The harsh portfolio!

Thanks for pointing this out. Definitely with the recent drubbing , Nippon has entered the buy range.

But what about the management quality?

Management has changed, its Nippon not Reliance now. They are returning most of the profits as dividends, no intercorporate deposits, etc. Plus they are trying to leverage the Nippon network to provide advisory services to their international clients. Do you know something about the nippon management in terms of bad capital allocation?

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Two main updates as of today:

  • I sold my 2% position in Balkrishna Industries which leaves cash of 2% in the portfolio. I bought the stock on 23th March 2020 (at around 700 level) and the stock has surprisingly re-rated very quickly. My fair value estimate was around 700 level (EV/sales of 3 times). Currently, it is trading at an EV/sales multiple of 4.5 which is on the higher side (based on past traded history). My projections for the business were 15% growth in revenues for the next 5-years which gave a fair value of 1400 in 2025. With the current stock price of 1162, the risk reward is no longer favorable, that’s why I have sold the position.

  • With the sharp re-rating in PI industries, I have sold some shares at 1600 level to bring the position size back to 6%.

The updated portfolio is below:

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Nice portfolio. Ajanta results are good after a long time. What about the product pipeline?. Do you think they can sustain the growth?. Due to some reasons, they dont do con calls. We cant hear from management.
Also, I am surprised at the muted market reaction on good numbers. Usually I dont like discussing about the price movement. Recently, I started giving importance to these two events. 1. Muted or -ve response on a good result 2. Good response on a bad/average result.

Their US growth was earlier guided at 20-25% over the medium term (link), plus they keep on gaining market share in India in all their segments. In the last couple of years, they ran into roadblocks in Africa (specially the institutional business) which seems to be coming back. In essence, it seems that they are well poised for reasonable growth over the next 3 years.
Your question about ANDA pipeline: management plans to file 10-12 ANDAs and launch upto 10 products in the coming year which is what they have also been doing historically.

I am not so sure about this, prices have gone up from 1000 to 1500 since mid-March, plus their price got re-rated sometime last year (around August) when market got clarity about medium term growth prospects.

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Here is a brief commentary of my actions during this market meltdown and the following meltup. For the first half of 2020, my portfolio is down by -9.53% against a nifty return of -13.8%. This is not something I am particularly proud of. The outperformance has mainly come from my pharma basket, PI industries and the new positions bought in March (details are posted in the thread above).

My reasonably large bet on pharma which made my portfolio lag in the past couple of years has started paying off . I am happy on that front. However, I also made a few blunders in March.

During the market fall, I sold out Reliance Industries at ~900. I first bought my reliance shares in February 2018 because I knew that Jio and Retail will be value unlockers in a 5 year timeframe. However, corporate governance always made me doubt my decision to hold Reliance and I finally craved into my fears at an inopportune time. This is my second biggest investing mistake so far, the other one was selling Bajaj Finserv at 4200 in 2017 and using the proceeds to buy Lupin at 1400. Bajaj went on to double from that level and Lupin halved, that was quite a nasty experience! I have been incredibly lucky to match nifty returns in the last two years despite making such horrific errors (also lost quite a bit of money in Zee and Shemaroo in the past 2 years).

Overall, I sold Reliance (6%), Mahindra Logistics (2%) and used the proceeds along with the 5% cash to buy biocon (2%), Balkrishna (2%; which was later sold because of sharp rerating), Maithan alloys (1%), Ashok Leyland (1%), Avanti (2%), INOX (1%), Wonderla (2%), NALCO (1%), 1% addition to Real-estate positions (Ashiana and Kolte).

In essence, I added to the deep cyclical part of my portfolio which might look stupid right now (eg: CV player, INOX, metal & real-estate companies, etc.) but these might play out when we go back to an economic expansion. I have started these positions at a small position size because I plan to add to it if my thesis turns out to be right.

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It took me time to read through the entire history from start but very interesting thought process and thanks for sharing

Excellent details… One advice is to prune the portfolio to keep it simple and easy to track.
I always support consolidation and <10 stocks which has been picked up after proper analysis.

All the best
Note: instead of INOX , have a look at PVR as i feel its expected to go up more in 2-3 years.

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I like the way you analyze companies in general. So don’t beat yourself too much. Post the run up after March, The Commodities and Cyclicals thread by @jitenp makes even more sense. It has been an eye opener for people like me because you don’t get good companies at great valuations 99% of the time like all the books teach you. Therefore I concur to your idea of entering into cyclicals that have hit rock bottom these days.

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The strategy looks easy in principle. And in hindsight it looks great. But executing this contra approach is not easy. It looks like there is not light at the end of the tunnel, ratios turn bad, feels like companies will fold, and so on.

One needs to understand the business/sector, learn from past history, understand what companies did in previous cycles, and so on.

And biggest tool one needs is patience. Nothing might happen for a while. And you will be tested.

Most of the times, one gets rewarded handsomely, if all this is followed. The linearity of returns is rarely there. So be prepared for that.

-Jiten

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Hey @mylu ! Thanks for your suggestions. The reason I am more diversified is my lack of conviction to allocate 10% of my networth in one company. Concentration can produce high returns but it has its own perils, i.e. if I am wrong about even a couple of my companies returns will be adversely impacted. Having a more diversified base might result in lower returns, but I am okay with it as long as I end up making enough. In short, I know what I don’t know.

About PVR vs INOX, I have studied PVR in detail. Their accounting is much more aggressive and their balance sheet is much weaker. I am happy with lower growth in INOX as long as the balance sheet is not out of whack.

On a different note, I love your 4-stock investing approach!

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Hello Harsh,

Would love to know your thoughts on Kolte Patil results. I listened to the concall and was satisfied but the market doesn’t seem to recognise that Kolte is doing much better compared to other real estate companies.
Also, I am worried the market has moved too far ahead and am scared of a draw down. How do you perceive the present market conditions and how are you preparing for it.
Thanks :slight_smile:

I always take Kolte management’s commentary with a pinch of salt, they have a track record of overpromising and underdelivering. That being said, valuations are depressed because market probably doesn’t believe that the real estate cycle will recover anytime soon. However, booking numbers for most real estate companies suggests that real estate cycle has already hit its cyclical bottom. Also, the difference between rental yield and interest rate is finally down below 4%, this is generally when the cycle turns. Now, how things will play out after corona stabilizes is anybody’s guess. For me Kolte is a bet on Pune residential market which has proven to be resilient (to a large extent) because of the low inventories (i.e. market is not oversupplied). Also, Kolte’s expansion into Bangalore and Mumbai is promising (at least so far). Lets see how management executes.

About stock market sentiments and outlook, I don’t know! I try focusing on businesses.

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As of today, I reduced my position size in Divis from 2% to 1%. This is mostly because of valuation concerns, I have used the proceeds to add to existing positions (such as Ashiana housing) whose position size has gone down because of sharp stock price correction. This leads to the build-up of cash of 3% which I am looking to deploy soon. The updated portfolio is below:

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Hi ,
What’s your views on Ajanta pharma? Despite of the positive things around the near term why it’s not moving (although nifty , pharma pack is moving up). Is it because of growth is allready factor in at current level or any other things in your mind?

Hi harsh, thanks for posting these granular updates. They are very useful in rest of us understanding your investment philosophy and action and through it reflecting on our own.

I’m wondering whether you’re 100% invested (this means 100% of your investable surplus is in equity) or whether you have additional cash on sidelines in case the stock market has a second leg down.

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I bought Ajanta a couple of years back because they were doing a large CAPEX to fuel US growth and were trading at reasonable valuations (plus debt free balance sheet, improving IPM rankings, reasonable ROCEs). Their US expansion is going well so far with strong growth.

Operating leverage is still to play out because of the low current capacity utilization. As long as book value keeps compounding, there will be stock returns (when? I don’t know!)

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Good question, I decide asset allocation at an overall portfolio level as I invest in Indian + global equities. Currently, the equity allocation (including global stocks) is in mid-70s i.e. I have 70-75% of my current networth in stocks. I don’t change this allocation everyday, the last major reshuffle was in the beginning of 2020 when I increased my equity allocation. The timing could have been a bit better (given how large the March fall was). Incrementally, I bought more stocks in February-March, and increased my equity allocation by around 5% in March. All this shows how bad my market timing is!

What I am sharing on this thread is my Indian discretionary equity portfolio. Also, given that I have a job (luckily!), cash keeps on building every month which automatically reduces my equity allocation.

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I have read your posts and see good knowledge and understanding in all of them. Specially was impressed by your discussions in Insurance thread. I feel with your knowledge, you can allocate more percentage to high conviction ideas and reduce the number of stocks. If you feel risk in that, then identify what really went bad for you earlier and then create a strong and sure filter for such stocks no matter the opportunity cost. Capital protection should be the first criteria to begin with when you trim and chose your winners. I think in the long run it can help you.
Finally, surprised to see no Insurance stocks in portfolio although you have good understanding of the business. Maybe thats the reason for their absence? :slight_smile:
(Pls note above are just my thoughts and I maybe wrong in my assessment)

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Thanks for your nice words. I maintain a journal of my past mistakes, once I make enough mistakes that there is some statistical significance, I will write a detailed post.

About more concentrated portfolio, I know the charm of having that, but I am not skilled enough. A bit of context, I have a family business which I ran for sometime which made me realise the true unknowns in businesses (even if they are relatively matured). While running a business if I did not know how the next week/year will turn out, how can being a passive owner make me better at seeing the future? Base rates for success for concentrated portfolio is much lower (look at this lecture on ergodicity in financial markets). I don’t want to be someone who gives “gyaan”, just want to clearly communicate my limitations. We see only examples of people who are successful in running a concentrated portfolio, however the base rates are much much lower. Plus having 20-30 stocks is by no stretch less concentrated. The 6% rule is kind of arbitrarily set, but I have found that it works for me.

I do own insurance stocks but just not in India. As you might have seen in the thread, I do not understand valuations of Indian insurance companies. No global insurance company (even with similar growth rates) trade at these multiples. Maybe India is different and its okay if I dont participate in this, these are plenty of other things to do :slight_smile:

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