Progressive State of Mind

Hey,

Hope all of you are in smiles with a fruitful end to the financial year. I am particularly elated at the way the portfolio shaped up throughout the year, though for varied reasons.
a) I tried being more disciplined towards identification of companies and in persistence.
b) I stuck to a repeated allocation to best performers, a moderate allocation to second line and no third line;
c) I tried reading as much as was desirable but avoided all the usual noise that sprang from media-print, electronic or from any person who advised market disaster or scrip’s “too much run up”. History bore its dent in reminding me of “quality compounding” and “greater certainty in disciplined investing” rather than forecasting.
d) I remained tax efficient in my investing. Some of this was more attributed to a general sense of bullishness and desire to build a quality portfolio rather than to fall for a quick buck. It is ironical that when it is well known that there is a zero tax cost of long term gains and that maturity cycles in a company are not in months but longer, there is a greater desire by post investors to kill the very goose that lays the golden egg on its first egg itself.
e) While there could rightly be a debate on what is quality and what is not, I decided to keep investing simple and focussed. Something that has always worked for me in years. Since “selfie” is the latest word that found universal acceptance, I decided to admit like a selfie and a proud one too: I have always done well in picking stocks when I follow a read, see, research, buy in phases, persist and prune when over exposed approach. In several years of investing that started as a student, the only time that I was not disciplined was when boisterous of my success in stock picking and tempted by some rather insane stock brokers who really have no interest but to make you churn and trade, I flirted with the derivative segment for 2-3 years. What started as a huge and easy money game landed with a thud. One of my mentors says that was worthwhile as “it was the fee I paid for an education”. Almost committed to not falling in this pit of day calls, tips and x y z buying A B C company, I remained focussed on only what I saw, liked and believed.

It gives me pleasure to share some of my stars without whom I would have ended up like a lame duck and the rationale that drew me to them. I will try and do this with brevity to keep this post short of a book.

a.Ajanta Pharma- the stock was identified at 150 rs levels, booked out at 600 odd and then re-entered at around 350 odd. The stock continues to find its own room in my holdings now fortified with a bonus credited to its holdings.

b. Ashiana Housing- I was initially inclined towards the stock. Then became somewhat unsure when they changed their accounting practice. What alarmed was not the usual paraphernalia about real estate companies, since this co had a better accounting system (all cash, no agents and a profiling towards better life for old people. The co was drawing referrals from existing customers and as a good management book oriented towards sales will tell you happy customers are the best source of growth. I prompted myself to ignore the short term aberration that would trigger slower growth in the back drop of its accounting change to focus on the ability of the same accounting turning favourable with time and stuck on. The stock has delivered a great return and I thank Ashaina Housing and its promoters for an excellent role.

c. Astral Poly- this has been one of the best return stocks. Identified at 90 rs before any split/bonus the key here was technology in an underpenetrated market with aesthetics. The fact that it had exclusivity from Lubrizol, a Warren Buffett co, had low interest of institutions and a great opportunity were draws. In one great book I read, Asia, Automation and Aesthetics/Designs will play a good differentiation role going ahead. Astral scored not only in terms of technological excellence but also aesthetic appeal targeting a rather depleted looking home and industrial Pipes solution. I recall one of my dear friends after the release of one of Astral’s qtr results sold out and called me to say results were not good. I coaxed him to read the results again and told him where the judgement error lay. Thankfully both he and me are smiling today though he still owes me a treat. I wrote this deliberately so as to get my treat in good time.

d. Atul Auto: in several interviews, Mr. Rajiv Bajaj kept talking of a slow down in motorcycle sales but suggesting the 3 wheeler segment was doing better. And here we had a 3 wheeler co expanding capacities both in manufacturing and in terms of geographic spread. Recently two value investors, Mr. Raamdeo Agarwal and Mr. Sanjoy Bhattacharya, added Atul Auto at 260 rs (post bonus/split)which is gratifying considering an identification of this idea at 90 rs pre bonus/split. Thank god for the distraction of this markets will go to 4500 levels that kept people away from identifying such gems. Logically value is a function of either earnings or asset base, or both. With a rather small market cap and improving order size, how would 4500 if it were to arrive hit a co that was trading at the lowest band of its industry PE and yet registering higher growth and return on capital ratios is historical. In hindsight I would have liked it to stay low as I was adding religiously every month.

e. Aurobindo Pharma: Amidst the gloom lies the opportunity. Auro went through nightmares with USFDA, Patent Suits and tanked all the way to 100 odd levels. Picked up on my radar at 160, somewhat by reading between its problems and motivated by a meaningful exposure initiated by HDFC mutual fund at 105 odd levels, this stock had the portfolio in the pink of health.

f. Relaxo/La Opala: while I no longer own these companies, one was a play on moving up the pricing (and hence margin) pyramid (relaxo) while the other a BUY WHAT YOU SEE phenomenon. Relaxo was identified at 160 odd and is now 2500 rs while La Opala identified at 85 rs odd is now 730 rs odd.

g. Bajaj Finance, Mah & Mah finance: it was interesting to see better and faster growth in NBFCs when Banks were constrained by their own to extend funding in some of the niche segments these cos catered to. While both gave super returns, MnM Finance is now out of the portfolio following some concerns on its future profits.

h. Cera, Kajaria: one was a clear play on sanitation, a segment that I previously blogged on. Cera has been a star performer from 190 odd bucks. Again, negative news on the untimely death of the son of the promoter just when the ball was to be handed over to him for his inning had triggered a crash. Entrepreneurs who create businesses and not inherit them usually are a world apart. Mr. Somany came back with a bang in his second inning to create lots of cheers. Kajaria: interesting write up on Gen 2 in latest Fobes makes a valid point on the vision ahead.

i) Dhanuka, PI Ind, Monsanto, Bayer, Kaveri: i now wonder why I liked so many seed, agro chemical and speciality chemical cos. Two reasons: one was a bet on domestic one on MNC. One trigerred by a generic vs Proprietary battle, one by its R&D muscle. Bayer had the additional cash flow advantage setting in from sale of its properties. Continue to own all these.

j) Gruh, Repco: Specialized housing players, one with a commendable backing of the giant, HDFC and the other branching out from a regional focus of small loans into more territories. Recently (at 190) India Bull Real was added

k) JK Bank, HDFC bank, Indus Ind: the banking sector is a mirror of the economy even more so in a country where savings were historically as cash or jewellery or land. The per capita consumption of banking services and allied services remains low and HDFC and Indus Ind both showed max focus on tapping this. HDFC bank recently found the going good even at this mkt cap in terms of tapping branches in Tier 2 and Tier 3 and under the dynamic Aditya Puri promised continuing growth and the best of times. Indus Ind too had its share of a dynamic Mr Sobti breaking the bank away from the not so sure Hinduja control and lead with incentives in ESOPs and NRI access to funds. JK bank was uniquely placed in terms of maximum surveillance (being in Kashmir- recall how the last Chairman too was replaced) to a handsome holding in MetLife India. Higher scrutiny equals better accounts. Dividend payout at 650 bucks when I identified it was the dessert.

l) Tech M, Hcl Technologies: Tech M was the cheapest IT co that was coming out of a telecom over focus (British telecom) and Europe slowdown and a messed up Satyam. Just as the frog turns into a handsome price when kissed, Tech M was turning into the league of the biggies. The fact that Infosys was (and to my mind remains) in a spot of worry meant some one was winning a pie of the huge IT spending. hcl Tech was obviously one such gainer but the others could have been TCS with the highest market cap in India, Wipro where till 2 quarters back the management itself was experiencing a transit from a low growth to an improved growth wish list. I interacted with some software engineers too who frequently travel either on offshore projects or to book new orders and the feeler was Tech M was giving TCS, Infy a tough time. In his book, One up on Wall Street, Peter Lynch advocates the feel on buy what you see. Two things stuck me here: one that Tech M was a threat to the giants and being acknowledged so in the midst of a transition and two the taking of granted approach of HCL Tech doing well in getting orders, usually a sign of a good business.

m)Mayur Uni: I can write on Mayur Uni as a separate post. However since the best of it has already been baked , its best to enjoy the cake. Enough has now been written on Mayur and Westbridge’s recent stake into it has drawn more crowds. While I hold this stock, I am more tempted to read THE CROWD: A STUDY OF THE POPULAR MIND by Gustave Le Bon for now. If the madness continues in terms of price running ahead of a sustainable earning I may switch to reading IRRATIONAL EXHUBERANCE. For now, Mayur had rewarded twice in the year one with a bonus one with a stock split. I sound cuckoo calling Bonus a reward but in such stocks infusion of liquidity in markets (by additional shares or split shares) is a reward not only in price performance but the ability to buy or sell in more controlled dosages.

n)Bosch, eicher motors: I am very keen to meet Siddharth Lal over business. I have some good thoughts and lots of appreciation for how Eicher has built a dual business. One in the consolidated co with VOLVO which I learn is now exploring growing with Eicher outside India and the second with the formidable reputation of the Bullet. While one is a smaller contributor financially it talks god depth about the management’s versatility, passion and progression. Eicher was picked at 1000 rs odd and now hits the 6000 mark. Bosch, one of the most committed auto ancillary companies. Most auto ancillary business is characterised by a generic nature of the industry and growth from capex (volume growth) with very little pricing power. In an ACMA seminar where I spoke I asked the attendees who were all from the auto trade why automobile brands have brand power, so much so that brands like BMW, Mercedes even license the brands to products such as key chains, t shirts etc but auto ancillary co have not focussed on similar brand power. Exide, MICO (Bosch) and now Amaron are perhaps the only known auto ancillary brands. Another good factor feel for Bosch was the commitment of the management on capex despite plant shut downs on designated days to meet the slowdown blues. Bosch was picked up around 5000 levels and remains a core holding.

Enough.

Not many are keen on all that I keyed in. Most want to know what’s next.

Starting with my standard caveat that I am not an investor advisor and only express my personal views with the possibility of going wrong and surely with an invested interest, I feel the markets will reward going ahead as also could punish. The probability of the later lies in an unfavourable electoral outcome or if BJP wins and Mr. Modi comes to power, the role that support partners play in taking reforms ahead. The recent move to summon the head of Samsung in India leaves a bad flavour even though from a legal stand point it may be within the expected norms. There is a positive move to enter into tax agreements with some MNCs that should place India better. The BJP party has expressed concerns on FDi in Retail(multi brand) but suggested that all other FDI will be allowed. Insurance should be a big trigger if opened under FDI as it may attract a more sustained inflow into equity markets as well.

The good feel about markets is most of the cos under the tracker are not truly IFFY ie based on a Congress or BJP govt. we are also now in a capitalist frame of confidence ie if some of my favorites fall I may shuffle some of my holdings and perhaps add to a few at the cost of some non core holdings. As I say to a few friends: who knows? The process needs to be good, the outcome will follow.

I have started picking a few small cap companies that seem to be currently in a stage that could transform them. For the good or for the worse is what time will reveal. I surely believe the efforts are on for the good.

Some of these companies include HCL Infosystems which is re vamping its product and services business, has undergone change of directors, business heads and is making efforts to improve working capital was was locked up.

Another is Archies, a 250 store business, with a phenomenal brand ownership that has struggled from a change for the worse towards printed cards (product obsolesce) but should pick up partly due to CSR (CRY, UNESCO cards) and partly by an alarm clock that needs to trigger management focus into building a better internet business for its gifting business. At 50 crs odd market cap, for a co that has a good brand, 250 stores, some 5 tie upsm some real estate, almost no debt and some easy potential if there is awakening patience could be a real test.

The third is a borrowed idea, KRBL, on which smarter investors have worked and benefitting from the change. Global crop, with ability to store, huge export demand for premium with an awakening Indian demand, scarce land, good brand, almost 6 takeovers in the industry in recent times.

Review of some of the recent thoughts: Heritage, Hatsun have done well in the logic I propounded for dairy stocks while Sunshield Chemicals (owned by Solvay) is basking in the glory or as INXS’s song says AFTERGLOW of its parent’s gracious open offer in Rhodia CHemicals.

I conclude for now, wishing our country a good election and a good govt. We are proud of India and its a matter of time we will take the lead to transform our country. We have no dearth of talent, hard work, intelligence and success stories. It’s time to look forward and not backward. Except in markets where we must always learn from history. Cheers