The harsh portfolio!

As of today, I have reduced position size in Indigo from 6% to 4% and used the incremental cash to add 1% position in Maithan alloys and Cadila Healthcare, both of these are now at 2% of portfolio.

The reason for reducing position size in Indigo is because its trading close to its fair price, which allows me reallocate capital into other bets. Alongside this, increased crude prices may impact company margins in the next few quarters. My bet on Indigo is on Indians traveling more and a budget airline to gain from this, so far that these has never been broken since I first bought Indigo (sometime in 2017).

About increase in position size in Maithan, I have wrote about my thought on its valuations (link), I expect Maithan to double in the next 4-years. About Cadila, I have done a detailed valuation work (in the next post) and would appreciate any feedback. I expect Cadila to double in the next 4-years. One thing I am contemplating is whether I should switch Cadila to Cipla which has a smaller US business (so can grow more). The updated model portfolio is below.

Companies Weightage (cost basis)
HCL Technologies Ltd. 6.00%
I T C Ltd. 6.00%
PI Industries Ltd. 6.00%
Power Grid Corporation of India Ltd. 6.00%
Larsen & Toubro Ltd. 6.00%
Ajanta Pharmaceuticals Ltd. 4.50%
Kolte-Patil Developers Ltd. 4.50%
Ashiana Housing Ltd. 4.50%
InterGlobe Aviation Ltd. 4.00%
NESCO Ltd. 4.00%
Bajaj Auto Ltd. 4.00%
Suprajit Engineering Ltd. 4.00%
Housing Development Finance Corporation Ltd. 3.50%
Lupin Ltd. 3.50%
Manappuram Finance Ltd. 3.50%
HDFC Asset Management Company Ltd 3.00%
Reliance Nippon Asset Management Co 3.00%
CARE Ratings Ltd. 3.00%
Avanti Feeds Ltd. 2.00%
Cera Sanitaryware Ltd 2.00%
Indian Energy Exchange Ltd. 2.00%
Infosys Ltd. 2.00%
National Aluminium Co. Ltd. 2.00%
NATCO Pharma Ltd. 2.00%
Wonderla Holidays Ltd. 2.00%
Maithan Alloys Ltd. 2.00%
Cadila Healthcare Ltd. 2.00%
Biocon Ltd. 1.00%
Ashok Leyland Ltd. 1.00%
Inox Leisure Ltd. 1.00%
Cash 0%
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Cadila projections as on 04.03.2021

  • US sales should grow from $800mn in FY20 to $1.2-1.4bn in FY25 (transdermal + injectables): 9’600-11’200 cr. (assuming USD-INR exchange rate of 80). Taking sales value as 10’000 cr.
  • India sales should grow from 3714 cr. in FY20 to 5981 cr. in FY25 (10% growth)
  • Animal healthcare should grow from 515 cr. in FY20 to 1030 cr. in FY25 (15% sales growth)
  • Emerging markets sales should grow from 875 cr. in FY20 to 1170 cr. in FY25 (6% growth)
  • API sales should grow from 453 cr. in FY20 to 551 cr. in FY25 (4% growth)
  • ROW (including Europe) sales were ~500 cr. and should grow to 638 cr. in FY25 (5% growth)
    - EV calculations:
    o Total sales (excluding Zydus Wellness) ~ 10’000 (US) + 5981 + 1030 + 1170 + 551 + 638 ~ 19’370 cr. At 4.5x EV/sales, EV ~ 87’165 cr.
    o Zydus sales should grow from 1767 cr. in FY20 to 3114 cr. in FY25 (12% growth). At 6x EV/sales, EV ~ 18’684 cr. Debt will probably reduce from 1520 cr. in FY20 to 500 cr. in FY25, implying Mcap ~ 18’184 cr. This will value Cadila’s stake to ~9’000 cr. (assuming gradual reduction to 50% shareholding from current 57.59% in December 2020).
    o Total EV: 87’165+9000 ~ 96’165 cr. bringing market cap ~ 90’000 cr. (assuming 6’615 cr. debt). Share price: 880

I will appreciate any blind spots that others can point in my understanding of Cadila.

While cadilla and maithan are good franchise. But personally i like glenmark and natco more.

I am aware that you have evaluated both but still felt like sharing my point of view.

While i have not invested in rajratan, huhtamaki and neogen. But find them intresting as well.

Why |HDFC Asset Management Company
|Reliance Nippon Asset Management Co|

Both u have kept? Overlapping

N no exposure to Pure Speciality chemicals( PI - I consider agro chemical) Banks, API pharmaceutical, Techonology stocks Fmcg ( ITC - Still cigarettes it’s cash cow) ??

Why not Alembic pharma instead of increased allocation to cadila??

As of today, I did small reallocation among portfolio companies purely based on valuations

  • Sold 1% stake in IEX (1% position size) and added that 1% to INOX Leisure (2% position size)
  • Sold 0.5% stake in HDFC (3% position size) and added that 0.5% stake to NESCO (4.5% position size).
    Updated portfolio is below.
Companies Weightage
HCL Technologies Ltd. 6.00%
I T C Ltd. 6.00%
PI Industries Ltd. 6.00%
Power Grid Corporation of India Ltd. 6.00%
Larsen & Toubro Ltd. 6.00%
Ajanta Pharmaceuticals Ltd. 4.50%
Kolte-Patil Developers Ltd. 4.50%
Ashiana Housing Ltd. 4.50%
NESCO Ltd. 4.50%
InterGlobe Aviation Ltd. 4.00%
Bajaj Auto Ltd. 4.00%
Suprajit Engineering Ltd. 4.00%
Lupin Ltd. 3.50%
Manappuram Finance Ltd. 3.50%
Housing Development Finance Corporation Ltd. 3.00%
HDFC Asset Management Company Ltd 3.00%
Reliance Nippon Asset Management Co 3.00%
CARE Ratings Ltd. 3.00%
Avanti Feeds Ltd. 2.00%
Cera Sanitaryware Ltd 2.00%
Infosys Ltd. 2.00%
National Aluminium Co. Ltd. 2.00%
NATCO Pharma Ltd. 2.00%
Wonderla Holidays Ltd. 2.00%
Maithan Alloys Ltd. 2.00%
Cadila Healthcare Ltd. 2.00%
Inox Leisure Ltd. 2.00%
Indian Energy Exchange Ltd. 1.00%
Biocon Ltd. 1.00%
Ashok Leyland Ltd. 1.00%
Cash 0.00%

Go up in the thread (somewhere) to read my thoughts about this, I have explained this in quite details.

I invest in companies that I understand, I dont take macro views and sectoral calls, unless a sector becomes very cheap (like residential real estate now, like pharma in 2019, like IT in 2017).

A better comparison for Alembic is Ajanta. Cadila is at a different growth stage, being much bigger than Alembic. I preferred Ajanta over Alembic because of their dominance in their Indian business, their diversified business line, their low exposure to US markets (as other pharma companies that I hold have lots of US exposure), and their debt free balance sheet.

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Appreciate your point of view. Thanks

I also believe that residential real estate in India is very cheap. It seems to be on multi-year decline. I also observed that 100s of small builders have closed their shops which will help clean and well managed real estate companies.
Do you have any research on if it is really cheap or it looks cheap? And what would would you consider signs of recovery (if there are any)?
Plus you got a couple of real estate companies. So you would have done the research on that. You have any view on Sunteck realty ?

@VishalVerma
Lots of small builders are stuck on their existing development, because almost no fresh investment is coming in real-estate sector, Recent recovery in this sector is seems to be coming due to various government incentives like PMAY, reduced interest costs on home loans coupled with allowances on income tax, reduced stamp duty charges in states like Maharashtra, also in Maharashtra they released new DCRs to incentivise developers as lot of state-government revenues are coming from real-estate.

Also, I think property rates corrected around 20% from its peak, but still, I feel its too expensive to invest in real-estate.

Like in Mumbai where I live, rental yields are around 3%, which is very low, also the property rates are not going up, like it was doing earlier in 2005 to 2012, so government bonds are looking more attractive investments then real-estate.

There is still lots of inventory yet to be cleared, where as big developers are creating more, which may reduce property rates further, also as commodity prices are increasing, steel, cement, raw materials prices are increasing day by day which may also put pressure on margins.

Similar situations are there in other metro cities like Ahmedabad, Surat, Thane, Bangalore etc.

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As of today, I have switched my position from Biocon to Jubilant Ingrevia. Reason is valuation is quite high for biocon and growth delivery is definitely not up to the mark. On the other hand, Jubilant Ingrevia has leadership in a few chemistries (pyridine, acetic anhydride), is ramping up their specialty chemicals division and are quite cheap (~1.5x EV/sales). The recent investor presentation provides valuable insights into their business (link). Updated portfolio is below, cash stays at 0%.

Companies Weightage
HCL Technologies Ltd. 6.00%
I T C Ltd. 6.00%
PI Industries Ltd. 6.00%
Power Grid Corporation of India Ltd. 6.00%
Larsen & Toubro Ltd. 6.00%
Ajanta Pharmaceuticals Ltd. 4.50%
Kolte-Patil Developers Ltd. 4.50%
Ashiana Housing Ltd. 4.50%
NESCO Ltd. 4.50%
InterGlobe Aviation Ltd. 4.00%
Bajaj Auto Ltd. 4.00%
Suprajit Engineering Ltd. 4.00%
Lupin Ltd. 3.50%
Manappuram Finance Ltd. 3.50%
Housing Development Finance Corporation Ltd. 3.00%
HDFC Asset Management Company Ltd 3.00%
Reliance Nippon Asset Management Co 3.00%
CARE Ratings Ltd. 3.00%
Avanti Feeds Ltd. 2.00%
Cera Sanitaryware Ltd 2.00%
Infosys Ltd. 2.00%
National Aluminium Co. Ltd. 2.00%
NATCO Pharma Ltd. 2.00%
Wonderla Holidays Ltd. 2.00%
Maithan Alloys Ltd. 2.00%
Cadila Healthcare Ltd. 2.00%
Inox Leisure Ltd. 2.00%
Indian Energy Exchange Ltd. 1.00%
Jubilant Ingrevia Ltd 1.00%
Ashok Leyland Ltd. 1.00%
Cash 0%

Plenty of data available on this, the spark capital report provides a lot of insights. For a quick summary, you can look at the presentation by @rupaniamit

Inventory situation was high in MMR, I preferred buying developers where existing inventories were lower (Pune, Bangalore, Hyderabad, Jaipur).

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Hi @harsh.beria93 - A lot of learnings for me from your portfolio. Did you happen to compare Cera with HSIL; HSIL appears to be cheaper compared to Cera but I might be missing out on certain elements.

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Hey! I did evaluate HSIL a while back and preferred cera mostly because of Cera’s slightly differentiated business model ranging from outsourced manufacturing of low margin products, being early adopters of gas based manufacturing, culture of innovation such as 3-d printing critical parts, and large spending towards brand building (~4% sales).

If we look back in time, cera took market share from HSIL, despite HSIL having a better product recall. This is clearly reflected in growth numbers for last 10-years, despite both companies originally coming from the same family. Additionally, HSIL is into glass manufacturing which is more or less a commodity business (as reflected in their volatile margins). However, cera has also ventured into tiles business (totally outsourced) a few years back which is more or less a commodity.

Overall, as a business Cera has superior economics (reflected in higher return ratios). A better comparable will be the building products division of HSIL which was recently carved out into Somany home innovation, and this business is not at all cheap!

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Harsh,
Ur portfolio strategy and brief investment rationale provided in this thread are of great help for initial vetting of ideas. I refer it before delving into further analysis for any of our overlapping ideas.

Have few queries for u : -

  1. Concentration vs. Diversification : - U mentioned earlier in this thread abt why u keep a diversified portfolio and cap any particular investment. Will u ever consider taking a concentrated bet as learning improves with experience? U referred WB’s portfolio of 50-60s but at certain juncture during those times he took concentrated bets of upto 25-40% in a single stock. Will u consider taking any such position in future with improving experience?

  2. Indian vs Global portfolio : - Not sure if u’ve mentioned this earlier, bt will u share how mch is ur total portfolio divided b\w Indian & global equities as mentioned in the other thread?( if dat’s okay with u to share )

  3. Avanti Feeds : - Wat’s ur view on Avanti Feeds currently. The current price is factoring in a lot of issues that the co. is facing - Rising input costs, Freight costs, consumption de-growth, US tariffs. However , frm wat I’ve studied so far, the business has become quite stronger over the yrs to take on these issues vs. the competition. Also, the consumption de-growth seems to be a temporary phenomena. Over medium to long term - shrimp consumption shd increase as a healthy food variety & no viable vegan substitute developed for it as done for meat.
    Plz share ur views on the same.

Thanks in advance!!!

The basic question comes down to, under what situation am I willing to bet 20% of my net worth into one stock?

At this point in my journey, the below criterion have to be met.

  • There has to an absolute downside protection i.e. chances of business going to zero has to be negligible in my assessment.
  • The potential optionality should be very high i.e. if I hold it for 10-years and things pans out as I expected, it should be >50x (20% of networth * 50 = 10x of net worth), i.e. my net worth should become 10x.

The above can only be true if I have a unique insight into that business and its available at a ridiculous valuation (eg: a 30% ROCE business growing at 25% available at 5-7 P/E). Why these numbers? Because in a decade sales will grow by ~10x (25% IRR) and multiples will grow by 4-5x (assuming terminal multiple of 20-35x), giving me my expected returns. If these situation are met, I will be willing to bet disproportionately.

Surprisingly, these opportunities were available in plenty in the past, especially in the 2009-13 period, where trailing growth was >25% and trailing P/Es were 5-7x (eg: Vinati, Ajanta). A lot of these companies also had some sort of pricing power.

My criterion about absolute downside protection excludes a number of businesses such as that of financial lending, businesses with leveraged balance sheets, and promoters with a established record of minority mismanagement.

Currently, I hold companies which cannot go to zero (eg: Powergrid, NALCO, ITC) but the optionality of >25% sales growth doesn’t exist (in my assessment). Places where I see a possibility of 10x sales belong to cyclical sectors such as aviation, real estate and commodities. In these cases, I am much better off in diversifying. An added advantage to this is it also increases my knowledge base because I am forced to read about more companies.

~66% Indian, rest global. I am working on consolidating my domestic and international portfolio into one, lets see how long that takes!

I think you covered most aspects very well. Avanti is not at all expensive, the news item of US proposing to impose anti-dumping duty to Indian shrimp exports made me look back at my notes. Here is what I had in my risk section.
Risks:

  • Imposition of US anti-dumping duty (has happened in past leading to industry decimation). 27.03.2021: This has been proposed again
  • Disease outbreak
  • Currency devaluation (relative to other shrimp manufacturing countries)
  • 50% market share in Andhra Pradesh (location specific risk)

Fluctuation in commodity prices, supply chain problems, consumption trends, etc. are transient issues and part of any business. Avanti to its advantage has been gaining market share, so they have a very resilient business model. The one thing which can kill this business is a big disease outbreak in AP, which has happened in the past.

About anti-dumping duty, I guess Indian government will come up with a bargain, especially because this is a sensitive subject catering to farmers. Additionally, this sector brings in USD balancing our trade reserves. But we never know!

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Harsh,

Is L&T your bet to play the capex cycle? Veterans like Kennath Andrade, Madhu Kela, Rakesh Jhunjhunwala were all saying that a capex cycle is very much likely to happen in coming years.

Yes and also because of my limited understanding of companies catering to this space. I would ideally like to replace L&T with smaller more niche companies like Kennametal and Disa and have a higher allocation at a portfolio level, which can benefit returns in terms of higher potential growth (if cycle actually revives). However, my understanding of this space is very limited. If you can point me to a good research report describing business model of companies operating in this space, I will highly appreciate it.

Thanks for explaining!

On to your last sentence, I checked that the consumer product division is the one which got carved out into Somany Home Innovation. Whereas building products division still remains with HSIL and its about 33% of the revenue.

The fabulous returns of Cera in past 12 years compared to HSIL is testimony to what you have mentioned. HSIL is paying 60-70 Cr. interest each year compared to Cera which is paying almost no interest. That is one of the big gap in terms of financials.

HSIL management’s plan on debt repayment (after have done quite a lot of capex in past 3-4 years - almost equivalent to current market cap - some actually might have gone into SHIL) would be an important element to understand.

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I have reduced my allocations to Lupin from 3.5% to 2%. This is because of their consistent disappointment in FDA inspections. Additionally, they have been experiencing high volume of product recalls.

This raises cash in the portfolio to 1.5%. Allocations are below.

Companies Weightage
HCL Technologies Ltd. 6.00%
I T C Ltd. 6.00%
PI Industries Ltd. 6.00%
Power Grid Corporation of India Ltd. 6.00%
Larsen & Toubro Ltd. 6.00%
Ajanta Pharmaceuticals Ltd. 4.50%
Kolte-Patil Developers Ltd. 4.50%
Ashiana Housing Ltd. 4.50%
NESCO Ltd. 4.50%
InterGlobe Aviation Ltd. 4.00%
Bajaj Auto Ltd. 4.00%
Suprajit Engineering Ltd. 4.00%
Manappuram Finance Ltd. 3.50%
Housing Development Finance Corporation Ltd. 3.00%
HDFC Asset Management Company Ltd 3.00%
Reliance Nippon Asset Management Co 3.00%
CARE Ratings Ltd. 3.00%
Lupin Ltd. 2.00%
Avanti Feeds Ltd. 2.00%
Cera Sanitaryware Ltd 2.00%
Infosys Ltd. 2.00%
National Aluminium Co. Ltd. 2.00%
NATCO Pharma Ltd. 2.00%
Wonderla Holidays Ltd. 2.00%
Maithan Alloys Ltd. 2.00%
Cadila Healthcare Ltd. 2.00%
Inox Leisure Ltd. 2.00%
Indian Energy Exchange Ltd. 1.00%
Jubilant Ingrevia Ltd 1.00%
Ashok Leyland Ltd. 1.00%
Cash 1.50%
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Lupin proair generic is doing exceedingly well in usa. In absence of competition.
All their major filings are from usfda approved plants.
I went into lupin basis their q4 ppt shared by you on VP lupin thread which highlights their pipeline. Which is phenomenal, heavy on injectables, in halers and most of them are ftf / para iv.

Also it is consolidating very nicely.

Thanks @harsh.beria93 for sharing ur views.

Jst one follow-up question : -

U mentioned that diversified portfolio helps you as a force to analyse lots of cos, bt on the other hand dont u think it increases the chances of making sub-par investments? I mean whn less %age of portfolio is allocated to each security, it increases the propensity to take more risk. How u guard against such tendency?