Saikumar's portfolio for long term

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

Hi All,

I am following Valuepickr for quite sometime. It is very informative and helpful. I recently started building portfolio for 10 years for long term goals like my 2 kids education and marriage etc.

  • My planned asset allocation is 40-50% in Sukanya Samruddhi, PPF/FD/Bonds, Gold and 50-60% equity (direct stocks).
  • From equities expecting a return of 12% - 15% over 10 years. If i achieve this then the overall return will be 3X in 10 years which is good to achieve my financial goals.
  • I want to remain invested in following stocks for long term and plan to exit only if see any corporate governance issues or lacking growth or if i find better opportunities
  • I am salaried employee and plan to invest at regular intervals of time. Prefer to begin with equal allocation in all stocks to avoid traps.
  • Criteria for majority of the stocks is – sector leaders, well known brands, past history. Due to this i selected stocks mainly from FMCG, Finance and B2C domain.

Stock name, Allocation percentage , Reason for selection.

  1. ITC => 6% – Management decided to give 80% dividends. After few years dividend yield may be more than FD yield. Attractive valuation , FMCG percentage is growing.
  2. HUL => 6% – FMCG leader. Plan to add more during corrections if at all happens
  3. Asian paints => 6% – Paints sector leader. Plan to add during corrections
  4. Britannia => 6% – We like the products and long way to go.
  5. Pidilite => 6% – Monopoly in adhesive domain.
  6. Marico => 6% – Added in recent correction. We use their oats regularly. Major share in Hair oil sector. Recently came up with Veggie clean and i see this in many of near by stores.
  7. HDFC => 6% – Housing finance sector leader and holding company of HDFC bank, HDFC AMC, HDFC insurance. Attractive valutions.
  8. Bajaj Finance => 6% – NBFC leader. Good management. Present situation is temporary. People don’t stop taking loan for buying consumer items. Growth may not be like before but will give decent returns.
  9. LIC HF => 6% – Attractive valuation and good dividend yield. 2nd largest in housing finance sector. May get re rated if LIC IPO comes. Housing sector is not saturated.
  10. IDFC BANK => 6% – Transparent management. I believe after few quarters growth will be huge. If there are no major NPA issues this may give very good returns in long term. If bank is not progressing or continue to declare high NPAs i will exit.
  11. BATA => 5% – Sector leader. I chose this over relaxo because of valuations.
  12. POLYCAB => 5% --Sector leader. Attractive valuation. Long way to go.
  13. VGUARD => 5% – Good management. Got chance to invest in recent correction.
  14. SIRCA PAINTS => 5% – Started a factory to manufacture products in India. Have license to sell in few asian countries. Products are innovative. Attractive valuation in paints sector. Sirca Italy and another italian company has 20% stake in this. May give very good returns in 10 years.
  15. Heidelberg => 5% – MNC company. Good dividend yield. Management planning to increase capacity by acquisition. Cyclical industry.
  16. LUX industries => 5% – Attractive valuation, consistent growth in sales and revenues.
    Total 90%

I invested remaining 10% in following basket of chemical companies. Not familiar with how chemical companies work and valued. As i understand more and gain confidence i will consolidate the investment into 2 or 3 stocks.

Aarti Inds – Long term contracts. High valuation compared to industry average.
Deepak Nitrate – Attractive valuation. Migration from basic chemicals to speciality chemicals.
Alkyl amines – Duo poly. Expansion. High valuation
Bharat Rasyan – Tie up with Nissan. Expansion plan to come up with more products.
Transpek Industries – Long term contract with Dupont company and expansion plan. Attractive valuation.
Shivalik Rasayan – Currently agri chemical player. Migrating to API domain. Revenues are expected to double.

I excluded few industries as i don’t understand them.
Pharma/IT - I can’t understand the domain
Insurance / AMC – Valuations are high.

I preferred to chose investing in chemical sector due to China issue, expansion of chemical companies and GOI support for make in India.

Please review and share your opinions. Thank in advance.

3 Likes
2

Portfolio looks good. First 7 are solid companies!

3

Portfolio looks decent, then you have very high allocation in Financial , FMCG sector which is not that great.

Diversification is the only free lunch in investing. Never let a stock get bigger than 10% your portfolio. Secondly, never ever, ever, more than 20% in any one sector.

4

@Investor_No_1, @JJoy thanks for the feedback.

I did few changes to portfolio to diversify across sectors and reduce the number of positions to 14.

Added
Reliance Industries — Jio and Retail play.
Apollo Pipes – Good management, coming up with new products.
Tata elxi
Removed
Marico –
Heidelberg – Cyclic industry
Lux industries
LIC holdings –
Vguard

My portfolio looks like now

Reliance Industries (8%)

FMCG (20%)
ITC
HUL
Britannia

Finance (20%)
HDFC
Bajaj Finance
IDFC Bank.

Paints & Chemicals. (20%)
Asian Paints
Pidilite
Sirca Paints

Consumers & Retail (12%)
Polycab
Bata

IT (6%)
Tata Elxi

Pipes (6%)
Apollo Pipes

1 Like
5

Any reason for removing Marico Also your rationale for Tata elxsi ?

1 Like
6

Marico is good company and in fact launched many products (fittify , oats) last year. I removed Marico to reduce exposure to FMCG and sold few other stocks to avoid over diversification.

I selected Tata Elxi because of following reasons.

  • To have exposure to IT domain and Tata Elxi belongs to Tata group.
  • Working in niche sectors (Infotainment, Media & Communication, IOT, Automation, Vlsi design and verification)
  • Strong expertise in automative solutions. One concern is majority of revenues (50%) is coming from this sector and JLR is major customer which is not doing good currently.

Any suggestions in IT sector?

1 Like
7

In IT I would suggest you look into Persistence Systems since you are not aiming for large caps.

I would like to ask you, why did you remove Heidelberg Cement. As I see that you are investing with a ten year timeframe, how you see this stock perform over the long term? The management is achieving excellent efficiencies, and its good that it is not doing any expansion right now. Sensible I would say. Do you have any specific reason removing it?

1 Like
8

LTTS is better alternative to tataElxi. LTTS is bit more diversified.

9

I think you have selected a good company in IT for long term. Tata and Digital is a good combo. LTTS is also fine in Digital engineering space. PE owned Mphasis is also giving good results after Blackstone acquired it.
I would include Honeywell Automation also into Digital tech firm. Parts of 3M, Siemens, ABB are doing cutting edge technology in India. Sadly none is focussed only on digital.
Honeywell seems closest but not sure on valuations and MNC parent’s future roadmaps.
Disc: Have tracking position in Tata Elxsi, LTTS and Mphasis. This is not a buy/sell recommendation

1 Like
10

Good you have made some good changes i guess. Reliance - Jio i think it will be a game changer, dont expect all the below people to be irrational

Reliance
Reliance900×636 110 KB

NESTLE is always better than HUL, NESTLE has a very wide moat , whereas HUL is more of a dividend play. But current valuations of Nestle is not that great, its better to keep a track if opportunities emerge.

Not sure of IDFC and , should have considered Kotak Bank , that should have provided more edge.,

Sirca Paints, whats your concept there, why didn’t you consider Berger Paints for that matter.

Ploy cab , i dont know much not tracking.

Tata Elxsi is good, have a look on Oracle Financial Services Software Ltd

Screenshot 2020-06-08 at 6.25.37 PM
Screenshot 2020-06-08 at 6.25.37 PM2258×1082 248 KB

Also instead of Apollo Pipes, why not consider Astral Poly. Whats your rationale on selecting Apollo pipes.

Screenshot 2020-06-08 at 6.25.55 PM
Screenshot 2020-06-08 at 6.25.55 PM2248×1088 243 KB

In short, right now, we need to buy high-quality businesses.

More than 50 years ago, Charlie told me it was far better to buy a wonderful business at a fair price than to buy a fair business at a wonderful price.

- Warren Buffett

Opinions are personal, not SEBI registered. Currently invested in BAJAJ FINANCE, ITC, ASIAN PAINTS, PIDILITE etc…

1 Like
11

Heidelberg cement is well managed MNC company and good dividend yield. It may give good returns in long term. But i removed because of following factors

  • Commodity business with no pricing power.
  • Many companies with same product with nothing much to differentiate.
  • Deeper understanding of business cycles is required. Many variables to track. demand vs supply, monsoon etc.
  • Other opportunities are available where growth predictability is there

In Heidelberg board a link to following article is given. This provided good insights about the company
Please check this https://www.drvijaymalik.com/2020/06/analysis-heidelberg-cement-india-ltd.html

1 Like
12

OFSS is a great stock, but has a low number of 5year growth. Tata Elxis and Persistent are great stocks too, and are able get more business hv better growth.

Because of Tata Elxis being tied to JLR it might again be available at 600, which is a strong support. It’s a stock for the long term.

Amongst the three, Tata Elxis ranks best with a High RoCE of 60%. Only problem is the Auto Cycle

Honeywell Auto is a fantastic stock. However, it’s sales growth was sluggish is FY1920. Therefore, I am hoping that the bear market gets it to a more agreeable PE. Value Investors wouldn’t like to pay 50PE for 3% sales growth.

3 Likes
13

Thanks for your valuable suggestions. My thought process is i would like to have mix of sector leaders and emerging companies with good management, reasonable valuation.

Sector leaders-- Reliance, Itc, Hul, Hdfc, Bajaj Finance, Asian Paints, Pidilite, Britannia (2nd largest in food sector), Bata. I think these stocks don’t need regular monitoring. My expectation from this group of stocks is 12% in long term. I keep conservative targets and plan my investment accordingly.

Emerging companies/small caps with good management that can grow well in 5-7 years – Polycab, IDFC bank, Tata Elxi, Sirca Paints, Apollo Pipes. These stocks need relatively higher monitoring. My expectation from this group of stocks is 15% in 5 years time frame. If this is not feasible, i will exit and look for other better opportunities.

Nestle is very good company. Because of high valuations i didn’t choose this. I will keep tracking Nestle, Marico and Tata consumers in FMCG sector.

Idfc bank – Transparent management. Promoter has very clear vision about to make Idfc bank as retail business driven bank. As of now promoter is walking the talk. Due to covid, financial sector is not in good condition. Only concern is any hidden/uncovered npas due to legacy infra book. The recent correction provided good opportunity to buy at lower price i.e much below book value.

Sirca paints – So far the company is selling Italian products in Indian market. Recently started a factory to manufacture the products in India. This is going to help increment sales. Company had presence in North India and recently planned to expand in South India before Covid hit. As per investors presentation ICA Pidilite, Asian Paints have similar products. Competition is there. But this is a debt free company with 3 years sales and profit growth of > 30% with p/e of less than 20 in paints sector.

Apollo Pipes – The reason i didn’t select Astral Poly is due to its high valuation and don’t prefer to invest in many high values stocks except FMCG sector. I am not sure how long these valuations are sustainable not sure about any time wise or price wise correction in future. I may be wrong.

I will study more about the existing products and future plan/growth of Astral poly.

Apollo Pipes belong to Apl Apollo promoter group. Expansion is in plan to improve sales. Promoters guidance is 25% growth in revenues next 3 years. I will see how this goes. Valuation is < 15.
I will track these things sales growth, any margin growth, debt reduction, possibility of re-rating.

Recently i read a document posted in one of the forums here (templeton letter) that has interesting point.

The letter says that because of increased availability of funds, limited quality/common stocks , the price of quality stocks go high. It is also mentioned that

We should bear in mind the fact that the top-quality stocks are already very high in price. A greater ultimate reward may be achieved by searching now for those stocks which are not regarded as top-quality now, but may gain that reputation within few years. Such stocks can be bought at much lower prices; and then later improving reputation may lead to institutional preference and consequent improving prices. Another policy which may be successful is selecting stocks is to purchase those which have medium quality with increased earnings

I am also exploring chemical companies and have tracking positions in the companies i mentioned in original post.

2 Likes
14

I have a different view on the above letter, i have previously burned fingers in buying companies that appear like bargain or at wonderful valuations, so lately i’m sticking to the below approach irrespective of temptations. In the long term it works well for me. I do use the Cigar butt approach to get some puff but its short term, like i recently bought, Oberoi Reality, Ashok Leyland, Bombay dyeing, just to get 20 , 30 % and exit.

It was far better to buy a wonderful business at a fair price than to buy a fair business at a wonderful price.

  • Warren Buffett

I’m more oriented towards consistent compounders, they do value high but considering their consistency in profitability and market leadership its acceptable. To explain NESTLE was always valued high the least i saw was at 7500 Rs still i thought its valued high and never bought a share, now look at the share price 17000 Rs so missed opportunity. PE do not always says the full story of a company. It’s just a number.

Let me give you a recent news, the person who is considered as the next Warren Buffet, didn’t go for bargain hunting either in the current market, in fact Seth Klarman bought the best companies. Alphabet - Google , Facebook just considering the market leadership and wide moat irrespective of valuations.

2 Likes
15

That word fair is important in the above quote. Value investing is not about buying any company at cheap prices, it is about identifying undervalued companies. There is a big difference.

1 Like
16

Yes absolutely, the word FAIR is extremely important, its just not a PE number. A market leader / monopoly business at PE of 100 can still be fairly valued if it has a market share of 95% and increases profits and sales by 40% year on year with clear visibility. If you want to buy a Mercedes Benz you need to pay the fair price.

17

@JJoy @Investor_No_1 @jamit05 @Sudheer_Pal Thank you for sharing your thoughts and suggestions. It is very helpful to get different perspective.

I thought of reducing the stocks to 12 -15 but somehow i am not feeling confident or comfortable may be due to risk averse nature or due to FOMO. It seems i find peace with diversified portfolio for now. I am in the process of building portfolio. I would be investing 30% of my planned portfolio amount in next 1 - 5 months. The remaining i am planning to add every month.

Replaced
HUL with Nestle– It is difficult to pick among FMCG. Nestle has many sector leading products. Most of the launched products are very successful with high ratings. It’s sales and profits growth are consistent in last few years. I hope ITC will help for regular dividends.
Bata with Relaxo Both are good with different business models. Chose Relaxo because of consistent sales and profit growth. Valuation is high. Plan to add around Q1FY21.

Added
Voltas – Demand for AC will keep growing. Tata company.Planning to setup a factory to manufacture Ac and refrigerators in south India.
Atul & Aarti Industries – Many chemical companies planned or completed expansion due to increased demand. I chose these because they are diversified, sector leaders, contracts in pipeline and corporate governance is good.
LTTS – Added this in addition to Tata&Elxi as LTTS is more diversified.
Kotak Bank – Banks are backbone to economy. This is 2nd largest with consistent track record of more than a decade.

Portfolio (diversified across sectors and with in sector)
Banking & NBFC – HDFC (holding company) , Kotak Bank, Bajaj Finance(nbfc), Idfc First Bank(emerging bank)
FMCG – ITC, Nestle, Britannia, Marico
Consumers & Retail – Relaxo, Voltas, Polycab, Sirca Paints
IT – Tata Elxi & LTTS
Chemical – Aarti Industries & Atul
Paints,Adhesives,Pipes,Others – Reliance, Asian Paints, Pidilite & Apollo Pipes

Some criteria i kept to avoid losses due to unforeseen issues.
Investment in each stock not more than 10%
sector allocation not more than 20-25%
Number of stocks – Not less than 15 and not more than 20

I will update the portfolio details with buy prices after Q1 results are out.

1 Like
18

Hey,

Everyone has their own investment styles and this have to be developed overtime. Myself when i started investing (actually no investing just watching stocks) 10 years back i was hunting for value. It was only years later that i realised that these stocks which i was tracking and some bought are not value but value traps.

It was only after long years that i understood what value really means. I have a concentrated portfolio approach. 10 to 12 stocks in different sectors mostly market leaders, investment is constant and whenever if one stock falls for market overreaction will buy more into it.

The stocks that you have selected are good, and i understand your rationale of keeping more stocks with low allocation to avoid concentration risk. But you also need to understand that if one of your stocks performs really good that will not create overall performance for your portfolio.

In summary if you want good returns from your investment you need to have concentrated investments with high conviction stocks.

2 Likes