Vineet Jain portfolio

Technically a fund can hold more than 10% if it happens due to share price rise or due to something like the merger. 10% should not be crossed due to fresh buying.

What Sandip Sabharwal seems to be implying is that funds cannot hold more than 10% in any case. Could you point me to the source which says that it is possible to hold more than 10% in such cases.

I saw it in some you tube videos of some experts. Plus this rule is applicable in US (read in Beating the street by Peter Lynch). Sorry to say I don’t have any source.

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Hi @sarthakkumar19_ and @Souresh_Pal

Apologies for the late reply - I have been traveling extensively over the past two weeks and haven’t had the chance to go through VP at length.

It is correct that there is likely to be a technical overhang of supply for HDFC and HDFC Bank till MFs rebalance their positions which may lead tonsome forced selling. There is enough and more time for this supply to come into the market though as the merger will take 12-18 months or so to fructify. And so I don’t expect any major crash with supply, but a more gradual change of hands from some MFs to other AIFs and PMS’es. Even FII holding limits will increase in the combined entity and they will also be lapping up some of the supply. The merged entity will likely get added back to MSCI and so some ETF flows will come back too.

Essentially there seem to be both supply and demand factors playing out. There is no way to time one’s entry to perfection in this scenario in my opinion. It is perfectly likely that the price may consolidate for a while - I view that as an opportunity. Over the medoum term even the return ratios may not look that good with combined entity having to comply with the liquidity and priority sector norms of banks - basically the HDFC portfolio will have to have higher liquiditycusion and overall priority sector exposure will have to increase, which can have a drag on RoE. But this is known to the market as everyone and their grandmother track the HDFC twins. When all this will get discounted by the market, no one knows. At the end of the day, this is and will be a dominant franchise (a term used and abused by some, but it perfectly describes the HDFC group in India’s financial landscape), which will keep gaining market share from PSU banks. Banking is all about scale and efficiency. Everything else is noise.

As long as I am able to buy at the bottom end of what I believe the valuation will be, I will buy. Not all at once, but slowly build a position. Will take it to no more than 5-6% of the PF, unless there is a major drawdown from present levels, in which case I am happy to add aggressively depending on relative valuations of other positions (especially the financials in my PF).

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Suddenly finding a lot of interesting opportunities. part from some of my portfolio companies like Tips, Globus, Solara that I am considering adding more capital too, I have 9 companies on my study list over the next few weeks, largely sourced from fellow investors I follow closely, and a couple of companies I came across by chance.
(I rarely run screens for idea generation - there are enough and many ideas out there to evaluate for non-full time investors I feel)

In all likelihood I will take positions in at least two of the following over the next few weeks: Krsnaa Diagnostics, Timex, SJS, Gravita, Sandhar, Rupa, NIIT, KEI Industries, Bharat Bijlee. Wish I had been less lazy and studied these earlier, some have been on the list for over a month now. Who knows how long this correction will last.

I also find myself not having too much surplus capital anymore. And this is where the skill of portfolio management will come in. I don’t want to add numbers to my portfolio - ideally want to keep the number of companies close to 20. I’m at 22 at the moment, plus some Nifty ETF and four ETFs in the US (KWEB, Ark K, Ark G and a really small amount of Roundhill Ball Metaverse).

With so many competing ideas, I understand that I may have to make some tough calls and sell something to buy something else that may seem more attractive from a risk-reward point of view. At the moment, I find two stocks on my portfolio that seem closest to getting the axe - Edelweiss and Laurus Labs, both for very different reasons.

Edelweiss: A bit late in the day but I realize that Edelweiss should have always been in the “too difficult” basket. Intuitively it looks dirt cheap, and maybe it will give outsized returns in the future, but I am not being able to pinpoint with any degree of certainty what the triggers for rerating will be and when they will play out. In this context, when so many good stocks have corrected a lot too, the relative value in holding Edelweiss looks weaker to me. The daily charts look good though, and will mostly look for an opportunity to either reduce or exit if any of the above 9 companies seem more attractive.

Laurus Labs: This one will be a bit more contemptuous. Laurus is an amazing company and Dr Chava is one of the best entrepreneurs in the country IMO. The only reason I’d consider selling Laurus is because of relative valuations. Everyone in the market knows about the billion dollar sales target and I think a large part of the market believes Laurus will achieve it. I am not so sure though, with supply chain risks and general macro uncertainties. I don’t think there will be any major rerating if Laurus achieves what it promises, but if it doesn’t, there can be a large derating. The risk reward just doesn’t seem as compelling now when so many good stocks have corrected so much. Again the charts look good and if there is another spike to close to 650, I think I will significantly reduce it for the time being.

Other potential reductions:

Sunteck: RE is a bit unpredictable and quite risky, plus Vishal Bhargava’s recent articles on oversupply in Mumbai RE make a compelling case for reduced exposure

Caplin: Will also be affected significantly by supply disruptions and freight cost increases

Request anyone who has strong views against this particular approach, especially with respect to Laurus, to please let me know why you feel so. It will help me think this through better as well.

Disclaimer: A lot of what I have said above is speculative and based on my personal beliefs and biases. I may be completely wrong and may change my mind at any point in time. Please don’t treat it as investment advice.

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Hi Vineet,

Since you are actively looking for strong counter views wrt Laurus, as somebody long Laurus, let me offer some:

  1. The focus on the $1Bn Dollar goal is unnecessary from an investment point of view. Its a short term goal and its achievement or lack thereof will only impact short term stock prices. I don’t know why Dr. Chava has fixated on this so much, but as long term investors, I simply won’t fret about 1Bn happening in FY23 or in FY24. I would want to evaluate what’s the realistic chance of Laurus hitting 2Bn dollars in 5 years.

  2. The biggest medium term risk for Laurus is significant decline in its oral ARV business before the other non-ARV, synthesis and Bio businesses are large enough. There’s been a lot of debate on that (Good discussions starting here). The jury is still out on that, but Laurus management’s strong commentary in last Qtr concall and presentation was that ARV injectables are not a threat in the near to medium term. One can do their own research and choose to believe the Management or otherwise. This, I feel, is the key thesis underpinning a long Laurus vs short Laurus position. So far, I am letting Dr. Chava guide my opinion on this and monitoring ARV revenues Q-o-Q to update my beliefs and check Dr. Chava’s walk-the-talk.

  3. Optionalities: Laurus, like Praj, has some key optionalities.
    a. De-merger of synthesis business in a few years - The Synthesis business so far has been doing very well and there’s a genuine possibility of value creation via a de-merger sometime down the line.
    b. Laurus Bio - Laurus Bio is not a Pharma subsidiary. Its stated focus is the lab meat market. Hence, its not in a crowded space and is likely in an industry which will see massive growth in the coming decade.

  4. Valuations: Assuming Laurus ends FY22 with an EPS of ~14.5, at current prices its available at below 40x PE. Even if one believes Laurus will only deliver 6000Cr topline in FY23, that still probably means an annual EPS of 20. At a reasonable PE multiple of 35, that’s a great return on current price. Even if it trades at 30x PE, you’re not losing money at current prices.

I guess it boils down to the horizon of investment that you have for Laurus. My horizon is at least 3 years from now and my average buy price is around INR 500 and I feel extremely comfortable in holding on to the position and tactically increasing it on price dumps. I will reconsider my position only if there is an adverse business trigger such as further ARV revenue collapse or an adverse FDA observation or something like that.

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Thanks for your post @nirvana_laha and I’m with you on all the points on why Laurus as a company will do very well going forward. ARV will improve with the low base formed this year and like you can see in the latest results, synthesis and CDMO are doing very well.

The reason I am circumspect about Laurus is relative to other options in the market and among my portfolio stocks, I see a less favorable a risk-reward at present valuations and holding on may have an opportunity cost attached to it. My sense is that at a 35-36k crore market cap (if there is a spike to 650 which will be my trigger to prune the position), a large part of the market would believe the $1 billion sales target is likely to be achieved. There are a lot of things that can go wrong in Pharma, most of all USFDA risk. IMO five times forward sales and about 35 times forward earnings for a business of which more than 60% revenues are from a segment that faces terminal value challenges is above fair value, especially in an increasing interest rate environment and when so many options all over the world are at steep discounts.

I am always a buyer on dips, but want to deploy capital with more margin of safety as far as possible. Thats the rationale to consider reducing Laurus, doesn’t mean I’m doing it in a hurry as I admire the management and the long term direction the business is moving in.

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Solara results out and they have decided to not go ahead with Aurore merger. Sold immediately. Not advice.

Edit: For transparency since some people have asked offline, sold at marginal profit of 2% and it was under 2% of the PF. Aurore was an important part of the thesis for me. They may still do ok with disruptions for BASF and upward volatility in Ibuprofen prices, but CRAMS scale up will slow down considerably without Aurore and so it doesn’t cut it for me.

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Good time for a portfolio update - I have used the volatility to churn a bit.

Exits and reductions

Sold Equitas Holdings today at 109 - I like where the bank is headed but for a bank, the captain of the ship is everything and I don’t know what impact the resignation of Mr Vasudevan will have on them. He has been there for years and has shaped the culture and ethos in his personality, and I just don’t feel comfortable holding through any upcoming uncertainty, specially when there are so many great opportunities in the market. Took a loss of 2% over a few months.

Sold Edelweiss at 60 as I had indicated I intend on doing last month. Took a loss of 20% over a longish holding period, but a small position overall. Still tracking and willing to buy in if things start improving. It is still extremely cheap.

Sold the tracking position in Panacea yesterday at 168. Lot of better opportunities in the market now, so see less value in hoping that the Panacea management use the cash proceeds well.

Reduced Sunteck and Laurus by about 20% purely for risk management.

Additions

I have added small 2% positions in SJS and IIFL at about CMP. Also added a bit to Globus, Tips, IDFC, Intellect, Caplin, Indoco and PDS close to latest lows.

Sold out of Roundhill Ball Metaverse ETF at $10.5 and added those funds and some more to KWEB and Ark K. They are now at average buy prices of $33 and $61 respectively. No idea where the bottom is for the US and China markets so adding slowly on all major drops. I am long term bullish on China internet and US innovation and I believe the risk reward is very favourable from a 2-3 year horizon. Will keep adding slowly. These two and Ark G total to about 12.5% of the PF at the moment.

Performance

On a portfolio level doing pretty ok even in this wild wild market. Down about 10% from ATH (but with some 4-5% additional capital). I am very happy with the results of all my PF companies so far - Indoco, Caplin, Mastek, Intellect, Neuland, HDFC, IDFC, BlackRose and PDS. They have all shown resilience in growth, margins and cash flows as compared to peers. Tips demerger is done. the films business will list separately in its own time. Sunteck pre-sales were decent, will probably add back the quantities I sold if it dips to below 375. Globus, Kilpest, HCG, Ugro and Apollo Finvest results to come in soon, I am fairly confident they’ll be ok.

Worried about Strides. Hope they will have received the 550 cr odd of deferred proceeds that they had said will come in March. That will significantly help their cash position. Market is currently valuing it like it will go bust. Any good news on the cash flow front, warrant issue, Sputnik offtake or price normalcy can be a reversal trigger. That said, it is technically very weak and promotor pledge is rising, so not adding any fresh funds here.

I have about 7-8% cash and am patiently waiting for companies like Newgen, LTTS, LTI etc to stabalize. Structurally bullish on IT long term and valuations are now beginning to make sense.

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Hi,
Any further study of Panacea Biotec?
The recent deal of selling its formulation plant and brands for India and Nepal (Domestic Business) to Mankind Pharma in Rs1872 Crs should have been taken by mkt as big positive, but its not showing in share price movement of company.
I personally belive its a very big positive.Company has executed the deal as said in press release on 1`st March. Got major money, paid off debt and released pledged shares also.
What you feel, what is neagtive, why mkt is not taking it positive? Do we miss any thing?
Regards

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Hi @SajanDidwania

Panacea released results a couple of days back and the sales proceeds are reflecting in other income. They have almost paid off all the debt as they had said they would and have over 550cr of cash. At a MCap of under 1000cr, the EV is a little over 400cr and sales net of formulations are a little under 400cr. So the surviving business is trading at close to 1 times EV/Sales with enough funds available for growth. So in all, yes, it does look like deep value.

However, when I had made the initial tracking position purchase, the rest of the small and mid cap market was not as cheap as it is today. So on a relative basis, I see more certain opportunities at equally attractive valuations. And so I’d rather not bet on the management utilizing the cash well here, and instead increase bets on my core holdings which have better disclosures, where I understand the businesses better and where I have more certainty of business trajectory, all at compelling valuations.

The market may be worried about exactly this - how will the cash be utilized and how will the growth in the vaccine pan out. On an absolute basis Panacea is definitely cheap. But on a relative basis, I’m less certain and so is the market.

Well ok. In my view Panacea is going for major comeback. Company was suffering with huge debt since over a decade and in 2019 they raised fund with private lenders at 20% per annum rate around 750 Crs thats why their annual interest expenses were around 180 Crs in FY 20, FY21 and FY 22.
After a long time company is out of its financial crunch. Whatever business company sold, makes only around 35% revenue so sizebale business company hold in hand with good cash in hand.
Second a big point, Company has a very small equity of Rs.6.13 Crs. Multibaggers comes from normally small equity companies easily if they have capability. Panacea with around 400 Crs revenue left with unsold business can do great in coming future as they will be saving Rs.180 cool on account of interest also they have surplus cash too.
Its a proven and well accepted pharma company with over 25 years existance.

Disc.: I have bought good quantity after this event at around Rs.165 and holding it.

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@SajanDidwania I hope this works out for you and I will be tracking the utilization of the surplus cash closely as well. Agree fully that they are well positioned to do well and are very cheap at the moment. Any clear indication on those plans and resultant growth projections will be a buy trigger for me. Alternatively there will be a price at which the uncertainty will be worth it relative to other market opportunities even without disclosures on the cash utilization, so if it comes there I may initiate a buy again.

The majority of cash already utilised i.e 1100 Crs approx in Debt clearing and Rs.400 Crs Tax total 1500 Crs gone out of 1872. Mere around 250 Crs cash they will be having surplus.

The utilized cash has already reflected in the enterprise value calculations above. Cash on books is 583 crores which is 60% of market cap. This is why the EV is 400cr or so and Panacea trades at one time EV/Sales.

My thesis for Panacea will be the efficient utilization of this cash. They say they will use it for growth initiatives in the vaccine business, which is great. The vaccine business though has had a fluctuating operating margin profile over the years (forget the debt and interest, this is at an operational level). They have posted operating losses in the vaccine business since 2019. This cash should hopefully help turn this business around, or it may not if the cash is not used well. The point is at the present price, one can discount the possibility of misallocation of capital. However, there are other cheaper and more certain options, and so I would not discount the possibility that the cash will not be used optimally and the vaccine business will continue to report operating losses. All about risk reward, but that’s me. Intrinsically I do believe there is decent downside protection at CMP for sure.

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I am less worried about Strides now than I was when I last put out an update. Arun Kumar chaired one of the best concalls I have read this season. He has unequivocally and repeatedly said that the business bottom is behind, and that there will be a linear quarterly runrate of $60 million in the US starting Q1 (about 35% growth). This will come with improving margins due to liquidation of piled up inventory, leading to reduced warehousing costs and transportation costs, as manufacturing will adjust to demand.

Other markets continue to grow, especially north Africa. Stelis has the overhang of Sputnik and RDIF, but apart from that the facility has scaled up well and has six customers signed for the coming year.

No major capex or R&D spends (in the US) over the next couple of years at least as they have a lot of approved products which will get commercialized. This will further improve free cash flow generation and they will use the money to reduce debt.

Hopefully they find a resolution for the Sputnik inventory, this is the one worry still there. May add once the numbers start reflecting the commentary.

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Got the timing right but position sizing wrong on both these. Initiated 2% positions and wanted to add on dips which didn’t come. In stead both bounced big on fundamental triggers.

SJS is a great business as far as I understand it at the moment - stable margins even in industry downturns, low capacity utilization at the moment and sittig on a lot of operating leverage, overall trend towards premiumization and their volumes not reducing even when end industry volumes reduce, and increasing focus on exports in the high dollar environment. Classic GARP. The triggers were all there to take a bigger position in hindsight! Will be on the lookout if it corrects a bit before adding more.

IIFL Finance had their big announcement of equity infusion into their housing finance subsidiary, valuing it at 11k cr (IIFL’s stake at 8.8k cr), and the overall market cap is now about 13.5k crore. Even not factoring in future growth, it looks undervalued. That said, a rising interest rate environment makes banks more competitive and may have an negative impact on NBFCs in general. I will likely sell if there is a further steep rise and buy back Equitas Holdings which is now back with margin of safety (20% below my sell price), even with the uncertainty around succession.

Have been trading around my position in HDFC. I realize that there will be a technical overhang for a while, as institutions adjust their holdings in HDFC and HDFC Bank to meet the upper limit requirements. I don’t think there will be a sustained rally in HDFC and so I have been selling on all bounces and buying back on dips. Have made about 10% of my position size on it by trading in the last month, and have bought back the shares today. Effective average buy price is now under 2k. Lets see how this evolves.

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Have tracking positions in Newgen Software, Valiant Organics and Krsnaa Diagnostics. All are in a downtrend and all look very cheap. All have their own risks and so I am trying to assess the risk reward for each before deciding which position to scale up. Bias is towards Newgen at the moment.

Risks in each:

Newgen: Seen higher than industry attrition. They plan on spending big on marketing efforts in the US which will be a drag on cash flows. And the macro risk of recession and reduction in tech spends looms large. Management guiding for 20% growth which at 16 ties trailing, and with the tech competence they have in low/no code is quite compelling. May fall to 300-330 levels where it consolidated last time.

Valiant: Promotor’s keep selling. There are too many families involved and so real float is very high which is damaging in a downtrend. Plus they are feeling the impact of rising raw material costs. Ramp up of PAP is taking longer and further capex may not be margin accretive. All that said, at 1.4 times consolidated sales and 9 times EV/EBITDA, it may be near a stock price bottom even if the business bottom may be a few quarters away.

Krsnaa: Krsnaa is almost a monopoly business. No one has been able to and wants to get into the geographies that they are into. Their business is much more capex heavy that traditional diagnostics companies, which gives them an inherent competitive advantage and a deep moat. The only issue is, having worked in the Government of India for almost five years, I don’t trust government schemes to be smooth sailing, and there can always be a change of strategy, and worse still, a dispute or a delay in payment which can be a huge overhang always. Still trying to understand their contracts better.

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Sunteck has held up even in this brutal market over the past few weeks. That said, Mumbai RE is bracing for a lot of supply coming through which may lead to a price war. There has been some excellent coverage by Vishal Bhargava on various platfirms on this subject recently. Plus rising interest rates are making home loans more expensive and may hurt demand for Sunteck’s portfolio. I’m going against the grain of traditional wisdom of holding onto winners and beginning to reduce Sunteck as I feel the risk reward is less favorable on a relative basis. Woukd love counter views so I can strengthen my reasoning or change my mind.

Sunteck accumulated a multiple land parcel in a number of excellent locations at a period when every real estate company was struggling. The only company to accomplish this during the COVID time, and their execution skills are excellent. Moreover, the management is expecting that some of the luxury inventory will be sold soon.

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