As of today, I have reduced allocation in Indigo from 2% to 1% and increased allocation in HDFC from 3% to 4%. Cash continues to be at zero.
Over the past year, I have been testing out a deep value strategy i.e. buying companies which are ridiculously cheap. I have categorized them as:
- Net nets (working capital bargains): Mcap below 2/3rd of net working capital
- Companies with above average return on capital over a business cycle (20%+) trading close to or below their book value
- Companies with moderate return on capital (12-15%) trading below half times their book value
The idea is to buy a bunch of these companies and hope for mean reversion over a 2-year time frame. If it doesn’t happen, sell it. If mean reversion happens, see if the business can find a place in the model portfolio, if not sell it. Last year, a large number of companies started meeting these criterion. As this was still experimental, I bought small positions in a few companies which are stated below.
- Time Technoplast (bought it below 0.5x book value, this business should trade atleast at its book value given they make 12-15% ROCE).
- RACL geartech (bought it around its book value, a business that has grown during an auto downcycle speaks a lot about their business characteristics).
- Atul auto (bought it at ~1.3x book value, this should trade at a large premium to its book because they make >30% ROCEs).
- D.B. Corp (this was a recent buy below its book value, DB should trade at a premium to its book value because they make 20%+ ROCEs).
Going forward, deep value bets will start to be part of the model portfolio, given the very attractive risk reward they offer (low downside, potential optionality for large upside). I will initiate their positions at 1% size and see how business develops. The current model portfolio (without deep value bets) are stated 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. | 4.00% |
| 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% |
| 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% |
| InterGlobe Aviation Ltd. | 1.00% |
| Jamna Auto Industries Ltd. | 1.00% |
| Ashok Leyland Ltd. | 1.00% |
| Cash | 0.00% |