Shouldn’t this apply to Suprajit as well?
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Hi Harsh - Fair point to raise.
I would like to judge Suprajit’s acquisitions in the recent past against 3 restraints - 1) the price paid 2) the size of the acquisition and 3) the patience to wait before striking a deal
Let’s look at 1) price restraint and 2) size restraint together
I do not think any of the acquisitions done by Suprajit posed a risk to change the capital structure of the company materially. The price paid was sensible and the size of the acquisition was under check. However, I admit Suprajit did QIP in 2016 which diluted ~ 5% of the equity.
| Acquisition | Product | Date of Acquisition | EV | EV / EBIDTA | Cash on balance sheet at the time of acquisition |
|---|---|---|---|---|---|
| Stahlschmidt Cable Systems (SCS) | Control Cable | 09 Jun 2024 | 123 Cr | Loss making | 512 Cr |
| Kongsberg Automotive | Control Cable | 28 Oct 2021 | 314 Cr | ~ 6 | 400 Cr |
| Osram Chennai Halogen Bulb facility | Halogen Lamp | 10 Jul 2019 | ~ 25 Cr | - | |
| Wescon controls | Control Cable | 09 Sep 2016 | 293 Cr | 8 | 160 Cr |
| Phoenix lamps | Halogen lamp | 07 May 2015 | 61% stake from promoters at ~130 cr rest 39% was merged with Suprajit | ~ 6 | 80 Cr |
But I believe, Mankind and Eris are going after significantly larger acquisitions and because multiples in branded formulations are higher there is a larger funding gap. This can change the capital structure of the company materially
| A | B | C | D |
|---|---|---|---|
| Mankind | Bharat Serums and Vaccines (BSV) | EV = 13,630 Cr.100% stake to be acquired | Cash on the book = 3700 Cr. Funding Gap ~ 9930 Cr |
| Eris | Swiss Parenterals Ltd (SPL)+ Biocon Biologics | 51% stake for 637 Cr + 100% stake 1242 Cr | Cash on the book ( as on H1 2024 ) = 190 Cr. Funding gap ~ 1200 Cr |
Point 3) Patience is the interesting one
Suprajit was scouting for acquisition targets since 2012 before they finally acquired phoenix lamps in 2015. Actis (erstwhile promoter) were responsible for “diworsification” into CFL( Compact Fluorescent Lamps ) and looking to get out of the business. Suprajit at the time of acquisition paid Rs 89 / share as against prevailing market price of 110 / share for phoenix lamps
Konsberg Automotive attempted divestment for their control cables business back in 2016 as well. Suprajit was involved in the process but they decided to walk away because of valuations only to acquire same business in 2021 when opportunity came back with favourable valuations
Similarly Suprajit was interested in acquiring Stahlschmidt Cable Systems (SCS) and Ajith rai approached the promoter family back in 2014 - 15 but again deal did not work out. The opportunity arose when SCS went in bankruptcy in 2023
All these points make me believe that future acquisitions of Suprajit will be “sensible” and there are higher chances that they will go after large debt-funded deal or have significant equity dilution
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hi sir, any particular reason for high
er %age on kotak among financials.
its almost sideways for past many years and results are also not encouraging.
thanks
Hi Umesh Sir
In my latest portfolio update, Kotak’s allocation is marginally higher than others. I aim to size all 4 BFSI stocks - Kotak, HDFC Bank, ICICI Bank and Bajaj Finserv - equally around 4-5%. In fact, I made some efforts in that direction today and slightly increased allocations in HDFC, ICICI and Bajaj Finserv
The reason for equal weight portfolio and not concentration
As mentioned a couple of days back following is my broad definition of a franchise, the description of which fits all 4 companies. I do not have any “differentiated insight” which enables me to find which among 4 has a better and more durable franchise
On your point of stock going nowhere and weak recent earnings
As Kotak Securities’ recent note puts it - the banking sector has gone through a process of ‘democratisation’ of multiples in the past 3-4 years. Multiples of earlier ‘Corporate’ private banks and PSU banks seeing rerating on improved performance of the banks with higher ROAs reflecting higher NIMs and lower credit cost ( barring the current quarter ). At the same time, multiples of earlier favourites see a derating because their superior underwriting skill is less of a differentiator in reasonable credit cycle conditions and also because of specific bank-related issues
( P.S. - Don’t think I am that smart after reading these lines. These are word to word copy from the report but I thought they are relevant here in answering your query )
This is the main reason why Kotak’s / HDFC’s multiples have converged with other banks leading to underperformance
Why I am buying only these 4 companies
Baggage of the past cycle
It’s a shame that I entered this bull cycle with the baggage of the past bear cycle where there was serious damage in a few names because of either poor underwriting decisions or asset-liability mismatch. I still remember that day when DHFL was down 60% in one day. I as an investor have failed to come out of that impact which is where I would like to improve in future
Witnessing benign credit conditions for the first time
In my investing career which started around 2014-15, this is the first time I am witnessing conditionals like these. First time I have seen PSU balance sheets so clean. To be honest with you, I did not know how to react and how long these conditions can last
Therefore I am sticking to names which has proven underwriting (rightly / wrongly )in the past cycle being fully aware that I don’t deserve any alpha because of the above 2 points. Having said that - I still believe these 4 companies hold earning power to grow earnings in high teens in future
3 Likes
ICICI bank does not have a previous underwriting track record. It’s my attempt of being ‘flexible’
thank you for your prompt and comprehensive reply. I too view the same and am invested in both. However I am recently diversifying myself by buying bankbees (bank ETF from nippon) , therby getting psus and small upcoming banks too. luckily i got in before psu 's stellar performance and am party to its good returns.
Abbott India - Messiah for the sloppy stock pickers
Pharma is very interesting sector where I believe the acceptance of “I am not a good stock picker” has helped me to generate above average returns.
Amongst all pharma companies, I believe Abbott India is the simplest business to understand especially for some one which focusses on 3-5 years earnings growth. Mid teen EPS growth with 100% ROIC, ever growing free cash flows year after year along with some certainty on the capital allocation make it more desirable portfolio candidate for me compared to capital intensive / lumpy CDMO businesses
The problem comes when I try to look beyond 5 years, disassociate myself from earnings growth and try to find “what” makes Abbott India’s franchise so strong to crunch cash conversion cycle from 44 days 10 years back to -25 days now. Failure to understand building blocks of the franchise make it difficult for me to assess its durability in future
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Problem with Abbott like MNC companies is, they have listed and unlisted entities. Many good products are sold through unlisted entity which is not good for shareholders of listed entity.
Hi Sudhakar
Your point is valid and it opens up very important debate - Obstinacy Vs Flexibility. ( I request reader to read Abhishek Singh’s tweets on this topic. Abhishek is a fund manager with DSP and very rarely fund managers tweets their thought processes. Most of the times finfluencers are very vocal on their thought processes on twitter and fund manger’s voice does not get attention it deserves in my opinion)
Coming back to point on Being flexible Vs being stubborn - We all agree that its very rare to find - best business, best management, best growth and best valuation. Therefore we all are ready to ‘compromise’ on ‘some’ (and not all ) of these aspects. As we gain experience in stock market, hopefully we will be in a better position to evaluate these compromises. That’s the “flexibility” part. Having said that, there are few things about which I am inflexible like - 1) track record of at least one market cycle 2) initial valuations and 3) cash generation evidence. These are mainly governed from my investment approach and because everyone has different investment approaches, even every investor will have their own set of non negotiables
IN case of abbott india - as long as standalone entity keeps generating cash and outpace IPM growth, I am ok to be “flexible” on MNC specific corporate governance aspects. You can see in my allocation - Ajanta pharma is getting more allocation compared to Abbott, as I believe Ajanta is more deserving on the business, management and growth parameters.
4 Likes
Role of the mutual funds in the portfolio - Updated 3.0
RECAP
Updated : 1.0 - Very first post on this thread April 2021
Update 2.0 - August 2022
Update 3.0 - Today : August 2024
Listening to the brilliant session by Kedar ( Zygo ) on diversification made me re-introspect my portfolio design. The outcome was very obvious which I already knew. 1) I have a suboptimal stand-alone portfolio design ( direct equity ) which is not diversified across factors. Therefore there is a high risk of my portfolio having a large tracking error in future cycles. A portfolio can lag benchmark/other professionally managed portfolios significantly. 2) But if I attach mutual fund portfolio to my direct equity portion, it starts looking much better in terms of factor diversification
To address point 1) - suboptimal portfolio design - I continue my efforts to improve my portfolio quality. New ideas added in last 3 years - Banks, IT and Vinati - added more factors and also sectors in the portfolio. Also, I am looking to add exposure to new sectors in the portfolio. The current sectors under review are - hospitals and building materials. The challenge for me is - with personal and work commitments along with other interests - execution takes time. Mutual funds + SIP help to bridge this gap very optimally. I believe the portfolio philosophy of my mutual fund holdings is significantly different than mine and also both the funds differ in terms of their philosophies. This provides much-needed factor diversification/risk management and a better foundation for the overall portfolio and buys me time when I am struggling to nurture my direct equity portfolio.
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Why should tracking errors matter for an individual-level portfolio? I agree it matters for professionals who invest others’ money.
Ideally, the individual’s long-term financial or wealth goals should be the only metric. Is lagging or leaping over a benchmark for a short period a key variable? Yes, you can track it, but should it worry a mature investor like yourself?
(I am asking this as someone still struggling to construct an ideal PF or at least an ideal style to achieve the desired PF.)
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Hi Hardik
You are right, even I think - evaluating portfolio performance VS benchmark over the short term is not that important. To be honest, I don’t even actively track my direct equity IRR because I believe it limits my imagination ( LOL, can’t believe I just said that!!! )
For me, tracking error is an important concept from a behavioural aspect. With whatever little experience, what I have learnt is that - the market is brutal and it will surprise you both on the upside and downside - both in terms of returns and duration. Suboptimal portfolio design makes it difficult to stay the course when our portfolio is at the receiving end during these extremes. I witnessed this personally ( which you can read in my very first post ). It is better to be prepared or at least conscious about these possibilities especially in my case when I am concentrating on small - mid-caps rather than being reactive when the market strikes
Following up on this argument. Suprajit last week announced buy back worth 1%+ of the market cap at 50% premium to the price at the time of announcement. This according me was possible because if the ‘restraints’ exercised at the time of acquisitions. They are in position to reward shareholders while Eris and Mankind are scrambling to raise funds
Having said that - Torrent is also in news to raise funds to acquire JB pharma. I get the feeling that market is conducting live capital allocation webinar and I am happy to be student. I am ready to change my opinion on the topic as these events unfold over next few quarters
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True that.
Again, for a retail investor, how do you figure out optimal design? Is it sectors, weight caps, or a blend of styles? If you study even some of the literature, everyone suggests and guides differently. Again then it becomes an hodge-podge. Frankly it is better to tune out the entire noise and build conviction by yourself on what drives you emotionally.
For eg: If I’m a nervous investor, it will not make sense to have high beta names and vice versa.
Another concern about adding Mutual funds is fund managers’ total lack of honesty regarding allocation. A key reason I have only one mf where I do sip. I don’t know why I wrote all this here but just thinking about it.
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I found following video very helpful. May be, it will help you also. Also, Harsh Beria’s portfolio thread can give you some direction
https://www.youtube.com/watch?v=SZNs63eKNAk
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Thanks. Will check it out.
Recap on my Investment Approach
I look to invest in small-mid caps where
- There is a history of at least one market cycle after listing along with a proven track record of ROCE across the market cycle.
- I understand the strategy that management is trying to execute to build or improve the franchise.
- There is a large listed peer set which makes it easy to make judgments on ‘Differentiation’ in the strategy.
Recap on Execution
- Least focus on near-term earnings but more focus on earning power and the quality of the franchise
- Very important that I understand valuation. If I don’t understand valuation by simple PE / PB matrix I walk away from the investment. I prefer entry valuation where
- Either PE/PB is at the trough of the cycle.
- Or the earning cycle is at the trough.
- I believe when initial valuation and business + management quality are taken care of, the selling framework and near-term earnings become less important. I try to sell only when a franchise is broken and not when earnings are broken.
- Average time taken to build position - Anywhere between 2 to 4 years. Average holding period - at least 2 to 3 market cycles. More than 10+ years
- Very choosy about small mid-cap investments. At the current juncture, I believe I only need 3 - 5 small-cap companies for the rest of my investing career.
- At the market cap level, I try to play counter-cyclical over the entire cycle because it matches the time I take to build allocation( 2-4 years ). I try to build large cap allocations when small caps are doing well and vice versa.
General Disclosure :
I believe multiple investment approaches can co-exist in the market and what I am narrating is not a ‘prescription’ for the readers but this is what I have been following so far.
With the above recap, I would like to present my view on how franchise value improved in my small - mid-cap investments in FY 25
Suprajit engineering :
The strength of Suprajit’s franchise lies in - 1) Building a moated business for the product as humble as Mechanical Cable and 2) Supply chain solutions which very few Indian manufacturing businesses are focussing on
While most of the other auto component manufacturing companies need technologically superior products to garner high margins and ROEs, Suprajit can achieve in the class B components like - Mechanical Cables and Halogen Lamps.Mechanical Cables need very low Capex and are very versatile across industry applications which extends the growth maturity cycle.
Delivery in itself acts as a differentiation, especially in the auto component business. Following is the snapshot of Suprajit’s Delivery Capabilities
Earlier -
US OEMs - Onshore: US, Nearshore: Mexico, Farshore: India
European OEMs - Onshore: Hungary, Nearshore: UK and Slovenia, Farshore: India
Now -
US OEMs - Onshore: US, Nearshore: Mexico and Morocco, Farshore: China and India
European OEMs - Onshore: Hungary, Nearshore: UK, Slovenia and Morocco , Farshore: China and India
I believe in the last year, the strength of Suprajit’s franchise has improved significantly as they not only can offer multiple supply options catering to OEM’s mechanical cable requirements but they can also use their global supply chain footprint to deliver any other products effectively than the competition.
Ajanta Pharma :
Following are highlights of FY 2025 which indicate stronger franchise compared to FY 24
- % of Africa Institution in overall business now < 3%. I am pretty judgemental about tendering business. I personally like to invest in businesses where the tendering component is as low as possible.
- Improved granularity of international branded generic franchise by expanding to new countries and new therapies
- The improved granularity of domestic branded generic franchise by entering 2 new therapies
- Significant improvement in working capital cycle in US generic business
Vinati Organics :
The company has made progress to judicially improve the granularity of its product portfolio by adding new products. I have not yet found the answer to the question - of whether a concentrated product portfolio is the cost the company pays to build a real “speciality” product portfolio or whether it is possible to add new products while maintaining the “speciality” franchise.
Other companies on my watchlist at the current juncture -
- PI Industries
- Narayana Health
- Cera
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Hi All
My top filter helps me to filter out frauds from my investment universe / watchlist ( and not portfolio ) under a minute
I consider my process is broken even if fraud enters in my watchlist forget portfolio
But this also means lot of error omissions which I am learning to deal with
I generally prioritise survival at the same time take concentrated allocations in small mid cap and hold them until franchise is broken. That top filter enables me to juggle these 3 aspects
This is just one of the many (and not ‘only’) risk management approaches
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