Performance review-February 2014

Dear Friends,

The year started off on the lines of a somewhat expected cooling off in the markets. While most of the cooling off was triggered by FII selling and worries on AAP and its economic agenda’s, I was banking on a cool off given the sharp surge in many of the tracked stocks. My reason was an overemphasis on them as many of the ideas became common between other websites, blogs and social media. This is quite natural as momentum has many claimants and underperformance or flat performance on scrips usually draws social ignore. The months that transpired also saw result season and most cos that I liked lived up to by personal expectations.

 

In today’s papers, there was an interesting article about how Corporate India is focusing on sanitation under its CSR initiative, compelled by amendments to the Companies Act. I have been bullish on the sanitation sector stocks as this seems an imminent macro theory. Cera continues to perform well and even though it sacrifices some margin in the current results, the management chose to enhance market share.

 

The currency trade as also revival in global economies has kept a lot of interest open in IT and ITeS sector. Tech Mahindra, HCL Technologies, Infosys, Wipro, TCS led from the front while mid cap IT cos caught on. While Infosys is not currently part of the core portfolio, the rest of the cos are and continued to outperform the market. I also caught on to more investment towards IT with a focus on some mid cap IT names-NIIT technologies, Tata Elxsi. Both stocks rewarded well and kept the portfolio momentum on. The size of investments in these cos has not yet grown to enter core but the stocks are knocking for an entry. Eclerx continued its good run and maintained its position.

 

MPS a stock that was bought fairly early saw an exponential growth in profits and in market capitalization. This co poses an interesting balance of an extremely well paying dividend stock and now has growth in its stride. Investors like Ajay Relan have also been bullish on it, though that is hardly a reason to own it as my ownership of this stocks owes its credit to a dear friend, Ayush. MPS courtesy its price rise made it through to core holdings.

 

In January, I wrote that the correction in some pvt sector banks seemed done. This become evident in January as prices held out in case of most banks. This actually dissuaded me from adding any positions as JK Bank, HDFC Bank rallied a bit while Indusind remained more or less stagnant. Looking at the increase in weightages of other stocks (non banking) the percentage weightage of the banks in the overall portfolio somewhat reduced. I also reduced some holdings in HDFC Bank and IndusInd bank for allocating towards some of the other stocks where weightages were increased. The PSU bank meltdown continued and it was alarming to see SBI say that they have a nearly 70 p NPA for every Rupee lent. Thankfully, the focus has remained away from PSU stocks even though at times some friends keep prompting me to consider them. One good thing in markets is self conviction which needs solid discipline and lots of reading. While markets do revert to mean, I chose not to chase such stocks simply on Book Values of 0.3 to 0,7 times as it seems almost impossible to predict the extent of damage caused to these stocks. In a recent Forbes India issue, an interesting and long interview by the new SBI Chairman (who is a lady but under a Govt act cannot call herself Chairperson!!!) makes me satisfied on the need to avoid the sector.

In the NBFC Sector, positions were reduced in MM Finance which thus saw its exit from Core. Bajaj Finance continues to perform well. SKS Micro currently looks interesting in its new management control and with significant increase in loan book. I am still studying the risks of microfinance given the RBI/Election/Govt action though on first look, the stock looks ok.

 

The agrochemical/Agriculture theme sector did exceedingly well. Monsanto, Kaveri, PI Ind all continued to outperform. I must however say Monsanto has been a star performer. The stock was quiting around 580 bucks abt 6 months back and the management triggered my interest on the stock with a rewarding 50 rs per share dividend. This was followed by 2 dividends of 12 rs each (24rs). Usually MNC cos are re-rated when they either infuse capital (GSK, GSK Consumer, Astra Zeneca-no interest loan, HUL) or when they start making interesting dividend announcements (Clariant, Elantas etc). The move to add Monsanto has paid rather well with the stock zooming closer to the 1500 level and effectively becoming a 3x in 6 months. With this move, the weightage of Monsanto went up and the stock not only made it to Core but now has a high weightage even in core. There is now some noise on the Govt allowing hybrid seeds, an element that is causing the stock to rise even more.  Meanwhile Kaveri underwent a stock spilt and perhaps the enhanced liquidity and price adjustment brought in new buyers. Dhanuka is another interesting co in this sector. The promoters have undertaken capex as also have become more focussed on branding, with none other than Mr. Amitabh Bachchan being signed on to endorse the brand.

 

The pharma sector seems to be a rather interesting sector. On one side companies face regulatory challenges of drug control, USFDA inspections and rejections, pharma battles and on the other side benefit immensely from off patent drugs and Obama Care. Dr Reddy, DIVI Lab, SUn Pharma, Lupin, Aurobindo Pharma, IPCA and Alembic Pharma all outperformed. In the last few days, I increased allocations to Dr Reddy. Meanwhile courtesy price re-ratings, Alembic Pharma, IPCA and Auro entered core weightages. This forced me to re-balance, partly through MM Finance and partly through banks.

 

In my last post, i had indicated that Selan was added to Core. This co seems to have been noticed by other investors too as the stock saw a massive re-rating since January. There is excellent progress on its exploration blocks in terms of seismic studies and the initial feedback on reserves. The co has been smart to buy back its shares as also pay good dividends. The fact of automatic approval which was hitherto plagued by bureaucracy and red tapism seems to be another trigger.

 

Symphony is another stock that has been scaled to Core Holdings. I will put up a separate write up on this soon.

 

meanwhile the poor results on Tata Coffee prompted a reduction in the holdings of Tata Global. Bajaj Corp, a new idea I was studying and adding to fell out of flavour in my re-assessment and I chose to deploy the funds raised on some other ideas. Motherson Sumi was added in the last few months along with TV Today.

 

I think one of the greatest contributions the markets have made off late is that:

a) they have taken care of themselves by not over emphasising on too many variables, including global concerns;

b) FII Selling in January was matched by strong DII purchases causing the markets to remain range bound rather than go into a slumber. FIIs have again turned positive in the markets;

c) The rally has become more broad based with many large cap names (cummins, Larsen, Siemens, ABB), mid caps and even small caps rallying. The retail investor continues to be weary of markets though some domestic funds like ICICI (Naren) successfully raised good money.

d) Much of the rally in January and February came from not too obvious stocks. ABB, Siemens, Larsen, Cummins, Kothari Products, TVS Suzuki, Apollo Tyres are some of the names and many more are in the small and mid cap category.

Sometimes more rewards come by inactivity. The focus is currently not on finding too many new ideas. It is on reaping the benefits of past 2 years of increased investments and backing stronger ideas against judgement errors. It’s the time to cut the noise and focus on the signals. Corrections will always come and go. I intend to use them to buy the stronger names and not to chase unknowns or to look in the rear view mirror for historical valuations of high debt and troubled companies.

 

Until we meet again, looking towards your feedback and exchange of views on markets.

Finally a caveat: i invest stocks out of passion, Stocks teach me about sectors, competitive advantages, moats, management differentiation, governance. This blog and none of my tweets is intended to be a recommendation.

 

Cheers

 

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5 thoughts on “Performance review-February 2014

  1. navjain says:

    Super …clear and coincise thoughts …Keep up the good work ..Cheers .

  2. pramod says:

    Thanks for u r updation many of u r suggetions I am holding and keeping as a core.

  3. wannabeinvestor says:

    Hi, u write that SBI says 70p NPA for every rupee lent. This is scary,can u please share any link for the article. if that is true, then a lot of other sectors would also need to be revisited unless off course SBI is facing the problems by having a very concentrated portfolio.

    Thanks for sharing your thoughts, helpful indeed.

  4. sanjaytaj says:

    CSR play further fuels the urbanization theme hitting tier 2/3 towns. Not only branded plays but eventually basic steel and cement themes will pick up. Latter is at a low PE in a down cycle. It has to move to reasonable PE of up cycle. Which means multiplications.

  5. Yathartha says:

    What kind of average CAGR you get from core portfolio, Safir? You said eralierr that non-core is played for around 30% gain by you.

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