Portfolio- Shobhit Jaju

Q&A: Questions & Answers Portfolio Q&A
#1

I joined ValuePickr about two years back and I can’t thank you all enough for creating this wonderful community for investors to brainstorm and share their views in the most constructive manner and the senior members to enlighten with their wisdom.

Before sharing my portfolio and the brief write-up about the stocks I hold, let me give a brief profile of me.
I am 27 year old and was always interested in stocks as a kid. I started investing when I started working in 2013, with zero capital, by investing my savings gradually into stocks. I had accumulated over 100 stock and after reading value investors and other books, I realized i needed to reduce the no. of stocks in my portfolio. In Sept-Dec 2017, worked on my portfolio and consolidated my holdings. I have made a CAGR return of ~10% till date, which is below par and hope to achieve a ~15% return from this portfolio. I believe in the portfolio size of 20-25 stocks. I am from a finance background and work in the capital markets. I request fellow members to share their views on my portfolio.

Some of the stocks on my watchlist are Minda Industries, Godrej Properties, Arvind SmartSpaces, Max Financial Services and NOCIL

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#3
  1. Tata Motors – I invested at a time when, the domestic business was bleeding but showing signs of turnaround, while the JLR business was holding the ship. Some turnaround did happen, however, everything bad that could have happened to JLR (the business which contributes ~80% revenues to the consolidated JLR), happened. The DVR is currently valued at ~ 0.3x the book value and while I would believe that theoretically the stock should not move below these levels, it manages to make a new bottom every week. I am betting on the new management, steep discount of DVR (~ 50% ) vs ordinary shares and their electric cars (specially the I-pace). It’s a long term investment with a horizon of around 5-10 years. Key risks: Capital intensive business, Low EBITDA business, trade war, Brexit and further slump in JLR.
  2. Rain Industries – It is a bet on the metal space and with the demand for Aluminium expected to increase (For EVs, construction etc), Rain is expected to do well as the aluminium industry capacity utilization, picks up from ~50% currently. Rain has a unique moat of long term supplier and customer relationship, technical dominance and being geographically diversified. The recent pet-coke ban in Indian is a negative, but it is more than factored in the price. It’s a long term investment with a horizon of around 5-10 years. Key risks: Ban on products due to pollution, Cyclicality of Aluminium Industry, New technology to disrupt Rain’s business.
  3. Motilal Oswal – The core business of Motilal (brokerage, AUM, PE) promises a rare combination high growth with high operational leverage. With the % of domestic savings invested in Equities to go up significantly over the the next 5-10 years, the capital market business is likely to do well. I specially like their AUM business as their products are different to products offered by the competition. The no. of stocks in each scheme is less ~ 20, not all stocks are Nifty and promoters’ money is also invested in these funds. However, the attempt to reduce the cyclicality of the capital markets business by investing in Aspire Home Finance, didn’t go that well. The lack of experience in managing a HFC reflected in high delinquencies and high provisioning wiping out the profits. In my opinion the worst is behind Aspire and I back the management to decide on its fate going forward. It’s a long term investment with a horizon of around 5-10 years. Key risks: Further stress in Aspire, Cyclicality of capital markets, Global market crashes.
  4. Mahanagar Gas -I first invested in Mahanagar Gas in the IPO and have added positions since then. It has the ability to grow about 10-15% for atleast the next 10 years, without incurring significant capex by just focusing on its existing territories (Mumbai and Raigad). The company is debt-free, high-divided payout ratio and decent ROE. The valuations are not mouth-watering at ~17x PE but can be a steady compounder. It’s a long term investment with a horizon of around 5-10 years. Key risks: Lower control on pricing and Unfavourable change in govt. policy.
  5. Reliance Industries – The shift in the business from B2B to consumer facing businesses will benefit the company to achieve better valuation multiples. The refining business is a steady cash cow, while Retail, Jio and Pet-Chem are poised to continue on their growth path. It’s a long term investment with a horizon of around 5-10 years. Key risks: Falling ARPU for Jio.
  6. Interglobe Aviation – Invested first in the IPO. It enjoys the highest market share and has the moat of having the lowest cost structure in the industry. The issues surrounding Jet and Air-India will only enhance its dominance in the aviation industry. Interglobe is best placed to the ride the growth curve, as the volumes increase in the under-penetrated Indian aviation sector. It’s a long term investment with a horizon of around 5-10 years. Key risks: A320 Neo engine issues, crude prices.
  7. GNFC – It is one of the largest producers of Industrial Chemicals and Fertilizers in India. While TDI is the most profitable and sought after chemical produced by the company, it has market leadership in various other chemicals like Acetic Acid, Formic Acid etc. The govt. has done well to reduce diversion of urea for other purposes and focus on DBT to reduce leakage of benefits. The production of neem oil for urea coating and then coming up with the Neem FMCG line was an exhibit of great vision and social responsibility. The overall business looks stable and the outstanding profitability in the past two years has ensured that almost the entire debt is repaid. I am overall optimistic on the Chemicals sector and current valuation of ~5x PE looks exciting. It’s a long term investment with a horizon of around 5-10 years. Key Risks: State PSU so……low leadership stability, chemical prices cyclicality.
  8. Yes Bank – I started investing in Yes Bank in 2014. Being on the corporate side I realized that they were aggressive in lending but were smart in recovering their money, due to a promoter running the shop. There is a lot that has happened at Yes Bank recently, but I believe that the current price of ~1.5x BV offers a good risk-return trade-off. I lot of the issues are overplayed and not very material in the long-term. I think the growth might slow down from 30% to around 15%-20% going forward, which still justifies the price. I will be keenly watching the new leader to take over and will take a call then. Key Risk: Large quantum of concealed NPAs, Leadership change, Falling NIMs due to credit cost increasing, Inability to maintain heathy credit and CASA growth rate.
  9. Sonata Software – Started investing in 2014. It’s a niche mid-sized IT company and has shown decent growth over the years. It has strategic partnership with the likes of Microsoft, SAP and Oracle. I particularly like the focus of the company on IP led business rather than the typical outsourcing business. The ROE has been growing decently and is currently ~30%, dividend payout ratio is ~60% and valuations don’t look particularly high a ~15x PE. It’s a long term investment with a horizon of around 5-10 years. Key risks: Rupee strengthening against USD.
  10. GHCL – Started investing in 2015. One of the largest soda ash manufacturers in India, with industry leading margins As the textile industry is turning around, its textile division has started contributing positively. The company has had governance issues in the past but that’s history now. Debt under control, ROE ~25% and decent cash flow makes the ~7.5x PE look attractive. It’s a medium term investment with a horizon of around 3-5 years. Key Risks: Low promoter shareholding, Soda ash prices cyclicality.
  11. Visaka Industries- Started investing in 2015. It has two major segments: Building Material and Textile. The building material segment mainly comprises of cement Asbestos sheets but has now diversified in non-asbestos panels and boards which have shown higher growth and better margins. As a result, Visaka has better growth rate and margins compared to its peers (Everest and HIL). The bet here is on improving volumes and margins (housing push), by support from non-asbestos business and again the textile business is likely to perform better. The valuation seems attractive at ~ 8.3x PE. It’s a medium term investment with a horizon of around 3-5 years. Key Risks: Asbestosis ban, competition from substitute products, low margins and ROE.
  12. RBL Bank – Mainly holding my IPO purchases. The management is focused and credible. The growth till now has been great and has all the promise to be the next HDFC Bank. I am not comfortable adding at these levels as the valuation of ~3.6x BV seems rich. It’s a long term investment with a horizon of around 5-10 years. Key risks: Lower NIMs, Inability to maintain credit and CASA growth.
  13. NESCO - I like the management and the way they utilize the capital and the Goregaon land. The BEC and the new BEC will be formidable assets once the metro issue is resolved. I am not a fan of the Indabrator (capital goods) business, as there is very little details about the business and its prospects. Despite all the challenges, the company has been able to deliver a profit growth of ~15% and an ROE of ~20%. It seems fairly valued at ~18x PE. It’s a medium term investment with a horizon of around 3-5 years. Key Risks: Ban by traffic authorities, lower rental yields and competition (reliance).
  14. ITC- I think the cigarette business has stabilized now and GST has improved the volumes and is likely continue the uptrend. The FMCG business has now started to bear fruits and looks like the effort and capital invested in creating the brands is finally paying off. It’s a long term investment with a horizon of around 5-10 years. Key Risks: Taxes on Cigarettes, Leadership change.
  15. Delta Corp – Very optimistic about the prospects of the company. It’s a discretionary spending play with high operating leverage. The casino industry in India has a long way to go and Delta Corp are best placed in terms of experience and presence. The online business is equally promising. I am poker enthusiast and spend a lot of time on Adda52. It gives the best online poker playing experience in India and you find players 24 hours on the platform. They have been spending a lot of money on promotions, but the platform is becoming more popular. The stock is not cheap at ~35x PE but it has a long runway of growth. I am increasing positions in the stock at corrections. It’s a long term investment with a horizon of around 5-10 years. Key risks: Ban on gambling/online poker.
  16. Indian Terrain- I started investing in 2014. It’s a niche brand that is focused on male clothing, that has significant presence in the men smart casuals category. The branded apparel is a competitive segment and the margins are not very promising. I am betting here on higher discretionary spending by males on clothing (specially in smart casuals/Friday wear). The balance sheet is a strength as they largely operate on a franchisee model, however, the volume growth and margin expansion are still to see light of day. The stock is reasonably priced at 19x PE. It’s a long term investment with a horizon of around 5-10 years. Key Risks: low promoter shareholding, Low margins, Competition.
  17. Dwarikesh Sugar- It is a good company in a bad sector. Overall I think as the yields on farm output increase for all the crops (as the govt. is targeting) the area cultivated under sugarcane will come down/remain constant, which will auger well for the long-term future of the sector. The recent developments in the sector like Ethanol blending, minimum selling price of sugar, global supply (brazil) reducing have been promising. The company was prudent to use the profits of FY17 and FY18 to repay all their debt and has given them the ability to survive the current hardships. As a result, the company has planned to increase its distillery capacity, which will be beneficial in the long-term. I invested in the company at the peak, failing to see the surge in the supply side and will now hold it till the cycle reverses (year with poor monsoon…….not hoping for one) or the government control on the sector reducing. It is a cyclical play of 2-3 years. Key Risks: Increase in Sugarcane MSP in UP, Fall in global prices, Government control.
  18. Britannia – One of the best businesses in the FMCG space. The ability to keep delivering volume growth by innovation and premiumization/higher discretionary spending by consumers and improving margins by cost control makes case for being one of the best businesses available. However, the only concern here is the valuations, which are not cheap to say the least at ~66x PE. I find it difficult to invest fresh capital at these levels. It’s a long term investment with a horizon of around 5-10 years. Key Risks: Growth in volume and margins goes down.
  19. Narayana Hrudayalaya – I like the management and the asset light model (revenue sharing), which gives them one the best balance sheets in the industry. The industry again for a country like India has the ability to grow at brisk pace for decades to come. However, it is a low margin business and any adventurous move to push them higher will invite punitive action by the authorities or disrepute (as in case of Max and Fortis). Therefore, 10-12% is a reasonable EBITDA margin one can expect in such business. The valuation here is a concern, with a PE of 136x the TTM earnings. Though I believe in the sector and the company, I am not confident to put additional capital in the company. Key Risks: Action by regulators and Pricing control on services.
  20. Gujarat Industries Power Company- I first invested 2014. It is a state PSU that has operations in Gujarat and has an existing production capacity of 1080 MW. EV of Rs. 1500 cr for a 1080 MW power producer looks low. The Debt/Equity is stable at 0.2x, Price to book value of 0.5x and a dividend yield of ~ 3.5%. Recently, Bhavnagar Energy Company Limited (BECL), a JV (bleeding) in which the company was invested, was merged with Gujarat State Electricity Corporation and as a result BECL is no longer associated with the company, which is a positive in long-run. The investment rationale here is not growth but just undervaluation. It’s a medium term investment with a horizon of around 3-5 years. Key Risks: State PSU, Poor ROE and low growth.
  21. KRBL – I like how the company has grown its margins by investing in its brands and is now a household name, with good brand recall. It is a premiumization/discretionary spend play. The company is almost debt free and has an ROE of ~20%. The stock is reasonably priced at 15x PE. It’s a long term investment with a horizon of around 5-10 years. Key Risks: Balsharaf Issue, Margins already peaking.
  22. Avanti- Invested at the wrong time, failing to understand the cyclicality and sustainability of FY18 performance. Already a deeply discussed stock, so won’t go in detail. I do believe it’s a business but the valuation look reasonable currently, so not able to employ fresh capital. It’s a medium term investment with a horizon of around 3-5 years. Key Risks: Natural disaster, Ban by EU or US and low growth.
  23. Sintex Industries – High risk investment. The FCCB issue is almost over now, but has left a huge debt behind. I am still holding on to the stock, as the textile sector is showing signs of revival, rupee has depreciated and about 50% revenues are from exports, as a result the margins have improved. The performance of the past 2 qtrs has been decent and can see good cash flow generation. It is a play on financial leverage. It’s a medium term investment with a horizon of around 3-5 years. Key Risks: Huge Debt, Low promoter shareholding with high pledging.
  24. SREI Infrastructure – It is a leader in equipment finance business, which seems lower risk as you can repossess the asset and sell it. The asset quality is not that bad, asset growth has been decent. The liabilities are not funded by short-term funds. It should be a beneficiary of the infra push by the government. The stock is currently valued at 3.4x PE, 0.6x BV, which seem too good to be true. It’s a medium term investment with a horizon of around 3-5 years. Key Risks: Default, Asset quality worsening or Corporate Governance Issues.
  25. Aditya Birla Capital – It is one of the most diversified financial services business and enjoys dominant position in most of its business. It has a holding co. structure and is therefore subject to a holding company discount. The NBFC and HFC lending books are not very seasoned and as a result, untested to a large degree. The AUM and Insurance business are poised to perform well, given the potential of the industries. The business is currently valued at 2.4x BV and a PE of ~ 26x, which seems reasonable, given the growth potential and quality of franchise. I will be looking at the performance in the next 2 qtrs and will be taking a call weather to sell or add the stock. Key Risks: Asset quality worsening or Lending growth slowing.
  26. Sintex Plastics – High risk investment. The decision to lower the focus on pre-fab and infra business to improve working capital cycle, seems like a positive move. The infusion by promoters, debt deal with KKR are all positives. However, any of the measures has not yet reflected in the results. I will be closely watching the results for the next 2-3 qtrs and will then take a call, whether to sell or hold the stock. Key Risks: Huge Debt, Low promoter shareholding with high pledging.
  27. Manappuram Finance – It is one of the leaders in the gold loan business. The gold loan business is a low risk lending business, with liquid collateral and given the kind of gold which sits in the safes of households, the growth in the lending should remain steady. The stock looks fairly valued at ~10x PE and 1.8x BV. It’s a medium term investment with a horizon of around 3-5 years. Key Risks: Liquidity issues, lower growth in asset growth.
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#4

Hi @jajushobhit

It would be nice if you could post your investment thesis as well. Regarding the real estate stocks in your watchlist - this business is going through some tough times and after RERA - developers have a major cash crunch issue. Some premium developers have been forced to exit the space completely and some have gone bankrupt. Its exceedingly difficult to be a developer and earn a decent return on capital - so I would suggest you relook at them. Rest except Mahanagar I don’t track so no view on the same. Mahanagar Gas is a good co and valuations are also moderate. I would suggest that you have a greater allocation.

Broadly, i think your portfolio consists of some stocks which you may have purchased because their cheapness so thesis has to be doubly sound.

Best
Bheeshma

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#6

I do not know about all of the stocks in depth but since you asked on portfolio level I will try and answer.
Weights of 3% and below have almost nil effect on your portfolio returns.
Unless you have plans of increasing weights I would suggest cutting out all the positions under 3% and buying into the positions at 3% or your higher conviction ideas.
I would suggest trimming this out. I know experts suggest and take tracking positions but let us come to reality and know our limitations. We are not experts. You can take a tracking position even with 0.1% of the portfolio.
Coming to the stocks I would stay away from the cyclicals.
Do not buy expensive or pay a premium unless you are getting something in return. I will refrain from taking the high quality names but I would never pay a premium valuation for a company unless they are of that class. So that is something to consider.
Sintex I think you need to check the promoter and books.
Stay away from the cyclicals, trim the portfolio and pay a premium only when justified.

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#7

You and I have similar thinking patterns. It consists of Good stocks. In addition do have a look at ICICI Lombard and VST industries.

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#8

I think you would do well with a bit more concentrated portfolio. I can sense that given the amount of research you have done, separating high conviction ideas from low conviction ideas should be your next step. The portfolio allocation thread offers a very good metric to help decipher the same.

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#9

I spent the last two years on improving the quality of stocks I hold. The approach towards a core and satellite portfolio helped me in understanding the reason why I am invested in a stock. Special thanks to @bheeshma for making me revisit my thesis on " cheap stocks" which made it easier for me to eliminate some of them. I will appreciate your views on the portfolio. Thanks in advance

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#10

Core Portfolio is ~70% by market price, would like to take it to ~80%. Obvious sectors missing in the portfolio are Pharma and IT. Sector wise break up is as follows:
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#11

Hi @jajushobhit

Clearly, your core portfolio consists of solid names with an established market position so the way forward is to have a view on their intrinsic valuation. The most easiest way to have a handle on valuation is to write the 200dema against the cos name. Ofc, it’s not scientific but since your core consists of names that a dominate the industry they are in and are well followed by analysts, it provides a good idea about the valuation status. I don’t know much about your satellite cos. Have recently started reading up on godawari power and have been invested in Cosmo which is in the same industry as Jindal poly. Packaging film cos are having a good run due to good gross spreads.

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