Sahil's Portfolio

While i continue to do deeper dives into Neuland and also Suven Pharma,

Wanted to add some thoughts regarding Portfolio structuring. Currently 33% of net worth is in this core high growth small-cap oriented PF. This is also extremely risky both due to concentration and higher uncertainty surrounding the companies involved. They need to be tracked day-by-day because there isn’t much institutional research. Even if there was a market fall i would be uncomfortable taking the % of PF deployed in this core-PF strategy beyond 40% because the risk of permanent loss of capital is high and I do not have enough trust in my own skills. Towards that end, I am thinking about starting a satellite “coffee can” PF which would contain companies which provide good/essential products or services and are likely to be around after 10 years. I fully understand that many of these are extremely overvalued companies. Which is why the plan is to build up a position slowly over time, adding higher %tages in the event of a crash which increases margin of safety.
Have added the proposed companies in Coffee can thread to enable better feedback gathering;


Please feel free to comment either here or on that thread regarding any aspect of it. I expect this to be between 10-20% of PF with 40-50% PF in safer assets like Fixed deposits and liquid funds. With this, I also plan to stop investing in Mutual funds except when doing so for specific goals (because i still do not trust my investing skills enough to tie investing for medium horizon goals to my own stock picking).

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Looks like a reasonable tactic at this point. As far as mutual funds are concerned - I am enticed with the ELSS variants for the extra few percentages obtained from tax break.

Because otherwise every fund manager seems to copy everyone else. Probably their core idea is to generate a few more percentage than standard FD to lure the middle income strata.

Would like to ask a rather witty question here. Has anyone heard of Max Fashion ?

I went to the mall today and in a kind of witty Peter Lynch like moment, got to know from my fiance that they are the next big thing right up with the Reliance Trends and Pantaloons of our world.

But upon checking Moneycontrol found nothing. But did find that their parent company is Dubai based Landmark group. So that’s a start maybe.

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Hey!

Its always a good idea to diversify investment styles, as different styles perform at different points over a market cycle. However, why is your coffee can so India centric? Instead of buying Indian franchises, why not go for global franchises (which are more dominant) and live off the royalty paid by the Indian subsidiaries to their International parent, which is then passed to you as dividend or a buyback? You can participate in India growth story, have the franchise element, pay much reasonable valuations and the cashflows will be more internationally diversified.

About the Indian coffee can, how does Kotak Mahindra, Bajaj finance and Biocon make it to the portfolio? I ask this because Kotak and Bajaj did horribly NPA wise in the 2008 downturn. They have barely had a decadal track record of maintaining low NPAs (Kotak’s 2009 NPA was ~5%, their current NPA is inching up and has reached ~3%). In lending financials, the only Indian company to have a track record of maintaining NPAs below 2% over 2 decades is HDFC, that makes much more sense over Bajaj or Kotak in a coffee can kind of an arrangement.

Biocon is also a very recent story, their re-rating was due to their biosimilar portfolio, the first of which was approved in 2017 December. How can you extrapolate this 2-3 year track record for the next decade? In principle companies in a coffee can portfolio should have a consistent track record of atleast >1 decade because the holding period is atleast 1-decade, or am I missing something?

If you are not averse to leveraged companies (as you okay with investing in lending financials), why do you not consider utility companies like Power grid? They get regulated ROEs of 16%, return most of profits as dividend and compound book value at ~15%. This is probably one of the very few companies which will be around even after few decades (irrespective of government), because they transmit almost all of India’s power (be it solar, wind or coal based).

About auto-ancs, why go for Motherson when they already such a big company? Instead, you can find much smaller players which have the exact same (or a little better) track record (in terms of sales and profit growth) and are much smaller in the auto anc space and have a much cleaner corporate structure (eg: suprajit). If you are looking at pure book value compounding, even a company like Swaraj Engine makes more sense (debt free balance sheet, most earnings returned as dividend & long term sales growth at 1.5x GDP).

In IT, why do you choose L&T info over its larger peers (such as HCL tech)? HCL has grown sales at a very similar pace, have superior margins (showing they are not undercutting to get orders), and are growing faster than most Indian IT companies.

Looking forward to your thoughts!

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Hi harsh, Always good to get your insight on everything.

I do not have a way to invest in global stocks. Last time i tried using vested, they needed me to open a bank account with ICICI bank to enable me to invest in global equity. This was after covid, so difficult to do.

This makes sense. As of right now though the purpose of even the coffee can PF is capital growth, not so much dividend investing. I have considered dividend investing in the past but I believe I’m not there yet. There are enough and more opportunities for even the largest companies in India to grow 3-4x in 10 year period. Are such opportunities available in Global markets? I’m not so sure. Global nominal GDP growth rates are typically much lower than Indian ones. I do agree that for a dividend growth type of PF these global giants (eg: Pharma in US, few swiss companies) make a lot of sense.

Bajaj finance changed their entire business model since Rajeev Jain and Sanjeev bajaj joined around 2007-08. I think one fallacy i observe in some investors behavior is that they prefer to rely on last 10 years (which might or might not be indicative of next 10) instead of thinking about the next 10. I agree i cannot project earnings and cashflows for 10 years (or even 2 for many companies). But what im interested is in the direction of the company.

Kotak bank is a misnomer. This is a diversified financial services company. Banking is one of their large operations, but other 2 valuable ones are AMC and Insurance. There is a lot of value unlocking in the future for Kotak bank if and when they decide to list their insurance and AMC operations. Even if they do not, they are one of the most prudent bankers in India now exemplified by provisions for covid-19 high capital adequacy ratios.

The past has almost no predictive value for the future. I agree that HDFC Bank is one of the best run franchisees in India, but i have had some very bad experiences with them off late. I’m an unsatisfied customer. How can I be a stockholder for them? I was begging them to give me a 1.5cr Home loan, but they just didn’t care enough. Haven’t heard great things about HDFC Bank from other people either. having said all of that, would HDFC bank grow earnings and AUM by 10-15% over the next decade, undoubtedly.

I disagree with this. I think investing has always been and should always be about the future. Not about the past. Pharma is a tricky space. Generics companies are not distinguished in any way. Same for APIs. They need to be monitored carefully. Biocon is the only Indian listed biosimilar company. Biocon valuations are very high, which is why I’m looking to build a position slowly over time. However, given that most global pharma innovator company pipelines are moving away from synthetic chemical towards biologics, i think biocon is a safe investment for the next 10 years. Am i overpaying for biocon? Definitely. Will it matter after 10 years? Probably not. The risk of execution being bad is definitely there. Which is why i plan to build this position slowly over time. I am also open to expanding my list of companies beyond the 8 to about 10-15 since this is a low churn PF with exits only on major events. This would reduce the risk posed to PF by biocon even more.

Im not sure how commodity companies can create value. If their output is not valuable, how can they be valuable? You’ve brought up a brilliant point about leveraged balance sheets. For a financial institution, this is unavoidable. Money is the product. They’re simply platforms for matching sellers with buyers with the guarantee being provided by the platform. However, they are also very well regulated by RBI (true for kotak not so much for BF). Power finance’s main business is not that of debt. I’m ok with high D/E for financial institutions because managing that risk is their bread and butter. Not so much for utilities since managing debt is not their primary function. Btw did you see their interest outgo? It is almost as much as their NP. Will the company be around after 10 years? Probably yes. Does that necessarily imply a good investment? probably not.

In their latest AR they have guided for a 4x increase in Sales in 5 years. They are known to set aggressive targets and underachieve. However, these aggressive targets ensure that even if they miss, they still multiply the revenues significantly. The entire purpose of this PF is to buy large companies with well diversified operations. Motherson espouses this ethic in everything they do. Not more than 10% revenue from any 1 country, any 1 component or any 1 client. Are you sure Suprajit or Swaraj engines would be around after 10 years?

L&T has much better return ratios due to better asset turns. To be fairly honest, I have not studied HCL tech a lot but could see a 3 negatives which put me away (of course deeper study can help me become interested):

  1. They have a fairly non-trivial debt. Their dividend payout is also significantly lower than industry consistently.
  2. Asset turnover is much lower than peers. (LTTS is 2.0 and HCL is 1.2 TCS is 1.8).
  3. Earnings fell in between in 2019/20 which is strange for an IT company. Their are considered to be one of the stickiest and more consistent earnings companies. Im sure there is some good reason for this, but the point is to pick companies which do not need many deep dives.

Overall, thanks a lot for your thoughts, Harsh. Key actionables for me:

  1. Look to add more companies to guard against execution risk of Companies like Biocon.
  2. Consider adding HDFC Bank.
  3. Find if there are global cos which are growing at 10-15% PA.

PS: I definitely do not want to invest in Global tech. My future is already intricately tied to my employer Google. I certainly do not want to invest in any other global tech company.

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Hi AVB thanks for adding your views,
I generally max out my 80C with my EPF deductions.

This is especially true for large-cap funds and very visible when you superimpose their NAVs on top of each other.

I have.

Definitely worth following up on. :slight_smile:

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I need a little bit of clarification, doesn’t coffee can mean having a very long established performance (consisent sales growth over the last decade along with high ROE)? If that is the case, then we need consistent YOY sales growth for over a decade, thats why my comment on Biocon. I am actually long that stock, but never thought of it as a coffee can thing. Let me play a little of devil’s advocate here. Feel free to ignore if it looks like a banter.

About biocon, the one thing which they have done well is being early in investing in the first round of biosimilars (which require $50-100 mn/molecule investment and a waiting period of 7-8 years). Others have been caught on the back foot and Biocon is milking this opportunity. But in 10-years everyone will be in this business line making it similar to a generic business line (this is also what happened with Reddy’s in 2000s when they were the first to get a FTF, everyone figured out that business model and now its more or less a commodity). Nobody in India actually has been successful in making a patented blockbuster drug yet.

About global investing, this is a misnomer that India offers higher growth. For example, Suzuki’s EPS growth over the last decade has been higher than Maruti’s. Starbuck’s EPS growth over the last decade has been higher than that of Tata consumers. Your argument is true for consumer staples, but not for every brand owner. I was talking about owning the brands but instead through the international subsidiary because the global parent already owns the Indian subsidiary (eg of Suzuki owning 56% stake in Maruti). Also, Indian growth optically looks higher because of 4% inflation differential, which simply means that Indian rupee is devalued by 4% more than USD. So a 4-6% growing company in USD is similar to an Indian company growing at 8-10% (which is almost all of India’s FMCG and IT).

About Bfin and general qualms in investing, past is not a very bad predictor (atleast better than human intuition). For instance, if you look at 1997 financial crisis, the NBFCs that went bust then again went bust now (eg: LIC housing, DHFL, even CARE ratings went through the same mess in 1997). About Kotak, I can apply the same argument for SBI. Nobody buys a bank because of its franchise value (remember Yes also had/has a very strong franchise value and diversified business lines) but on the quality of their loan book. That’s because banks work on a NIM of 3.5-4%, with Opex and employee costs accounting for 1.5% of costs, so their net return on assets is 1.5-2%. So they need to add ~10x leverage to achieve ROE of 15-20%, so its the leverage book which counts and not other business lines. I will recommend reading about Edelweiss, they also have very good ARC and AMC businesses, but they were butchered because of their corporate and RE book. Its not the other business lines which matter, its the loan book which matters in lending financials. Plus, Kotak is current trading at a higher valuation than HDFC (premium valuation for what?).

About utilities, I am talking about Power grid and not power finance. On one end you are saying that commodity companies cannot create value, and on the other end you are bullish on lending companies. How are lending companies not commodity businesses? Will you ever prefer taking a loan at higher interest rate from a bank just because its well known? About power grid, if this guy is not around and doing well after 2-decades, we will not be having this discussion on an online forum because we wont have electricity. Utility businesses create a lot of value (probably the only real value in the world) as they create the basic infrastructure on which industries are built. That’s why they get regulated ROEs. These are annuity businesses and are valued accordingly. Just for context, one of Berkshire’s large bet is on utility business because this is scalable (can take in a lot of capital) and the ROEs are greater than cost of capital (it has to be to make it viable). Power grid will always be leveraged, otherwise our electricity bills will go through the roof (because of cost of equity is higher than cost of debt).

About Motherson, don’t take me wrong here. My family bought shares of this company in 1996, we have done well here. But an auto ancilliary is dependent on an OEM. Motherson already has annual revenues of ~$8bn, the next 20 years cannot be like the last 20 because they will become larger than OEMs which is just not possible. About Swaraj and Suprajit, these two have been around for 25 years now (look at what anyone would have made if they invested in Swaraj in 1989 IPO). Suprajit has grown sales for 20%+ in last 20 years, I am willing to bet that these guys will be around in the next decade (as they are moderately leveraged unlike Motherson). All these 1 component, 1 country, 1 client non-dependence criteria also applies to Suprajit. They are just less discussed because of size.

In IT business, employee costs are the biggest contributors. These are not manufacturing companies where we should compare asset turnovers. What matters is client concentration, geograhic and industrial diversification, and product stickiness. Once ROE is much higher than cost of capital, its growth which drives value. About dividends, I am happier if my company can redeploy capital and grow at higher pace. HCL is probably the only one which actually acquires IP and tries to monetize it (thats why they have the higest industry sales growth). Also, earnings did not fall for HCL in 2019-20.

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Hi harsh, The principles of coffee can investing are: “Find a set of companies that you expect to provide growth and protection of capital over the next 10 years”. The ROE and past sales growth filters are all implementation details. Many large companies showing good sales CAGR in last 10 years, might not be geared towards next 10 years. Example: Saudi Aramco. IMHO, even LIC is such an example although a few people might disagree. My point being, it is important for us to have an opinion about the next years for the company.

Please, that would always be very helpful. It is only through spirited discussions (including healthy disagreements) that we test our own conviction in our statements/ideas. I also want to avoid confirmation bias.

This is an excellent question. But i ask you a counter-question. Does this risk not exist for all companies regardless of industry and even company? Eg: HDFC Bank (the one you think fits into Coffee can PF). We should also note that if currently generics-focussed companies start investing right now, due to the large gestation period of 7-8 years, in 8 years they would be where biocon is today. So they would always be 5-8 years behind biocon, unless they carry out some serious innovation. We should also understand that the pie for biosimilars is also growing faster than overall pharma space. You’re right that competition in Biosimilars will definitely be higher 5 years later, but this is also why i will definitely evaluate the financials at least once a year (target is once a quarter if time allows). The PF is coffee can in the sense that I do not intend to monitor each and every NSE filing. However, major shifts in company unit economics should still be reasonable triggers for exit, as long as such activities are infrequent.

Fair point. These businesses are definitely worth evaluating. I think the largest barrier to entry I face right now is entry into global stocks in India.

The AMC and the insurance businesses are causing Kotak valuations to be high. I agree that the manner in which the bank manages leverage matters a lot, which is why the net and gross NPAs are a key monitorable.
Valuations being high -
Please see the evolution of the valuations for HDFC, which held HDFC AMC (Listing in July 2018) and HDFC life insurance (Listing in November 2017).


We can see a clear fall in valuation in the valuation since end of 2017 and another one near July 2019 with the listing of the 2 subsidiaries.
I believe something similar will happen with Kotak when its subsidiaries get listed.

Due to their differentiated business models. Please read the Bajaj finance thread. It’s a good primer on how far a differentiated lending model based on technology can go in creating value. :slight_smile:

The answer might surprise you, but for a few people (co-owners in same society where I bought a flat) i know the answer is an emphatic yes. Based on better customer experiences.

If you read my previous answer carefully, you’ll observe that I do not doubt that at all. The question is whether they would have created value for investors.

Sorry I did not understand this part, can you please clarify a lot more if possible? Thanks!
Power consumption in India per capita grows at 5% PA in last several decades. Population at 1% PA. Is it really possible to expect value creation in such a sector, specially given all the political interventions, reducing cost of power and so forth? I agree they have a high ROE, but what good is a high ROE without commensurate opportunities for reinvestment?

It is if they add auto unrelated businesses, which they intend to. Please see their latest annual report for latest 5 year plan.

Thanks, i will study suprajit more. It definitely sounds like an interesting company. :slight_smile:

Thanks for adding this. You make a good case for me to study HCL more and understand it better.

Earnings fell for a few quarters at least, please see:

Updated set of to-dos for this coffee can PF:

  1. [High priority] Consider adding HDFC Bank, HCL, Suprajit and any other companies which fit the bill.
  2. [Medium priority] Evaluate global cos for figure out how to invest in a low-cost overhead manner.

Hedging explained - What is hedging, as a general concept?

Keywords: Hedging specific risks.

Hedging is not about removing all risks, it’s not about preventing your portfolio from going down. It’s about preventing your portfolio from being hurt too badly from specific risks

Very interesting take on Utilities…I liked your quote on “real value”. Although I can see real value in other sectors as well, which initially I could not…but thats a separate very long discussion we can have…
Regarding Powergrid…how do you compare it to say an NTPC or NHPC? I am aware many investors would say that powergrid is like monopoly and whether power generated by hydro or coal, it will be transmitted by powergrid…but can any government regulation of being a PSU play a spoilsport in this ever green everlasting story? Pls note US is very different than India in terms of policies, regulation, subsidies etc etc. Golden PSUs such as ONGC which could have been a behemoth much greater than RIL are struggling to grow now…in this context of being a PSU can you think of possible risks to the powergrid story?
NTPC and NHPC investment looks little simpler in terms of new capacities/commissioning as signs of growth…your thoughts? Also a Tata Power with being only innovative player in otherwise boring segment and vision of being a service and product oriented Power company (Solar - catering to retail segment as B2C cnsumer durable) …your thoughts would be good to know…Thanks

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Then why is this coffee can investing and not just investing? Why attach a tag to it? And how is it different from what you are trying to do in your normal portfolio?

About HDFC bank, I don’t consider it to be a coffee can (for that matter any company). The idea of investing for me is to have a hypothesis which is different from what’s in the price, and constantly reevaluate based on new data.

This isn’t true, lupin started investing in 2016, cadila in 2008 (except that they don’t plan to sell to US), Reddy in 2016. So competition is coming. For all the hype around biosimilars, price erosion in US is around 40% for the first player (link). For context this number is 62% for the first generic player (video). In UK (&Europe in general) biosimilars price erosion is in the 60% range i.e. closer to generics (link, also covered somewhere in biocon thread). In India, this number is more like 70% (this is based on Cadila’s commentary saying that emerging markets are super competitive price wise; another data point is even biocon complains that they do not want to sell their biosimilars in India due to bad pricing). It will be interesting to see if Biocon can actually pivot to the next wave of biosimilars which starts in 2023. And if you plan on checking a pharma company once a year, good luck with FDA inspections.

Valuations are a function of market mood. I remember that repco home used to get 6x P/b in 2017. Focusing on business performance helps me stay more rational than what holding company discount market is currently giving. The hdfc folks are not stupid, they have always wanted to do a reverse merger with hdfc bank, but rbi doesn’t approve. At some point in the next decade hdfc will either be demerged or reverse merged with hdfc bank. Oh and by the way, the PB of almost every nbfc has come down from 2017 level.

I personally think that the last few years of high valuations have distorted people’s vision of financials. Lending is a commodity business, there will always be people who go for convenience but larger loans will always be a function of interest costs. Again I can be wrong in my assessment of lending financials, atleast globally it’s true.

About power grid, look at growth in book value (from ~16’000 cr. in FY10 to ~64’000 cr. in FY20). Utilities are valued according to their book (paper on utility valuations) and they have compounded their book by 15% over the last decade. At the same time, sales, profits and CFO has increased by >15% in the last decade. Also what are you talking about in terms of reinvestment? Utilities have the highest reinvestment opportunities, I think you should first try and understand how utilities (be it gas, power, road) actually work. A 5% electricity demand growth doesn’t mean a 5% higher demand for towers carrying power. Just like an annual growth of 5% in vehicles sold doesn’t mean we just need 5% more road construction. That’s because the average density of grid network in India is still low as we are not fully electrified as a country. The way it works for power grid companies is that they first have a capex which is later commissioned which is when revenue starts getting recognised as power flows through the grids. Power grid did a capex of ~1 lakh cr. in the last 5 years and has plans to do about 1.6 lakh cr. until FY22. For context, a 1.6 lakh cr. CAPEX is to add 63’000 ckm transmission lines which is ~40% of its current network (this is growth CAPEX and not maintenance CAPEX). Some part of revenues have been recognised and some part will be recognised as grids get commissioned. Just for context, revenues are 38’000 cr. as on date, so a doubling of revenue is easily feasible in the next 7 years, and if there is no subsequent capex (which will probably not be the case), the incremental revenues go to shareholders as dividend (debt/equity will be 0.7 as per regulatory guidelines). Also, other growth drivers are their consultancy business, cross-border transmission network and telecom services vertical (called powertel).

Market valued them at 4-6x book in the last decade which was wrong. Its probably much fairer now at 1.5x P/B (12-15% growth in book at 16% ROE)

I rate power grid a little bit higher because they are the carriers and are independent of the type of power supply. However government can do things which are not in the best interest of shareholders, recently government asked power grid to give a 1000 cr corona rebate to discoms. The AGR case has luckily been settled, otherwise power grid could have suffered really badly. Government interference is something to be watchful about. However, government has also started realizing that they can be smarter and are planning to list assets of power grid as invits. This should be good for shareholders as it will lead to value unlock. Let’s see if government can execute. About NHPC, my buy limit order is at 15. That guarantees me a 10% yield and I will be happy to own NHPC instead of FDs.

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Agree, infact at 20 also it has a 7-8% yield which is way better than FD. Why I havent bought it yet is because of my history of faltering whenever I buy companies for div yield. Also, one point to note is that in case of Powergrid, the dividend percentage have increased by huge percentage in last 2-3 years…is that milking sustainable is another question…

High quality businesses expected to grow sales 10%+ CAGR over next 10 years with high probability.

Its an interesting question. I think this is just what everyone chooses to call it. I’m ok with calling it “low risk low churn investing”.

For Core PF, the expectation is, 4x-5x returns in 5 years as a combination of valuation gap bridging and high(er) earnings growth. Smaller companies (most of my PF companies do not even hold 1% Market share). Much larger opportunity sizes. Much higher probability of failure. Need much more monitoring.

The question posed by Coffee can hypothesis is following: Is it possible to construct a PF of companies to hold for a long duration, where even short term business variations are essentially noise? Of course 1 in 20 choices can go dud and lead to losses, but most picks are expected to break even with very high probability and deliver at least risk free returns with high probability.

Do you have any data to back up these numbers?

Repco also got beaten up due to the larger mid-cap and small-cap downturn. Valuation is a complex function of several variables including future expectations of returns. In some sense, valuations have a momentum of their own.

Could this be because their businesses are doing worse?

I think we can agree to disagree. Lenders do not provide a commodity. They provide a differentiated product for a market segment they know best. There is enough room for several businesses to exist with varied business models servicing varied customer needs and creating value for shareholders.

From what I can see, you seem a bit pessimistic (or under optimistic) about probability of indian companies fundamentals growth to beat their global peers in most things. I disagree. Take the case of financials: When GDP grows at X% and credit grows at 1.5X to 2X and good private sector lenders grow at 3X, then value is bound to be created. The key monitorable as always is the financial institution’s ability to manage NPAs.

Says who?

Can you please share any data to back your claims? I see a lot of statements and almost no hard data. Its hard to respond to anything this way. I shared with you a precise demonstration of how power per capita grows at 5% in India and population at 1% Per annum. Can you please explain to me why Power Grid’s revenues would grow much more than 6%? Also, please understand that since you’re more well versed with power grid (and are making a case for me to consider investing in it), i don’t think it should be unreasonable to expect you to share some knowledge resources with all of us which demonstrate why power grid, despite having 85% of the interstate power transmission has high reinvestment opportunities :slight_smile:

Looking forward to your views.

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Looking at your portfolio, it is quite interesting how for most of the stocks in common, your buy price is way lower than mine (with the exception of Rain). Also how most of your stocks are in profit, while I still have a few bleeding from 2019. I started buying IDFCF in 2019 and was fully allocated before the crash, although I did manage to buy more, my avg price is still 32. For me, the fear of missing out on something which I had conviction in is much stronger than the pain of temporary losses which tempts me to think price will run up if I don’t buy immediately.

Wondering how you managed to pick the bottom so consistently? Did you just happen to discover these stocks around their bottom? Or wait for them to fall even more even though they were already inexpensive.

I have added the relevant links to my previous post, thanks for the nudge. Just to add a bit of context, the 2017 market narrative was “chor bane mor”. There were even quite funny presentations on how kachra management will change because the next generation wants market cap. My point is that at each point in a market cycle, there are narratives (GST, unorganized to organized). The coffee can one started in 2017 with publications from Ambit folks and their launch of a PMS. This was followed by launch of Marcellus by folks who had left Ambit to start up their venture on the same principle. All this goes back to Terry Smith who has this coffee can approach for global equities for quite a long time. Point being we tend to go towards something which has done well in the recent past. That’s why I like your approach of trying to diversify investment styles. Enough of my mumbo jumbo, good luck with your investments :slight_smile:

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Hi Ankit, thanks for adding your thoughts.

The key difference is that my PF was only 10% of Net worth before the crash, the increased the allocation during the crash due to the additional margin of safety which reduced my buying prices. Even now, this core PF is only 26% of net worth by buying price. I have some appetite for buying more in the event of a second market crash.

I would suggest staggering out your buys. If it runs up 10%, you still sit on a 5% gain if you staggered them uniformly. If it falls 10%, you only sit on a 5% loss.

A large part of my IDFCF buying was when price was between 18-20 rupees. It was clearly a ridiculous price for a bank undergoing a transformation and represented a unique buying opportunity. My starting buying price though was around 42 rupees. Buying on the way down (and up) requires conviction in the company, which comes from read multiple years of annual reports, investor presentations, management interviews, industry reports and such like.

Thanks for the additional context. I was not aware about this context. My understanding of coffee can investing comes from a different book (forgot the name now). I wasn’t aware about the ambit or marcellus context. The top level idea for this part of the PF is:

  1. Lower investments due to lack of conviction due to lack of in-depth knowledge and lower expectation of returns (lower growth, often also over-valuation).
  2. Protection of capital over long durations of time. Periodic evaluations of business triggers. The broad based diversified nature of the business should ideally provide the stability which I am looking for.
  3. I expect returns from this part of the PF to be roughly between 10-15%, not too large. The primary objective is capital protection. After a long-enough period of time, If i have developed enough conviction in my own stock picking skills, I will happily let go of this (Coffee can) part of the PF. I just cannot allocate 50% of my net worth into micro-cap companies without even understanding if I am good enough to do so.
  4. Ideally, I would love to own 30 companies with a outsized allocation to the higher conviction, higher opportunity size investments with constant and consistent tracking of fundamentals. My commitments to current job and family disallow me from spending more than K hours every week though, so i end up prioritizing top conviction 10-15 companies for the core PF and intend to only track with less frequency the Coffee Can PF of 10-15 companies.

Your views are always welcome, Harsh. And thanks for adding the additional context for the valuation of power companies and other links as well. I will definitely go through them when I can. :slight_smile:

Also would like to add, since we are in a similar situation of having about a year or so of investing experience. (Although your net worth could be very different from mine and what I’m doing may not work for you)

I am almost entirely invested into equity. I keep a percentage in MFs just like you because I wasn’t confident of my abilities. But as my understanding has improved, that percentage has gone down. I don’t worry too much about hedging as I’m not managing an extremely large sum of money nor do I have to worry about redemptions. I’m okay with prolonged drawdowns.

And for risk management, I do a similar thing which you mention which is dividing the portfolio into different kinds of bets. I prefer to think of it the way Peter Lynch does - dividing into stalwarts, fast growers, turnarounds, cyclical plays. In any given time you find opportunities in all of them but the proportion varies depending on market opportunities so I like to keep it flexible as opposed to strict demarcations.

Stalwarts I suppose is another word for Coffee Can where you expect the least amount of churn. I think of these as defensive and I would increase their weightage when we have an early 2018 kind of scenario where broader market has a lot of fluff and I’m feeling scared of valuations.

Overexposure to nanocaps is a concern I relate to. Which is why I think smallcaps (Mcap > 500 cr) provide a sweet spot where you have some stability of business and information about the company/promoters available publicly.

And I’m not really comfortable having large allocations to 1-2 nanocaps (Mcap<200cr), which is why I tend to take smaller positions in a lot of them.

Monitoring the industry weights ensures that I’m not too exposed to any particular industry.

Ultimately, I like to keep things simple and the risk indicator I rely on the most is whether I can go to sleep peacefully knowing I own what I own . :slight_smile:

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Some updates on PF:

  1. After thinking about it a bit, I have decided not to pursue coffee can investing because as discussed earlier, it’s very difficult to “shut it and forget it”. A lot of these companies were also available at a very high valuation which also makes holding them psychologically challenging.
  2. In the core PF, I have added Neuland after some research which can be found on their thread. I also added a little bit of Suven Pharma because both of them seem very different types of companies although both are primarily being driven by CRAMs. Would be interesting to see how it plays out.
  3. Another company I added a little bit and that I intend to build a position over time is Amara Raja. The opportunity size for Battery makers in India is simply huge (specially with the switch towards EV). Amara is the better of the 2 battery makers because it is more efficient and profitable.
  4. Another company i added is Vaibhav Global: A vertically integrated retail ecommerce platform that is largely into discounted jewellery. They have some serious operating leverage going for them. Their market share in their target markets (US, UK discounted jewellery) is 3% (up from 1.5% few years ago) versus market leader’s market share of 93%. Average revenue per household is 3$ versus 60$ for QVC. Vaibhav global’s next leg of growth is being driven by their digital businesses (website, app, other platforms like Amazon). The valuation is a little outside my comfort zone, which is why I will look to build a position over time.
  5. I realize it is extremely difficult to hold a concentrated PF of stocks. This is especially difficult for beginners, and also difficult as the PF size increases. I also think it might be better to hold more stocks towards the beginning of a PF’s life cycle because that enables me to track the large set closely, and consolidate over time, as the distribution of my conviction changes. Number of stocks in Core PF is now 17 (including Vaibhav, amara, Neuland and Suven).
  6. I still want to keep a diversified investing style (specially given the inherent risks of investing in Microcap stocks). I have decided to diversify into dividend investing. This style has always seemed very attractive to me. A regular royalty + growth of capital is a deadly combo. Even if the dividend yield is only 5% today, as long as I believe the company can grow dividends at 10% PA, this is an attractive opportunity given that typically inflation has been 5-6% in India. As a part of this, I have bought heidelberg cement, ITC, National Aluminium Company, GAIL, Bajaj Auto, Powergrid.
  7. The lot size for Chemcrux is changing to 500 soon (yay!). I hold 2000 shares right now. I intend to at least half the position size to control for risk of owning an illiquid microcap. Chemcrux is now roughly 25% of my PF. This is an uncomfortably large position size.
  8. I am very interested in Shilpa Medicare and am reading about it a lot since last few days. The company has been investing into Biologics (both biosimilars and NBEs) since the last 4-5 years and consistently diversifying revenue away from oncology APIs while also forward integrating into formulations. This makes shilpa a difficult company to understand. While it is somewhat richly valued as per EV/Revenue, but if the biologics molecules fructify in the next 5-6 years, then Shilpa’s fundamentals will definitely see a quantum jump due to the market size of the molecules involved. At same time, I do not want my PF to be overly diversified into Pharma Stocks. I’m also actively considering which pharma stock to sell, if I do decide to own Shilpa.
  9. I think of PF construction as some form of gradient ascent. As we learn more about the stock market, PF churn is inevitable. However, after sufficient amount of time (acquiring knowledge), the churn should reduce down to 0. I consider most of my investing to have started around April/May. I fully expect some PF churn at least for another 6 months as I learn more and more about the specific companies and am able to find better opportunities than current PF stocks.
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Hi Sahil, I read through your posts in other threads and had a curious question. I see that one of your biggest mistakes has been yes Bank and also see that you have very high conviction in another bank IDFC bank. Not that these two have anything in common but generally I have seen among peers is that a person who have had a bad experience with any sector refrains from high conviction bets in that sector, like say I had a bad time in NBFC and do not look at them any more as a practice. Not that I am right in doing that but thats a general psyche as I realise the risks of that sector much more than my first experience.
In above context, is IDFC bank a significant portion of your portfolio? What percentage if you can share. Also, why did you chose a high conviction in Banks again. Is it because you understand Banks very well or your liking for that sector as a vision or some other reason would be good to know. Thanks

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Thanks for the question,

One reason I’m able to take some concentrated bets is that the equity PF is only 33%-40% of my net worth. Even a 10% Concentrated bet is only 3-4% of Net worth.
Currently, IDFCF is 10% of PF and ~3-4% of net worth.

My IDFCF position has been built over time, a lot of buying happened at prices of 18-20 rupees (some before covid crisis). As a result, my average buying price was at 20% discount to book value. I’ve been closely monitoring IDFC First and they are prudent bankers. All fundamental ratios which matter for a bank, are improving for IDFC First. From next quarter onwards, their loan book will start growing up. Due to large up-front costs, retail as a unit is still loss making, but i fully expect that to turn around over time, as the up-front costs get amortized, cost to income ratio comes down, and provisions normalize over the duration of next 1-2 years. Yes bank was in many ways the exact opposite of IDFCF. My understanding of investing was very limited when I was a yes bank shareholder. It has increased a lot since then.

My own understanding is, as a large rule of thumb, market underprice turn-arounds for a very long time, until there is fair amount of certainty about the turn around succeeding. This is because base rate for turnarounds is low. Most investors main concern with IDFC First is the stock underperformance. This should not be a reason for under-allocation, as long as the business is going in right direction. They’ve been fairly prudent in creating Covid provisions, have always been up-front about credit losses, even at the cost of large frequent quarterly losses and mostly following up on most of the guidances they gave for a 5-year period. I continue to monitor the Cost to income ratio and provisions. The investment thesis is clear. I will remain invested patiently for a period of 2 years, waiting for RoAs of 1% in retail banking. If that happens, I continue to stay invested. Otherwise, I’ll exit. Imo probability of staying is high (80%). Of course this is a subjective opinion, not a mathematically sound statement.

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Some PF updates.

Instrument Avg. cost LTP Net chg. % Allocation % of PF Type
IDFCFIRSTB 25.25 31.65 25.34 0.0992623176 0.1087794817 Core
CHEMCRUX 181.5 242 33.33 0.08394227441 0.09785200099 Core
APLLTD 943.02 978 3.71 0.07283522691 0.06604039634 Core
ASTEC 1050.11 1094.15 4.19 0.07187876597 0.06547762603 Core
GOLDBEES 44.27 45.6 3.02 0.06469946767 0.05826480138 Hedge
VAIBHAVGBL 1893.84 2013.35 6.31 0.05956022101 0.05535827348 Core
NEULANDLAB 1113.03 1218.6 9.48 0.05353580191 0.05124468857 Core
POLYMED 381.03 491.75 29.06 0.05321942973 0.06004898301 Core
KEI 304.5 331.2 8.77 0.05182498899 0.04928247291 Core
RACLGEAR 77.25 113.35 46.73 0.04987558576 0.06398251215 Core
NCC 29.1 34.75 19.4 0.04051012539 0.042293697 Core
LAURUSLABS 282.38 276.85 -1.96 0.03983252855 0.03414276684 Core
GAEL 90.35 113.45 25.57 0.0367718036 0.04036839823 Core
SIRCA 208.49 248.8 19.33 0.03162737703 0.03299731212 Core
RAIN 89.7 103.55 15.44 0.02833461067 0.02859730794 Cyclical
MASFIN 827.01 832 0.6 0.0267739781 0.02354917578 Core
ITC 170.69 173.95 1.91 0.01870942874 0.01666967467 Dividend
SANDUMA 672.69 720 7.03 0.01866681936 0.01746779522 Cyclical
NMDC 84.64 90.35 6.74 0.01565812475 0.01461310461 Dividend
HEIDELBERG 187.88 192.15 2.27 0.01564073506 0.01398515355 Dividend
POWERGRID 164.18 178.7 8.85 0.01518638304 0.01445136577 Dividend
NATIONALUM 32.75 32.6 -0.46 0.01514660874 0.01318171584 Dividend
RITES 256.64 242.5 -5.51 0.01305633049 0.0107859592 Dividend
BAJAJ-AUTO 2948.76 2979.2 1.03 0.01091022021 0.009637047317 Dividend
AGIIL 55.98 53 -5.33 0.006705586375 0.0055504728 Exploratory
TITANBIO 126.17 133 5.41 0.005835259924 0.005377816583 Exploratory
  1. As decided, Chemcrux allocation has gone down, since it was never a comfortable position to allocate this high a capital amount to 1 position.
  2. Deployed some extra capital into IDFCFirst
  3. Deployed Capital into Dividend plays.
  4. Deployed Capital into Polymed, Astec, Neuland, Vaibhav Global, Laurus Labs and reduced a bit of allocation into Alembic as I balance that position out with laurus.
  5. I’ve added the reason a stock exists in my PF. I will track gains only for (Core+Cyclical+Exploratory) PF stocks since dividend stocks were not added for capital appreciation (nor the hedge).
  6. Realized gains is 9.7% pre-tax (majority of gains includes chemcrux for rebalancing, caplin for exiting position, lincoln for exiting position).
  7. Unrealized gains are 16.8%.
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