Portfolio Growth + Winners

Q&A: Questions & Answers Portfolio Q&A
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Hi All,
I have been holding Godrej Consumer, Page, Britannia, Yes Bank , Engineers India, Dabur, ITC, Zydus, Bajaj Electricals, IPCA etc for almost 7 years, and have been investing with sum total of 1 lacs kind of money. I have been able to make my money 9 times through last 7 years, following a certain way . Over last 2 years have increased exposure to the markets, shuffling my portfolio significantly, picking a set of winners / potential winners (may or may not be market leaders) and trying to follow the spirit with which I grew my initial seed money.

Here are the latest stocks with allocations::

Bajaj Finance 37.65%

Jubilant FoodWorks 24.21%

Page Industries 5.88%

Avenue Supermarts 9.67%

Britannia Ind. 5.14%

Godrej Consumer 3.34%

L&T Technology Serv. 4.06%

Bandhan Bank 3.84%

RBL Bank 3.39%

AU Small Fin. Bank 2.83%

General theme: The company shouldn’t be a one trick pony and should have multiple products as a consumer company , operate in multiple segments as a lender etc… Hold these for the next 5-7-10 years , as long as they look like innovating and winning market share.

Rationale for Banks/ NBFCs: Buy Banks / NBFCs growing at 25-30% plus growth rate , managing NPAs well over last 5 years, having considerable retail exposure. Buy mid-cap banks as a basket, so that one can get an average 18-20% CAGR return over a period of time from that basket. AU / Bandhan operate in the so called “Bharat” which is supposed to be a huge expanding market. Bajaj Finance allocation is high based on intuition that there is a organized retail boom coming and this company gets windfall gains being in consumer durable loans. Bajaj finance has other tailwinds too, like housing and rural. Their housing finance is growing fast as well.

Rationale for consumer names: Avenue Supermarts / Jubilant Foodworks are the only new consumer stocks I have added , based on the fact that they seem to be winners. For example DMart can gush out way more cash than Reliance Retail when it reaches the levels of revenue. Jubilant Foodworks doesn’t seem to have any competitors at all. All of the consumer companies in the portfolio to see windfall gains from the organized retail boom in the next 5 years. The other tailwind being growth in rural spending.
Rationale for continuing to hold Page, Britannia, Godrej Consumer : Don’t fix it if it ain’t broken. Just because PE multiples have gone through the roof, I don’t want to see these gone from my portfolio. They continue to be hungry to grow profits. Their penetration will increase with the organized retail, be it online or offline. In fact the organized retail will offer these companies a playing field unprecedented at no cost of their own , and they should be able to create/experiment with entire new categories of products. I must admit that I have cut exposure to these during portfolio reshuffle, as reflected in the low percentage numbers, but together they form 14% of portfolio.

Rationale for LTTS : It seems to be a winner in the IOT field and I wanted to participate in IOT / AI growth because of my own background.

Regarding Valuations : I don’t know an iota of reading balance sheets. I do understand few things like PE, PEG, ROE, ROCE etc. The thesis is that well placed companies should be able to take advantage of tail winds for next 10-15 years and the PEG ratio is expected to remain rangebound between 1-3. So no permanent crash is coming in these stocks is what I feel. Given 20% of humans will be in india by 2025, and we would have taken 85% out of poverty, and would have put 40% on median per capita income due to more inclusive growth. The affluent+upper-middle+middle-middle will grow from current 25-28 crores to 56-60 crores . The target market becomes 2 times for consumer companies in just the next 7 years. Sales of these companies grow by 2-3 times in the next 7 years , the profits will grow by 3-5 times due to margin expansion. As I do not expect any further PE expansion , so the expected return on these investments : 3-5 times in next 7 years.I do not see major PE contraction either as the sales in these companies is expected to grow again significantly between 2025 and 2030. The core valuation theme is longevity of secular growth.

Would like to know opinion of forum members on the above investments.

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What a portfolio of stocks! Although I would be scared adding them at this price. Jubilant is the largest holding in my portfolio. Although, it is scary to keep holding as they are operating at close to 10 year peak margins. They also have huge tailwinds in that GST has really helped their sales due to significant overall reduction in tax.

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If I’m correct, it’s not just the reduction in GST that helped them. They also retained to old prices (i.e. Prices of most pizzas after applying old GST). They even had a notice served:

The company claims to have passed on the benefits, but I personally remember the Old prices Vs New prices. They simply retained the prices with Old GST applied. This is perfectly fine, coming from a business point of view. But is it very ethical? Not so much.

Domino’s is still a strong brand. I just wish the company didn’t have to stoop to such cheap tactics to improve margins.

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I just edited my original post with a note about valuations. I don’t buy Edelweiss because it used to be mainly brokerage, and I never read more about it as it transformed. I continued to feel that it is a cyclical business, like any other brokerage. But I might be entirely wrong now. I need to read up more on this.

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GST related glitch is in the short term, and may be they will be fined after all. But in the long term, not having any competition , about 70% marker share is the only reason to have Dominos in such big allocation in the portfolio. It might be a winners take all game in next few years. But it is a one trick pony , and only sells to the upper middle class as of now - they are the negatives which don’t fit my investment thesis. Any negatives emerging out of these or loss of market share will lead me to a sell signal - not sure if/when that will happen.

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your first line says about yesbank and dabur…but i dont see them in your allocation?

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I sold dabur, yesbank, itc ,zydus, baj elec, ipca etc. during reshuffle.

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I have restructured my portfolio during current fall, and replaced entire consumer stocks due to overvaluation of the entire space. Historically the valuation was something that one could live with , but the current juncture feels like a cliff to me, and I can’t justify it in my mind.
Now I have only one consumer stock i.e. VST Industries with a 10% allocation. I feel the recent results indicate that the company can grow faster , and given the product which is cigarettes , the sales momentum can sustain. In the worst case, the company should double sales every 5 years , and pays dividend for the bad times. ITC couldn’t kill them in the last 10 years , and next 10 years the company should survive again.

Would like to know if anyone has research about the negatives in the VST Industries stock which I am overlooking?

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Thanks @thecroc for bringing up VST Industries. I feel it’s one of those rare gems, terrific on all fundamental parameters, excellent balance sheet, foreign owned.

The one thing that I am unable to get is what brands the companies sell as. They also sell unpackaged tobacco. Overall, a significant chunk is exports, though I am not sure how much of it is intermediate product or finished cigarettes. Upon asking few local ‘pan walas’ (from where most people buy loose cigarettes), it was clear that the ‘Charms’ brand that was popular in old days is almost gone from the domestic market now due to low demand. Though I read somewhere that Charms and Charminar were decently popular in East Europe.

Because the company does not hold concalls and these things are not mentioned in the AR, I am wondering what brands the company sells its cigarettes under (if any).

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As per info available on Wikipedia , that brands of company are TOTAL , CHARMS , CHARMINAR , GOLD , MOMENTS and ZAFRAN

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Jubilant Food-works is mainly growing because of 30 min delivery at home while if you see around Zomato & Swiggy is giving growing at rapid phase and they are so much option available there. Plus now they facing a lot of competition of delivery guy, they employee cost increasing because of Zomato & swiggy.

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Hi, I have been amazed with the way you constructed your portfolio, high weightage to winners and good solid growing consumer names along with it. Bit surprised to know you sold off all the consumer companies which is about 50% of pf (i.e if you dint make any changes in between) owing to high valuations. So do you hold 40% of cash with vst industries being 10% of pf now?

One thing which I felt was may be due to consistent predictable earnings and cash flows of these consumer companies market is valuing them higher than their peers. If at all there is any crash or shocks/volatility for these consumer names they may still appear costly vis-a-vis to market and peers as the market itself may correct heavily. These are just my thoughts and I may be wrong.

Since you have been invested in growth stocks from quite long time, do you feel that these fmcg/consumer companies can get derated now? Would like to know your thoughts and further plan of constructing your portfolio.

Cheers!!

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I still hold DMart, from consumer I meant FMCG. I hold DMart because I see them making progress all the time. To me they are an inventor as they remained profitable from the beginning. Their model is to have monopoly in grocery sales in a given geography by all means, including DMart Ready - thats my reading. They seem to be working towards that. So the valuation and growth are definitely joined at the hip. FMCG companies are not looking aggressively to grow - look at how Haldiram’s a non-listed player is desperate for growth. The “buttermilk” is biggest new category in FMCG and coconut water etc. but they all have missed the bus. I don’t have any cash. I redistributed the cash over existing holdings , except I didn’t need to add any more Bajaj Finance. PNB Housing is only new addittion with 10% allocation bought at the good dips 750ish. The overall thought is to go for “Growth” and avoid “risk aversion”. So concentration in one sector is Ok, as long as buy price is good for the stocks. The buy price gives me enough comfort to have sectoral concentration, and I have decided to go against the bookish risk aversion by having sectoral concentration.

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PNB housing has been a wise choice. As minority investors, we are simply interested in EPS growth, as we assume that this will reflect in the share price eventually. Better Eps growth, than competitors, can come in many ways:

  1. low NPA
  2. Better ROA
  3. More Sales

Gruh has higher ROA (1.6vs2.5), but PEG (0.30vs2.4)is very high as well, hence PE for PNB is much pleasant (17vs50). Great choice PNB Housing.

PNB could beat Gruh in terms of returns on share price because of more sales and low NPA.

Which sectors do you intend to focus on? Housing Finance and FMCG only, or are you bullish on other sectors as well?

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Hi Amit,
I will just pour my thoughts down and give a long answer - so its not exact but a sense of what I feel.
I think Tech is #1 , Financials are #2 . Those are the most scalable businesses in the world. Tech = Scalability + less risk, Financials = Scalability + more risk. The big can become bigger , the bigger can become biggest and the biggest can become again 10x. There was never a bubble burst, according to me, its just that a better player kept on appearing in these fields. In India we don’t have many tech opportunities. If we marry the #1 and #2 the biggest scalable opportunities in the world will emerge.

Fintech doesn’t only mean having an android app. Its rather totally about big-data/ AI / ML. And Bajaj Finance is moving in the right direction. Their big-data repository is their strength. I think they are a fin-tech company.

FMCG / Retail is scalable but much less , order of magnitudes less. But predictable. So we look at how much our company can scale given the market opportunity , and at the time of our exit , our company should still look promising on scalability front. If we intend to hold for 5-7 years , the company should have a promise to grow at 20% CAGR for next 10-15 years. That is the kind of company that one should be bullish about, so that you find a buyer without valuation de-rating. Unfortunately , the indian FMCG today stands at a valuation, that the above seems challenging. In any under-penetrated consumer market there will be a time for consumer companies, and they can grow for some time, but only as far as they can scale.

So I am very bullish on Banks, NBFCs which are embracing technology and best process. Small finance banks are looking very good. They are scalable. We have to drop the risk guard a little, and I feel there is no choice. Next is obviously consumer business where valuation is justified by a growth trajectory right now.

There is an argument that only whatever has happened in US will happen or repeat in India, but India and US and the world are seeing disruption by AI/ML and fin-tech at the same time

Beyond that one can be bearish for many reasons, but that leads to a heavy loss. There is only so long you can hide behind the HULs, the ITCs, the PAGEs and Mr. Buffet hiding behind Coca-Cola. Coca cola isn’t scalable. Google can unlock another company of the size of Google by finding something widely applicable and monetisable in AI. Consumer companies can’t do that even in a thought experiment.

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Like your point of view in Fintech. Bajaj Finance is my largest holding as well. P2P lending is an emerging area which need to looked at by BFL and other NBFCs. As an Investor, I find P2P lending scaling up fast.

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In summary,

IT, FMCG, Banks are good businesses as they are scaleable. If the management is qualified for the job, then these businesses can grow well.

However, FMCG are richly valued.

EDIT: IT, FMCG, Banks are good businesses AND Financials, including Housing Finance and Insurance

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Financials include AMCs n insurance as well. I want to buy at dips some market leaders in those.

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Hi there,

I was totally thinking along the same lines as you regarding the Financials + technology. Maybe it’s because of my technology background. Had made some purchases in September 2018.

Bajaj Finance and Punjab HF have both given extensive press releases regarding their plans on this front. SBI, ICICI and HDFC are also doing simillar things but the three of them fare very differently in execution capabilities.

On the flip side, we still have the general weakness for all NBFC sector counters very much there. This had started with the IIFL, DHFL issues.

How does your portfolio and allocations look now?

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I own the fastest growing NBFC and the fastest growing Bank, Also they are both very tech savy. 56% Bajaj Finance and 44% RBL Bank. This is all in the portfolio. This is a high risk portfolio. I am guided by few factors like scalability, growth rate . ROE of RBL bank is not very encouraging but its a “buy what you see” stock for me because I see their presence in many city as well as remote areas and know friends who use their services and are satisfied .
I have exited every other stock that I used to own , because of having better conviction in the two.