I am a fairly newcomer to equity markets. I have started investment journey in late 2017 but until end of 2019 I did not invest any large sum and also did not spend time in studying about the businesses well before investing. At the beginning of 2020, I have sold all my old investments(had small quantities only) except few quality ones and started building a core portfolio and buying quality companies systematically every month by using my savings.
Here is my portfolio.
Rationale:
Quality companies with good management and reasonable growth.
Easily understandable businesses that can impact everyoneâs lives.
Right now, investing almost equal amount on all the below stocks. The last few names I have started buying only since last month.
HDFCBANK (Top Private Bank, Reputed group)
KOTAKBANK(Good private bank, like the management)
ASIANPAINT(Leader and consistent compounder)
PIDILITIND(Popular brands, consistent business)
BAJFINANCE(scope for high growth in nbfc sector)
ITC(very reasonable valuations for an fmcg)
HINDUNILVR(Everyone uses their products, Quality)
TITAN(Innovative, good management)
HDFCLIFE(Insurance has long way to go in India)
NESTLEIND(Leader in their segments)
WHIRLPOOL(Good Electronics company in India)
RELAXO(good brands, growth potential)
PIIND(good player in agrochem)
DIVISLAB(API Business, Good pharma name)
ABBOTINDIA(Quality pharma MNC)
PGHH(Hygiene products have potential to grow, good parent company)
3MINDIA(Innovative products, MNC)
TCS(IT leader)
DMART(Fascinated by crowd and sales in D-marts!)
HONAUT(innovative, good parent company)
Investment horizon is long time(10+ years).
Return expectation: ~15% CAGR
Some of them are over-valued but I wanted to stick to businesses that I understand well and have maintained quality over the years.
Thanks. Not sure, what is your acquisition price, for a 10+ years horizon, your portfolio is a dream composition. So good to see a good mix of companies and sectors. However, here is my key takeaways:
a list of 20 companies i feel is too many
considering COVID situation you should have waited investment in few of the sectors like Financials and IT. Both will have some headwinds in the coming quarters and may be more pain ahead. I am not saying they are bad investmentsâŚonly saying timing of the investment.
may be i would add high quality mid and small caps given the steep correction and attractive valuations.
@sameernics Thanks for your valuable feedback. Here are my thoughts on your points in the same order.
I agree. There are couple of reasons for this long list of selections. i) Since I am not that experienced with equity investing yet, I feel more confident about having a well diversified portfolio than a more concentrated one at this point in time. ii) I find it difficult to drop some candidates once I like the company/products and their business model.
But I still ponder over whether my approach of equal allocation to all is best or a weighted approach will do good and how to come up with a proper weighting strategy.
My hope is that, I will be able to buy quality financials at cheap valuations in this COVID situation. I believe Financials will do well considering my long time horizon.
Regarding IT, frankly speaking I do not like to own any Indian services based IT businesses. I work in a product based MNC. I would prefer innovative product based IT companies but those are only listed in US. Hence for diversification, I have picked indian market leader TCS. Also I do not plan to invest much in TCS until covid situation improves unless I see a good correction.
Midcaps yes. But I am not very confident about small caps. There is not much information available to know about the management and the credibility of financials can be questionable in many cases. My. return expectations are also not very high. Hence I prefer mutual fund route to invest a portion of money in mid and small cap companies. Over time, I intend to add some quality mid caps to my stock portfolio.
This is not the end as the management after integration of GSK Consumerâs business wants to expand margins further by 8-10% in the next few years.
Adjusted for DDT,HUL has paid over 90% of the earnings as dividends.
It has benefited immensely from the Corporate tax cut and DDT removal will mean higher dividend per share.
It is probably trading at more than 50 times next years projected earnings,what multiple one is comfortable with depends on their time horizon,currently momentum and scarcity and are driving up prices.
Nestle has grown only 6% in the last seven years because they had the Maggi fiasco,otherwise they are growing revenues at about 10-12%.
Adjusted for DDT,HUL has paid over 90% of the earnings as dividends.
The reason behind high dividend payment is thats the only way parent MNC makes money (other than royalty
expand margins further by 8-10% in the next few years.
due to emergence of organized retail and thus birth of private brands, margin for FMCG has shrunk.
Check US market and especially how COSTCO and Walmart are going after brand that have high profit margin.
For the high dividend payout,the reason I would focus on is that the business requires very little incremental capital to grow,the fact that MNCâs want to boost their cash payouts will mean very little if capital is taken out at the cost of core profitability and business growth.
On managements guidance to expand margins further,I would give them the benefit of doubt especially after GSKâs products get put on Leverâs platform,they have improved margins from 12% to 25% which is quite incredible,but I agree that it cannot go on perpetually.
The FMCG industry has always been extremely competitive,the intensity of competitive pressure can vary from product to product and category to category.
@Krishna1@nikhildoshi Thanks for your insightful comments on valuation of some of my picks like HUL and NESTLE. I will keep this in mind when refining my portfolio further. My return expectation is around 12% and if I get upto 15% cagr then I would consider that as a bonus and time horizon is 10+ years.
Can you also comment about my other picks and the portfolio as a whole if possible? Thanks.
Actually, we cant set valuations for stocks like HUL and Nestle. They are market leaders in their own channels. They are stable MNCs within FMCG with solid management, strong earnings visibility and hence always enjoyed that premium consistently. In any case, for a long term investor (10+ years) and a low expectation of around 12-15% CAGR returns should not matter valuations for such high quality powerhouses. Just have a look at last 15 years price chart, one will understand story of such steady compounders.
We canât ignore the valuation part because the dynamics of the business has changed a lot from before. Before the big investments of the retailers, there was more pricing power attached to the brands and longevity of the brand could be determined. With the retailers and ecommerce companies using data to build high volume goods of their own and placing them on supermarket shelves and in case of ecommerce, placing their own brands more often in the app, they are crushing the power of these brands in a big way. Warren Buffett has also acknowledged that brands will not be the same that were before because of the ecommerce and retailers. So, that poses a huge risk on HUL brands which can be turned into a mere commodities in decades to come and if not it will reduce its pricing power in a big way. With HULâs market value skyrocketing and muted growth, I donât see value in owning it. More views invited.
Well, e-commerce in India is long way to go and still it is at early stages and more specifically FMCG products and i have my own doubts how they would tap the rural part of India. Whatever so called own brands sold by e-commerce today are untested and hard to gain the confidence of the consumers. With massive retail distribution network pan India level and proven tried and tested brands of HUL and Nestle, they are here to stay for decades to come. These companies wont sit idle if they see e-commerce is eating their market share.
Letâs consider options available for FMCG firms in above scenario -
Reduce prices - this will reduce earning and thus result in lower earning
Increase marketing spend - again leading to profit decline
Customer pull (through discount or schemes) - again result will be similar to above
Come with different product that wonât / canât be copied easily - there is no IP or patents in products like soap / detergent
Quality / cost control in manufacturing - most of fmcg firms outsource manufacturing (barring ITC) and thus amazon /e-commerce companies can contact these vendors and make similar products
Distribution - I live in a very small town (population = 1 lakh) but both Amazon and flipkart already have established fulfillment center here (couple of years ago)
Urgency - unlike medicine, there is no urgency for FMCG products and customer can wait for couple of days to get them
All are valid points and that goes equally applicable to any e-commerce sourced brands. I really wonder how many people really order other brand FMCG products online in India?. Taking a simple example, I as a customer go to market for 2 reasons,
Buy most of my monthly FMCG requirements at one place with look and feel by myself and the trust of brand that i believe in.
I donât blindly trust (there are a number of cases that i know) e-commerce brands for the risk of counterfeit and cheap products.
For your loved kids, would you buy Nestleâs milk powder or some private label sold by Amazon?
Toilet and floor cleaner without harmful chemicals is next big thingâŚchild touch floor, play etc etcâŚbrands are and will remain kingsâŚthey have army of all IIM s to work strategies for themâŚ
Just a silly question âŚ
Market is giving sky high PE to fmcg company based on the theory that âhuman habits canât changeâ people will buy all this goods in whatever waysâŚ
Than why rice companies not getting any good valuation like KRBL, LT FOODS ETC
I mean they r also brands like I like India gate rice will never compromised with any other brand
To my understanding these companies exports significantly superior quality rice to gulf countries and with crude prices nose diving, the exports would be hit badly.
