Portfolio review - Long Term Wealth Creation (princevegeta)

princevegeta · July 5, 2020, 2:20pm

Dear All

I have been a minor contributor to this wonderful forum since last 2 years. Had started investing in equities since early 2014 (Got my first job in mid-2013).

Since then have been very cautious while investing and had never let equity investments cross 50% of Net Worth until 2020. Missing the 2014-17 rally was a big regret in hindsight, however not suffering a drawdown in 2020 coronavirus crash balances it out.

Have used the recent crash to build sizeable positions in shares so that equity investments now form~ 80% of Net Worth. Sharing my portfolio below for review - would love criticisms and suggestions.

About self - I am a Chartered Accountant having being in Audit profession since 2010 when my articleship started in a Big 4 audit firm. I am well versed with accounting and tax laws and currently self employed in the same profession. Investment journey is inspired by reading the usual books - Rich dad poor dad, Ben Graham, Warren Buffet, Phil Fisher, Howard Marks and in Indian context - Basant Maheswari.

I would call myself a growth investor - I feel sustainable growth in earnings is the most important attribute in the valuation of a Company

Learning curve increased dramatically after joining Valuepickr and since then I am continuing to learn every day about investing.

Portfolio Objective: Long term compounding of portfolio with objective of achieving inflation + 5-10% returns

Portfolio Rationale

Portfolio construct is inspired by VP. Will be forever in debt to Donald, Hitesh and other seniors for sharing their learnings and thought processes.

Core Growth: These are Companies in which I have maximum conviction having followed their story for long and personally used products / services. But more than anything - Have maximum comfort and liking for the owners and managements to continually invest and realize growth for the company. Even if one category in which these companies operate face stagnation / headwinds - they have the ability to find growth through other avenues.

For eg - Reliance from textiles to petrochemicals to complete backward and forward integration in Oil & Gas and polymers to Consumer facing businesses and Jio.

or For eg: Bajaj Finance from Auto Finance to Unsecured short term consumer credit to innovative products like No Cost EMI to currently persued avenues like housing finance / broking etc.

I would like to hold these businesses for many years and would ideally not rush to sell in case there is a temporary headwind facing the company / company’s industry.

Emerging bluechip

These are smaller companies which have a very good chance of becoming bigger and bigger through super-normal growth. Opportunity for alpha creation is the maximum in such kind of companies who can be the stars of tomorrow. Few important characteristics I track are:

Industry beating growth performance (taking away market share) - by ticking most boxes as outlined by Fisher - For eg: Strong marketing function, Low cost advantage over peers, better product quality over peers.
Visibility of near term growth - Capex visibility, Sustenance of competitive advantage, large and growing market opportunity for company’s product / services, sector tailwinds,
Competent and Ethical Management - Past performance record, walking the talk, corporate governance and attitude towards shareholders.
Valuation is favourable - I would refrain from buying companies like Dmart, Tasty bites etc although they would qualify for investment in this category since the current share price factors a lot of the future growth. Would prefer companies which are fairly valued / less than fairly valued so that there is a possibility of valuation re-rating in case the story plays out well.

As far as sizing and allocation to these Companies - I like to take a small position initially and then add as and when the investment thesis plays out.

Opportunistic

These are short term plays hoping for capturing likely upside in price in short term or turning of economic and market cycles.

Cash +

High visibility and predictability of cash flows which limits downside. However suppressed valuations mean there could be a possibility of valuation catch up in near term.

Recent exits include -

HDFC Life (Primarily due to expectation of downward treading of interest rates and expectation of shift of customer demand for investment linked insurance products),

Transpek - Used to be 5% of Portfolio in Emerging Bluechip category but sold aggressively after recent announcement of postponement of capex - growth visibility was impacted. Would re-enter once positive developments become visible.

Would prefer not to have detailed discussions on companies since we can have them on the companies threads where I am most willing to participate.

Views and comments on portfolio construct and sizing are most welcome!

Jaisish_Mohanty · July 5, 2020, 2:22pm

What price did u enter Vedanta…a very low delisting price has been provided by promoters which is high injustice for minority shareholders…what is your view on this

princevegeta · July 5, 2020, 2:31pm

The CAGR of returns my investment since I started investing is 7.8% till today largely due to heavy allocation to debt funds upto 2020. This compares with CAGR of returns of SIP in Nifty in the same period - 2.8% and CAGR of ICICI Prudential Balanced advantage fund (More apt benchmark) - 3.5%.

Hoping that with this portfolio in case of upmoves in equity markets in next 1-2 years, my returns move closer to the desired 10% + range.

harsh.beria93 · July 5, 2020, 2:48pm

Thanks for providing such a nice writeup.

I am wondering about your thought process behind the overlap between Nifty constituents and separately holding HDFC bank and RIL. Both HDFC bank and RIL have ~10.5% weightage in nifty, so in essence your portfolio weightage for RIL and HDFC bank comes out to be 11.4% and 9.4%. Have you defined weightage limits upto which you will let a stock run and how do you think about position sizing? And given that you have a portfolio overlap of ~20% with nifty, why not have a lower position size in the large nifty constituents?

Are your position sizes cost weighted or is it according to MTM? Do you have risk mitigation rules at a portfolio level (i.e. maximum weightage of individual scrip, sectoral weightages, cashflow diversification of businesses you are owning, etc.)?

I ask because I want to understand how you think about the impact of different macro factors on your portfolio (eg: crude prices, USD/INR, India specific risk, etc.). Looking forward to your thoughts!

Thanks again for sharing your thought process.

princevegeta · July 5, 2020, 2:59pm

Average cost price is around 92 rs per share. Entered after delisting news hoping to catch returns in the build up towards delisting through reverse book building.

Even if delisting fails to materialise (which at the moment I feel is the most likely scenario since > 90% shareholding has to agree to the price), the company seemed a compelling bet with commodity cycle at its nadir and high debt at promoter level which would mean decent dividend payout.

Not holding for very long term and would mostly exit if delisting/ turning of commodity cycle plays out or any other negative development which defeats investment thesis.

princevegeta · July 5, 2020, 3:09pm

Yes harsh you are right I will have many overlapping investments in a Nifty index fund. The main time for buying Nifty index fund was around first 3 weeks of March 2020 when I could not grasp the full impact of what hit the markets but knew it was a good time to invest and hence aggressively bought index funds every day. Now still holding as a

Hedge against stock allocation mistakes (chances of overall returns going very wrong are reduced by having benchmark in portfolio)
Strong momentum of ETF funds especially EPFO investing in Nifty (Comparative returns of Nifty after EPFO decision few years back give further conformation to this)
Low cost low maintenance investment - I am part time investor with time limitations and hence cannot have more than 10-12 companies with meaningful positions in portfolio.

All weightages are on current market price… I don’t track cost prices on a everyday basis.

Regarding maximum weightage- don’t mind even if it reaches 20% for individual company- but currently don’t have conviction plus certainty to allocate that much to any one company.

princevegeta · August 9, 2020, 7:58am

Portfolio position update: Last few weeks have seen a sharp run up in some portfolio stocks like Laurus and Neuland. Portfolio is currently performing well with Since Inception returns recovering to 12% (From 2014 onwards).

Absolute Return from 1st Jan 20 to 23rd March 20 was ~ -22% which meant a lot of the possible drawndown was avoided. This was due to large positions in Cash and Debt funds held since 2017-18.

Absolute Return from 23rd March 20 till date is 40% which compares with 49% upside in NIFTY in the same time. I was relatively slow in deploying cash and gradually added in April,May,June and July. Made up for lost time by having some stocks which outperformed.

Current Portoflio

Going forward, plan is

To maintain high position in Equities and low amount in cash till next year with the expectation of Further rise in global and therefore rise in Indian indices continuing upto next year as vaccine for coronavirus starts getting administered and governments take measures to stimulate demand
Get out of short term opportunistic investments at opportune times (Sharp run ups in prices such that future growth priced in by market seems too difficult to achieve)
Consolidate no of holdings into a lower number with around 4-5% being target minimum allocation to a stock.
However having said that, would not want to have a concentrated portfolio for the sake of concentration since I feel the objective of inflation + 5-10% returns can be achieved with much lower risk by having a reasonably diversified portfolio.

In Q1 earnings, entire Pharma - API pack outperformed convincingly with management commentary indicating that these numbers would be the new normal. One company that impressed me the most is Laurus - having executed brilliantly in all its verticals- APIs, Formulations and CDMO in last 1 year or so. Added more of Laurus immediately after result and again at around 1000 levels in last few days.

Looking at Transpek, KRBL, and Mastek as future additions.

sahil_vi · August 9, 2020, 12:32pm

Thanks for sharing your detailed portfolio as well as rationale behind decisions @princevegeta.

As far as my understanding goes, the median nifty midcap mutual fund would also be in this same category of returns. I was wondering what drives you to take up direct stock picking as opposed to just look for a good midcap mutual fund which is above average (which as per my knowledge would already give you inflation + 5-10%).

Looking forward to see how your portfolio performs and all the best for the same.

princevegeta · November 14, 2020, 6:53pm

Happy Diwali to All. I am writing this update after all Q2 results have been announced.

Firstly, portfolio position is as under. Since inception (Since 2014) CAGR returns are now 15%+ which I would say is has so far met my original objective.

Among Q2 Results, once again the Pharma - API pack of Laurus, Neuland and Alembic stood out. I have trimmed position in Alembic after management guidance of lower EPS
in next FY (which perhaps factors in partly higher depreciation and partly slower EBITDA growth). Whereas higher depreciation part was known earlier, the possibility of slower EBITDA growth due to either pricing, higher base etc was a risk I wanted to avoid. Even the market response post concall wasnt very favourable. Moreover I wanted to reduce exposure to Pharmaceuticals and on similar lines exited by opportunistic position in Dr Reddys.

APL Apollo also came out with excellent results and I could only regret not having bought more (like I could do with Laurus) after Q1 result.

I also trimmed position in Reliance when there were rumours about Mr Mukesh Ambanis health.

Among Financials - There was a sharp run up driven by FII Flows but I am waiting for more clarity on delinquencies which will only be visible post Q3 results (End of Morat). Still, I remain confident based on past experience that HDFC Bank and Bajaj would not have very high delinquencies and would be in a better competitive position to grow book in FY 22.

After the Sharp run up, normally I would have liked to take some money off the table and move towards a more balanced equity - cash allocation in order to reduce risk of loss due to sharp correction.

However at the moment I am more concerned with the inverse risk - risk that Market would see a continued up-trend in the next months and I would not fully be able to profit from it. It is this risk (FOMO) which seems more real by looking objectively at data points such as

Global Money Supply Increase
Lower Interest Rates and resultant lower opportunity cost
FII Flows into market

A guage for the valuation of broader market - Small cap index was ~2500 in Aug 2013 at the time of taper tantrum. In Jan 2018 it almost reach 10,000- a rise of 4x in the Index in 4.5 years. Then in Mach 2020 it again fell to ~3000 levels which was a very sharp fall. Now it has crossed ~6000 levels and looks to be heading higher. Even at current level, you will find many companies in this index alone which are growing at 10%+ and yet valued at less than 10-12 times earnings. A lot of other companies with superior business models which are growing much faster are also available at less than 20 times earnings.

As covid vaccine starts getting administered and economy gets fully opened up, I feel it is most likely that many of these companies will grow earnings even higher. Time and time again as we have seen that with increased liquidity and lower opportunity cost , money chases growth and risky assets. If say the risk free return rate falls to 5% and expected rate of return in a blue chip company like HUL, Nestle falls to ~8%, I feel it is quite possible that the market will price small caps growing at 12-15%+ at higher multiples than what they currently trade at.

With this in mind, I have been tracking, adding positions into small caps in Opportunistic category in my portfolio- some of which have already provided handsome return in % terms in a short period of time. I plan to increase allocation to more of such companies and also to high beta bets (High leverage, turnarounds) which can go up by more than x if market goes up x.

Needless to say if the thesis doesnt play out, I am okay with exiting opportunistic bets at small losses.

princevegeta · August 28, 2021, 7:56pm

Greetings to all.

Posting an update after what has been an extremely rewarding period in markets. I was 80-90% invested in equities (base is always TNW) until around June. So many stocks went up 3-4-5x, that it was really difficult to not catch atleast a few of them in a 10-15 stock portfolio. For me the biggest hit with high allocation was Laurus - now 6x from average purchase price (Still holding). Few others where i have exited were APL Apollo (5x in ~ 1 year) - exited at 1400 and Bajaj Finance (3x in 1.25 year) - exited recently between 6600 - 7000. Also managed to exit 2/3rd of holdings of Neuland at ~ 2000 and around half of Nalco and Vedanta at prices near to recent highs.

The biggest learning and experience was mind shift to that of a Trader , especially during Feb - May period where so many small caps were flying on a daily basis. With a limited capital - Could generate decent trading profits in Companies even without detailed research - just by studying charts / accounts on screener / twitter posts etc. Bulk of trading profits was made in Filatex, NGL Finechem, RACL Geartech, Greenpanel, Tata Steel to name a few - most of the times by simply following - Buy the breakout - sell when trendline breaks.

Lifetime CAGR returns (since 2014) of Total Portfolio had crossed 20%+ even after accounting for tax and low interest yield on cash held in savings a/c.

I started selling small caps looking at the wild moves starting around June - and moving the money to cash. Ofcourse - impossible to time it perfectly well - lost out on opportunity in a few cases but also managed to avoid significant downside especially in a stock like Neuland.

Currently Cash is at a level of 46% of TNW - deployed mostly in Debt MFs, FDs and Savings a/c. Portfolio is ~ 1% below all time high hit a few weeks back. My primary theses of keeping a 60:40 portfolio is that the period of steep upmove in equities has ended / is nearing an end and the next phase will be a ‘no trend’ phase of sideways movement. I am most comfortable with this kind of allocation and had kept cash at similar levels for all of 2018, 2019 and early 2020 before covid crash.

With central banks no longer in the mood to stimulate through further money supply - my bet is that the next correction on account of any fresh bad news would most likely ‘allowed’ to happen. Of course stock specific bad news will always being welcome falls in many buoyant prices.

At current prices - I am in no mood to add a stock unless there is sustainably earnings visibility (not hope) that hasnt been well priced in by the markets. Best guage of earnings visibility is data : order books for manufacturing companies, published data like monthly export / secondary sales data in case of textiles, on the ground feedback from multiple reliable points for geographically concentrated lenders like Bandhan. Worst guage is often outspoken management commentaries.

When the prices do become favourable - I wouldnt mind entering with big allocations again. Of course if it doesnt happen that way and there is another quick rally - there will be opportunity loss.

Current portfolio is as follows:

New Buys in last 2 months have only been - HDFC Bank and in last few weeks entered Bandhan and Gokex. Have trimmed all other holdings except Laurus, Mastek and Compounders.

Have also been tracking and liking some names like Apollo pipes, Indoco.