Investment Memo — 2020
Before I begin for crux of this memo, I want to reiterate the intentions of writing the same. I wanted to repeat the purposes of starting this blog because I see continued readers’ traction, growing month by month since last year.
Purposes of this blog —
- Make quality decisions about your investments.
- Avoid noise in decision making.
- Create a community of long term focused, quality investors in which we will share thoughts, thereby help in improving our thought process as an investor.
- Discuss mistakes as well as wins with fellow readers.
This blog is not for —
- Short term thinkers like traders, option sellers etc. I strongly believe that wealth can be earned by compounding at reasonable rates without taking unnecessary risks which compromises safety of capital.
- Earning money. I don’t want to receive any monetary benefits by discussing stocks, mutual funds or any fixed income instruments, neither from readers nor from companies. That’s the reason, I kept this blog free to read.
Portfolio returns and its benchmark
Because of diversified nature of my portfolio spanning across small, mid and large-caps to Sovereign Gold Bond to Real Estate Investment Trusts to mutual funds investing across globe, I have decided to benchmark my portfolio with BSE Sensex and Nifty 50. My goal is to achieve returns more than BSE Sensex and Nifty 50 without taking risks of losing capital permanently. In short run of 1–3 years, investors may underperform broader indices. That’s why, I have decided to have longer term view of 10 years to compare.
I will provide returns in absolute percentage rather than CAGR. I have finalized my investment style by year end 2019. For me, this is the first year for which portfolio returns should be compared in years to go. In years to come, I will stick to this philosophy and present results accordingly in absolute percentage terms. In following chart, I have provided reference price as of 1st Jan 2020. My buying price/returns could be different. Here are details of portfolio —
Mutual Funds updates
As part of this blog, I have recommended Parag Parikh Long Term Equity Fund, Parag Parikh Tax Saver Fund and Mirae Assets Emerging Bluechip Fund under direct category. Except Parag Parikh Tax Saver Fund, both funds are ranked as top performing funds in their respective categories. Parag Parikh Tax Saver Fund is a newly launched fund under ELSS tax saving category. That’s why, it has not been ranked yet. However, this fund replicates PPLTEF’s investment philosophy and Indian stock positions. So, if any reader wants to invest money for tax saving purposes of section 80-C, PPTSF under direct plan is the right place to be.
I have exited PP Liquid Fund because I found better opportunities in Mirae Assets Short Term Fund Direct plan. I chose Mirae Assets Short Term Fund because it has invested in bonds of top rated corporates like Reliance, L&T, HPCL and other Govt. related securities . All these instruments have low-to-zero probability of default. Fund has diversification across as many as 56 fixed income instruments, making it safe.
Mirae Assets Emerging Bluechip has crossed assets of 50000 Crs. and decided to stop accepting subscriptions greater than Rs. 2500. This decision to limit the inflow will prove beneficial for existing unit holders. Both fund houses care a lot about their unit holders and it is visible from actions they take. They have reduced their expense ratios over the period of time. They have been vocal about their mistakes and challenges in investing large sums of money. They communicate to their unit holders regularly in the form letters or AGM where unit holders can ask questions about individual investments. I found these traits 3 years back and decided to put my family’s money with them. That decision was a bold one because entire net-worth of family is distributed only in two funds. In the hindsight, it was the best decision in mutual funds investment so far. You can read about why I love these mutual funds here.
Evolution as value investor this year
Needless to say, I make mistakes while allocating capital to these investment instruments. I want to share learnings of this year with my fellow readers. When BSE Sensex was breaking lower circuit days after days in March and April, I haven’t put in additional capital to buy more shares. I haven’t bought heavily because I had no idea about impact of COVID-19 on businesses. I didn’t know when lockdown would be lifted, when economy would recover and how would business performance would be. Rather, I decided to stay invested and avoided putting additional capital. When I think in hindsight, my action would have generated extra returns. This was a clear miss. But, I still didn’t lose too much because I put this money in IDFC First account to earn 7%.
I have decided to diversify into different fixed income avenues like REITs and Mirae Assets Short Term Fund. I learned that in case of fixed income, one need to diversify as much as possible to spread risks.
Investment Philosophy
I want to invest in business that is of good-to-great quality, backed by competent management, having growth potential in earning without hurting quality for long-long period of time. And, such wonderful business should not be bought at infinite price. So, I pay reasonable valuations keeping margin of safety in mind. If I find any business with such characteristics, then I want to make allocation of minimum 5% — 10% of my portfolio. Businesses qualifying for such rigorous selection criteria are rare. That’s why, I run focused portfolio of 12–15 businesses. Because of nature of investment philosophy, portfolio churn is minimal. My investment philosophy is discussed in great details as part of last year’s investment memo.
Updates on businesses discussed in the blog
All businesses have steered COVID-19 pandemic effectively with hurting earnings power. That’s the reason, all stocks were up significantly this year.
Banking, Finance and Insurance sector — Aavas Financiers, IDFC First Bank and ABCapital
BFSI sector has been hit hard by 6 months moratorium imposed by Govt. Moratorium was lifted in the month of August. Accounting rules want certain provisioning to counter delinquencies due to COVID-19 scare. That’s the reason, quarterly results of these companies have impacted so far. However, most of the businesses look back to normal as per second quarter results. Year end results will show complete picture about the underwriting skills of companies in finance sector.
Aavas Financiers is a newly added but minor holding in my portfolio. Why did I add this exceptional housing finance company? Aavas provides housing loans to self-employed, first home owners living in Tier-2 and tier-3 cities. Average ticket size of housing loan is under Rs. 15 lacs. I checked the track record of this company’s qualitative parameters like NPAs, RoA, RoE, Asset-Liability Mismatch etc. Their superior track record of underwriting skills impressed me a lot. Additional thing to note is they don’t have any exposure to short term debt papers like Commercial Paper which gives me reasonable confidence about how they are building this institution. I couldn’t add truck load of this because of overvaluation. However, fundamentals are intact throughout COVID pandemic.
IDFC First Bank could perform very well on all qualitative parameters except loan book growth. Let me take you through all aspects where performance of the bank has improved. Firstly, short term money like Certificate of Deposits which poses dangers to financial institutions is reduced significantly and it is replaced by sticky CASA deposits. Secondly, 65–70% of loan book is converted to retail assets, reducing the risks of default from corporates and infrastructure loan book. Thirdly, CASA deposits are grown to 40% which is more like long term money. 7% campaign helped bank a lot on this front. These moves improved bank’s performance significantly which is reflected from operating cash flow number. As bank is in expansion mode, bottom line is not showing real picture. Once, investment phase completes, investor should see profit growing year after year.
ABCapital could show strong growth in insurance business despite industry degrowing this year. Insurance business is expected to be break-even in a year or two. NBFC business started lending without only 1% of its loan book applied to restructuring. AMC business of ABCapital showed good traction so far.
Technology — Vaibhav Global, Affle India, Indiamart Intermesh
Amid social distancing, the power of technology businesses is unleashed in this year.
Affle India is my another investment decision this year. Affle works on Cost Per Converted User based model. Lets dive deep into business model of this niche technology firm. Affle India has built a platform which recommends many retail firms to display ads to targeted set of users. This firm charges retail firms if user buys recommended products. Company has lots of data of Indian users and it has many patents for its algorithms. Only risk is if superior tech-houses like Google, Microsoft and Amazon get into this business, then business may get disrupted. I was not able to invest a lot into this business because of egregiously high valuations.
Indiamart Intermesh is my third investment decision this year. Indiamart started in 1996 to connect buyers with sellers from MSMEs. Since then, company has saw many disruptive changes in technology starting from Web 1.0 to Web 3.0 to Android App to AI-ML based capabilities to match-making. But, platform companies like Indiamart, Amazon, Google and Facebook, provide a mechanism for match-making purposes which acts like positive feedback loop. As there are sellers going to be benefited from buyers and as there are buyers going to see sellers, such platform companies going to live very long. Plethora of Indian small and medium enterprises are registered on Indiamart with millions of products. Because of positive feedback loop, company acts on negative working capital cycle and growing its presence in Digital Indian Economy. COVID-19 has hit Indiamart’s growth but not the quality. I was not able to invest a lot into this business because of egregiously high valuations.
Vaibhav Global did not feel hit of COVID-19 pandemic at all. Management decided to introduce new variety of products which pushed their revenues and earnings significantly. In last year, I have discussed about Vaibhav Global’s buyback offer at Rs. 1000/- per share. This buyback was announced at a price far less than true intrinsic value of company. After buyback, share price started zooming up. Vaibhav Global’s buyback is classic example where buyback (capital allocation) decision which created a lot of value and that’s the reason I like this management.
Auto Ancillary sector — Minda Corp, Suprajit Engineering
COVID-19 has dealt a blow to already slowing Auto and Auto Ancillary space. In the month of April and May this year, country’s biggest auto maker, Maruti Suzuki, was not able to sell any vehicle. Since June, recovery was evident from sales number of two wheelers and four wheelers companies. Due to slowdown, this space is not growing as fast as others, but, valuations were corrected a lot.
Suprajit Engineering had seen record sales in Q2. Company had taken many initiatives to cut cost across the counters. One adorable aspect of this business is consistency in performance. Suprajit’s order book is totally normalized after Q2. I am planning to add more in Suprajit at reasonable valuations.
Minda Corp had eventful year due to many factors. Company has closed down German subsidiary which is expected to add value in terms of RoCE and margins. Company decided to bring in PHI capital as investor. This decision was not taken good spirit because of dilution of equity in short term. But, I think PHI capital has brightest auto sector minds which can be leveraged in business planning for long term. That’s why, I decided to support this decision. In this year, company has become net debt free and free cash flow positive, representing strong financials on books. I think Minda Corp will be on growth path as fundamentals have improved a lot.
Packaging sector — Huhtamaki PPL
Because HPPL addresses clients in FMCG and Pharma sectors, it didn’t feel the hit of pandemic. Financial performance was quite satisfactory for this year, which increased the intrinsic worth of company. Company had hit many issues in the year of 2018 because of which share price was corrected a lot. But, management could address every issue leading to normalization of business growth. This is reflected in share price and dividend payouts so far.
Services sector — Quess Corp
Quess Corp committed many changes in leadership structure. Because of shopping spree, goodwill was accumulated on its books. Many businesses were hurt badly in pandemic which lead to goodwill impairments. The revenues of Quess remained flat. But, cash flows are coming in strong after Q2. New CEO is focused on debt-free status, 20% growth in Operating Cash Flow with 20% RoE. So far, my investment in Quess lead to satisfactory gains. I am reasonably confident that company will be on growth path along with good qualitative factors.
Pharma sector — Caplin Point Lab
Caplin Point has forayed into US markets very steadily so far. It is planning to introduce its products into Australian and Canadian markets slowly. It has acquired channel partners in South American markets. Only concern with Caplin is receivables and its increasing cash conversion cycle. But, I think that once new business bets are normalized, receivables will naturally come down. Its business has grown satisfactorily this year.
Commercial Real Estate Sector — Embassy Tech Park REIT
Embassy REIT is my forth and last investment decision of the year. Commercial and residential real estates are very costly. Maintaining these estates is another head-ache. Properties of REIT, are managed by professional managements, very high quality companies with superior cash flow live in these campuses. REITs are meant for investments in cash generating properties of which 90% of earning needs to be paid to REIT’s unit holders. This is the very good instrument for regular fixed income as it provides 7%–8% rental yield along with appreciation in property will be reflected in unit prices. Also, you don’t need lots of money to buy this instrument. Embassy REIT is first ever commercial real estate investment in Indian Markets. It has tenants like IBM, Google, Microsoft, Facebook etc. Properties are located in markets of Bengaluru, Mumbai, Pune and Noida. Around 93% of property is leased. Many escalation clauses are built into contracts of these tenants which ensure timely increments in leases. Embassy REIT has provided total dividend of Rs. 25 in first year of operations. Due to COVID-19, growth in operations was halted for short term. But, it should be normalized soon. Embassy REIT could be a very good commercial real estate investment for the long term.
Views on Indian Economy
COVID-19 pandemic has changed the world due to hard lockdowns of economies. In Mar-2020, when COVID-19 cases were rising, it seemed that the whole world is getting a rude economic shock of depression. It is estimated that Indian Economy would decline by around 10%. Shutting down economy has hit companies in every sector. The sectors hit hardly by Govt.’s move are Hospitality, Travel, Tourism, Auto, Auto Ancillaries and Financial services. Many players in informal sectors have to shut their shops because of no demand. Govt. has taken many steps to lift economy from doldrums. Direct and indirect tax collection of Govt. was declined significantly in this period, leaving Govt. technically bankrupt. Govt. had to start their money printing machines to manage fiscal calculations. After June, phased unlock-downs resulted in economic recovery.
The economic history of India underscores a fact that we have made economic reforms because no other options have left. The same goes for privatization of Public Sector Units. I strongly believe that all PSUs (barring few exceptions) are inefficient in their operations and capital allocation. Hence, PSUs are value destructors for last 15 years. All governments kept them alive at the cost of tax-payers money because of political ramifications. COVID, however, has disturbed Govt.’s fiscal mathematics. Govt. wants to put these companies on block to raise money. This move will reduce fiscal pressure. I frankly admit that Govt. is making right decisions about these companies that saves tons of taxpayer money which can be utilized to build nation in constructive way.
As I write this, Pfizer has approached US FDA for approval of COVID-19 vaccine which proved to be 95% effective. Many pharmaceutical giants are making headways for vaccine which indicates that COVID will be a thing of past soon. Full economic recovery is expected to happen within 6–9 months. Liquidity infusion by Central Banks and lowest interest rates environment all over globe will result into inflation sooner or later. Central Banks will have to squeeze liquidity at some point in time in future.
Disclaimer
Investments in mutual funds, stocks and bonds are subject to market risk. Please read scheme related documents and annual reports carefully. As I have invested in these funds, stocks and bonds, I have positive biases for them. I can be wrong! You are requested to do your home work before investing in any of these instruments. Also, I wrote about these funds, stocks and bonds because I genuinely find them as good investment instruments. As I have discussed that direct instruments should be selected, nobody gets commission. All I want you to understand that I won’t receive any incentives to write about them! Next blog post will be shared by Jan-2022.
Other blog posts
Investment Memo 2019
