Investment Memo — 2021
I am pleased to announce that I completed 5 years in investing. I mark last 5 years as a journey of fulfilment and tremendous learning from business analysis, investment in public markets and transparently sharing thoughts with readers. As I celebrate my half decade in investing, I am mindful about my responsibilities as a investment blogger. This blog has been started with intentions of building a community of long term investors so that I learn, unlearn and relearn something out of the discussion. So far, it is serving the purpose and that’s the reason, the tradition of yearly memo will continue. For new readers, I recommend to read memos of last few years to understand intentions behind starting this blog.
The year 2021 is again marked as year of learning and avoiding mistakes with emotions of FOMO(fear of missing out). To be precise, I kept myself silent by not deploying capital in equities while others are taking equity markets to astronomically high level. I had decided to sell out equity holdings and repaid all housing debt. This step has given me satisfaction of enjoying debt-free status. I dedicate the success of being debt-free to investment tenets put forth by Warren Buffett.
Coming to mistakes part, I missed investing into Caplin Point Lab and Suprajit Engineering even if I found the prices were fair enough to deploy money.
Portfolio returns and its benchmark
Because of diversified nature of my portfolio which spans across different investment instruments (10 small and mid cap businesses, 2 equity mutual funds, 1 conservative hybrid fund, 2 REITs, 1 INVIT, Sovereign Gold Bonds, FDs and EPF), 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. 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 I believe in making few bets, only 3 mutual funds are included in my portfolio. Parag Parikh Flexi Cap Fund and Mirae Assets Emerging Bluechip Fund have been a steady outperformers in the Indian Mutual Fund industry. Needless to say that the investment style adopted by these two funds is working in favor of investors. This doesn’t mean that these funds will continue to outperform forever. It is investor’s responsibility to stay put and don’t give up when these schemes won’t perform better. In short, investor’s character will be tested when underperformance hit these schemes in future.
Parag Parikh AMC launched a new fund this year called Parag Parikh Conservative Hybrid Fund (PPCHF). I found this ‘go anywhere’ debt fund as a unique one in fixed income category. There are few reasons for this. 70% assets of PPCHF is invested in high quality, AAA rated securities like state Govt. bonds. Around 10% of assets is invested in REITs and INVITs like BIRET, Embassy, Mindspace and INDIGRID. Around 10–25% of assets is invested in equities and equity related instruments with high dividend yield and great business quality. My opinion is that the portfolio is constructed with utmost due diligence to replace existing fixed income instruments like Recurring Deposits, Fixed Deposits and all debt funds. The distribution of assets can vary depending upon fixed income opportunities available in the market. While it is difficult to quote exact returns from this fund, I strongly believe that it can generate returns way more than bank FD. I am happy to share that I have replaced all of my fixed income investments with PPCHF with direct growth plan.
I have sold out holdings in Mirae Assets Short Term Fund and routed money to PPCHF.
Sovereign Gold Bond
Govt. of India comes up with series of Sovereign Gold Bond regularly. These bonds earn 2.5% on initial investments every year for 8 years. At the end of 8 years, money will be returned to investors considering average price of gold for last 15 days. So, investors receive appreciation as well as 2.5% interests on their investment. Gold has appreciated by around 12% in last 30 years. As 8 years is pretty long term horizon and 2.5% extra income, investors may get around 12–13% returns on Sovereign Gold Bond.
Gold prices went nowhere in this year. I had subscribed to SGBs couple of times when prices dropped. SGBs is a minor investment for me.
Evolution as value investor this year
I learned a lot during this year from the perspective of fixed income investments like REITs and INVITs. I evolved from pure play equity investor to an investor with diversified portfolio consisting of high yield fixed income instruments like REITs and INVITs. Another significant learning is to protect your equity portfolio from vagaries of inflation and personal emergencies. I created a personal emergency fund worth 10 times of my per month expenditure. This fund will not be touched unless situations demand so. This is to ensure that I wouldn’t sell my stocks under pressure just because money is needed.
As equity markets are touching sky everyday, it is hard to deploy capital in equities. Fixed income instruments like RD, FD and debt funds are giving negative inflation adjusted returns. Reduction of interest rates in savings account of IDFC First Bank compelled me to look for better choices to park my savings.
That’s why, I started analyzing REITs and INVITs available in Indian market. Due to second wave of Corona all office places were shut down. This resulted in awesome opportunity to invest in real estate sector businesses as prices had corrected a lot. So, I bought Embassy and BIRET at dirt cheap valuations. Both businesses are rock solid in their fundamentals like occupancy, low debt levels, quality of management, tenant profile and diversified properties across India. The prices were such that Embassy and BIRET were trading at 7% and 9.5% dividend yields, respectively. As offices are opening up, prices of these REITs have started moving up giving approximately 25%+ returns so far.
INDIGRID INVIT was another investment opportunity found during these days. It also ticks all requirements to deserve a place in portfolio. It has long term (30+ years) contract for power transmission. The assets are rock-solid and cater to power demands in many Indian state. The dividend yield of INDIGRID is close to 9.5% with minimal risk of losing capital and earnings visibility. Though dividend yield is attractive, the price for INDIGRID was quoting at the fair value of business. So, returns from price appreciation will not be handsome as compared to REITs.
Any long term investor who needs regular income way higher than bank FDs can consider these three options (BIRET, EMBASSY and INDIGRID). I plan to hold these investments for medium term. If opportunities pop up in equities, then I will switch this fund. Till then, I will enjoy the dividend and appreciation of these three investments which combined together can be more than 20%, beating inflation and mainline indexes by wide margin.
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.
Updates on businesses discussed in the blog
I have removed Minda Corp, Huhtamaki PPL and ABCapital from my portfolio. I have added better businesses like Indigo Paints, Tasty Bite Eatables, Embassy, BIRET and Indigrid INVIT. Lets go through my take on progress made by these businesses.
I have decided not to add any equity share to portfolio as all businesses are trading at exorbitant valuations.
Banking and Finance sector — Aavas Financiers and IDFC First Bank
Due to COVID-19, Indian economy faced many challenges. The same is reflected in banking sector as well. The main difficulty for banking sector is growing non performing assets on their books. I feel that as COVID wave is subsiding due to availability of vaccines, Indian economy will soon go to pre-COVID levels. This will enable banking businesses to bring down non performing assets.
Aavas Financiers is a niche housing finance company which got least affected due to COVID-19 even though it is serving rural markets. Aavas could grow revenues and net profits significantly over this year which proves the underwriting capabilities of the management. Overall loan book is found to be sane.
IDFC First Bank is a newly created bank from merger of Capital First and IDFC bank. The bank is facing headwinds after merger because of legacy infrastructure and corporate loan book. The management could wind down problematic loan book significantly. The bank has grown their CASA franchise significantly to 50%+. The brittle and short term money in terms of certificate of deposits is replaced by diversified sticky CASA deposits. The bank is in investment phase opening up many branches across India. Due to COVID-19, GNPA and NNPA are zoomed to 4% and 2% respectively. This created provision pressure for the bank. I still feel that management of the bank is competent to address these issues over the period of time.
Technology — Vaibhav Global, Affle India, Indiamart Intermesh
Technology sector and businesses in my portfolio are doing pretty well due to their differentiated business model and effective management teams.
Vaibhav Global is value retailer of jewelry. Vaibhav Global is growing pretty fast these days due to people ordering online and cheap cost but quality products. Q2 for Vaibhav Global was not that good because they are investing in Germany. However, Vaibhav Global is the great long term investment that any investor would do. Stock was split as 1:5 as it was trading Rs. 4000+ range.
Affle India is advertisement recommendation platform for sectors like FMCG, pharma, entertainment etc. Affle is enjoying tailwinds because of its differentiated offering in recommendations and lots of consumers are turning online in India. I believe this will be favorable for Affle over long term. The negatives for Affle is their data acquisition costs increase as they grow in revenues as well as debt on the book is growing. In nutshell, Affle is another crown in my portfolio.
Indiamart Intermesh is B2B marketplace for SME businesses with significant market share in India. The business works on negative working capital model with significant pricing power and strong brand equity. Indiamart’s business is growing healthily without hurting quality of business. Indiamart will grow bigger over the period of time as it has all great factors working in favor.
Auto Ancillary sector — Suprajit Engineering
Auto and auto ancillary sector has shown recovery in demand this year. The terrible memories of last year had gone where every auto companies were in red. Suprajit Engineering found revenues and operating cash flow to grow beyond historic numbers. The company had shown the best results in Q2 this year. I have no reason to say that stock price has also caught up with the earnings and trading at high valuations. I believe Suprajit will be large cap company in the future to come.
Services sector — Quess Corp
As offices were closed for this year, Quess had another muted year in terms of revenue and profitability growth. However, it could maintain the revenue, reduce debt and operating expenses which resulted in core profits getting converted into operating cash flow. In Q2 of this year, Quess could show significant increase in revenue (20%+) over last year. As offices are opening up and people will start to come to office, Quess will recover. I find the new CEO’s strategies are working with respect to quality of business.
Pharma sector — Caplin Point Lab
Caplin point lab could attain revenue and profitability growth owing to introduction of new products into US markets. Caplin point lab is expanding itself into new markets like Canada and Australia which will grow its revenue further. Their receivables are increasing proportionately as revenue grows. I wish management will reduce receivables on balance sheet as business stabilizes.
Paints sector — Indigo Paints
I have analyzed and decided to buy Indigo Paints once valuations are reasonable. Indigo Paints is a small cap company with diversified offerings in paint business. The balance sheet and all qualitative factors are found to be great. The later half of this year was heady because of tremendous rise in raw material prices. The whole paint industry decided to raise prices in Nov. Indigo is expanding with reasonable speed from increase in dealership network and advertising campaign.
FMCG sector — Tasty Bite Eatables
Tasty Bite Eatables is another business where all qualitative factors are great but valuation is not attractive. Tasty Bite Eatables was admitted to bankruptcy few decades back. The current management submitted a business plan to turnaround this business into ready-to-eat organic Asian food and introduce its products into developed markets. Since then, there is no looking back for the company. The company was acquired by Mars Foods few years back and enjoys solid support from the giant. Looking at the numbers, company’s business model is working fantastically. Management has decided to invest heavily into land and products.
Commercial Real Estate Sector — Embassy Tech Park REIT and Brookfield India Real Estate Trust
Commercial real estate sector has muted year due to lack of office demand. Embassy didn’t see much pressure on earnings and distributions. Embassy enjoyed solid occupancy, low debt and rise in revenues. Embassy’s entire real estate portfolio is pretty robust which was proved by distributions given by trust over last two years.
Brookfield India Real Estate Trust is newly debut on exchanges this year. Due to COVID, operating income didn’t grow but remained stable. On the other hand, unit price went down significantly, giving dividend yield in the range of 9–10%. BIRET composes all solid qualities that one should look for in REIT. Occupancy level remained more than 85% in all bad years of COVID. It remained low debt, high operating cash flow business with good prospects of enhancing the portfolio to significant extent over the period of time. Additionally, it is backed by high quality management in the name of Brookfield, which alleviates all worries.
Unit prices of both Embassy and BIRET went up high in Oct and Nov.
Power Transmission Sector — Indigrid INVIT
I added Indigrid as another fixed income instrument due to its ability to fetch long term cash flows. Indigrid has long term contracts to transmit electricity across states. Quality of services provided by Indigrid are impeccable with 99.9% availability or minimal trips on transmission lines. Indigrid has a solid balance sheet with low debt and most of its cash flow is getting distributed to unitholders having dividend yield of 9%+. Given these characteristics, I decided to buy Indigrid INVIT.
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-2023.
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