Thank you for the explanation sir. However, don’t you think that CAMS should get a slightly premium valuation as competition between the AMCs doesn’t affect it much.
Secondly, in the past 5 years, CAMS competitors have come down from three to one, whereas competitors of HDFC AMC have been continuously rising and now are increasing even faster. With the advent of these so-called new age AMCs like Navi, Zerodha, and Groww don’t you think that HDFC AMC is going to have a tough time? It is even facing pressure from the likes of other bank-backed AMCs like ICICI and SBI who have aggressively gained market share at their expense.
Lastly, just a query do you know the reason why HDFC AMC’s net profit hasn’t risen much in the past 5 quarters?
The other way to look at this is that despite increasing competition, underperformance in equity book and subdued SIP book, business has still outperformed listed peers (in terms of profitability and revenues). This shows the underlying resilience in the business model, where there are multiple levers to drive profitability.
The question I would ask is if CAMS cannot outperform a bank-backed AMC when its facing multiple tailwinds (such as reducing competition), why should it be valued at a premium? This situation can also reverse, where AMC starts growing much faster and CAMS faces increased competitive intensity (either by newer player entering or by AMCs exercising their power to reduce their fee).
In any case, all these are hypothesis and we can test it over time as there is no dearth of openly available data to evaluate this business.
HDFC AMC got a huge fillip in margins when they passed out the entire expense cut to the distributors. That benefit is in the numbers now. Additionally, HDFC AMC has lost significant market share in their high yielding equity book. These are cyclical trends which occur in each business and a good manager keeps gaining profit share over time. Lets see how business performs over time.
Thanks again. However, from what I have heard from CAMS con calls and analyst reports is that the chance of a new player is negligible because:
In this business the gestation period is very high
The AMCs have large amounts of data stored with these RTAs that can’t be transferred easily. For example: When Franklin Templeton shifted its data to CAMS it took over 8 months and the only reason they did so is that the RTA that they used has been closed down.
As of today, I increased my position size in HDFC AMC from 2% to 4%. The recent price underperformance has made valuations more attractive. This reduces cash to 9%.
Core compounder (56%)
Companies
Weightage
I T C Ltd.
8.00%
Housing Development Finance Corporation Ltd.
4.00%
NESCO Ltd.
4.00%
Manappuram Finance Ltd.
4.00%
Ajanta Pharmaceuticals Ltd.
4.00%
Aegis Logistics Ltd.
4.00%
Alembic Pharmaceuticals Ltd.
4.00%
Amara Raja Batteries Ltd.
4.00%
Avanti Feeds Ltd.
4.00%
Eris Lifesciences Ltd.
4.00%
HDFC Asset Management Company Ltd
4.00%
HDFC Bank Ltd.
2.00%
Aditya Birla Sun Life AMC Ltd
2.00%
PI Industries Ltd.
2.00%
Control Print Limited
2.00%
Cyclical (16%)
Companies
Weightage
Kolte-Patil Developers Ltd.
4.00%
Sharda Cropchem Ltd.
4.00%
Ashiana Housing Ltd.
2.00%
Ashok Leyland Ltd.
2.00%
SWARAJ ENGINES LTD.
2.00%
Kaveri Seed Company Ltd.
2.00%
Slow grower (6%)
Companies
Weightage
Cochin Shipyard Ltd.
4.00%
Power Grid Corporation of India Ltd.
2.00%
Turnaround (6%)
Companies
Weightage
CARE Ratings Ltd.
4.00%
Lupin Ltd.
2.00%
Deep value (7%)
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%
Shemaroo Entertainment Ltd.
1.00%
Its very hard to independently value their movie inventory, the balance sheet figure represents historical acquisition cost which may or may not be realisable in cash. Management has decided to use the inventory in their B2C business which has its own incubation period. The fatality rate is very high in this business line, as there are well funded peers and the digital space itself is evolving really quickly.
I have had an interesting stint with Shemaroo, it formed 2% of my folio until February 2020 which was when their traditional business started de-growing by 50% levels, management stopped communicating clearly.
Additionally, they had funded inventory through borrowings resulting in a weak balance sheet. Somehow, they have managed to come out without diluting equity. Now, business seems to be coming back and they have started deleveraging. This being said, Shemaroo was a favorite among a lot of market participants, so investor sentiments are very low and against this stock (which is also why they are trading at these valuations). Lets see what happens going forward!
Dear Harsh,
I have doubt on growth of AMCs as many new entrants are coming. These players are known for new ideas & can pull some incremental flows from existing MF houses.
As of today, I increased position size in Aditya Birla AMC from 2% to 4%. This reduces cash to 7%. The current market fall has increased the opportunity pool again and I am happy to allocate more capital to my existing positions and also increase the number of portfolio companies. I will keep this thread updated as and when I make changes.
There is definitely lots of chatter about this, there are few trends that are quite clear.
Industry level growth will be 15%+ over an extended period of time
Bank backed AMCs will take a dominant pie (as is clearly evident in last couple of years)
Niche boutique firms with robust investing processes will always have a unique place, however they will be badly impacted if they are too rigid with their process (e.g. Quantum AMC)
The one question for which I don’t have an answer to is the significance of different distribution networks in bringing AUM. If large platforms (Zerodha, Groww, etc.) start pushing their own products, how big an impact will the incumbants feel. The current distribution mix is very small from these platforms and also highly skewed towards young males in the 25-35 age bracket. Their penetration is very low in 40+ individuals, especially those who can put large sums of money to work. But this is something to be tracked
Generally, entry of newer players increase the overall size of the pie by bringing newer participants. An example from a different industry is Patanjali which was supposed to kill all FMCGs, but ended up not opening a new ayurveda division that benefitted incumbants. In case of AMCs, incremental market share of individual players is available on a monthly basis, thus easily verifiable. This means we can make course correction if a new trend emerges and continues for a reasonable amount of time. Lets see how future unfolds.
I like your contrarian views on old generation AMCs, specially HDFC AMC. Curious why you hold an Aditya Birla AMC as well with 4% allocation to both…as HDFC group is good enough to bet an 8% for long term if you believe in traditional AMC players? Thanks
One fundamental question – looking at the percentages, they seem to be at cost. Shouldn’t one track the portfolio at Mark To Market, rather than at cost? This gives a misleading picture and may lead to incorrect decisions I feel.
The FMCG and agri divisions are growing well, their tobacco business is a free cash generator, valuations are reasonable. Also, they have a very very long track record of being profitable and dividend paying while growing at higher than nominal GDP rates. The diverse business profile provides a lot of downside comfort making ITC more than a one trick pony. My expected IRR is 30%+, that’s why the high allocations. Lets see how future unfolds.
Of course valuations! In the past, I have made money on both HDFC AMC and Nippon Life despite Nippon being a bit inferior in terms of business performance (which was reflected in valuation differential). My expected IRR from HDFC AMC for a 4% allocation is much lower (~19%) than from an Aditya Birla (~26%). That’s why 4% allocation for both.
Its not at cost, it MTM. The model portfolio is supposed to be a guide as I allocate fresh capital on a continuous basis. I let most portfolio positions vary by ±2% from target weights. Recently, I have started the practise of only adding to positions whose weights have fallen but not trimming positions whose weights have increased slightly (mostly to reduce churn and reduce transaction costs and taxes).
Hi was going through ur portfolio and setup and all details are beautifully explained.
Can you please guide in hw to find the forward price and hence deduce the total returns . I am new to investing and learning phase and trying to understand more on value buy, growth buy and fundamental analysis
Hi Harsh! What’s your rationale behind choosing Ashiana Housing than someone like Ahluwalia Contracts which has a more Diversified and large Book order, better financial strength and more reasonable valuations?
I have explained my thought process for a few companies, you can look at them. Also, I would not call this system perfect, these are back of hand calculations and guesses. Below are some examples of my speculation for a few growth companies.
About value buys, the post below summarizes my thoughts.
Both are part of different industries, Ahluwalia is an EPC player and Ashiana is a pure residential developer. The underlying business models are completely different.
I haven’t done much work on EKC. A quick look at their balance sheet shows that they have rapidly deleveraged in the past few years. I don’t have anything meaningful to contribute here.
Over the past few months, I have been working on the domestic agri value chain and will share my understanding in the next post. This hopefully will also clarify my thought process about such opportunities.
I have managed to outperform nifty over this period, with CY20 being the year with maximum outperformance and CY18 being the year with maximum underperformance. I also track other features of my portfolio. My portfolio beta has decreased over time (computed on monthly data with 1-year lookback).
This is mainly because of increasing divergence of my returns with Nifty returns as a result of more bottom-up stock picking. This is clearly shown in the standard deviation chart which has not shown any significant divergence. It has always been slightly lower than Nifty consistently.
One feature that stands out in the above chart is how volatility regime changed in CY20 and is now back to normal. In changing regimes, there are lots of stock specific opportunities (so called stock picker market). This was also the time when my portfolio performance diverged the most against Nifty. We are now back to the normal volatility regime.
Over a long term period of time, I want higher returns with lower volatility and this has been achieved thus far. Lets see how things happen going forward. Wish everyone a very happy new year and loads of success in life.
