Green Portfolio has been one of the best performing Portfolio Management (PMS) Company in India over the last 2 years. We would want to share some key takeaways from our investment philosophy and some recent investment success stories with a rationale on why we invested in those companies.
Let us discuss, which investment philosophy worked for us?
We believe in the philosophy of buying “High-Quality Stocks at the Right Price”
Over the last decade, growth investing has outperformed value investing.
With the availability of more frequent information and screeners these days, gone are the days when a market used to take months to realize a deep value stock.
Also, with the frequent change in technology, the life cycle of companies has reduced. Today, we have to not only rigorously monitor our company performance but also look into the growth aspects of the company.
Growth companies these days, tend to generate higher investor interest which can sometimes result in higher valuations. We need to always keep a margin of safety while investing and always look at valuation’s comfort before entering the right stocks.
Following are the key things that an investor should consider while investing:
Fundamentals of your company:
- The story behind your company is the most important factor to be considered, keep a track on the overall picture of the company’s business and the chances of success in light of the information
- Operating profit margins should be comfortable, this protects you against unprecedented challenges like a lockdown
- Debt should not be high, the company should be able to pay the debt from its internal accruals
- Other ratios like Sales/PAT growth rate, ROE, PE should be comfortable. Look at sector-specific ratios.
- Corporate Governance should never be ignored while investing
- You should look at factors like the sustainability of cash flows, addressable market opportunity, business moats
- Don’t buy a share if you have any of your questions unanswered
Discipline is the key:
- Staggered investing and divesting. Never put all your allocations in one go, stagger your acquisition. Use SIP to invest wherever possible.
- Don’t put all your eggs in one basket. Diversify your portfolio to 10-20 stocks.
- Invest as per your risk-return profile. Don’t simply follow other investment strategies. Look within your own investment needs before investing.
- Understand the risks of investing. Try to reduce the risks wherever possible
- Set a time horizon for your investments and invest accordingly. Don’t change the horizon with short term changes in markets.
- Don’t change your strategy basis short term news flows or macro-economic changes.
- Evaluate your investments on a regular basis but don’t take action too frequently. Most of the wealth from stock markets has been created through long term investing.
- Read about your companies on a regular basis
- Don’t get swayed by daily changes in stock prices
- Like a stock but do not love a stock.
- Book profits wherever you believe that the stock has become expensive
- Be humble; strive to learn something new on a daily basis.
- Don’t hesitate from accepting your mistakes, learn from others folly
So, now let us discuss some of the company-specific rationales which we considered while investing. These are the recent investments that have fetched us multi-bagger returns.
1. Balkrishna Industries Ltd
- The company is one of the leading off-highway tires producing companies in India with the highest Operating Profit Margin (OPM) of 30% – best in India’s tire industry.
- It enjoys 75% revenue from the replacement segment which is least affected compared to the OEM segment.
- With improving brand position and a large variety of tires under its offering, it has been able to grow the Topline and bottom line with CAGR of 13.3% and 17.8% respectively in the last 10 years.
- Backward integration through carbon black plant, one of the key raw materials, will ensure the sustainability of raw material and improve the OPM by 2% when the plant runs at full capacity.
- It has been doing continuous Capex to produce a large variety of tires. These CAPEX has been done through internal accruals.
- It enjoys debt-free balance sheet even though it runs capital intensive businesses.
2. Astec Lifesciences Ltd
- Astec is the part of the renowned Conglomerate-Godrej Group, which provides us with comfort on corporate governance aspects. It manufactures a range of agrochemicals, active ingredients, and pharmaceutical intermediates, and others.
- Astec is majorly owned by listed company Godrej Agrovet, which is in similar industries, therefore synergies in terms of market access, product development, and technologies are there.
- With diversified business segments, continuous product launches helped it to grow the top line and bottom line with a CAGR of 16.2% and 13.2% respectively in the last 10 years.
- With a bunch of strong portfolios, the company has been able to improve its presence in the export markets. The export segment which used to contribute 22% in revenue in March 2011, and now it is 57% in March 2020.
- Astec has done backward integration to de-risk itself from relying on procuring raw material from China
- Environmental concern and consequent action in China has given immense opportunities to Indian Chemical players. Astec was also a major beneficiary.
3. Aurobindo Pharma Ltd
- APL is working on specialized segments such as Injectables including Penam & Microspheres, Hormones, Oncology, Vaccines, Neutraceutical, Depot injections, and Peptides which would improve margins due to complexity in the manufacturing & better pricing.
- APL has a presence in the US, Europe, ROW. 50% of total revenue comes from the US and 20% from the EU. Hence is geographically well-diversified.
- The company acquired a portfolio of oncology drugs from Spectrum International Inc., Apotex inc and strong launches of the new products helped the company to build a strong portfolio.
- The company has strong R&D and continuously spends around 4% of its revenue.
- The company has also partly backward integrated due to which the company is able to maintain its margin.
- APL business profile derives strength from a well-diversified portfolio.
- The company has a strong pipeline of ANDAs pending approval and the company proposes to launch many new products.
- At the time of investment, it was one of the lowest PE shares with the highest OPM among big peers.
- Although the company faced USFDA observation and received OAI on five units, this was the first time that the company received so many observations within a short period of time. However, the majority of the observations were resolved as of FY20, indicating that the company undertook prompt action to address the regulatory observations.
4. Aarti Drugs Ltd
- Aarti Drugs is a part of the prominent Aarti Group and is in the APIs sector which has attracted government focus for many years.
- It is the market leader in 10 APIs out of its 50 APIs, therefore has been able to grow top line and bottom line with CAGRs of 15% and 21.5% respectively in the last nine years.
- With sustained acceleration in sales and profit, it has been able to deleverage itself from 1.64 D/E in March 2011 to 0.51 in March 2020.
- It has 35% export revenue and 65% domestic revenue, therefore it not completely dependent on a single market.
- Focus on import substitutions has helped to garner more opportunities with better margins. Not long ago, it introduced four import substituted products.
- With the strong foot in APIs, now the company had plans to expand into Specialty chemicals with greenfield expansion, this will ensure a diversified source of revenues.
5. Adani Gas Ltd
- Adani Gas is in City Gas Distribution (CGD) networks to supply the PNG to the Industrial, Commercial, Domestic (residential) and CNG to the transport sector.
- AGL is in the business which is growing rapidly as the government wants the private sector for this job.
- During FY20, Adani Gas emerged as the largest private player to have won the highest number of licenses and became the largest CGD Company in India. Similarly, AGL’s JV with Indian Oil Corporation named IOAGPL also received authorization for additional 10 GAs, taking their tally to 38 GAs which comprises 71 districts, 68 Large towns in 15 states covering 8% of the population of India.
- The company has aggressively added 33 CNG stations in FY20 taking it to Rs 115, which will benefit the company. With the reduction in domestic gas & global LNG prices, the company has passed on some cost benefits to customers, which gave AGL healthy margins and competitive advantage against other fuels.
- Debt-free Balance Sheet.
- In Feb 2020 it issued a 37.4% stake to Total SA to make it a 50:50 JV. Total SA will bring in best practices with AGL because these two companies create one of India’s largest Downstream Energy Partnership.
- Also, the price at which Total acquired the stake was Rs. 150 odd rupee, this gave us comfort.
- AGL has strong financial statements and healthy margins.
- We bought the AGL share at Rs. 103.75 in May and CMP is 147.40.
6. Valiant Organics Ltd
- Aarti Group Company.
- Very High margin of 32% and very low PE of 12.
- The products of the company are used as intermediaries in a variety of products such as Agrochemicals, Dyes, Pigments, Polymers, Veterinary Drugs, Automobiles, Refineries, Fuel Additives, Rubber and Pharmaceuticals to name a few of them.
- Fully integrated chemical player.
- Inorganic growth and organic capital expansion without much increase in Debt Equity.
- The company has purchased 68,000 sq. mt of land at Sayakha near Dahej, Gujarat, which will be appropriately utilized for future growth.
- Currently, the Company has three projects in progress at Jhagadia, Gujarat, with a total estimated capital expenditure of Rs. 100 Crores. The Company is setting up a new plant at Jhagadia. The current capacity of 4,800 MTPA is expected to increase to 12,000 MTPA by the end of CY 2019, and further to 18,000 MTPA by the end of CY 2020
7. Clariant Chemicals Ltd
- The Clariant chemicals (India) Ltd. is engaged in the business of manufacturing and supply of specialty chemicals.
- It has a very strong parentage, which gives assurance that Clariant India will remain a technology leader with best practices.
- In India, the company is focusing on creating value in the fields of anti-bacterial packaging for edible oils, non-sustaining solutions for detergent, colorants for transparent soaps, safe color for soap bars, poly fast pigments for coloration of synthetic leather, poly band preparations for coloration of EVA footwear. Hence end-user industries are well diversified.
- We have considered this share for dividend yield which was consistently very good.
- Clariant is a Debt Free Company.
- As a matter of strategy, Clariant has been exiting low margin business, which was our key consideration for selecting this share.
8. Tata Chemicals Ltd
- Tata Chemicals Limited (TCL) is the world’s third-largest producer of soda ash with manufacturing facilities in Asia, Europe, Africa, and North America. It also has a strong focus on consumer, Agri, and specialty businesses.
- Tata Chemicals is fairly diversified in its businesses and it operates in Basic Chemistry and Specialty Chemistry.
- Being debt-free gave us more comfort.
- We got comfort from the investment tin Rallis India which a subsidiary of Tata Chemicals. Rallis’s valuation is very high as compared to Tata Chemical Valuation. That makes Tata Chemical a value play.
- Tata Chemicals Ltd has strong financial statements and healthy margins and value creation.
- Focus on FMCG (Tata Sampann) was one of the key reasons to buy this share. Later it paid really well when the demerger of FMCG business to Tata Global Beverages was announced. The Swap ratio was very decent. This was the event of value unlocking in Tata Chemical.
- During FY20, The Company has spent Rs11bn on CAPEX and Tata Chemicals increases holding in Tata Chemicals North America to 100%.
- Tata Chemicals launches li-ion battery recycling operations.
- Tata chemicals plan to invest Rs. 2100 crores to expand capacity in the coming 3 years.
- Tata Chemical is very much like an incubation center for Tata Group. Hence we expect new viable businesses being developed and later demerged to create value.
9. Aarti Industries Ltd
- It is the flagship and most successful company of Aarti Group with a strong track record of wealth creation.
- It is in the specialty chemicals market with 25% market leadership in Benzene Derivatives. With strong technical know-how, it has been able to improve market position in pharmaceutical segments as well.
- Three long term contracts with sales of 4,000 crores, 10,000 crores, and 900 crores spread over many years were won by the company. This shows the strength of the company. (However recently 4,000 crores contract was canceled, but the compensation to be received by Aarti is very handsome.)
- With the continuous addition of new chemistries and high margins products in the basket, it has been able to grow the top line and bottom line with the CAGRs of 13.5% and 26% respectively in the last 10 years.
- With sustained acceleration in sales and profit, it has been able to deleverage itself from 1.3 D/E in March 2010 to 0.61 in March 2020.
- It enjoys 40% export revenue and 60% domestic revenue with a continuous focus of import substitution and backward integrations therefore it is not dependent on a single market.
- It is only one of the few companies in India that has the capacity, capability, and technology to beat China, so it is one of the leading contenders to have the benefits of Anti-China steps.
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