Portfolio Update

Being a value investor is fun!! It gives one a leeway for being lazy and inactive while putting on a facade of being intellectually stimulated. 

The above is a disclaimer for delaying updating my portfolio at the end of July and doing it a month late :-)

The updated portfolio is on the Portfolio page of the blog.

The performance of the portfolio has been extremely satisfying to me. Luck does indeed catch up sometimes. For the first half of the year:
Portfolio - 89.3% 
Sensex - 21% 
HDFC Equity Fund - 40% 

HDFC Equity Fund is my benchmark mutal fund. My thesis is that if one can't perform better than a good fund over a period of time, then better invest in the fund and pursue other passions.

This time the returns were distributed and came from many of the portfolio stocks - Mayur contributed the most with a stellar rise, taking the price to an uncomfortable territory. Astral also has gone to a level which is making me uncomfortable, but not yet to the point of selling. Finolex Cables, Balkrishna, Ajanta, Alembic, PI Industries all contributed their fair share in the performance.

In the first half, I added Bajaj Finance, PTC India Financial Services, Kitex Garments and Selan Exploration and booked profits from Page & Atul Auto. 

I believe Bajaj Finance is on a very strong wicket and will do very well for a long period and is available at reasonable valuations (more I suspect due to the fact that they did not get a banking license). PTC Finance is also doing extremely well and has good visibility of earnings in the short and medium term though longer term is hazy. I need to do more due diligence on Kitex and Selan. 

Currently, I am relooking at some of my old favourites like Sintex, Shriram Transport and some others like Persistent Systems, Symphony Coolers to see if they fit into the portfolio.

In my opinion, we have just started a bull-market and we have a long, long way to go. So, good stock selection and portfolio weightage can give outsized returns even from these levels.

Happy Investing!

Stock Idea - Bajaj Finance

Bajaj Finance Ltd (BFL) (CMP - 2293, NSE:BAJFINANCE) is a financial lending company from the Rahul Bajaj group. The company is involved in multiple areas of lending in 3 verticals - retail (consumer), SME & Commercial with a split of 40:50:10 as of now. The company is looking to increase the commercial loan book to 20%.

The NBFC sector is growing consistently. Consumer finance is growing very fast. This is reflected in the growth of the company in the past as well as anecdotal experience at all consumer electronics stores and auto dealerships. With more and more consumption-driven culture and higher disposable incomes (specially in urban centers with double income families), consumer loans is likely to grow well for a very long period of time. Indian penetration of consumer loans / GDP is 11%, whereas it is 20% for China, 23% for Brazil, 54% for Germany and 99% for US. Even at the lower end of the spectrum, there is an opportunity to double the loan/GDP ratio.

In 2 wheeler finance, BFL has a 18% market share. It is the largest 2-wheeler lender in India focused on semi-urban & rural markets. Currently contributes to 30% of Bajaj Auto's 2 domestic wheeler sales. 

It has a 15% market share in consumer electronics finance in India and is the largest in India.

The market is very fragmented with other NBFCs and banks in the fray. BFL has a competitive advantage of being from the Bajaj group so will get a first shot at customers buying Bajaj 2-wheelers.

A lot of banks & NBFCs are in the space. Main competitor is HDFC Bank, followed by other NBFCs like Sundaram Finance, Shriram City Union etc. 

BFL has two major advantages - i) it is already entrenched in Bajaj Auto dealerships and gets an advantage in sourcing customers in the 2-wheeler business and ii) it is well entrenched in the large malls / electronic stores/chains for consumer electronics loans. It is not going to be easy to replicate the reach by others. 

• In FY2014, BFL’s total income was up 31% to 4,073 crore
• Profit before tax (PBT) increased by 25% to 1,091 crore
• Profit after tax (PAT) was up 22% to 719 crore
• BFL’s assets under management rose by 37% to 24,061 crore
• Loan deployment had risen by 34% to 26,024 crore. 
• Consumer lending grew by 36%
• Small and medium enterprise (SME) lending grew by 52%. 
• Commercial lending de–grew by 11% due to the company’s cautious stance on the precarious state of India’s infrastructure sector
• Capital adequacy as on 31 March 2014 was 19.14%, is well above the RBI norms
• BFL’s net NPAs were at 0.28% of total assets
• Present in 117 cities of India, BFL continued to be the largest consumer durables lender in country — and helped finance 15% of all consumer electronics sold in the year. 

The stock is available at a PE of 15 and a P/B of 2.7 which seems reasonable in an environment where all stocks have been bid up aggressively. BFL has good consistent profit growth of 87% over 5 years and a sales growth of 47% over the same duration, which has been rather difficult for the Indian economy. With any improvement in the economy and reduction of interest rates, BFL is well poised to outperform the industry and provide good growth over the longer term.

Note:- I am invested in the stock and thus have a vested interest. Please consult your financial advisor or do your own due diligence before investing.

Update on Finolex Cables

The Economic Times reports that the IT ministry is looking to connect 50,000 gram panchayats through non optical fiber network this year followed by 2L gram panchayats in next 2 years. 

Finolex Cables, which operates and is the leader in this space and which I have written about in my earlier posts (read them here and here) continues to do well. 

With an IT savvy PM, I expect the broadband rollout plan to be aggressively followed through. The power cable business is also likely to pickup once the industrial cycle picks up.

I continue to be bullish and hold my previous opinion of the price target of between 240-360 and a FY15 EPS target of 16-18.

CMP - 199.

End of the "hope rally". Focus back on fundamentals.

Last month, India may have witnessed a watershed moment in its history. The reason I say may, is because, only time will tell if it really was such a moment, or it was another great opportunity lost. Expectedly the markets rallied as the results poured in. All the common reasons were offered - Modi has a single majority so he can fix all the problems of the economy, India will push forward with its reform agenda, industrialization and fix governance.

So, the "easy" money based on the hope of "acche din" played out. During the hope rally, everything that a "India development" story went up - mining, power, infra, cement - almost everything. A lot of the PE re-rating for mid caps took place. It removed the glaring cheapness of most of the "good" midcaps. 

With the obvious cheap stocks now becoming well priced, we are back to the grind of making money on the fundamental basis. So, it is critical to focus back on individual companies and how they can perform and grow in the next few years. 

It is obvious that there are no easy answers (from Modi or anyone) of India's challenges. Inflation is stubbornly high and so are subsidies. Any reduction in subsidies (oil, LPG, fertilizers, rail fare etc) without a commensurate increase in efficiency is likely to increase inflation even higher. There is no magic wand that the PM has to fix the Indian economy. Once people start realizing that, markets are likely to correct or stagnate at the very least. And provide an opportunity for patient investors to buy into. The trick is to be prepared with a buy list and cash when (& if) that happens.

Finolex Cables - Quick Update

About a year back, I had posted on Finolex Cables (refer to the post here). The company has performed well. The company has delivered an EPS of 13.6 versus 11-12 that I had expected. 

The company had very good margin expansion (the OPM expanded by
2.31% yoy to 11.6%). 

The company has also commenced a solar power plant for which it has got a tax benefit. This has aided in Net Profit growth (79% yoy) for Q4. 

Operating cash flow was above Rs 200 crore (about 85% of the operating profit). It repaid 54 cr worth of debt.
I am expecting an FY15 EPS range between 16-18. At a PE range of 15-20, the possible price ranges are 240-360. There is a lot of potential that still remains in the stock, even after its sharp run-up. The stock continues to remain attractive for investors for the medium term.

CMP - 153.

Note: I am invested in the company and have a vested interest in the stock. Please do your own due diligence before investing.

2013 Portfolio Roundup

With the calendar year coming to an end, it is time to take stock and look back at the year and the developments in the portfolio.

For the majority part of the year, I was bearish on the Indian economy. Even today, I am not convinced that the country is in very good financial health. The recent rally is more based on hope than substance. This rally has been fuelled by the hope of a stable pro-reform BJP government at the centre in 2014. Purely on fundamentals, there is no improvement on the ground. Inflation continues to be high, specially food inflation. It is unlikely to come down any time in the near future as long as the supply side structural issues are not addressed. The Current Account Deficit, thankfully has come down with the prices and consumption of gold falling during the year. Rupee scared everyone (atleast the importers and of course cheered the exporters) by shying away from the Rs 68 mark and settling for some time around 60, up from the 45-50 range established for a fair number of years.

I made some changes to my portfolio. I booked profits on some of the stocks where I had made good profits and where the business climate was looking sluggish for the next few years like Balaji Amines, Titan, GRP, Shriram Transport Finance, Cravatex and JK Lakshmi Cement. I booked losses in CEBBCO (lost 70% of my investment on this), Sintex and Thangamayil Jewellery.

During the year, I added some stocks, which are either more export focused and thus likely to gain by the strength in the dollar or simply who businesses are faring well in this recessionary environment. Shilpa Medicare, Poly Medicure, Alembic Pharma, Ajanta Pharma and Finolex Cables. I have added to my initial positions in PI industries and Kaveri Seeds over the year in small quantities. I have reduced my positions in Cera as I think the price has run much ahead of fundamentals. I have added Page Ind to my portfolio as a dipstick investment more from a tracking perspective. I am still not decided on the valuation comfort in the stock. I have not made any changes to my top 3 holdings.

Over the year, my portfolio has returned 25.14% versus 8.27% of the Sensex and 3.3% of the HDFC Equity fund. I have chosen the HDFC Equity fund as it is one of the largest and best-managed equity fund over a 15 year period. The point is, if I am not beating a decent mutual fund, then I would rather put my money there and go sit on a beach ;-)

Name of Company	% of Portfolio (Dec'12)	% of Portfolio (Dec'13)	Comments
Mayur Uniquoters	19.08%	19.79%	Hold / Buy on dips
Supreme Ind	16.37%	16.42%	Hold / Reduce
Astral Poly	8.02%	14.75%	Hold
Kaveri Seeds	2.02%	6.78%	Hold / Buy on dips
Amara Raja	5.06%	4.98%	Hold
Cera Sanitaryware	7.88%	4.72%	Hold / Reduce
Finolex Cables	0.00%	4.44%	Hold / Buy on dips
Yes Bank	6.03%	3.89%	Buy
Auto Auto	2.88%	3.85%	Hold
PI Industries	0.50%	3.77%	Accumulate
Balkrishna Industries	2.44%	2%	Hold / Reduce
Shilpa Medicare	0.00%	1.99%	Accumulate
Alembic Pharma	0.00%	1.97%	Hold
Ajanta Pharma	0.00%	1.88%	Hold
Poly Medicure	0.00%	1.75%	Accumulate
Page Industries	0.00%	0.66%
Cash	0.31%	6.35%
Balaji Amines	3.51%	0%
CEBBCO	2.20%	0%	Analyze mistake
Cravatex	0.84%	0%
Gujarat Reclaim	2.56%	0%	Wait for turnaround
JK Lakshmi Cement	3.51%	0%	Keep watch; Buying time may be soon
Shriram Transport Finance	8.22%	0%	Keep watch; Buying time may be soon
Sintex India	3.00%	0%	Keep watch; Buying time may be soon
Thangamayil Jewellery	1.22%	0%	Analyze mistake
Titan Industries	4.32%	0%	Keep watch

Why Doesn't Sachin Tendulkar & Roger Federer Retire?

With another new Test series coming up, one of the favourite questions for Indian sports journalists have started raising all over again is the question of Sachin Tendulkar's retirement. Roger Federer, another sporting legend, had an early exit from the currently ongoing US Open. So, instead of asking the usual question of is it time for them to retire, I was thinking about why it is so difficult for them (or similar others) to let go.

I have tried to answer my question from the Charlie Munger's theories of human misjudgement.
Here are the psychological tendencies/biases at work for these people that prevents them from being rational:

• Psychological Denial - It is difficult for a great performer to admit that his performance has declined. That he does not make the cut purely on merit but more on the crutches of past performance.

• Incentive caused bias - Huge endorsement contracts and money is at stake. Roughly, Federer earns over $65 million annually (from Forbes). Tendulkar has earned $18 million through his endorsements (from Forbes). Great incentive for not quitting, I would think!

• Social Proof - Everyone around them say they are the greatest ever. Everyone says, form is temporary but class is permanent. Sachin can think that if Gavaskar could have played till 39-40 years, why can't I? Federer sees people like Hewitt, also a former world no 1 and same age as him, still playing, so why can't he?

• Commitment & Consistency bias - They have both said multiple times, that they will get back their previous form. Also, that they will play till they "enjoy" playing. It is difficult to go back to that one fine morning and say, I am not enjoying playing anymore.

•  Overoptimism tendency - Over reliance on their own individual abilities.They think with a little bit more practice they can get back their previous form.

• Deprival super-reaction syndrome - There may be a conscious or sub-conscious fear in their minds that the adulation and fan-following that they get will wane once they are out of the spotlight.

So, now you ask, all this is fine, but what has all this got to do with investing?

Well, if people like Federer and Tendulkar are being fooled by psychology, just think what your brain is doing to you and your investments? How many stocks have you bought because someone else has it (social proof)? How many stocks are there in your portfolio for years but you are not able to sell because you think you will get back your price (anchoring) or the company will turn around (denial)? How many times have you chased a stock when it hit upper circuits because you just had to have it (deprival super-reaction syndrome?

The list goes on....

Be mindful of what your mind is doing to your portfolio!!

Enjoy investing!