The harsh portfolio!

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?

If I may ask, what companies you have in your international portfolio?

There’s different thread for tracking his international holdings :slightly_smiling_face:

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).

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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… :slight_smile:

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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).

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%
Maruti Suzuki India Ltd. 4.00%
Suprajit Engineering Ltd. 4.00%
Manappuram Finance Ltd. 4.00%
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%
Jubilant Ingrevia Ltd 2.00%
Indian Energy Exchange Ltd. 1.00%
Ashok Leyland Ltd. 1.00%
Cash 0.00%
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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.)

What are the thoughts on OTT?

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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.

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%
Maruti Suzuki India Ltd. 4.00%
Suprajit Engineering Ltd. 4.00%
Manappuram Finance Ltd. 4.00%
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%
Jubilant Ingrevia Ltd 2.00%
Jamna Auto Industries Ltd. 1.00%
Ashok Leyland Ltd. 1.00%
Cash 0.00%
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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.


Taken from Anand Rathi report (Inox Leisure - Biggest Beneficiary Of The Situation: Anand Rathi)

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.

https://forum.valuepickr.com/t/inox-leisure-a-faster-running-horse/22953/78?u=harsh.beria93

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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.

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%
Maruti Suzuki India Ltd. 4.00%
Suprajit Engineering Ltd. 4.00%
Manappuram Finance Ltd. 4.00%
HDFC Bank Ltd. 4.00%
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%
InterGlobe Aviation Ltd. 2.00%
Lupin Ltd. 2.00%
Avanti Feeds Ltd. 2.00%
Cera Sanitaryware 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%
Jubilant Ingrevia Ltd 2.00%
Jamna Auto Industries Ltd. 1.00%
Ashok Leyland Ltd. 1.00%
Cash 0.00%
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Hi Harsh, Did you also check Jubilant Pharmova along with Ingrevia. If yes, what was your thought process to zero down on Ingrevia?

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Hi Harsh, Given the severity of the Covid 2nd wave either the Supreme court may have to again reinstate the moratorium on NPAs else I expect tough quarter or two for banks…
IT on the other hand seems to be going strong with revenue growth above the 3 year average…
While I like your valuation approach on selling and buying I am slightly not sure if it’s too early for the switch…

Hey! Yes I evaluated Jubilant Life even before their demerger and couldn’t find much differentiation in their line of pharma business vs other generic players (except the fact that Jubilant was cheap + had more debt). The Jubilant management has failed to reduce leverage since FY14, this despite the fact that pharma business throws out cashflow. They also had a few bad acquisitions. In a nutshell, I preferred my pharma basket (Ajanta, Biocon, Cadila, Divis, Lupin, Natco). This covers almost everything there is in generic pharma (oral solids + biosimilars + custom synthesis + Para IV + inhalers + injectables + vaccines).

Now coming to Ingrevia, I was attracted by cheapness + close to net debt free balance sheet + cost leadership in certain quasi-commodity chemicals. Now lets see how business performs.

These are things which I don’t give much credence to. If you go up in the thread, you can see my general investing thought process. I was buying IT (Hcl + infy) in 2017 when there was pessimism all around it, consumer cyclicals (like indigo, inox, wonderla) when there was a lockdown, metal companies (maithan, nalco) when there was no domestic demand and almost everything had to be exported. So, buying and selling for me is not a function of near term business performance, but a difference between current stock price and my assessment of underlying value. Sometimes, I am right in my assessment and sometimes I am wrong. As long as my (hit rate*average gains/losses > certain threshold), I will do okay.

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Hi Harsh,

Can you talk a bit about Infosys vs HCL Tech? What made you sell Infosys but hold HCL Tech?

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If we look historically over the last 15 years, HCL has been the fastest growing large IT company. This is because they acquire other assets and capabilities (which reduces free cash generation) thereby reducing net shareholder distribution. However, this strategy has allowed them to grow sales at a higher clip (~6x over last decade vs Infy’s growth of 4x and TCS’s growth of 5x). This is also one of the reason they trade at a cheaper multiple.

In a recent industry seminar, HCL said that they aspire to double sales over 5 years. If they manage to accomplish this feat, they are trading at cheap valuations. That’s why I hold HCL and sold Infy.

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Hello Harsh,
Dumb Q to ask but still i will ask : I couldnt follow the Infosys vs HDFC bank logic ? Is there a bit of a layman explanation of your calculations as i am fascinated how you calculated the risk/reward of future value ( Incremental returns ) …i would like to learn this …any source for a beginner like me …? or a more step-wise explanation of how to calculate this …?

Hi Harsh

Curious on why you’ve picked Kolte Patil Developers over say Sunteck reality. Especially now when the relative valuation gap has widened so much.