Vineet Jain portfolio

Q&A: Questions & Answers Portfolio Q&A
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Portfolio updates

  1. Exited half my position in Geekay Wires a couple of weeks back at about 172. This was a phenomenal trade and I made more than 2x in a few months on a fairly large position. De-risking it a bit by taking some chips off the table for now and to invest the money in less speculative bets.

  2. A couple of weeks back I had booked profits in Newgen Software at about 470. Looking at the results today, I feel pretty foolish in hindsight. My thesis is that I don’t think I understand the impacts of AI advancements. ChatGPT is a start, who knows what more is coming and how fast it things will evolve. In such an environment of technological flux, I am not technically qualified to be able to identify automation and tech product winners, from India. And so I’d rather stay out of it and stay invested in innovative tech through ETF instruments in the US and Chinese markets. Wondering if I should have used technicals like a trailing stop or a vstop sell signal to exit, instead of exiting outright when the charts looked good. This is a question I have to answer for myself for future trades.

  3. Reduced Strides Pharma significantly and moved some of the money to Punjab Chemicals at close 800. IMO the latter offers much better risk-adjusted reward potential, even though it is in a downtrend. Is still a small position, about 2% of the PF. Looking to scale it up on consolidation.

  4. Added a tracking position in Ducol at 112, a pigments and dispersions SME company with an amazingly strong clientele for a player of its size. This came out of conversations I had with some excellent scuttlebutt focused investors at a recent local investing community meet. Hoping to schedule a meeting with the management of the company soon and gather more information about the business and it’s prospects.

  5. I have been adding to existing positions over the last month and a half, mainly Krsnaa, Kilpest, Gati, Sunteck, Ugro, CSB, PDS and Globus. Have close to 8% cash available to deploy. Taking things slow for the time being.

Edit: Missed Caplin in the above list of existing positions that I have been adding to. Continue to hold on to my trimmed position in Equitas and Neuland. May add more if there are dips. Holding Valiant too, just about breaking even here. Aurum and Apollo Finvest are small and speculative positions with the hope of big pay offs (but big risk too). Trimmed a bit of Indiabulls Real Estate at break even - most confused position. Now under 2% of PF.

One common thread across all my core holdings is a focus on cheap starting valuations. Margin of safety in the buy price is arguably the single most controllable factor in risk management. Looking for growth at cheap prices.

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Neuland management in their last concall mentioned that their last quarter results should not be seen as one-off, which means the next quarter shouldn’t be too bad. Are you taking that bit of commentary with a ‘bunch’ of salt?

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A bit of salt, definitely yes.

As the business matures with more CNS contribution and as unit 3 capacities get utilized, the margin fluctuations should reduce, but I do exoect it to remain lumpy. Hopefully there will be a quarter or two more of good numbers. Important to weigh the risk-reward at every stage. I’m holding till momentum is there, or till valuations get to 2021 levels.

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What aspect of the business, specific to Neuland, stops you from making it a long term keep for you, let’s say about 10 years. Would you keep it if the earnings get relatively smoothened out from the current lumpy form.

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My investing style has evolved quite a bit over the years, to a point where I have stopped categorizing companies as ‘long term’ anymore.

I do specifically categorize some trades as short term where I have an event in mind around which I am investing (a special situation like a merger/demerger, a capex coming onstream etc), but for all other investments, I like to invest as long as I see scope for rerating and/or where growth is predictable. In Neuland, lumpiness is known, but the market seems to treat it as structural and the valuation oscillates wildly. I try to take advantage of such volatility wherever possible, and stay invested as long as the risk-reward is in my favour, and while momentum stays.

If the lumpiness in Neuland goes away, then the volatility in valuations will also likely reduce and I’ll keep holding. I’m learning to use some basic technicals for sell signals in volatile stocks, and try to buy them back if possible when the risk-reward improves. The theory is still evolving and can go quite wrong too.

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Ducol appears to be interesting. Dispersion seem to be latest method all pigment based companies are adopting. Is there any competition to Ducol. And any specific moat

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Dispersion as a chemistry - So what happened 15Y back Asian nerolac and berger, they used to make their own dispersions, however the probs they were facing was is that when lets say u buy pigments from sudarshan. Biggest prob is tinctorial strength (strength of imparting color)

When u put x grams of pigments in a paints the shade has to be exactly as standard thats given to u but that was not happening. It had variation of about 2-3%. As a house owner u want to paint wall blue - u get 2 boxes of blue from asian paints. And after the 1st coat from first box and now u open 2nd box and you would notice that tonal variation is seen at this pt. About 15-20Y and possibly still u use to apply putty first and then 1st coat of paint and then let it dry and then a 2nd coat and 3rd so on.That was 1 of the reason paint companies had grown in volume.

Now the way dispersion chemistry has changed and coz of dispersions u are able to get exact color and strength across the batches manufactured. Now there is no need to use putty and now u might just need 1.5 coats of paints. So its in a way double whammy for paint companies as vols go down. And there are few companies that are helping paints companies with these dispersions.

Clariant is one name which are doing this manufacturing of dispersion with sync Paint companies - they buy pigments or make their own pigments and they will create the dispersions for each colors. And as per standards by paint companies they will do color matching with spectro photometer and then this finally goes for packaging like moldtek pkging. This is one new step in the value chain that got added in last 10-15 Y as paint companies wanted consistency coz dispersions companies are very important.

Eg asian buys pigments from 3 companies then it becomes impossible for all 3 pigments suppliers to match the pigments. So it comes upon dispersion companies to create an end shade of all these 3 pigments. Coz paint companies will catch their neck if match doesn’t happen.

Its like an important sub segment in the value chain. Obviously cyclical as it depends on pigments and paints industry. But its a niche as stickiness is there. Its a critical thing in the chain and OEM won’t go anywhere else.

Benefits of Dispersion : Time reduction + Cost reduction + Reduction in size of operations + consistent quality

Dispersion market : Paints 40% Plastics 15% Inks 35% approx

If dispersion guys go into pigment powders that would mean self-sufficiency and far better quality control.

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Vineet, are you still building your position in Kotak as it is again below 3.5 times book value. Would like to know your views on this.

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Thanks @Gautam_Chopra for the detailed note.

@kyajith I have nothing more to add, apart from the fact that Ducol is one of three known companies to have contracts and associations with the large paint companies for dispersions. This is a sticky business and Ducol could be a picks and shovels play on the expansion of the paints industry of India, with higher growth than the mainstream paint players.

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Good to hear form you @Gaurav_Bhandari. Apologies for not being able to write here more frequently - a lot has been happening on the personal and professional front. I’m in the middle of moving countries - my wife and I are relocating to the US to work there for a few years and we’ve been completely subsumed by it. I’ve been posting brief updates on twitter but a detailed post here on the portfolio positioning is long overdue. Later this week perhaps.

On Kotak, I took profits sometime in May when the uncertainty of SVB et al had started waning and had added those funds to higher beta microfinance names like Satin and Spandana. It was more of a macro call - microfinance was coming out of a few bad years with rock bottom valuations, and there were management efficiencies in these two players, making them kind of turnaround and special situation plays. Essentially in a roaring bull market, I erred on the side of greed and went with the lighter boats which rise the fastest when the tide is high. It has worked out well so far, but there will come a time when the risk-reward of holding them will not be favorable and I may decide to sell and buy Kotak or HDFC Bank then.

I am unnecessarily aggressive sometimes, but that’s just me. Kotak in my view at these levels is an excellent long term buy with a peaceful 15-17% compounding, with the potential to go to 20%+ too if foreign money starts flowing in once the succession story is resolved.

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Well, this is a first. Believe it or not, my September’s portfolio update got flagged here and the admin removed it. What could possibly be “inappropriate: offensive, abusive, hateful conduct or a violation of VPs community guidelines” about a portfolio update on my own portfolio thread?

I’m genuinely curious, as this beats be hollow.

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Same happened with me with regards to a question on a chart pattern I asked on 52 weeks high thread. Not sure, why it was removed. If this happens, not sure how long people will continue to be here.

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Life update and musings on investment philosoply

The last couple of months have been all about adjusting to this new life in the US. My wife got a job with her employer (PepsiCo) here and we moved. I have put my papers in woth the Tatas after a 9.5 years stint with the Tata Administrative Services, in which I did exciting roles across the Tata Trusts, a long secondment to the Government of India, and the last two years at Tata Consumer Products.

As with most notice periods, work has been slow and a lot of time has been spent reflecting on on what I want to do next in my career, what opportunities I should look for in the US, and networking across the board. From an investing standpoint, one not so intuitive benefit of being here has been that I spend very less time awake when the Indian markets are open, and so I spend less time drooling over the screen and over-trading, and much more reading about businesses and refining my investment philosophy when the markets are closed :slight_smile:

I have made a few changes to my portfolio, which i will post about separately (Hopefully it won’tget flagged like last time. I still can’t believe someone flagged my portfolio update!!). The general principle has been to conventrate into businesses in sectors experiencing tailwinds, with clean balance sheets (net cash is preferable), good management pedigree and reasonable valuations. If there is a trigger coming up, I have raised allocation aggressively. Like most people, my portfolio has done very well this year, with more than 2x of what it was on 1st April, and 85% up from 1st Jan.

Of all the investing content I have consumed in the last two months, I enjoyed the Motilal Oswal Wealth Creation Study 2023 the most.

They key take way for me was that high earnings growth at low RoE is not necessarily value additive, especially if the RoE is lower than the cost of equity. These businesses do not get sustained high valuations, even at high growth, and rightly so. And so, economic profits are more important than accounting profits. In present markets, we are seeing many companies growing fast at low RoEs. That is actually value destructive and the water will find its level.

The best returns are made when good growth comes at high RoE (or ROCE if you please, so long as debt is not too high and destabalizing with risk). If RoEs improve as well while earnings grow, you’re sitting on a hockey stick. Usually happens at the intersection of a trending sector, a business with a competitive edge (call it moat or right to win if you please), and a trigger.

In a way, RoE is a measure of the “quality” of a business, signifying it’s potential to add value. If a business can sustain high RoEs, it means that they are not easy to replace, and signals longevity, which is an anecdotal way to justify high valuations, provided there is growth.

Reminds me of a line that line thay Basant Maheshwari uses often. High RoE is like a Ferrari, high growth is like petrol. If you have both, you can speed with ease.

More details on the portfolio to come soon . . .

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Can you give some examples of high growth with low ROE/ ROCE companies in large cap and midcap category for study purposes, where value destruction might happen?

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@Mudit.Kushalvardhan there are some sectors where it is generally difficult to make consistent and high RoEs, like EPC players, most railways players, many auto ancillaries etc. A company like Adani green for example makes RoEs of 20% purely on the back of large debt. The ROCE is 8% and so the business itself doesn’t generate good return ratios.

I think my takeaway is to try and avoid such sectors as much as possible, unless there is a special situation, differentiated insight for rising RoEs, or a specific trigger to unlock value that I am working with. A lot of companies in the recent bull run have been rerated on expectations of good growth, from sectors that have had structurally low ROEs. These are the companies that one needs to watch carefully and exit on time.

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PF update for Jan 2024

While the bull market keeps doing bull market things, the core of my PF remains almost intact, but almost the entire sub 5% portfolio churned, and some more in the past few months.

10%+
Sunteck Realty
Caplin Point
3B Black Bio

7-8%
PDS Ltd
Neuland Labs
Ugro Capital

5-6%
Geekay Wires
Kalyani Cast Tech
Coastal Corp

3-4%
Ducol Organics
Marine Electricals
IZMO
Phantom FX

<3%
NR Agarwal
Shilchar Tech
Prop Equity
Vadilal Industries

Top 6 positions are almost 60% of the PF. I’ve held all of them for 12-24 months, and have added to some along the way. This doesn’t mean that these positions will stay in the PF forever though, I am happy to sell on any break in thesis, medium term headwinds or better risk-reward elsewhere. It is crucial to maintain objectivity and not get married to stocks. This is easier said than done, and I am still learning the art of being ruthless.

Lowest absolute return among the top 6 positions is Ugro at 1.7x. Highest is Neuland at over 5x. The big lesson gets reinforced again - position sizing and riding winners is the ultimate truth and is MUCH more important than stock selection. Even after such a magnificent run, Neuland is still not a double-digit position as I had sold half of the original allocation on 2x for no good reason, except that I thought I’ll buy it back lower.

It was even worse with Geekay, where I sold 80% of the original position between 2x-3x, and it is now almost a 7x! Not selling these would have meant at least an additional 30% PF value today. Obvious lesson, but hard to implement. I’m slowly getting better at it, I think.

Recently sold a core position Equitas after HDFC results - I sense a deposits war as HDFC goes nuts trying to grab them from everyine else. I had held Equitas pre reverse merger. Still like the company and hope it does well, but I don’t see favorable risk reward in most banks for the time being. I may add it back in the future.

The sub 5% space has been my trading portfolio of sorts. While the music is on, one’s got to dance. Recent super profitable short term trades have been Bharat Bijlee, Bajel, Gujarat Themis, Avanti. Flat trades were Mold Tek Tech, Dollar, Capacite.

As always, I’d invite you to critique these positions. I am actively looking for disconfirming evidence, especially now with markets going through bouts of euphoria.

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Hi Vineet,
Considering how it has played out in the last year after this post, what are your views on the three banking scrips: Kotak, IDFC and HDFC?

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Hi Abhinav

That post was at the time of the SVB collapse which fizzled away quickly. I had then sold out of Kotak but didn’t add any other bank to the portfolio, except to the Equitas position. I have now sold out of Equitas as well as I am finding better risk reward in other themes. I think the banking landscape is not prepared for a desperate HDFC Bank doing everything in its power to raise deposits, which will likely come at the expense of deposits of other banks. HDFC in 9M Apr-Dec accounted for 15% of all incremental deposits, while their present market share in deposits is 10%. And they have a long way to go to make up for the gap in deposits to advances that has resulted from the merger.

So my sense is that we will have higher costs of capital for all banks, and potential NIMs compression all year, at least till we see a sizable uptick in debt funded private capex, or till interest rates drop which I don’t expect will happen till late 2024 at the earliest going by the RBI governors comments at an interview he did with CNBC in Davos. HDFC Bank may take 2-3 years or so to get the deposits in order and NIMs up, the interest rate cuts notwithstanding. if it takes them 3 years, by then they would have grown their book value by 40-50% at least, and should potentially trade at 3-3.5 times trailing book as NIMs and return ratios would have improved, implying a 50-80% upside from present levels in three years which is not extraordinary but not bad either. Kotak and IDFC may possibly offer a slightly higher return potential with higher valuation and higher growth respectively.

These are my views, which I can change if the facts change, or my understanding improves, or if I am not able to find good better growth at cheaper prices. I wrote a detailed thread on this subject a few days back. Pasting the link here. Admins, in case this is not permitted, please let me know and I’ll edit this post.
https://x.com/vineetjain1101/status/1748533700399104268?s=20

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Thank you, Vineet. Indeed, this is going to be a dogfight for deposits. And I don’t see IDFC being at a big disadvantage compared to HDFC just because they have a lesser number of branches. They will fight equally hard for deposits.

With banks, I believe, there are no good surprises. I would agree with the estimate of around index returns in the next 3-5 years.

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Hey Vineet, when do you update your PF here? If it after 30 days from your initial investment? Or quarterly?