Yash Portfolio Feedback

[yrm91]

Added Policybazaar (PB Fintech) in the last couple of weeks. The core insurance platform is superb, and has dominant share of the industry’s digital premiums (more than all the insurers own website channel combined). The website attracts 3x-5x more traffic than most insurers own websites and as much traffic as LICs. I believe it has become a strong brand in the insurance space, and is now top of mind in the consumer insurance buying journey. This brand strength should continue to grow over time as the company continues to spend increasing amounts on brand and customer acquisition.

PB-Fintech has the potential to be a structural long term compounder with the following growth triggers:

1. Increased penetration of insurance in the country leading to double digit industry premiums growth
2. Incrementally more of these premiums coming from digital channels (~60% of Policybazaar traffic comes from consumers below the age of 34 who will coming into their prime income earnings years over the next decade) taking share away from agency channel which is prone to mis-selling, poor experience and fraud.
3. Potential for Policybazaar take rates to improve as they become a larger part of industry premiums

At the moment, the platform originates about 1% of total industry premiums. For health, by my calculations, Policybazaar is already accounting for >5% of industry premiums. The superiority of this channel over the agency channel is evident by the premium/salesperson number which is 10x of the agency channel.

Economics:
The core platform generates a 45% contribution margin (including all acquisition costs and variable employee related costs). Below contribution are mainly corporate salaries, brand spend and ESOPs. ESOPs should come down next year and continue at a ~200-300 cr run rate over the long term. Other fixed costs are growing at ~10% per year.

Over long periods of time, as renewal revenue starts to become a bigger part of the premiums, the company’s contributions will expand. Renewal revenues have 85% contribution margin (no acquisition expense).

This is what I think numbers for the core platform can look like by FY28:
Growth of insurance premium from 7000 cr to 35000 cr
Growth of Credit Disbursement from 6500 cr to 35000 cr
Revenue from core platforms: 1200 cr to 6100 cr
Contribution: 470cr to 2750 cr (assumed no change in margins at 45%)
Fixed cost (including ESOP): 1200 cr to 1550 cr
Leading to PAT from core business of ~950-1000 cr in FY28

This is not very far from the guidance given by Yashish Dahiya of 1000 cr PAT by FY27

At 1000 cr PAT, and with 100+% ROE, company can easily be valued at 50x PE. Including Cash accrual, we could be looking at 55-60k MCap by FY28. Effectively a 3x opportunity in 5 years (25% CAGR). Plus all the optionality with the experiments the management keeps doing.

There are 3 things I am concerned about here:

1. Market share moving to mobile app players such as Paytm, PhonePe, GooglePay over time. All in all, the biggest value that Policybazaar is providing is comparison between different insurance plans. While there is some challenge of technical integration with various insurers, this can easily move to other more convenient app based channels over time. Will only be evident over the long term given the low digital penetration.
2. Change in commissions structure by the regulator: this is not a short term risk anymore given the IRDAI white paper last week. In any case, even if the regulator mandates lower premiums, PB should be able to mantain take rates by charging in other cost items.
3. Bima Sugam: regulator is planning to come with its own insurance exchange. Contours of this are still to be detailed out but this could lead to a “UPI” moment for insurance.

The thinking is if any of these 3 come true, I can easily exit at a small loss; whereas if the core platform grows and becomes a dominant insurance distribution channel, the potential for long term compounding is immense.

[yrm91]

Portfolio Review:

Returns:

A more normal return year after the frenzy of the last two years. A year that saw good decisions and bad decisions alike and was filled with lots of learnings.

Things that worked well in the year:

• Decently high allocation in the portfolio to banks and financial services which were a good outperformer during the year
• Avoided frothy sectors: new age technology, IT, pharma & manufacturing which were significant wealth destroyers during the year.
• Selling decisions much improved over the previous year. Tata Communcations, HOEC, Real Estate Portfolio, Faze Three, Bajaj Finance & Saregama were all sells that helped the portfolio avoid losses/0 returns. No obviously bad sell decisions in the year except Rossell; which was a low conviction buy.
• Incremental Capital Deployment pretty decent: The capital released from the funds released from selling were put to use in much better opportunities: Some of them were Ujjivan Financial, PSU Banking, Ganesha Ecosphere, MCX and Arman. Also increased banking weight during the year. All in all, the churning of positions contributed significantly to portfolio alpha during the year.

Big Mistakes/Learnings from the year:

• Big losers for the year: Indiamart & Delta Corp. Took some big learnings from Indiamart (declined almost 60% during the year). 2 mistakes were made here: a) Extrapolation of temporary pandemic related benefits into the future & b) Failure to sell despite being fully aware that the stock was wildly overvalued. Learnings from Indiamart have informed sales of Saregama and more recently Raghav Productivity
• While this year had relatively few mistakes of commission, there were plenty of mistakes of omission. Discussed a few posts above. A lot of opportunities were missed. I dont expect to not make these errors. But by journalling and keeping a thesis of not buying as well, I hope to reduce the errors of omission over time.
• Sizing: Got a couple of sizing decisions wrong during the year; most obviously with PSU Banks where the weight was far too low. When odds are glaringly in your favour, and there are near term triggers for value unlocking; I need to be bolder and bet bigger. One similar opportunity I see in the upcoming year is Chinese stocks as a whole. Thus, I will be quickly ramping up allocation to Chinese stocks to the 10-15% range in the next 6 months.

Excited for the upcoming year though I suspect it will be a lot more volatile and difficult than the last year! The ability to invest across asset classes and geographies I suspect will be very important for the upcoming year.

[yrm91]

Quite a few changes since the last post. 2 new entrants to the portfolio

1. Added Zomato with a 3% weight:
   I view Zomato as a long-term compounder. The business has dominant moats that will prevent new entrants from coming:
2. Large benefit of scale: as scale increases; density of network increases which reduces order fulfillment costs (more deliveries per hour) and improves customer experience (think about how long it used to take Swiggy/Zomato to deliver 4 years ago vs today).
3. 3-sided local network effect
   A potential new entrant would have to first burn money acquiring users and then burn money fulfilling each order while it scales up; all while competing with Swiggy/Zomato’s scaled up cost structure and network density. VC’s wont fund a new player. That leaves Reliance, Amazon and Flipkart. Amazon tried and shut its service down. Flipkart wont try. Realistically only Reliance has the pockets to compete.

The growth levers are well known: User Base expansion x Frequency Increase x Order Value Increase. All 3 should happen over the long run. However, I dont think the 40-45% growth will continue; the company should easily be able to grow at 20% over the next decade.

I view Zomato more as a low-cost hyperlocal logistics player. I feel the TAM is much larger that food delivery; the company has a per order delivery cost of ~Rs 45. They should be able to deliver anything where they are able to earn Rs 100+ per order. Potential expansion areas could be: Groceries (experiment on), Medicines, alcohol, documents, personal care products, etc. However, I will ignore all these optionalities for valuation purposes.

Economics:
The company has a take rate of 22-24% (including ads), and current contribution margin is 4.5%. The management has guided for contribution margin to increase over time to 8-9%. I see a path to these kinds of margins even without increasing take rates; simply by cost efficiency, AOV increase at inflation rate and reduced discounts. Those kind of contributions with high scale could lead to EBITDA margins of 4-5% of GOV or roughly 15-20% on the company;s revenue.

If we give a platform business multiple of 30x EV/EBITDA (company will not really need any capex to grow); that implies that at steady state profitability, company could be valued at 4.5-6x revenues (of the food delivery business). Current food delivery revenue ARR is about 6000 cr, and current EV is about 30k cr (ex cash). Thus we are already at 5x sales; the lower end of the valuation range. Thus I feel that we are already being well compensated for just the food delivery business and effectively getting all the other optionalities for free.

Risks:
There are 3 things that I worry about:
a) Reliance entry
b) Realistically how many people can afford food delivery > Rs 350/order? Is the potential user base much smaller than we think? The Ken has written about this in detail
c) Self selecting low cost/value restaurants

2. Bought Chamanlal Setia Exports: Not a great business; but a great valuation. The business can be best described as a very disciplined rice trading operation. The business benefits from fragmentation at both the production side and consumption side and acts as the aggregator in the middle. The only thing that matters is not doing anything stupid like dealing with poor credit quality customers, taking excessive leverage or doing business with companies in countries with sanctions. Their competitors have been guilty of some of these actions in the past and as a result dont exist today. They are still a tiny part of India’s rice exports so growth is not a problem. They turn their Working capital about 2.5x every year and make 10% EBITDA margin on sales leading to about 20% ROCE. The profits each year are reinvested into working capital which is the only thing the company requires to grow. The company is available at 8x P/E which is far too cheap. Should be able to make 20% earnings growth + some re rating to ~12x PE

[yrm91]

(Continued)

Also had a few sells in the quarter:

1. Exited ICICI Lombard: Misjudged the cycle here and ended up buying at the top of the earnings cycle. No change in underlying thesis. Its just that better opportunities were available. End of the day I expect ~20% earnings growth here over the next decade. I could get that with ICICI Bank and HDFC Bank as well at half the valuation. Look forward to owning this again at some point. I think booked about a 15% loss here exiting at ~1220.

2. Exited PSU Bank ETF: trade largely played out; when people start talking about underwriting discipline at PSU Banks and sustainability of earnings is the time to exit. I felt most of the re rating was behind us and the risk reward quite unfavourable to keep holding these.

3. Started exiting Delta Corp: Poor Q3 results + weak discretionary outlook coupled with existential threat to the business with the GST issue. Enough to take money off the table in my opinion.

4. Started selling Arvind Fashions. Recent channel checks indicated very weak sales momentum post Diwali. This will put a dent in the managements margin recovery program as well. At the same time, I had other capital deployment opportunities.

5. China allocation is being ramped up almost every day.

[Investor_No_1]

@yrm91

The business has dominant moats that will prevent new entrants from coming:

There are already enough existing entrants in “delivery”
You mentioned adjacencies for Zomato into groceries etc. Same is true for others working in “delivery” to enter Food if they find it suitable.

@yrm91

Large benefit of scale: as scale increases;

I think already it has huge scale and benefits, if any, should be visible already. if not visible now, then what makes you believe it will be visible later? I see Zomato everywhere in tier 1, 2 cities. They do have significant scale now already…

@yrm91

That leaves Reliance, Amazon and Flipkart. Amazon tried and shut its service down. Flipkart wont try. Realistically only Reliance has the pockets to compete.

Amazon may try again someday, we never know. Why would Flipkart not try? Then there are likes of Big basket, who may enter Foods/Restaurants. QSRs have developed their own delivery ecosystem. In this disruptive world, you never know that one day a Jubilant may hive off its delivery part and use it for self as well as nearby restaurants as a different revenue source…hypothetical but possible.

Point is…I agree to many of your points but just wanted to present another side as somehow I feel that moats may not be as strong as they might seem…

Disc: I can be completely wrong in all my assessments. Not a buy/sell recommendation

[yrm91]

Always great to hear counter opinions, only helps in building a more well rounded thesis.

@Investor_No_1

There are already enough existing entrants in “delivery”
You mentioned adjacencies for Zomato into groceries etc. Same is true for others working in “delivery” to enter Food if they find it suitable.

@Investor_No_1

Amazon may try again someday, we never know. Why would Flipkart not try? Then there are likes of Big basket, who may enter Foods/Restaurants. QSRs have developed their own delivery ecosystem.

I think one thing is common if grocery players want to enter food or food players want to enter grocery; massive capital will be required. The advantage that food players have is that their core businesses are already close to break even and they have massive cash on the books. This is not true for hyperlocal grocery players. So if players like Zepto, Dunzo, etc want to enter food; they will have to fund burn of their core business and fund burn of the new foray. Who will fund this? No VC will fund a foray into restaurant delivery when there are already 2 established players; money isnt free anymore and VCs arent raising $100 bn funds which compels them to do nonsense “investing”.

Of the established profitable businesses like Jubilant/Dmart/etc, theoretically it is possible, but do they have the will to burn the amount of capital required to do it? I would put the probability of trying as very low and then probability of achieving success if they try to be equally low.

The resources are not so much a problem for the e-commerce players. The issue there is more of synergy. There just isn’t any synergy between the e-com business and the hyper-local business. Sure its the same customer, but the logistics network required is completely different. I do think however, that over the extreme long term hyper local fulfillment will be a threat to horizontal e-commerce. I already have started ordering some of the things I would normally buy from Amazon on Zomato/Blinkit.

Obviously anything can happen, we can only be open minded and relook our thesis if such things happen. But another question to ask is also what would happen if nobody enters? How much wealth would be created and are the risks worth it?

@Investor_No_1

I think already it has huge scale and benefits, if any, should be visible already. if not visible now, then what makes you believe it will be visible later?

Well you are already seeing it become visible in terms of experience and to a large degree in terms of unit economics as well. If you think of the unit economics; there are 3 main variables: a) Take rates, b) Fulfillment Costs & c) Discounts/User acquisition costs

My thesis is The benefit of increased scale in the mid term will be most visible in b) and c). For delivery cost; the more orders in a given locality; the more efficient your delivery partners will be. This is somewhat visible in the numbers. The Order Values have gone up from Rs 300 to Rs 400 in the last 3 years (some one time gains here) but the delivery costs per order have actually come down from Rs 52 to Rs 45 (as of FY21 which is the last disclosed number).

The other large benefit is in discounts. The way I think about it is that discounts are largely a customer acquisition tool. When you have 5 million customers and you are acquiring 1 mn customers a quarter; the impact of discounts on your unit economics is very high. When you will have 30 mn customers and you are acquiring 1 mn customers a quarter, the impact will not be so high. The economics will keep improving as you gain scale.

The real fun will happen in the long term in a). The management has said that after a certain margin (8-9% contribution) they will give all the scale benefits back to the ecosystem either in the form of reduced take rate or delivery partner incentive. Does that sound familiar? It will become another shared economies of scale business over the long run like Costco/Walmart/etc.

Every year there is no new entrant, the task will become harder and harder. It is a bit like entering horizontal e-commerce today? Anyone can still enter it, realistically very few people (I suspect only Reliance) have the will, the resources and the ability to succeed. Obviously though, horizontal e-commerce is far far more moated and has far stronger national level network effects whereas here the network effects are local.

[yrm91]

Few changes to the portfolio since the last update. Cash pile had gone up post a number of sales in the last few months, can look to deploy some of that in the coming weeks/months.

1. Added Religare Enterprises: New addition, have been following this company for a while but never had the guts to take a position. The successful resolution of the One-time-settlement with the lenders in the lending subsidiary RFL was the trigger for me to start buying. Essentially view this as a special situation value-unlocking play for the Care Health Insurance subsidiary. The last funding rounds at Care were done at ~22k cr valuation (~5x FY23 GWP). Current valuations based on grey market are in the range of 15k cr (~3.3x FY23 GWP and broadly on par with Star Health). This implies that Religare’s 65.5% stake in the company should be worth between 10k-15k cr vs current entire market cap of ~5k cr. In her media interaction last week, the MD of Religare in no uncertain terms mentioned that the next step is to unlock value for shareholders either through an IPO of Care or a demerger (interview found here: Religare Finvest Completes ₹2,178 Crore One-Time Settlement With Lenders: Rashmi Saluja Exclusive - YouTube). If its a demerger, then that will be an immediate 2-3x for Religare holders. An IPO would actually be less preferable as it will entail a large Hold-co discount. Probably not much upside in that scenario. In the meanwhile, I am happy to wait as Care is a phenomenal health insurer. It caters to a slightly more premium target market as compared to Star; thus even at almost 33% the scale of Star, it is able to do better combined ratios (94% in the last quarter).

At the same time, with the OTS completed in RFL, the NBFC becomes quite healthy. Further we should see a massive writeback to the tune of ~3k cr next quarter due to the OTS. I think the NBFC itself will turn profitable in the next quarter as long as no more asset quality stress. There are also some other subsidiaries: Religare Broking and an affordable housing subsidiary which are profitable to which I am ascribing no value.

Seems like another one of those Heads I win big, Tails dont lose much kind of bet. Also thinking of swapping some part of Star Health Holding to Religare. The only short term risk here is the composite license where Life Insurers will be allowed to sell Health insurance. I have written previously how I dont think this is a long term threat. However, it is bound to sour sentiment and cause panic in the short term which will impact the stock price. This is one of the reasons I hadnt made Star 10% of the PF despite a very attractive valuation.

2. Few other updates: had added Star Health @Rs 500 and exited Arvind Fashions and Delta Corp completely; as mentioned in the last update

Have a number of ideas which I think are becoming interesting:
-Punjab Chemicals: Trying to understand the agro-chem cycle better before buying; but price seems attractive. Some near term risks on the horizon.

• XPRO: may have missed the boat on this one. Felt at the CMP werent being compensated adequately unless the company was able to crack exports in a major way. Was comfortable to buy at Rs 450-500 before the price took off.
• FDC: good margin mean reversion play for the next 12-18 months available at 30% lower than historical P/S.
• Also looking at number of other companies such as Krsnaa Diagnostics, Kabra Extrusion, Bajaj Consumer, GHCL, etc.

[yrm91]

Portfolio Update: 2 new entrants. Also added a short-term trading bet (not discussed) which sucked up some portion of the cash.

1. Added Krsnaa Diagnostics: Credit to @Chins for this one. A lot of the deep work on Krsnaa has already been discussed in the VP thread. Not much more to add. Company is in the sweet intersection of sectoral tailwinds with states increasing budgetary allocations to Public Diagnostics Programs, a strong competitive positioning with limited competition, ability of Krsnaa to ‘exclude’ competition via technical bidding criteria, reaosnable economics leading to 20% ROE and attractive valuations. Investors have fair visibility today based on tenders already won by the company. Current price is not even discounting the existing won tenders let alone new tenders the company will win. Company comes with substantial risks, its similar to an EPC business with similar risks: political involvement, receivables, etc. Want to do more on the ground work before scaling up the position.

2. Added FDC: I view this as a 1-2 year Margin mean reversion play. Company has strong brands, namely Electral and Zifi. Margins have fallen quite dramatically in the last 2 years. This is mainly because prices are controlled and company cant take price hikes frequently. The price hike allowed last year was not sufficient to deal with the increased cost inflation. This year will see another double digit price hike; at the same time cost pressures are easing. This should see margins going back to 20%+. Company’s exports are also rebounding and scaling up well. Contrary to peers, the export business is extremely profitable because FDC also gets a share of the distribution profits. If the multiples rebound to ~3.5 P/S, that gives 35% re-rating return + 12-14% revenue compounding CAGR + 2% div/buyback yield. Quite attractive, especially if the re-rating can happen quickly.

3. Swapped some portion of Star Health for Religare. So far, I am behind on that trade. I am also behind on the Manappuram for Ujjivan trade; which is up 25% from my sell vs Ujjivan only being up 15%.

Still have some good opportunities. Would like to increase FDC and Krsnaa weights. Also some smallcaps have come to attractive levels: Coastal Corp, AMC stocks, Punjab Chems, diversified financials: Motilal, Edelweiss. At the moment, struggling to see where I can reduce weights in the existing portfolio; to re-allocate to other ideas.

[yrm91]

@yrm91

Risks:
There are 3 things that I worry about:
a) Reliance entry
b) Realistically how many people can afford food delivery > Rs 350/order? Is the potential user base much smaller than we think? The Ken has written about this in detail
c) Self selecting low cost/value restaurants

Clearly missed out a 4th risk for Zomato, ONDC. This is starting to look very interesting. I had Initially felt that ONDC will find it difficult to gain share vs incumbents with the simple thought: how can you disrupt something that is already not making money by offering worse service and even lower prices? However that seems to be exactly what is happening.

The economics of Zomato were discussed above. It currently makes Rs 20/order (contribution) after having a take rate of 23% (17% from the restaurant and 6% from the customer). I dont completely understand the ONDC economics, but it seems restaurant commissions are 4-8% and the restaurant is also funding free delivery at the moment (lets assume Rs45/order, or ~10%). So total restaurant outgo is 14-18%, similar with the aggregators. In addition, the network is funding a Rs 50 discount with each order. The big difference is that the customer, who was already deriving the most benefit from the aggregators by being severely under-monetized is now effectively being paid to order from ONDC (no delivery fee, discounts, cheaper goods). In effect this is the customer acquisition cost, but instead of being borne completely by the aggregator, it is now being shared by the restaurants and the ONDC network (and maybe the logistics partners).

This is obviously completely unsustainable, but can still cause disruption in the marketplace. We effectively have a third competitor. And it is growing really rapidly albeit of a low base (1k to 10k orders/day growth in a couple of weeks). At the moment, a lot of data points are missing. For eg, what kind of warchest does the network have to continue funding these Rs 50/order discounts? What is the actual delivery cost and is the logistics partner also subsidizing the network? However, the restaurants clearly have an incentive to see ONDC succeeding as it will lead to elimination of platform power (exactly the goal of ONDC).

At the moment I dont have enough data to exit, but am keenly watching developments with an open mind. My excitement on Zomato/Swiggy had already gotten tempered when more scuttlebutt revealed that restaurants (even the big chains like McDonalds, KFC,etc) dont actually make money of home delivery orders via aggregators. Thus really everybody is unhappy: restaurants, delivery partners and the platform which is not making money. The only satisfied person is the customer because he is being severely undercharged. We saw movement toward charging the customer more in the recent quarter by Swiggy but ONDC is likely to reverse that.

[yrm91]

Been a while since the last update. Been an active few months with a lot of churn. The last month especially has seen a lot of sells as a lot of positions reached the <10% IRR tipping point or where stories played out and incremental risk-returns didnt seem great:

Sells:

1. Ujjivan: Story largely played out. Was contemplating whether I should hold till demerger given there is still a ~15% arbitrage available with the opco. However the SFB is at >2x P/B already and I feel re-rating is behind. We are clearly in the middle of an MFI upcycle. There were also risk management considerations here since I also hold Arman, and between the two MFI had become >25% of the PF at one point. Sale @ ~Rs 485

2. FDC, Indo Count : Reversion to mean stories largely played out with valuation catch up back to normals. FDC Sale Price ~360 & IC ~240

3. Krsnaa Diagnostics: Had sold prior to them losing the Rajasthan contract. Primarily business quality reasons. To some extent the B2G nature of the business is on show. Sale price ~580

4. Trimmed Faze Three above 400 & Chamanlal Setia sold @180: Not sure why I sold Chamanlal in hindsight. Its still so cheap and business is delivering.

Buys:

1. Coastal Corporation: Domestic shrimp industry has been reeling due to both cyclical and structural factors: Cyclical factor is the temporary build up in global inventory leading to massive fall in demand & related inventory price correction. Structural factor is relating to competition from Ecuador which has been making good headway into the USA market. In the meanwhile Coastal has done a good job developing new relationships with Japanese and Korean customers. Furthermore, they are also diversifying the business by adding an ethanol plant. It also seems from trade data that the bottom for shrimp cycle is also behind. In 18-24 months, once the ethanol plant is fully utilized as well, we could be looking at ~70 cr of PAT here and potentially upto a Rs 1000 cr M-Cap from 350 cr today.

2. Rupa/Dollar: largely reversion to mean story. Industry has struggled due to falling RM prices affecting margins and high inventory affecting demand. Historically fair value here should be 2-3x P/S (15-20x EV/EBITDA & 12-15% EBITDA%) and we are at the bottom end of the range. The sales figures are also lower than normal due to a poor demand environment. So there should be decent sales growth as well as P/S rerating in these companies.

3. Punjab Chemicals: Had bought post Q1 results, effectively saw this as a specialty chemical maker trading at commodity valuations. But post some more research have been disappointed with mgmt aggression and execution. Will probably exit and track a bit more.

Portfolio now looks as follows:

At this point dont have many incremental deployment opportunities. Studying the chemical sector to see if I can find some opportunities.

[yrm91]

Been a busy few months. Definitely some froth in smallcap space; hard to find long term ideas where the risk-reward is better than the banks. Following changes made to the portfolio:

Additions:

1. Arvind Fashions: Bought this back post the Sephora sale and relatively splendid quarterly results (compared to peers). Same thesis as posted earlier in the thread Yash Portfolio Feedback - #16 by yrm91. 3 out of 5 brands that the company now operate are splendid and hugely profitable while the other 2 are a work-in-progress. Since the time I exited, the company has also done fantastic work on the Working Capital side. I expect 12-15% revenue growth here and think fair value is >2x P/S (even including minority stakes) vs 1.2x today.

2. Bought Inox Wind: Cyclical Turnaround bet. The wind energy has gone through a horrific 5-6 years which started with a few regulatory changes and aggressive bidding on the part of power developers. This has also led to industry consolidation; only those players who could support the companies could survive. Wind power capacity addition slowed from 4GW to <2GW over the last 5 years. In the recent past, govt has put more emphasis on the wind power sector. Number of initiatives such as 1) 10 GW annual project tendering commitments, 2) Pooled power tariffs, 3) Hybrid Policy & 4) Green Open Access are expected to lead to a revival of the industry. I expect capacity additions to grow 3-4x in the next 3 years. By FY27, Inox Wind could be executing ~1GW of projects annually. This would translate to revenues of 7500cr and EBITDA of ~1000 cr plus the stake in the asset light O&M subsidiary. These numbers could translate into a M.Cap of 20-30k cr by FY27 for the consol entity.

3. Added Godfrey Phillips: Credit @harsh.beria93 for this one. A low risk medium term opportunity. Company is a beneficiary of the Russia-Ukraine war which has re-oriented trade toward India. Bulk of the revenue growth of the company is due to exports which have scaled 3x in the last 2 years. Domestic high margin business has also recovered smartly from Covid. Good place to park money while I look for new ideas.

Sells:

1. Indiamart: Was shocked at the supplier additions number in the quarter gone by. They were the result of both higher attrition and lower gross additions. The lower gross addition is especially concerning given the large investment the company made on the distribution side in the last 18 months. These could still be temporary aberrations based on recent prike hikes. However, I prefer to wait on the sidelines to confirm that. Long term value creation here has to come from volume growth and any data points that put a doubt to that is a big blow to the thesis. Supplier additions recovering to 5k would cause me to relook again.

General thoughts: A lot of positions are now starting to slip into sell territory on account of valuations where expected returns fall below 10%. These are Raghav Productivity, Faze Three, even Inox Wind and MCX post the large rallies. On the flipside I am struggling to find many pockets of opportunity other than the large banks. Rural economy related stocks is an area that I have started looking at. General pessimism can be seen here which is reflected in the stock prices. Inflationary pressures easing as well as election related short term income boost could see a rural recovery in the next year. Some bit can already be seen in rising 2W volumes. However, there are a lot of discretionary consumption stocks in this universe: underwear companies (already owned), apparel companies (VMart), rural focussed FMCG companies (Bajaj Consumer, Emami), tractor companies, etc that are available at reasonable valuations.

[yrm91]

Portfolio Review:

Returns:

An exceptional year for the market overall and especially for the smallcap index and investors who tilt their portfolio toward smaller companies.

Things that worked well in the year:

• Early identification of some key trends such as microfinance cycle turn, options trading & “value” in loss making technology companies helped returns. In fact, these three trends alone were responsible for ~60% of my yearly return.
• Large tilt in the portfolio toward smallcap stocks. At the end of the year, ~65% of the pf was invested in small &midcaps
• Active churn: churn decisions in general added value in the year: purchase of winners such as Indo-Count, Inox Wind, FDC, etc as well as early churning out of poor performers such as Delta Corp & ICICI Lombard helped to optimally use capital. The last 2 years have really shown me the value of churn in a small size portfolio.

Things that Didnt Work Well:

• Opposite to last year, large allocation to banking names was a drag on returns.
• Gepgraphical diversification into Chinese stocks was a disaster. Hard to see when this cycle ends but stocks there are unbelievably cheap. For now, plan to give the economy one more year to see signs of a turnaround. Good learning that sometimes things are cheap for a reason.
• Lot of misses (post research). In general, missed a lot of opportunities in the broad industrials/capex theme. I have noticed that I struggle to evaluate these companies and my predictions are often extremely wide of the mark. Definitely need to do some work here to understand the cycles better. Some of the misses were GE T&D, HBL Power, BSE, Sandur, Action Construction, Prestige, Voltamp, Disa India (all of these were 100%+ yearly returners).

In general satisfied with how the year has gone. However, as we begin the new year, the situation seems similar to end 2021 whereby valuations are in general stretched for most parts of the market and its hard to find great opportunities without diluting quality filters. 2024 is likely to be more challenging than 2023 and stock selection, active management and capital preservation are going to be key in the year. In addition, at the beginning of the year, there seem to be a lot of stocks with unfavourable risk-reward in the portfolio such as MCX, Zomato, Raghav, Faze Three. However, as seen in the previous year, one only needs to identify 2-3 new themes/ideas which with proper weight can lead to significantly alpha creation.

[yrm91]

Portfolio Update:

1. Added Garware Hi-Tech Films: A highly differentiated film manufacturer that is more like a consumer brand. Incredible economics are shown in the low receivable days. Company is in niche high margin segments and has been successful in opening up new opportunities such as Paint Protection Film in its existing and new markets. High growth visibility led by new products and penetration in existing and new geographies. Management has guided for revenue growth of 20%+ over the next 2-3 years. Company does core ROCE of 25-30% and turns almost all profit into CFO and available at ~25x PE. Whats the catch? Truly awful corporate governance. Promoters are openly stealing from the company via RPTs and obscenely high salaries. Took a small allocation here given high visibility of growth. Its one of the best manufacturing companies I have ever seen and would be trading at 2x the current multiple with better governance. However, with no visibility of that happening, I am a fair weather friend here and will try and trade it out before the music stops.

2. Added weight in Dollar Industries where more channel checks showed a structural market share gain story here. Also swapped Rupa allocation to Dollar. Some other minor weight changes like Raghav and Faze Three due to valuations.

3. Exited Inox Wind. Very quick catch up to fair value and stock already in a amtter of months has started to discount an extremely rosy future. Exited @450/share

[yrm91]

Portfolio Updates:

Not too much change. Bit of churn in a few tail positions and few addition and weight changes

Buys:

1. Agarwal Industrial Corporation: One of the largest importers and specialized logistics players in the bitumen place. The company is also completely integrated, owns its own ships, storage tankers at ports, processing units as well as logistics trucks. For now, View this as a short term bet to play the expected unpriced pickup in Q4 numbers. Along with this, doubling of ship transportation capacity in Q4 should also lead to significant growth in profitability in the upcoming year. Could even be a longer term play if road capex revives as incremental demand will all be met via imports. Could make a 50%+ return here very quickly.

2. Modison Ltd: Still a work in progress and could be an exciting long term play on growth in the power sector. Govt has announced ambitious plans to grow the country’s transmission network in order to future proof renewable capacity addition which is more transmission heavy. The biggest growth will come in high voltage substation capacity addition as per CEA projections. Modison seems to be the only company in the country that makes contacts for HV switchgears. 50% of the company’s EBITDA comes from this product. In addition, company also makes LV contacts which has immediate tailwinds with real estate demand and is also a beneficiary of the govt smart meter drive. Company is not expensive on normalized margins (<15x PE). Expect a catchup to normal margins this quarter itself with silver prices shooting up. Given the immediate tailwind to margins, it became necessary to buy even with limited research.

3. Added PB Fintech and HDFC Bank

Sells:

1. Sold SIS: one that I was wrong in. Kept waiting for the turnaround in margins that never came. The entire pain was self-inflicted by mgmt. They chose to take poor contracts with low margins during Covid to show growth and appease investors. This is biting them back now. Some of the acquisitions have also been poor with less due diligence. Not qualities I want in long term investments. This was one of my worst ever investments in terms of opportunity cost given it was bought in 2020 and yielded <20% absolute returns.

2. Coastal Corp: Another one it seems I made a mistake in. The structural factors of competition from Ecuador in the shrimp industry are outweighing everything else. There is still some hope here with anti-dumping ruling by USA expected soon. In addition, there have been challenges with grain based ethanol as well with FCI not releasing broken rice stock to ethanol producers amongst shortages/high inflation in rice. Enough for me to exit. Had redeployment opportunities as well.

3. Trimmed Faze Three, Godfrey Phillips & Bharti Airtel. All playing out well; just valuation and opportunity cost reasons.

4. Sold Garware Hi-Tech: Quick buy and sell. I feel I diluted PF quality in order to buy this with the known governance issues. In addition, trade data showed the pickup in PPF films may have been temporary.

General Thoughts:
I continue to have more ideas than resources at the moment. While market may be choppy in the near term, I feel there are still plenty of good opportunities available. It helps that in general, I believe the PF quality to be the highest at this point than it’s ever been in the past. Finding plenty of opportunities in financials space for even long term investments. At the same time there is clearly froth in certain segments such as a few PSUs in certain segments, hot themes: railways, renewables, defense and cap goods where prices are much much above fundamentals.