Portfolio Performance - 2012

This year onwards I have decided to close my stock books on Dec 15th to enable me to enjoy the Christmas season a bit better and catch up on some pending reading. So, here is an update on my portfolio and how it performed. I believe quantitative evaluation is important although performance (good/bad) needs to be judged over a 3-5 year period.

This year was an interesting and eventful year (probably like any other). Overall the market performed well, contrary to popular belief. Gold was up to record highs this year based on the economic fears around the world. China and India continued on its path of guzzling gold. The Indian rupee fell to Rs 56 levels before recovering to around the current 54 odd levels. How long it stays at this level or which direction it moves next is anybody's guess.

The Indian government finally woke up and started on some much needed reforms. FDI in retail, creating a Cabinet Committee on Investments (CCI), the urea investment policy and the much awaited Land Acquisition Bill. There were significant activities in the political front with the civil society movement and Arvind Kejriwal launching a political party amidst a plethora of scam accusations.

Sensex started the year at 15455 and is up 25% till date. My portfolio performed well over the year. It appreciated 71% over this period. I have also started looking at comparing the performance with HDFC Equity Fund (a fund which I admire for its consistent and long term good performance). HDFC Equity Fund has returned about 30.5% over this period.

I have not added any money over the period of this year so any changes to the portfolio weightage is due to relative performance of the stock. I have added Amara Raja Batteries, Atul Auto, CEBBCO, Kaveri Seeds and Thangamayil Jewellery. I have re-added PI Indistries more from a tracking perspective and intend to build up my positions if the results pan out well in the next 2 quarters. I have booked profits in Elecon, GEI Industrial, HSIL, IFB Agro and Opto Circuits.

Name of Company	% of Portfolio (Apr'12)	% of Portfolio (Dec'12)	Comments	Cumulative Portfolio%
Mayur Uniquoters	11.68%	19.08%	Hold / Buy On Declines	19.08%
Supreme Ind	15.33%	16.37%	Hold	35.45%
Shriram Transport Finance	7.75%	8.22%	Buy	43.67%
Astral Poly	5.90%	8.02%	Accumulate	51.69%
Cera Sanitaryware	3.92%	7.88%	Accumulate	59.57%
Yes Bank	6.02%	6.03%	Buy	65.60%
Amara Raja	0.00%	5.06%	Buy	70.66%
Titan Industries	4.59%	4.32%	Hold / Sell On Advances	74.99%
JK Lakshmi Cement	2.88%	3.51%	Buy	78.50%
Balaji Amines	5.04%	3.51%	Hold	82.02%
Sintex India	0.91%	3.00%	Buy (2 year horizon)	85.02%
Auto Auto	0.00%	2.88%	Accumulate	87.90%
Gujarat Reclaim	2.67%	2.56%	Buy	90.46%
Balkrishna Industries	6.51%	2.44%	Hold & Watch FY13	92.90%
CEBBCO	0.00%	2.20%	Hold	95.10%
Kaveri Seeds	0.00%	2.02%	Accumulate	97.12%
Thangamayil Jewellery	0.00%	1.22%	Hold / Buy On Declines	98.34%
Cravatex	5.23%	0.84%	On watchlist for FY13 results	99.18%
PI Industries	0.00%	0.50%	Accumulate	99.69%
Cash	10.04%	0.31%		100.00%
Elecon Engg	2.49%	0.00%	Profit Booked	100.00%
GEI Industrial	3.73%	0.00%	Profit Booked	100.00%
HSIL	2.05%	0.00%	Profit Booked	100.00%
IFB Agro	1.89%	0.00%	Profit Booked	100.00%
Opto Circuits	1.37%	0.00%	Profit Booked	100.00%

 
I intend to continue my focus on mid & small cap companies and ones which are reasonably priced.

Stock Idea: Thangamayil Jewellers - The gold edge

Describe the business in a few sentences. What does the company do? Who are its primary customers?

Thangamayil is a gold jewellery retailer based mainly out of Madurai and Tamil Nadu. 92% of sales are from gold jewellery. 30-35% sales are from recycled jewellery. The company currently operates 22 stores and is looking to expand its stores by 3-4 every quarter.

Is the sector that the company is in growing? i.e. Is there a headwind or a tailwind present?

The gold retailing industry is very fragmented mostly with local small retailers. Very few large branded players in the market – Tanishq and TBZ are a few large players. Gold has been a traditional & sentimental asset class for Indians. And with the rise in its price in the last 5 years, the attachment towards it is unlikely to go down in a hurry, unless there is a lon & protracted price decline. That is an unlikely event till there is a long term improvement in global financial markets.

What is the current market share of the company? Can the market share be increased?

Currently, the company has a 25% market share in and around Madurai. It will be difficult for the company to increase market share as newer players are entering their markets. To increase sales, the company is moving into newer territories, smaller cities and towns in Tamil Nadu. The company has seen a rise in customers opting for its gold savings schemes. From 38,000 customers, it has gone up to 80,000 this year and is expected to be close to 125,000 by year end. This provides free funds to the company also provides assured customer sales.

Who are the primary competitors? Why is this company a better investment than them?

Large players like Tanishq, TBZ would not go down to the Tier II cities like Madurai before penetrating the Tier I cities. Similar sized players like Alukkas Jewellers, Bhima Jewellers, Kalyan Jewellers, Lalitha Jewellers, Kirthilal Jewellers are entering Madurai and may take away some market share from the company. An important factor in jewellery retail is “trust”. Women (the main decision makers wile purchasing jewellery) tend to stick to a particular store/brand and since pricing is the same across companies, personal relationships with the retailer are definite plus point. Thangamayil is the only small sized jewellery retailer that is listed on the stock exchanges.

What is the owners’ and managements’ stake in the company?

Promoters hold nearly 70% stock of the company.

Are management's salaries too high?

Management salaries were increased in 2012 to 90 lakhs (9 million p.a.) and 1% of net profits. At a 60 cr profit, 1% commission comes to 60 lakh. So, an annual compensation of 1.5 crores, which is not exorbitant by today’s standards.

How much debt is there in the balance sheet? Is it increasing, decreasing or remaining constant?

Company has a debt of 250.93 cr on its books. Most of the debt is short term working capital debt to finance buying gold and maintaining inventory at store level. Since, the debt is used to purchase gold, the risk associated is limited, unless there is a very sudden and sharp price decline in gold (which is a very low probability event).

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)?

Thangamayil’s D/E is 1.85. It has increased over the last 5 years. This is one area which needs to be carefully watched. Most gold retailers have high D/E ratios with the notable exception of Titan (which is practically debt free). TBZ has a D/E ratio of 1.28.

How much cash is there on the BS? What is the cash per share?

Cash is 9.5 cr as on Mar 31, 2012. Not significant with respect to either equity or debt.

Is the Networth rising over the years?

Networth has gone up from 22.9 in 2008 to 146 cr in 2012 at a growth rate of 59% CAGR.

Is the inventory/sales rising or more-or-less in the same range? [Rising ratio may mean company is not able to sell its products.]

Inventory / Sales is nearly 30% for the last 2 years.

Is the debtors/sales rising or more-or-less in the same range? [Rising ratio may mean company is not able to collect payment.]

Debtors is negligible.

Has the company increased its sale, net profit, operating margins and net margins over the years?

TRENDS: 5Years 3Years 1 Year Sales Growth 54.83% 66.12% 53.84% OPM 8.79% 9.23% Profit growth 80.3% 87.6% 9.64% RoE 41.41% 41.97% 48.35%

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?

Due to the extensive use of leverage, ROCE is nearly double that of RoE. Narration Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 RoE 30% 27% 21% 32% 40% RoCE 23% 20% 16% 19% 22%

Is the company operating cash flow positive? Is the operating – investment cashflow positive? Is the company net free cashflow positive? Is the Operating cash flow higher than earnings per share?

Company has negative operating cash flow for the last 5 years.

Does the company pay tax, dividends every year?

Company is paying a standard tax rate. Dividend payout. Div yield is over 2% at CMP. The company has decided to expense out all its advertisement and publicity expenses (written off accumulated deferred revenue expenses) in this year. This will reduce reported net profits for FY13. e.g. In Q2Fy13, profit was under stated by 7.3 cr as a result of expensing deferred advertisement expenses.

Is the Free Cash Flow per share higher than dividends paid?

The company has been consistently running a negative operating cash flow in order to grow. Again, a key monitorable.

Is the business capital intensive?

Gold retailing is very capital intensive. The company maintains around 1,500 kgs of gold as inventory. As the numbers of stores go up, the size of the inventory also needs to go up.

What is the possible valuation or price target?

FY12 EPS is 43.05. Unadjusted EPS for FY13 could be around the same level as last year. FY14E EPS could be around 60-65. A conservative PE of 8-10 could provide a price range of 480 – 650 which is substantially higher from CMP.

Is the PE ratio below 15? Is the PEG above 1.0?

PE is around 8.5 (TTM). PEG is well below 0.5 as the company has been growing well over the last 3-5 years.

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?

The peer group of gold or jewellery companies is all trading at much higher earning multiples. The differential is primarily because Thangamayil operates in Tier-II & Tier-III towns and not the large metro cities.

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?

The stock has moved from about 70 to 330 in approximately 3 years (a return of 368% vs 20% of the Sensex in the same period.

Guru Speak: Michael Mauboussin on Luck vs Skill in Investing

Michael Mauboussin - One of the best minds out there.

Guru Speak: Buffett Partnership Letters (1957 to1970) - Key Takeaways and Learnings - Part VI

In continuation of reading the Buffet Partnership Letters, here is the 6th part in the series. You can read the previous posts here:
Part I
Part II
Part III  

Part IV 

Part V

I would request you to read Buffett's 1967 letters. Those two letters are by far the best I have read so far and shows some of the crystal-clear thinking that became his signature in the later years. I try to capture some of the best lines from the letters.

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1966 July

If we start deciding, based on guesses or emotions, whether we will or won't participate in a business where we should have some long run edge, we're in trouble. We will not sell our interests in businesses (stocks) when they are attractively priced just because some astrologer thinks the quotations may go lower even though such forecasts are obviously going to be right some of the time. Similarly, we will not buy fully priced securities because "experts" think prices are going higher. Who would think of buying or selling a private business because of someone's guess on the stock market? The availability of a quotation for your business interest (stock) should always be an asset to be utilized if desired. If it gets silly enough in either direction, you take advantage of it. Its availability should never be turned into a liability whereby its periodic aberrations in turn formulate your judgments. A marvelous articulation of this idea is contained in chapter two (The Investor and Stock Market Fluctuations) of Benjamin Graham's "The Intelligent Investor". In my opinion, this chapter has more investment importance than anything else that has been written.

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1967

In the last few years this situation has changed dramatically. We now find very few securities that are understandable to me, available in decent size, and which offer the expectation of investment performance meeting our yardstick of ten percentage points per annum superior to the Dow. In the last three years we have come up with only two or three new ideas a year that have had such an expectancy of superior performance.

We will not go into businesses where technology which is away over my head is crucial to the investment decision. I know about as much about semi-conductors or integrated circuits as I do of the mating habits of the chrzaszcz. (That's a Polish May bug, students - if you have trouble pronouncing it, rhyme it with thrzaszcz.)

Furthermore, we will not follow the frequently prevalent approach of investing in securities where an attempt to anticipate market action overrides business valuations. Such so-called "fashion" investing has frequently produced very substantial and quick profits in recent years (and currently as I write this in January). It represents an investment technique whose soundness I can neither affirm nor deny. It does not completely satisfy my intellect (or perhaps my prejudices), and most definitely does not fit my temperament. I will not invest my own money based upon such an approach hence, I will most certainly not do so with your money.

The evaluation of securities and businesses for investment purposes has always involved a mixture of qualitative and quantitative factors. At the one extreme, the analyst exclusively oriented to qualitative factors would say. "Buy the right company (with the right prospects, inherent industry conditions, management, etc.) and the price will take care of itself.” On the other hand, the quantitative spokesman would say, “Buy at the right price and the company (and stock) will take care of itself.” As is so often the pleasant result in the securities world, money can be made with either approach. And, of course, any analyst combines the two to some extent - his classification in either school would depend on the relative weight he assigns to the various factors and not to his consideration of one group of factors to the exclusion of the other group.

Interestingly enough, although I consider myself to be primarily in the quantitative school (and as I write this no one has come back from recess - I may be the only one left in the class), the really sensational ideas I have had over the years have been heavily weighted toward the qualitative side where I have had a "high-probability insight". This is what causes the cash register to really sing. However, it is an infrequent occurrence, as insights usually are, and, of course, no insight is required on the quantitative side - the figures should hit you over the head with a baseball bat. So the really big money tends to be made by investors who are right on qualitative decisions but, at least in my opinion, the more sure money tends to be made on the obvious quantitative decisions.

When the game is no longer being played your way, it is only human to say the new approach is all wrong, bound to lead to trouble, etc. I have been scornful of such behavior by others in the past. I have also seen the penalties incurred by those who evaluate conditions as they were - not as they are. Essentially I am out of step with present conditions. On one point, however, I am clear. I will not abandon a previous approach whose logic I understand (although I find it difficult to apply) even though it may mean foregoing large and apparently easy, profits to embrace an approach which I don’t fully understand, have not practiced successfully and which, possibly, could lead to substantial permanent loss of capital.