The harsh portfolio!

In-line with past updates of increasing allocation to cyclical sectors, I have sold my position in Mahindra Logistics (2%) and added NALCO (1% position). This builds up 1% cash which I am looking to deploy very soon.

The reason for this switch is below:

  • NALCO has a normalized PBT margin ~ 18%. For the last 2 quarters, PBT margins have been negative due to pressure on aluminum prices. Aluminum prices like most commodities is cyclical. FY13, FY14 period was the last bear cycle, followed by a cyclical uptick in FY15, followed by cyclical downtick in FY16 & FY17 and a cyclical uptick in FY18 and FY19. Over long term, the company trades at P/sales ~ 2 and it goes below 1 during cyclical downticks. Currently, company is trading at P/sales ~ 0.6 (market cap ~ 5600 cr. with cash of ~2800 cr.) Valuations are reflecting poor future prospects. In the next five years (i.e. by FY25), a cyclical upturn in aluminum is likely. When that happens, sales will go beyond the last peak sales and is likely to cross 12’000 cr. I will consider selling at P/sales > 2 i.e. 24’000 cr. (~128 share price). Current stock price is ~30. This gives me a favorable risk reward. Plus, its a debt free balance sheet with 51.5% GOI stake (i.e. not too much scope for further equity dilution)
  • Mahindra Logistics: The growth is supposed to recover after corona stabilization. As company is rapidly expanding into new business (i.e. cold storage, warehousing), I am comfortable giving it a growth rate of ~15% for the next 5 years and a normalized PBT margin ~ 4% (Global leader C.H. Robinson has long term EBIT margins ~ 5.5%). Looking five years ahead (FY25), with 15% topline growth, revenues will go from ~3200 cr. (taking into account corona impact) to ~6500 cr. At 4% PBT margins, PAT ~ 195 cr. PE ~ 20 will give Mcap ~ 3900 cr. Current Mcap ~ 1800 cr.

In essence, I have a better risk reward in NALCO compared to Mahindra Logistics. Also, I have certain doubts about accounting in Mahindra Logistics (details here)

3 Likes