Omkar's Portfolio Analysis and Discussion

[OmkarT]

@OmkarT

• US - 0% tariff
• Mexico - no reciprocal tariffs on the goods which fall under USMCA ( United States Mexico Canada Agreement). Auto components fall under USMCA
• Morocco - 10% tariff and has FTA with US
• India - 26% tariff
• China - 104%

• US - 0% tariff
• Mexico - no reciprocal tariffs on the goods which fall under USMCA ( United States Mexico Canada Agreement). Auto components fall under USMCA
• Morocco - 10% tariff and has FTA with US
• India - 10% tariff
• China - 125%

[OmkarT]

@OmkarT

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

@OmkarT

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 am going post self critical post in near future on what went wrong in above line of thinking but before that, I would like to update - why I am going to increase allocation to Vinati to ~ 6% from current ~4% as this can happen as early in next two days

Recap

@OmkarT

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

@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. 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/co

The increased allocation reflects growing confidence in management’s ability to juggle ‘granularity’ and ‘speciality’ of the franchise. Earlier hypothesis was ‘Concentrated Portfolio’ is the cost chemical company pays for its spec chem franchise

[OmkarT]

@OmkarT

I am going post self critical post in near future on what went wrong in above line of thinking but before that, I would like to update - why I am going to increase allocation to Vinati to ~ 6% from current ~4% as this can happen as early in next two days

This has been processed as informed. Latest Portfolio below

Name	%
Suprajit Eng	18.93%
Ajanta Pharma	18.33%
Kotak Bank	6.33%
Vinati Org	5.99%
HDFC Bank	3.71%
ICICI Bank	3.60%
Abbott India	3.55%
Bajaj Finserv	3.45%
HCL Tech	2.34%

Mutual funds - 34%

[OmkarT]

Thoughts on Being a Full-Time Investor

[Note: This piece was restructured with AI assistance to improve flow and clarity while preserving the original thoughts and perspective.]

The decision to become a full-time investor is deeply personal, and I value hearing perspectives from both sides of this debate. For me, the answer is clear: I will never become a full-time investor, regardless of how large my portfolio grows. Let me explain my reasoning.

My Framework for Different Market Conditions

During normal market conditions, I focus on deepening my existing framework rather than reinventing it. However, when we face severe bear markets—not the typical corrections we saw earlier this year, but genuine, prolonged downturns—I am prepared to look well beyond my established framework.

What Normal Markets Actually Require

In typical market conditions like today’s, my needs are straightforward:

1. A solid investing and risk framework

2. At most, one compelling investment idea per year

3. Consistent monthly cash flow

4. Ability to bear BAU (Business as Usual) market corrections without panic.

Being a full-time investor would not enhance any of these four elements. In my opinion, building a robust investment framework requires at least two complete market cycles of careful observation and analysis. What I am emphasising here is that the number of hours in a day does not correlate with investment wisdom—more time doesn’t necessarily mean better results.

The Reality of Bear Markets

During prolonged bear or sideways markets, the equation changes completely. What you need most are capital and guts—or composure, though that’s easier said than done. During these periods, both investment ideas and time are abundant. What becomes scarce are the financial resources to deploy and the courage to act when others are selling.

Once again, being a full-time investor would not necessarily improve my prospects during these critical conditions.

My Long-Term Strategy

I plan to build a comprehensive 20-year track record by documenting every buy and sell decision through forums like this. I am currently in my fourth year of this process. The goal is to establish a verifiable track record that can serve as a foundation for future fund management opportunities.

This approach allows me to maintain the income security and mental clarity that comes from diversified professional pursuits while still building credibility as an investor over time. It’s a patient strategy that aligns with my belief that the best investment decisions often come from those who are not under constant pressure to generate immediate returns.

[OmkarT]

@harsh.beria93

@OmkarT

Interestingly, From whatever conf-call I heard so far, being exact same business, the reason for Eris having significant higher margins is because of its in-house production (Views welcome). 5 years back when Eris was outsourcing most of their production, their margins were in 20s. If this observation is right and it is low hanging fruit then why can’t Abbott improve their margins to 30s?? Views welcome

The big difference is in terms of gross margins, domestic specialty focused (not OTC) pharma companies specializing in chronic therapies make 75%+ gross margins. You can look at the gross margin profile of competitors who have similar business mix (Ajanta, Sun and Torrent). These companies make 75%+ gross margins in India, this is due to their higher specialty focused portfolio. On the other hand, companies with large OTC brands are akin to FMCG companies, most of these make gross margins in the 55-60% kind of range. Abbott’s business mix is more towards OTC than specialty. Additionally, Eris has a smaller portfolio under NLEM (around 12-15%) compared to 25% for Abbott. NLEM products will have lower realizations (due to price capping), hence lower gross margins. Also, I don’t know how much of Abbott’s products are in-licensed from other companies (or from the parent entity). In-licensing also has a large adverse impact on margins as royalty payments would be linked with sales. However, in-licensing is ROCE accretive. Eris has very low amount of in-licensed portfolio so far, although this will change in the future.

I don’t think margins has a lot to do with outsourcing vs in-house manufacturing. When Ajanta was outsourcing a majority of its products in 2012-13 timeframe, gross margins were still 70%+. Gross margin is more of a function of product mix (specialty vs OTC vs pure generics). EBITDA margin is more a function of business strategy (marketing vs research based vs B2B). A B2B pharma co can make 35-40% EBITDA margins despite having only 55-60% gross margins (likes of Divis/Gland) as they don’t have to invest a lot in frontend. However, its not possible for a marketing company to make 35%+ EBITDA margin unless their gross margins are 70%+. The only exception I have found so far is Caplin Point (55-60% gross margin but 30%+ EBITDA margin). So, I don’t think its possible for an Abbott to make 35%+ EBITDA margin as their gross margin itself is 45%. There are not many pharma marketing companies whose employee cost to sales ratio can be below 10%.

A better comparison for Abbott is Sanofi India. Sanofi makes 55-60% gross margin and 20-25% EBITDA margins. Hope this clarifies my thought process.

Hi @harsh.beria93

Going back to our discussion on Abbott India in Mar - 2022 ( Seems ages back ), I found more data points on Abbott India in the attached report on its Margin trajectory

AbbottIndia-CompanyUpdate4Jul25-Research.pdf (441.5 KB)

As per this report EBIDTA margin of the core business is ~ 38 - 39%. The lower Ebidta Margin compared to core margin is because of its distribution business with NOVO Nordisk - part of it is being phased out in next 2 years. Following is the contribution of NOVO’s product in Abbott India sales. OTC contribution in abbott’s sales is only 8% in FY 25

[OmkarT]

Happy Samvat 2082

Happy Samvat 2082 to everyone! Wishing all of you very happy, healthy and prosperous Diwali !

I will be taking tracking position of ~2% in Nesco Ltd today. Nesco was on my watchlist for a while now but I did not invest before because according to me there was a limited scope to judge management for their capital allocation skills

The land mangement bought in Mumbai in 1960 still provides them opportunity to generate incremental profits and cash even after 60+ years today. Therefore I thought any Capex done on this land does not provide opportunity to assess capital allocation skills of the management

I am willing to delve deeper in above argument and revisit investment thesis especially at the time when management started investing in the projects outside Mumbai. Watch this space!

I don’t expect to ramp up position further anytime soon

Thank you

[OmkarT]

Inspired from Abhishek Singh of dsp.

My goal of investing in a stock is not to pick the stock with the highest return, but to choose a company where I can stay invested in for the longest time - without being shaken out by volatility in price and earnings. One good way to evaluate is by thinking through- how would I behave during its worst periods ( of earnings and market volatility ). I tend to display better discipline with companies where there is a 1) “track record” of atleast one cycle 2) scalability and 3) differentiated insight on management’s capital allocation. My belief is that this confidence leads to higher longer term allocation and better outcomes

[OmkarT]

@OmkarT

Even though pharma sector is difficult to comprehend for an average retail investors like me it is the only sector according to me which can give you earnings growth in recession years (FY 2020 is the most recent example). Therefore it is hard to ignore this sector. Also if you do little bit of research then you will realise this sector has gone through at least two down cycles in last two decades and because of that ‘’Risks’’ are widely known (at least most of them). I again repeat, risks are widely known. This is a significant advantage to retail investors because if you know most of the risks then the quality of decision making is better

IEX

While going through the PPFAS AGM meeting recording, one statement about IEX has been lingering with me: “the bull and bear cases are well known.”

I plan to think through this more critically when I get the time. In my view, the situation is similar to the notes on Ajanta Pharma’s thesis, where both the bull and bear cases are also well understood.

The reason I don’t want to dismiss this is that the quality of a decision is often much better when both the upside and downside scenarios are well known.

[OmkarT]

Thinking Long Term with a right ‘Lens’ - Global competitiveness

Thinking in decades and executing successfully over long periods requires choosing the right investment lens.

A company’s franchise is under constant attack from competition. When holding periods are very long, erosion of company franchise becomes one of the most common deterrents that can push an investor off course. Therefore, a key element of my investment lens is assessing the global competitiveness of a company (excluding sectors with strong regulatory protection such as banks, power exchanges, etc.).

If the depth of the moat is evaluated in the context of global competition, domestic competition is largely addressed by default. This significantly strengthens the investment thesis and improves the ability to hold the business for extended periods.

Suprajit Engineering, Ajanta Pharma, and Vinati Organics, in my view, are globally competitive businesses. As a result, the threat from Indian competition is inherently mitigated within the investment thesis.

More recently, both Suprajit Engineering and Ajanta Pharma have defended and expanded their global franchises by leveraging the global platforms they have built:

• Suprajit Engineering announced a exclusive partnership with BluBrake to introduce ABS technology across key global markets, including India, China, Southeast Asia, and Brazil.

• Ajanta Pharma announced a exclusive partnership with Biocon to distribute generic GLP-1 across 23 countries.

These developments, in my opinion, add a new dimension to the franchises of both companies. Successful execution could not only strengthen their competitive positioning but also unlock further such global opportunities over time.

[OmkarT]

@OmkarT

I will be taking tracking position of ~2% in Nesco Ltd today. Nesco was on my watchlist for a while now but I did not invest before because according to me there was a limited scope to judge management for their capital allocation skills

The land mangement bought in Mumbai in 1960 still provides them opportunity to generate incremental profits and cash even after 60+ years today. Therefore I thought any Capex done on this land does not provide opportunity to assess capital allocation skills of the management

I am willing to delve deeper in above argument and revisit investment thesis especially at the time when management started investing in the projects outside Mumbai. Watch this space!

I don’t expect to ramp up position further anytime soon

In next few days/weeks, I am looking to ramp up significantly ramp up the portfolio allocation of Nesco ltd ( may be to the level of Suprajit and ajanta ). following are the reasons

1. Reasonably ok starting valuation
2. Back of envolope calculation suggests company can keep monetising Goregaon land bank for next decade (conservatively) at least
3. Most important: Very high confidence company will maintain its franchise (ROCEs) for next decade ( or in-fact 2 decades). It is one of the very few companies where both - foundation and longevity of the franchise can be judged relatively easily

[OmkarT]

In general I see panic in only price, as per my narrow sample set observation, there is no panic in investor psyche

I am Not sure whether to focus on absolute valuations or focus on relative valuations