Vernon's portfolio - a mix of coffee can and opportunistic investing

Q&A: Questions & Answers Portfolio Q&A
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This is my first thread on the forum, after silently following some of the more accomplished and experienced boarders during the last 6 months.

Would like to share my portfolio which has been created during 2013-2015 and left untouched since then till Dec 2020 (with a couple of exceptions). Due to other commitments, I was unable to actively track this portfolio and decided to hold on through cycles of demonetization, GST and Covid.

The outcome - Coffee can strategy has played out very well resulting in an ~18% CAGR since 2014 (excl dividends). I started measuring the performance seriously only since Jan 2014. From this year, I have spent more time weeding out the non performers and adding a few promising companies, which I hope will help further enhance the returns to a level of 20-22% over the next 10 years.

Portfolio stocks with a brief rationale as below.

Sr. No Company Name Rationale Allocation
1 TATA CONSUMER PRODUCTS Market leadership in tea and coffee, could well be the next HUL as it expands its product portfolio to ready-to-eat and nutritional products 11%
2 RELIANCE INDUSTRIES Multiple triggers across O2C business, Jio and retail were the key drivers behind investment. Next driver will be OTT and media through Network18 / Jio expansion 10%
3 BAJAJ FINSERV Holding company for Bajaj Fin and insurance business. Strong promoter group with potential for value unlocking in case BLI and BAGIC get listed; sustainable profitability through data science and consumer durable financing 8%
4 AXIS BANK Holding for more than 8 years, offers better risk/reward vs Kotak and HDFC, but timing entry is crucial here. Picked up some more shares in the OFS 7%
5 NESTLE INDIA Slowly started investing during the Maggi issue, added more after reading Marcellus’ thesis on this company; expect baby milk + ready to eat categories to compound steadily. Offers a good capital protection option 6%
6 PIDILITE INDUSTRIES Adhesive + waterproofing market leader, confidence in management under Bharat Puri who has helped create immense wealth for shareholders 6%
7 LARSEN & TOUBRO LTD A play on the capex recovery cycle, strong order book + increased traction from IT services 6%
8 TITAN INDUSTRIES Largest organized jewellery retailer in India, well diversified into eyewear and watches; mandatory hallmarking to drive higher market share 6%
9 GODREJ PROPERTIES Huge land bank with Vikhroli and Pune projects, sitting on 5x returns but will exit gradually and reinvest in my midcap watchlist 6%
10 HAVELLS INDIA Value migration from switches and cables to electronic items, a play on the growing middle class and construction sector 6%
11 RELAXO FOOTWEAR Market leader in organized footwear in the 100-400 price band. Pan India presence with brands that appeal to the masses 5%
12 ALEMBIC PHARMA Strong ANDA pipeline, pharma tailwinds due to PLI, API focus 3%
13 MINDTREE 1 of my two picks in midcap IT, compounded returns of 30% over 7 years, regret allocating only 2% to this initially. L&T acquisition further demonstrated long runway for growth 6%
14 MAYUR UNIQUOTERS Huge opportunity for import substitution on PU Leather and new orders from Mercedes and BMW 3%
15 LT FOODS* Driving the growth of branded basmati rice in India for the last 70 years, this company has grown a well-known brand in India to compete at the global stage 4%
16 HEXAWARE TECHNOLOGIES* Liquidated some of the shares at 470 when delisting news came out 2%
17 ICICI BANK* Will be reducing allocation here. Better opportunities in other stocks 3%
  • Have sold partially from Hexaware, ICICI Bank and LT Foods in 2019 due to fund requirements
  • Mayur Uniquoters and Alembic Pharma are new entrants since 2021, bought mainly from fresh capital invt + sale proceeds of the stocks I decided to exit

“Indeed, I can be wrong more often than I am right, so long as the leverage on my correct judgments compensate for my mistakes” - Leon Levy (Co-founder, OppenheimerFunds)

I have had my fair share of losers (which currently account for ~2% of my portfolio). Prominent names include Future Retail, Eros Int’l, Mcleod Russell, Speciality Restaurants and Dish TV, all of which I will gradually liquidate during the ongoing bull run. What is extremely satisfying though is that the gains from just one company i.e. Tata Consumer Products has more than compensated for all these laggards.

My midcap watchlist - Metropolis Healthcare, Federal Bank, Escorts, Fine Organics, Bank of Maharashtra, IRCTC, Kajaria, Godrej Agro and Dhanuka Agritech

Comments and feedback are welcome. Thanks for visiting this thread.

Vernon

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Nice to see you Vernon on the forum. Good luck!

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Welcome to the forum…I could very much relate to your way of investing. You would not find many people with this mindset, so really good to see you here. We have few stocks in common as well. I share your story of Tata Consumer and it is also my largest holding. Other than that I hold Nestle & Pidilite among your picks. In insurance, I have chosen HDFC Life as a more pure play. I also relate well to your regret on not allocating more to technology. Infact, I did not allocate any until last year when I corrected this mistake. I also relate to your story of holding on all your stocks through various crisis, infact adding them in such scenarios. When you know you hold good quality businesses, there is no need for panic in even 30-40% corrections. Those are buying opportunities. The main problem people with our mindset would face is we do not find many coinvestors who relate to us and with whom we can discuss ideas, thats also because we focus more on learnings and tend to discuss those rather than speaking on fast returns and huge short/medium term CAGRs which attract people for discussions!
Good to see your portfolio and do keep writing!

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I too have invested in alembic pharma.Unfortunately the stock price has not moved inspite of good results and fundamentals.Also the volume is low.Any reason for this peculiar behavior of the stock.

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Also…I would like to know if you have compared your portfolio to the index/benchmark.How has it fared in terms of its benchmark?

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Thanks @OmkarT and @Investor_No_1 for your kind words. Technology and pharma are two sectors which have presented a lot of lucrative investment opportunities over the last few years.

A lot of investing boils down to temperament and following a process rather than focusing on the outcome. I have learnt that apart from tracking the business fundamentals, identifying red flags in accounting and window dressing by management/promoters is equally important. Taking timely exits from such companies is as return accretive as identifying the multibaggers.

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The Alembic Pharma stock has been moving sideways since the QIP last year which was at 932, a discount to the then prevailing price of ~980. The market will be waiting to see how the huge capex of 1500 cr incurred over last 2-3 years will aid revenue growth.

The out-licensed product Umbralisib will add royalty revenue to its associate company Rhizen Pharmaceuticals. I am hoping this will have a meaningful contribution to Alembic’s bottomline over the next few years.

To your second question, I have been comparing returns to the BSE 200 since last 2 years (never bothered about beating benchmarks earlier :smile:). If i look at returns since 2015, once my portfolio had less churn, returns have been CAGR of 17.5% vs BSE 200 return of 12.4%. This is despite 9 companies giving negative returns between 2015-20.

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As far coffee can investment goes there is very little scope for fundamental analysis of stocks.After initially screening for coffee can stocks what methodology do you use to finally shortlist stocks.I mean there are too many coffee can stocks

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Any reason for choosing bse 200?

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My portfolio has a mix of large and midcaps. Hence the inherent volatility and returns are different compared to NIFTY/Sensex. Since 90% of my portfolio is part of BSE 200, I believe it is an appropriate index to benchmark performance against.

If I choose to have small caps at 25-30% of portfolio (unlikely for the next 6 months), I would choose BSE 500 instead.

Vernon

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How do you choose coffee can stocks… check my earlier post

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Sharing a brief summary of my investing strategy and how I pick stocks.

  1. The time horizon for investing in companies in my core portfolio (>3% allocation) is a minimum of 5 years. I top-up the investment over the first 12 months till it is sizeable enough, then let it run for 5 years.
  2. Selection of companies is done only from the set of businesses that I understand well a la Peter Lynch style. The company has to be among the top 3 players in at least one of the segments it operates in. This is for new entrants to the portfolio. The initial list of stocks was selected after multiple rounds of trial and error, monitoring earnings over 3 consecutive quarters (did this during my MBA) and reading at least 1 Annual report of each company that is part of the above list.
  3. I do not buy more than 4 companies per sector. If I cannot build conviction among the top 3-4 companies, the sector is probably an avoid for me.
  4. I do not time my exit from the companies based on the price/valuation. For entry, I initially allocate 1-2% of my portfolio. Since I have a full time job, I do not get a lot of time to actively monitor and hence, spread out the analysis over a year. If I miss the bus and the stock runs up a lot (like Laurus and Metropolis recently), I do not regret. Instead, I keep tracking through a 1% allocation and wait patiently for market drawdowns to add to the existing holdings
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Are you still holding hexaware inspite of delist? What is the moto?

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I would be sending the request to the company accepting the exit offer at 475.

Most of the shares I was able to liquidate at 470 when the delisting news was announced.

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A brief summary of my MF portfolio - the monthly allocation to the equity part of the MFs is similar to direct equity.

Equity Funds

  • Axis Bluechip Fund (SIP since 2019) - 27%
  • DSP Midcap Fund (Created during Covid, part fresh invt and part reallocation from Franklin India Prima Fund) - 25%
  • DSP Equity Opportunities Fund (SIP since 2017) - 18%
  • Kotak Flexicap (Lumpsum) - 16%
  • Kotak Emerging Equity (Lumpsum) - 8%

Debt Funds
ICICI Pru Savings Fund - 6% - primarily as a contingency fund

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I suggest you compare your MF portfolio vs index in terms of returns and risk. More than 2-3 funds generally means you end up owning stocks similar to index, while paying way more in fees.

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@RedEPS agreed…each of the funds in my MF portfolio is aligned to specific goals over the next 5-10 years, hence the multitude of funds. While some overlap with index constituents is bound to happen, my MF selection is based on those funds whose holdings do not overlap with my direct portfolio.

Among the equity MFs, the highest allocation in terms of stock weightage is Infosys (6.1%) followed by HDFC Bank (5%), hence these are not in my direct portfolio. For midcap funds, the avg returns of the 2 funds has been 18.4% vs NIFTY Midcap 100 TRI of 15.8% over last 5 years, hence I don’t mind paying 0.4 - 0.6% extra in fees.

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Please review my updated portfolio

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Portfolio Update:

Additions

  1. Escorts Ltd - One of India’s top engineering companies with diversified business across Agri Equipment, Construction Equipment (CE) & Railway Equipment. Recent decline in price due to slowdown in tractor demand has resulted in Escorts trading at reasonable valuations with good margin of safety. An established legacy of 70 years and domestic market share of 11% with room to grow further through partnerships with a global leader like Kubota
  2. TV18 Broadcast - Had a tracking position earlier which have increased to about 2% of portfolio. TV18 offers a strong bouquet of channels diversified across general and business news (largest news network in India CNN + CNBC) as also entertainment and OTT platforms (Viacom 18). Current reach to 10 cr Indians and could potentially be a key content provider for RIL group’s telecom growth ambitions
  3. Metropolis Healthcare - Diagnostics sector is seeing rapid horizontal and vertical growth. Covid19 has accelerated growth of well-scaled diagnostics players like Metropolis and Dr. Lal. Chose Metropolis mainly due to its concentrated presence in West India and plans to grow market share in South (particularly Tamil Nadu) through the Hitech Diagnostic Centre acquisition

Deletions / Partial Exit

  1. LIC Housing Finance
  2. ICICI Bank - reduced weightage to 1.8%
  3. Godrej Properties - Booked profit on 50% holding
  4. Hexaware Tech - applied for exit offer of remaining shares
  5. Dish TV - Exited @15
  6. Speciality Restaurants - 2nd wave of Covid has further derailed hopes of demand recovery for fine dining. Exited with 50% loss
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Portfolio update

  1. Fresh allocation to Central Bank of India and Bank of Maharashtra - recent correction provided a good entry point, play on the potential disinvestment by Govt of India next year.

  2. Reinvested hexaware delisting proceeds in Zomato IPO and Devyani International IPO. Was lucky to get one lot in Zomato. Booked profit within two days of listing. Will look to add on declines.

  3. Added more to Alembic Pharma, Pidilite and Metropolis Healthcare

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