Portfolio Re-Structuring/25% CAGR quality-growth for next 2-3 years

Investing Strategies
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even tho there was a steady correction in the markets since feb2015-the valuation of most of the stocks i owned were high & continue to be so.one crucial criteria i set was to look for sectors where valuations were reasonable. while reading on these sectors i also realized some sectors like Textiles, Rubber, Steel products & specialty chemicals also had favorable tailwinds & i found the valuations reasonable compared to the sectors that i owned. Also some of the companies in each of these sectors were available at a decent discount to the leader in the pack.
Looking forward some of these sectors were to be the beneficiaries of govt capex ( Infra, Agri), some were given sops by the govt (Textiles),some would benefit from the re-focus on the sector (Manufacturing-make in India), some would be seeing demand once the economy took off (Rubber, Auto, Low cost Housing/ HF/ Niche Housing).

I feel Defense is a very very long term play & the track record isnt strong enough other than BEL /L&T type of companies
Digital is yet to show they can make money & the few companies that exit are well discovered
Solar related ideas might see traction once the grid infra is in place

As Mr Prashant Jain mentions & the basis of this thread - which of these sectors would be taking over the mantle from the old guard of Pharma/FMCG/IT etc. Frankly this no one can tell for sure

In that
I believe the commodities tail wind is too strong to be ignored- call it opportunistic if you will, the benefits of such low prices in crude, rubber, steel, and other inputs is bound to benefit companies ( in Manufacturing-Auto/Pipes/Rail infra / Power/Engineering, OEM catering to consumption, Tyre’s/Re-treading, Agri/Specialty Chemicals, Textiles, ) for more than a couple of years- that’s where backward & forward integrated companies with in demand products ready to take advantage of the huge capex, decent management & good capital structures are likely to do well for themselves & their share holders

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I am also curious to know the real beneficiaries of lower commodity prices, which has been going for so long. Of course in India not everything is being passed on, such as Oil prices remains high at retail even though global prices have tanked. But there must be some company’s who will benefit. Already we could see over the last 6 months the airline stocks have immensely run up.
The commodity beneficiary’s may not be long term, but if there are some companies going to get benefit it will be a great play. Would be interested to explore companies such as Exide, Castrol, VIP, Welspun Syntex etc

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My two scents on this beautiful discussion - The sectors like HFC, Pharma, SMAC and Agri would do well. Other sectors like Infra, power, Rail, Road, Port, Defense etc are capital intensive with huge gestation period, here it would make sense to play with ancillary industries which supplies to them instead of direct plays.
Overall, can this be a probable allocation for 30 to 35% CAGR ???
HFC : 40% - 10 year consistent play
Pharma 10% - for next few years and then relook at the sector
Agri - 30% - Starting the act for next 4 to 5 years
SMAC - 20% - For next 2 to 3 years before something new comes in
Need more information on ancillary players for Infra, port, roads etc and also some rural consumer plays to rework on the allocation. Would sincerely request for the feedbacks from fellow members.

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Dear Donald and fellow VP’ers,

Thanks to all contributors to this thought-provoking exercise.
Please accept some inputs that may contribute to the thread:

AGRI:

I have a slightly divergent view. Over the long term the supply chain can only exhibit robust earnings growth when the customer is solvent.
Majority of farmers in India owns less than an acre of land, yields per acre are pathetic due to several well documented reasons, and a vast majority of younger farmers / future generation of current farmers will not want to farm – if given a viable choice.
Add to that the trend of increased weather irregularities, and lack of reliable tools to allow farmers to plant accurately. The odds are heavily stacked against farmers. The lack of an efficient land bill also means farm land sale becomes difficult.
While there is a case that the farmer will be subsidised, loans may be waived etc. for the agri supply chain to continue to make money, I would be far more enthused about considering investments to suppliers / agri-producers, if for eg. there was an attempt by farmers to form cooperatives and long-lease their land banks to far more resilient (capacity to suffer a bad drought etc.) / efficient MNC’s. If the land banks are put to productive use, then the investment thesis can be relooked at and a new trend can emerge.

FMCG:

Certainly this sector has potential for possible disruptive models.

Patanjali / Sri Sri Ayurveda (opportunity: identify listed suppliers / stockists for their products), as well as the innovative model of a listed company – (farm / mill to retail outlet) bear watching. The ability to deliver better quality at lower cost at scale can drive sustained market share gains.

As discussed in an earlier thread, Patanjali will need to maintain its quality when margins compress with their dramatic increase to ad-spends.

Organic food will also be a big trend in India in the future, one may look out for any future listings /opportunities.

DEFENSE:

It is heartening to see structural changes in the new DPP, however one needs to monitor how the changes will translate on the ground.

There is a case for robust defense expenditure till 2019, however, a lot of structural reforms are required and for the system to be cleaned up and efficient will take time.

At the next general elections it will be time to take stock again.

Certainly, if there is a favourable outcome, the tailwind can continue beyond 2019.

Wish you all a good weekend.

Best regards!

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I am not sure about sector weights here.

First of all why 40% HFCs? Good part is that people in India don’t default on home loans but there is too much competition and scaling business is not too easy either. An NBFC like Bajaj Finance just needs to put a button ‘finance by …’ next to the exclusive cellphone launch on Flipkart and voila they have new customers. HFCs need to establish physical infra to expand. HFCs also suffer from regulatory risks like recently debt exposure of MFs to HFCs was cut down. So split 40% in HFCs, NBFCs and banks.

10% pharma also is not to my liking. Pharma companies are immune against India doing poorly. And given their earnings in dollars and euros, they are also a hedge against rupee. Moreover, people in US and developed world are ageing and getting poorer so whether anyone likes it or not, cheap Indian drugs are there to stay. So I would bump up pharma to 30%. Current correction in pharma is a good time to accumulate.

30% agri is fine if govt. keep focus on it. It can also be called a rural play versus the urban play of the 40% financial component we have.

20% SMAC - obviously with above weight there is no space for this. And I am not even sure there are any companies in the listed space for this segment. May be my ignorance here but if I were to invest in this space I would want to invest in InMobi and Amazon India but thats not possible.

One more thing I forgot to mention. Infra can be an interesting play and if I feel a bit like taking risk, I would be willing to shave 10% each from both financials and agri to make 20% space for Infra players.

That’s my 2 cents. Thanks.

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I personally think that one cant bet against the rupee tide, Rupee is bound to fall, whenever rupee rises RBI starts buying but RBI is not so aggressive in selling rupee so rupee has a downward bias.

With this in mind I would tend to keep my portfolio export heavy, now within exports pharma still is a good bet and there are still small cap/mid cap pharma which would double their earnings in next 3 years. Even RJ was very bullish on pharma in his last interview so was Basant.
Other than pharma we can look at some selected exporters in manufacturing which are growing faster.

To me one can have these exporters(say 70% allocation with both consistent growth as well as a few aggressive ones) and remaining 30% with some NBFCs for safety/consistent growth.

Aggressive ones we would have to find, something like cupid(just eg) which came from nowhere but turned out to be a 10 bagger in a year.
Also, If we get any good play in defense/inra we can adjust a few %ages from exporters.

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While looking at possible changes, one can first have a view as to which of the existing ones are difficult to dislodge.

According to me with the tailwinds, and performance till now,

some companies which are sure to retain their place going forward too are

canfin, pi inds, page inds, ajanta pharma, alembic pharma. That takes care of 5 slots for steady growers.

Companies like avanti and may be also mps also bcos of the sheer correction in their stock prices have come to attractive levels. These might be companies which can spring positive surprises and from current prices might offer higher than compounding kind of returns.

Shilpa medicare is a case of a waiting game, and one should have the patience to wait for triggers to play out if one is invested/thinking of investing.

I feel all the above may be cases of being retained in the PF.

Coming to companies like shriram citi, I dont follow it too closely but personally if I have to make a call I would prefer to buy something like indsuind bank.It has been a fantastic growth story with nearly 30% cagr growth rates with little to worry about in terms of asset quality.

I dont follow the textile story too closely so not much of a view on ambika cotton or welspun syntex.

I think some ideas that might turn out to be interesting could be, torrent pharma (discussed in details), db corp (their yield strategy is bound to come up with results), indoco remedies(they have good strategic tie ups with watson, dsm etc – lot of details available in concall, annual report etc) , repco home finance (it could actually replace gruh – near term concern about state of npa due to TN floods and once q3 results are out of the way it might be business as usual), axis bank (near term concerns on asset quality but much of it might be priced in), shemaroo entertainment (advent of netflix could be a game changer for it). A long shot could be kitex garments which has corrected nearly 50% from its top and one needs to consider how much of a concern the balance sheet problems could be).

I personally dont like to base my investments on govt slogans and such planks and hence staying away from make in india, defence, and such themes. If I find a good company with strong growth prospects, I would be happy to consider it.

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One sector to watch out is the IT product companies in India which are increasingly moving to the top-right corner of the garner, forrester and other research firms. Companies like Take Solutions (Pharma/CRO/Supply chain), Intellect Design Arena (Banking), Majesco (Insurance), Nucleus Software (Banking) etc are making in-roads into the top products in their own domain. Though these guys face stiff competition from biggies like Infosys, Accenture etc, they have focused approach and better products, that are producing better growth and margins.

Would appreciate if members could add their views on this sector and add more to the list of IT product companies.

Disclosure: I own Take Solutions and Intellect Design Arena.

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Super like post hitesh. you put it very well. one should continue to hold existing winners who have a good earning visibility for a few years. this hype about railways, defense, infra etc has been there since may 2014 :slightly_smiling: i think one should get in (if they want to) only after its reflected in results. it might be a little late. but no harm.

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Please continue to pour in your comments. The purpose of this thread is being served - make people think about their existing portfolios, examine existing investment planks critically, also make room to effect some changes as needed from time to time.

This thread is NOT about discarding your existing winners -many have a long runway in front. Its about making sure that there is enough visibility for growth in tandem with valuations. As HItesh has so aptly pointed out, there are a few which make a strong case intrinsically. And there are others which have corrected a lot, and from these levels they are attractive, even albeit at lower growth expectations.

This thread IS ALSO about getting some views in from market practitioners - about how they prepare for the road ahead. The beauty of markets is - there is always something incremental to learn. As a senior investor is fond of putting it - “We are all seeking after TRUTH, and there is no one single truth”. One has to work hard, one has to remain flexible and open, one has to learn to adapt to new learnings and changing market conditions.

I want to share a simple single new insight (for me) from the conversations I have started having on the subject. Let’s look at the past couple of bull market frenzies building-up say in 2000 or in 2008 - that many of us may recall - the IT/Dot Com mania in 2000, and the Real Estate/Capital Goods mania in 2008. If you were not present in these Sectoral flavours of these Bull market - you actually had missed the Bull Market by far.

If you ask market veterans to comment on the characteristics of such bull markets in India, a couple of things stand out

  1. The build-up or the mania has the base in developments in the country in that sector/related sector of a massive, unprecedented scale hitherto UNSEEN in that sector in the country. Think of IT/DOT COM for india in 1999-2000 or Reals Estate/Capital Goods in 2006-2007
  2. It’s very very rare for something that has already played out in the last boom cycle to repeat itself in the next boom. It has to be something new. It has to catch the imagination of everyone around, and also be grounded in some new base developments happening - on an unprecedented massive scale - a first for India??
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Hi

Probably the theme is "Intellectually Make in India - serving Business 2 Business ".
Serving to other businesses intellectually - either in Phrama, manufacturing, Research like CRAMS or CRO, or exporting to big MNC.

and also

Housing for all - Nichee NBFC’s and other related housing material compnaies which also support Swacha Bharat.

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There is one critical thing I have observed and imbibed over the years - that “Victory or Success” is always created twice - first in the “Head” and then in the “Field”. Aspiration levels are crucial to success. If VP’s abiding byline was any different than “Separating the Wheat from the Chaff”, our results could have ended up very different.

Its important to be humble and not lose your head as Guru’s wont stop to remind us. Its important to be open to new learnings and continuously upgrade our skill-sets. Its also equally important to keep our aspiration levels high. Quite often I run into “Purists” who are frankly skeptical of our pursuit of the unconventional. We respect the well-meaning caution that we get from our well-wishers of the type - “why fix something that ain’t broken”.

At the same time we want to keep the “hunger” alive. keep the aspirations high. That we can continue to learn from smarter folks around us, learn to play the game better, smarter, every year. As we keep running into skeptics/purists in this pursuit, its important not to lose our individuality; I would urge everyone to continue to think independently - Ayush’s dad told me a home-truth recently - Leadership is never created from Conventionality; Leadership almost always emerges out of unconventional ideas/pursuits!!

While thinking critically about the road ahead, should we consider?

  1. Stories that have played out before - the Capex/infrastructure story from last cycle e.g. how likely is that to repeat?
  2. Imagining what can be the next wave of sectoral flavour that is probably already starting to unfold before our eyes on the ground - that can reach massive, unprecedented levels in the next 5 years
  3. How about “Financial Inclusion” - imagining the massive scale of Jan-Dhan implementation, mobile wallets & plastic money access 5 years from now, mobile commerce penetration 5 years from now, and the like, and its beneficiaries??
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If we are thinking of new sectors, how about aviation? Globally these companies never made money and if you live in say USA then it is often faster and cheaper to take that 6 hour road trip than take the one hour flight along with its various inconveniences like going to airport, parking your car there, taking a shuttle to terminal, go through security and so on. In India, given the poor quality of roads, high fuel costs and tolls and traffic jams, may be aviation will take off big-time. Just a thought.

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"It has to catch the imagination of everyone around, and also be grounded in some new base developments happening - on an unprecedented massive scale - a first for India?? "

This then has only one answer - E Commerce unfortunately no listed plays - unlisted ones already highly valued ?

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This might be plain stupid but how about sports betting? Betfair, a UK based company, has said that each IPL match sees 10 million pounds of legal bets (in UK of course). Some estimate illegal bets in India could be 20-50 times that. Given 60 IPL matches each year, the number is mind boggling. Unfortunately, again, there are no ways to participate in this via a listed entity for now.

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Industries which will see huge disruption (sooner than we expect ?)

  1. Consumer Auto segment (Electric vehicles) : 100x fewer moving parts than existing gas based ones. Not sure if any of Indian car companies are innovating here.
  2. Banking (mobile) : Here I see Private Banks doing a better job and capturing good market share from PSU banks. I rarely visit Bank and so why should Banks have so many branches (esp in Urban areas) ?. Another aspect is the technology behind bitcoins. RBI too is looking at it. Will we reach a point sometime in future, where we need not go through a bank for transactions (how would this affect the banks) ?.
  3. Power (Renewables - Solar + Wind) : Who will emerge leader here (given than India has set a huge 100GW target from Solar alone) ?. Should we look at proxy plays here (focus on companies which will enable this growth (e.g, grids, transformers, electricity storage …)
  4. Manufacturing (3D Printing) : Are there companies in India look at the potential of this ?. How would this disrupt some of the manufactoring companies ?.
  5. Education (Digital) : Education is a key sector (preschool, K12, higher edu, vocational etc.,). Traditional skill training companies are going the digital way (e.g: http://www.niit.tv) and how can coursera like model disrupt existing way people learn ?
  6. IT (CAMSS - Cloud, Analytics, Mobile, Social and Security) : Though every company says they are focussing and investing heavily on these, there’ll be very few who will end up making money. Cloud has many flavors (Public could is hugely commoditized one). One should look for companies which create niche solution around this space (than a mee too ones). Technology changes so fast and open source community plays a huge role here. Not sure if anyone can bet for very long term (10-20 yrs).
  7. FMCG (Organic) : Our forefathers were doing organic farming and were consuming organic food. We then introduced hybrid seeds, fertilizers, pesticides etc, and now people pay premium for Organic food :slight_smile: …so players focussing on organic food may emege as winners in future. 20 years down the lane, if say 30%+ ppl chose organic way, many pesticide, fertilizer companies would cease to exist.
  8. With stricter rules/enforcement, black money transactions should keep going down in future and how would this change real estate industry ?

About financial inclusion (esp Direct Benefit Transfer) will restrict corruption and is going to put money into the hands of deserving people. This should increase the spending for basic needs (good food, shelter, clothing, education etc.,). Any company which caters to this segment of population will be a beneficiary (NBFC’s, HFCs ?).

AND then there will be sectors/companies which may NOT BE DISRUPTED and grow well for next 3-5-10 years :slight_smile: … so the bets should be spread across disrupters and things which will not change for long time to come.

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My take on the topic

Major problem with Aviation sector is that profits of even most efficient players tend to dwindle over time. Example is South west airlines who was among the industry leader in late 90’s because it operated in only profitable routes but it had to give away most of its advantages as others started copying its model and it had no option but to expand services on other not so profitable routes. Also company needs to pass on most of the benefits of falling input costs to its labour force (like in case of most automobile manufactures) as pilots, flight attendants, ground crew and other personnel seek higher wages and salaries as company profits climb.
.
Main reason for sector not able to create wealth for its investors is that the airplane seat is pure commodity.Most of us would hardly think about anything apart of lowest ticket price while booking a ticket. Its almost similar to playing on metals,crude oil and should be avoided as much as possible which was highlighted beautifully as no fault rule by Professor Bakshi in his recent talk in Mumbai to seek protection from nature. Even with massive tailwinds in the sector due to falling crude price most of savings didn’t went to company’s bottom line because most airlines had to pass on the benefits. Example Indigo’s realisation per person falling along with EBITDA margins being almost at similar levels

Pharma, Housing, Agrochemical and Niche FMCG companies should continue to do well over next few years.One sector which I believe should do well in next few years is Textile sector due to fundamental change in industry dynamics (China escalating costs). But major benefits would accrue to company dealing in value added products rather than spinning companies.Chemical sector should also do well but as most of them are pure commodity it is difficult to keep them in your portfolio as long term plays.

Number of changes are happening in sectors like Defense, Railways, Power but it is very difficult for investors to take advantage because of huge gestation periods, inevitable delays and thus escalating costs and most importantly because India’s policies are itself in trial and testing phase. Besides there are two ways to make money in defense one via volumes (which is used by most players worldwide but requires huge capex and long gestation periods) and other via niche manufacturing (not many companies in India have the required capability). Railways,Power sector can best be played via auxiliary sectors like bearings, transmission companies but again these companies will test our patience like anything and here also there would be inevitable delays. Lastly there is one more sector IT SMAC/Product development which is expected to do well but these people are burning cash like anything so not too sure about who all will survive when the music stops playing (liquidity in world market dries up).

Sources

Defense http://www.indiandefencereview.com/spotlights/make-in-india-in-defence-sector-an-overview-of-the-dhirendra-singh-committee-report/0/

Airline Sector http://25iq.com/2016/01/16/more-than-a-dozen-reasons-why-investing-in-airlines-belongs-in-the-too-hard-pile/
Video https://www.youtube.com/watch?v=7s4Z6O3uYLU

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Thanks @Donald for starting this thread. Very useful for learners like me.

  1. The build-up or the mania has the base in developments in the country in that sector/related sector of a massive, unprecedented scale hitherto UNSEEN in that sector in the country. Think of IT/DOT COM for india in 1999-2000 or Reals Estate/Capital Goods in 2006-2007

Few themes (might be already discussed) that I can think of matching the above mentioned build-up criteria for which foundations have been already laid out are …

  1. eCommerce - till we get big/good listed players, we can play with proxy players like - logistics
  2. Express delivery, Logistics, Warehousing - TCI, BlueDart
  3. Mobile Wallets - Paytm, few telcos
  4. Branded Retail - Aditya Birla Fashions (Pantaloons) / Page
  5. Quick Service Restaurants - Jubilant Food
  6. Smartphones → Mobile Data → Telcos - Reliance/TataComm ?
    disc: not invested in any of above
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Over the next 5 years, India needs innovation to grow. As Clayton Chrstensen puts it, very clearly
http://www.inc.com/christine-lagorio/clayton-christensen-capitalist-dilemma.html

The first are “empowering” innovations. These transform complicated, costly products that previously had been available only to a few people, into simpler, cheaper products available to many. The Ford Model T was an empowering innovation, as was the Sony transistor radio. Empowering innovations create jobs for people who build, distribute, sell and service these products.

The second type are “sustaining” innovations. These replace old products with new. The Toyota Prius hybrid is marvelous–yet every time a customer buys a Prius, a Camry is not sold. Sustaining innovations replace yesterday’s products with today’s products. They keep our economy vibrant–and, in dollars, they account for the most innovation. But they have a zero-sum effect on jobs and capital.

The third type are “efficiency” innovations. These reduce the cost of making and distributing existing products and services–like Toyota’s just-in-time manufacturing in carmaking and Geico in online insurance underwriting. Efficiency innovations almost always reduce the net number of jobs in an industry, allow the same amount of work (or more) to get done using fewer people. Efficiency innovations also emancipate capital for other uses. Without them, much of an economy’s capital is held captive on balance sheets, tied up in inventory, working capital, and balance-sheet reserves.

If we see from this angle, how about the following possibilities

  1. Empowering Innovation ------ Solar, Wind Power, Logistics, Electronics Manufacturing, Defense… which creates lot of jobs with new business for India.
  2. Sustaining Innovation -------- Auto companies might find favor here. Also the Retail will go through the innovations and then the Pharma which will have to continue to sustain innovation. FMCG can face disruption here as with internet and smartphone penetration, the reach for customers will be much easier for new entries and existing brands from Nestle, HUL, ITC will face tremendous pressure from new entries.
  3. Efficiency Innovation - This is where I feel we might get lot more of innovation and much needed for India. Because of the all pervading smartphone & internet penetration, everything will be done in different and efficient way. My main hunch is Banking will transform as well as lot of retail facing industries. We saw over the last 5 years the disruption in the market space such as retail. The Meta markets will be formed which will have in one place everything. Ex Real Estate meta market may have everything such as developer, financier, transporter, architect, legal services, contractor, designers under one place. The guys who can get this done, will have huge command over market. Ex. The way Priceline, Expedia managed to build their meta market in US.
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Hi Guys,

I am doing a lot of restructuring in my portfolio these days. If current turmoil is similar to what happened in 2008, experience tells that the market would go through a long and painful consolidation phase, wherein, the Large caps would go side-ways and the Mid-caps would continue to correct for next few months. And of course, the baton of leadership will be passed on to new sectors and new stocks. Assuming this is the case, it will give us some time to think, decide and buy. But which are those sectors and stock? Well, I am dreaming…….:slight_smile:

So, here are my thoughts on how my model portfolio should look like along with the identified sectors and stocks.

Pasted image773×419 16.6 KB

Comments / Narration :
= Stocks like Speciality Rest / Jubiliant Food / Westlife Deve / Talwarkars etc would be natural beneficiary of the Urban consumption theme. However, imho, none of them appear attractive at current level.
= Sectors where any kind of Govt intervention is likely – be it Agri / Oil / Commodities etc - are kept out
= I am positive on Infra but believe that the structural problems (high debt, tightening of bank credit, low commodity prices, high receivables coupled with long gestation period) will be here to stay for some time.

Risks : The portfolio is highly skewed towards mid-caps but it is intended that way. Banks, Logistics, Infra are notable exceptions but the intention is to keep the portfolio concentrated.

Discl : I have invested in many of the above companies and thinking of investing in some/remaining of them.

Request for views / counter-views please.

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