Tar's Portfolio and Information Attic

Q&A: Questions & Answers Portfolio Q&A
24

Reason for selling IOLCP were
Wanted concentration in my portfolio
Couldn’t track more than a few companies and researching new ones takes me at least a month before I decide to buy a company. My process involves, researching a company from screener, reading about it on value picker (the entire thread from start to finish), reading conference calls (at least of the last 2 quarters), researching the industry, listening to management, researching about them on LinkedIn and whatever material I can find and then finally building my one page thesis on possible triggers for the industry along with the company.
All of this takes me a lot of time and if a company doesn’t excite me in first few hours of research, I don’t follow it with further investing.

Having a full time job + studying for my CFA designation and having a life in between doesn’t leave me with much time. So I had to decide to concentrate my portfolio into companies I really believe in and understand very well.

This exercise left me with 12 stocks that I am most convinced about, so much so that if they were to fall 50% tomorrow, I would be taking a loan to buy them. Every other stock that didn’t meet this 50% drop criteria was removed from my portfolio.

This meant selling
Hindustan Foods (I bought it at 800, sold it off at 870. Its gone 2x since I sold it)
IOLCP (reasons for selling mentioned in detail below)
Happiest Minds (I decided to passively invest into Nasdaq ETF rather than track tech service companies in India, sold it off at 350, gone up 60%+ since I sold it)
Tata Chemicals (sold it at 480, gone up 70%+ since then)

Why I sold IOLCP
The company while cheap right now has various reasons behind it. I entered the company at avg buy price of 140 and sold it off in multiple tranches till it reached 900.

Its a single product company that is trying to remove concentration risk by diversifying into other sectors like specialty chemicals. IOLCP benefitted from the Covid related tailwinds and BASF temporarily exiting ibuprofen market. IOLCP also sells its product at current market spot rates without really having any purchase agreements in place with its customers. This also created temporary tailwind for them as demand for ibuprofen shot through the roof during the pandemic. All this helped the stock rerate itself.

These tailwinds will disappear or at least significantly diminish in the coming months. BASF has re-entered the industry, demand for ibuprofen is declining and reverting back to mean and as such elevated prices are reducing further.

IOLCP’s tailwinds from the past year will now become headwinds. It will find increasingly hard to keep growing its revenues by just being in Ibuprofen business and I think its management realizes that. They are diversifying into other products due to that reason.

Vinati Organics is on the other hand is a well run high margin already diversified business that will keep getting bigger as it identifies new areas to enter. It meets my criteria of 50% drop and I bought it at attractive valuations. I will just keep adding more to it as and when they keep delivering on their growth story. I have no doubts that Vinati Saraf will grow the business much more in the next decade than it has grown in the previous one.

A pure play CRAMS business is Syngene. Its a giant in the making.
If you want a CRAMS business within Specialty Chemical industry with high barriers to entry, look at Navin Fluorine.

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25

good stuff. IT is missing may be reduce some pharma and some mid cap IT and in consumer burger king doesn’t cover all, guess Tata Consumer would be a consumer king :wink:

26

Actually sold off Burger King as well.
If you read above, I have mentioned I am not interested in investing in Indian IT service companies as I want concentration in my portfolio. All my IT related exposure is taken care of by investing passively into Nasdaq ETF.

Not interested in consumer sector either.
Tata Consumer is a great company, infact all Tata Companies will do well for themselves in the next decade. The new Tata Sons CEO is a great well experienced man who single-handedly turned TCS into a world giant.

I am not interested in investing in every sector in India nor in every stock that will go up.

A small concentrated portfolio that can deliver 20 to 30 % returns for 20 years is good enough for me.

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27

Thanks for your reply!

I see why you chose to book profits, given how low your entry was.

This surprises me, because from their recent concall, page 11: So, we do
very less business on spot market, most of our businesses on long-term
basis. they also claim to have yearly agreements, with the price decided around November for exports, and March for domestic markets. (Page 18).
They sell half of their ethyl acetate on the spot market, and have shorter contracts for the other half with their clients.

Is there something I’m missing that causes you to distrust these claims?

I’m invested to see how this story plays out, I like how cognizant the management is of having a large dependency on ibuprofen, and their efforts to diversify through internal accruals, but as I said, I’m studying Vinati to understand more about them. Like you, I only want upto 15 stocks, and hence I’m trying to understand if replacing IOLCP makes sense right now for a higher margin company, given my entry is higher than yours.

I already own Navin Fluorine! I’m studying Syngene, but I’m not clear yet whether an entry at these valuations is wise, or whether to wait until the biologics unit becomes public.

PS: I entered Hindustan Foods at 1170, and booked 25% of my profits when it ran up recently.

28

Liked your clarity. One question - what is the weightage for Nasdaq and China fund?

Thanks

29

They don’t have any long term contracts and if Ibuprofen prices correct significantly, they have to lower their prices irrespective of the contract as the customer will just go to someone else to buy. In that aspect they are selling a commodity product.

Vinati on the other hand has year+ long contracts with customers like BASF to sell IBB (a key raw material for Ibuprofen), so they skip the volatility in final product prices and thus have consistent and stable revenue visibility.

30

Both are SIPs to enable Dollar Cost Averaging. I don’t pause my SIPs or skip even a single installment. Very small weightage right now but by year end should grow to 5% of my portfolio and so on.

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31

If you want to take some risk go with IOLCP, if you want peace of mind go with Vinati. Or if you’re confused, allocate 50% to each. IOL may or may not play out but Vinati will definitely be higher in a year or two than where it is now. That’s the difference between the two companies.

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32

Adding a list of my investment checks and research steps (this is to adhere myself to a systematic process for each company I invest in)

Steps

  1. General Understanding of a company (What does a company do, what sector does it operate in, what its selling, who are its customers)

  2. Financial Screening of the company (What its market cap, How much its is debt relative to cash reserves, what is its ROIC, ROCE, ROE over a 1y,3y and 5y period, what are the margins of the business - will they increase in future, how many outstanding shares are there, if ROIC, ROCE is low why?, is the recent QoQ profit is growing much faster than previously - why?, What is its Book Value?, what is the value of cash per share on the balance sheet, what is its free cash flow, who are the existing shareholders - what are they doing?, how much of the company is owned by promoters)

If the company passes first two checks and interests me further

  1. Go through investor presentations, all information available on the website, conference calls of last 4 quarters, latest annual report and threads on value pickr

  2. Research about promoters, watch their interviews, are they of good pedigree? do they walk the talk? do they seem shady or honest? Are they involved in any issues previously? Do they appear too often on news channels giving outlandish stories and promises or are they focused on their business?
    (If promoter check fails and company is good, I will still not invest in it)

If the company still passes through the above checks

  1. What is the moat of the company?
  2. Porters 5 force analysis
  3. How will the sector and future most likely play out for the company?
  4. At what % can the company grow its earnings
  5. Does the company has enough target market to address or can it enter into other complimentary target markets?
  6. Does the company has interests in businesses that are not synergic to its core business?

If the company still passes through the above

  1. One page thesis on why I should invest in the company
  2. Technical analysis of the company (buy zones, sell zones, consolidation zones)
  3. Current PE, Market Cap to Sales and Price / FCF of the company and the market sentiment around it
  4. Decide % allocation of the portfolio
  5. Determine investment strategy (levels to buy at and how to buy)

After a company is part of my portfolio

  1. Update it to my core watchlist in screener, tickertape, trading view, google finance
  2. Set google alerts for the company
  3. Attend quarterly conference calls
  4. Monitor any developments and the company’s filings
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33

New Addition:

Jubilant Ingrevia
High growth, diversified business, great corporate management/promoters, finally the cash guzzling research intensive pharma business is hived off, available for less than 1 times sales with new capacities being added.

Was pretty much a no brainer buy for me.

Added 3.3% of my portfolio at a average buy price of 250.

Will add a detailed one pager note here on this.

Not a recommendation, please do your own research before investing.

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34

is it Motilal Oswal Nasdaq 100 ETF ?

35

Yes, selected it as it has the lowest expense ratio among all existing Nasdaq ETFs

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36

Buffett on when to sell a stocks

Favorite holding period for a stock: Forever

When you have more ideas than money - Sell some to raise cash for the new ideas
When you have more money than ideas - Don’t sell unless the competitive edge (Moat) changes/story you have told yourself while investing changes/ fundamentals deteriorate, economic characteristics of the business changes

When you are in terribly cheap market - may sell something cheap to buy something we think is even cheaper

Not our natural inclination to sell
Don’t borrow money to buy

https://youtu.be/MjwtZnuEexA

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37

Hi Tar,
Can you please guide me as to how you are investing in the US Markets directly. Which broker are you going through.

Thanks.

38

Unless your ticket size per investment in US direct stocks is > 1 lakh, direct investing would not make sense as

  1. There are a lot of charges in deposit, withdraw, and transfers from INR to these Brokerage Accounts. Further the transaction fees on these is not free or the ones we are used to by Zerodha and like. So you will end up paying a lot in fees and other costs if you invest which causes your required return on your investment to up by a few percentage points.

  2. US markets is more sophisticated. It’s not like our markets where an investor is protected to some extent via lower and upper circuit filters. US markets doesn’t have training wheels like that. If a stock falls it is allowed to fall and go to 0 (theoretically) at any day.

  3. Taxation becomes an issue by investing directly in US stocks. Your dividends are taxed at 25% and you then have to use the tax credits to claim tax return in India. You also don’t get any indexation benefits and filing of income tax return becomes a lot more complicated.

99% of investors are better off investing in US markets via an ETF provided by an Indian investment house. You skip all of the above issues doing that while still getting exposure to the US market. There are several Nasdaq, S&P and DJI based ETF and funds available to select from on any mutual fund app.

If you however still want to invest directly, you can check out Interactive Brokers, Groww has an offering and stockal GlobalInvesting is another platform you can use.

I don’t recommend anyone to direct invest unless they have done deep research and want exposure to one or two stocks while maintaining a ticket size of > 5 lakhs.

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39

I didn’t see Manappuram in your recent portfolio ,what’s the reason for exit

40

Yes I exited it some time back last year around Aug/Sep. I could see the economy reopening and projections around growth forecasts for economies around the world were bullish. In such a scenario, gold prices were bound to come down. Whenever that happens, Manappuram’s Loan to Value will shoot up beyond a comfortable number. There was also uncertainty around interest moratorium from RBI etc.

I exited at around 20% above my purchase price. I stay away from a few sectors now like Financials, Real Estate, Cyclicals and Airlines. These industries have a lot of moving parts and as an investor I cannot account for/don’t want to time my investments into them. I would rather invest in stable growing businesses with good revenue visibility like pharma, speciality chemicals, energy etc. In these sectors I just have to worry about one or two moving parts like for example in pharma an unseen risk is FDA Audit letters which can really impact a business. If I invest in pharma companies that have good business models + clean history of FDA audit I mitigate that risk to some extent. Where as with NBFCs I have no visibility into what Supreme Court may decide, what RBI policy may be, where gold price may go etc.

Businesses like these have high unseen risks and I tend to stay away from them as such.

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41

Exited Tata Power: the company cancelled it’s plans for raising money via a InVIT to pay off its Debt. It will now focus on raising money via an IPO for their renewables subsidiary as the Board believes they can get a better valuation and I agree this is a better route. But this also means, that existing shareholders will not get anything other than maybe a preferential allocation when the IPO of the new company takes place. It’s also unclear what parts of the renewable portfolio will be housed under the Tata Power Renewable Energy company.

My reason for investing was to get exposure to their renewables portfolio and now with latest developments it’s better to get out, wait for clarity to emerge and maybe invest in the renewables company whenever it gets listed.

I may miss out possible upside here but felt it’s more prudent to book profits, wait for clarity and reassess the situation rather than staying put and taking risk without additional clarity.

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42

Borosil Renewable Forward Earnings and Potential Stock Price Calculations

This is just a back of the envelope calculation scenario. Nothing on this thread is investment advice.

Tried to calculate approx. EPS of Borosil post the recent expansion and the new expansion that they will be announcing.

Current Quarterly Sales in Dec 2020 (when the capacity utilization was close to 100%) were 140cr.
Yearly Sales should come to around ~500cr.

Since they are increasing their capacity by 4 times, FY23-24 sales can be around 2000cr (500cr *4)
Operation Profit Margin for quarter ending Dec 2020 was 37% (this was due to high sales price etc.) Lets assume a more reasonable margin of ~25%.

At 25% OPM on 2000cr sales, Operating Profit would be around 500cr, PAT would be around 350 cr. (assuming a 30% tax rate)

Current shares outstanding are 13.0 crores
EPS post all capacity coming online should be around Rs 27-30

If I value the company at a conservative 25 times EPS of FY 23-24, Share Price should be around Rs 750.

On a bull case this share price should be around Rs 1200

With economies of scale and better tax rates and higher PE ratings, the stock can even touch Rs 2000

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43

I agree with most of your assumptions except no. of shares… I expect company would need to raise equity capital (in addition to debt) for next 1000TPD expansion. Conservatively you can assume equity dilution by 40% from here so no. of shares outstanding can become around 18Cr. Then EPS would become 20. Rest of the logic can follow.

So I expect price to hover between 600-1000 in next 3 years time, which is about 3 times from CMP, which is not bad :smiley:

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