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:


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


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.


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:


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.



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.


I have made the following changes to the model portfolio:

  1. Reduced position size in Cochin Shipyard from 4% to 2%
  2. Reduced position size in ITC from 8% to 4%
  3. Created 2% position in Godfrey Phillips
  4. Created 4% position in Chamanlal Setia

So cash continues to be zero in the portfolio.

Drop in position size in Cochin Shipyard is due to rerating in the co from 7x PE a few months back to 14x now. When I had initially written about the company last year, I had asked the question “Will it ever become a growth stock”? If it reaches 20x earnings, I will say yes and sell.

Over the last 5-6 years, I have seen that the easiest way to make money is to buy good dividend paying cos at 5%+ yield (sustainable and not due to one-time things) and simply hold it until market gets excited about it. In this category, I have made gains in cos like Powergrid, ITC, SJVN, Cochin Shipyard. Another company which fits this criterion is PFC, but somehow I could never pull the trigger as its a leveraged play. Currently, I am looking to add Petronet LNG in this category of stocks.

ITC has tested patience over a period of time, but it has been very rewarding. In terms of rupee value, I have made the maximum gains here and the IRRs have now reached 26%, which is why I have started reducing the position as there are better opportunities available (such as Godfrey Phillips).

I have already written about Godfrey Phillips in the previous post, so I will not repeat the thesis. The basic idea is fast growth and reasonable valuations.

Chamanlal Setia is a basmati trader and has better return metrics vs market lead KRBL, and has also grown at higher rates, despite being in a sector often plagued by debt issues. Every 4-5 years, Chamanlal seeds a new market or a new set of customers, which results in 50%+ sales growth (FY14, FY18). In the next couple of years, they work on improving margins.
FY23 is another year which will show 50%+ sales growth. I expect margins to revive in the next couple of years, leading to a large delta in earnings. Its attractively valued even on trailing earnings where margins have been subdued (7.5x earnings, 3.5x EV/EBIT). So, I expect good growth in earnings in next few years, and hopefully some rerating.

Updated portfolio is below.

Core compounder (42%)

Companies Weightage
I T C Ltd. 4.00%
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%
Godfrey Phillips 2.00%

Cyclical (46%)

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%
Chaman Lal Setia Exp 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 (2%)

Companies Weightage
Cochin Shipyard Ltd. 2.00%

Turnaround (4%)

Companies Weightage
Punjab Chem. & Corp 4.00%

Deep value (6%)

Companies Weightage
Jagran Prakashan Ltd. 1.00%
D.B.Corp Ltd. 1.00%
Shemaroo Entertainment Ltd. 1.00%
Modison Metals 1.00%
Suyog Telematics 1.00%

Hi Harsh,

I noticed that you hold Control Print in your portfolio and had initially classified it as a core compounder up until may of this year before moving it to a cyclical play.

What trends did you observe that caused you to reclassify it?

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Very good observation. I dont have a scientific reason behind reclassifying Control Print as a cyclical in late May 2022. I notice that there was a 20% price drop around that time, maybe that influenced my thinking. In general, I tend to be less critical when prices are going up, and overcritical when prices are going down.

Majority of Control Print customers are industrial facing (likes of cement, pipe, etc.) which are more cyclical in nature. Thats why I continue to keep in the cyclical basket. I am generally more strict about entry and exits in cyclicals.

Another company in my list of stocks which I have a hard time classifying as a core compounder is Shri Jagdamba. Their core end market is US residential housing, which is cyclical. However, they have never had a single year of decline in profits. It seems FY23 will be the first year where profits will reduce. So, when I created a position in the company last year, I classified it as a core compounder as there was a never a profit decline year, but now I am thinking that I should classify it as a cyclical. These are conflicts which happen quite often. Do you have any advise on it?


Thank you for clarifying. Shouldn’t sales be a better indicator to determine if the company’s business is cyclical or not, as profits could be impacted by rising input costs and other expenses?

I do not track shri jagdamba, but a quick glance at its financials indicate continuously growing sales. May I ask you as to what could be the reason that it’s profits are going to decline for this financial year?

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Hi Harsh, can you please clarify - why chamanlal but not LT foods ?

Interesting pick. Can you compare Chamanlal Setia vs Sharda Crop? Both seem to be similar type of businesses with similar metrics and one is substantially cheaper than the other. What is the rationale of having a higher weight in Sharda Crop as compared to CSL?

Cyclicality can come from sales and margins. In most cyclical companies, cyclicality in profits comes due to margin variation.

Higher polymer prices have impacted their gross margins. Additionally, they are running at close of full utilization which implies limited potential of sales growth. In H1FY23, profits have already declined vs H1FY22.

Chamanlal has better return metrics, higher growth and are available at cheaper valuations. Most of LT Foods profit growth in past 3-4 years have come from deleveraging, despite which their return metrics are still quite low. I dont get how despite having a brand, they cannot make reasonable ROCEs. Also, they keep on spending so much on capex, generally branded companies spend on marketing and are supposed to be asset light. With these doubts in mind and cheaper valuations, I preferred Chamanlal. Also, in this whole basmati rally, Chamanlal never really rallied.

I have 4% weightage for both Chamanlal and Sharda. In general, if I am confident of achieving my expected returns, I go to 4% weightage. Currently, I have a lot of stock ideas which means I can have a number of these 4% positions. If there was a scarcity, I might have gone higher.

Business wise, I think Sharda’s business model is better than Chamanlal as it operates in a regulated space, where their competitive advantage is their registrations that require a large amount of money and time. With all the Indian agchem boom and upcoming technical supply, I think Sharda and UPL should be the ultimate beneficiaries as they will have more technical suppliers to procure from.


You are holding Alembic Pharma with good weightage. What is your rationale behind this?