I have a full time job plus I am pursuing a doctoral degree so that leaves me with little time these days to read/research as much as I would like. However, the interest in investing has kept me going.
It was great to be a part of the VP chintan baithak 2016. Probably I was one of the least experienced guys in the room.
Big learnings from the meet- focus on risk, riding long term stories without trying to be too smart and something that Om said has stuck with me- “deep research gives insights, and insights give foresight”.
Pharma basket seems to be occupying a big chunk of your PF at around 43%. It seems the pharma bull has decided to take a pause and havent seen the pharma companies do anything since past 12-18 months. There will always be some exceptions like Shilpa, Natco etc but overall the sector seems dull.
Rest of the companies seem good companies.
Only thing I can say is not to confuse companies with slightly longer term cycles as long term growth stories. Many companies will have earnings momentum of 3-4-5 years on strong tailwinds and then will take a pause or there will be reversion to the mean. These are the companies one needs to be watchful about.
My portfolio is also Pharma heavy similar to yours,with Ajanta,Alembic,Shilpa,Torrent and Granules.My portfolio was built around the start of Valuepickr,The only difference is i have not sold some of the winners,which went through a bad phase,Mayur Uniquoters and Kaveri.The other ones i have stuck with and major part of my portfolio are Canfin Homes,PI,Avanti,Bajaj Finance and Indraprastha gas.The one time favourite here GRPL was the one i sold out in loss.I have not bought a lot during the past year due to valuations,but bought some Kitex,Mahangar gas and Ujjivan post demonetization.
Just try calculating your returns if you had stuck with Ajanta and Mayur.
@hitesh2710 thanks for your comments. I realized the high allocation to pharma has been a drag. My bias for pharma was because I made a large chunk of my returns here. However, the sector lately started facing problems but I didnt react to that. I would like to reduce Torrent and Granules but they have fallen so much recently that it didnt seem such a great idea to sell them at this point. In the hindsight I should have done that a while back as I did have an idea of problems faced by the sector and lack of immediate triggers for many of these names.
@biju_john I held all these names at some point or the other. Sold out Ajanta few at 1500 odd so not much regret (yet ) Selling shilpa in 2015 has been the biggest mistake not only from the point of view of losing on the money but I also regret having missed it inspite of knowing alot but just thought I may be able to get it at cheaper valuations which never happened and I got anchored to the price. I have been very lucky with Avanti, where my first purchase was below 50rs (adjusted) and managed to average up, last purchase being at 350 few months back.
I was Pharma heavy at around 35-40% portfolio allocation. I have sold 100% of holdings in Alembic this morning and bring down pharma exposure to around 18% of portfolio. Pharma has been a drag on returns for some time and there are better alternatives available. I will hold cash for now for attractive buy. I have learnt that cash is also key in such a volatile market.
I may look to add consumption stock or bank to the portfolio.
Invested: Granules, Sun and Cadila.
Exit: Alembic Pharma.
You mentioned a presentation by Mr. Ananth Shenoy. Would it be possible for you to share a link to this? Pharma falls out of my circle of competence and I’m keen to learn about it. A broad head start in learning would be very helpful.
Yes I agree but frankly I was too late in realizing this and I feel the time now is not right given the current valuations. For ex, I should have sold Torrent at 1600 odd and Granules at 140 odd…At these prices, I dont want to sell unless a no brainer opportunity comes along.
My thoughts on cash allocation
Personally, I find it very difficult decision to implement. The only times it has worked for me is if individual holdings run way beyond my assessed fair PE band. In such cases the decision is somewhat easier but again, the risk is that my assessment can be very easily wrong.
In a range bound market, it is very tempting to sell at the top of the range and buy at the bottom. It has been fairly common in recent past for individual stocks to fluctuate quite a lot. Let say I am holding cash and market falls, then I feel very happy about being “right” but then suddenly in a matter of 1-2 weeks, the market moves up sharply and I sit there looking like a fool. We dont know when the market will break the range. A good trader will happily buy on such breakouts but normally I would get paralyzed and wait for a correction.
I have been guilty of thinking about it less when the market last hit 9000+. I now remember clearly that all the stocks in portfolio were going up. I think that is a strong signal to keep in mind.
Till now, I have been buying when I get my salary and my holding is trading in my comfortable PE band. I have been thinking of keeping some cash in portfolio but haven’t been able to implement it.
I took the decision to improve my risk allocation from one sector i.e. Pharma. Also, with Trump and global currency fluctuations I see the market to be range bound for some more time. Uncertainty in short term due to global macros also motivate me to put cash in the allocation.
A sector which is going through some rough times should be trimmed down a little bit in favour of a no brainer opportunity which could be mispriced. I would look at Pharma again in neext 3-6 months given a good entry point and less FDA woes. Granules results have been good and Biocon is great company but expensive for my own comfort. I am still waiting on the sidelines for a significant stock specific opportunity due to FDA or other recall issues. We are on a similar boat when it comes to taking a call on breakouts, I tend to avoid it too. I avoid IPOs too.
I just had a fresh look on your presentation and have a few questions/remarks:
Exit of first sign of red flag (eg: Kaveri)? With a perfect 2020 foresight, was it a prudent strategy? Also, you had mentioned diversification as a bad strategy. Why will a manager want to be only dependent on cotton?
Hawkins: How did you manage to make losses in Hawkins! Was it because of too much focus on the opinion of others during the time when the business was in a bad patch? Shouldn’t we stick with companies which have shown resilience in past cycles?
You mention that a large CAPEX is a trigger for excitement. Shouldn’t it be the opposite? Demand is the hardest thing to forecast and even managements cannot foresee that. Isn’t a better time to get excited is when CAPEX has come online and demand has vanished, that is when depreciation is high taking a toll on P&L statement and stock prices are often depressed.
I accept that I am talking about this with a perfect 2020 foresight.
The management had announced to diversify into food processing and they we re planning to partly sell their stake. I would have been perfectly happy with a diversification away from cotton to other seeds (in fact, they were fairly well diversified in seeds already). However food precessing seemed to be a little far away from existing operations. The valuations also at that time were on the higher side. Normally, when the valuations are already high and there is no clear visibility of sustained growth momentum, then its better to trim or book out. In this case, I exited completely
In Hawkins, the management has been very conservative (though they seem to be growing pretty well in last few Qs). It has been a business where they generate good return ratios but were not finding avenues to grow. I would prefer a 25% grower with 20% RoE over a business that can grow just 10% at 30% RoE. Hawkins was not expanding its product basket and product replacement cycle is pretty long. The pressure cooker at my home had lasted~20years. Also at that time Hawkins performance was not consistent and there were many other better options.
Yes this has to be looked in context of demand as well. I wouldnt be too happy if the sector and company is not showing a secular volume growth. You can look at whats driving valuations of Fine Organics recently. If the company is able to consistently and profitably grow volumes and is close to exhausting its existing capacities, then new capex is a welcome sign. Some live examples are Syngene, Alembic. However, I would be worried if a Dishman pharma wants to go for additional capex at this stage is it has bad return ratios and low utilization of existing plants.
At the outset, thanks a lot for your reply. I was trying to understand your thought process when you decided to pull the trigger.
A couple of follow-up questions, a business cannot grow at 25% with a ROE of 20% for a sustained timeperiod without equity dilution. Even if it is able to reploy 100% of its earnings, the maximum growth theoretically can be 20% (in actual practice, growth will be much lower). On a different note, will you add Hawkins today? It has clearly shown growth at almost the same level as TTK. For Kaveri, fair enough!
About your observations for individual companies for CAPEX, I am sure that some companies will be able to able to time their CAPEX correctly and some will not. However, over a capital cycle, typically higher pricing tends to attract competition which leads to additional CAPEX, followed by pricing collapse. There are very very few sectors which can have secular volume growth (eg: run a screen with 15% volume growth each year for the last decade). Again thanks for explaining your process
Hey…Yes I stand corrected. I mean I would prefer a faster growth with a slightly lower ROE than a very low growth at very high ROE.
Hawkins was stuck in low profit growth for 8 odd years and now seems to be doing good. It deserves a closer look. One needs to watch out for higher RM costs going fwd.
On the capex front, you are right that there are very few sectors that can have secular volume growth. And that makes our job easier to hunt for potential opportunities. The comment was in context of such sectors. The game will be of course be very different for commodities/cyclicals. I wouldnt want to look at such companies for a longer term view.