Portfolio Update - 2014

Another year comes to an end - one which has been an eventful year for India, with a new government at the center, one which has a majority in the Lok Sabha, after decades of coalition politics. The stock markets have run up a lot on partly fuelled by overall global equity market rallies and partly by the hope of an economic revival in India under the new government.

2014 was also a great year from a return perspective. My portfolio returned 135% gains during the year as opposed to a 30.75% rise in the Sensex and 81.67% of the HDFC Equity Fund. (As I have explained above, I try to see my performance with respect to this fund just to make sure that I am not wasting my time picking stocks!!)

Most of the great return came from just sitting out on the picks that I had in the portfolio. That is the beauty of having a long term portfolio with good and stable businesses. I continue to hold on to nearly all my long term picks and remain convinced about their growth prospects in the future. 

During the year, some notable changes in the portfolio were as follows:
New additions - CCL Products, Sintex, Symphony 
Reduced holding - Mayur, Cera
Completely booked profits / losses - Selan Exploration, Finolex Cables, Page Industries

I have also updated the Portfolio page.

The case for Mayur was very interesting and I had to spend a lot of time to think through. It continues to be a business which I am most confident about in the long term and the stock performance over the years has been a 100+ bagger for me, so endowment effect was very strongly present. The only reason to sell was I decided to book some profits as it had grown above 25% of my portfolio and was creating risk that I was unwilling to take.

I wish all my friends a great, prosperous and rewarding 2015. 

May the Force be with you in 2015!

Disclosure: I am not an investment analyst. Stocks discussed in the blog should not be construed as buy / sell recommendations. This blog is a chronicle of my actions and thoughts in the markets. Please consult an accredited financial advisor for financial advice.

Stock Update: CEBBCO

The last few days for investors in CEBBCO has been traumatic. The stock has literally tanked and is now close to 60 levels. On Friday, it was down nearly 20%. So, overall in a matter of a few weeks, the stock is down nearly 40% (from around 100 levels to 60).

The question in everyone's mind is what should we do now. There are 3 things one can do now -- there are always only these 3 things one can do ;-).
1) Buy more
2) Sell and get out
3) Hold and watch!!

Personally, I am a bit perplexed at the steep 20% fall on Friday. The results that the company announced was reasonable. Net Sales has gone up y-o-y; so has net profit & EPS.

The only negative news that has come out is the pledging of shares by the management. The percentage of shares pledged is fairly low (around 2% of total outstanding shares), so that too should not be a big deal. Unless, insiders know something that we retail investors don't - things like corporate governance issues - there may not be a fundamental case for such a dramatic fall in prices.

So, in this case, I am planning to hold on to my shares - just wait and watch to see further developments. The stock is fairly close to its 52 week low so there may be some buying around these levels (I doubt it though, given he steep fall last week).

Stock Pick: Amara Raja Batteries (ARBL)

1	Describe the business in a few sentences. What does the company do? Who are its primary customers?
	Amara Raja Batteries is a lead acid battery manufacturer. They own the popular Amaron brand. They produce automobile and industrial batteries. They supply to almost all major auto companies (4 wheeler & 2 wheeler) and telecom companies.
2	Is the sector that the company is in growing? i.e. Is there a headwind or a tailwind present?
	The sector is growing and is likely to continue its growth trajectory. Industrial batteries will be required for both new and replacement demand for a larger installed base of UPS & power backup users (Hospitals, Offices, Telecom towers etc). Similarly, demand for automotive batteries will continue as the replacement demand will continue to be robust. Dieselisation of cars will also drive towards more powerful batteries and Amaron is better placed inthis regard than its primary competitor and market leader Exide.
3	What is the current market share of the company? Can the market share be increased?
	OEM 4 Wheeler = 26% 2 Wheeler  = 0% (Just getting started, so good growth expected in this segment) Replacement 4 Wheeler = 34%
4	Who are the primary competitors? Why is this company a better investment than them?
	The market is an effective duopoly between Exide and ARBL with Exide being the market leader. ARBL, being the smaller company, has been able to grow much faster compared to Exide. In addition, ARBL has much better return ratios (RoE = 29% vs 16% of Exide). Exide’s PE is 29 at CMP of 153 ARBL’s PE is 15 at CMP of 221 Historical data: ARBL Compounded Sales Growth 10 Years: 33.68% 5 Years: 31.48% 3 Years: 20.96% Compounded Profit Growth 10 Years: 46.64% 5 Years: 34.64% 3 Years: 23.03% Return on Equity 10 Years: 27.82% 5 Years: 29.36% 3 Years: 29.91% Exide Compounded Sales Growth 10 Years: 21.62% 5 Years: 19.71% 3 Years: 10.81% Compounded Profit Growth 10 Years: 25.43% 5 Years: 24.63% 3 Years: 16.46% Return on Equity 10 Years: 25.63% 5 Years: 26.15% 3 Years: 25.50%
5	What is the owners’ and managements’ stake in the company?
	The company is a JV between the Bhalla’s and Johnson Controls (world’s leading battery company). Both the entities own 26% each in the company. Jayadev Galla, the MD, is also interested in getting into politics and there was a news that he was to contest polls on a Congress ticket. His mother is a minister in the AP government. This may be a problematic area for the company. The MD delving into electoral politics may not find sufficient time to devote in growing the company's business.
6	Are management's salaries too high?
	Management salaries including profit commissions are extremely high. Between the father-son duo of the Galla’s they take nearly 28 cr (FY12).

1	How much debt is there in the balance sheet? Is it increasing, decreasing or remaining constant?
	Practically debt-free. Most of the debt is working capital. For most of the last 10 years, debt level has been very low. Between 2006-07 to 2008-09 debt was relatively higher but has since reduced significantly.
2	Is the debt level normal for the sector the company is operating in (i.e. how much is the debt-equity ratio of its nearest competitors)?
	Exide has zero debt as well. This is a good cash flow generating business.
3	Is the Networth rising over the years?
	Networth has gone up significantly over the last 10 years. It has moved up from 175 cr in 2003 to 823 cr in 2012, growing 18.77% CAGR.
4	Has the company increased its sale, net profit, operating margins and net margins over the years?
	Yes. OPM has been around 15% and NPM around 8-9%.
5	Has the company increased it RoE, RoCE, (RoA for financial companies) over the years or atleast maintained it? How does it compare to its competitors?
	It has maintained RoE, RoCE at healthy levels and is better than Exide.
6	Has the EPS growth over the years kept pace with sales/profit growth? (Impact of dilution)
	No dilution. The stock has split from a FV of 10 to 2 in 2007. And from FV of 2 to 1 in 2012. The company has given a 1:2 bonus in 2008.
7	Is the company operating cashflow positive? Is the operating – investment cashflow positive? Is the company net free cashflow positive? Is the Operating cash flow higher than earnings per share?
	Strong cashflows.
8	Does the company pay tax, dividends every year?
	Company pays tax at the rate of around 30% Dividend payout ratio is 17% Dividend Yield: 0.85%
9	Is the Free Cash Flow per share higher than dividends paid?
	Much higher.
10	Is the business capital intensive?
	Business is not capital intensive. Company does not need to add debt and has strong cash flows.

	Valuations
1	What is the expected valuation?
	FY13E EPS = 16 FY14E EPS = 20 Expected PE of 15~18 would give a price range of 300-360 in 1.5 yrs (Upside of 35%-60%).
2	Is the PE ratio below 15?
	PE is 15.
3	Why do you think the stock is under priced? Is there an expectation to double the investment in 2-3 year timeframe? If not, why bother?
	Being a duopoly and strong growth expected on the back of replacement demand, a 25%+ growth cannot be ruled out for the next 3 years. In addition, there is a possibility of re-rating to somewhere close to 18-20.
4	What has been the share price over the last 5 years? Has it matched the profit growth? If not, why not? Does the market know something I don’t?
	Over a 5 year period stock has returned 373% vs 8.63% of the Sensex

	Risks
1	What will happen if the interest rates go up (or down)?
	No impact
2	What will happen if there is cheap import (from China or somewhere else)?
	Very difficult to import and create a retail presence. So, no problems on this  front.
3	Is the Sensex/Nifty PE above 22 (broader market overheating)
	Sensex PE is around 17 and P/B is 3.13. Not very overvalued but it has run up in the near past.

Recommendation: Long term investors can add ARBL to their portfolios at the CMP and add more on dips or on periodic basis.

Disclosure: I am invested in ARBL and am likely to increase my exposure in the future. Please do your own due diligence before investing.

Stock Update: Cera Sanitaryware

The company announced that it has appointed Shri S.C. Kothari, as C.E.O. of the Company. Mr Kothari  joined Cera as Corporate Finance Head. In 2002 was made CEO of the company. He had retired from the company in Aug.2008. So, this looks like an interim measure to bring in the previous CEO back at the helm. 

I am getting a feeling that option 3 is playing out from my previous post.

Valuation for the company and political uncertainty in India continues to be high and investors need to be cautious.

P.S.: Looking at some companies. Should be able to post about them in a couple of weeks.

Stock Update: Cera Sanitaryware

With the untimely death of Mr. Vidush Somany, the MD of Cera, there are a lot of questions in the mind of investors. Here are possibilities:-

1) There will not be any significant long term impact to the performance to the company. Mr. Vikram Somany, the founder and CMD of the company will continue to drive the company.

2) If there are no natural successors, then Mr. Vikram Somany may decide to sell out to another company at a later point in time.

3) If there are other potential natural successors, then Mr. Vikram Somany may continue at the helm or hand over to a professional CEO, till the successor is groomed.

Whichever scenario plays out, the business may see short-to-medium term weakness as it adjusts itself on the loss of its prime mover. The valuation is also not cheap.

Recommendation: Adventurous investors can continue to hold with a stop loss around 320-325 levels. I would suggest gradual profit booking of atleast 50% of your positions and then waiting to see how the business actually pans out. At this moment the risk-reward is NOT in favour of the long term investor.

Disclosure: I am invested in Cera Sanitrayware and HSIL and my views are likely to be biased. Please do your own due diligence before investing.

Supreme Industries Vs Astral Poly: Quick Look

Here is a quick look at Supreme vs Astral:

	Astral	Supreme
CMP	286	280
Face Value of Share	5	2
Sales	609.31	2962.2
Net Profit	39.46	240.52
Op Margin	14.15%	15.85%
Net Margin	6.83%	8.08%
RoCE	28.83%	45.6%
RoNW	21.55%	37.5%
Debt-Equity	0.34	0.4
Inventory Turnover	4.96	9.44
Asset Turnover	2.86	2.39
Material Cost	75.32	65.82
Dividend Payout Ratio	7.39	36.82
PE	15.17	14.9
P/B	3.49	5.58
Div Yield	0.4%	2.13%
Last 5 yr Rev Growth	42%	22%
Last 5 yr Profit Growth	23.51%	47.29%

  


The numbers are probably self-explanatory! Interestingly, Supreme has consistently improved its RoCE over the last 10 years. It used to be around 10% in 2002-03 and has moved to nearly 45% currently. It's CPVC business has grown 60% this year.

What I am most interested in is however, the composites business, which I think may be a big differentiator. This is their 5th and newest line of business. The company has received ISO approval for making fibre glass gas cylinders and is expected to start their trial run from Jan'13.




Disclaimer: I am invested in both Supreme and Astral and they are in top 5 holdings in my portfolio.