ValuePickr Forum

The harsh portfolio!

Hi all,

I am sharing my portfolio (also attached as an excel sheet) along with my rationale below, I will love to get your thoughts. The goal is to generate ~15% compounded returns over the long term with very low churn.

Thesis.xlsx (12.2 KB)

Entry strategy:

  • Shares are acquired in 3 equal tranches with difference of atleast one month between two traches
  • Single sector allocation < 25%, single stock allocation < 20%

Exit strategy:

  • Shares are sold in 3 equal tranches, similar to the buying rule

Exit reasoning:

  • Flawed thesis
  • Better opportunity in another company (switching)
  • Expensive valuation (>50 p/e considered normalised margins)

I have built this folio over the last 2 years, the IRR returns since 2018 are shown below:
2018 -> 2.5% (absolute return was 1.4%)
2019 -> 17.7% (absolute return was 10.2%)
2020 YTD (until 07.02.2020) -> 27.9% (absoute return was 2.4%)

Cheers!
Harsh

3 Likes

With the FY20Q3 results for my companies, I am giving a brief snapshot of the portfolio results. There are not changes in position sizes.

  • The way market is de-rating shemaroo says that market has lost all confidence in management. Either corporate governance problems will crop up soon (will exit if that happens) or it is a really undervalued stock
  • Lupin continues to disappoint on US business, lots of write-offs taken against one time gain from Japanese generic pharma divestment. (Will give a couple more quarters to see if management can resolve FDA issues)
  • Care rating results is in-line with my expectation. Whenever growth comes back there will be very strong operating leverage. For now, I keep reinvesting the dividends to buy more shares

Good results

Ajanta Pharma -> Strongly growing US business along with recovery in Africa business
Ashiana Housing -> 9M booking growth ~45%, will probably meet the booking target of 2M sq.ft in FY20, should contribute to sales in 2-3 years
HCL Tech -> Fastest growing large cap IT company (~15% revenue, ~16% profit growth) on back of acquisitions
Indigo -> 25% revenue growth with rapid expansion in higher margin international markets
Manappuram -> 30% NII growth on back of 35% AUM expansion, NPAs under control so far
NESCO -> 26% topline growth on back of leasing of new IT park
PI -> ~20% topline growth on back of strong domestic revival (~21% sales growth) and 19% export growth

Average results

Bajaj auto (exports saved the day), Cera (no real estate recovery), Divis (good FDA compliance, expanding capacity), HDFC (higher than industry growth, controlled NPA), IEX (slight degrowth on back of soft electricity demand), Infosys (SEC probe still an overhang), ITC (awesome hotel business performance, FMCG margins picking up), Kolte Patil, L&T, Natco (continues to invest in agro chemical and focus on diversification away from US), PowerGrid (lower CAPEX would mean higher freecashflow), Reliance, Nippon India life (drop in debt fund AUM continues to be a matter of concern)

Bad results

Care ratings -> 23% sales de-growth, valuation reflects this well.
Lupin -> 5 facilities under FDA scanner, US business still not doing well, India business doing well
Mahindra logistics -> Auto keeps top-line subdued (~8% degrowth). Continues to diversify out of auto. Very strong operating leverage play whenever growth comes back
Shemaroo -> 50% de-growth in traditional broadcasting a howler, continues investing in new business avenues with launch of a new free to air marathi channel.

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As of today, I sold Shemaroo. The degrowth in traditional business of 50% is too hard to digest. I continue maintaining a small tracking position. The updated portfolio is:

image

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Hello Harsh,
Just wanted to know what made you take the decision to sell off shemaroo. I am also invested in shemaroo and confused about future course of action. Have you noticed some issue related to corporate governance.
Could you share your thought process in deciding to sell it off now.

Thanks

Hi Sarthak,

I haven’t identified any corporate governance issue. The reason for my exit is my incorrect assessment of growth, the underlying thesis was digital business is going to be the growth driver (which is true so far) with nominal growth in traditional business. However, the traditional business degrowth of 50% shows that my underlying thesis was incorrect. This becomes much more evident when I compare the ad numbers with Zee and SunTV as they didn’t show such degrowth, which means either Shemaroo doesn’t have the right content or they don’t have pricing power. I hope management has not overstated the inventory numbers. I personally couldn’t find anything wrong with the management except that Raman Maroo was an independent director in Orbit Corp, which later was declared a wilful defaulter by RBI. There can be three things happening: (1) I am wrong in selling a seriously undervalued business run by a good management, (2) management is not as good as I thought, or (3) the business inherently is much more cyclical than I had thought.

To clarify my thought process, I am having losses on another position which is Care Ratings. The reason I hold Care is that I have more confidence that it will exist after 10 years and it has much better operating cash flows, which is returned as dividend. However the same is not true for Shemaroo. I will be tracking Shemaroo and if I realize I was wrong in selling, I will be happy adding it back to the portfolio. Hope this clarifies my thought process.

Harsh

2 Likes

Thanks for the detailed answer.
Taking a loss is the most difficult thing for me in investing. Haven’t managed to do it right even once. Anything that you do to make it easier to let go.
Thanks

Hi,

In investing, we have to let our winners run and try to cut our losers. Losses suck but having a 50-60% hit rate is good enough for a long only portfolio. So, its important to learn to take losses.For me, I try not to defend my positions if the underlying logic is proven incorrect. There are two mental frameworks which I find useful:

  1. If you are not sure of a position, sell all of it and then re-evaluate. Having no position in a stock helps improve clarity of thought.
  2. Think of selling as switching from one company to another.

Maybe you can find them useful. Good luck!

Harsh

2 Likes

Just thinking aloud, given the content library will Shemaroo be an acquisition target for any of the larger players (Netflix, Prime, Jio, etc) who want to build local library ?

They might be an excellent acquistion candidate but its highly unlikely as promoter holding is 65%. Also at these valuations, it doesn’t make any sense for the promoters to sell out. They have invested >500 cr in content in the last 3 years, their current market capitalization is ~200 cr. Additionally, the promoters seem to be ambitious, given how much they are investing in different business lines.

Right, makes sense - promoters are likely to hold lions share. Thanks for answering!

I came across Shemaroo first through this Bloomberg video

My investment thesis was digital growth of regional content with Jio effect and was like worst case someone will acquire although not sure for how much! :wink: