The harsh portfolio!

Very nice analysis…
Just 1 query…
What r your views on Chola invt &Finance vis a vis Sundaram Finance?

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I have looked at Chola in the past. Business wise, the key difference b/w Chola and Sundaram is that Sundaram has been very conservative and not moved beyond their core expertise of CV financing whereas Chola has built a more diversified book. However, we should also note that on a like-to-like basis, Chola’s asset quality is inferior to Sundaram. Lending is a field where I am ultra conservative as its an opaque business (also seen in my other investments like HDFC, HDFC bank, Sundaram, gold financiers).

The reason why I chose Sundaram was that it was trading at its cyclical low valuations when we were already in a CV upcycle, so risk reward was very favorable. At the same time, management started talking about increasing market share. I like the setup when a conservative management guides for growth, and are available at low multiples. That was clearly not the case with Chola. My job is to try and identify good risk reward opportunities, rather than getting enamored by high growth and then paying a high multiple for the same. Even paying a high multiple on HDFC family has not served me well :wink:

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Looks like mean reversion is playing out for hdfc twins as explained by you :smile:

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Mean reversion is much more prevalent than people give credit for. In past few months, some mean reversions have affected my portfolio positively: Amara Raja Batteries, Cochin Shipyard, Nesco, ITC, Atul auto, HDFC twins, etc. Also, there are a number of companies where mean reversion hasn’t played out yet: Kaveri seeds, Avanti Feeds, Alembic Pharma, Manappuram Finance.

The good thing with this diversified approach is that some ideas are always working and some ideas are not. As long as my underwriting logic is correct, mean reversion will happen at some point of time.

There are two more companies where I have been building positions in the past month - Godfrey Phillips and Chamanlal Setia. Both are again mean reversion plays, I will add them to the model portfolio and explain my rationale once I have built my position.

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Very true. Even, Janes O’ Shaughnessy observed " the most ironclad rule I have able to find studying masses of data on the the stock market is the idea of mean reversion".

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I think similar thing is sought to happen for sharda crochem.

In the last quarter they lost 82Cr. in Foreign exchange.

@Chins Harsh has been dabbling in mean reversion approach for a while now. Might be a good pointer to use his help to avoid some initial mistakes in your recent experiment.

It’s nice to see you are building position in Chamanlal Setia…I feel it will catch up with KRBL and LTfood sooner than later being a smaller player. But whenever sector is showing lot of positivity smaller player will reward higher.
Disc: Invested in KRBL from last 2 months and Added Chamanlal recently.

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Thanks for tagging me @vibhor_vaish. I’ve been working with Harsh on companies like Punjab, Suyog, Avanti, Aegis and others. Admire his style a lot! :slight_smile:

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Appreciation of Mean Reversion runs into Recency Bias.

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Looking forward to your rationale on Godfrey Phillips. Don’t you think a lot of the mean reversion has already played out in Godfrey Phillips? It is now trading at a higher PE compared to VST Ind. I believe VST deserves a premium based on single, high RoE business line (cigarettes) and given its track record.

Thanks

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There are three main earnings drivers for Godfrey Phillips:

  1. Growth in exports of unprocessed tobacco to Europe due to Ukraine Russia war. Ukraine used to have around 8-9% of global market share in tobacco which has recently gone down. Indian exports have benefitted from this temporary shortage, and is also reflected in Godfrey’s export nos.

  2. Revival of domestic business: In domestic markets, growth was coming from TFS (pre-covid). Chewing products business ws struggling and has been recently divested

Now, normal cigaratte volumes have also revived.

So, there is a clear mean reversion in domestic business.

  1. Reduction in legal and ad expenses resulting in higher margins.

Their annual legal expenses used to be very high at 80-100 cr. which has recently gone down to 30 cr. I dont know why.

Ad expenses for Godfrey used to be very high vs peers (ITC, VST). This has recently been reduced to the industry levels.

I think both these margin benefits are sustainable as they have continued in last 2 quarters as well.

As a result, despite similar gross profits, their EBITDA and PAT has gone up significantly. When gross margins revive, I imagine another jump in profitability.

Summary: Ad & promotions along with legal & professional expenses are now in-line with peers, if this trend carries on then EBITDA margins should expand to 25% levels and may even go up to VST’s margins of 35% as gross margins are at similar levels. Valuations should also go in-line.

When I started building my position, valuations of Godfrey was the cheapest among peers. With recent move, Godfrey’s valuations have become equal to VST. However, valuations are nowhere close to historical maximum, in the past Godfrey has peaked out at 20x EV/EBITDA. So, Godfrey has now moved from a buy to a hold zone for me.

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