Vaeder’s portfolio

1

Hello all, been a not v active member of this forum for over four years now and have learned much. I’ve made many goof ups in that time, and embarrassed myself several times. So thought it’s time to put what I think is my portfolio for the next 2-3 years for members’ feedback and comments.

Background: I like investing in cos which face limited competitive threats, and which have good (preferably high) revenue growth and a high rate of return on capital reinvested into the business , so they can compound for long periods of time. I like to pick these businesses up at reasonable prices, by which I mean pretty much anything that looks reasonable to me - since I prefer that companies reinvest their cash back into the business, earnings and cash flow may be optically thin, so I tend to focus on unit economics and operating cycles. I play in cos between 1K-30K cr , mostly in the lower range, with the simple thesis that with time they can grow to be larger midcaps or be large caps. So a reasonable price may be one where I feel growth will largely de risk the investment valuation wise in 2-3 years.

As for competition, I try and pick unique companies (only scaled player in their space in India) , or proven competitors in a larger fragmented space (this is mostly a management call as that is the only differentiator for most such companies in such spaces) or #1 or #2 player in a limited oligopoly / emerging oligopoly. Another theme I like to play is shifting market structure - when a formerly oligopolistic or concentrated market sees the loss of its largest players, whose market share is snapped up by new, smaller entrants.

This is the theory at least, and I have found few businesses in Indian markets that fit this thesis currently. So I also scatter some more structural or catalyst driven bets with hopefully limited downside and a clear time frame for action.

After much thought, I’ve decided I am not a position concentrator. I like making limited bets (10-14) equally positioned, of which the real long term ones are even fewer (4-5) , where I aim to average up beyond a starting position over long periods of time as biz performs or as price becomes attractive. The rest will hopefully generate some quick flips over 1-2 yrs if catalysts play out, or stay flat and get liquidated periodically to fund core investments as they get more attractive. So, in 3-4 yrs time, the core would get concentrated , while a share keeps getting allocated to more situational bets. I also like holding a decent share of cash (20%). I like this because the diversification let’s me breathe easy on making mistakes (of which I make plenty), and it lets me learn by tracking more companies and test my own theses over time. In this approach, I am v much hoping for 1-2 6-8x baggers in the long run to help pay for mistakes in the portfolio. I am more focused on getting 2-3 situations very right in the long run than avoiding losses / getting it somewhat right on 8-10.

Sorry for the long wind up. Here’s the portfolio. The time period refers to how long I’m willing to wait to see performance / catalyst play out:

Long term - 5+ yrs

AU Small Finance Bank - Effective management in highly competitive space, high growth and rates of return
Syngene - Unique biz in India , with strong culture + IP moat. Long India CRO story as biotech grows globally.
Metropolis - Effective competitor in limited oligopoly in long term consolidation, high rate of return on invested capital
Biocon - Biologics business only ideally. High IP / complexity moat, structural change in industry, unique biz in India. This was sourced from this forum, so the original post is the best explainer on the thesis. May sell this and wait for Biologics IPO.

Medium term - 3-5 yrs

EPL - Riding along with Blackrock for the turnaround and scale up of the largest listed packaging player in India - believe it is an emerging growth space for India.
Home First - Riding along with Warburg Pincus in this rapid growth home finance company targeting new to credit borrowers. Shifting market structure story here as collapse of DHFL, India Bulls issues etc has left the affordable mortgage market open for new entrants to take share - players like Aavas, CanFin, HomeFirst etc - Aavas is too expensive so the latter two are my picks. Rates falling as they have is huge structural tailwind.
JM Financial - Strongly believe we are past the bottom of the corporate credit crunch. Shifting market structure story - Most big players of first cycle are gone - Religare, Edelweiss, Reliance, Piramal, Indostar etc - Most banks are focused on retail, leaving large white space for mid / large corporate credit revival. JM one of the oldest franchises in the space, trading quite cheaply for v reasonable steady growth. Expect growing earnings as credit cycle ticks the other way.
NGL Fine Chem - Borrowed from this forum. Did not invest earlier due to micro cap size. However, recent performance in past 2-3 years has kept valuations reasonable, and co is in an attractive growth space (animal health). Sequent has shown potential for scale and upside, and it seems NGL is better run, with better cash generation and returns.

Short Term - 2-3 yrs

Prime Focus - Unique biz with a catalyst. Large promoter buyback recently coupled with refinancing of large portion of debt load leads me to suspect co will list it’s v valuable U.K. subsidiary DNeg shortly - the previous plans were disrupted by Covid. IPO of DNeg will pay down substantial portion of debt and change earnings profile. Core business stable and growing, with a rapidly growing SaaS business.
Ujjivan Financial Services - Upcoming RBI decision on merger of hold co with bank will close the 50% Holdco discount to current value of Ujjivan SFB. Key Ujjivan investors still have shareholding in holdco and are trapped there, and will agitate for closure of the gap, plus entity has no other biz, so is a straight pass through.
Coal India - Pure punt on rapid recovery of coal prices , and extremely low valuations of company, and steady dividends at 8% with low debt. Least informed bet.
Prataap Snacks - Effective promoter management in highly competitive space. Stock was beaten down due to palm oil prices and lockdowns. Pure recovery and margin expansion play.
Borosil Consumer - Effective promoter management in highly competitive space. Under covered at the moment post de merger and lockdowns. Potential for rapid scale up in e-commerce channel. Recovery play.
Canfin Homes - Darling of the last cycle that has continued to perform such that valuations are now v reasonable again. Hoping for a repeat fomo on this name again. Shifting market structure in mortgages , similar to Home First above.

Comments / feedback / discussion welcome.

9 Likes
2

PS : I also invest in US markets and can cover that too if folks are interested.

1 Like
3

Looks you have clear reasons for all companies . Sounds good. Very interested in the US stocks too

4

I liked your clarity in your picks and approach. Regarding diagnostics, why did you chose a Metropolis over say Dr Lal or Thyrocare?

Also, I see in Pharma, you have chosen the leaders - Biocon & Syngene, which I see most other investors here either do not allocate or allocate less because of valuations and they chose more of less valued and more growth expected laurus, solara etc…
So what makes you chose these leaders of today and not those of tomorrow, as believed by many other pharma investors?

Would be good to know your thoughts as I respect your clarity…thanks

1 Like
5

Thanks for feedback.

Metropolis was more due to better management / promoter (my take, explained below), smaller size relative to Pathlabs (while not v different in scale), and slightly better ROCE in recent years. One factor is that inorganic consolidation of regional and unorganised players is a big part of the diagnostics thesis, and Metropolis has been a big deal maker , both attracting big PE investors and a good track record of assimilating and scaling acquisitions. IMO this ability to make big deals and smart buyouts will be key in this space - core business is cash rich and they have lots of options to raise and allocate capital, so need a smart inorganic operator. They are also investing heavily into organic tech and digital, which seems to be a v cohesive strategy and good capital allocation - organic investment into things that will scale quickly across inorganic additions. Ameera Shah as promoter is still quite young , and has long runway, so overall a more dynamic promoter / management team.

Regarding Thyrocare, honestly not much, it is smaller so it will have less flexibility in inorganic deal making, so that’s one thing , and if I understand it correctly it is a bit more B2B and specialised. My strategy is more picking #1 or #2 player in a 3-4 horse race , so Metropolis was more the right scale and breadth in B2C and pathology for that.

Biocon ans Syngene are plays on v specific sectors in which there are no other relevant competitors in India today - namely Biologics and CRO. I believe there is a v long runway for both these spaces and they are difficult to break into due to complexity and talent requirements. I am v bullish biotech long term and Indian complex knowledge outsourcing opportunity , and Syngene is an intersection of that. It is also a cash generative machine.

So I do not see this as the same as say CDMO (diff from CRO) or complex generics plays like Laurus, Solara etc. Simple answer is I never looked into them and missed the bus , but I would put these into a different segment, that I don’t understand well or where the competitive dynamics over the medium term are unclear.

2 Likes
6

Why syngene and not J B chemicals.Better valuation and strong fundamentals.Same goes for Biocon

7

Hi, my understanding is JB is more a generics player for emerging markets , so this is not really a thesis area for me. I did look at this company as it has strong cash flow profile , and KKR was going to take a stake here , and it was available at reasonable price , but decided to concentrate in the two areas I had higher conviction in - biologics and CRO. JB is certainly a reasonable pick but not an area I decided to invest in.

2 Likes
8

Again a very clear though process, much appreciated. There is some talks about Pharmeasy buying out Thyrocare today. How do you see it as any long term benefit to Thyrocare with new set of promoters who have disrupted the Pharma supply chain and worked in digital healthtech domain? Any thoughts on th epromoter API holdings?

9

Thank you for bringing the Pharmeasy acquisition news to my notice. It is certainly v important to the thesis on the entire diagnostics space , further it is likely that 1mg which is rumoured to be currently in buyout talks with Tata is also eyeing a similar strategy. Pharmeasy (B2C) of course was a VC backed company while API holdings (B2B) from what I know was one of the largest pharma distributors in the company. It is a formidable player with deep pocketed investors and v healthy core B2B business.

It means I need to think about the Metropolis thesis. Certainly valuations vis a vis risk have gone up significantly. If Pharmeasy and Tata-1mg , and soon Amazon (who have launched into pharma distribution in the US, and India is their top international priority) were to decide that owning diagnostics was important it could introduce a lot of pressure into the inorganic strategy of all incumbents. However , Pharmeasys last valuation was $1 billion post its reverse merger with API holdings, and buyout of Medlife , so it is still smaller than Metropolis. The Thyrocare acquisition likely cannot happen till Pharmeasy itself is listed , as the size is v comparable , so they would need to IPO at a higher valuation to make this work out. So there is time. Metropolis is hopefully better prepared to deal with this new competition, as they are more savvy deal makers and work with large PE funds. The strong cash flow profile leaves lot of room for leverage too. Will need to see what Pharmeasy and others plans for the space are.

2 Likes
10

You are welcome! As far as I aware, Tata’s have already bought majority in 1mg.
Also, what I understand, Pharmeasy, via API holdings, is the only big player in digital and organized B2B pharma distribution along with a good B2C interface and if Thyrocare acquisition materialises, then their own diagnostic as well.

btw, as per articles I read in public domain, Pharmeasy plan to do the Thyrocare acquisition before the IPO and they intend to carry on with 2 seperate listed companies subsequently…although all news is fresh potato at the moment…