The harsh portfolio!

Hi Harsh,

Have u made any study about hospital sector? Especially AsterDM healthcare. I feel it’s very attractively priced compared to peers with improving margins, improved India business, debt reduction, capex in India and other fundamentals.
I feel long way Aster can go and create wealth in next 5 years.

1 Like

I invested in ITC in October 2020 by doing some reverse DCF and thought it’s fair value should be around 210-220. That time I didn’t know these concepts of mean reversion or valuation by EV/Sales. ITC was down at that time due to lot of negativity around its cigarette business due to increased tax and ESG concerns. I thought it should not be valued at this much low valuation because people are not going to stop smoking no matter what and sooner or later govt will also realize imposing tax doesn’t stop people stop smoking (honestly I don’t care if the same flake I smoke costs me 5 rupee or 6 rupee after tax).

Now that I understand this pattern little bit, I feel HDFC Bank is showing similar pattern. Presently the bank is trading at historical low PB ratio. The bank trades in a range of 4-6 PB ratio. During this time the bank has seen several market cycles.

Fundamentally there is some uncertainties regarding the merger with HDFC Ltd and growth slowing down due to size and regulatory norms. But the banking sector of India is big ocean and the merged entity should be able to grow at mid teen rate (Inflation + market share gain from PSU banks + growth in Indian economy). So this bank should not trade at this much low valuation. Historically it has traded in a PB range of 4-6.
If we consider FY25 forward PB ratio it’s trading at of 2.0 (assuming the bank grows at 15% CAGR which matches the ROE of the bank). So if mean reversion happens and even if it attains a PB ratio of 4 by FY25 then the price becomes 2700 and that gives a CAGR of 25%.
So here I see the pattern similar to ITC.

What is your opinion on the thought process drawing this analogy?

7 Likes

I think it has more to do with growth in their consumer business which is very low gross margin as trading silver bullion margins are only 8-10%. I think with growth coming back in their core switchgear division, margins can improve.

In this sector, I follow Kovai Medical and really like how they have scaled up over years. I track other companies but am uncomfortable in buying them as most hospital chains make subpar ROCE. Kovai makes one of the highest ROCE is this sector, have diluted only once in 1990s (that too through a right issue) and have very long term focus (shown in their investment in medical college which should lead to lower employee cost over time, but costs a lot to build). For me, Kovai becomes a buy at around 2x book value. Sorry that I don’t have anything meaningful to add about AsterDM.

This pattern of mean reversion in large caps is very common. Every few years, market falls out of love with certain large cap cos and people come up with all kinds of narratives to justify stock price movement. Many a times, business is only slightly impacted (or sometimes completely unimpacted like in the case of ITC/HDFC/HDFC Bank). This pattern was earlier used by value folks like Tweedy Browne who have been successful in implementing this over last 6-decades! You can read more about this strategy below.

Coming back to HDFC bank, here are the longer term numbers. The lowest it has traded in last 20 years is around 1.76x P/B. On the higher side, it has traded upto 6x P/B. Generally, HDFC bank is a good buy below 3x P/B and a good sell above 4.5x P/B. I largely trade in this valuation band. Currently, HDFC is a better risk reward vs HDFC bank.

I am attaching my projections for both HDFC & HDFC bank.

HDFC bank projection on 02.05.2021
FY21 book value: 210’443 cr. (382/share), share count ~ 551.23 cr. In FY25 book value will grow @18% to ~ 408’000 cr. Long term share dilution ~ 2% i.e. 597 cr., Book value per share: 683 (including dilution). I would like to sell at >4P/B (share price: 2732).

HDFC projection on 07.05.2021
FY21 book value is 165’617 cr. which should grow to ~378’892 cr. (@18% growth) in FY25. Long term share dilution ~ 2% i.e. # shares ~ 195 cr. (from current ~ 180.4 cr.). Book value: 1943 share price. I would like to sell at > 3.1 P/B (share price: 6023). Start selling at >6000

Hope this is useful and clarifies my thought process :slight_smile:

36 Likes

Kovai Medical has a land bank of 27 acres to build on? This land is in Avinashi Road in Coimbatore where most of the new development is happening in Coimbatore. Many new luxury hotels are on this road. This hospital is quite close to the airport as well. A cent here should go here for say around 20-40 lakhs and probably on the higher side. Would it be worth it for another hospital to buy this much land and compete with them?
However, not sure if they can scale to other cities? They are expensive but still have good doctors so they are a very busy hospital.
I have been sitting on my hands watching this share go from 100s to where it is now. I didn’t buy at that time because they had too much debt.

5 Likes

Hi Harsh ,

I see that you are holding ITC as largest position in your portfolio. Can you share your investing style - are you doing sip or buying in dips in general and also in case of ITC?

Thanks!

I sold my 2% stake in Care Ratings as I don’t have clear visibility on their future growth trajectory. It seems CRISIL has gained significant market share from everyone else as evident in their growth in last few quarters. This leads to buildup of a 2% cash position which I will deploy soon. Updated folio is below.

Core compounder (44%)

Companies Weightage
I T C Ltd. 8.00%
Housing Development Finance Corporation Ltd. 4.00%
NESCO Ltd. 4.00%
Eris Lifesciences Ltd. 4.00%
Ajanta Pharmaceuticals Ltd. 4.00%
HDFC Asset Management Company Ltd 4.00%
Aegis Logistics Ltd. 4.00%
Gufic Biosciences 4.00%
HDFC Bank Ltd. 2.00%
PI Industries Ltd. 2.00%
Shri Jagdamba Poly 2.00%
LINCOLN PHARMACEUTICALS LTD. 2.00%

Cyclical (42%)

Companies Weightage
Kolte-Patil Developers Ltd. 4.00%
Sharda Cropchem Ltd. 4.00%
Avanti Feeds Ltd. 4.00%
Aditya Birla Sun Life AMC Ltd 4.00%
Manappuram Finance Ltd. 4.00%
Alembic Pharmaceuticals Ltd. 4.00%
Amara Raja Batteries Ltd. 4.00%
Ashiana Housing Ltd. 2.00%
Ashok Leyland Ltd. 2.00%
Heranba Industries 2.00%
Kaveri Seed Company Ltd. 2.00%
Control Print Limited 2.00%
Sundaram Finance Ltd. 2.00%
Time Technoplast Ltd. 2.00%

Slow grower (4%)

Companies Weightage
Cochin Shipyard Ltd. 4.00%

Turnaround (2%)

Companies Weightage
Punjab Chem. & Corp 2.00%

Deep value (6%)

Companies Weightage
ATUL AUTO LTD. 1.00%
Jagran Prakashan Ltd. 1.00%
D.B.Corp Ltd. 1.00%
RACL Geartech Ltd 1.00%
Shemaroo Entertainment Ltd. 1.00%
Modison Metals 1.00%

Hi!

About ITC I have been holding ITC for the last few years, I increased the position size to 8% in 2021 as valuations became very cheap and there was absolute ridicule around the stock. Business wise, they have done reasonably well. This being said, I sold some ITC shares in past few months to bring position size back to 8-10% and rebalance to other positions.

About general investing style I am value focused bottom up investor who likes to incorporate multiples styles within my portfolio. I hope not to make blunders at a portfolio level, and perform reasonably over cycles. Reasonable outperformance over long periods of time makes for unreasonably good track records, thats my attempt!

15 Likes

Hi @harsh.beria93!

I notice that you have a pretty spread out portfolio with the highest allocation being 8%. Can you elaborate how you decide your portfolio allocation strategy/concentration? Do you want to limit the max drawdown in your PF or do you target a particular CAGR over a number of years? Also do you have a core vs satellite portfolio strategy or do you hold everything in a core portfolio?

Its always a trade-off between concentration and diversification right? What guides this balance for you?

2 Likes

I made a follow up presentation on the agchem space where I categorized cos by different criterias like: complexity of core molecules, end selling markets, business model and level of backward integration. I compared 6 cos in this presentation (Punjab chemicals, India Pesticides, Meghmani Organics, Heranba, Bharat Rasayan, Astec). Key takeaways are summarized below.

Molecule complexity: Punjab Chemicals ~ India Pesticides >> Meghmani ~ Heranba ~ Bharat Rasayan >> Astec

End markets: Punjab Chemicals ~ Meghmani ~ India Pesticides ~ Bharat Rasayan >> Astec >> Heranba

Business model: Punjab Chemicals >> Astec >> India Pesticides >> Bharat Rasayan ~ Meghmani >> Heranba

Backward integration: Heranba ~ Punjab Chemicals ~ Meghmani >> India Pesticides >> Bharat Rasayan >> Astec

The presentation is also available at the link below. I will be happy to discuss further as this space is seeing good growth and valuations are also reasonable.

48 Likes

As of today, I have increased my position size in Punjab Chemicals to 4% from 2% earlier. This brings down cash to zero.

Brief thesis: Most Indian agchem cos are strong in insecticides, particularly in pyrethroids and organophosphates range of molecules. In past few years, a lot of capacity has come up in these molecules and I expect realizations to be impacted going forward. With this context, I find Punjab and IPL as differentiated as they are not reliant on pyrethroids or organophosphates. Instead, they are making niche molecules where they are the only major producers out of India. As a result, both IPL and Punjab have been able to get dominant global market shares in their core molecules.

For context, Punjab’s largest products are Metconazole, Metamitron and Diflufenican. Their exports shares in these products are shown below:
Metconazole: 40%
Metamitron: 65%
Diflufenican: 100%

Recently, Punjab launched prosulfocarb and thiocyclam. In prosulfocarb, the other significant Indian co is IPL and in thiocyclam, there is no one else from India.

If we were to look at margins, IPL’s margins are the highest in this industry, whereas Punjab’s margins are much lower. On a gross margin basis, Punjab’s margins are much higher than industry averages, however the same is not reflected at the EBITDA level. I feel with scale up, Punjab’s margins can go to 18-20% levels in next 3-years. If that happens, Punjab can make 150 cr.+ profits in next 2-3 years which makes for an interesting risk reward situation.

The reason for me choosing Punjab over IPL is both are trading at similar multiples, but there is a larger scope for margin expansion in Punjab vs IPL.

Core compounder (44%)

Companies Weightage
I T C Ltd. 8.00%
Housing Development Finance Corporation Ltd. 4.00%
NESCO Ltd. 4.00%
Eris Lifesciences Ltd. 4.00%
Ajanta Pharmaceuticals Ltd. 4.00%
HDFC Asset Management Company Ltd 4.00%
Aegis Logistics Ltd. 4.00%
Gufic Biosciences 4.00%
HDFC Bank Ltd. 2.00%
PI Industries Ltd. 2.00%
Shri Jagdamba Poly 2.00%
LINCOLN PHARMACEUTICALS LTD. 2.00%

Cyclical (42%)

Companies Weightage
Kolte-Patil Developers Ltd. 4.00%
Sharda Cropchem Ltd. 4.00%
Avanti Feeds Ltd. 4.00%
Aditya Birla Sun Life AMC Ltd 4.00%
Manappuram Finance Ltd. 4.00%
Alembic Pharmaceuticals Ltd. 4.00%
Amara Raja Batteries Ltd. 4.00%
Ashiana Housing Ltd. 2.00%
Ashok Leyland Ltd. 2.00%
Heranba Industries 2.00%
Kaveri Seed Company Ltd. 2.00%
Control Print Limited 2.00%
Sundaram Finance Ltd. 2.00%
Time Technoplast Ltd. 2.00%

Slow grower (4%)

Companies Weightage
Cochin Shipyard Ltd. 4.00%

Turnaround (4%)

Companies Weightage
Punjab Chem. & Corp 4.00%

Deep value (6%)

Companies Weightage
ATUL AUTO LTD. 1.00%
Jagran Prakashan Ltd. 1.00%
D.B.Corp Ltd. 1.00%
RACL Geartech Ltd 1.00%
Shemaroo Entertainment Ltd. 1.00%
Modison Metals 1.00%
21 Likes

Hi harsh, Can you plz throw some points on future prospects of Amara Raja Batteries. Lead acid batteries is a decaying industry.

I have shared my thought process on allocations before, you can read more here.

Also, this debate about diversification is rather meaningless. Our time should be spent more on improving our understanding about businesses or in formulating new investment strategies. There are people who have built meaningful track records with 5 and 5000 stocks, choose anything which resonates with you.

Also, given that I am running a long only folio, I cannot control absolute drawdowns. If market goes down, my folio will go down with it. However, I can control my own allocations on stocks on the basis of current risk reward and try to minimize mistakes.

Hi Ravi,

I feel its wrong to assume that lead acid batteries is a decaying industry. If we look at underlying industry trends, lead acid batteries are still growing volumes. Any my thesis with Amara Raja is that their margins will improve with lead prices coming down as their competitive positioning is the same (or even stronger) than the case 5-years back. I have shared my thoughts at link below.

5 Likes

With a sharp price drop in RACL Geartech, I have increased its position size from 1% to 2% and changed its basket from being a deep value bet earlier to now being a cyclical bet. As cash position was anyway zero, I have reduced position size in Manappuram Finance from 4% to 2%. Interestingly, I didn’t have to sell shares of Manappuram to reduce the position size, the sharp cut in stock prices did the job :wink:

Last couple of years have been really good for RACL with strong earnings growth coming in on the back of continued sales growth and expanding margins. Market has also recognized the same and stock has moved up a lot and doesn’t trade at very cheap multiples anymore. From a near term perspective, RACL can be adversely impacted due to on-going European energy problems. However, the management seems very confident of achieving 20%+ sales growth while maintaining margins over the next 3-years. If that happens, I expect their PAT to reach 45-50 cr by FY25 (20%+ EPS growth on FY22 base). However, valuations are also fair at 20x earnings. Given the risk reward, I have still not made it a full position and limited exposure to 2%. Updated folio is below and cash remains at 1%.
Core compounder (44%)

Companies Weightage
I T C Ltd. 8.00%
Housing Development Finance Corporation Ltd. 4.00%
NESCO Ltd. 4.00%
Eris Lifesciences Ltd. 4.00%
Ajanta Pharmaceuticals Ltd. 4.00%
HDFC Asset Management Company Ltd 4.00%
Aegis Logistics Ltd. 4.00%
Gufic Biosciences 4.00%
HDFC Bank Ltd. 2.00%
PI Industries Ltd. 2.00%
Shri Jagdamba Poly 2.00%
LINCOLN PHARMACEUTICALS LTD. 2.00%

Cyclical (42%)

Companies Weightage
Kolte-Patil Developers Ltd. 4.00%
Sharda Cropchem Ltd. 4.00%
Avanti Feeds Ltd. 4.00%
Aditya Birla Sun Life AMC Ltd 4.00%
Alembic Pharmaceuticals Ltd. 4.00%
Amara Raja Batteries Ltd. 4.00%
Ashiana Housing Ltd. 2.00%
Ashok Leyland Ltd. 2.00%
Heranba Industries 2.00%
Kaveri Seed Company Ltd. 2.00%
Control Print Limited 2.00%
Sundaram Finance Ltd. 2.00%
Time Technoplast Ltd. 2.00%
RACL Geartech Ltd 2.00%
Manappuram Finance Ltd. 2.00%

Slow grower (4%)

Companies Weightage
Cochin Shipyard Ltd. 4.00%

Turnaround (4%)

Companies Weightage
Punjab Chem. & Corp 4.00%

Deep value (5%)

Companies Weightage
ATUL AUTO LTD. 1.00%
Jagran Prakashan Ltd. 1.00%
D.B.Corp Ltd. 1.00%
Shemaroo Entertainment Ltd. 1.00%
Modison Metals 1.00%
19 Likes

As of today, I have utilized the 1% remaining cash position to add Suyog Telematics as a deep value bet, which brings down cash to zero.

In the last couple of years, I have been reasonably successful at implementing a deep value strategy, where the idea is to buy reasonable cos at very good prices & hold for 2 years to see if there is some kind of value unlocking.

Suyog fits in this framework very well as the company has grown well and are available at cheap multiples. Over last 5-years, Suyog has grown sales, operating profit and PAT at 21%, 21% and 19% respectively. They generate 25%+ ROICs and have invested for growth, which is shown in their gross block growth of 32% vs sales growth of only 21% in last 5-years. Company is currently trading at 8.7x p/e and 6.3x EV/EBIT, which is quite reasonable for this kind of growth profile. I think there are 4 major reasons behind such cheap multiples:

  1. Vodafone is a large customer, it can lead to receivable problems if they go under
  2. Telecom industry is consolidated which will lead to lower realizations per tower for Suyog
  3. Suyog has certain conflicts with MSRDC which has led to decline in revenues this quarter
  4. There are certain related party loans given to Suyog Funicular (which is also a listed co)

My rationale for investing is that despite such low ARRs for the telecom industry and consolidation, Suyog has improved margins and grown sales. The sector has seen a lot of stress, and Suyog has managed to tackle this (maybe because of their niche business strategy). If situation improves, there can be a positive delta as company has already done very well in a downcycle, and a couple of their competitors have gone out of business. Lets see how things play out.

Core compounder (44%)

Companies Weightage
I T C Ltd. 8.00%
Housing Development Finance Corporation Ltd. 4.00%
NESCO Ltd. 4.00%
Eris Lifesciences Ltd. 4.00%
Ajanta Pharmaceuticals Ltd. 4.00%
HDFC Asset Management Company Ltd 4.00%
Aegis Logistics Ltd. 4.00%
Gufic Biosciences 4.00%
HDFC Bank Ltd. 2.00%
PI Industries Ltd. 2.00%
Shri Jagdamba Poly 2.00%
LINCOLN PHARMACEUTICALS LTD. 2.00%

Cyclical (42%)

Companies Weightage
Kolte-Patil Developers Ltd. 4.00%
Sharda Cropchem Ltd. 4.00%
Avanti Feeds Ltd. 4.00%
Aditya Birla Sun Life AMC Ltd 4.00%
Alembic Pharmaceuticals Ltd. 4.00%
Amara Raja Batteries Ltd. 4.00%
Ashiana Housing Ltd. 2.00%
Ashok Leyland Ltd. 2.00%
Heranba Industries 2.00%
Kaveri Seed Company Ltd. 2.00%
Control Print Limited 2.00%
Sundaram Finance Ltd. 2.00%
Time Technoplast Ltd. 2.00%
RACL Geartech Ltd 2.00%
Manappuram Finance Ltd. 2.00%

Slow grower (4%)

Companies Weightage
Cochin Shipyard Ltd. 4.00%

Turnaround (4%)

Companies Weightage
Punjab Chem. & Corp 4.00%

Deep value (6%)

Companies Weightage
ATUL AUTO LTD. 1.00%
Jagran Prakashan Ltd. 1.00%
D.B.Corp Ltd. 1.00%
Shemaroo Entertainment Ltd. 1.00%
Modison Metals 1.00%
Suyog Telematics 1.00%
12 Likes

While I like deep value strategy you provided, but some of the stocks aren’t that liquid . Taking Shri Jagdamba , ~1800 was volume today . while the price is just 845. Same goes for some more stocks.

Isn’t this a bit of a concern ?

1 Like

Hi Harsh…

Any change of view about Symphony? If i remember correctly u had told like it would be good buy around 800 levels…As u are tracking concalls too what’s your opinion now as all worst are behind it at present situation

Hi Harsh, Similar boat here. How are you looking at Manappuram now as competition is increasing and we’ve seen the pricing power also eroded to some extent. How do you see growth going forward.
Would love to hear your views.

Cheers
AJ

I buy in chunks, building up positions in a period of 2-3 months. So far, liquidity hasn’t been a problem for me (also given my low capital base).

Yes levels of 850 is generally attractive, however I have been able to find other opportunities where growth is more clearly visible or I have more conviction. Thats why I haven’t bought the stock. But valuation wise, it looks reasonable at these levels.
I do track the company and really admire their execution over years.

I haven’t done anything on Manappuram over the last 6-months. Current valuations are very cheap and I don’t like selling things that are very cheap. The mistake that I made in Manappuram was of not selling last year, when it reached 2.5x P/B and I upgraded my sell price to 3x P/B as I thought growth will continue.

From near term perspective, it seems that quarterly profit run rate of 260-280 cr. should improve given improvement in MFI performance. If I assume a 280-300 cr. quarterly run rate and a 10x exit multiple, exit price should come around 130-140 (assuming business never really improves). Lets see if business ever revives. I am okay holding it for now as the management has turned around the ship multiple times in the past, from crises which were far severe than the current one. Right now, the only problem is in growth due to higher competitive intensity which at some point should normalize. But to add more, I need some visibility on business improvement or more attractive prices (Manappuram reached 0.4x P/B in 2013 downcycle).

3 Likes

Sir any rationale for sticking around with alembic pharma? A good business seems to be in difficult times, so why lose on opportunity cost?

I have found the concept of opportunity cost to be more useful in cos which are trading at very high valuations rather than all time low valuations. When prices have taken a lot of beating, one needs very few upside triggers as there is pessimism already priced in. Let me give some examples from my own investing journey.

ITC: We could have talked about opportunity cost at every point of time until early 2022. All of a sudden, prices moved up when broader markets are flat and made up for a lot of underperformance. Over my holding period, my IRRs have been around 25% in ITC which is because it looked like a value trap for the longest time, and I kept on buying it as underlying business was always solid.

Nalco: When I first created its thread (see below), share prices were at 15 year lows, aluminum prices were at decadal lows and there was gross skepticism around PSUs. It looked like a value trap, but that was only true in hindsight. It was a 4x in 1.5 years, although I could only ride 3x on it.

More recently, I have had a similar experience in Cochin Shipyard. I created my position at a time when it looked like a value trap. Who would have known at that time that in little more than a year, defense would be the flavor of season and Cochin Shipyard has made up for its underperformance at a time when broader markets have been flat.

I have also had very interesting experiences in highly valued cos and how they become a value trap. The whole HDFC family has lost its market fancy and my own IRRs in HDFC triplet (AMC, bank, parent) has taken a serious beating. During my holding period, there was never a time when anyone has doubted their growth, quality or longevity. Luckily for me, I have been able to sell at higher multiples and then buy back at lower multiples.

So its very hard to have the foresight of what markets will think of a company in the future, and trailing 1,3, 5 or even 15 year returns have no impact on future returns.

Now coming back to Alembic Pharma, its a classic cyclical where one can make money by buying through an industry downcycle. Look at EV/sales chart below to see how cheap Alembic is right now.

For cyclicals, the only thing which I have found working for me is to buy pessimism. And during upcycles, one makes their IRRs in very short periods of time. The only caveat is one has to sell in an upcycle (look at how I got stuck in Manappuram because I didn’t sell during the upcycle).

If you get time, read this thread and see examples of cyclicals like Wonderla, Nalco, Indigo, Inox Leisure, Maithan alloys, Ashiana Housing, etc. and how one should be buying through pessimism.

Hope this is useful.

37 Likes

Hello @harsh.beria93

So are you planning to add Alembic Pharma given how cheap it is currently.

Thanks