As of today, I have added 2% stake in Sharda Cropchem Ltd which is a part of my cyclical basket. Sharda sells agrochemicals in developed (EU, NAFTA) and developing parts of the world (LATAM). They identify molecules, register them with the authority and then source it from (mostly) Chinese vendors. As a result, they don’t have any manufacturing assets, leading to a very asset light business model. On an employee base of 175, they do turnover of >2600 cr. (14.8 cr. per employee).
Since the pollution crackdown in China starting in 2018, raw material prices have increased structurally leading to a decline in gross margins from the earlier 35% levels to the current levels of 30-32%. As a result, market has de-rated the business from earlier valuations of 2-3x EV/sales (prior to 2018) to <1.5x EV/sales post 2018. Management is very upfront about every issue, they have grown the business very well, preserved the balance sheet (net cash), funded through promoter debt when required (in FY18 gave 170 cr. at 10% interest rate to fund working capital for a few months), and given reasonable dividends (15-20% of PAT).
Apart from the Chinese supply problems, Sharda also suffers from stiff competition from innovators who set the pricing of agrochemicals. In the last few years, global agrochemical market hasn’t grown much but Sharda has grown very strongly. Here is my speculation about their future.
Projections as on 13.10.2021
FY21 sales ~ 2’400 cr., at 15% growth, FY25 sales ~ 4’200 cr., sell @2x EV/sales, EV ~ 8’400 cr., Assuming 0 cash level, Mcap ~ 8’400 cr. (930 share price)
Confidence in projection (Medium)
Business quality (high/medium/low): Medium (ROE is almost always < 20% but greater than 17%, generates reasonable free cashflow)
Promoter quality (high/medium/low): Medium (details below)
Financial projections (high/medium/low): High (15% growth seems achievable given the promoter is growth oriented, underlying business allows for 15% growth + 15-20% dividend payout)
Valuation projections (high/medium/low): Medium (Hasn’t traded at these valuations since 2018, however this multiple can be improved to 3x if gross margin improves or intangible asset turnover goes > 6x)
Is it a cyclical business (Yes/No): Yes (agriculture is a cyclical business)
Management quality (Medium)
Organic sales growth greater than category level growth: Don’t know (Don’t know the appropriate benchmark, have grown well that’s all I can say)
Able to find new avenues to grow: No (Have not found any meaningful new market, non-agri portfolio has grown slower than agri portfolio)
Treats minority shareholders in a fair manner: Yes (Reasonable dividend payout + management do not sugar coat things)
Sales growth guidance can be relied upon. Do not rely on margin guidance
4 years fwd Price (FY25)
Price return %
Dividend yield %
Total returns %
Sharda Cropchem Ltd.
Updated portfolio is below, cash remains high at 21%.
On comparing the ROA tree of Kotak and HDFC bank (standalone level excluding subsidiaries), I found that Kotak has more volatile and lower ROAs (along with higher GNPAs), implying that they are not at par with HDFC bank in terms of core lending operations. This is probably why they don’t lever up to HDFC bank’s level, hence delivering lower ROE. This is despite them having higher NIMs (especially in recent years), which also implies that their operating cost structure is inferior to that of HDFC bank.
COVID has provided a very good asset quality test and Kotak bank has again delivered much higher NPAs. Additionally, Kotak had to dilute for having sufficient buffer whereas HDFC bank didn’t require dilution and maintained asset quality through the crisis (+ higher growth). Dilution matters much more over the longer term, in terms of book value compounding per share. Overall, I don’t rate Kotak’s underwriting at the level of HDFC bank, which implies that I am not willing to pay a premium for Kotak bank.
As lending financials is a very opaque business, if I am unsure about the quality of lending I will want a very attractive price to cover my downside. As HDFC bank didn’t show asset quality problems, I am happy valuing them at 4x P/B (on core operations) but I won’t pay that multiple for Kotak.
Thanks for sharing detailed rationale for holding HDFC. Much helpful, especially on asset quality and dilution related aspects. I actually have all 3 banks HDFC + ICICI + Kotak but with higher allocation (picked when it was 1700 levels) to Kotak .
Agree there is a premium on Kotak but as I mentioned my play is not just standalone bank but on whole financial services package. Let’s see how it pans out.
As of today, I have increased my position size in Ajanta Pharma from 2% to 4%. This is because of their very robust Indian business performance and reasonable valuations. The African institutional operations have large uncertainty, however superior US strategy should be able to more than offset it. My projections remain the same as before.
This brings down cash to 19% and I am looking to deploy it soon. Updated portfolio is below
I have been able to find some opportunities to deploy cash (summary below).
Increased position size in Sharda Cropchem from 2% to 4%. Their recent growth has been really impressive, they are cheap and growing fast
Added Aegis Logistics (4% position size). Growth is coming back, though the Vopak deal was at lower valuation, it opens new opportunities in new chemicals. I will post more details in a subsequent post
Added Control Prints (2% position size). Niche business with reasonable growth, attractive economics
Added Shemaroo as a deep value bet (1% position size). Business is reviving and valuations are very cheap.
As a result, cash position has been reduced to 10%.
@harsh.beria93 Its good to see u have initiated position in aegis logistics . Last year in valuepickr many seniors were actively tracking this company and seperate threads were created on this and video presentations were there. Now it seems no body is interested and due to multiple headwinds, covid disruption , promotor demise , JV with vopak, market share decrease etc. 50% down from 52 week high just before JV with vopak announced . LPG future is still a question if we compared to LNG,CNG etc but company is still on track on their planned capex . Latest result is showing company is back on track and except haldia expansion plan company ( as per latest concall , haldia will be track on last quarter of FY23) is well on execution too. Waiting for ur view on this
Gas logistics + liquid + new business:
o Gas logistics volumes should grow from 3mn MT in FY20/21 to 7mn MT in FY25 and EBITDA of 1000/ton should make EBITDA ~ 700 cr.
o Liquid EBITDA should increase at 10% from 173 cr. in FY21 to 250 cr. in FY25
o New business: I am assuming they get 100 cr. EBITDA from newer ventures with Vopak
o EBITDA ~ 1050 cr., assume they get 60% share (Mumbai operation is completely theirs and has higher profitability), Aegis’ EBITDA share ~ 630 cr.
Gas distribution volumes should grow from 1.65 lakh MT in FY20 to 2.5 lakh MT in FY25 translating into EBITDA of 187.5 cr. (assuming EBITDA/ton of 7000 in-line with FY21 numbers)
Total EBITDA (Aegis’ share): 630 + 187.5 ~ 818 cr.
EV/EBITDA: 25x implies EV ~ 20’450 cr., assuming they have 2’000 cr. net cash on balance sheet (from sale to Vopak), Mcap ~ 22’450 cr. (share price: 640)
Business quality (medium)
ROCE & ROE > 20%
Total # years
# ROCE & ROE > 20%
# Positive FCF
HIGH BUSINESS QUALITY
Management quality (High)
Organic sales growth greater than category level growth: Yes (Have grown market share in gas business)
Able to find new avenues to grow: Yes (Built gas business from cash of liquid business, now venturing into other chemicals)
Treats minority shareholders in a fair manner: Yes (Very good dividend payout)
Negative points: Gave very large ESOP in FY19
Confidence in projection (Medium)
Business quality (high/medium/low): Medium (Gas business is very high ROCE, but liquid business is 12-18% ROCE)
Promoter quality (high/medium/low): High (Grown gas volumes faster than Indian imports + good dividend track record)
Financial projections (high/medium/low): Medium (Gas volume projection is on the bullish side, need to continuously track progress)
Valuation projections (high/medium/low): High (Should easily trade at 25+ EV/EBITDA, has also traded at >30x EV/EBITDA for prolonged time period)
Is it a cyclical business (Yes/No): No (Distribution business is non-cyclical, sourcing business is more cyclical in nature)
The main story is growth in LPG volumes in distribution (from 3mn MT to 7mn MT). Monitor this
Joker in the pack: Auto and retail business. Keep monitoring volume of LPG there
As of today, I sold my stake in Jamna auto. I bought it in April 2021 as a replacement for IEX (which in my opinion was fairly valued at that time ). If I had held onto IEX, returns would have been higher as IEX has doubled whereas Jamna has gone up by ~70%.
Jamna is a play on MHCV revival. Though the CV cycle is still in early stage, stock prices have zoomed in anticipation. I have valued Jamna on a 10x EV/EBITDA multiple (on conservative side as CV downcycles can be bad and prolonged) giving me an exit price of ~150 by FY26. The incremental returns have fallen below 10% and I have exited accordingly. So my current CV cycle play is via Ashok Leyland and Atul auto. Cash is at 11% and detailed portfolio is below.
@harsh.beria93 Sir seeing your portfolio it seems that you are quite bullish on AMCs. Then, what do you think about CAMS instead of the AMCs as even when there is market share gain of one AMC over the other, it remains unaffected. In addition to that, they have are also becoming RTAs of PMSs, AIFs and NPS funds.
I had evaluated CAMS at their IPO time, the one thing which made me focus more on AMC companies was the fact that revenue growth of CAMS would always be much lower than AUM growth of the industry. At the time of CAMS IPO, management had guided future revenue growth of 12-13% assuming mutual fund AUM growth of 17-18%. Its probably a good time to evaluate their performance against listed AMC companies since 2018 (which was when growth in mutual fund AUM started slowing).
Since FY18, HDFC AMC has outperformed everyone with 23% CAGR growth vs 14% for Nippon and Aditya Birla and 11% for Cams.
So my initial hypothesis that AMC business is superior in terms of growth profile compared to CAMS has turned out be true. Both banking and non-banking AMC have outperfomed in terms of growth in profits, with the best performer being HDFC AMC. None of these businesses require much capital with great return profiles where a large part of profit is paid back as dividend.
If I had to assign valuations to these businesses, I would pay the highest valuation for HDFC AMC (or bank backed AMC like ICICI/Kotak/Axis) followed by non-bank backed AMC (Nippon/AdityaBirla/UTI) followed by a registrar like CAMS.
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%)
I T C Ltd.
Housing Development Finance Corporation Ltd.
Manappuram Finance Ltd.
Ajanta Pharmaceuticals Ltd.
Aegis Logistics Ltd.
Alembic Pharmaceuticals Ltd.
Amara Raja Batteries Ltd.
Avanti Feeds Ltd.
Eris Lifesciences Ltd.
HDFC Asset Management Company Ltd
HDFC Bank Ltd.
Aditya Birla Sun Life AMC Ltd
PI Industries Ltd.
Control Print Limited
Kolte-Patil Developers Ltd.
Sharda Cropchem Ltd.
Ashiana Housing Ltd.
Ashok Leyland Ltd.
SWARAJ ENGINES LTD.
Kaveri Seed Company Ltd.
Slow grower (6%)
Cochin Shipyard Ltd.
Power Grid Corporation of India Ltd.
CARE Ratings Ltd.
Deep value (7%)
ATUL AUTO LTD.
Jagran Prakashan Ltd.
Time Technoplast Ltd.
RACL Geartech Ltd
Shemaroo Entertainment Ltd.
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!
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