The harsh portfolio!

Its now been close to 4 years since I have maintained my investing records, the performance according to calendar years is shown below.

Calendar year My returns Nifty returns 100 invested in Harsh folio 100 invested in Nifty
2018 -0.63% 3.15% 99.36629809 103.1512625
2019 11.83% 12.01% 111.1261021 115.5428994
2020 27.18% 14.89% 141.3329775 132.7468312
2021 27.30% 24.12% 179.9159566 164.7644355

A more granular performance (on monthly returns is shown below).

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.

46 Likes

Thanks for sharing. May I know how you keep track of your returns?

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Hi Harsh, any write-up on Aegis?

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As of today, I have created 2% position in Shri Jagdamba Polymer. The key rationale is beautifully captured in the thread below. With 360 cr. in FY22 revenues, PAT should be somewhere around 55 cr. (adjusting for foreign currency fluctuations) making it kind of fairly valued (~15 P/E). They are growing very well without any dilution and I want to see how this story plays out. The key risk is that of information availability. Cash levels have come down to 5%. Updated portfolio is below.

Core compounder (60%)

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%
Aditya Birla Sun Life AMC Ltd 4.00%
HDFC Bank Ltd. 2.00%
PI Industries Ltd. 2.00%
Control Print Limited 2.00%
Shri Jagdamba Poly 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%
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@Rafi_Syed: I am summarizing my understanding of the agri value chain, mainly focusing on agrichemical companies dealing with insecticides, fungicides, herbicides, and plant growth regulators. I am not including seeds or tractor companies.

1. Domestic marketing companies: Traditionally, Indian agrichem companies would forge partnership with innovator MNCs (mostly Japanese, American and European) to launch exclusive products, whereby active ingredients (AIs) were procured from the MNCs. In this so called in-licensing arrangement, Indian companies would pay royalty on sales, in addition to buying AIs from the MNCs. A number of Indian players adopted this strategy (Rallis, Insecticides India, Dhanuka, etc.). This strategy is asset light in nature as formulation mostly involves mixing of different ingredients in a given proportion (making fixed asset turns of 8-10x). However, the downside of this strategy is that its not scalable beyond a given point (around 1’300-1’400 cr. of domestic sales). Here is domestic agchem revenues of large agchem players.

Its very clear that all Indian companies (PI, Dhanuka, Insecticides, Rallis) have struggled to scale beyond 1’300-1’400 cr of domestic sales. MNCs who have a larger product offering due to their global R&D along with better brand recall (I am considering UPL as a MNC here) have been successful in going beyond 2000 cr. Bayer numbers look very high because it includes Monsanto’s seeds business, for UPL ~10% contribution would be seeds (so domestic agchem would be ~4000 cr.).

Once a large domestic scale is reached, companies face usual vagaries of monsoon, government policy, etc. making sales growth in-line with nominal GDP growth. However, this business is super capital efficient as shown in the return ratios of companies like Dhanuka (30%+ ROCEs leading to high dividend payouts and buybacks).

2. Exporters of AIs: In the last few years, this space has garnered a lot of attention due to shift of market share from China to India. A large number of companies have been doing well here. There are largely two business models that exist here, i) Export of generic off-patent AIs and (ii) Export of patented AIs by collaborating with MNCs. In the second category of patented exports, PI is the only successful player with some others like Bharat Rasayan and Astec Life trying to crack this business model. This line of business is very sticky and high margin in nature. Below is agchem exports of major Indian companies.

Generic or patented, exports have grown for everyone. Even MNCs such as Sumitomo have started using India as their base to manufacture AIs. Fastest growth players (20%+ sales growth) are Bharat Rasayan, India Pesticides, PI Industries, UPL (through acquisitions), Insecticides India (although on a small base). If we only consider off-patent AI exports, most players have scaled to 400-600 cr. kind of annual sales. PI with its unique business model has scaled beyond 3’300 cr. and is in a very different league.

In this business model, capex is of utmost importance making it capital heavy unlike domestic formulators who only need to setup a strong marketing engine.

3. Global marketing companies: Global agchem marketing companies build a portfolio of finished formulation of agrichemicals by registering in different countries, and sell them as per demand from the respective countries. Two such listed companies are UPL and Sharda Cropchem, who derive a significant proportion of revenues through outsourced manufacturing. Sharda Cropchem has a unique business model, where they do not manufacture AIs or formulations but procure it from different suppliers and supply it as per demand from various markets. Sharda has grown sales at ~18%+ rates over the past decade. In this business model, money is spent in registering products which is both time consuming and expensive (3-30 cr. per product depending on the geography). Once a company has a large portfolio of registered molecules, their job is to procure from manufacturers according to demand schedule and manage working capital. So capex is in form of molecule registration (and not machinery management) and working capital management is important to generate reasonable cashflow (to fund further registration). This business has very good economics (20%+ ROCE). To showcase how scalable a marketing business can be, revenue per employee for Sharda is ~13.69 cr. in FY21 (vs 0.42 cr. for HCL Tech and 0.32 cr. for TCS).

Here’s the summary of the three business models
Domestic marketing: High return ratios + asset light + strong working capital management + limited growth (beyond 1’300-1’400 cr.)
AI export: Asset heavy + Product concentration risk + strong growth with a large market (PI has scaled to 3’300 cr.+) → return ratios is a function of product profile
Export marketing: High return ratios + very high registration costs + strong working capital management + strong growth with very large runway (UPL has scaled to 34’000 cr.+)

Now lets see how market is currently valuing these business models.
Domestic focused companies: Market values MNCs much higher than Indian players. Sumitomo, Bayer trade at 25x+ EV/EBITDA and 5+ EV/sales (basically at branded FMCG kind of valuations). The remaining (Rallis, Insecticides, Dhanuka) trade at 1-2.5x EV/sales or 10-20x EV/EBITDA.
AI exporters: These are currently in market fancy and trade at 5x+ EV/sales or 20x+ EV/EBITDA. Also, these companies as a group (PI Ind, Bharat rasayan, Astec Life, India pesticides) have shown higher growth rates than domestic focused companies (so premium valuation is for a reason). In this lot, the cheapest companies are Meghmani Organics and Heranba and that has to do with corporate governance doubts in the minds of market participants.
Global marketing: Both UPL and Sharda Cropchem trade at very modest multiples (9x EV/EBITDA for UPL and 5.5x EV/EBITDA for Sharda). Similar to generic pharma, market is currently not assign a high multiple for formulation exporters. I find this to be the most opportunistic space because both UPL and Sharda are growing at high rates (15%+ sales growth) and are not in fancy (UPL probably because of governance doubts and Sharda because of their different business model which involves intangibles and is clearly not understood by the market).

My approach
Clearly the most exciting space (in terms of growth) is that of exports. In AI exports, I like PI’s business model the most. However due to high valuations, I have reduced my allocations over time (from 6% in 2018 to 2% currently). Bharat Rasayan is also at an interesting juncture, if they are able to crack the MNC business (like PI did) their valuation might expand. In terms of new listings (India Pesticides, Heranba), I find India Pesticides as more interesting. However, in the paucity of a public market track record, I will prefer Bharat Rasayan (as both are trading at similar valuations).
My bigger bet is on Sharda Cropchem which is growing at very high rates and have built in operating leverage (in terms of higher possible sales per molecule). Also, their margins are at decadal low levels, so a revival in margins will have disproportionate impact on earnings (and they are cheap even at current margin earnings). So Sharda can benefit from margin expansion + multiple re-rating, that’s why my higher allocation.

This is a very rough mental model that I have built, I will be very happy to discuss more specifics and dive into more granular discussion.

52 Likes

I would love to hear your views about Astec Lifesciences which is also in the field of herbicides/fungicide and at an interesting juncture as founding promoter will be leaving by March end giving complete control to majority shareholder Godrej (who are bringing in professional managment - ex Navin Fluorine guy).

As Sharda cropchem and other asset light players get affected by petroleum prices, we need.to watch it. If recent jump in crude prices and subsequent cooling indicates players like sharda cropchem are going.to be in fancy. Threat of hike in US interest rate should keep crude prices in check.

Disc: No holidings, used to track Sharda Crop

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Astec Lifesciences has delivered lower sales growth compared to its peers. Given their business model, I consider their peers as Insecticides India, India Pesticides, Bharat Rasayan and Heranba. Also, their margins have been quite volatile which might be because of their limited process expertise (mainly an expert in triazole chemistry leading to product specific risk) and raw material procurement from China. I like Bharat Rasayan more than Astec.

Also, Astec is mostly a fungicide company, and only now getting into herbicides (which is the largest segment globally). About Godrej being promoter, its both a good and a bad thing. It gives them access to cheaper capital (in terms of ICDs) but also brings in a different kind of corporate culture than a hungry entreprenuer driver company.

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Hey Harsh, Do you see a revision on the projections based on the spectacular turn around Sharda have posted during Q3.

Growth has been very strong in the last 4-5 quarters, and is way higher than my own expectations. This calls for revision of estimates, I revisit most of my estimates at the end of a fiscal year. So I will do the detailed calculations at the end of FY22.

At the current growth trajectory, Sharda should end FY22 with sales of ~3600 cr. and management is guiding for 20% volume growth beyond that. This would imply they are trading ~1.25x EV/sales (on FY22 sales) which is still one of the cheapest (after Insecticides India). My thesis is built on strong sales growth + possible margin expansion. If current quarter gross margins of 33-34% are sustainable, it would imply PAT margins of 12%+ which means they are trading at 11x P/E on FY22 numbers. This is quite cheap for a business growing sales at 20% levels. I am happy to hold it as long as growth continues.

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@harsh.beria93 - how do you see Q3 results for Eris. Added here

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You summarized it perfectly, nothing exciting nor dull! They are growing at faster rates than IPM, Q4 has a large number of product launches which can boost growth in the coming quarters. Its a cashflow and margin focused management, and is a better alternative to MNC pharma who are also cashflow and margin focused (but don’t have same growth ambitions).

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As of today, I sold my stake on Power grid. This is because of my concerns on growth going forward. Updated cash is 7% and portfolio below. I am able to find a lot of opportunities to deploy in this market, I will keep the page updated as and when I create position in companies.

Core compounder (60%)

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%
Aditya Birla Sun Life AMC Ltd 4.00%
HDFC Bank Ltd. 2.00%
PI Industries Ltd. 2.00%
Control Print Limited 2.00%
Shri Jagdamba Poly 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 (4%)

Companies Weightage
Cochin Shipyard Ltd. 4.00%

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%
10 Likes

As of today, I sold my 1% stake in SJVN which was a deep value bet. This was a very recent position (invested in August 2021) and generated decent returns (~18%). On existing capacities, company is still very undervalued. However, they are going on a massive capex cycle. In the past, I have invested in Powergrid where I realized that the best time to invest in utilities is when majority of their capex are coming on-stream resulting in high free cash generation, this is also the time when market re-rates such companies. When powergrid was going through its massive capex in 2016-19 period, share prices didn’t move much. However, once market had clear visibility of debt peaking out and capex coming on stream, stock rerated quickly. Over my 4-year holding period (2018-22) in Powergrid, I had 24% IRR which could have been more optimized if I had this insight before. I will try to capture this learning in other utility opportunties (such as SJVN and NHPC which are undergoing large capex).

Also, I created a 4% position in Gufic Biosciences. I like the increased transparency in this company, along with their differentiated strategy to launch drugs with new delivery methods and in-licensing of new first to market products in India. Coming to capabilities, they are leaders in lyophilisation and are coming up with a very large capacity in Indore. One of my concerns is that management might be trying too many things. However, the COVID windfall has deleveraged their balance sheet meaning the case of going under is negligible now. Lets see how it plays out. Cash levels have reduced to 4% and updated folio is below.

Core compounder (64%)

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. 4.00%
HDFC Asset Management Company Ltd 4.00%
Aditya Birla Sun Life AMC Ltd 4.00%
Aegis Logistics Ltd. 4.00%
Gufic Biosciences 4.00%
HDFC Bank Ltd. 2.00%
PI Industries Ltd. 2.00%
Control Print Limited 2.00%
Shri Jagdamba Poly 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 (4%)

Companies Weightage
Cochin Shipyard Ltd. 4.00%

Turnaround (6%)

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

Deep value (6%)

Companies Weightage
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%
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Alembic Pharma mgmt has missed guidance consistently and stock has crashed to below 700 levels. Are you still bullish on it?

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US generic business is quite unpredictable and I do not rely on management guidances because of the inherent business characteristics. I think I mentioned this in my post on Alembic.

Alembic’s strategy is to gain from shortages, which means their growth will always be lumpy in nature. We saw this in 2016 when they gained from abilify shortage, then in 2020 when they gained from sartan shortage. This is clearly visible in US revenues per product launched, we see a jump in these years (more evident in FY16). I expect such a thing to happen again in the next 3-4 years, I just don’t know when or why.

FY15 FY16 FY17 FY18 FY19 FY20 FY21
US revenue (cr) per launch 12.15 36.11 24.84 20.91 24.30 26.00 23.51

Additionally, Alembic is positioning themself to benefit from this strategy by trying a large number of things (injectables, oncology, onco APIs, EU APIs, etc.). I have also been pleasantly surprised by their Indian business turnaround, this used to be a sore point in the past. And amidst all the pharma API problems, they have maintained gross margins in excess of 70%. This shows they are not going for volume (but for value). So overall, I feel comfortable holding (and adding to) my Alembic position.

All this said, market will only rerate Alembic when it sees execution (in form of actual profits earned). My only long term worry is market might start treating Alembic’s business as an Aurobindo which can lead to structural derating (this is also a worry I have for Laurus). I don’t think that should happen to Alembic which makes gross margins of 70%+ and ROCEs in excess of 20%, whereas Aurobindo’s gross margins are below 60% and ROCEs are in the 15-20% range. Lets see how future unfolds.

17 Likes

Hi Harsh

good thread and thanks for updates.
I have 1 quick Q - what is going on with Lupin? whole Pharma bucket is doing good with some doing great.
I googled but noting much is helping with regards to Lupin.
Thanks

Lupin has disappointed on the execution front, their compliance problems have meant that they have not been able to launch enough products that can offset base price erosion. Along with this, they have had lots of writeoffs at different points in time, margins have done badly and management has not been able to read the market well. So I think there is a derating going on currently, its probably one bunch of investors are churning out as they have burnt their hands. Among large generics, Lupin and Jubilant have done really badly in the past few quarters. That being said, despite all the disappointments they were able to get back to $200mn US quarterly sales runrate. Lets see if management can turn around the ship.

6 Likes