Top 5 picks

1). Just dial (current price: 693, market cap: 4800 crore)

)- Very effective localized search engine (try it).

)- Survived and flourished in voice, mobile and desktop internet regimes.

)- Well aligned/incentivised sales force (everyone from the call center lady down to the marketing guy gets a cut of continuing business from a paid listing)

)- Paid listing still 3% of the total listings, so room for growth.

)- Multiple may look expensive (40+ P/E), but size of the opportunity is huge and market cap is not huge. Mobile internet is on the verge of exponential growth as data penetration increases. Lack of alternative plays in Indian internet space will benefit Just dial. Can potentially be non-linear growth story.

)- Negative working capital and a net cash balance sheet.

2). Info edge (current price: 318, market cap: 3500 crore)

**)- **Everyone sees it as a unidimensional job classified website. It is much more than that.

)- It has great set of leading internet franchises – Naukri (#1), Jeevansaathi (#2), 99acres (#1), Zomato (#1) etc to name a few. Despite sales growing 2x in last 3 years, the stock has basically been flat given current dominance of Naukri in revenues (~80%) - which is being affected by macro. Management is investing for growth and so earnings and margin profile is not great, yet.

)- Nevertheless, the business is net cash, and generates cash flow every year (normalized for growth investments).

)- Again, market cap is tiny for a leading bouquet of internet franchises – in a sector that is about to see a non-linear growth.

)- History has shown that internet franchises are often a land grab and winner take all game, so having #1/#2 assets is invaluable.

)- Again, multiple at 30x+ may look expensive, but in small, scalable opportunities one should focus on market caps as much as multiples. Market cap is tiny, in my view.

3). Sun Pharma (current price: 1108)

)- great management which is able to go up the demandin-elasticitycurve by progressively raising prices. It is able to do this as it focuses on niche segments, with limited competition.

)- It has to be seen not in conventional multiple terms - where it will always look expensive - but as a portfolio of out of money call options. It was Taro for the past year and will be DUSA/URL this and next. Beyond that it could be M&A given its Net cash balance sheet.

4). Supreme Industries (Current price: 374)

)- Well covered in this forum. Leader in its segment, with good capacity expansion driven volume growth ahead. Essentially a staple category, available at commodity multiples. Offers both earnings and multiple led returns. Potentially, a 1000 rs stock in 3 years.

5). Bajaj Finserv (Current price: 643)

)- Arguably the best life and general insurer in the country. Best capitalized and never needed equity infusions from promoters in the last 8 years unlike other private/public peers. Industry going through a tough patch due to regulations and macro. Also, owns a good NBFC and can potentially get a banking license.At current price, you get the best life insurance business in India for free, practically. Multiple is 5-6x. Potentially, a 5-6 bagger in 3-4 years.

Hi Rajesh,

AFAIK Life Insurance and general Insurance businesses of this company is owned by Allianz 75% and Bajaj Finserv owns only 25%. They have signed some options of this effect(as legally it is not allowed for foreigners to have more than 26% in insurance venture) and it was in news long time back. I hope you know about this. That way, this company is only a holding company and is liable to all the discounts that holding companies get in the market.

Hi Gyan,

Thanks for the comment. Yes, but currently Bajaj owns 74% and Allianz only owns 26%. It has certain options to acquire the balance at pre-determined prices, as and when FDI regulations allow. The catch is that those options are not RBI approved and seem to be have been an exceptional issuance, so they may not be executable at historical prices. If they get executed at current prices, then its much less negative.

In any case, hold co discounts can be big when opcos are listed – bajaj auto/Bajaj holdings being a prime example, where the discounts are huge (60%+). Since Bajaj’s insurance biz are not listed, there is every incentive to own the HoldCo.

Update on my top 5 picks since initial post in July 2013.

Recommended Current
Price Price % Change
Just dial 693 1480 114%
Info edge 318 459 44%
Sun Pharma 554 582 5%
Supreme Industries 374 420 12%
Bajaj Finserv 643 753 17%

Latest addition to my portfolio: Manjushree technopack (CMP Rs 163). I see it as a toll-collector on FMCG growth. Demand for PET bottles should grow 15-20% per annum. Market share gains from unorganized sector (which dominates) and snowball effect for Manjushree (critical mass achieved with 15% share of domestic PET capacity) would allow Manjushree to grow better than industry. As scale improves, unit costs would decline while unit realizations should hold, driving up margins. Earnings growth, therefore, should 'on average' be faster than topline growth over the next 2-3 years (quarterly fluctuations notwithstanding). I expect 20-30% earnings CAGR. The length of contracts is not long, but a diversified mix of clients and good emphasis on R&D, Quality, Client relationships should ensure renewals. Multiple at 8-9x P/E is cheap in my opinion given the lower than normal linkage to crude price and better than average demand visibility. Capex remains high due to consistent capacity additions, but core business remains cash generative and earnings are of good quality (for 3x increase in Net income over the past 4 years, the Cash flow from Ops has increased 6x). Asset turnover at 1+ (incl. incremental asset turnover) remains better than other packaging peers, so capex should not be a big concern (no 'leakage' so to speak). Promoters have consistently increased their stake over the past few years (up from ~ 54% to 66%). Market cap and profit are small, management depth is reasonable (4 family members involved). Over the next 3 years, I expect 60-80% Earnings growth and 40-60% Multiple re-rating, so 2-3x return. M&A optionality is embedded (Emerging markets packaging acquisitions tend to get done at multiples 2-3x the current multiples of Manjushree i.e. 8-10x EV/EBITDA).

Do your own due diligence.

Excellent picks n logic R Jain . Please post more often.

It’s a pleasure to go through your posts.

Yes, great to read about companies not frequently discussed here!

Interesting. good picks.

I have 2 out 0f these 6 in mine already!

Sun Pharma @ 530

Manjushree recently entered

Do you any views on TCPL packaging. It is in folded cartons business and growing at decent rates. In last 4 years sales growth has been 20% CARG and EPS growth of 36 % CAGR. It is trading at 5 PE, but may show some degrowth in EPS this year. Another negative point is liquidity of stock and leverage. Let me know if you have done any research on this. Thanks.

New addition. FIEM Industries (CMP 553, 660 crore market cap). Provides lighting solutions to 2W (Honda is a key customer). Story is predicated on diversification into 5-6 different new/related segments - 4W, LED substitution of conventional lighting (so ASP uplift), institutional LED and ultimately consumer LED market, potentially into locks, handles and control cables. Has grown much faster than lighting peers and with better margins. That Harley Davidson sources from it is a testament of its quality. Also has a design studio for LEDs in Italy where he’s doubling headcount. Balance sheet has remained reasonable amid growth - debt has come down. Promoter shareholding is high. In a blue sky world, it can grow revenues at 40%+ CAGR over the next few years with most of the incremental revenues generating higher margin than current. So Earnings CAGR can be 50-60%. Multiple is <15x PE so there is modest potential for a multiple re-rating as well. I think this can be a 10 bagger.

Attaching an informative recent article.

Please do your own due diligence.

New addition. Saregama (current price: 125)

Jayendra has written about this before, so I will link up to those below. It’s at once a cash cow and an asset play. The advent of Internet has suddenly rendered its massive music library - arguably one of the most valuable in India - into a potential goldmine. Old timers would know the label HMV. Half - perhaps more - of all music ever created in India, certainly 60%+ of pre-90s music is Saregama’s property. Copyright in India is valid for 60-70 years. I reckon the average age of Saregama’s library is 30-35 years or centered around 1975-80. So there is another 30 years of juice/IP left. Think of it like a mine where incremental capex required is minimal and all one needs to do is sell the ore. It doesn’t matter as much that they are not very active in post 95 music as the old song library would still have immense value in a digital world with moderate broadband speed and millions of smartphones. We don’t have to worry about its existence post 2035, so please forgive if terminal value considerations concern you.

Anyway, here’s the asset play kicker. It owns 100+ crore of CESC shares plus 100 crore+ worth of landbank (valued at around 65 crore as of 2007. So very likely has doubled in value by now). And it is net cash. In effect, you get half of all music ever created in India for free since market cap is just about 200 crore.

What’s more - this music segment, which generates more than 100% of EBIT is doing 60-70% ROCE, 50% EBIT margin and about 50 crore of annualized EBIT, growing at 20% per annum. It would not be heresy to say it could command 10x EBIT multiple (peer content companies trade at nearly 25x). So aggregate value is of the order of 700+ crore or more than 3x the current price. Maybe much much more - it all depends upon how they monetize this content.

New CEO has just been appointed. The good thing is RPG group has to do very little - just stand out of the way. And let companies such as google, saavan, spotify generate demand and pay them royalties, which are typically 50%+ of the invoice value or ads generated.

Please do your own due diligence.

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like your picks…how much of your capital like a % do you allocate to your top 5 ?

Normally 75% to top 5. Ideally it should be 90% but I’m not there yet.

Dear Jain,

All your picks are very interesting.Ur portfolio stands apart from other valuepickr portfolio.

One query about Saregama,whether they are stopped doing movies and telefilms etc… Bcz of this division earlier they were making losses…recently I have not read about saregama.


Dear Shanid - Ideally they should close down their other divisions which in aggregate still make losses and eat up capital. Fortunately, their music divisions’ profits now dwarf those other losses comfortably. And the differences should keep growing making other divisions irrelevant in a couple of quarters. Moreover the balance sheet is net cash now and company pays dividends. They can also reduce corporate overheads which are not really needed as the hard work is now being done by other media companies that provide an avenue to listen, stream or download music and Saregama team has to do very little except cash incoming cheques - whose number I expect will grow exponentially.

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Seemed to have missed the bus in all. Still mulling on Saregama. Any more picks? Thx

R Jain

Superb clarity of thoughts. A different perspective.As always a pleasure to go through your posts.

Where are you based ,your background & since when have you been investing?

Also whats your take on Avanti Feeds & PFS and also other VP favorites? Any other pick you may be tracking please.

Hi R. Jain,

Saregama is interesting pick, one of the critical parameter I consider for undervaluation themes is dividend yield which acts as a cushion in case things doesn’t turn the way we hoped. For Saregama it turn out to be just little over 1%, which makes me little uncomfortable. Would be great if you can let me know ur thoughts on this…

Disc: I don’t hold it as of now.

Kalyan - these are the stocks I like. If I have not mentioned others, it is because I may not have sufficient conviction on others yet. I think all of these 8 have the potential to double from here in 3-4 years or sooner.

Vivek - Avanti could be a much bigger company. It’s one of the leaders in its category, with a market cap that is still small, in a scalable business. If you can deal with intermittent 20-30% negative volatility that is inevitable in such a business - diseases, anti dumping duties etc - there’s a long run way ahead. Don’t forget we are still a primarily vegetarian country with a long coastline and at some point when GDP/capita reaches $2500+ levels, we could see significant upswing in non vegetarian consumption, which will pull shrimp & therefore Shrimp feed companies along. Meanwhile you benefit from EMS troubles of others and conversion to white shrimps as the drivers of feed demand for a few more years. It can be a billion dollar company in the next 5-7 years. So there is that potential in my view. Don’t track PFS. I’ll skip your other questions for the time being.

Pravin - tough to say on dividends. RPG group are not paragons of virtue. But saregama has little in capex needs as I don’t expect them to bid aggressively for new content. So most of the incremental cash flows (which could soon be of the order of 25% of current market cap) can be paid out substantially as dividends if there is intent. I’m not banking on dividends though. I am thinking of it as a lottery win in the hands of a less than able promoter, who didn’t even realize till recently that they had won the lottery.

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Thanks R Jain for your positive feedback on Avanti. The best part about Avanti is the ethical pomoter & their superb execution tack record the very first n most important criteria one should consider in Indian context.

Years back when I Burnt my fingers with Andhra based companies like Tanla n Mic electronics & was cursing Hyderabad based promoters some sage investor said there were some truly great cos also tehre in AP.First name he gave was of Dr Reddy & 2nd of Avanti & 3rd of Kaveri Seeds.

Yes scale of opportunity for avanti both abroad & in India is humongous with world becoming cautious of consuming healthy non veg food like shrimps n fish instead of cholestrol heavy non veg & prone to disease like Bird Flu, Mad cow etc.

Tie up with TUF worlds largest sea food co which enjoys a PE of 25 on bangkok bourses and can provide superb tech guidance & access to world markets,scale of operations,operating leverage,more than 20 year old legacy n experience and relationships with farmers,Branded products like Mannamei & others helps in attracting consumers ,pricing power & negative working capital are some of the unique feature of AF.

New capex of 1 lac T feed,processing capacity totally refurbished & increased & setting up of hatchery after finally purchasing the land will add more revenue stream.

If Modi govt grants Agri status & tax benefits to Seemandhra based co if fructify will be added hidden benefits.

Risks-Can be contained imho

Discl- Invested Since Feb-April @ 300-500/-Recently purchased more at 1100-1200