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 : -
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?
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 )
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.
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!
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.
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.
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.
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.
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?
Lets put things into context, I am 27 and have 35-40 years of working life and probably 50-60 years of compounding infront of me. If I am able to increase my knowledge base at a decent clip, I will have a decent understanding of certain sectors and companies over a period of time. If I am able to find 4-5 stocks which turn out be true compounders (100x in 20-30 years kind of opportunities), my financial life will be taken care of. So, I want to increase my knowledge base because of the very lucrative financial incentive.
Now coming back to assessment of risk, I have never found any relationship of risk with % of my net worth allocated to that opportunity. I have lost money in small and large bet sizes (eg: ~2% allocation in Shemaroo that suffered 65% loss, ~3% in Zee that suffered 38% loss, ~4.5% in Lupin that suffered 20% loss). I haven’t yet lost significant money in 6% bets but I will probably lose at some point of time.
If we look at the other end, some of my large returns have come from both small and large allocations (>5x in HCL tech and PI Industries at 6% position size, >3x in IEX and Ashok leyland at 2% and 1% position sizes).
In this context, I don’t know how my returns actually correlate with my deemed confidence in a given business. When I first invested into HCL tech (in 2017), I was expecting 15%+ returns along with 2-3% dividend yield and I was reasonably confident which is why I allocated 6%. Similarly, for Shemaroo I expected 15% (sales growth) + 7-8% (re-rating over a 5-year timeframe), but I was not sure if their business was very scalable (that’s why 2% position size). Now, in hindsight its very easy for me to be overcritical on these positions but it wasn’t very clear to me 3 years ago. Then how can it be clearer now when I invest into a new company (say a Jubilant ingrevia)? There is a lot of uncertainty in any business and diversification saves me from severe downside surprises.
Lupin has actually lost a bit of market share in proair in recent months (latest market share is ~5.5-6% vs peak levels of 7.5%). Also, at some point of time perrigo will come back.
If you look at their pipeline slide from FY15, it always looked very healthy. Its approvals followed by product launches that drive revenue and Lupin has struggling on this count because of their poor compliance and delayed product cycle (plus their specialty business didn’t take off at all). They also have one of the highest product recalls in the past 2-years, there is something seriously wrong in their compliance culture which management has accepted in past few concalls. The upside surprise can come from a unique drug opportunity that we are not talking about (like proair opportunity that came out of the blue) combined with reasonable valuations (~3x EV/sales).
Thanks @harsh.beria93 for lucid replies. Portfolio allocation is as important an aspect as which stocks to pick in portfolio. Nd ur answers hv certainly been a useful roadmap for anyone to think over risk, allocation, cash holdings & sell decisions. Looking fwd to more value add in this thread…
As of today, I have switched my 4% position from Bajaj auto to Maruti Suzuki. Additionally, I have deployed the 1.5% cash into two exisiting positions (1% in Jubilant ingrevia taking its position size to 2%; 0.5% in Manappuram finance taking its position size to 4%). Reason for switch to Maruti is the superior growth profile of 4-wheelers compared to 2-wheelers. Also, bajaj auto is trading closer to fair valuations compared to maruti (in my assessment). Below is my speculation for maruti.
FY20 sales: 75’660 cr., @12% growth (on low corona base): FY25 sales: 133’339 cr., I want to exit at >2.5 EV/sales; EV: 333’348 cr.; Cash ~ 40’000 cr. (this was >35’000 cr. in FY19); Mcap ~ 373’348 cr. (share price: 12360).
Couple of thoughts if you can please share about - 1. Thought process behind having both HDFC & Reliance AMCs. you could have one to simplify at 6% 2. Inox is clearly having the headwind, what is making you to stick to it.
Can you share your views regarding why Inox instead of PVR?( for me , they are a huge fish and will devour little ones which have been left wounded by covid and I find the management very honest and growth aspiring. Their expansion model is similar to dmart in thesis and I find their views regarding OTTs in line with mine.)
OTTs can never replace the feel and touch of cinema halls. Watching something on your mobile / TV screens doesn’t have that magic . ( Me for eg) am really tired / not anymore interested in seeing my fav content at home despite me not being a very avid cinema movie watcher ). Every decade , some kind of technology comes and same has been said about them but cinemas stand tall and have kept growing. PVR already has significant cash at hand and once this situation resolves, they may go for acquisitions of small players at peanut values and further increase their market cap.
As of today, I have switched my 1% position in IEX to Jamna auto. Jamna is a play on MHCV cycle (which currently hasn’t revived to FY19 levels). However, if we look back, company has managed to double sales across cycles.
FY12 peak sales were 1’120 cr. on fixed assets of 185 cr. (Fixed asset turn ~ 6x)
FY19 peak sales were 2’135 cr. on fixed assets of 373 cr. (Fixed asset turn ~ 5.7x)
I expect CV cycle to revive sometime in the next 5-years and here are my very very naive projections.
Sales double to ~4000 cr., EBITDA margins vary from 13-16% (implying EBITDA of 520-640 cr.), EV (on a 10x EV/EBITDA) ~ 5200 – 6400 cr.; Assuming 100 cr. debt, Mcap ~ 5100 – 6300 cr. (share price: 130-160).
The reason I have not assumed higher debt is because internal accruals (in a normalized year) can easily fund fixed capex requirement. Incremental fixed asset investment over next 5-years comes out to be 350-360 cr. to increase sales to 4’000 cr. (5.5x fixed asset turns), implying 70-75 cr. annualized CAPEX. Annualized average CFO over last 5-years was ~120 cr. Also, working capital investments are negligible given company has cash conversion cycles varying from -ve to 20 days, which is also why Jamna has been able to pay 30% of profits as dividends without any dilution in last 5-years. Lets see if the cycle plays out! Updated portfolio is below.
Nippon is a play on ETFs and business revival (in debt funds + international business coming from Nippon relationships). Honestly, I like AMC business where cash is not needed to grow and substantial amount is paid back as dividends. So rather than choosing one, I will like to play both (not UTI because of their higher cost structure). HDFC AMC has a banking parentage, so growth will be much easier.
Both Inox and wonderla are facing similar headwinds. My bet is not really looking at the next 1-year, but more from a larger trend perspective. For Inox, the trend towards multi-screen exhibitions has been established and its only accelerating.
I preferred Inox because of their better balance sheet and more conservative accounting. A couple of bad years doesn’t have much impact on terminal value of such businesses. About OTT, this is an endless debate and I will prefer looking at number of footfalls. I don’t see a lot of other entertainment venues for an urban Indian. There was a recent JM Financial report that showed the economics of OTT vs cinema for movie producers and there is no way OTT can take over theatres unless there is a large change in underlying economics.
As of today, I have sold my 2% position in Infosys, reduced allocation in Indigo from 4% to 2% and invested the money in HDFC bank (at 4% position size).
Assumptions Infosys: FY20 revenue: 90’791 cr., will grow @10% to 146’220 cr., Earnings (28% PBT margins): 146’220*28%*75% ~ 30’706 cr., Sell at 22P/E ~ 675’532 cr. (share price: 1587). Incremental returns are ~6%. HDFC bank: FY21 book value: 210’443 cr. (382/share), share count ~ 551.23 cr. In FY25 book value will grow @18% to ~ 408’000 cr. Long term share dilution ~ 2% i.e. 597 cr., Book value per share: 683 (including impact of dilution). I would like to sell at >4P/B (share price: 2732). Incremental returns are ~19% (adding 1% dividend yield)
Risk reward seems to be more favorable for HDFC bank vs Infy (hence the switch). Updated portfolio is below.
