ValuePickr Forum

Portfolio rationale

Have made a portfolio of 15-20 stocks along with a watchlist of 15-20 stocks. Basic underlying theme of the folio is market share gains by the companies that I own in the Pf . Have given a weight age of 5% to each stock, only 2 stocks have a weight age of 6%.In some where conviction isn’t that strong, have allocated between 1-2.5%, Pf is as follows:

HDFC bank 6%- goes without saying that it is a Casa franchise with excellent underwriting skills. An article by finception further clarified my doubts about the growth sustainability.

Bajaj Finance 3%- unluckily couldn’t scale the position appropriately as prices ran way ahead of the fundamentals within a day or two. Really like what Sanjiv bajaj has built. But one has to be wary about the current high growth, as in lending biz it pays to be more prudent. Sustaining 30%+ kind of growth is a tall ask considering the overall slowdown in the economy. Underwriting quality might get compromised. No reason for that happening right now, just a possibility to be kept in mind.

Kotak bank 5%- in BFSI main bet is on the management and their ability to sustain the quality of growth. Same thesis as HDFC bank.

P I industries 5%- after the painful consolidation in the last 3 years, growth has come back in the company. Their csm is firing on all fronts. One of the best performing stocks of the last decade or so.

Alkyl amines 5%- like the single minded focus of the Kothari family on Amines chemistry. He even says in the concall that we won’t diversify into other chemistry chains due to their hands being full with Amines chain in the next 3-4 years.
Meets all the filter- Stable margins+skin in the game+less competiton+long runway for growth.

Aarti industries 5%- multiple chemical chains plus long term contracts making them indespensable for its customers. Solid co with a proven trackrecord of execution.

Divis lab 5%- one of the leading Api manufacturers supplying to the regulated markets. Capex underway and more capex to be likely undertaken in the future. Just look at the OPM’s in the last decade.

Apl Apollo 5%- leading steel tube manufacturer in the country. Gaining market share as the competition around it is collapsing. Even the recent Q2FY20, volume growth was around 20% in such a subdued environment.

Gujarat Ambuja Exports Limited 6%- short term pain for long term gain. 10% capacity of the entire industry has collapsed due to the disproportionate increase in the prices of the maize. They are dominant (25% market share) in the industry that they operate in. With the derivative manufacturing starting in October and when the maize prices stabilize, difficult to see the co not getting re-rated by the market. Its a classic- low risk high uncertainity bet.

CanFin homes 4%- main bet is on the competition from other Nbfcs receeding. This is one of the well run Hfc’s. Major catalyst can be the stake sale by Canara bank. Have to keep in mind the rising proportion of non salaried segment in the book along with growth coming from Tier 3 and beyond cities.

Knr construction 2.5%- just like in banking where the most prudent guy wins. In sectors dependent upon the government, guys with lowest debt and prudence in terms of handling their balance sheet and bidding for orders win in the long run. Others like Dilip buildcon were busy taking up their order book and adding debt ok their B/s. Only when the tide goes out we get to know who is the strongest player. Still wary due to the mounting debt at Nhai. Still, India needs a lot of roads to be constructed. (Risk-Nhai, if business model changes due to change in nature of projects being offered)

Psp construction 2.5%- asset light player with best in class ratios when compared to the competitors. Would wait and watch how the company scales the order book and in what segment they scale the order book. Won’t shy away in averaging up if the thesis works out.

DCB bank 5%- anyone wanting to understand the conservative nature of the management should go and read the Q2FY20 concall. Main bet is on Npas remaining under control and Roes improving above 15%. Can see a Cub like outcome if the above mentioned happens.

Cera 4%- third largest player in it’s segment. Main bet is on the cyclical recovery that can take place with real estate cycle reviving.

CCL products 5%- they have a world market share in coffee processing of nearly 10%. With new plant commissioned, main triggers can be improving margins and 10-15% volume growth. However, thesis might go for a toss if incremental voolumes don’t come. The other risk is that a major agglomeration customer of theirs opened his own plant. The entire narrative might go for a toss about CCL’s competitive advantage of the above mentioned risks materialize.

Cholamandalam 5%- again the same theme. In an environment where the competitors are struggling to survive. This co reported a growth of 20%+ in Q1FY20. The quality of promoters and Cholas diversified auto loan book makes it a good candidate for the folio.

Aia Engineering 5%- with capacity expansion in place and with the introduction of mill liner, which can help Aia to increase the customer stickiness. As it will become the one stop shop for all the solutions

Orient Ref 5%- major beneficiary of the EAF boom. Earnings growth coupled with ROCE’S of more than 25% will likely deliver high teens kind of returns in the next 4-5 years.

Edelweiss 5%- getting EGIA almost at 10 times its earnings of FY21 at the current valuations.
Market is assigning bankruptcy kind of valuation to the Nbfc business. I believe the cycle might have turned with the interest rates bottoming out. Though have to track the book very closely. If Egia is demerged in the next 2-3 years, just think about the valuations this business which generated 650cr(normalized) of Pat will get. Do think about the valuations ascribed to IIFL Wealth by the market.

Trading/pseudo investing postions-

1.5%- Sanghvi Movers: main bet is on wind energy revival. Getting at 20% value of its gross block.

1%- Managalam organics: near term triggers their in the company with the camphor prices holding firm.

1%- Hsil demereger: lets see the what is the outcome of the experiment. My first demerger bet. Will bring a lot of learnings.
Watchlist

  1. Kei Industries
  2. Bkt Tyres
  3. Deepak Nitrite
  4. Abbott India
  5. Ngl Finechem
  6. City Union Bank
  7. Hester Biosciences
  8. Ratnami metal and Tubes
  9. Minda industries
  10. Rites
  11. Solar Industries
  12. Bharat Rasayan
  13. Valiant
  14. Syngene
  15. Dharamsi Morarji
  16. Maithan Alloys
  17. Srf
  18. Garware
  19. Apollo Tricoat
  20. Sundram Fasterners

Remaining portion is Cash.

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Can u tell us about your investing background
And when did u buy these stocks
Looks a great portfolio

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Great set of companies. I hold aarti, Chola, pi and apl Apollo and Aia eng. These are great set of business and have long runaway for growth. I like solar industries, minda and srf from your watchlist.

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I used to work as an equity analyst for a family office based out of Delhi. I’ve been investing for the past 4 years, my investing philosophy is shaped up by Bharat Shah, Samit Vartak, Phil Fisher and Charlie munger.

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Added 1% Alkyl amines and 1% P I industries even at these prices. Runway for growth seems to me will last for the next 3-4 years at minimum. Market would most likely assign a compounding multiple of greater than 1 to stocks like P I which can reinvest its earnings at 25%+ kind on incremental capital.

Total allocation is 6% each to both of them.

Maybe check if there is any corporate governance issue here. I don’t remember the details but have read/heard something to that effect long back.

Multiple time I have read in this forum that GAEL has corporate issue and noone has ever mentioned exactly what are those and just that they have read/heard. Is there any truth behind it or common shouting from the roof syndrome till whole town start repeating it.

High salary might not necessarily be a corporate governance issue. Look at Balkrishna tyres and the kind of value they have created inspite of promoter taking 10% of the net profit as salary for several years. Corporate governance is a very transient thing though and one must keep assessing every 6 months or so

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Removing Bharat Rasayan and Dharamshi Morarji from the list.

Adding
Paushak and Sirca Paints to watchlist

Just to stay rational and sane will post an anti-thesis for the entire folio

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This is an excellent portfolio and excellent watchlist.

Edelweiss, Garware (technical fibres) and Maithan alloys are in my portfolio

Edelweiss: this is a well run business in my opinion now developing strong capabilities in niche segments such as advisory and ARC
Garware: leader in a niche field again; well run business; wimbledon uses their fibres and customer segments are well diversified (from sports to fisheries)
Maithan alloys: low cost operations mean that they will ride out this crisis at 5-6 pe multiple if not more. Only upside from here on.

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A couple of questions:

  1. Would be curious to know your thoughts on KNR vs DBL; valuations are richer for KNR if i am not mistaken.
  2. Same question for Can Fin Homes vs. HDFC - i feel HDFC is trading at 2x book after we remove its other sister companies holding and apply holdco discount

Sorry about the questions, but want to compare notes!

I haven’t added Maithan Alloys due to the following reasons:

  • These multiples might be artificially low due to Cycle turning against them now. Lets see how this pans out.

-There is a capacity constraint. 24-36 months is the time given for new Greenfield capex.

-80% of their sales is to a single customer i.e. Sail. Sail’s management in a lot of their interviews has shown an intent to do backwards integration into ferro alloys. Not only sail’s, but the rest of the industry has been doing backwards integration into ferro alloys.

-Lastly, even though they’re dominant in their industry. They lack pricing power. Their Ebitda margins would keep fluctuating a lot.

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  • There are many CG issues in Dbl. Look at the criminal cases against the promoter, Debt heavy balance sheet, intangible assets in an epc (check the b/s, I was shocked at this one )+ the amount of inventories on the balance sheet. These are a few red flags which kept me away from DBL+ They’ve pledged 27% of their holdings.

  • Hdfc, no doubt it’s a super quality company. I think with this base it would be difficult to sustain the historic growth rates. With CanFin Homes having demonstrated their execution capabilities, can grow faster when the liquidity situation and demand for housing improves.

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Added 2% Sirca Paints+increased 1% allocation in Sanghvi movers

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Watchlist update
Removing Solar Industries, Maithan Alloys and Garware from the list- reasons:
Already dominant in their industries, getting more market share is not possible for Solar and Garware. Their growth rate unsuprisingly has fallen to industry level. Maithan - too many risks involved at the moment. Will keep tracking though.

Added

Polycab
Amber Enterprises
TCI Express
Axis Bank
Balaji Amines
Atul Ltd

To the watchlist

Hi! I was wondering if you have ever compared Amber and Dixon. Both are mostly plays on contract manufacturing in consumer durables, with Amber mostly catering to A/C business and Dixon having a more diversified basket.

Thanks!

I think you are talking about Garware Technical Fibres. In that case, your rationale doesn’t hold because there is no exact listed or unlisted peers to compare with. So, how are you measuring that their growth rate has fallen to industry level?
Also, GTF is a unique player in the way that it offers highly customized Value Added products to various industries. Since, it is an unique player it is creating niche market in various geographies by replacing inferior products.
However, lately its growth rate has tapered off, not because of the reason you mentioned but because of the macros in the industries it focuses.

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Sirca Paints Concall: Q2FY20 (Rough notes)

-12.1% Growth in sales, 20% in H1FY20.
-26.8% PAT GROWTH Q2FY20.
-First result post migration from SME Platform.
-Volume growth: 22.74% Q2FY20
-Focusing on setting up Physical infra+ 52% increase in sales force
-Key supplier to Godrej+Ikea (getting apporvals from their contract manufacturers, they will have 4 contract manufacturers in the country)
-Wood coating facility commenced developed with complete tech collaboration from Sirca Italy+ 33cr+12k tonne facility
-Wall paint unit- 24L litre also commissioned earlier in FY20.
-Core product offering; premium Italian wood coating range+ also entering the economical PU
-Expanding reach beyond India.

-New Plant commissioned- strategy for new plant and sales potential

-Mgt- 200-225 crore turnover at its peak, facility for exporting as well. Bangladesh, Sri Lanka and Dubai.

How fast can we utilize?

-First year; 25-30% utilization
-in 2-3 years, 100% utilization
-Initial few days can be slow in terms of gaining momentum
-Can manufacturing in India lead to higher margins and profitability?
-This facility is for Horizontal and Vertical expansion of product line.
-Will keep importing from Italy.
-Will also manufacture Economic Pu.
-Gross margin of trading and manufacturing biz would be the same.
-New plant is only meant for new products (apart from thinners)
-Volume growth coming from new territories; have entered 7-8 new territories
-Duration of contract; 15 years (2018)
-Royalty; 15 cents per litre (Pu products)
-No royalty on other products which will be manufactured
-Size of the market of the entire PU market; 7000 cr, 50% Indian Pu, 10% Italian Pu, rest is for other products like thinner, melamine etc
-20% market share in Italian PU
-Wood coating market is growing at double digits
-Market share is increasing every year
-Asian paints leader in Economical Indian PU due to distribution
-Asian Paints leader in Italian PU due to distribution
-We are number 2 in Italian PU
-other expenses increased due to rent, advertisement, 1CR on CSR.
-Sales force in March- 120+
-Now it stands at 172
-Wall paint facility; can generate 40 odd Crores at peak capacity
-Gross margins would be the same from Economical PU manufacturing as well.
-25-26% Ebitda margins are sustainable
-Delay of capex due to major delays of explosive licence from Govt of Haryana (required due to storage of corrosive solvents)
-By 1st week of December, we will start manufacturing big batches (manufacturing small batches from the new plant, getting the product right with Sirca’s help)
-From Q4FY20 one can start seeing impact of new plant
-In first year, expect 50-60cr of incremental revenue from new plant
-In trading biz expect growth of 20-25% due to growth Italian PU.
-In FY21 expect 250cr+ turnover.

  • Why Paints? Collaborating with SIRCA, some formulations for the most luxury products.
    -Wall paints contribution is extremely low and small.
    -This will increase once South India Retail Business starts.
    -Long term plant to manufacture imported products; not going to manufacture high quality PU+will keep it for imports only.
    -Hiring being done for new Infra+ due to focus on Pan Indian presence
    -Employee cost will stabilize at 6-7% in the future.
    -Working on to reduce the receivables+ on reducing the working capital intensity
    -Major product IICA Pidilite(they’re giving more credit)
  • IICA started as SOUTH Indian plant, we started from NORTH. IICA is stopping imports and going for local manufacturing. We will keep importing the high end PU. Giving the customers a feel of pure Italian products.
    -Italian PU market is growing faster than Indian PU market.
    -Exclusive studios; 12
    -Sale from neighbouring countries; identified distributors there. Not going to export Italian PU from India. We can only export the products that we manufacture in India.
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Exited Mangalam sometime back. Can’t differentiate between noise and signal regarding the camphor prices. Was always a 1% position. Such Roes and Roce’s won’t sustain for long.

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