look at businesses with foreign assets. Let me know what’s your takeaway about auto ancillary business not being consistent compounder

Suprajit Standalone - ( Indian Operation ). Please note these margins are in Mechanical Cables which is Tier 2 product not a fancy tech product

Endurance Tech

Motherson Wiring India

Uno Minda

Now lets see same companies with global business

Suprajit Consol ( Foreign assets acquired mainly from 2018-2019 )

Motherson Global Business

Look at Pricol pre and post disinvestment of foreign assets in 2022

[hardik_shah1]

I beleive what i wanted to say got lost somewhere in my communication. My error.

Will put a post to explain myself.

kudos for the detailed research and analysis done.

[OmkarT]

@OmkarT

Eris Life science – As per my judgment - business model focussing on acquiring brands for growth is less attractive to me as compared to launching brands organically. I am not convinced with capital allocation abilities of Eris’s management

I lost the count now, how many acquisitions Eris did after this post. I am not calling this as a bad capital allocation but I am not aligned with management’s thinking. Eris can very well be a multi bagger in future but it is very difficult for me to partner with management over cycles if I do not believe in management’s strategy. Some notes on - How I view capital allocation decisions

Threshold to past capital allocation mistakes - the evolving point of view

I categorise capital allocation mistakes in two buckets - 1) There is some opportunity to quantify the capital allocation mistake and 2) Where I perceive capital allocation is not the optimal one

Examples of first buckets are easy -

1. Material and frequent write offs on investments
2. Constantly losing market share
3. Business has to stress sale assets because of cashflow/debt issues

Examples of bucket 2 are my perceptions and hence these are more qualitative. Different investors can have different judgements. Some of the examples are as follows. In my investing journal, this is not the management thinking which I can associate with

1. Endurance Tech calling off Tyre capex because of stock market reaction
2. Minda corp investing in Pricol as a financial investment in the hope to do future hostile take over
3. Alembic pharma’s way of allocating capital
4. Tube investment foray in CDMO
5. Saregama announcing QIP for 10% equity for their expansion
6. Eris Life science way of growing branded pharmaceutical business

Each of the above points need separate nuanced discussion which also depends on one important point - time horizon around which investor makes this judgement

Till now I was very inflexible towards historic capital allocation mistakes by the managements. One of my core belief in equities is - I should drive car looking at ‘windshield’ but one eye on ‘rear’ mirror. Though past does not guarantee future but management decision across cycles is powerful way to analyse management’s thinking

Recently after listening to Pankaj Tibrewal interview, I am working in direction to change this rigid mindset to the one where I am more open towards past capital allocation mistakes and I do not outright reject ideas. Having said that, this change in point of view will reflect in my execution only in next bear markets.

[OmkarT]

@OmkarT

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%)

Mutual Fund Portfolio Performance

I am in my 9th year of my mutual fund journey.

Current allocation - Axis: 57% , Bandhan (Erstwhile IDFC ) - 43%. SIPs are still running

Bandhan (Erstwhile IDFC) XIRR : 20.21%

AXIS XIRR : 15.14%

XIRR at Mutual Fund portfolio level - 17.31% which is around 170 bps below my expectation mainly because of Axis recent underperformance

Update on Axis fund house strategy under new leadership

Having observed new management for over a year now, I think I am in a position to write update on Axis MF strategy and smartly I have chosen this period to write the post because Axis’ performance has improved across all the schemes ( though it is too early). That’s why I can subtly flaunt ( note - “subtly” ) maine bola tha and feel good about myself which I have been resisting to do all through this thread but i gave up to human desires

What changed with new management ?

1. Core fund philosophy of existing funds will remain same which is “Relative” growth and quality
2. Breadth has been improved across the funds especially : multi/flexi caps. Concentration in top 10 stocks has come down from 65-70% to 45-50%
3. Fund house has increased coverage universe from 150 to 400
4. The overlap between existing schemes have been reduced
5. Fund house will employ multiple strategies now and not just focus on one philosophy. But important thing to note - all existing schemes will be run using same philosophy ( as mentioned in point 1 )

My Take -

I am relieved that the fund I invested in - Axis tax saver - will be run with the same philosophy. I am very gung ho about future of Axis’s philosophy. In my opinion - Axis has a very differentiated “thinking” which drives their fund philosophy. I am spending lot of time to understand their approach well.

Following is my updated analysis

Axis Philosophy - “Relative” Growth and Quality

As famously put by Rupesh Tatiya in his one of the many top rated valuepickr posts -

“In my limited experience, figuring out business quality & management quality over the years has become easier - one will roughly get it right. The part that remains hard is figuring out GROWTH & figuring out QUALITY of GROWTH”

In my opinion, being objective about 3-5 years GROWTH is where Axis excels and Saurabh Mukharjea falters. Some of the examples in recent times

1. Axis prefers hospitals over diagnostic companies
2. Axis prefers retail over fmcg/fmcd companies
3. Axis prefers NBFCs over banks.
4. Axis did not shy away to add US generic companies and mankind pharma along with their DIVIS position because former have better growth prospects due to reviving US generic cycle
5. Axis preferred Tata motors and Mahindra over eicher

Apart from being good in objectively predicting growth another thing in which Axis excels is the bottom up stock picking beyond obvious names and holding on to it for very long term

Some of the examples in Axis ELSS tax saver

Torrent power - Holding since : Jun 2013
Info edge : Holding since May 2014
Astral : Holding since Dec 2013
Sundaram Finance : Holding since Mar 2013
Symphony : Holding since Sep 2011

And finally their strategy of relative quality and growth , they have manage to expand to not so ‘quality’ sectors which are capex beneficiaries. Some of the additions since 2020 are below

Cummins
Cg power
Tube investments
Shree cement
Timken india

All these points gives me confidence in keep on holding Axis fund house in my portfolio. One of the benefit of my current two funds mutual fund portfolio is that even after achieving descent size, it can easily absorb 10X more capital with just 2 existing funds ( same portfolio strategy) with optimal diversification and risk adjustment

[OmkarT]

@OmkarT

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.

Warming Up to Vinati Organics - Planning to increase allocation to 4% from 2% at present

After Suprajit and Ajanta Pharma, first time I have a feeling that - I have got a candidate to concentrate albeit it’s too early. My typical allocation life cycle is 5-6 years for concentrated positions. Suprajit : 2014 - 2020, Ajanta 2016 - 2023. Vinati, I have started journey in Jan 24

Rationale behind increasing the allocation

1. Clarity emerged as one time gains withered away

From 2017 - 18, there were series of one time windfall gains clouding the true margin profile of the franchise. Lubrizol exit, change of business matrix in covid, chinese supply disruption, aggressive customer stocking - all these events boosted margin profiles in short term but it was not the true reflection of the long term strength of the franchise. In my view - FY 24 margins of 24-25% ( which are decadal low ) is a good starting point to model future trends. Margins can still go down further but I believe we are somewhere at the bottom

2. Journey towards diversification while maintaining the speciality franchise?

From 100% ATBS, IBB portfolio in 2008 - 09, company now has more diversified profile with ATBS/IBB contribution reduced to 55-60%. Company plans to introduce 2-3 new products every year. I do not have strong reasoning yet to decide - “are the new products diluting the speciality franchise or really making it granular?” Example - even after Anti Oxidant being doubly backward integrated to butyl phenol and IB, it is still not matching Chinese prices which can be confirmed from the management response in Q4 FY 24 confall that AO is the only product in the portfolio which is facing pricing pressure

3. Understanding the durability of ATBS/IBB product franchise

This point is also work in progress. Company has shown proven capabilities of scouting, absorbing and re-engineering the third party technologies. For me, proof of pudding still lies in ‘’time’’. If Vinati can defend its ATBS franchise over next 1-2 years when there is more competition is propping up, that itself will act as a good data point to ramp up allocation further

[Mudit.Kushalvardhan]

Just curious hence asking, being a devil’s advocate :-
Your allocation period ( from starting a position to making it fully sized) for a particular company , itself is 5-6 years, But what if that company goes bust, during your allocation period itself, after all 6 years is a very long period, in today’s fast culture?

[OmkarT]

Hi Mudit

Forget about Going bust, my key monitorable is whether franchise is broken or not. Even if company does not go bust, if any capital allocation mistake or regulatory action or competition breaks into the franchise then that becomes an exit criteria. This is part of the process, as buy and hold does not mean there is no active monitoring. I almost try to think/introspect about these threats everyday

I would argue that - slow build up of position over long time period will in fact act as a cushion.

Also, my stock selection criteria is curated considering the long term execution. All the positions which has larger allocations should have seen at least one market cycle. In my opinion - market cycles throws data points which I cannot even think while building investment thesis without market cycle. More the number market cycles, better insights and helpfully lower gap between actual and perceived terminal value. I stay away from sector/companies which hasn’t seen cycle but I want to be agile enough to not miss second cycle. `for example - Hospitals, I did not participate in the first cycle when numbers were not reflecting underlying franchise but I want to make most of it from second cycle onwards with right selection and allocation

[OmkarT]

Why Pricol is not suitable for my execution style

Pricol after correcting their past capital allocation mistake by divesting foreign subsidiaries has garnered lot of interest from market participants and rightly so because of the good YOY pop in the EPS

It will do well because of anticipated two wheeler recovery but management thinking does not align with my execution style. I put this in the second bucket of capital allocation assessment where I perceived capital allocation as sub-optimal and its purely qualitative ( and hence debatable )

@OmkarT

Threshold to past capital allocation mistakes - the evolving point of view

I categorise capital allocation mistakes in two buckets - 1) There is some opportunity to quantify the capital allocation mistake and 2) Where I perceive capital allocation is not the optimal one

The primary reason for this judgement goes back to the point of - adding granularity in business profile per unit of invested capital

@OmkarT

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

One of the important aspect of adding granularity in business model, is layers or dimensions to this granularity. More the layers, more resilient the business model. As per Q4 conical Pricol’s focus is going to remain on domestic two wheelers and CV which is ~70-80% of the portfolio. In 4 wheelers, though they are working on cockpit technology but focus looks limited. Export markets, they could not execute as envisioned before.

Therefore for 200 Cr of Capex they will be spending per year for next 3 years, The only layer of granularity is the Revenue/product. There will be improvement on Revenue per product but all the other matrices - Revenue/segment, revenue/geography, Revenue/OE&aftermarket, revenue/client will not improve that much in my judgement. Therefore I believe, capital allocation is sub optimal and may not be suitable beyond 1 or 2 cycles and hence I can not partner with the management

[OmkarT]

Cera - Getting constructive, tracking position soon

Following are not the reasons why I am getting constructive on Cera

1. Industry tailwinds
2. 2-3 years earnings outlook
3. Any immediate earnings trigger

Following is the reason why I am going to take tracking position in Cera (1-2%)

1. Odds of getting long term call ( good or bad ) - over 2-3 cycles - right are high. According to me returns over 2-3 cycles depend on answering following question right

Considering business will remain pretty much india focused over next 2-3 cycles - can company’s strategy of focussing on only two product lines- bathware and sanity ware making it vulnerable to competition or it will improve the focus and thereby making it harder and harder for a competition to break in?

[OmkarT]

@OmkarT

Posted on - Apr 22

@OmkarT

My reflection on the news - Varroc News: Varroc looking to sell global lighting business for up to $650 million - The Economic Times (indiatimes.com)

Progress Today

Suprajit consolidates global supply chain footprint by adding manufacturing base in Morocco and enhancing manufacturing base in china

[OmkarT]

@OmkarT

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

I will be completing 9 years in the fund with 21% XIRR. Abhishek singh of DSP who’s views I closely follow posted a very powerful tweet sometime back which I can completely relate to, especially after witnessing this particular investing outcome

When most of the literature focuses on “selecting” mutual fund scheme, what scheme one selects is not an important variable in our investment outcome. As Abhishek Singh highlights its not even in top 5

Following are top 5 factors according to me which decide mutual fund investment outcome

1. Not being pro cyclical

2. Disciplined contribution

3. Decisions taken during underperformance of the scheme

4. Decisions taken during market correction

5. Time horizon

[OmkarT]

Initial thoughts where I can possibly add value if I start my own venture

Top of the bull market makes you feel indispensable and gives you these kind of weird thoughts

Having said that, i always keep thinking about - if I start something of my own in this space what would it be?

The answer to that question is where - I can add any value compared to already available options

1. I dont think I can add any value as a manufacturer. There are enough mutual funds, PMS and AIF is already available. I dont think I can differentiate myself here

2. I don’t think I can add value in Research desk as thats not something I am good at and also I dont enjoy it much

3. I dont want to be a social media influencer

Where I feel I can value, as fee based advisor - who can handhold investors to create long term wealth

What are the prerequisites -

1. Experience atleast 4 cycles
2. Mutual fund portfolio should outperform BSE 500 at the end of 4 cycles
3. Document decisions through out 4 cycles

If I manage to do all 3 above, then I would consider myself eligible for advising others

[OmkarT]

Why I will keep Holding Kotak ( and HDFC/ICICI/Bajaj Finserv ) despite lacklustre Q1 FY25

Though equity market has derated private banks in last 3-4 years, as per my judgement there is no change in the strength of their franchise which according me lies in -

• Diversified financial conglomerates with stable low ROE annuity flow to balance high ROE but volatile capital market revenue streams
• Proven underwriting which allows to take large allocations with buying points spread across current cycle to benefit multiple future cycles

As my execution style gives least importance to near term earnings, I am happy to hold or even add my investments as long has franchise’s earning power is not lost

[OmkarT]

Current portfolio

Company	%
Suprajit Eng	23.00%
Ajanta Pharma	18.50%
Kotak Bank	5.75%
Vinati Org	4.24%
Abbott India	2.95%
ICICI Bank	2.90%
HDFC Bank	2.88%
Bajaj Finserv	2.53%
HCL Tech	2.51%
Mutuals funds	35%

[OmkarT]

@OmkarT

Threshold to past capital allocation mistakes - the evolving point of view

I categorise capital allocation mistakes in two buckets - 1) There is some opportunity to quantify the capital allocation mistake and 2) Where I perceive capital allocation is not the optimal one

Mankind is buying BVS with EV = 13500 Cr for EV/EBIDTA = 22. The current cash on the book is around 2500 Cr. This falls in bucket 2 capital allocation error for me where I perceive it is wrong and I can not relate with the decision

Again it can turn out to be one of the best acquisitions in the history but I am not confirmable and willing to put my money and time on such managements. I am more than happy to watch them becoming multi baggers from side lines

In capital markets, growth is ‘addictive’. I like to partner with managements which exercise “restraint” but still show agrresion. My belief is managements will not say these things explicitly in investor interactions but one has to deduce them by observing their actions over cycles