1. Yes Bank:
    1. Best performing bank for the last 5 to 10 years from profit growth and stock market returns perspective .
    2. Its profits are greater than those of IndusInd bank, but IndusInd banks market capitalization is more than 2 times Yes banks, hence the belief that its valuation is reasonable. NPA’s have decreased and the disputed NPA’s are not significant in the overall scheme of things.
    3. Banking is an institutionalized business and is significantly process driven. CEO’s role in a bank is less person dependent. It is a business which is well understood and can be run by any competent banker. Most banks are run by professional CEO’s and they are replaceable. CEO change may not justify over 30% drop in share price.
  2. DHFL
    1. Best performing HFC for the last 5 to 10 years both from profit growth and stock market perspective. It continues to report robust profits.
    2. DSP which was owning 1,100 cr worth of DHFL bonds, it selling 300 cr DHFL bond has no bearing on the business of DHFL, nor does it say anything about DHFL liquidity, which seems to be robust.
    3. In the long run cost of funds go up for all HFC’s, so there is nothing special about DHFL to deserve a 50% fall.
  3. Vakrangee
    1. India with limited banking connectivity has a large opportunity for entities that can act as banking correspondents. Retail foot print of such entities can enable them to sell other products & services and generate additional revenue. Vakrangee has been in this space for a very long time. It has been paying taxes to the government based on profits (which brought credibility to the profitability).
    2. Rumors about insider trading are not proven – No updates from SEBI. No formal case on it money laundering. But the recent quarter was far worse than the past.
    3. This could be a case where public information was not correct and our investments were driven by this information. If this is the case, then it could be a case of permanent capital loss. Information is still not clear –we will exit or reinvest based on more information, an analysis of profits over the next few quarters will drive our decision making.
  4. Vedanta
    1. One of the largest natural resources company and owns some highly profitable companies, Demand for its products is expected to go up.
    2. There were setbacks in Goa, Karnataka, and TN because of HC and Govt, but these can be transitory. Imports and global prices are current challenges, but this industry is cyclical.
    3. Has some management challenges but is becoming more professional – has decent prospects in the short to medium term. Current high oil prices can also benefit it.
  5. Can Fin Homes
    1. One of the best performing HFC’s over the last 5 to 10 years, professionally run, and has consistently delivered good profits.
    2. Its parent, Canara bank, was trying to sell it. There was a large fall in price due to sale of Can Fin Homes not going through. Failure to sell does not impact profitability of the company.
    3. Last couple of quarters Karnataka has had greater NPA’s and this is a temporal problem as the housing demand continues to be decent. Though the cost of funds going up may lead to some amount of margin squeeze, it may not justify such a steep fall when the valuation is not rich.
  6. Avanti feeds
    1. Has consistently improved profits and stock market performance reflected that over the last 5 years.
    2. Increase in soya prices have reduced the profit margins, this may be temporal.
    3. Market opportunity is very good due to consumption story, and the management is very good. In its journey, it can have temporal issues due to virus attacks on shrimps or due to floods, hurricanes etc, but it is a good long-term story.
  7. KRBL
    1. Owns “India Gate” brand and has significant market share and mind share in India and also has good exports.
    2. Its exports to Iran are impacted by the sanctions. It is also impacted by an allegation that the former Independent director was involved in money laundering, though there is no formal case.
    3. Long term story still intact, product demand is increasing which provides it a good opportunity.
  8. Kalyani steels
    1. Part of the well-run Kalyani group and the products are used by niche clients, good profit growth and stock market return over the last 5 – 7 years.
    2. Is having challenges due to imports from China and input prices
    3. Steel cycle is expected to run in the next 4-8 quarters thus making it worth our while to be patient and maybe invest as we go along.
  9. Himatsingka
    1. It has a decent presence in a high margin textile business, with a lot of brands as its clients. It had a good profitability track record over the last 5 years.
    2. Textile business is having a tough year due to global cotton prices (this is usually temporal, as prices go up, cotton production tends to increase).
    3. They are venturing into own brands – this is a risk – but also an opportunity to increase margins significantly. Having own brands initially moves the costs up, and profitability change usually trails the cost. If there is an increase in profitability it will start showing up in results in 18 to 24 months and we can take a call based on how things go for the company
  10. Srikalahasti pipes
    1. Has been consistently growing profits. Electro casting which owns SP also owns Electro steel which is being sold off but this should not have any impact on SP as it is an independent company.
    2. It is having challenges due to imports from China and input prices. It had a plant maintenance issue due to which last quarter has been down.
    3. There is a growing domestic demand – only 37% of the sewerage is treated today and it is reasonable to expect that there will be more demand for better waste processing. SP’s extensive market presence and limited formal competition creates an interesting opportunity to generate good returns.

 


Our decision making is based on data published by the companies and its analysis.  The implications of this approach are as follows

  • If the data available is bad, then the analysis will be incorrect. We buy public data from very reputed sources, but in cases of fraud, the public data is bad, e.g., Enron, Satyam etc., then our analysis will be incorrect. This is an inherent part of a data driven approach.
    • One protection we have is that we take a very slow approach to investing, in a year we will invest only 4 times in the company and deploy limited capital. Our maximum investment in any opportunity is limited to 30% of the month’s capital in one company. And this maximum is reached only after making 4 investments, the minimum duration for making 4 investment is 1 year. The logic is that it takes a long time for us make significant investment, hence there is a chance that bad data will be exposed before we invest a significant amount.
    • The number of cases of poor data and fraud is limited. They happen, but when viewed as a percentage of the overall data, it is quite small. Though our perception of it could be skewed, for instance all of us can recall airplane accidents but we don’t take notice the millions of flights making safe journeys every day.
  • The data could be good, and our analysis could be incorrect. This could impact us in 2 ways. Missing opportunities and investing in poor opportunities.
    • Missing opportunities does not usually impact the portfolio negatively.
      • We regularly review companies that are doing well and where we are not investing to understand the reasons.
    • Investing in poor opportunities could impact the returns negatively. The checks and balances that limit this are
      • Our slow capital deployment process will only allow us to invest in a gradual manner. The chance of being misled for too long is limited.
      • We reinvest only if the opportunity meets all the valuation criteria as well as beats the benchmark Index from the time of last investment. This is a reasonably high bar and has high chance of preventing significant deployment of capital.
    • Data driven approach also limits our investments when the data and analysis are both correct. This means that the amount of money we will make is going to be limited.
      • Our approach is best suited to invest in multiyear opportunities, where the valuation is right as well as the company performance is good. Statistically there are a good number of such opportunities available and the returns from such investments are satisfactory.

 

Our approach is gradual, measured, and is designed to be risk averse. We are okay if we miss out on opportunities rather than commit capital too fast and take a chance of losing capital. Our gradual approach also means that we don’t take out capital in downturns but ride them out by limiting our investments and increasing the rate of sales. This approach, in the long run, has a decent chance of generating satisfactory returns.

 


 IndusWealth: Making your money work for you