The harsh portfolio!

https://www.sebi.gov.in/sebiweb/other/OtherAction.do?doPmr=yes

DB Corp has better readership and are the more dominant player compared to Jagran. It was bizarre that at one point DB Corp’s market cap came below Jagran. Although, Jagran is more share holder friendly.

3 Likes

Interested to know that u have invested in Alembic pharma now…It would be very helpful which aspect of the company made u to invest in it now…
Thanks in advance

Last year, there was a lot of buzz around Alembic Pharma because of the sartans opportunity and how there will be consistent shortage in US markets going forward. This was an exact replica of 2016 (the abilify shortage) when there was lots of buzz around Alembic. I never subscribed to that belief, for me Alembic’s business is lumpy in nature but is of high quality (shown in ROCEs > 20% during the pharma downturn despite R&D > 10% of sales). Now, that the buzz is gone, I revisited the story.

The main competitive advantage of Alembic Pharma is their vertical integration and their very nimble supply chain capabilities. This combined with 70%+ gross margins means they can do operating margins of 25%+ despite spending large amounts in R&D. So I was always interested in Alembic but preferred Ajanta over it (and still do) because of Ajanta’s branded business (~68% of sales) and debt free balance sheet.

Last year, I chose to buy shares of Cadila because they were reasonably cheap. Now that the valuation arbitrage in Cadila is more or less over, I switched to Alembic because now Alembic is trading reasonably cheap. For any generic pharma company with 70%+ gross margins (Ajanta, Alembic, Natco, Sun, Torrent), EV/sales of 3.5x is cheap. That’s why I made the switch. Here are my detailed valuation notes on Alembic.

Business quality

Year ROCE & ROE > 20% Positive FCF
FY11 Yes Yes Total # years 11
FY12 Yes Yes # ROCE & ROE > 20% 10
FY13 Yes Yes # Positive FCF 7
FY14 Yes Yes
FY15 Yes No SUM 17
FY16 Yes Yes AVERAGE 77.27%
FY17 Yes No HIGH BUSINESS QUALITY Yes
FY18 No No
FY19 Yes Yes
FY20 Yes No
FY21 Yes Yes

Promoter quality (Medium)

  • Organic sales growth greater than category level growth: True for US and developed markets, False for Indian market
  • Able to find new avenues to grow: Yes (Created large US sales despite being a late entrant)
  • Treats minority shareholders in a fair manner: Yes (Dividend payout ~ 20% of PAT)
  • Red flags:
    o Promoter takes very high remuneration (~10% of PAT)
    o Related party transactions are also pretty high (>150 cr.)
    o Promoter entity has been previously linked in Panama papers

Projections as on 06.06.2021
By FY25

  • US sales will reach $500mn (~4000 cr. at USD/INR ~ 80) implying 16.6% growth from FY21. This should be achievable given the large number of things they are trying (injectables, oncology, ophthalmology, dermatology)
  • Rest of world generic sales will grow @15% from 779 cr. in FY21 to 1’362 cr. in FY25
  • India sales will grow @10% from 1’497 cr. in FY21 to 2’192 cr. in FY25
  • API sales will grow @10% from 955 cr. in FY21 to 1’398 cr. in FY25
  • Consolidated sales ~ 8’952 cr.
  • Sell at EV/sales ~ 4 (given they are mostly in generic sales and not brands), EV ~ 35’808 cr. Assuming debt free balance sheet, market cap ~ 35’808 cr. (share price: 1821)

Confidence in projection (Medium)

  • Business quality (high/medium/low): High (Produces >20% ROE/ROCE and FCF over 75% of time)
  • Promoter quality (high/medium/low): Medium
  • Financial projections (high/medium/low): Medium (US sales of $500mn will not pan out unless they get injectables right)
  • Valuation projections (high/medium/low): High (In good times, should get >4x EV/sales)
  • Is it a cyclical business (Yes/No): No

Expected returns ~ 18% which comes in the 4% position size bucket.

As I had mentioned before, I am reshuffling my portfolio significantly which will probably take a few more weeks at the end of which I will start sharing the model portfolio again.

27 Likes

Was going through eldeco thread. They have a listed vs unlisted tradeoff.

Probably got confused between the two as both of them are large names in my hometown lucknow.

Sorry about that.

Congrats.

25 Likes

Over the past few months, I have made significant changes to my portfolio. In-line with my portfolio allocation strategy, I have simplified the structure into 5 kind of bets (core compounder, cyclical, slow grower, turnaround and deep value). I am sharing the current model portfolio structure.

Core compounder (44%)

Companies Weightage
I T C Ltd. 8.00%
Housing Development Finance Corporation Ltd. 4.00%
NESCO Ltd. 4.00%
Manappuram Finance Ltd. 4.00%
Alembic Pharmaceuticals Ltd. 4.00%
Amara Raja Batteries Ltd. 4.00%
Avanti Feeds Ltd. 4.00%
Eris Lifesciences Ltd. 4.00%
Ajanta Pharmaceuticals Ltd. 2.00%
HDFC Bank Ltd. 2.00%
HDFC Asset Management Company Ltd 2.00%
PI Industries Ltd. 2.00%

Cyclical (12%)

Companies Weightage
Kolte-Patil Developers Ltd. 4.00%
Ashiana Housing Ltd. 2.00%
Ashok Leyland Ltd. 2.00%
SWARAJ ENGINES LTD. 2.00%
National Aluminium Co. Ltd. 1.00%
Jamna Auto Industries Ltd. 1.00%

Slow grower (8%)

Companies Weightage
Power Grid Corporation of India Ltd. 4.00%
Cochin Shipyard Ltd. 4.00%

Turnaround (6%)

Companies Weightage
CARE Ratings Ltd. 4.00%
Lupin Ltd. 2.00%

Deep value (6%)

Companies Weightage
SJVN Ltd. 1.00%
ATUL AUTO LTD. 1.00%
Jagran Prakashan Ltd. 1.00%
D.B.Corp Ltd. 1.00%
Time Technoplast Ltd. 1.00%
RACL Geartech Ltd 1.00%

Cash is a little bit high at 24% and I am looking to deploy it soon.

The broad changes are summarized below:

  • New additions: Alembic Pharma (4%), Cochin Shipyard (4%), Eris Life (4%), Swaraj Engines (2%).
  • Exits due to valuations: HCL Tech, L&T, Maruti, Suprajit, Nippon asset management, Cera sanitaryware, Wonderla Holidays, Maithan alloys, Cadila Healthcare, Inox leisure, Jubilant Ingrevia, Natco pharma
  • Increased position size: ITC (from 6 to 8%), Avanti feeds (2 to 4%), Amara Raja (2 to 4%), Care ratings (3 to 4%) and Ashok Leyland (from 1 to 2%)
  • Decreased position size: PI Ind (from 6 to 2%), Powergrid (6 to 4%), Ajanta (4.5 to 2%), Ashiana (4.5 to 2%), HDFC Amc (3 to 2%), Nalco (2 to 1%)

Among new positions, I have already shared my assumptions about alembic pharma. I will subsequently add my thesis for Cochin Shipyard, eris life and swaraj engines.

22 Likes

Hi @harsh.beria93

Always good to check out ur portfolio updates :slight_smile: Lots to learn for novices like me.

The increased position size part that u mentioned in ur portfolio - did this happened bcoz exits that u made or u specifically added to these positions over the previous time period?

Regarding Maithan Alloys, can you please share your opinion on valuation ?

I thought with the current steady high base pricing for ferro manganese & silicon manganese, the potential for increasing EPS QoQ this year along with their record high EPS for recent quarter being around 38, there is distinct possibility of Yearly EPS for FY22 being atleast more than 150 and so at current prices, this would be undervalued.

Lets look at each company individually.

ITC: Earlier, I used to cap position size at 6% which has now increased to 8%. That’s why the increase in position size from 6 to 8%.
Avanti: Sales growth which was missing in the last couple of years seems to be coming back. Its a very high quality business (albeit cyclical) and with growth coming in, makes risk reward more interesting.
Amara Raja: Another very good business where growth was missing which seems to be coming back. Also, I have sold a lot of auto companies (bajaj auto, suprajit, maruti) and want more exposure to this space given auto has been in downturn since late 2018 and should rebound at some point.
Care: Ratings numbers have stopped de-growing and stabilized. The new management team seems to be doing reasonably well, this is another very high quality business where a cyclical economic recovery can lead to good business performance. Valuations are not very demanding.
Ashok leyland: If economy revives like it did in Q4FY21, MHCV players should benefit. My projections suggest ~19% IRR over the next 4-years thus coming in the 2% allocation bucket.

Here is my speculation about the future, this was made a year back on 19.06.2020

Lets assume the next bull cycle comes in 3 years:
Best year → FY21 + 3 years ~ FY24
Topline ~ 3500 cr. (generally topline doubles from last top)
EBITDA margins ~ 18% (can go >20% during a cyclical high)
Depreciation ~ 50 cr. (putting a high number)
EBIT ~ 3500*0.18 – 50 ~ 580 cr.
PBT ~ 550 cr. (let’s say for some reason there were other expenses of 30 cr.)
Tax ~ 25% * 550 ~ 140 cr.
PAT ~ 410cr.
P/E ratio ~ 10
Market cap ~ 410 * 10 ~ 4100 cr. (share price: 1408) (I am assuming that cash of 500 cr. was spent in growing topline)

6 Likes

Harsh,
Wanted to understand your rationale behind Eris.

If you want a domestic only play why not Abbott instead which has more powerful brand. Is it just because of valuations?

About Eris vs Abbott, Eris has grown sales faster than Abbott which maybe because of their very strong chronic vs acute mix with acute only accounting for 12-14% of sales. This number is >25% for Abbott. Also, Eris runs a very tight ship which is reflected in their margins. Branded generic is very high gross margin (75-80%) business and efficient players operate at 25-30% net profit margins. Promoters of Eris have managed to create strong brands and seem to be quite growth oriented (reflected in acquisitions made since listing). Abbott trades at much higher valuations and probably donot have similar growth ambition due to their international parentage.

Here is my speculation about Eris as on 14.05.2021

FY21 sales: 1212 cr. will grow @13% to 1976 cr. in FY25. Want to sell it at 9x EV/sales (assuming 30% PAT margins + 30 P/E), EV ~ 17’784 cr. Cash + investments should increase from ~330 cr. to 500 cr. giving Mcap ~ 18’284 cr. (share price: 1347)

Confidence in projection (Medium)

  • Business quality: High (consistently produce 20%+ ROE & ROCE along with free cashflows)
  • Promoter quality: Medium (I haven’t done enough work on past guidance of promoters)
  • Financial projections: High (sales growth of 13% is conservative, plus margins should re-rate to 30%)
  • Valuation projections: High (all MNC pharma companies get 30+ P/E)
  • Is it a cyclical business: No
8 Likes

Don’t you think the PE would increase in a full blown bull market . Obviously one would have to time his exit to the best of their ability .

Some of my concerns with ITC are:

  1. ESOPS. Do you think it does not have a significant dilutive on the existing shareholders? Want to know your opinion.

  2. It seems like they don’t mind their share price languishing. Shouldn’t they take actions such as buybacks, spinoffs, dividend payouts that would make the markets recognise the true value of the company if the company is being traded at well below the intrinsic value, unless they believe the current price is fair value?

Hi @harsh.beria93
Can’t wait to understand your thesis behind Cochin Shipyard. I am heavyweight but the margins going down from FY24 (New Orders coming at low teen margins) is a concern. Also can’t wait to know your return expectation here.

2 Likes

Here is my speculation about Cochin Shipyard (as on 21.06.2021)
Current shipbuilding order book > 20’000 cr. (including new Missile vessel order). If these get executed over 5-8 years, it should translate into 2’500-4’000 cr. annual sales.
Assuming 3’000 cr. annual sales from missile orders + 400 cr. from other customers gives 3’400 cr. sales from shipbuilding.
Add to this 1’000 cr. ship repair sales gives FY25 revenue potential of 4’400 cr.
Given company makes PAT margins of 15%+ in good times, I am assuming an exit multiple of 3x EV/sales (can be re-rated higher to 4x sales depending on performance + market sentiment).
EV ~ 4’400 * 3 ~ 13’200 cr.
Mcap ~ 13’200 + 2’000 cr. (cash) ~ 15’200 cr. (share price ~ 1155)

Business quality (Medium)

Here are the very long term financials since FY2002, sales have grown at 15% CAGR and PAT at 21% (FY02-21). At the same time book value has compounded at 16% CAGR. The core EBITDA margins have averaged at 21.6% and has varied b/w 10-30%. PAT margins have averaged at 12.23% and this can go upto 20% in good years.

FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21
Turnover 210.25 235.16 228.44 276.48 373.53 719.74 833.79 1’256.21 1’248.50 1’461.72 1’404.85 1’554.16 1’652.66 1’859.51 1’993.45 2’058.87 2’355.12 2’962.16 3’422.49 2’818.90
Turnover increase % 11.85% -2.86% 21.03% 35.10% 92.69% 15.85% 50.66% -0.61% 17.08% -3.89% 10.63% 6.34% 12.52% 7.20% 3.28% 14.39% 25.78% 15.54% -17.64%
Total income 253.84 282.07 267.94 323.31 452.89 845.64 857.17 1’383.26 1’326.49 1’589.17 1’481.54 1’642.33 1’728.64 1’952.97 2’107.37 2’217.50 2’544.28 3’190.27 3’667.57 3’009.72
Depreciation & write-offs 5.40 6.80 6.47 7.24 10.62 7.89 9.69 9.80 15.24 17.06 18.07 19.22 26.43 38.33 37.19 38.51 37.51 34.16 48.94
PBT 25.45 85.77 149.40 247.63 331.25 344.23 252.97 275.55 290.96 367.56 419.65 493.40 604.86 751.38 857.72 808.13
PAT 16.41 16.49 17.78 12.10 18.23 58.11 93.85 160.07 223.04 227.53 172.33 185.27 194.24 235.07 273.79 321.55 396.75 481.18 632.01 608.66
PAT increase % 0.49% 7.82% -31.95% 50.66% 218.76% 61.50% 70.56% 39.34% 2.01% -24.26% 7.51% 4.84% 21.02% 16.47% 17.44% 23.39% 21.28% 31.35% -3.69%
Equity share capital 111.28 113.28 113.28 113.28 113.28 113.28 113.28 113.28 113.28 113.28 113.28 113.28 113.28 113.28 113.28 113.28 135.94 131.54 131.54
Reseves & surplus 15.68 25.86 34.19 36.83 55.06 93.67 199.64 336.70 490.54 775.38 898.41 1’062.42 1’239.25 1’447.79 1’701.05 1’915.30 3’119.93 3’200.54 3’591.34
Net worth 245.43 255.66 264.03 266.62 284.85 323.45 429.43 566.49 680.32 967.80 1’050.83 1’175.70 1’352.53 1’561.07 1’814.33 2’028.58 3’255.87 3’332.08 3’722.88 4’033.00
Gross fixed assets 198.86 205.00 195.86 204.65 206.92 217.18 233.46 270.39 349.68 362.10 376.73 444.35 602.38 636.84 569.53 357.72 369.79 426.69
Net fixed assets 84.92 86.30 74.09 78.30 76.33 81.91 92.16 121.64 189.75 190.67 192.61 247.30 383.41 377.44 296.44 302.85 284.47 313.03 700.48
EBITDA margin 17.40% 15.20% 16.30% 10.10% 11.70% 14.50% 19.50% 22.00% 29.20% 26.70% 20.21% 20.45% 20.37% 22.81% 23.52% 26.38% 27.76% 27.00% 27.95% 32.43%
ROE % 6.69% 6.45% 6.73% 4.54% 6.40% 17.97% 21.85% 28.26% 32.78% 23.51% 16.40% 15.76% 14.36% 15.06% 15.09% 15.85% 12.19% 14.44% 16.98% 15.34%
ROCE % 4.22% 4.28% 4.33% 2.45% 3.65% 11.70% 23.28% 29.09% 38.57% 27.44% 18.76% 19.08% 13.97% 14.61% 17.14% 16.41% 12.35% 15.95%
Capital employed 389.25 392.75 410.98 493.63 499.64 496.60 401.33 550.31 578.32 829.27 918.68 970.70 1’389.98 1’621.24 1’695.35 2’089.05 3’212.22 3’017.66
PBT margin 6.81% 11.92% 17.92% 19.71% 26.53% 23.55% 18.01% 17.73% 17.61% 19.77% 21.05% 23.96% 25.68% 25.37% 25.06% 28.67%
PAT margin 7.80% 7.01% 7.78% 4.38% 4.88% 8.07% 11.26% 12.74% 17.86% 15.57% 12.27% 11.92% 11.75% 12.64% 13.73% 15.62% 16.85% 15.08% 17.23% 20.22%
# of employees 2’232.00 2’189.00 2’175.00 2’109.00 2’075.00 2’084.00 2’059.00 1’962.00 1’907.00 1’818.00 1’900.00 1’656.00 1’751.00 1’786.00 1’671.00 1’829.00 1’781.00 1’744.00
EBDIT 36.58 35.74 37.24 27.92 43.70 104.36 162.59 276.37 364.56 390.28 283.92 317.83 336.65 424.15 468.86 543.13 653.78 799.78
Shipbuilding income 1’643.00 1’626.00 1’516.00 1’732.00 2’130.00 2’852.00 2’406.00
Ship repair income 196.00 367.00 543.00 623.00 832.00 570.00 413.00
Order book
Indian navy shipbuilding 767.00 6’567.64 12’813.09 10’777.14
Other shipbuilding 1’345.00 1’718.55 1’317.53 940.50
Ship repairs 800.00 500.00 500.00
Year ROCE & ROE > 20% Positive FCF
FY10 Yes No Total # years 12
FY11 Yes No # ROCE & ROE > 20% 2
FY12 No Yes # Positive FCF 6
FY13 No No
FY14 No No SUM 8
FY15 No Yes AVERAGE 33.33%
FY16 No No HIGH BUSINESS QUALITY No
FY17 No Yes
FY18 No Yes
FY19 No No
FY20 No Yes
FY21 No Yes

Management quality (HIGH)

  • Organic sales growth greater than category level growth: Yes (Most other private ship builders catering to commercial ship building has gone bankrupt)
  • Able to find new avenues to grow: Yes (Have managed to grow ship repair operations which are less cyclical)
  • Treats minority shareholders in a fair manner: Yes (Good dividend distribution + buybacks)
  • Concerns
    o PSU: Higher cost structure (although they have managed lower employee costs by hiring contract workers)
    o Client concentration: Very high from Indian Navy and AP government

Confidence in projection (Low)

  • Business quality (high/medium/low): Medium (Core business ROE is >20% but large cash on books reduces ROE)
  • Promoter quality (high/medium/low): High (Despite being a PSU, they have executed very well especially in their ship repair business)
  • Financial projections (high/medium/low): Medium (Lumpy revenues, ship repair should reach >1’000 cr. given the massive expansion they are undertaking)
  • Valuation projections (high/medium/low): Low (Market has never valued them at >2.2x EV/sales, but given this margin structure they should trade at >3x EV/sales)
  • Is it a cyclical business (Yes/No): Yes (Ship building is very cyclical + concentration of orders towards Indian navy)

Overall summary:

Companies Ticker Projection date Price 4 years fwd Price (FY25) Price return % Dividend yield % Total returns % Confidence Business Promoter Financial proj. Valuation proj. Cyclical?
Cochin Shipyard Ltd. nse:cochinship 20.06.21 356.00 1,155.00 34.21% 4.35% 38.56% Medium High Medium Low Yes

The expected returns seem to be high, however I do not have much confidence in the assumed exit multiple of 3x EV/sales (implying ~20x P/E). Hence, I have not allocated 8% and limited its position size to 4%.

You can always put your own multiple, I avoid high multiples when I am already assuming cyclical high margins.

The point about ESOPs is very valid, I don’t have much control over it. About share price movements, these are cyclical factors. ITC over its history has largely traded between 4x-10x EV/sales, I am assuming this will persist going forward. Sometimes I will be correct in my assumptions, sometimes not.

12 Likes

Hi Harsh,

U mentioned Amara Raja on ur watchlist.Here’s my understanding of the valuation : -

Per recent con-call the co. generates 900crs. FCF before taking into account any sort of Capex or payouts. with maintenance capex of roughly 200 crs. that leaves out 700 crs. The co. gave guidance of 15% for next 5 yrs and ample growth opportunities for next 2-3 decades. Taking a conservative 2% growth against risk free 6% gives valuation of arnd 16000 crs. & the stock currently trades at a good 30% discount to it.

This is a very rudimentary valuation based on wat I cld analyse abt the co. so far. Would like to hear ur views.

1 Like

Currently it is available at 1x EV/Sales, your gain calculations relying on valuation gain ( 3x EV/Sales). Will top line growth (but reduced margin), better market conditions be sufficient for this valuation gain, worth relying upon?

My understanding is that in short term (FY22) revenue will be depressed, will this give better entry opportunity down the line.

Disclosure: 2 month old position, 1% of portfolio

Good point, the honest answer is that I don’t know. I have very little confidence on my exit multiples and I have mentioned it clearly in the post above. However, if we ignore the company name and simply look at the P&L statement (line-by-line), a 3x EV/sales looks conservative.

This being said, most PSUs have been undervalued for a reasonably long time now and I don’t know if or when the market will re-rate them. Cochin Shipyard is an example of a very well managed PSU which has survived the shipping downturn where most private players went bankrupt. They have the largest market share in ship repairs business in India and have consolidated the market by taking over a large number of ports from bankruptcy (hence at very attractive valuations). If I ignore the market sentiment around it, this is a business which generates reasonable returns on capital and offers downside protection through a good dividend yield. All this being said, the near term earnings profile will probably look a bit depressed due to slower rampup of new orders. I don’t make my decisions by near term business performance as you would have probably seen through my posts. Cochin Shipyard reminds me of HCL Tech which was grossly overlooked in 2016-17 time frame and it has been a good journey for me since. Will Cochin Shipyard ever become a growth stock? I don’t know!

4 Likes

As of today, I have sold my stake in NALCO. Although, alumina is nowhere close to its peak prices, aluminum prices have played out very well. My assumptions about NALCO was that by FY25, there will be a cyclical upturn in aluminum prices. When that happens, sales > 12’000 cr. I want to sell at P/sales > 2 i.e. 24’000 cr. (~128 share price). The current price of >90 offers <10% IRR, hence the sell.

Updated portfolio is below. Cash remains high at 25%.

Core compounder (44%)

Companies Weightage
I T C Ltd. 8.00%
Housing Development Finance Corporation Ltd. 4.00%
NESCO Ltd. 4.00%
Manappuram Finance Ltd. 4.00%
Alembic Pharmaceuticals Ltd. 4.00%
Amara Raja Batteries Ltd. 4.00%
Avanti Feeds Ltd. 4.00%
Eris Lifesciences Ltd. 4.00%
Ajanta Pharmaceuticals Ltd. 2.00%
HDFC Bank Ltd. 2.00%
HDFC Asset Management Company Ltd 2.00%
PI Industries Ltd. 2.00%

Cyclical (11%)

Companies Weightage
Kolte-Patil Developers Ltd. 4.00%
Ashiana Housing Ltd. 2.00%
Ashok Leyland Ltd. 2.00%
SWARAJ ENGINES LTD. 2.00%
Jamna Auto Industries Ltd. 1.00%

Slow grower (8%)

Companies Weightage
Power Grid Corporation of India Ltd. 4.00%
Cochin Shipyard Ltd. 4.00%

Turnaround (6%)

Companies Weightage
CARE Ratings Ltd. 4.00%
Lupin Ltd. 2.00%

Deep value (6%)

Companies Weightage
SJVN Ltd. 1.00%
ATUL AUTO LTD. 1.00%
Jagran Prakashan Ltd. 1.00%
D.B.Corp Ltd. 1.00%
Time Technoplast Ltd. 1.00%
RACL Geartech Ltd 1.00%
9 Likes

Just a bit curious why racl is deep value. Maybe it might have been a year ago, but seems like fairly value high growth company now. :sweat_smile:

4 Likes