Deviating from the usual practice of March end review(FY end) this time I am resorting to a year end review of sorts, more to reflect on the costly mistakes and huge opportunity cost incurred over the past 9 months (Apr - Dec '13).
As one can see from the updated portfolio five stocks has been ousted from the then 10 stock portfolio which between them had ~34% of portfolio allocation. Will discuss more on the mistakes rather than new additions and replacements (that might get a new post later on).
Unichem Labs (11% allocation): What was attractive here was the superior balance sheet strength, strong existing domestic brand portfolio with a sharp turnaround exhibited over FY10-12. The fresh proceeds of 160 Cr from Indore SEZ sale to Mylan further provided fresh cash to fuel capex needs and raised the potential dividend payouts.
The lack of a definitive domestic strategy and non-performing subsidiaries overseas didn't augured well for the current period. The management hunger for explosive growth is somewhat missing and despite the superior balance sheet support the turnaround didn't played out as expected. The price erosion from the impact of drug price control order(DPCO) coupled with further margin erosion from significant de-stocking (major dealers were not resorting to purchases because their margins got significantly reduced when Unichem products came under National List of Essential Medicines (NLEM)) led to muted sales and profit growth in H1FY14.
These temporary blips led to the stock under performing most of its pharma peers, which were doing good despite the sectoral blues with differentiated strategies and/or other tailwinds.The biggest issue here was the opportunity cost incurred. The ideal way to ride this would have been to have a small allocation and ramp up when the growth traction and execution was seen in place.
This could augur very well for H2FY14 and beyond, but loses its position in pf to better alternatives from the mid cap pharma basket ( ~20% allocated between Shilpa/Alembic/Ajanta) where higher growth and superior execution is seen.
Amara Raja Batteries (8% allocation):This would rather find increased allocation given the superior growth in the duopoly battery market and the challenger snatching market share from the incumbent (Exide).
However, as a part owner of businesses (as opposed to being an investor only) one ought to be comfortable with the management of companies first above everything else.
Prof. Bakshi on his blog wrote an excellent piece on understanding and owning family owned businesses. The ARBL management seemed typical OO3 and seemed best to avoid in spite of the company providing strong growth and future visibility.
The initial position was taken on the premise of a strong foreign entity (Johnson Controls) being their partner, will restore some control on the capital stewardship and management compensation. However political clout laden promoters sometimes think too big of themselves. I would prefer rather not be a partnering with this kind of a management.
Kajaria Ceramics (8% allocation):Reducing Kajaria was more to do with price rather than any fundamental reasoning. With limited resources at our disposal one should always pit the best ideas against each other in terms of risk and reward. The allocations should go to the winners. Fundamentally this remains as a top pick. The recent equity dilutions might strain the EPS growth in the shorter term. The 2013 AR is a must read for anyone willing to track and invest in the sector.
Kajaria/Cera remains excellent stocks and great proxy plays on the Indian Real Estate sector. The companies have learned hard from the RE down cycle in 2008-09 and managing receivables/client spread way better in the current scenario. This remains a buy on reduce and augurs well a long term portfolio pick.
Dishman Pharma (5% allocation): I discussed the turnaround story in Dishman in Dec '12 followed by an analysis and strong upside potential in Jun '13. The stock has since recovered a lot from the then Rs 65 (Jun '13) to Rs 106 at present ( up 63% in less than 6 months) and might be on way to its price target, however I decided to sell.
As I highlighted in the risks, heavy promoter pledging coupled with high debt position and management inefficiency in debt reduction doesn't bode well for the company and its investors .Further in October '13 there was news of IT raid on Dishman premises. Overall the management action doesn't give one enough confidence to make this a short term vehicle to ride the CRAMs opportunity. There might be more negative surprises in store here. I booked losses here and moved on to other ideas.
The long term low ROEs itself suggests the unsuitability as a longer term pick. However even as a turnaround bet, the management integrity was key, which was lacking.
CEEBCO(2% allocation): The flurry of brokerage up gradations, Tata capital as anchor investors holding steady, huge order flow from TATAs were blinders to a serious mistake. The huge capital loss (the initial position was in double digits) and lack of margin of safety for the sake of participation in a rather special situation (!!!!) proved detrimental.
CEEBCO was another case of glorified fraud perpetuated by Ajay Gupta. All brokerages painted a rosy picture and came out with one strong recommendation after another. Coupled with the doldrums of HCV/MCV sector and huge fraud company came up with huge losses in the last quarter of FY13.
To put things into perspective, the company announced losses to the tunes of Rs 60 Cr in last 3 quarters (Q4FY13 - Q2FY14) while FY09-FY12 (16 Quarters) total profits amount to Rs 68 Cr. There were huge line items of other expenses, provided for one off items, quarter after quarter.
The father in law Kailash Gupta tried to recover the pledged shares, forced Ajay to "gift" his stake to him and what not. Off late company is trying to survive by disposing of any non core assets, but given the magnitude of fraud and pathetic macro scenario it's difficult to foresee whether this would survive or not.
The focus in 2014, therefore would be on quality of growth and to partner with able managements. The error of omission would certainly be more acceptable than error of commission, and given the plenty of opportunities in the mid/small cap space it augurs well to ride on to handful of growth engines and steady compounders rather than trying to participate in everything.
Here's wishing everyone a Very Happy and Successful investing journey for 2014.
Do share your thoughts and learning from the past year.
As one can see from the updated portfolio five stocks has been ousted from the then 10 stock portfolio which between them had ~34% of portfolio allocation. Will discuss more on the mistakes rather than new additions and replacements (that might get a new post later on).
Unichem Labs (11% allocation): What was attractive here was the superior balance sheet strength, strong existing domestic brand portfolio with a sharp turnaround exhibited over FY10-12. The fresh proceeds of 160 Cr from Indore SEZ sale to Mylan further provided fresh cash to fuel capex needs and raised the potential dividend payouts.
The lack of a definitive domestic strategy and non-performing subsidiaries overseas didn't augured well for the current period. The management hunger for explosive growth is somewhat missing and despite the superior balance sheet support the turnaround didn't played out as expected. The price erosion from the impact of drug price control order(DPCO) coupled with further margin erosion from significant de-stocking (major dealers were not resorting to purchases because their margins got significantly reduced when Unichem products came under National List of Essential Medicines (NLEM)) led to muted sales and profit growth in H1FY14.
These temporary blips led to the stock under performing most of its pharma peers, which were doing good despite the sectoral blues with differentiated strategies and/or other tailwinds.The biggest issue here was the opportunity cost incurred. The ideal way to ride this would have been to have a small allocation and ramp up when the growth traction and execution was seen in place.
This could augur very well for H2FY14 and beyond, but loses its position in pf to better alternatives from the mid cap pharma basket ( ~20% allocated between Shilpa/Alembic/Ajanta) where higher growth and superior execution is seen.
Amara Raja Batteries (8% allocation):This would rather find increased allocation given the superior growth in the duopoly battery market and the challenger snatching market share from the incumbent (Exide).
However, as a part owner of businesses (as opposed to being an investor only) one ought to be comfortable with the management of companies first above everything else.
Prof. Bakshi on his blog wrote an excellent piece on understanding and owning family owned businesses. The ARBL management seemed typical OO3 and seemed best to avoid in spite of the company providing strong growth and future visibility.
The initial position was taken on the premise of a strong foreign entity (Johnson Controls) being their partner, will restore some control on the capital stewardship and management compensation. However political clout laden promoters sometimes think too big of themselves. I would prefer rather not be a partnering with this kind of a management.
Kajaria Ceramics (8% allocation):Reducing Kajaria was more to do with price rather than any fundamental reasoning. With limited resources at our disposal one should always pit the best ideas against each other in terms of risk and reward. The allocations should go to the winners. Fundamentally this remains as a top pick. The recent equity dilutions might strain the EPS growth in the shorter term. The 2013 AR is a must read for anyone willing to track and invest in the sector.
Kajaria/Cera remains excellent stocks and great proxy plays on the Indian Real Estate sector. The companies have learned hard from the RE down cycle in 2008-09 and managing receivables/client spread way better in the current scenario. This remains a buy on reduce and augurs well a long term portfolio pick.
Dishman Pharma (5% allocation): I discussed the turnaround story in Dishman in Dec '12 followed by an analysis and strong upside potential in Jun '13. The stock has since recovered a lot from the then Rs 65 (Jun '13) to Rs 106 at present ( up 63% in less than 6 months) and might be on way to its price target, however I decided to sell.
As I highlighted in the risks, heavy promoter pledging coupled with high debt position and management inefficiency in debt reduction doesn't bode well for the company and its investors .Further in October '13 there was news of IT raid on Dishman premises. Overall the management action doesn't give one enough confidence to make this a short term vehicle to ride the CRAMs opportunity. There might be more negative surprises in store here. I booked losses here and moved on to other ideas.
The long term low ROEs itself suggests the unsuitability as a longer term pick. However even as a turnaround bet, the management integrity was key, which was lacking.
CEEBCO(2% allocation): The flurry of brokerage up gradations, Tata capital as anchor investors holding steady, huge order flow from TATAs were blinders to a serious mistake. The huge capital loss (the initial position was in double digits) and lack of margin of safety for the sake of participation in a rather special situation (!!!!) proved detrimental.
CEEBCO was another case of glorified fraud perpetuated by Ajay Gupta. All brokerages painted a rosy picture and came out with one strong recommendation after another. Coupled with the doldrums of HCV/MCV sector and huge fraud company came up with huge losses in the last quarter of FY13.
To put things into perspective, the company announced losses to the tunes of Rs 60 Cr in last 3 quarters (Q4FY13 - Q2FY14) while FY09-FY12 (16 Quarters) total profits amount to Rs 68 Cr. There were huge line items of other expenses, provided for one off items, quarter after quarter.
The father in law Kailash Gupta tried to recover the pledged shares, forced Ajay to "gift" his stake to him and what not. Off late company is trying to survive by disposing of any non core assets, but given the magnitude of fraud and pathetic macro scenario it's difficult to foresee whether this would survive or not.
Looking Forward
Here's wishing everyone a Very Happy and Successful investing journey for 2014.
Do share your thoughts and learning from the past year.
