Hi there !
I have been a long time lurker in this amazing forum. I have been seriously investing from June 2017 of a fairly diversified portfolio of around 15 stocks which I have trimmed to present 7 stocks .
Name of company -------- weight by cost(% approx)----------------- average purchase price
Kei Industries - ------------------------- 46 --------------------------------------- 340
Muthoot Finance- --------------------- 12.3 ---------------------------------------- 743
Jamna Auto- ---------------------------- 12.12 ----------------------------------------- 43.88
Nocil- -------------------------------------- 8.4 -------------------------------------------- 106.5
Polycab- ------------------------------------- 9 ------------------------------------------- 1281.73
Amines and Plasticizers ---------------- 6.8 ---------------------------------------- 53.67
Frontier Springs- -------------------------- 5.6 ----------------------------------------- 309.8
Ill try to present my investment thesis on subsequent posts
Thank You For Reading
Kei industries and Polycab -Investment thesis
P.s Kei industries has been my oldest stock in this portfolio.
Wires and cables industry- I consider Wires and cables a good proxy for Infrastructure and Real Estate sector. This industry is interesting ,
- Commodity Business, is it??-Even though it seems like commodity business but this industry has power to pass on the change in input costs .The ebidta margins of the top 3 companies(polycab finolex and KEI) has been steady and increasing since the last 8,9 years .
- Consolidation in progress-The top three four companies earn the lions share of the profits For FY-21 Polycab Earned 883 Cr net profit, Finolex 461 Crs and KEI Rs 273 Crs while the next largest comapany Universal cables Rs 67 Crs.
- Asset Light-The industry is asset light with Asset turnovers at 4-8X , however it is working capital intensive with working capital cycles from 100 days for Finolex to 250 for Universal cables. This can be explained by the sale segments companies with more B2B sections compared to retail are struggling with higher working capital, which is the key differentiator on which companies can grow faster .
- High ROCE-Since the industry is asset light the top companies have sustained relatively high ROCE of more than 20%
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Industry Tailwinds- a) With Probable Capex cycle starting and massive infrastructure investments envisaged by Government these Wires and cables sector is standing to gain. Real Estate sector growth is a added bonus.
b)Since Demonetization, GST Covid 1,2 There is a strong shift of the sector from a predominantly un organized to organised. As Cables and wires for Homes are a essential but relatively less costly part of home , these companies can safely increase prices as migration to organized sector commences.
c)These large players have been shifting the targets to more retail side of business hence aggressively expanding their dealer networks and advertising which is the starting of building a brand some of whom are more advanced than the others which further increases their pricing power.
Thank You for Reading.
Ill keep adding posts to try to explain further
KEI Industries pays Rs 1.78 crore to settle 2 cases with Sebi
Read more at:
Can you add some light on the above issue regarding corporate governance?
Also, Trade receivables are high 1,350 compare to profit that increased debtor days to 118.
Please advise.
Hi!
@vinoddalvi Thanks for asking the question.
I won’t comment on corporate governance for now. I’ll answer the receivables part.
Receivables for companies in this industry depend on the revenue mix i.e higher the retail
business share lower the debtor days , So Finolex and Havells which have highest % of retail business have the lowest debtor days , on the other hand companies like universal cables which are entirely dependent upon B2B have highest debtor days.
I case of KEI industries 1.it has high receivables as some 150 Crs of retention amount hasn’t been paid even though work in those projects is completed (as per latest concall), and this remains one of the key monitorable going forward.
2.Since 2021 1st quarter management has decided that the EPC business will be scaled down to Rs 500 Crs annually compared to around 1000 Crs as the receivables cycle is longer(3-4 months) and concentrate more on B2C ,retail wiring.which has a recievable cycle of 30 days. As the % of B2C increases debtor days should decrease accordingly
Thanks For reading
Great!
Thank you for the detailed reply.
Your portfolio seems concentrated containing 7 stocks so why does it contain multiple stocks from the same industry?
Well! I like the cables and wires industry . I think they are undervalued as a whole
and as long as the pecking order in the industry is unchanged I’ll keep on adding on to both companies as opportunity arises.
The wires and cable companies have been treading a predictable path to grow. When they start out they are suppliers to Industry EPC contractors, growing they tap into retail wires segment which is B2C segment selling wires directly to customers who are either general public and builders for which they build distribution networks . Then they foray into FMEG , switches , bulbs mccbs etc with which they can leverage their existing distribution networks.
Coming to your question , I think Polycab is where KEI wants to be in 5 years . Polycab has got better brand, better reach and more advertising muscle muscle then KEI . Polycab for me is a P/E rerating play, if they continue with their growth , the’ll be competing with Havells in FMEG space with similar PE. KEI is more of a earnings growth stock, I don’t expect it to trade at more that 25 PE anytime in next 5 years.
I’ll try to post the industry analysis this week.
I sold Amines and plasticizers at 144 Rs on 9th Aug 2021 and added the proceeds to KEI Industries and Frontier springs
| Company | weight by cost | weight by present value | avg purchase price |
|---|---|---|---|
| Kei industries | 57 | 62 | 409.47 |
| MUTHOOT FINANCE | 10.5 | 9.6 | 743.18 |
| nocil | 7.2 | 8.8 | 106.48 |
| jamna auto | 10.4 | 9.7 | 43.88 |
| Polycab | 7.7 | 6.6 | 1281.73 |
| frontier springs | 7.2 | 3.4 | 300.99 |
KEI INDUSTRIES
Tailwinds-
-Infrastructure spends by Govt.
-Real estate recovery
-Private capex(Any kind of capex will require Cables)
Structural factors-
-This sector has traditionally been high fixed asset turnover and high working capital intensive business with fixed asset turnover of 6x i.e for each 100Cr invested the company increases sales by 600 Cr
-The sector is consolidating, only the companies which have their cash flows in place have been able to grow.KEI industries has completely paid off the long term loans and reducing the EPC exposure which has the longest payment cycle.
-The raw material fluctuations pass through for most big players.For KEI they purchase raw materials against orders and for retail space there is raw material pass through every 15 days
-A long runway of growth-Retail wire space is dominated by local unorganised players , whose share is decreasing. Players in this sector first distribution develop channels then when it is in place the diversify into higher margin FMEG items.If everything goes as planned this is a good 10-15 year Journey for KEI industries.
MOAT/Competitive advantage-
The B2B cable business is a pre-qualification only business.Unless you are already prequalified for the tender you can’t bid.In High margin EHV business KEI along with paramount communications are the only players in india.
Things to monitor-
-Accounts receivable days
-New capex coming on time
-Any unnecessary debt
Risks
–Slow capex,over supply,During 2008-13 the whole sector was facing oversupply issues and not much demand the margins had collapsed and the share price of KEI /industries had decreased from Rs 127 to Rs 7
-Accounts receivable ballooning
I’ll add more risks I items
NOCIL-
Investment thesis-
-Largest Rubber chemical manufacturer in India
-The end product price has been firming up since the Oct which is expected to continue .
-Anti dumping duty has been introduced into one of its largest product
Montitorables-
-Research reports of China Sunsine, which is the largest competitor in this space.If the realisations for China sunshine are decreasing then its time to exit nocil
Jamna Auto
Investment thesis-
-A very good proxy for CV sector
-Largest manufacturer of Leaf springs with 70% market share
Monitorables-
-monthly CV numbers
Frontier springs-
The company produces Springs for LHB coaches for indian railways. The company is now including air springs into its portfolio .
Investment thesis-
As more and more coaches are converted to LHB coach the company is expected to gain more business.
Monitorable-
I couldnot find the production figures of LHB coaches however Escorts Ltd has a railway equipment supply division which has commentary on how railway manufacturing is progressing.
I added Jamna auto at 89.84 on 5th October. My present portfolio is-
| Company | weight by cost | weight by present value | avg purchase price |
|---|---|---|---|
| Kei industries | 54.46 | 59.92 | 409.47 |
| MUTHOOT FINANCE | 10.04 | 9.62 | 743.18 |
| nocil | 6.86 | 8.84 | 106.48 |
| jamna auto | 14.41 | 11.97 | 52.26 |
| Polycab | 7.35 | 6.56 | 1281.73 |
| frontier springs | 6.89 | 3.39 | 300.99 |
Investing background
Phase-I (2010-2014) Learnings- Bought my 1st stocks during 2010 after reading The Intelligent investor,peter lynch books.I learned to read annual reports and financials . It was a very low PE stock with market cap less than its accounts receivables a la classic Graham. In two months the portfolio value increased 30% . Supremely confident of my stock picking prowess I decided that I’ll run a PMS(like buffet partnership) service for my friends and colleagues . I approached a few of my colleagues with the proposal , Thankfully Everybody refused! Next month the largest holding dropped 20% in a day due to a fraud in the books, like a good value investor I bought the stock all the way down till it was 1/4 of the original price.The reasoning was If the stock was a good buy at 100 it is even a better buy at 50. At the time the portfolio consisted of 3 stocks the largest holding was 80% of the portfolio. I exited the three stocks in 2014 with around 3-4 % profit .
Other than learning to read annual reports ,financials that was my most intense learning period. I was(I still am) obsessed with Non fiction books on economics , economic history . I used to download annual reports and enter financials in excel and calculate the financial ratios myself . I used to do it with all the companies I researched. I learned to code using ruby and scrapped Financial metrics from rediff money( I used to suck at programming during engineering) .
Learning - The market doesn’t owe you returns just because you bought a Low PE/ P/B stock . More often than not the company is low PE for a reason.
Phase -II(Resignation) 2014-2017-
I understood that I cannot get good returns by myself , So I invested in a mutual fund , The person selling the fund assured me the fund returns will be at least 20% , I chose the dividend option . Till 2017 the cagr returns were less than 10% .
Phase-III(Re-evaluation)2017-2020-
When I sold the mutual fund I found out that companies which I had researched during 2011-12 but did not buy(too expensive) had turned out to be multibaggers. And I was barely surviving on PPF returns .Determined to improve my returns I looked into portfolios of the best performing mutual funds and invest the stocks having the highest weightage. I started looking for portfolios of Mutual funds and superstar investors Picked some 6-7 stocks(all smallcaps-midcaps) and invested equally in each of them . However I wasn’t focused , I bought any stocks I had heard about or read about in research reports. Basically I was FOMO’ing on stocks. My portfolio swelled upto 15 stocks.
During that time I looked into profit growth of last 3-5 years and assumed that profit will keep growing.I had bought KEI industries, Jamna Auto, NOCIL during that time. I didn’t know at the time you can find monthly vehicle sales figures online even though I had few auto ancillary stocks. My portfolio was running on hope that the next quarter would be better than this one.
The thought process for Buying KEI Industries (at that time) was that out of operating profit of around 270 Cr, 125 Cr was only Interest payments . If the company could reduce its debts it can increase the net profit without increasing its operating profit and any increase in operating profit was a bonus. At that time the company was selling for 18 PE at Rs 228.
Phase Coronavirus-More learning-
During the coronavirus Crash my portfolio nosedived almost 60% . During the crash I sold most of my portfolio and concentrated on buying KEI industries because :
a)It had done a rights issue 2 months back which helped it reduce all of its long term debt.
b)I had looked into the companies worse times in 2008 crash aftermath . Due to oversupply in cables industry the margins had nosedived. I was mentally prepared to keep the stock if similar thing happened now.
I added into Jamna Auto and NOCIL.
I bought Muthoot Finance(avg price-743) , Eicher motors(avg price -1400) , Bajaj Finance(avg price -2200) .I listened to few Bajaj Finance Concalls but could not make sense of anything. Sold all the shares in a week with minor loss.
Learnings-
-Just because P/E , P/B is low doesn’t make it a good investment . If earnings doesn’t increase they will stay value stocks forever.
-My job as an investor is to purchase future increasing stream of earnings at the lowest price possible.Increasing earnings is important , stable earnings is of no use to me unless is accompanied with a good after tax dividend yield. Future earnings can be characterized by 2 variables-a) How fast they grow
b)How certain that growth will happen
c)How long is the runway of growth
Point b) is more important to me. If I am certain the earnings of a company will certainly grow at 15% for the next 10-15 years and is available at a cheap valuation. I’ll put all my money in it and comfortably beat any index. I rank my investments with following weightage of characteristics b>c>a.
-As per portfolio diversification ,I follow Buffets Advice to rank my ideas and invest in my best 5-6 ideas.Also this quote from keynes sums my thinking quite well
“As time goes on, I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes.-John Maynard Keynes”
-Researching a stock is an investigative process.For example If the sales were growing at 10 % rate last 5 years , what drove them? , Are the drivers still present, Are the competitors growing at the same rate, why or why not? How is the end user of the industry doing?etc. I made a mistake of not following Auto OEMS during 2018-19 due to which I Lost almost 50% of investment in auto ancillary companies. Always check if other players are doing substantially better or worse, your company could be next.
Try to read all the annual reports available on the company and its competitors or any trade magazines for the industry. If any competitor is having troubles then ask why? How safe is your company from the same troubles.
-Every stock investment is a Bet that future will turn out the way you think. Understand the odds .For example 2 days back I added to my position in JAMNA auto. I am betting that the CV sector will recover in the next 3-5 years . Since Jamna auto has more than 70% market share in Leaf springs the sales of Jamna auto will substantially increase from last years . The question I had to ask is how likely I think that the CV recovery is happening?
-RISK-I divide risk into two parts-a)Risk that the company is a fraud
b)Risk to the business
a)I am fairly new to forensic accounting however I have simple common checks like how transparent the balance sheet is, how forthcoming they are to provide information during concalls etc. This area is one where I am focusing a lot these days.
b)In project management there is something called Pre-mortem,Where you think of your future self in say 5 years and find out that in the company you invested in , profits are down 95%. Now you think of the possible reason why that could have happened. The exercise is to think of ways in which your company can lose.I’ll try list all the risk the company faces that I can think of and rank them according to their probability.
I’ll continue the learnings in coming posts
Thanks for Reading
Portfolio changes since october.
I sold off Nocil and Frontier springs early November last year a.
With the proceeds I bought more Kei Industries, Jamna auto, Muthoot finance and two new additions to my portfolio Cholamandalam Finance and Universal cables.
My present portfolio is
| Company | Weight by Cost | Weight by present value | Avg purchase price |
|---|---|---|---|
| KEI INDUSTRIES | 51.2 | 62.0 | 418.77 |
| JAMNA AUTO INDU | 21.2 | 16.7 | 64.19 |
| MUTHOOTFIN | 11.7 | 9.7 | 837 |
| POLYCAB | 6.6 | 5.9 | 1281.73 |
| Universal Cables | 2.0 | 1.0 | 158.09 |
| Chola finance | 7.2 | 4.6 | 497.57 |
Comments are welcome
Portfolio change update.
Exited Muthoot Finance and Universal cables on 11th feb and added into KEI industries
My present portfolio is
| Company | Weight by Cost | Weight by present value | Avg purchase price |
|---|---|---|---|
| KEI Industries | 67.1 | 71.8 | 503.5 |
| Jamna auto | 19.9 | 17.1 | 64.19 |
| Polycab | 6.2 | 6.2 | 1281.73 |
| Chola Finalce | 6.8 | 4.9 | 497.57 |
Some Personal observations:
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Its very hard to hold cash. Having cash magnifies small opportunities and leads to FOMO(Fear of missing out)
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Hence I am always invested 100% no cash.
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That further means If opportunity comes like a crash I have to sell company with least conviction to buy higher conviction stock which is at attractive levels
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I don’t deploy cash in stages. If I find a good price(in a high conviction stock) I’ll assume that’s the best price I’ll get and deploy all cash in one go. I find sitting in cash worse than share price falling.
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At present if I get KEI industries less than 20 PE ,Polycab less than 30 PE and jamna auto less that 25 PE Ill add , provided I have cash and things don’t change for these companies
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I am researching Chola finance, I’ll add if conviction grows, If not I’ll exit.
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Financial Companies are harder to understand than Manufacturing companies.
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One big risk I found out about wires and cable companies is if Copper price falls and stays low then the top line will reduce along similar lines along with ebitda.
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As you can see in my portfolio there are two themes I am betting on
a)wires and cables depend on capex cycle, real estate, Infrastructure etc b)Jamna auto and Chola are both CV Play and a procy to capex cycle, Infra spendingHence My whole portfolio is a play on Infra capex play.
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2 more stocks are on my radar: a) Fluidomat -it produces fluid couplings which is used in pumps and again is a play on Capex
b)Crompton greaves Consumer -An FMEG play with brilliant ROCE
Portfolio update-
I exited Polycab and added into Jamna auto at 107.75 on 2 may .
My present portfolio is
| Company | Weight by Cost | Weight by present value | Avg purchase price |
|---|---|---|---|
| KEI Industries | 64.0 | 75.5 | 503.5 |
| Jamna auto | 29.6 | 20.0 | 75.1 |
| Chola Finance | 6.5 | 4.5 | 497.57 |
Chola Finance seems to be a very good play into CV recovery, but the price has moved faster than I anticipated. I am planning to add into Chola finance at suitable price
KEI Industries is a very good company and a sensible play on Govt and Private Capex, Renewable Energy Trend, EV Trend and increasing consumption of consumer electronics by Indians. The company has enough boosters to create long term wealth. And since its only a 11k crore enterprise, the probability of it giving great returns for next few years cannot be ruled out. My only regret is that I didn’t find this gem earlier. @G_Sandeep enjoyed reading your analysis and development as an investors. Happy to learn from your experience.
Thank you for taking time to comment!
I like your confidence on your picks. Really admire you. I doubt whether will I be able to do like this, I wish though 
.
Nice confidence you have in your selected stocks. I am your polar opposite. I cant sleep at night, if my number of stocks fall below 25 numbers. And also I need a validation of being all major sectors of economy present in my portfolio…Banking, NBFC, Pharma, IT, Chemical, Agrochemical, FMCG ,FMEG, Retail etc.
Just one query about your past holding: Muthoot Finance…You were having good purchase price around 700, while i have purchased it at more than double ,your price. It has corrected more than 40%…What was your rationale behind selling it?
I sold Muthoot Finance looking at the competition , too many banks and nbfc’s competing on yields. I had bought Muthoot hoping that it had a moat which would protect its yield , turned out it’s not the case at least in short term .
SBI gives gold loans at much lower interest rates and its ubiquitous , and then there’s other south indian banks, IIFL etc , I don’t know how Muthoot can keep earning these high yields.
Maybe they’ll come back stronger after this attack on their business, may be they won’t, but that risk is not which I wanted to take especially when other opportunities which I understood and having lesser business risk were available at that time.
Starting to agree with you on Muthoot. But if it was not having any moat, how come its business performance is so stellar from past decade? Profit growth of Muthoot Finance for last 5 years is CAGR 27 % while its PE is now 10…Is it fair?