@hiral wrote:

Hello Friends,
I will be sharing my investment style and portfolio on this thread. I would appreciate reviews / feedback from esteemed valuepickrs.

About me:
I started trading, speculating, investing 12 years ago without any process in place. I was lucky to sail through that phase without paying much tuition fees. I was introduced to value investing and valuepickr approx 5 years ago and since then I have adopted a more disciplined approach.

Weekness:
I am from non finance background so do not get into complex valuation models.

Strengths:
Good temperament and patience to do nothing for a long time.

What is a Grizzly bear portfolio?
Grizzly bear goes into hibernation (deep sleep) to escape winters and food scarcity. I am following a similar approach - When there is too much enthusiasm in markets and risk/ reward is not in favor, move to debt instruments and be content with 7-9% pre tax returns. Come out of this hibernation mode once there is enough pessimism around and almost everything is available at a good valuation similar to 2009 or 2013 period. Nifty PE will be one of the major indicators for my re-entry decision.

Current Portfolio:
Debt 100%

Watchlist -
HDFC bank
Maruti
Eicher
Asian Paints
GodrejProp
MothersonSumi
CCL
Thyrocare
Shemaroo
Cupid
Mahanagar Gas
Ongc
TCS
Bajajfin
Sun pharma
NGL fine
Banco
Maithan alloys
Centuryply

Framework:
No of stocks - 12-15
Max 10% in a stock
Max 30% in a sector
Max 20% of portfolio in small caps

Sectors that I currently avoid - capital goods, insurance, shipping, defence, infra.

Stocks I avoid

• high debt
• stocks or sectors with govt interference / price control

Thank you
Hiral

Posts: 17

Participants: 9

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@abhijain wrote:

Dear Valued members,

Utmost thanks to the founding members(Mr Hitesh,Ayush,Abhishek,Donald,Manish and others) for this excellent platform to learn and attain financial independence.
I too have a dream of being financially independent and building my portfolio which can give me 18 to 20% CAGR till 2021( almost 3 yrs from now). If I am able to do so, then I can look for some other aspects of life and career.
With an objective of returns mentioned above, here is my portfolio, with % allocation.I have invested a good amount in the recent drawdown of sept/October and thus average buy of most of the scripts is quite fair.
Request your review and guidance. I will be grateful:

image.png1070×729 36.9 KB

Will keenly wait for your reviews.

Regards
Abhishek Jain

Posts: 35

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@Harsh1 wrote:

Hello Fellow Members

This is my first post (i have been silent reader all these years ) and i post my portfolio here

This was supposed to “Fail safe ” Portfolio but now its “ Ticking Time Bomb ” given the nauseating valuation

Rational

image.png953×301 15.5 KB

This portfolio i have started constructing in mid 2018 and have sipped from then on as i am salaried guy

A little about my investing journey, Like typical upstart i was fascinated by Warren Buffett and read all his books everything i could lay my hands on.

My First Picks (as you might have already guessed) were typical Low P/E and high dividend yield PSU stocks. I thought myself of true Graham disciple when i first bought REC below “Book Value “ (i was so excited that i thought i had the best bargain deal of the century.)

However one good thing emerged from it, i came out unscathed from Mid and Small Cap Meltdown as i didn’t have any of them in my Portfolio

Buy-and -Hold comes naturally to me and holding “Coffee can Portfolio“ suits me in temperament wise

The current Portfolio is still Work in Progress and i would like to add more stocks when the valuation froth in “Quality” stocks cools down

Common Theme across Portfolio is

image.png861×139 7.92 KB

My NAV on 1/1/2019 was 1000 and as of today i.e 27/10/2019 its 1243 implying 24.13%, In IRR terms it would have been even greater . The short term returns means nothing and it might be gone in one trading session . The Portfolio has been greatly aided by “Flight to Quality” and “Quality-at-any-Price” style currently in vogue. i had no foresight then and am lucky to be holding “Right” stocks in Bull market

Looking for your valuable feedback
Harsh

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Participants: 6

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@Worldlywiseinvestors wrote:

Have made a portfolio of 15-20 stocks along with a watchlist of 15-20 stocks. Basic underlying theme of the folio is market share gains by the companies that I own in the Pf . Have given a weight age of 5% to each stock, only 2 stocks have a weight age of 6%.In some where conviction isn’t that strong, have allocated between 1-2.5%, Pf is as follows:

HDFC bank 6%- goes without saying that it is a Casa franchise with excellent underwriting skills. An article by finception further clarified my doubts about the growth sustainability.

Bajaj Finance 3%- unluckily couldn’t scale the position appropriately as prices ran way ahead of the fundamentals within a day or two. Really like what Sanjiv bajaj has built. But one has to be wary about the current high growth, as in lending biz it pays to be more prudent. Sustaining 30%+ kind of growth is a tall ask considering the overall slowdown in the economy. Underwriting quality might get compromised. No reason for that happening right now, just a possibility to be kept in mind.

Kotak bank 5%- in BFSI main bet is on the management and their ability to sustain the quality of growth. Same thesis as HDFC bank.

P I industries 5%- after the painful consolidation in the last 3 years, growth has come back in the company. Their csm is firing on all fronts. One of the best performing stocks of the last decade or so.

Alkyl amines 5%- like the single minded focus of the Kothari family on Amines chemistry. He even says in the concall that we won’t diversify into other chemistry chains due to their hands being full with Amines chain in the next 3-4 years.
Meets all the filter- Stable margins+skin in the game+less competiton+long runway for growth.

Aarti industries 5%- multiple chemical chains plus long term contracts making them indespensable for its customers. Solid co with a proven trackrecord of execution.

Divis lab 5%- one of the leading Api manufacturers supplying to the regulated markets. Capex underway and more capex to be likely undertaken in the future. Just look at the OPM’s in the last decade.

Apl Apollo 5%- leading steel tube manufacturer in the country. Gaining market share as the competition around it is collapsing. Even the recent Q2FY20, volume growth was around 20% in such a subdued environment.

Gujarat Ambuja Exports Limited 6%- short term pain for long term gain. 10% capacity of the entire industry has collapsed due to the disproportionate increase in the prices of the maize. They are dominant (25% market share) in the industry that they operate in. With the derivative manufacturing starting in October and when the maize prices stabilize, difficult to see the co not getting re-rated by the market. Its a classic- low risk high uncertainity bet.

CanFin homes 4%- main bet is on the competition from other Nbfcs receeding. This is one of the well run Hfc’s. Major catalyst can be the stake sale by Canara bank. Have to keep in mind the rising proportion of non salaried segment in the book along with growth coming from Tier 3 and beyond cities.

Knr construction 2.5%- just like in banking where the most prudent guy wins. In sectors dependent upon the government, guys with lowest debt and prudence in terms of handling their balance sheet and bidding for orders win in the long run. Others like Dilip buildcon were busy taking up their order book and adding debt ok their B/s. Only when the tide goes out we get to know who is the strongest player. Still wary due to the mounting debt at Nhai. Still, India needs a lot of roads to be constructed. (Risk-Nhai, if business model changes due to change in nature of projects being offered)

Psp construction 2.5%- asset light player with best in class ratios when compared to the competitors. Would wait and watch how the company scales the order book and in what segment they scale the order book. Won’t shy away in averaging up if the thesis works out.

DCB bank 5%- anyone wanting to understand the conservative nature of the management should go and read the Q2FY20 concall. Main bet is on Npas remaining under control and Roes improving above 15%. Can see a Cub like outcome if the above mentioned happens.

Cera 4%- third largest player in it’s segment. Main bet is on the cyclical recovery that can take place with real estate cycle reviving.

CCL products 5%- they have a world market share in coffee processing of nearly 10%. With new plant commissioned, main triggers can be improving margins and 10-15% volume growth. However, thesis might go for a toss if incremental voolumes don’t come. The other risk is that a major agglomeration customer of theirs opened his own plant. The entire narrative might go for a toss about CCL’s competitive advantage of the above mentioned risks materialize.

Cholamandalam 5%- again the same theme. In an environment where the competitors are struggling to survive. This co reported a growth of 20%+ in Q1FY20. The quality of promoters and Cholas diversified auto loan book makes it a good candidate for the folio.

Aia Engineering 5%- with capacity expansion in place and with the introduction of mill liner, which can help the Aia to increase the customer stickiness. As it will become the one stop shop for all the solutions

Orient Ref 5%- major beneficiary of the EAF boom. Earnings growth coupled with ROCE’S of more than 25% will likely deliver high teens kind of returns in the next 4-5 years.

Edelweiss 5%- getting EGIA almost at 10 times its earnings of FY21 at the current valuations.
Market is assigning bankruptcy kind of valuation to the Nbfc business. I believe the cycle might have turned with the interest rates bottoming out. Though have to track the book very closely. If Egia is demerged in the next 2-3 years, just think about the valuations this business which generated 650cr(normalized) of Pat will get. Do think about the valuations ascribed to IIFL Wealth by the market.

Trading/pseudo investing postions-

1.5%- Sanghvi Movers: main bet is on wind energy revival. Getting at 20% value of its gross block.

1%- Managalam organics: near term triggers their in the company with the camphor prices holding firm.

1%- Hsil demereger: lets see the what is the outcome of the experiment. My first demerger bet. Will bring a lot of learnings.
Watchlist

1. Kei Industries
2. Bkt Tyres
3. Deepak Nitrite
4. Abbott India
5. Ngl Finechem
6. City Union Bank
7. Hester Biosciences
8. Ratnami metal and Tubes
9. Minda industries
10. Rites
11. Solar Industries
12. Bharat Rasayan
13. Valiant
14. Syngene
15. Dharamsi Morarji
16. Maithan Alloys
17. Srf
18. Garware
19. Apollo Tricoat
20. Sundram Fasterners

Remaining portion is Cash.

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@Akshada_Deo wrote:

A few things to understand about the Cinema/multiplex space.

ATP- is the average ticket price
F&B SPH- is the food and beverage spend per head
Occupancy- The number of seats filled per screen
Footfalls- number of people visiting the establishment in a given period. (could be yearly or quarterly)

Lets say you are interested in the business and want to build a multiplex:

Capex required would be 2.75-3 cr per screen (Acc to Inox’s management)
ATP is 197, Occupancy is 28%, Number of seats in the screen are 235, F&B SPH is 73 (Current q4fy19 numbers)

So every day you will earn= Occupancy*(ATP+F&B SPH)
So, 28% of 235 is 66 Seats. So your earnings from one show will be= 66 (197+73)=17820.
Every screen plays 4 shows per day. So daily earnings will be 178204=71280.

Along with this the burdensome time we spend watching the vicco vajdradanti and lyra ads during interval and start of the movie, also provides us with additional revenue.

Other sources of revenue would be any ticketing platform use, renting out some space to different vendors, etc.

This would bring our daily average sales to around Rs.85000. So on an average a screen will provide with revenue of 3.10-3.5 Cr per year. With a 8% net profit margin, in our pockets is 27- 30 Lakh.
This is 10% cash generation for the capex.

The footfall generally increases, after a year or two of operations. So in 10 years time, we will own the infrastructure of the screen as well as a free cash flow machine. Due to dealing with customers we get upfront payment and there is no bad debt scenario, giving us a negative working capital.

Before we get too excited by this, lets see the challenge in opening a screen. The regulatory approvals take time. If you’re ready to build a multiplex right now, it takes 4-5 years to carry out the plan. Why so? Multiplexes are generally built in a mall. So, the plan needs to be present when the mall is being planned as well. Plus there is usually an exclusivity given to only one multiplex per mall, as multiplex brings a lot of footfall for the mall as well.

INOX LEISURE:
It is a company of the Inox group which consists of a lot of companies in Chemical sector.

This is how Inox’s revenue is divided:
Net Box office (60-65%)
Food & Beverage (20-25%)
Advertisement (8-10%)
Others (6%)

This is why single screen lost popularity and how soon they lost it:

image.png764×654 21.4 KB

After a screen has matured, nothing other than external content will be able to drive revenues. So, geographical expansion is key to grow.

Inorganic acquisitions are done to boost growth.

The GST point:

• Entertainment tax was levied which was of 25%. GST is 18% and hence the 7% difference gave a good margin expansion. They have passed on this benefit to customers, which is why you may see a dip in ATP when GST was rolled out.

• F&B had a tax of 12% which got revised to 18%. Company has increased F&B prices.

Following is the growth strategy for Inox:

• They are increasing screen presence like never before. They used to have a 3 screen addition per month as their growth. However this year company has grown to opening 17 properties and 85 screens bringing the total number of screens to 583. This is the highest ever new screen opening for the industry in a year. Inox was adding lesser screens in a year than PVR and is one of the reasons why it was trailing PVR’s growth.

• Inox had 250 seats per screen, which has now been reduced to 235, and they aim to reduce this more. Lesser seats more screen.

• Company is net debt free.

• Company’s screens are divided as:
  42% in West
  22% in South
  21% in North
  15% in East

• Current Segmental Revenue Breakup:-
  

• Company has also paired up to broadcast Cricket matches and leagues in 8-12 locations to boost revenue.

• A fact to note is that movie business do good in recession as it is the cheapest form of entertainment compared to any travel and tourism.

Risk:

• Content
  There is content risk as company provides a service based on someone else’s product. Revenue will differ with onset of blockbusters. In 2018 when Padmavat was banned to be released in certain states, revenue was hampered.

• Government:
  Government in the past have promoted the multiplex sector by providing subsidies, cheap land and electricity etc. Govt may take all of this away and impose more restrictions. Regulations such as allowance to bring your own food can be bad for the company.

• Valuation:
  Stock has recently touched its all time high. It is not the cheapest valuation and that needs to be taken in consideration.

With the entry of Insignia, Inox IMAX, and the aggressive expansion with no net debt seems like a good opportunity.

This is my first post on ValuePickr and I have gained a lot of knowledge here. Do let me know if I have made any mistakes or breached any community guidelines.

Disclosure:- Not invested but interested.

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@basumallick wrote:

About the Company:

• 65 Year old company

• Y.R. Ghorpade, the former Maharaja of Sandur, after he merged the Sandur State with Union of India, was awarded a mining lease over an area of 7500 ha. It was he, who founded the Sandur Manganese & Iron Ores Limited (SMIORE) and the lease was transferred to the company. Out of this, 2800 ha of area, which was largely iron ore bearing, was deleted when our lease was renewed in 1974 and retained by the Government. During the second renewal, the company voluntarily surrendered another 1500 ha of forest area for land preservation. Finally the lease was renewed over an area of 3200 ha with effect from 1st January 1994.

• With a view to ensure better protection and development of the forested land, Founder Y.R. Ghorpade, magnanimously gifted about 1600 ha of his personal property in 1980. Out of the 3200 ha, we work on 2005 ha, keeping the balance 1200 ha reserved for future use.

Let’s look at some of their past nos

Then the mining crisis happened

vsuqQmjCrF1kvYB7AMzTeSHw2nqnRgwDYyG9TM7bpEvnWqSEENRe_yxveY4iy58YGt8_fN91ifM-p5FvBGrISd1FrAgs6m4NOtCK_vAM1OHlJFMp1BCzKq2c_ROScl0_MjOHPHLxP6Y742×92

One of the few honest company in mining

OBxe4K5kV_qcg5d3SXTeK0TNJPDvljtZe0UOZY6SinQy_d9YCl1MtwMwLzjdcr_9-GsAFDllZvKJG5grG5jMdvyn-ipen2ElKkqsivm9Tbc4MtNYV2-rTWFDymRj2pdDmKv2wmQuYxM1061×95

Only Mining Lessee to have been awarded 5 Star rating in the state of Karnataka and one of 3 in the Country to have got 5 Star rating

SC allowed category A mines to operate with a cap on production. This cap is being relaxed gradually.

qdDbCY5Uh3dp-CbwCj4wO-JvHv96DTgMjZknXarbYQoQTrFOobJ3CTqw1DOzYKx6lN7ZKGWFDJQ3Uw0hRtIT6l_EGQwZzoxRXw0DvFsxsP8As1P8U3OdleXSztYyRDxC-QVFqVR3zUM593×617

Why it could be interesting now?

VyktAnX85MA5SzOoLdNwY252cLNeTCt8C-Ud4_pLFNWgJrd2qPZzUrxioyTFp--FuqVrI2pcNB4cFROZxSrMcTiqO105gSMAw5-pLGyP_7tcaeC8dDqMEE2PsSC9wFb2mJ2dM6uvnj8767×558

Financials - https://www.screener.in/company/504918/

To Summarize:

• At Mcap of 700 Cr
• Stock trading at 5 PE
• Profits for last 3 years - 56 Cr, 107 Cr, 142 Cr
• Business generates high margins and free cash flows. Co is debt free with cash on balance sheet
• Optionality of substantial increase in operations
• Expansion of 400-500 Cr underway - co investing into Coke Oven plan, ferro alloys etc as forward integration

Negatives:

• Highly volatile commodity
• Regulated by Govt. Strange rules in Karnataka
• Major expansion into steel in coming years

Disclosure:
I am a SEBI registered RA and founder of www.intelsense.in. I have no current investments in this stock, neither have I recommended it to my members. However, I may do so in the future. Please do your own due diligence before deciding to invest. This post is for educational purposes only.

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@sujay85 wrote:

About Polycab India Ltd.

Established in 1964. Incorporated in January 1996. Listed in April 2019.

Journey.png983×444 76.6 KB

Domestic leader of W&C Industry:

86% of revenue [Power cables, control cables, instrumentation, building wires and industrial cables]

• Polycab (PIL) is a leading player in India’s wires and cables (W&C) industry with ~18% / ~12% market share in the organized / total market.

• Despite being a highly commoditised and extremely price sensitive segment PIL has able to gain market share due to a robust distribution network, wide product offerings, efficient supply chain management, strong manufacturing capabilities and brand image.

• W&C revenue growth at a CAGR of 14% from FY15-19.

Quickly scaled FMEG Segment:

8% of revenue [Fans, LED lightings and luminaires, switches, switchgear, solar products, heaters, pumps and electrical conduits]

• PIL forayed into multiple Fast Moving Electrical Goods (FMEG) product categories from 2014 (FY15) and was therefore required to invest behind manufacturing capabilities, distribution network expansion and brand building exercises; this led to EBIT losses during FY15 and FY16.

• However, the business attained breakeven in merely three years (FY17) and turned profitable in FY18 with an EBITM of 3% (as per company reporting), showcasing PIL’s strong focus on this space.

• FMEG revenue increased at a CAGR of 44% over FY16-19.

• Intends to concentrate on street lighting, agriculture pumps, air purifiers, and water purifiers.

• It is working on strengthening its after-sales service. As of June 2018, PIL has ~ 230 customer-care franchisees.

Emergent EPC Player

6% of revenue [Projects requiring a large supply of cables, wires, and conductors]

• PIL entered the engineering, procurement and construction (EPC) business in 2009.

• It provides electrical turnkey solutions comprising project management, onsite execution and resource management through specialized erectors and financial management.

• Their solutions are largely provided for the transmission and distribution sectors involving projects in extra high voltage and high voltage levels for various government utilities in India.

• These projects typically require a large supply of cables, wires and conductors, which they supply.

Segmental Performance.png506×634 68.4 KB

Competitive Strength

Market Leadership in W&C:

• Institutional and retail customers in different industries: power, oil & gas, construction, IT parks, infrastructure, metal and cement industries.

• Customer base is well diversified while none of the customers contributes more than 5% to its topline, which reduces dependency on any single customer.

• Made-to-stock: based on demand forecasts from customers and/or company sales team.

• Made-to-order: customized products for varied applications.

Synergistic expansion to FMEG

• Common raw materials, economies of scale, higher negotiating power.

• Cost-savings in transportation & distribution

• Opportunity to cross-sell to a larger customer base.

• Leverage distribution network across diverse product offerings.

Manufacturing with strong focus on backward integration:

• PIL has built strong manufacturing capabilities in the W&C and FMEG segments with 24 facilities in operation (3 for FMEG), with stringent control over costs & quality.

• It has incurred a capex of Rs11bn in the past 5 years, including plants for FMEG. Currently capacity utilization stands between 70-80%. In-house manufacturing will provide flexibility in improving the quality and range of FMEG. Backward integration into polymers, wire rods, cable/wire colors reduces costs and improves the quality which will continue to drive superior growth and margins.

• Joint venture with Techno Electromech Private Limited (2017), a manufacturer based in Vadodara, Gujarat, to manufacture LED lighting and luminaires.

• Joint venture with Trafigura Pte Ltd (2016), a commodity trading company, to set up a manufacturing facility in Waghodia (Gujarat), India, to produce copper wire rods.

Strong distributor network:

• PIL has well entrenched distribution, 2800+ distributors and over 100,000 retailers, with long standing relationships and stickiness, some of them being with them for 3 generations.

• It has the largest network of 29 warehouses in 20 states & UT, typically located close to distributors, dealers, and direct customers, which enables PIL to mitigate transportation costs.

Network.png511×660 93.4 KB

Exports:

PIL has a presence in 40 countries (5% revenue is from exports); it has received a US$ 143mn order from the international market recently.

Powerful Branding:

• Over the years, Polycab has evolved from a largely B2B play to a fast-growing B2C
  brand.

• Advertising and sales promotion expenses increased to 1.4% of sales in FY18 from 0.4% in FY14.

• Featured in Superbrands of India in 2016, 2017 & 2018.

• Endorsing Indian Premier League (IPL) since 2016.

• Brand endorsers are Paresh Rawal, Rajpal Yadav, R Madhavan, Ayushmann Khurrana.

Polycab Wires - Connection Bachat Ka. Connection Zindagi Ka.

Polycab Fans - India ka Naya All Rounder.

Polycab MCB - Bharosa Safe Zindagi ka.

Polycab LED - Afwah nahi, Roshni Phailao.

Experienced and committed management team:

Management.png1175×709 155 KB

• PIL‘s success has been, and will continue to be, dependent on its management team. Its management team has collectively many years of entrepreneurial and managerial experience in the electrical products industry and also possesses an extensive network of customer relationships and a deep understanding of its operations, pricing strategies, business development and industry trends.

• Salary: Highest salary is paid to Inder T Jaisinghani (₹36.54 mil), then Ajay T Jaisinghani & Ramesh T Jaisinghani (₹28.25 mil).

Note:

Comparison with Key competitors.

Competitors 1.png1183×291 77.5 KB

Competitors 2.png824×426 57.4 KB

Channel financing to ease working capital cycle:

• PIL has high working capital (27% of sales) due to penetrative strategy in FMEG and manufacturing focus.

• Also the EPC segment serves various sectors with an average working capital of 90-100 days.

• However, PIL has started channel financing like Havells - the impact of which is already visible in reduction in receivables.

Intends to become debt-free

• PIL has raised Rs 13.5bn through the IPO. The object of the offer was to 1) scheduled repayment of all or a portion of certain borrowings availed by company, 2) to fund incremental
  working capital requirements of the company.

• With the IPO funds, improvement in margins, and strong cash flow, PIL expects to become debt-free in 2-3 years.

Credit Rating

CRISIL has assigned its ‘CRISIL AA/Stable/CRISIL A1+’ ratings to the bank loan facilities of Polycab Wires Private Limited (PWPL). [13 July, 2019]

Key Financial Ratios

FY	2019	2018	2017
EPS	35.39	23.35	16.99
BVPS	201.62	166.26	141.94
ROCE	27.9	21.0	15.2
ROE	17.5	15.2	12.0
OPM	12.7	11.7	10.2
NPM	6.24	5.24	4.18
D/E	0.10	0.34	0.43
Current Ratio	1.5	1.58	1.34
Revenue Growth	17.51%	23.09%	6.04%
Net Profit Growth	40.22%	53.79%	24%
BV Growth	20.63	17.76	11.64
Receivable days	60.74	64.49	76.14
Inventory Days	76.97	75.87	75.39
Payable days	30.18	68.53	85.17
Fixed Asset Turnover	4.78	4.77	4.94

P/E: 16.81
P/B: 1.97
Price/Sales: 1.06
EV/EBIT: 9.69
Price/Cash Flow: 6.87
Face Value: 10.00
Promoter holding: 68.69% (No Pledge)
Market Cap: ~ 8500 Cr.
Altman Z-Score: 4.70
Piotroski F-Score: 8
Modified C-Score: 0

Opportunity

• Various government initiatives to drive cable & wire demand.

• Increase in organised pie of W&C industry to benefit market leader Polycab in long term.

• PIL manufactures and sells a diverse portfolio of wires and cables and FMEG, which also gives the opportunity to cross-sell its products to its diverse base of customers.

• Energy-efficient products gaining traction: Like LED & Energy Efficient Fans.

• Improving realizations driven by value-added products especially among the younger generation, owing to increasing disposable incomes and evolving preferences.

• Home improvement cycles in urban areas are shortening on account of rising disposable incomes and changing consumer preferences.

Risks

• Higher exposure in W&C segment poses business concentration risk.

• Macroeconomic slowdown can have a material impact on W&C segment.

• Fluctuations in raw material prices pose a key challenge to the cable and wires industry. Realisation and profitability depend on copper and aluminium commodity prices.

• Imports of raw materials like copper, aluminium, steel, and insulation materials are exposed to exchange rate fluctuation which can adversely affect the cost, and thus impact margins.

• Concentration of suppliers of raw materials in a few sources places the business at risk from disruptions in supply.

• Inability to scale up FMEG business division / lower than expected profitability woing to competitive pressure.

• Significant increase in WC requirement likely to impact return ratios.

• Being part of a labor-intensive industry, the company is subject to stringent labor laws and carries a risk of unexpected strike, work stoppage or increased wage demand.

• Short listed history to understand management ethics towards minority shareholders.

Sources

• Equirus Securities IC:

• Philip Capital IC

• ICICI Direct IPO review

• Prabhudas Lilladher IPO Review

• HDFC Securities IPO Review

• Ventura IPO Review

• Q4 FY2019 Earnings Conference Call Transcript

• Q1 FY2020 Earnings Conference Call Transcript

• Corporate Presentation FY19

• Corporate Presentation Q1 FY20

• Annual Report 2018-19

• Red Herring Prospectus

• Screener

• Ratestar

• Value Research

Disclosure:

No holding, tracking.

This is not a recommendation. Please do your own research. I am a novice & is bound to make mistakes.

This is my first thread on a company. Learned a lot from ValuePickr, learned even more while doing the necessary homework for starting a thread.

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@Venkat.Anna wrote:

Dear Forum Members,

I have been investing in stock market since 2009 onward’s after the subprime crisis. I started earning/saving only after 2008 time. During the crisis I was working for a Wall Street Bank in US when daily I used to hear that some or the other company in US is bankrupt. Luckily, the department I was in was the one used to block all these bankrupt companies, so my job was saved. Bank also got saved as it was part of the Big Four(Too big to fail).

My earlier Multibaggers were Sterlite Technologies (10X), Arvind Mills(10X), IOCL(5X) & GIC Housing Finance(11X).
Failures - NHPC, Bharati Shipyard, Adani Power, Mphasis & Aban offshore.
I sold all my shares in Jan 2018 fearing recession in India as the economy was slowing.

Here is my learning, Government decision plays a big role in stock market investing, so choose business where the government is favorable towards the sectors. Also, government will open the purse when there is a big turmoil in the economy/GDP growth(Current Situation). Government also favors businesses or incentivize the business where there is huge demand. Need to monitor those sectors closely.

Here is my list of Stocks with equal allocations of 10% each which I started adding from October, 2018. I am sitting on 80% cash waiting to be deployed before the general elections.

Nitin Spinners - It is into Cotton Yarn manufacturing. Very good management, CEO is a Chartered Accountant with all India Rank, first generation enterpreneur with long run way. Company has been a turnaround story after initial mistakes with forex, NPAs etc. It has since then made a turn around & made good capacity additions recently. Next capex is planned for Rs. 600 for production of fabric but yet to start. Good Inventory Management & debt Reduction. Expected Return - 3X in 5 years.

CAN FIN Homes - Retail HFC, Good ROE, Risk of default is less. Branch expansion is good, predominantly south India based HFC. Future growth is more in South India as the majority of the Tech companies(Young Population), lesser defaults. Company is growing at a decent pace. Expected Return - 3X in 5 years.

Yes Bank - Company is really good at marketing, CASA is GOOD, CEO has a good global experience. May be having a bad time handling the Government. ROE is comparable to HDFC bank, lot is being invested in technology which is the back bone for any bank. - 5X in 5 years.

Rain Industries - Company has a good R&D & Capacity to grow, lot is being invested for future materials used in EV. Company is cyclical with crude as the main raw material. We are in the down cycle for crude as there is over capacity world wide & emergence of EVs. - 5X in 5 years.

Mirza International - Consumer discretionary theme very good leather products. Company has good products, RED TAPE brand. - 5X in 5 Years.

ABFRL - Consumer discretionary theme, Company has good set of brands for all category of peoples, Retail Stores with Pantaloon. Quality of the products are really good - Peter England, Van Heusen, Louis Phillip, shoes, belts etc. - 3X in 5 Years, 10X in 10 Years. Long run way.

LT Foods - Consumer Discretionary theme, more people will eat Basmati Rice. Company has good products in packaged foods. - 5x in 5 years.

Deepak Nitrite - Good Management with vast experience in Chemical Industry. Capex completed recently. Long runway with Phenol & Acetone plants. - 3X in 5 Years.

Also, tracking GIC housing finance, HDFC life, ICICI Securities, Birla Cable, Bodal Chemicals, Biocon, Persistent Systems.

Kindly, provide your views on my portfolio. I have learnt lot from the fellow forum members. During my initial days, there was no forum like this to discuss on stock markets. Thanks to ValuePickr team for such a superb platform. Hope this will help n number of investors to create wealth in India as most of the shady companies have been cleaned up in the last 3 years.

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@Matt1985 wrote:

Hi All - The below is the portfolio of my wife, Angel who has scant experience in investing. While she has started to read and learn from this forum, I have volunteered to create this thread as she is just making baby steps.

Just to give you a background, Angel used to keep her money in FDs and savings account. Also she owns some gold jewelry which is very common when we talk about female folks. On the other hand, I have been investing and that might have inspired / motivated (I don’t know… what has happened) which made her to seek my help to build a portfolio.The below is a humble attempt to come-up with a portfolio (in fact, the aim is to create a low churn portfolio) where she can add incremental savings on a going forward basis.

Angel has promised the following: (a) firstly, she would invest two times in a year, lumpsum money once in June and December which is a bit confusing for me as to how to hand-hold her. I would appreciate your thoughts as to, should she add the money in the form of bottom-up approach or should she stick with most consistent picks when she invest on a half year basis? (b) secondly, she would start interacting on this thread as well as share her thoughts and seek guidance

As you would see, the picks are largely centered around Angel’s circle of competence (as she is coming from a medical background) and her individual preferences. I have added a few names which are experimental as well as consistent compounders (likely coffee-can portfolio candidates). While we have started creating this portfolio from the beginning of 2019, it includes recent purchases / IPOs. As a house policy, we don’t wish to own sin stocks such as ITC / VST/ UBL and Manappuram / Muthoot / other NBFCs were exorbitant interest is charged from customers. Here you go with the portfolio as of today:

1] Aarti Drugs (10.7%) - Promoters of Aarti industries and Aarti surfactants, as such no promoter issues. A low cost API player and specialty drugs manufacturer. Also, it’s a play on Crams. No threat of USFDA issues as US is not their key export market. Aarti drugs enjoys market dominant position in select API products. I feel the stock is not expensive (at PE of 12) given the 17% ROCE it enjoys. Sales growth is tepid and hovers around 11% for the past three years. On the negative side, I feel that the management has focused more on the chemical businesses and this may continue. Apart from the above, the debt levels should be monitored.

2] Abbot India (17%) - Obviously, a pick from Angel. This was the first name my wife wants to buy given her expertise / knowledge. Well discovered story and well discussed in this forum. Its a pseudo consumption play. Ranks among the consistent compounders with MNC parentage. The stock has run-up in the last few months and boast a PE multiple of 51. ROCE at 37% and 3 year sales growth stands at 12%. On the negative side, the stock may undergo time correction / price correction given the sharp rally it had from 8000 odd levels. Would have added further positions into the portfolio, but couldn’t get a chance owing to the steep appreciation in prices.

3] Affle India (25.5%) - An experimental pick from my end which I believe has a long runway ahead. I heard about Affle after IPO listing and took a token position initially. Bought further after research and converted small position into the largest position of the portfolio. Currently sitting on massive gains after the price run-up. Affle is a Singapore based (i.e. Promoter settled in SG) tech company which is focused on mobile advertising. What attracted me is that Affle can generate incremental cash flows with less capital cost. In other words, it has an asset light business model which is scalable across the world at large (currently the revenues derived from ex-Indian market is 55%). On the flip side, it is an expensive stock with PE ratio of 76 after the run-up according to screener (read somewhere that the PE is higher than 100 which I don’t know is correct or not). ROE at 67%, negligible debt and enjoys good cash flows. On the negative side, one doesn’t have enough info on the company. Risk of time / price correction as Affle has almost doubled from its IPO price. I am having a thought of booking some profits as the run-up was sharp but the business model keeps me away from selling. In short, my heart is divided .!! Not sure what to do.

4] Avenue Supermarts (10.6%) - I selected this stock as Angel won’t find any difficulty in understanding the business. Was easy to convince her and she happily agreed. Indeed, it’s one of the most expensive stocks. However, I’m not worried as long as Dmart can consistently grow. High regard for the promoter and there is no second opinion on this. Dmart is trading at a PE multiple of 111 and enjoys an ROCE of 26% with three year sales growth at 33%. On the negative side, the promoter stake sale to achieve 75% threshold might be an overhang in the immediate future. Candidate for price correction as and when there is a lower Dmart sales / SSG growth / slow down in store additions (hopefully not.!)

5] Bata India (5%) - We are regular customers at Bata, so it was easy to include it in the portfolio. Bata’s offering has improved tremendously whether it is for toddlers / kids or adults. As far as I understand, they own and operate showrooms apart franchise model. Therefore, while we say that Bata is very expensive, one has to take into account the real estate it owns. I feel that buying a footwear is a low ticket item (as we were confused between Bata vis-à-vis Titan. I know, I’m not comparing apple to apple but still they all fall within consumer discretionary. Titan is a strong candidate in our watchlist and may be added going forward). The other reason for buying Bata is that it would be easy for us to keep a tap on the business as we are regulars. Other positives include MNC parentage and healthy balance sheet. Bata currently trades at a PE of 65, ROCE of 30% and meagre sales growth of 6% over the past three years (where as Titan has a healthy sales growth of 21%).

6] Indimart Intermesh (6.5%) - This is play on platforms which has done well in the rest of the world. This is my personal pick to portfolio like Affle India. I don’t agree or expect that IndiaMart would be next Alibaba but I honestly believe that for the Indian SME businesses, this is a blessing to host their products to the world at large. I personally likes the promoter who has built the business from scratch without any Private Equity (PE) money. This is a business where one need to see how Amazon and Flipkart would evolve. Anyway, I feel that all products can’t be listed in the latter two platforms, so there is field available for IndiaMart to play and consolidate. The stock is trading at a PE of 55, ROCE around 14% and sales growth at 26%.

7] Jubliant Foodworks (4%) - This was an easy pick as my wife loves to eat from Dominos when we dine-out. I asked her why not Pizzza Hut for a change, she rejects it abruptly. So I feel that Dominos has earned its own share of fans who are sticky and what else I need to include this business in the portfolio? As Dominos is expanding into Bangladesh and Sri Lanka, I feel we have good business which has many legs to grow. I’m unsure whether the Chinese restaurant business would be successful, however, turning around DD was impressive and gives a ray of hope. Jubliant food trades at a PE of 62 with an impressive ROCE of 44%. Three year sales growth are in the region of 13%. The key negative is Promoter who doesn’t have a good track record. Anyways, I have bit the bullet and let’s watch. Next is the competition from Swiggy and Zomato which I’m not interested to listen. My personal experience is that Pizza lovers will find a way to eat Pizza as well as force others to eat it.!!

8] Sanofi India (7%) - This is my wife’s suggestion after Abbot India and obviously there was no room for denial. My personal inclination was to buy GSK as their capacity expansions would start reflecting to the bottom-line numbers. The positives include MNC parentage and leadership in key sectors. The stock is available at a PE of 37. ROCE and sales growth stands at 29% and 9% respectively. The key negatives include inconsistent sales / profit growth.

9] SRF (6%) - This company was in radar since 1300 odd levels, but could only buy after sharp run-up. SRF is not a common name in portfolios shared here in VP. It’s a diversified chemical company with largest market share in Fluorochemicals. It’s first Indian refrigerant manufacturer to get ASHRAE certification (ASHRAE stands for American society of heating, refrigerating and Air-condition Engineers) for its patented formulation. Apart from fluorochemical business, it has a robust specialty chemicals, technical textile business and packaging films business. SRF is trading at PE multiple of 23 with ROCE of 14. Three year sales growth stands at 17%. Haven’t heard any Promoter integrity issues. SRF has demonstrated consistent track record of earnings growth in the past several years. Coming to negatives, SRF has planned for capacity expansions and its debt levels which one needs to monitor closely.

Other portfolio bets:
IIFL wealth, Colgate and Galaxy surfactants which are about 8% of portfolio

Watchlist

Titan, Kotak Mahindra, IRCTC, AIA, Marico, Dr Lal,
Syngene Vs Laurus Vs Divis Vs PI industries, Atul Vs Sudharshan Vs Vinati, Vguard Vs Bluestar Vs Whirlpool, MRF Vs BKT Vs Ceat, Timken Vs Schaeffler Vs SKF and one of the AMC business. Note that these are not comparable strictly, i.e. not an apple vs apple comparison. Just jotting down the names and still confused how to arrive which stock / business to be included in the portfolio.

As you might have noted, this is not a typical portfolio and notable absence includes bellwether stocks such as HDFC companies, paint companies, Pidilite, Nestle, Britannia, HUL, Page, Eicher or insurance players. I have tried to play a bit differently taking into account Angel’s circle of competence and individual preferences.

I specifically ask your valuable thoughts on these portfolio picks and / or which should be replaced or stocks that can be added. Secondly, how to allocate the money on an incremental basis. I expect the incremental money on an yearly basis would be about 25% of the current portfolio size. Should the approach be bottom-up or stick to consistent compounders? I seek all your help in assisting Angel with her portfolio.

Currently, we have 12 stocks and believe that we could add another 3 more in the portfolio. Therefore, the important question is which among the watchlist stocks would find its inclusion to the portfolio and similarly, which among the current names in the portfolio can be replaced (with a better name).

We look forward to hear your thoughts. Thanks.!

Cheers,
Mathews & Angel

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@Akshada_Deo wrote:

A few things to understand about the Cinema/multiplex space.

ATP- is the average ticket price
F&B SPH- is the food and beverage spend per head
Occupancy- The number of seats filled per screen
Footfalls- number of people visiting the establishment in a given period. (could be yearly or quarterly)

Lets say you are interested in the business and want to build a multiplex:

Capex required would be 2.75-3 cr per screen (Acc to Inox’s management)
ATP is 197, Occupancy is 28%, Number of seats in the screen are 235, F&B SPH is 73 (Current q4fy19 numbers)

So every day you will earn= Occupancy*(ATP+F&B SPH)
So, 28% of 235 is 66 Seats. So your earnings from one show will be= 66 (197+73)=17820.
Every screen plays 4 shows per day. So daily earnings will be 178204=71280.

Along with this the burdensome time we spend watching the vicco vajdradanti and lyra ads during interval and start of the movie, also provides us with additional revenue.

Other sources of revenue would be any ticketing platform use, renting out some space to different vendors, etc.

This would bring our daily average sales to around Rs.85000. So on an average a screen will provide with revenue of 3.10-3.5 Cr per year. With a 8% net profit margin, in our pockets is 27- 30 Lakh.
This is 10% cash generation for the capex.

The footfall generally increases, after a year or two of operations. So in 10 years time, we will own the infrastructure of the screen as well as a free cash flow machine. Due to dealing with customers we get upfront payment and there is no bad debt scenario, giving us a negative working capital.

Before we get too excited by this, lets see the challenge in opening a screen. The regulatory approvals take time. If you’re ready to build a multiplex right now, it takes 4-5 years to carry out the plan. Why so? Multiplexes are generally built in a mall. So, the plan needs to be present when the mall is being planned as well. Plus there is usually an exclusivity given to only one multiplex per mall, as multiplex brings a lot of footfall for the mall as well.

INOX LEISURE:
It is a company of the Inox group which consists of a lot of companies in Chemical sector.

This is how Inox’s revenue is divided:
Net Box office (60-65%)
Food & Beverage (20-25%)
Advertisement (8-10%)
Others (6%)

This is why single screen lost popularity and how soon they lost it:

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After a screen has matured, nothing other than external content will be able to drive revenues. So, geographical expansion is key to grow.

Inorganic acquisitions are done to boost growth.

The GST point:

• Entertainment tax was levied which was of 25%. GST is 18% and hence the 7% difference gave a good margin expansion. They have passed on this benefit to customers, which is why you may see a dip in ATP when GST was rolled out.

• F&B had a tax of 12% which got revised to 18%. Company has increased F&B prices.

Following is the growth strategy for Inox:

• They are increasing screen presence like never before. They used to have a 3 screen addition per month as their growth. However this year company has grown to opening 17 properties and 85 screens bringing the total number of screens to 583. This is the highest ever new screen opening for the industry in a year. Inox was adding lesser screens in a year than PVR and is one of the reasons why it was trailing PVR’s growth.

• Inox had 250 seats per screen, which has now been reduced to 235, and they aim to reduce this more. Lesser seats more screen.

• Company is net debt free.

• Company’s screens are divided as:
  42% in West
  22% in South
  21% in North
  15% in East

• Current Segmental Revenue Breakup:-
  

• Company has also paired up to broadcast Cricket matches and leagues in 8-12 locations to boost revenue.

• A fact to note is that movie business do good in recession as it is the cheapest form of entertainment compared to any travel and tourism.

Risk:

• Content
  There is content risk as company provides a service based on someone else’s product. Revenue will differ with onset of blockbusters. In 2018 when Padmavat was banned to be released in certain states, revenue was hampered.

• Government:
  Government in the past have promoted the multiplex sector by providing subsidies, cheap land and electricity etc. Govt may take all of this away and impose more restrictions. Regulations such as allowance to bring your own food can be bad for the company.

• Valuation:
  Stock has recently touched its all time high. It is not the cheapest valuation and that needs to be taken in consideration.

With the entry of Insignia, Inox IMAX, and the aggressive expansion with no net debt seems like a good opportunity.

This is my first post on ValuePickr and I have gained a lot of knowledge here. Do let me know if I have made any mistakes or breached any community guidelines.

Disclosure:- Not invested but interested.

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@zygo23554 wrote:

Sector view on one of the emerging sectors - asset management and wealth management. As of now we hardly have companies in this sector but this number is likely to go up over the next few years.

This presentation was oriented towards presenting ground up insights and qualitative viewpoints which one may not be able to get from annual reports and investor presentations. One should look at my related posts on the other threads on this forum for a much more basic view, those have some basic industry sizing numbers for financialization as a theme and a deep dive into the specifics of HDFC AMC

Financialization thread - FINANCIALISATION: TSUNAMI expected in AMC & Insurance?

HDFC AMC thread (please do read all 4 posts in this cluster) - HDFC Asset Management Company

Wealth Management & Asset Management.pdf (862.5 KB)

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@Akshada_Deo wrote:

Hi everyone,

I’ve started to invest pre elections and these are my investments:

I’ve bought patiently on dips and my portfolio is 2% down ytd.

Rationale behind each:

Vinati Organics- I like that company is the leader in their products and that it takes a long time to formulate something. I like the management as well as the growth rate, which was present even before the Chinese Chemical sector problem.

Maruti:- I believe that Auto’s are getting a bad rap and rightfully so, the numbers have fallen to a low of 2017. However auto is a very tough sector to implement regulations. Even when the changes happened in America Ford, GM and Chrysler all went through a very bad phase. When it comes to the EV story, I believe it is far away, and when it comes Maruti will be ready. A 50% market share company won’t give up so easily.

Minda Industries: Minda has created a lot of weath for its shareholders and is a very well managed company. It is a leader in Switches, Lights, Alloy wheels and a lot of other segments. It is in both 4 and 2 wheeler segments. Minda has been one of those companies who has given positive revenue growths in grim market scenarios.

Dabur- Steady FMCG compounder, and at the time of buying was near its 52 week low and valuation wise as well as a good company was at attractive valuations.

GodrejCP- Same story as Dabur. Difference between them however is of distribution and products. I like them both. Valuation gives much comfort in this.

VIP- I like the story due to a few factors:- Their continued market share, shift from unorganised to organised, Decent valuation and growth, however would like to buy cheaper. I like that it is one of the niches who has the potential to gain from the trade war.

Deepak Ntr- Acetone and phenol plant was the main attraction. I expect the growth from that would lead the company to better profitability. Also, the board of directors is a group of very interesting people. I like the bargaining power it has over the govt, however it can be a double edged sword as govt may have too much of intervention.

I am still siting on 55% cash

Other companies I am tracking, GMMPfaudler, APLApollo, Natco Pharma, Maithan Alloys, Edelweiss, United Spirits, ION Exchange and Godrej Properties.

I was holding RBL Bank, but its journey from 52 week high to low was too quick and that worries me.

If market crashes and only then I’ll proceed to buy Bajaj Finance, HDFC Bank, Asian Paints, Pidilite and Nestle.

I invite all views/suggesstions/criticisms.

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@suru27 wrote:

Was surprised to see that one of most well-known company does not have a thread and thought to create a thread for the same. However, going through researching this script has been one of complex experiences though exciting.

So, let us start from the start. United Spirits Limited, abbreviated to USL, is an Indian alcoholic beverages company, and the world’s second-largest spirits company by volume. It is a subsidiary of Diageo PLC.

Background:

The company originated as a trading company called McDowell and Company (also known as McDowell & Co, McDowell or McDowell’s), founded in India in 1826 by Angus McDowell, a Scot.

In 1959, Mallya established the company’s first distillery at Cherthala. McDowell’s began bottling Bisquit Brandy and Dorville French Brandy, from imported, becoming the first company to manufacture Indian Made Foreign Liquor(IMFL). The company opened India’s first distillation plant to manufacture extra neutral alcohol (ENA) at Cherthala in 1961.

Fast forward to 2013, On 27 May 2013, Diageo PLC acquired a 10% stake in United Spirits at a cost of ₹20,927,196,000 (US$300 million). It also separately acquired an additional 58,668 shares for ₹ 85,778,082. On 4 July 2013, Diageo bought an additional 14.98% of the company for ₹31.35 billion (US$450 million). Diageo acquired an additional 21.77 million shares at a cost of ₹1,440 (US$21) per share in an off-market-deal from United Spirits’ promoters, raising its holdings to 25.02 per cent of the company. Following that purchase, Diageo held 36.3 million shares in USL, acquired at a cost of ₹52,358.5 million (US$760 million), making it the largest shareholder. Under pressure from Diageo, some substantial changes to the management structure of the firm began to take place in 2013. In 2014, Diageo’s share holdings rose to 54.8% of USL.

There are many informative articles how the overall story unfolded and one can read:

Even though Mallya is out and Diageo PLC is done lot of clean up, still, there are some old wounds which continue to haunt USL and present in various annual reports and we will discuss further. However, below links can give a feel of kinds of tussle which went even post Diageo PLC taking over control.

Current Business and Product Portfolio

Company has 80 brands of scotch, whisky, IMFL whisky, brandy, rum, vodka, gin and wine. In FY 19 company sold over 81.6 million cases, second highest in the world. Company works through 19 manufacturing facilities spread across India.

The Transition from 2013 till now:
Now, let us see, what Diageo PLC has done in last 5-6 years post take over though it is evident from above links that lot of time went in fixing corporate structure itself to create the basic foundation to start any kind of financial and operational clean up

As it is evident from above tables that new management has been able to do the herculean task of bringing house in order from one of the worst-case scenarios to a respectable state by fixing balance sheet, cash flows as well as profitability. This has been achieved by:

1. Overall organization level clean up by getting a new leadership team
2. Fixing balance sheet by getting rid of non-core assets
3. Controlling operations and supply chain by improving efficiencies and improving margin
4. Deep focus on premiumization and improving share of premium segment from 53% of revenue to 66% of revenue in last 3 years through both double-digit volume as well as value growth rate and hence bringing profitability back on track
5. Improving route to customer strategy across states considering regulatory constraints
6. Leveraging improving profitability to strengthen balance sheet by improving credit rating and reducing interest cost further and deleveraging debt further
7. Strengthening and investing in core brands and marketing
8. Bringing best practices from parent company like technology and data driven marketing and business planning through salesforce automation, MDM and advance analytics

How has company performed recently:

Opportunity:

• Urbanization, Growth in per capita income and young population would provide enough scope for growth

• Premiumization is phenomenon playing out and should benefit companies like USL

• Very low chances of disruption

Risks:

• Highly regulated business with many regulatory issues occurring every 2-3 years like election driven state mandates, highway ban on liquor, non-ending tax hikes, price controls, state level complexities etc.

• Raw material price fluctuation of ENA making gross margins cyclic to some extent (depending on pricing power of brand and products)

• Raw material price fluctuation in terms of glass prices for bottling

• Highly working capital-intensive business with working capital to sales ratio around 40%

• Legacy legal issues related with banks and state governments

• Non-core legacy investments like IPL Bangalore

Sources:

1. Google Search
2. Annual Reports
3. Company Presentation
4. Screener.in
5. Wikipedia

Disc: Hold a tracking position. Please do your own research. This is not a recommendation by any means

Note: There is much more to cover in terms of industry analysis, financial analysis and legacy and financial issues and will cover slowly in next set of posts. This is just a start.

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@KC1986 wrote:

Of late I am writing this topic after going through multiple reports about the retail industry and different players in this industry. So you can find a nice summarized view of the industry and the reason I choose this company from the sector.

The Indian organized retail although undergoing constant disruption, one thing has remained steady but consumers’ affordability is on the rise and aspirations are growing more than ever. It is expected to get tripled by FY25 with a CAGR of 22% and 27% in F&B and Appreal segment respectively. Household retail spends, too, are shifting from traditional kirana shops to modern retail formats, which are gaining share due to better price offerings and greater convenience of shopping. To cater to this demand about 4000 retail store opening is needed as per Motilal Oswal estimate.

Indian retailers have seen healthy expansion in their store footprint, driving revenue and earnings growth. Unlike the previous cycle in the early 2000s when euphoric expansion in retail footprint led to a sharp fall in store profitability and eventual rationalization and downsizing, the existing retail expansion is far more measured and primarily fueled by internal accruals and not leveraged expansion. To reduce operating cost and drive an efficient working capital cycle, we see most companies focusing on (a) leaner store layouts, (b) cluster-based growth, © private labels and (d) membership-based model. This has led to an improvement in per store economics and an expansion in the EBITDA margin across retail companies over the last 2-3 years. The outlook on the returns profile has also improved significantly.

The top-24 cities (metros, mini-metros and tier-I cities) account for 29% of total retail spending, with the Delhi and Mumbai clusters contributing about 9%. Even the top-72 cities account for 38% of total retail consumer spending, which highlights the strength of rest of India that has 71% share. Major expansion in terms of retail consumer spending is expected to come from India’s tier-2 cities. This should benefit the value apparel category, which is a much attractive option for customers. Pricing difference between unbranded and branded apparel is ~4x, but value category products come with just 2x higher pricing. Thus, more apparel players are increasingly expanding into tier-2 cities to tap this opportunity.

In absolute terms, India is blessed with the largest millennial population (age bracket of 18-35 years) globally. With a population of over 440m, the group constitutes ~34% of the country’s total population. Further, with a median age of ~26 years, India is one of the youngest major economies and is expected to stay so in the foreseeable future. This is in contrast to other countries such as the US, large European countries, China, etc, where the median age of population is higher and an imminent situation of declining working-age population looms the markets.

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The Indian millennials stand out from the rest of the population in terms of better education, lifestyle choices, consumption pattern, significant need for convenience, and brand preferences. Millennials spend a high proportion of their incremental income towards eating out and entertainment (32.7%), apparel and accessories (21.4%), and electronics (11.2%) among others. Savings account for ~10% of the income. This indicates a shift towards a consumption economy rather than a savings economy, which was a predominant feature of the preceding demography. Millennials, with their low inclination towards savings and increasing spending capacity, provide brands with vast growth opportunities. With a high and growing millennial population, modern retail, organized apparel sector should get a push.

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Households with annual earnings of USD5,000-10,000 have grown at a CAGR of 17% over FY11-16 and are projected to grow at a CAGR of 12% to reach 109m in FY20. Households with annual earnings of USD10,000-50,000 have also grown at a CAGR of 20% over the last five years. Increase in the number of households with annual earnings of USD10,000-50,000 will lead to an increase in indulgence spending by the group. This will lead to an increase in expenditure on consumption categories such as Food, Fashion, Luxury Products, and Consumer Durables. It is estimated that 23% of the global middle class will be from India by FY30.

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GST has allowed business owners to start their business faster through a centralized registration process in which they do not have to worry about individual state requirements. With the implementation of GST, the movement of goods across states is becoming easier due to a standardized set of rules in place. Warehouses are not needed in every state and this will help companies reduce costs. Organized players with an all-India presence should benefit and inflows to the formal economy should increase. Digitization should allow businesses access to a larger market.

Organized retail – Huge runway of growth
Presently, the organized general merchandise players in India occupy 40-45msf area of retail space as per Technopak. This is estimated to grow to 60-65msf by CY20, that is, 14% CAGR over CY17-20 to cater to 21% organized retail growth, indicating 7% SSSG. Assuming a blended store size of 20,000, overall 1,000 new stores will be required over the next three years to cater to the growth in the organized retail market.
One of the key positives of the retail market growth is that it offers a strong and long runway for growth. With a high single-digit GDP growth, the retail space should continue to grow at 14% until FY25. This is assuming (a) overall retail market grows at 12%, at a pace of 1x nominal GDP growth, (b) organized segment continues to grow at 1x overall retail growth, and © SSSG is 6%. At 20,000sf blended store size, over the next eight years, to cater to the growth in the organized retail market, 3,900 new stores are required, highlighting the huge scope of growth for all retailers. This implies organized retail penetration of a meager 17% in 2025, highlighting the huge demand in the organized retail market.

In the helm of all the above mentioned factors it is quite obvious I will choose a company which satisfy my investment style. Although many organized retailers available in this apparel domain like Future Lifestyle, Shopper Stop, Aditya Birla Fashion etc. but I choose Trent mainly due to the below factors.

1. It is a value unlocking story by restructuring it’s existing stores which is evident by it’s best in class SSG growth in the last year.
2. It’s focus on store expansion to drive the revenue along with operating efficiency to improve the margin.
3. Value retailing via Zudio brand which is poised to see exponential growth in next couple of years.

Trent mainly operate in 4 devisions:-

1. Westside:- A premium to mid range apparel brand which contributes to 85% of Trent revenue and expected to grow at 17% CAGR.
2. Zudio:- A value retail apparel brand which contributes 7-8% of Trent revenue and expected to grow at 50% CAGR.
3. Zara:- Trent holds 49% stake in its JV - Inditex Trent Retail India Private Limited (InditexTrent). However, the operations of Zara and Massimo Dutti are controlled by Inditex (in entirety), whereas Trent has primarily been a financial investor. After the revival of margin in FY18 from the impact of countervailing duty, we can expect healthy 20% revenue CAGR and 16% EBITDA margin over FY19-21. With FY21E EBITDA of INR3.5b, Zara could garner healthy enterprise value of INR42b at 25x EV/EBITDA, ~33% of TRENT’s overall value. Over the next 5-7 years, this could increase to 3540%, considering the fast evolving market for premium fast fashion products and Zara’s strong product portfolio.
4. Trent Hypermarket :- TRENT’s 50% retail venture, Trent Hypermarket (THPL), which runs the Star brand stores, was among the first to enter the food and grocery retail business. However, it is yet to become profitable – negative 7% EBITDA margin (FY19E). After operating in three different formats – Star Daily (~2,500sf store size), Star Market (~8,000sf), and Star Bazaar (~20,000sf), it is now focusing on the Star Market format. It has closed the loss-making Star Daily format and is tightening the SKU list for Star Market to improve store productivity. The launch of gross margin-accretive apparel line-up, Zudio, in all 12 Star Bazaar stores should further improve store turnover and profitability. They have built in 15 Star Market store adds annually over FY19-21 (company targets 20-25 store adds annually). This, coupled with 7% SSSG, should help THPL grow at 18% over FY19-21. The closure of loss-making Star Daily stores, the launch of Zudio and the focus on the profitable Star Market format should reduce EBITDA loss to 4% by FY21, enabling THPL to reach closer to breakeven.

Value Unlocking Story:-
Zudio has adopted a unique FOCO model, unlike the conventional COCO/FOFO model used in the industry. Therefore, a franchisee’s capex is INR15-20m for a store size of 6k sqft; in turn, a franchisee receives a fixed revenue share, while the company operates the store and retains the profitability. Typically, franchisees get ~16% revenue share and 12-15% IRR, while the company garners strong ROCE on merely one-month inventory capital.
Zudio made its debut just two years ago. Since then, it has expanded to 40 standalone stores with revenue of INR1.5b in FY19. While currently Zudio’s revenue is insignificant in TRENT’s overall consolidated revenue base of INR26.3b, we can expect it to grow tremendously in the coming years. According to my estimates, Zudio will see 70/80/100 store adds in FY20/21/22, taking its total store strength to 290 by FY22. Also, we can expect Zudio’s revenue to hit INR14.5b by FY22. Thus, Zudio is expected to contribute 26% to TRENT’s overall revenue; contribution toward EBITDA is also expected at similar level. However, the estimates are conservative and still below management’s target of 100 store adds annually, which would take Zudio’s total store count to 340 by FY22, ensuring stable 6-7% EBITDA margin. Note that our estimated average revenue/sqft of ~INR8k is much below the like-to-like INR14k/sqft indicated in the company’s Annual Report 2019 .

Why Choose Trent over others:-

1. Trent Ltd. outperformed its apparel retail peers this year as its revenue rose the most and it opened a greater number of stores. Shares of the Tata Group company have risen nearly 39 percent year-to-date. Among peers, only Aditya Birla Fashion And Retail Ltd. has gained. Others, including Future Lifestyle Fashions Ltd., Shoppers Stop Ltd. and V-Mart Retail Ltd., tumbled.
   

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   Trent’s revenue grew 32 percent in the first six months of 2019-20—the highest among its peers—while its operating margin was 17.7 percent, according to its exchange filings. The company is well placed in the Indian fashion retail industry to outperform, led by its focus on fast fashion and value fashion, Antique Broking said in a recent report.

2. Nearly 85 percent of Trent’s revenue comes from the Westside store chain, with the subsidiary’s growth boosting its performance. Westside’s same store sales growth—or sales growth at an existing location that has been in operation for at least one year—has not only been the largest but also the most consistent in the past six quarters, according to Axis Capital. Its six-quarter average of the metric is around 10.2 percent. Westside is also the only company whose same-store sales growth hasn’t declined in the same period. That, according to Edelweiss, could be attributed to the company’s focus on private labels and enhancing the shopping experience. Westside, according to the brokerage, derives nearly 97 percent of its revenue by selling private brands.
   

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3. Trent’s Westside format added stores at a steady pace and has, according to data on its website, as many as 158 stores across India as of March. Only V-Mart and Future Lifestyle have added stores at a greater pace, Edelweiss Financial Services Ltd. said in a report. V-Mart’s expansion has come at the cost of its operating margin, the brokerage said, while Future Lifestyle’s grew on a low base. Edelweiss and Motilal Oswal Financial Services Ltd. expect Trent to open 30 to 35 stores in the Westside format in FY20. Trent recently acquired retailer Zudio from its joint venture Trent Hypermarket Pvt. Ltd., which had 40 stores as of March. CLSA Ltd. expects Trent to “aggressively” increase the Zudio store count to 120 by the end of the ongoing fiscal. Zudio’s products are priced at Rs 999 or below and the store owns all the brands that it sells. The store’s revenue grew 31 percent on an annualised basis over the past three years to Rs 204 crore as of March, according to CLSA.
   

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4. Trent holds 49 percent stake each in joint ventures with fast fashion giants Zara and Massimo Dutti, which operate 22 and three stores in India, respectively. The two retail brands are owned by billionaire Amancio Ortega’s Inditex Group. Both the ventures, according to CLSA, are financial, and not strategic, investments. Trent in its annual report said that revenue from the Zara JV grew at an annualised rate of 15 percent between FY15 and FY19 to Rs 1,438 crore. Massimo Dutti India, which launched in FY19, posted revenue of Rs 63 crore in FY19, according to the report. Trent is yet to respond to BloombergQuint’s emailed queries on its growth prospects and store additions.

Valuation:-
Trent is the most expensive apparel retailer, with Edelweiss indicating an FY20 price-to-earnings ratio of 82 times. That’s at a 50 percent premium to second-placed Aditya Birla Fashion. Analysts expect Trent to rise the least. The company, according to Philip Capital, is likely to maintain its premium valuation because of its rapid store expansion.
Westside/Zudio should see higher pace of store addition at 105/250 stores cumulatively over FY19-22E. Also, we can expect TRENT’s consolidated revenue/EBITDA/PAT to register CAGR of 29%/62%/62% on pre-Ind AS 116 over FY19-22E and EBITDA margins stabilising at 10.1% by FY22E. With strong contribution from margin-accretive private labels (over 90%) and faster execution capabilities of new launches, TRENT should witness healthy growth. While the recent fund raise is expected to have a near-term impact of equity dilution on earnings growth and RoIC, over a three-year period, the dilution could drive accelerated growth. Our SOTP-based TP of INR605 values Westside and Zara at 30x EV/EBITDA and Star at 2x EV/sales on Sep’21E. Due to Zudio being currently loss-making, it has suppressed Westside’s earnings. But, we can expect valuations to normalize as Zudio turns profitable over the next 3-5 years.

Discloser :- Invested hence views might be biased. Opinions are welcome.

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@basumallick wrote:

The Quant Journey

With 2 recent books on investors / traders who were predominantly quants, there is seemingly an awakening of quantitative methods amongst investors in India. The two books are The Man Who Solved The Market on Jim Simons and A Man For All Markets by Ed Thorp. Let me take some time to pen my journey down. This is a developing story and I am probably in the first chapter.

Flashback
My journey into quant systems started about two and a half years back. With a WhatsApp forward!!

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It showed, not sure how accurately though, the CAGR of some of the best investors (or traders) in the world. Scanning the list I gathered that I knew about nearly all of the people mentioned. What was interesting was that the names on the list came from completely different investment styles. Some were hard core bottom up stock pickers, some were macro traders, some technical traders, some commodity traders and some quants.

I have always been a curious person. And I always try to go back to first principles. So, I asked myself that if there are people who have been this amazingly successful over decades being non-fundamental, non-bottom-up investors, then am I missing something? Have I drunk too much of the Buffett kool-aid?

I decided to make the decision for myself. So, I started learning. I took a course of technical analysis. I started reading voraciously on quantitative systems, automated trading systems, mathematical and statistical indicators. The whole objective was to understand and assimilate as much as possible of these into my own accumulated knowledge of long term investing.

There were two other triggers to this. The first one was during our long walks on the beach during the VP annual meets in Goa with Hitesh bhai (Hitesh Patel) I realized that he had been very successful at blending technicals with fundamentals and was able to follow many more stocks and get very good results though with a higher amount of churn. That was worth thinking about.

The next thought that triggered was I wanted to be able to teach my son about investing and the road I took seemed very long and arduous and everyone has to start from scratch. I was looking for a structured process that could be taught and learnt relatively easily and in shorter time.

Cut to Now
The proof of the pudding is always in the eating. So, to prove and enhance my learning, I have worked on multiple algorithms and have picked two of them and have started investing for the last 3 months. They are mechanical, systematic, non-discretionary systems. I have a friend, who shall go unnamed for reasons of privacy, whom I collaborate with closely in this.

All the words are important. The system is mechanical meaning there is no human intervention during decision making. It is systematic meaning that buy-sell decisions are time based and pre-determined. Non-discretionary means once the algorithm tells me to buy something, I buy. I do not rationalize the choice.

The Results, Thus Far
September 2019: 0.81% (Complete)
October 2019: 22.06% (In Progress. Sell Date 1-Jan-20)
November 2019: 3.56% (In Progress. Sell Date 3-Feb-20)
December 2019: -1.02%(In Progress. Sell Date 2-Mar-20)
XIRR (till date): 58.8%

The results thus far have been excellent. To say the least. I have backtested this for various durations and periods. Since the availability of data is a major challenge, I have been able to backtest only for slightly more than a dozen years. What has given me confidence is that the backtest period covers the 2008 and 2018 periods.

More about the system in the next post. Also, will try to log my learnings in this thread for future reference.

DISCLOSURE: I am a SEBI registered RA and run an equity advisory service. This and all other posts are for educational purposes only. They should not be construed as investment advice.

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@Shikhar wrote:

RACL GEARTECH

Market cap – 75 cr , CMP – 68 , Book Value – 65.5 , ROE – 16 % , ROCE- 17%

Promoter holding – 51.12% ( 28.54 % pledged)

Established in 1989 , based out from New Delhi

RGL (formerly Raunaq Automotive Components Limited) was incorporated in 1983 and is engaged in the business of manufacturing of transmission gears and shafts for automotive and industrial applications. The company was initially promoted by the Raunaq Group. However, due to financial difficulties the company was referred to Board for Industrial and Financial Reconstruction (BIFR) in 2001. Post-restructuring and with a new management team under leadership of Mr Gursharan Singh (CMD), RGL came out of the BIFR purview in November 2007.

RACL is engaged in the Business of manufacturing of automotive components Transmission Gears and Shafts and other types of gears related to power transmission to engine. RACL manufactures drive train parts for Tractors, Two Wheelers, Electric Car, Three Wheelers, Cargo Vehicles, Light and Heavy commercial vehicles etc.

The company has also expanded into sub-assemblies, industrial Gears for electrical switch Gears and Circuit Breakers, Winches and Cranes.

Manufacturing Plants – Grajuala ( UP) and Noida

Grajuala plant is 100 km from New Delhi , while Noida plant is 15 km away

350 employees are there in the company .

Snapshot of financial performance of company for last 10 years. ( from screener.in)

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There has been a consistent rise in sales , margins and profits over time.

	Compunded sales growth	Compunded profit growth	ROE
Last 10 years	12.71%	16.67%	11.87%
Last 5 years	12.78 %	39.19%	12.59 %
Last 3 years	17.37 %	38.22%	14.43%

Clientele: Caters mainly to OEMs like

BMW Motorrad, Germany,

Kubota Corporation (Japan, Thailand & USA),

I.T. Switzerland (SAME Group Company) ,

KTM AG (Austria),

Schneider Electric (Germany),

Dana (Italy & China)

Piaggio – Italy, Vietnam

BRP Rotax – Austria

In the domestic market - Yamaha India, Piaggio Vehicles, SML Isuzu , TVS Motors

Management Information and Remuneration:

RGL has a long track record of operations with established market position and reputed client base and long association with these clients.

RGL has more than 3 decades of presence in the automobile component industry. Mr Gursharan Singh, CMD of the company, joined the company as a plant head and has been associated with the company since its inception. He is a mechanical engineer with Post-Graduate Diploma in Export Management.

This is the information of the top management of the company . One can see the vast amount of experience each one of them has in the given company.

Management remuneration is very high

Exports as a percentage of sales is 58 % in FY 19 . The same was 17 % in FY 09 . Exports have steadily increased over the year as a percentage of revenue.

	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018	2019
sales	58.42	65.15	82.7	98.72	95.05	102.95	107.5	117.74	123.61	138.79	189.95
exports	7.55	11.17	13.27	18.93	29.46	46.29	49.89	58.99	55.85	71.81	109.87
% exports	13%	17%	16%	19%	31%	45%	46%	50%	45%	51%	58%

Working capital management

The business is very working capital intensive .

	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018	2019
DSO	43	40	40	46	68	55	58	27	32	107	98
DIH	60	66	71	65	79	75	86	82	79	87	69
DOP	0	0	0	46	54	81	72	44	46	55	41
CC	103	106	110	64	93	49	71	65	64	139	126

Although the working capital cycle was showing signs of improvement it has fallen back in the last 2 years to worse than previous levels. There are signs of competitive intensity in the business increasing , also shows better bargaining power of customers.

Ratio Analysis

Year	RoCE	RoE	Sales growth	PE	PH	Div Payout
2014	3	8	8%	5	55.98	-
2015	6	12	4%	6	51.07	-
2016	6	11	10%	8	51.1	-
2017	18	11	5%	8	51.07	-
2018	17	14	13%	8	48.47	-
2019	21	15	37%	6	51.12	-

The return ratios of the company have steadily improved over the years . that has been due to steadily improving operating margins. Valuation wise the market has not really given the company any value more than a single digit P/E . With improving ratios, and improving scale of the company there is a possibility of the company getting re rated by the market.

In smaller companies the client profile is of extreme importance . The clients of the company are some of the finest in the auto industry. The company is adding clients to its existing profile. For example TVS was added last year by the company( in FY 19). The company has a long standing relationship with some of the clients.

The company has much superior margins than the industry average. Having a 16 % OPM is not easy in this industry. For example Bharat Gears a competitior of the company has 8-10 % OPM.

The company has been growing at a pretty fast rate , much greater than the end industry it is servicing. These are signs of improving market share. The company maybe targeting to service the new launches by its clients , which may lead to much faster growth rate than the end industry.

Company is gearing up for providing drive train solutions to the EVs also. It has already invested substantial capital expenditure in the recent past and is ready to cater to high precision drive train components for E-mobility solutions.

Also the company will not be much affected by the EV disruption coming in the future. Autmotive gears and axles the main product of the company is pretty much used in the EV vehicles as well. The company has 66 % of its revenues from tractors and 2 wheelers. These segments will be the last to face the EV disruption.
The other division which contribute are- 3 wheelers( 14 % of sales) , recreational vehicles (13% of sales), CV - 5 % of sales.
It is good to see a diversified end user industry of the company’s products.

RISKS

1. The business of the company is working capital intensive. The cash conversion cycle is over a 100 days. Also there is great competitive intensity among the suppliers to the auto industry. The clients also enjoy a good bargaining power in this industry leading to strecthed working capital cycles.

2. The auto industry is cyclical in nature. The slowdown in the auto sector globally can dampen the growth at which company is growing.

Disc- Not Invested , Tracking

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@hiral wrote:

Hello Friends,
I will be sharing my investment style and portfolio on this thread. I would appreciate reviews / feedback from esteemed valuepickrs.

About me:
I started trading, speculating, investing 12 years ago without any process in place. I was lucky to sail through that phase without paying much tuition fees. I was introduced to value investing and valuepickr approx 5 years ago and since then I have adopted a more disciplined approach.

Weekness:
I am from non finance background so do not get into complex valuation models.

Strengths:
Good temperament and patience to do nothing for a long time.

What is a Grizzly bear portfolio?
Grizzly bear goes into hibernation (deep sleep) to escape winters and food scarcity. I am following a similar approach - When there is too much enthusiasm in markets and risk/ reward is not in favor, move to debt instruments and be content with 7-9% pre tax returns. Come out of this hibernation mode once there is enough pessimism around and almost everything is available at a good valuation similar to 2009 or 2013 period. Nifty PE will be one of the major indicators for my re-entry decision.

Current Portfolio:
Debt 100%

Watchlist -
HDFC bank
Maruti
Eicher
Asian Paints
GodrejProp
MothersonSumi
CCL
Thyrocare
Shemaroo
Cupid
Mahanagar Gas
Ongc
TCS
Bajajfin
Sun pharma
NGL fine
Banco
Maithan alloys
Centuryply

Framework:
No of stocks - 12-15
Max 10% in a stock
Max 30% in a sector
Max 20% of portfolio in small caps

Sectors that I currently avoid - capital goods, insurance, shipping, defence, infra.

Stocks I avoid

• high debt
• stocks or sectors with govt interference / price control

Thank you
Hiral

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@suru27 wrote:

Was surprised to see that one of most well-known company does not have a thread and thought to create a thread for the same. However, going through researching this script has been one of complex experiences though exciting.

So, let us start from the start. United Spirits Limited, abbreviated to USL, is an Indian alcoholic beverages company, and the world’s second-largest spirits company by volume. It is a subsidiary of Diageo PLC.

Background:

The company originated as a trading company called McDowell and Company (also known as McDowell & Co, McDowell or McDowell’s), founded in India in 1826 by Angus McDowell, a Scot.

In 1959, Mallya established the company’s first distillery at Cherthala. McDowell’s began bottling Bisquit Brandy and Dorville French Brandy, from imported, becoming the first company to manufacture Indian Made Foreign Liquor(IMFL). The company opened India’s first distillation plant to manufacture extra neutral alcohol (ENA) at Cherthala in 1961.

Fast forward to 2013, On 27 May 2013, Diageo PLC acquired a 10% stake in United Spirits at a cost of ₹20,927,196,000 (US$300 million). It also separately acquired an additional 58,668 shares for ₹ 85,778,082. On 4 July 2013, Diageo bought an additional 14.98% of the company for ₹31.35 billion (US$450 million). Diageo acquired an additional 21.77 million shares at a cost of ₹1,440 (US$21) per share in an off-market-deal from United Spirits’ promoters, raising its holdings to 25.02 per cent of the company. Following that purchase, Diageo held 36.3 million shares in USL, acquired at a cost of ₹52,358.5 million (US$760 million), making it the largest shareholder. Under pressure from Diageo, some substantial changes to the management structure of the firm began to take place in 2013. In 2014, Diageo’s share holdings rose to 54.8% of USL.

There are many informative articles how the overall story unfolded and one can read:

Even though Mallya is out and Diageo PLC is done lot of clean up, still, there are some old wounds which continue to haunt USL and present in various annual reports and we will discuss further. However, below links can give a feel of kinds of tussle which went even post Diageo PLC taking over control.

Current Business and Product Portfolio

Company has 80 brands of scotch, whisky, IMFL whisky, brandy, rum, vodka, gin and wine. In FY 19 company sold over 81.6 million cases, second highest in the world. Company works through 19 manufacturing facilities spread across India.

The Transition from 2013 till now:
Now, let us see, what Diageo PLC has done in last 5-6 years post take over though it is evident from above links that lot of time went in fixing corporate structure itself to create the basic foundation to start any kind of financial and operational clean up

As it is evident from above tables that new management has been able to do the herculean task of bringing house in order from one of the worst-case scenarios to a respectable state by fixing balance sheet, cash flows as well as profitability. This has been achieved by:

1. Overall organization level clean up by getting a new leadership team
2. Fixing balance sheet by getting rid of non-core assets
3. Controlling operations and supply chain by improving efficiencies and improving margin
4. Deep focus on premiumization and improving share of premium segment from 53% of revenue to 66% of revenue in last 3 years through both double-digit volume as well as value growth rate and hence bringing profitability back on track
5. Improving route to customer strategy across states considering regulatory constraints
6. Leveraging improving profitability to strengthen balance sheet by improving credit rating and reducing interest cost further and deleveraging debt further
7. Strengthening and investing in core brands and marketing
8. Bringing best practices from parent company like technology and data driven marketing and business planning through salesforce automation, MDM and advance analytics

How has company performed recently:

Opportunity:

• Urbanization, Growth in per capita income and young population would provide enough scope for growth

• Premiumization is phenomenon playing out and should benefit companies like USL

• Very low chances of disruption

Risks:

• Highly regulated business with many regulatory issues occurring every 2-3 years like election driven state mandates, highway ban on liquor, non-ending tax hikes, price controls, state level complexities etc.

• Raw material price fluctuation of ENA making gross margins cyclic to some extent (depending on pricing power of brand and products)

• Raw material price fluctuation in terms of glass prices for bottling

• Highly working capital-intensive business with working capital to sales ratio around 40%

• Legacy legal issues related with banks and state governments

• Non-core legacy investments like IPL Bangalore

Sources:

1. Google Search
2. Annual Reports
3. Company Presentation
4. Screener.in
5. Wikipedia

Disc: Hold a tracking position. Please do your own research. This is not a recommendation by any means

Note: There is much more to cover in terms of industry analysis, financial analysis and legacy and financial issues and will cover slowly in next set of posts. This is just a start.

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@Himanshu_Nigam wrote:

Hello,

This is my first post on the forum, having learnt a lot from the various posts.

I work in the Corporate Banking domain for one of the main Private Banks, so going through balance sheets on a daily basis is part of my work. However, I do not see myself as an expert in terms of investing basis a deep balance sheet understanding.

Coffee Can type of investing suits me as per my limited balance sheet understanding, and as my equity investing is planned for at least till the time of my retirement. I invest major investing amount into the portfolio on a regular monthly basis, to try and attain a rupee cost averaging instead of trying to time too much. Some portion I keep on the side for a timing opportunity.

My first aim was to just beat the Index. Working in the Corporate Banking domain I feel I have a better understanding of banking, so I started with evaluating investing in Kotak Bank ETF, but I did not want any money in PSU stocks. So I started with a portfolio of Private Banks and am comfortable with it being skewed towards the domain. Also, my understanding(which might be totally incorrect) is that with increased marketing of MFs and Index investing, the SIPs into the major Nifty stocks will continue(and will change only with a big change in Nifty composition).

HDFC, ICICI, Axis and Kotak - These together help me diversify within Banking. I ideally want a much higher allocation to Kotak, and am working towards that.

Reliance - Forms a large chunk due to its weightage in Nifty currently, and majorly due to their plans in the retail domain. There are a lot of firms I have met in the domain, and their feedback about Reliance’s agresiveness is the same. Based on all that I have read and understood, I have the feeling that Mukesh Ambani wants to be the biggest entity in India and wants to get to the Alibaba/Amazon level in India.

Nestle - Was a pick due to a Peter Lynch line of thought. I was reading his book and asked my wife to tell me a firm she felt would do really well in India. Being a Coffee lover, and having seen the kind of product range Nestle has internationally whenever we have travelled to other countries, she told me Nestle can expand to a huge product range in India. I analysed the financials, and decided to invest, which has turned out really well in terms of returns till now.

TCS - I wanted to have some exposure to the IT domain, and between Infosys and TCS, decided on TCS due to the Tata group and the various articles on the web I studied about the firm.

Bajaj Finance - Again from the financial domain, but seeing the kind of retail debt I saw everyone around me taking(plus the increased focus of the banks towards that domain as well now), I wanted an exposure in the domain. From all of my analysis and the options available, Bajaj Finance seemed the best bet for the long term.

Asian Paints - I do not have an in depth understanding of the domain, but based on the historical track record(plus the financials showed enough strengh), decided on the firm.

Marico - Wanting an additional exposure in FMCG, with the other firms have very high valuations, I decided on Marico since I was getting good value plus again the historical track record and the increase towards the health segment helped me decide in favour.(Other candidates were Britannia and HUL).

Titan - I handle the Jewellery segment in my region for my bank, and while I personally never thought that in the long term our generation will buy a lot of gold, I was proved wrong looking at the kind of business the unorganized sector does(many small players are my clients).I saw that a lot of business Titan can still eat into(and is regularly eating into). They have already proved adept at moving from watches to Jewellery, and seeing Taneria being launched I was confident of their long term prospects. Being from the Tata group also helped.

Tata Global - This was a very small bet as I really wanted to get into the Starbucks story, plus I wanted to own a small cap stock as well before the days it became big. While it will take a long time for Starbucks to be big, which I feel it will seeing their presence in other countries, and our culture shifting to a daily coffee habit after some years. Already the multiple Starbucks around me are always full despite the prices(I buy a stock of Tata Global every time I go to Starbucks for a meeting and don’t buy an expensive coffee, just for fun). The FMCG strategy of the Tata Group might do well too, but I do not have the confidence yet to invest a larger amount(the stock has run up a lot too). Trent was a candidate which I decided to pass up in Tata Global’s favour.

HDFC Life - The Life insurance business will do well as per my understanding. Banks sell a lot of Insurance as cross sell, as some people might have noticed, and HDFC Bank’s branch network and aggressiveness will help HDFC Life do a lot of business in the future. HDFC AMC was also a stock I wanted to own, but I was not sure about the long term prospects of the AMC domain in general.

Abbot - Wanting an exposure in the Pharma domain, but not having an in depth understanding, my first criteria was a debt free firm(an advantage with Nestle as well), as I have seen first hand in my job what debt does to a firm( I am confident Mukesh Ambani can handle it). Pfizer was another candidate but I liked the financials of Abbot plus the product range expansion plans looked good. This has given good returns till now as well.

I am looking for a chance to increase allocation to the non financial stocks whenever the timing is right.

In addition, I have SIPs in:

1. Axis Long term Equity(Direct Growth) ELSS for wife(expense : 0.92%)
2. Mirae Asset Tax Saver(Direct Growth) ELSS for myself - I liked the lower expense ratio of 0.3% and figured Mirae would want to improve the AUM of their ELSS so will focus on performance. Mirae has a good record and Neelesh Surana’s performance in his other funds is good.

The other funds I have are Multicaps/Focussed funds from 3 different fund houses because I don’t have the knowledge for Mid Caps/Small Caps, so I was okay with giving that authority to a fund house. Low expense ratio was a big criteria.

1. Kotak Multicap Fund - Direct Growth(Expense : 0.87%)
2. Axis Focussed Fund - Direct Growth(Expense : 0.65%)
3. Mirae Asset Focussed Fund - Direct Growth(Expense : 0.23%)

Hope the long post made sense. Will edit and correct this for mistakes.

Happy for any feedback on this.

Thanks,
Himanshu

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@lingalarahul7 wrote:

Kotak is a well known bank across the country. Since there is no existing thread, I would like to take the opportunity to create one.

Key banking numbers in FY19:

PAT Margins: 17%
RoA: 1.7%
CASA Deposits Ratio: 52.4%
Govt Securities in Investments: 81.6%
Unsecured Loans: 23.8%
Priority Sector Loans: 35.1%
NIM: 4.48%
GNPA: 2.14%
NNPA: 0.75%

For more numbers, please allow me to quote screener: https://www.screener.in/company/KOTAKBANK/consolidated/

Management:

Uday Kotak who owns about 30% of the bank is leading the bank full on. His wording in ARs and Conf calls suggest he is fully committed to its long-term prosperity. A step further is to notice that he bought out the minority shareholders in Life Insurance business and all the non-banking subsidiaries are now 100% owned by the bank. He is also fighting with RBI in court to retain his ownership in the bank. If one goes through the conf calls, it is easy to observe that Uday Kotak is quite cautious in nature, going slowly when trying out something new (like ARC, Consumer durable) and slowly increasing their growth in that as they learn that segment.

Another important point to notice is most of the senior management professionals have been with the bank since 1990s which demonstrates their commitment to the bank, its leader, culture and prosperity.

Liabilities:

Regular customers - These customers typically belong to mass affluent segment and have high balances and most of them were acquired during the pre-demonetisation era.

811 customers - 811 campaign was launched after the demonetisation incident to acquire customers digitally. After launching the campaign the company set itself a target to double its customer franchise from 8 million to 16 million in 18 months (from March17 to September18) which it did achieve successfully.

Kotak’s CASA Deposit ratio is industry best at 52.5% and they don’t have a number in mind and would like to achieve as best as possible for that. Important to remember that Kotak also offered higher interest rate for savings deposits till FY19 which is hitting the bottomline by 1000 crores. Uday Kotak says this is the cost they would like to take for building long-term stable liability franchise. Starting FY20, they seem to be decreasing the interest rate here. In Q1FY20, they decreased for savings accounts with balance less than 1 lakh.

According to Uday Kotak, building a stable low cost franchise is the toughest part of building a financial services firm. He clearly stated that this is his top priority over everything else and his team is fully committed to go as far as possible in this aspect.

Deposits		2019	2018	2017	2016	2015	2014
Demand Deposits - From Banks		3685.3	4031.4	3839.9	3951.4	2551.4	1710
Demand Deposits - From Others		385324.3	318426.2	273768	228865.3	129262	85698.2
Demand Deposits - Total		389009.6	322457.6	277607.9	232816.7	131813.4	87408.2
Savings Bank Deposits		796847.1	655292	415039.3	294947.2	140361.1	100870.5
Term Deposits - From Banks		630.8	13446.9	5776.8	7476.2	10575.5	6103.6
Term Deposits - From Others		1072316.1	935236	875834.7	851190	465853.1	396341.1
Term Deposits - Total		1072946.9	948682.9	881611.5	858666.2	476428.6	402444.7
Total Deposits		2258803.6	1926432.5	1574258.7	1386430.1	748603.1	590723.4
CASA Deposits Ratio		0.5249	0.5075	0.4399	0.3806	0.3635	0.3187

Assets:

Corporate Banking - 30% of Assets (stable across years)

Kotak is growing at 20% in this area and would like to keep it that way. Based on management commentary, it sounds like they can grow at faster rate than this if they want to but however would like to limit themselves to 20%. Important to remember that banks with heavy exposure to corporate / wholesale banking are those with highest NPAs. There is a study by PwC on this area. Please find that attached here: banking_profitability.pdf (629.6 KB)

Corporate loan book contains about 60% working capital, 40% term out of which around 25% will be what we call the long term about 3 year plus loans. So it is largely medium term and short term oriented book.

Home Loans and LAP - 20% of Assets (used to be ~25% few years back)

Though home loans is considered to be one of the safest loan asset, there are some evil practices going on in the LAP area. The collateral valuers of LAP (or any other collateral) are not regulated / monitored and typically quoting very high value of what they actually should. The bank is cautious in this area and has developed relying on internal mechanisms to judge about the same.

Agriculture Division - 13% of Assets (used to be ~20% few years back)

The bank slowed down in this area too and again due to some bad practices. Apparently farmers don’t have to pay any amount to the bank for the first year after they receive a crop loan. Lots of people, especially in Punjab, are exploiting this law by just taking loan on land by claiming it as crop loan. And that too in big ticket size. Essentially, it is LAP disguised as crop loans to avail its benefits. So the bank has slowed down quite a bit here too and decreased its exposure. Actually, most of the existing exposure has come from ING Vysya bank when they were merged.

Another thing the bank has done is to increase its market share in tractor financing. Kotak bank is the best in tractor financing and have been increasing their share significantly to meet the Agri target.

CVs & CEs - 10% of Assets (stable across years)

This was slowed down during the period of 2011-12 due to some bad practices which were openly called out by the management. Once it is resolved after the slowdown in 2013-14, the company seems to be growing this portfolio at 20%

Business Banking - 10% of Assets (used to be ~20% few years back)

This portfolio is also slowed down due to bad practices. Again the same story of collateral valuation mismanagement. The NPA probability of SMEs is a bit higher as compared to other loans. But when the bankers go to collect the collateral, it is typically observed that the defaulter is vanished, his equipment also sometimes and the value of the factory is a fraction of what the independent collateral valuer valued it for. So this portfolio is also intentionally slowed down by the management.

Small Business, Personal Loans & CCs - 16% of Assets (used to be almost 0% few years back)

This is fast increasing as this segment is highly underpenetrated. Analysts did ask that the income levels of people is not growing at this rate and how are we comfortable growing this segment at such rates and the answer was underpenetration.

Other Loans - 2% of Assets

Advances		2019	2018	2017	2016	2015	2014
Corporate Banking		618887	521333	417031	346965	202995	143773
Home Loans and LAP		407216	324294	261209	230094	147087	120994
Agriculture Division		269915	229156	189687	179929	121058	104681
CVs & CEs		197058	152017	108270	74633	52040	54412
Business Banking		182154	182690	178841	233181	64216	53879
Small Business, Personal loans & CCs		331642	251292	173865	96268	62628	4320
Other Loans		50076	36397	31918	22853	11583	6217
Total Advances		2056948	1697179	1360821	1183923	661607	488276

Asset Liability Mismatch:

Reasonable amount of mismatch during the periods of 3 months to 6 months; 6 months to 1 year and 1 year to 3 years. I’m not sure if this is a big concern. Request experienced people to guide on that.

ALM (crores)
		2019	2018	2017	2016
1 day - Assets		11561.86	14093.59	17535.32	13314.5
1 day - Liabilities		6604.18	5795.79	4993.39	1478.91
Cum Diff		4957.68	8297.8	12541.93	11835.59
2 to 7 days - Assets		15393.87	9484.21	6052.64	8249.24
2 to 7 days - Liabilities		17712.73	11501.91	13218.02	11403.61
Cum Diff		2638.82	6280.1	5376.55	8681.22
8 to 14 days - Assets		3766.22	4630.57	4128.86	4840.51
8 to 14 days - Liabilities		4743.57	4526.37	3296.55	10007.56
Cum Diff		1661.47	6384.3	6208.86	3514.17
15 to 28 days - Assets		8113.85	8402.84	5310.05	6778.39
15 to 28 days - Liabilities		4551.87	6914.95	6017.64	5480.13
Cum Diff		5223.45	7872.19	5501.27	4812.43
29 days to 3 months - Assets		27451.79	23450.52	20518.54	21089.26
29 days to 3 months - Liabilities		35230.54	32005.44	26403.64	30254.4
Cum Diff		-2555.3	-682.73	-383.83	-4352.71
3 to 6 months - Assets		23774.75	17740.54	15457.5	13501.25
3 to 6 months - Liabilities		38008.35	33584.26	30937.76	30338.5
Cum Diff		-16788.9	-16526.45	-15864.09	-21189.96
6 months to 1 year - Assets		22997.73	20459.17	12472.42	15893.62
6 months to 1 year - Liabilities		38483.56	29938.59	22618.66	25229.8
Cum Diff		-32274.73	-26005.87	-26010.33	-30526.14
1 year to 3 years - Assets		118425.33	98397.76	73888.59	61929.7
1 year to 3 years - Liabilities		127012.12	101434.67	77771.76	47126.85
Cum Diff		-40861.52	-29042.78	-29893.5	-15723.29
3 years to 5 years - Assets		27546.99	23668.19	14736.43	14084.42
3 years to 5 years - Liabilities		4073.05	4430.1	2577.12	9705.03
Cum Diff		-17387.58	-9804.69	-17734.19	-11343.9
> 5 years - Assets		33786.81	25527.66	19921.14	18858.86
> 5 years - Liabilities		480.56	378.83	971.77	2739.47
Cum Diff		15918.67	15344.14	1215.18	4775.49

Kotak Mahindra Asset Management Company:

KMAMC is the asset management arm of the bank. It is well acknowledged that the asset management industry is highly underpenetrated. I think one can go through HDFC AMC thread to find out more details about this industry. I’m putting down some numbers for people to quickly get to speed.

KMAMC Financials		2019	2018	2017	2016	2015	2014
Income (crores)		655	518.9	291.2	240	125.4	166.1
PBT (crores)		337.1	124.5	58.6	71.9	-35.9	49.6
PAT (crores)		218.1	81.2	38.2	59.3	-36.2	33.4

KMAMC Other Numbers		2019	2018	2017	2016	2015	2014
Equity AUM (crores)		54830	44475	19922	13666	6450	3107
Debt AUM (crores)		83385	70924	57169	41079	32137	32582
Total AUM (crores)		138215	115399	77091	54745	38587	35689
Market share (Net Equity Inflows)					5.20%	5%
Market share (Total Equity)				3.70%	2.40%	1.80%	1.30%

Kotak Life Insurance:

This is the Life Insurance arm of the bank. Again, I would not like to clutter the first post with too much info on subsidiaries. So just putting some numbers and will come back on details of the subsidiary in later posts.

KLI Numbers (crores)		2019	2018	2017	2016	2015	2014
Gross Premium Income		8168.3	6598.7	5139.5	3971.7	3038.1	2700.8
First-year premium		3977.1	3404.2	2849.7	2209.7	1540.2	1271.8
PBT - Shareholders’ account		590.8	471.2	342.7	281.9	261.2	261.2
PAT - Shareholders’ account		507.2	413.4	303.3	250.7	228.9	239.1

KLI Premium Mix		2019	2018	2017	2016	2015
Individual regular premium		1616.2	1530.4	1176.2	925	602.3
Individual single premium		515.4	441.5	260.4	138.8	147.1
Group regular premium		1845.5	1432.4	1413.1	721.7	459.1
Group single premium		0	0	0	424.2	331.7
Total new business premium		3977.1	3404.3	2849.7	2209.7	1540.2
Renewal premium		4191.2	3194.5	2289.8	1762	1497.9
Gross premium		8168.3	6598.8	5139.5	3971.7	3038.1
New Business Premium Growth %		0.16825	0.19461	0.28963	0.43468	0.21103
Renewal Premium Growth %		0.31200	0.39510	0.29954	0.17631	0.04821

KLI Other Numbers		2019	2018	2017	2016	2015
Cost Analysis		16.30%	16.80%	18.10%	20%	22%
AUM (crores)		30310	25133	20940	16936	15219
Claims Settlement Ratio		99%	99.30%	99.50%	98.80%	98.30%
Market Share (of Private)		5.80%		6.20%	5.97%	4.40%
Solvency Ratio		3.02	3.05	3	3.11	3.13
AUM Growth Rate		0.2059	0.2002	0.2364	0.1128	0.2573

There are other subsidiaries which are owned by the bank too which are quite small. Kotak Mahindra Prime is a reasonably sized one which gives Auto loans and recently starting consumer durable loans. I will write follow up posts on the subsidiaries in the following months to come.

Investment Case:

1. PSU Banks and NBFCs are struggling and this is to benefit well-run private banks. This will also help bring back appropriate pricing into the industry increasing the margins. High CASA deposit ratio of Kotak is going to help them give industry leading margins
2. Kotak has more than doubled its customer base over the past two years after demonetisation using 811 initiative. However, the new customers are of low balances. The management is now looking to cross-sell products to these customers and increase their revenues
3. Kotak’s savings deposits used to offer higher interest compared to other banks. This has helped them increase their CASA deposits by mind-boggling growth rates. Kotak is now decreasing this interest rate which is helping them increase their margins and this is coming while maintaining (in-fact increasing) their CASA deposit ratio. You can observe that PBT margins have improved in H2FY20
4. Non-banking financial businesses like Life Insurance and AMCs are doing very well. I believe the under-penetration of these industries well discussed across various threads now. No plans for management to spin them off and list them but still should help contribute to bottom-line of the consolidated company

Risks / Concerns / Questions:

1. Asset Liability Mismatch during the periods of 3 months to 6 months; 6 months to 1 year; and 1 year to 3 years. Bank might be borrowing some funds when those periods occur during the year and using those to clear the liabilities. But is this sustainable?
2. Very low (though increasing) penetration in credit cards. HDFC is bang-on in this area. People typically maintain higher balance in the bank of which you own the credit card. So wondering if that will hit the CASA deposit ratio of Kotak going forward
3. Why did the bank merge itself with ING Vysya Bank?
4. Tail risk, like for any financial company. You lend today but realize only few years later that it is a bad loan
5. High valuation

Discl: No holdings. Recently started looking up. Planning to follow the company closely. This is not a buy / sell recommendation. Investors are required to do their own due diligence before taking any decision. All of the above information is public and available on Kotak Mahindra Bank website.

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