A few days back you were researching on route mobile. Why did you not invest in it.
was it bcoz of low margin business and low differentiation(or twilio’s entry)? if that is the case, I want to ask if you researched on their new acquisition of phonon? also, what i fail to understand is IT firms like mphasis, coforge etc have very little differentiation between the skills they offer to the client, yet they have seen earnings expansion for 3-4 yrs (that too in double digit) My question is ‘Is differentiation in business necessary for IT firms’? and if you could share what discouraged you to invest in route
Summarizing the changes and some observations here:
A few pf churn: arman out, ncc out, pokarna out pix, garware poly, sastasundar, kilpest inside. Reasons in next few points:
Arman will have an undefined period of pain with covid 2nd wave, more potential waves. The other thing is i am uncertain whether MFI industry can hit the kind of valuations it used to have. Even commentary from MFI players is that days of 0% NPA are over (even in steady state). If profits get wiped out once in 3-4 years, real ROEs go down by that much which makes it difficult for any rerating to take place. I still expect arman to compound beautifully in long term, but to reduce pf risk and to keep bfsi allocations in check, sold out of armaan. Sold it despite future return expectations being high.
NCC: easiest one i decided to sell. Cyclical. Difficult to have any revenue visibility. Can expect a pop in valuations and also some growth of revenues; but due to cyclicality and inability of management to do anything about that cyclicality this was one of easiest one to sell. It also showed low future returns as per my return expectations.
Pokarna: Similar to NCC, revenue visibility was poor, definitely some pop in valuations and growth was expected (housing demand picking up in USA) but could not see how long it can last. Whether this is pent up demand or not. Becomes difficult to sell out of such stocks. Was also one of lowest expected return stocks and hence easy to sell.
Pix: have written extensively about it in pix thread. Secular capex cycle expected in india as well as globally. Much better unit economics than even global leader, trading at discount to global leader, gaining market share in exports. Very anti-cyclical industry with demand for replacement belts always there even during downturns (can be seen in pix revenues in last few years). A unique case of smallcap dominance. Improving cash flows. 5000 SKUs. Industry tailwinds is a key element of investment thesis.
Garware hi tech films: Clearly misunderstood co with co being clubbed together with commoditized players. Dominant position in many sub-verticals like shrink films, indian market. Expanding marketshare in US and export market. Part of value-added in topline expanding and with it, the margins. Clear revenue visibility for 2 years at least. R&D focussed co. Another example of smallcap dominance.
Kilpest: Another misunderstood co. People are thinking this is a covid play. And covid has helped this co. But their biotech R&D strength and obsession with quality goes way beyond that. Have written extensively in Kilpest thread. Their tests are better than even some american competitors. First USFDA approved Indian covid RTPCR test. One among only 5 RTPCR tests which can test saliva. Shows the biotech R&D capabilities of the Co. Huge opportunity size (7000cr and growing indian market, 21B$ global market). Lots of optionalities: 120cr cash due to covid tests, exports to US, UK. Possibility of rerating after co’s amalgamation scheme. Similar korean co growing topline at 15% is valued at 20-25 earnings. This one as per my estimate is at 10-12x non-covid earnings. Efficient market hypothesis working well? Go figure.
Now coming to riskiest investment. Sastasundar. Definitely high probability of going bust thanks to hypercompetition with Amazon, blah blah. Key investment thesis is that SS is profitable (or close to it). Will grow at 40% topline every year. With wright’s law, profitability will follow soon. Deeply undervalued. Potential for 3x rerating and then acquisition by larger player. If they can raise money, then potential for even higher growth, delayed profitability but higher chances of emerging as top K winners in the sector. MoH e-pharmacy rules when implemented would be a huge tailwind (competitors cannot do the kind of crazy advertising they’re doing right now). Their key competitive advantage is the brand and higher ability of medicine and customer relationship they are able to establish by ensuring some physical presence (online only model is completely a commodity).
Moderator asked me to not post total returns so i will not do that. Anyone that wants to compare returns of individual PF stocks can do so by comparing with previous post. Suffice it to say that PF returns have been quite satisfactory. PF size has also grown by 12% as i deployed capital into new positions and scaled up the top investments like Vaibhav, neuland, saregama, idfc first bank.
Only major increase in allocations is saregama: when i listened to the concall i realized what a wonderful business this is. And how long and secular the growth runway is for them. Each and every business vertical is total money minting machine just that 2 are not yet firing and dented due to covid. But management commentary is quite bullish for all segments. Some people consider carvaan to be capital misallocation. 2 things are good for saregama: only profits generated from carvaan would be plowed back into it. Streaming profits go back into streaming. So, simply by the virtue of higher more profitable growth in streaming it becomes larger part of pie. Unless: carvaan can improve its unit economics with podcasts. Heads i win. Tails i dont lose much (or, eventually I win). Also their music catalog seems far higher quality than all incumbents (specially tips) except T-Series which is not listed. The growth in revenue with paid subscription will surprise everyone on the upside. Also imo it is very difficult to disrupt this incumbent. It won’t be profitable for Spotify or anyone to directly make music unless they can command 20-25% market share. This industry is fragmented and likely to get more fragmented with time unless someone can create differentiation.
Lot of people use top down thinking to see why investments dont make sense “if tatas or reliance enter how will they compete? Are durable client relationships established over X years and process expertise developed over many decades their only competitive advantage?” Well, of course. You can dismiss any company on earth by saying “what if amazon starts doing it” but unfortunately reality is seldom top down, reality is seldom so simple or black and white. Tatas and reliance are present in many industries. They are not monopolies in most of them. There is enough room for many of them to succeed. “What if HDFC bank starts giving loans to IDFCF’s customers” They could have, all these years. They didnt. “What if Indigo paints distributors are poached by asian paints”. Indigo paints grew despite asian paints. There is a need for us to stop idolizing the industry leaders, understand the extent of their moat and seriously consider the small guy. You obviously cannot get a 300cr mcap company with HUL’s or Asian paints’ brand or distribution dominance. You can only look for certain patterns of success, make enough high quality bets, build a high quality PF and then hope that you can catch a large successful company in it’s infancy.
Interesting anecdote: Something very interesting happened in angel broking. I bought my quantity at 550 rs average. It got short delivered. I ended up getting 800 rs for each stock, while MP was 650. Bought again at 650 and it is at 930 now. This implies almost 100% gains in a short span, thanks to the sharp run up and some dumb luck.
Disc: Invested in all these companies, this is not buy or sell reco. Do your own due diligence before investing. Please dont tag me and ask me what i think about results. Invest based on your own conviction. I will add my thoughts here on PF thread after all my PF companies results come.
I am eyeing Mastek Wonderful business, their acquisition of cloud services company is paying results. Their significant presence in UK healthcare and govt contracts should give some tailwinds to the business. UK’s health service is getting a massive budget to transform its tech and move to cloud. Mastek is the lead candidate in servicing that.
Curious if you have posted your notes on it before?
I haven’t actually. this is a very well researched company i didnt have much to add. You’d also find that i havent added much for racl: same case, very well researched.
Yes, you’re right. Mastek is in a very high growth areas of ERP cloud migration, digitization (extreme tailwinds in western economies), good capital allocation, looking to diversify in a larger way into US market. Order book growing by 40%. two key monitorables for me are:
who will the new CEO be
How will they deploy all this cash? Asset light business so dont need too much capex. All this cash generated they will try to acquire. Need to evaluate the strategic intent of the acquisition. Would be prove to be a nice 1+1=11 type bolt on acquisition? We hope it turns out like evosys not like previous acquisitions.
Hi @sahil_vi, might seem like a naive qustion but I’m going to ask anyway:
Did you mean the number of songs in the music catalogue when you say quality?
Saregama music licensing revenue is about 3x that of Tips, but they have 4x the number of songs. So my understanding was that Tips revenue per song is higher than Saregama - meaning average streaming of a Tips song is 33% higher than a Saregama song. Is this correct or am I missing something?
Here are top reasons i prefer SRGM over tips. 1st one answers your question
No, i mean the quality. As per scuttlebutt done by some private investors there is concentration in tips catalog. There is a large contribution by head and smaller concentration of the tail. Just like few biz have client concentration risk, tips library has singer/artist concentration risk. In comparison, SRGM catalog is much more diverse, much more spread out over artists and also eras. This makes it more robust to demand trends. As a poor proxy, consider cumulative views of top 10 songs by views. This is 18% for tips. This is 13% for saregama. The actual metric: singer concentration would take tremendous amount of hard work to verify.
Saregama is trying to play up retro coz that is their game. But tips being having more fresh catalog of course get higher streams per song and thus higher revenue per song. However, interesting thing here is the incremental share of pie which each co will take on. For saregama this is 25% of all songs released. For tips, this cannot be that large. Large Incremental share of market is going to come to saregama.
Frankly I dont find much of what tips management says very trustworthy. They take about payback period of 1 year. This means that whoever is selling their song, is selling it for same amount as the amount of profit it takes in a year for tips. Why would anyone do that? It doesnt make any sense. Management also talks about music streaming industry growing 30-40%. Music streaming industry releases data and the growth rate is not 40% for sure.
I know right now everyone is going gaga over music streaming (that includes me), but i like betting on managements who are looking to get ahead of the curve and experimenting with new sources of revenue. I find that in SRGM: carvaan and yodlee are both experiments. Yodlee definitely successful, carvaan: it remains to be seen. A big intangible people are discounting is the analytics they can do over the catalog using carvaan. They are able to get a distribution of song listens wrt any underlying variable, age of song, singer, geographical region (in carvaan 2.0, my guess is) and analyze where the gaps in their library are. Other music labels ability to do this is restricted. Other intangibles are there too. When the young people listen to old people listening to songs on carvaan it serves to enable SRGM to capture the young person’s mindspace.
Tips music streaming gets 40-50% of their revenues from non-digital means (TV, live music concerts). Their revenue streams are less anti-fragile against covid like disruptions which we can see in 9MFY21 degrowth in revenues.
Hi Sahil,
I wanted to know how comfortable are you with RACLGEAR now forming 11.7% of your portfolio. Till what point would you be comfortable? Just wanted to know your conviction and timeframe towards this company.
Thanks
PS: Thank you for sharing invaluable knowledge and insights across various threads. Incredibly helpful and gives direction and perspective to a new investor like myself.
Infinite. I don’t believe in cutting my flowers and watering my weeds. Only criteria to exit is poor business performance outlook or extreme overvaluation relative to business outlook or opportunity cost (better business available).
I am closely watching performance of arman at ground level , i dont find any difficulties at considerable level ,
They have created 7.2% buffer which is highest in industry and If you check at customer level they dont have any issue because of COVID second wave.
But being conservative they have provided full year profit,
They will come up with great set of numbers next year , Majority of armans customers are cattle owners who have 2 or 3 cows or buffalos this people can easily survived by selling thier milk to nearest BMC unit. Which was essential goods and milk supply was uninturupted during whole pendemic.
Disc. Could be cometly biased because of My top holding
To my knowledge this is not pent up demand in USA… real estate companies maintained almost negligible ready to move inventory…after 2008 before 2008 … they were maintained ready to move inventory… more over real estate demand increased… in USA… see the last 5 , 10 yrs built homes across USA… still how much less homes they are constructing …you will get an idea…+ added this new theme after COVID … family wants either bigger home if they hold one… if they don’t hold… they want one… this tendency become more and more…
This one also added some demand to my knowledge…
Most of the builders have huge closed contracts which they need to deliver in next 8 months to 1 yr… so basically quartz requirement is not full noticed… as quartz/ granite required for home at the end …
So to my knowledge… still not yet opened the bigger cake to cut it…
I may go wrong also in all above mentioned points
Disc: invested , my views may be biased. No buy/ sell recommendation
I dont find much of this useful tbh. Any ground level work done directly with borrowers gets us a biased sample. Lot of care has to be taken to ensure a representative sample is drawn. One of my friends missed IDFCF bank saying that he had done scutlebutt and their underwriting is too aggressive. This completely misses the point. Lenders in the long run should be judged only on basis of management quality and ability to steer the ship. Armaan definitely has that going for them. Very conservative management. However, MFI as an industry is changing. Larger banks are also trying to take direct exposure. Borrowers mein cream has been skimmed. NPAs will continue to be reasonable in medium term. Profits getting wiped out once in 4-5 years doesn’t help either. The concern i have is wrt their ability to rerate. Lending itself is volatile and cyclical. But MFI seems seems to be more so. Armaan also has a large exposure to maharashtra which was worst affected by covid and the lockdowns. Unless your scuttlebutt was a uniformly random sample of armaan borrowers, it is not something i could rely on. All the best to you for the investment though. I am still hopefully armaan would grow AUM 30-40% in medium term.
This is the other concern I had with armaan. They have a HUGE client concentration in 1 end industry: cattle related activities. This is imprudent lending practice. Client concentration in 1 industry is recipe for high risk, and potential disaster. (imagine a covid for cattle or the likes). This always bothered me and aided my decision to exit. Really good scuttlebutt by Debashish in getting this data though.
long term business momentum intact and growing.
Whatever you are saying says absolutely nothing about sustainability of demand. Unlike India where most people do not have homes of their own. USA is a developed country. How fast can their housing market really grow in a sustainable way, is not clear to me. Also, after all pokarna’s product is a commodity. They have created differentiation and only cater to the top clients (no competition with chinese exports). At the same time, even from scuttlebutt done by pokarna experts, it is not clear that their differentiation necessarily results in much of an advantage in actual sales. The part which really disappointed me was that when all of India was exporting quartz to USA, pokarna wasnt (look at last 2 Q results). Why? It is not clear. Pokarna was always a profits pop, valuations pop play for me. I decided to look for more sustainable growth businesses, and for these reasons i decided to exit.
Have mentioned before in the thread, please find and read it.
Intresting to see your decision of allocation across the new holdings. From your noes on the individual threads, I got the sense that the risk reward for say a Kilpest may be better than a Sasta Sundar (especially given 3B’s massive projected profits till 2025 in their valuation report, Kilpest having a third of its mcap as cash, and sastasundar being in a much more frangemted market). On the other hand, Pix and Garware seem more in the realm of consistent compounders with industry tailwinds.
Could you please share how you decided to allocate funds in the ratio that you have among these four companies?
all 4 are roughly 4-5% each starting position. One thing you missed out writing about is : SS has very strong industry tailwinds. Industry itself is growing 40-60%. And with pharmeasy medplus IPOs, rerating of SS was only a matter of time. SS and kilpest both are heads i win, tails i dont lose much kind of bets. Just that kilpest is a position i am still building / in the middle of buying. All positions start out with 4-5%. THen, over time allocation increases as conviction increases, otherwise it doesn’t.
Hi Sahil, With regards to Kilpest, What is the non-Covid revenue expected to be going forward. Is it the product line and research capability at the core of your investment thesis for this. Thanks mate!
Wonderful business, their acquisition of cloud services company is paying results. Their significant presence in UK healthcare and govt contracts should give some tailwinds to the business. UK’s health service is getting a massive budget to transform its tech and move to cloud. Mastek is the lead candidate in servicing that.
