ValuePickr Forum

The harsh portfolio!

As of today, I added 1% position to NALCO increasing its weightage to 2% in the model portfolio. This post clearly summarizes that aluminum and alumina prices have reached pre-COVID level. However, the company share prices are not reflecting it. That’s why the increase in allocation. Updated portfolio is below:

Yes

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Hi Harsh,

Have you looked at VIP Inds recently? What are your views considering the price has corrected from the 2018 highs? It seems that the company is aggressively moving away from China for its raw materials to its own plant in Bangladesh. This seems to be reflected in the Income Statement as well -

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Hey! I have listened to the recent interviews of their management where they mentioned about Bangladesh. Valuations are much more attractive now. Here is very naive projection. Let’s say they are able to get back their peak sales by FY22 and grow at 11% (their long term growth rates) over the next 3 years. That will give a topline of ~2400 cr. When operating leverage kicks in and raw material prices are soft, their net profit margins can easily go upto 10%, i.e. profits of 240 cr. Market generally gets bullish in these scenarios and can easily give a 25x multiple if trailing growth rates look high (Mcap ~ 6000 cr.). The IRR returns (including dividends) will be ~12%, and my assumptions are conservative (i.e. 0% growth until FY22, 11% growth post that). A key monitorable for me would be their market share, there are lots of cheaper bagpacks available, so as long as management can maintain market share this can be interesting.

Another way to look at it is how has market valued them in the past. Here are the EV/sales numbers taken from tikr.

On a FY25 sales number of 2400 cr., an EV/sales of 3x (which will be probably available during a bull market) will translate into a EV of 7200 cr. So, a probable doubler from these levels.

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Thanks for the clarification! Yes. I would also assume that they should be able to grow atleast 10% from FY22 onward. I understand that this is not like Indigo as you have rightly pointed out earlier in this thread where there is a clear monopoly that is happening primarily due to debt laden peers in the airline industry. But that being said, it seems there are only a handful of players (VIP, Samsonite, Safari). From the respective threads and other research, I understand that these companies have built a strong network of supply chain management which is very difficult for a new entrant to replicate soon.

That being said, the biggest threat could be Amazon and Mi who have launched bags and travel luggage online. VIP currently operates at various segments (< 3000 Rs, 3000 - 6000 Rs and > 6000 Rs). Now are they going to face a tough competition in all the 3 segments is something that needs to be seen.

In terms of advantages I see that -

  1. They are early movers in terms of setting up sourcing input from outside China. For others, setting this up might take a lot of time
  2. Brand Recall. They seem to have a good brand recall. Any new entrant would have to spend a ton on Advertising
  3. VIP Carlton offers lifetime warranty. Even Samsonite does not provide that. I read somewhere in the VIP thread they cannot change their warranty policy only for India (which makes sense).
  4. These big ticket purchases (both in terms of size and price) will still have a good share of sales in retail stores. People would want to inspect the material before buying.
  5. Since these bags occupy a lot of space, only a few brands can be accommodated in these stores.

Thanks again for your initial analysis!

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Any reason for holding on to wonderla

Business not going to be great due to covid

Plus they were not doing well before Covid too

Hey Harsh,

Great to see your active interest towards markets.

Do you work at present? Am unsure how you manage time and work together or are you full time investor?

Saw your articles, you do good set of research whereas in my case am always caught in a act of work + learning (technology as am IT professional) + read about stocks (during travel or during lunch hours)

How do you handle and learn in case if you are at work?

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Hi!

I am a hobby investor, I have a full time job as a scientist. Its in the last few months that I have started sharing a lot of my research. I simply like tracking companies and building up my personal knowledge base. About managing work and time, its really personal and varies from person to person. For me, I take short breaks to track companies. Most of my in-depth reading such as annual reports, industry structure, etc. is during weekends or during holidays. Also, given that I live alone I have plenty of time to read. Not sure how long this will persist though.

Cheers
Harsh

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As of today, I have added 2% position in Suprajit Engineering to the model portfolio, bringing down the cash level back to zero. Its an unusual auto ancilliary company with higher margins (of 14-16%) compared to peers (~10%). Their focus on after market has enabled them to earn higher margins. Management of Suprajit are hungry, CEO is young, and they have managed to compound sales by 20% for a very long period of time. They are still very small in the broader context, being only leader in cables business, and currently trying their hands in lights business. EV doesn’t impact them as quantum of cables are same in an electrical vehicle, and EVs need lights. My naive projections are below.

FY20 sales: 1563 cr., assuming FY21 sales will be 1500 cr., @15% growth FY25 sales: 2623.51 cr.; To sell at 2.5x sales; EV ~ 6559 cr., Debt for FY20 was 391 cr., Debt in FY25 will probably compound at the same level as increase in sales (in sync with past) ~ 391*1.15^5 ~ 786 cr., Mcap ~ 5773 cr. (share price: 413). From current level of 166, the future potential returns are ~20% (+1% dividend yield). If price drops to 100-125 or growth improves, I will increase my position size. The updated portfolio is below.

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I would like to know how you manage with zero cash?
Which stocks do you sell to pay bills?
Do you have any other portfolio with emergency funds? Do you deploy new cash immediately?

I wrote about it in a post before.

International portfolio is shared below.

About emergency funds, I always keep 2-3 years of my expenses in my bank account.

About incremental cash from my job, I deploy in a few mutual funds along with stocks and bonds.

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Hello Harsh,
How do you invest in US stocks? Which brokerage? Any resource to understand taxation?

I am from the semiconductor industry and I have good hold over who is doing well/will do well in the coming days in the industry. The plan was NVDA & AMD but unfortunately, my venture to buy US stocks got blocked in march because vested asked me to fill some form and submit at my bank. I decided not to step out for sometime.

Thanks,
karthik

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Hi buddy,

Have you studied or had a chance to look at micron?

I live in Switzerland and invest through Interactive Brokers. Taxation is different for me due to my residential status, so I guess you need to ask your CA about it. It will be great if you can start a thread on semiconductors so that we all can learn from you :slight_smile:

I can only say from technological side. Zero from fin side. Not sure if that makes for a new thread :slight_smile:.

Let me mull over it

As of today, I have re-added HDFC AMC to my portfolio (position size: 3%) and reduced the position size of Nippon Life AMC to 3% from the earlier 6%. This switch is because of the much more reasonable valuations of HDFC AMC than when I sold it (in July, August 2019). Whenever I sell/switch a position, I keep a track of how the sell/switch transaction worked. Let me illustrate how.

I first bought HDFC AMC at its IPO in August 2018 (1100 price), added more shares in October 2018 (at 1300 price). Market then re-rated it very quickly and I sold the position between July-August 2019 at prices ranging from 1960 to 2400. As it usually happens, the stock was in a very strong uptrend and went up to ~3800. With near term uncertainty around mutual fund flows, the stock is now back to much more reasonable valuations. Now lets evaluate if my switch actually worked. I sold my last shares of HDFC AMC on 27.08.2019 at 2400. Since then (i.e. 27.08.2019) the overall portfolio has given absolute returns of 13.5% (and IRR of 18.1%) whereas the stock has gone down from 2400 to 2180. So, I did much better in selling the stock then and buying it back now (how future plays out is anyone’s guess). Buying quality is not enough, we need to have growth and valuation support.

With the sharp re-rating in IT companies recently, I have sold some shares of HCL Tech to bring back position size closer to the model portfolio. I have also some shares of PI Industries to bring back the position size closer to model portfolio. The model portfolio is shown below

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GROWING ESG CONCERNS KEEPING FIIS AWAY
With global financial institutions prioritising investing in companies with high compliance to environmental, social and governance (ESG) norms, they have been reducing their exposure in ITC, the country’s largest cigarette maker. From 20% at the end of June 2017, the FII holding in ITC declined to 15% at the end of December 2019. Its sustainable business practices (being water positive, carbon positive and solid waste recycling positive) have failed to win over its ESG-conscious investors.

Slightly dated article on ITC (currently one of hot topics). Please flag/remove if inappropriate

Regards

Hello,
Would love to know your thoughts on CARE Ratings.
Thanks

This Nirmal Bang interview (link) provides a lot of insights into how the business is doing and how it might unravel going forward. My broad interpretation is that the company should do revenues of ~350cr. in FY23 (as per management guidance). Profitability will be much lower than in the past because they have finally decided to pay their employees properly and want to build a quality rating house (thats what the management pretends currently). Plus, they are investing more in technology to take care of smaller ratings (they are talking about algorithmic based ratings).

Lets speculate about margins, CRISIL makes a net profit margin of 20-25%, ICRA does 20-30%. Lets say with operating leverage playing out, CARE is able to meet 25% margin in FY23 (PAT ~ 87.5cr.). Now put a PE on it, in good times this business will be highly valued because its capital light and if they are able to diversify revenue lines, there is no reason why they should trade at large discounts to ICRA/CRISIL.

This might play out quite similar to what Sanjay Bakshi commented in the CARE thread

As for me, I stay invested and will increase my position size if management starts achieving their promises. Its quite cheap right now.

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Hey Harsh,
As you seem to be quite bullish on the Real Estate Market,I would love to know your views on Godrej Properties.
I have been looking at it as a potential investment candidate for a while now but until yesterday the valuations did not justify an investment.
But the Q2 results which were announced yesterday were quite bad and as a result the stock has declined.

They are growing very fast and luckily the market likes them, so they have been able to raise equity at very heavy valuations building a monster of cash. This will allow them to lead this wave of consolidation in residential real estate. However, taking on so many projects can lead to dilution of brand name, even if a few projects get delayed. Execution for me is the biggest risk followed by brand dilution.

I don’t like their current valuations and that’s the primary reason I don’t have Godrej in my portfolio. However, I listen to their commentary because they are now the largest pan India player.

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