At Capitalmind, we currently run 4 portfolios :
Long Term Portfolio which is a market-cap agnostic portfolio comprising growth stocks that we believe shall deliver better returns than the market.
Momentum Portfolio is a very active short term portfolio with a monthly change with philosophy being to ride the trend until it ends. Once again, while its market agnostic, we do take care to ensure micro-cap and ill-liquid stocks are avoided.
The Electric Vehicle portfolio was created to provide us with the ability to select stocks that may take advantage of the coming shift from gasoline based vehicles to electric vehicles. This change whenever it happens will be monumental.
The Dividend Yield Portfolio is to generate periodic cash flows in terms of dividends. Stocks in the portfolio generally have high dividend yield.
We’ve had a gap in the portfolio list, because as a long term player, we haven’t really solved the issue for a large cap investor. There is comfort in investing in stocks that are atleast 10,000 cr. in marketcap, and reasonably well known names. Even though the long term growth may not necessarily be as exciting as some smaller caps, the stocks themselves tend to be large enough to weather economic downturns or corrections.
We are now introducing a new portfolio that is bit different from the above portfolios – The Long Term Large Cap Portfolio. The current Long Term Portfolio is “multi cap” – and more risky that way, with a lot of small caps in it. Unlike the long term where changes are low in number yet we do actively take stock of the constituents, this portfolio comprises of stocks that are basically large cap in nature and ones we believe can be held for ten years or more without the need to switch.
Most of the stocks in the portfolio are well known names. Some of the stocks have Price to Earning Ratios that may seem to be on the expensive side. But as and when earnings picks up, these stocks should be able to deliver much better returns than any other comparable investment.
The core logic of the fund is to have a portfolio into which one can systematically invest. Not do a one-time entry. Since we don’t expect much of churn, this also means reduced expenses in managing the said portfolio. Over the long term, we believe this portfolio shall match or even beat the best of funds out there.
The thought process here is to build a stable and safe portfolio with a periodic SIP on a regular interval as we do in case of mutual funds. In other words, it’s just like having your own mutual fund, without the 2% fees they charge. That’s the equivalent of a Rs. 1 lakh saving if you build it up to Rs. 50 lakh in size.
The advantage of having your own mutual fund kind of portfolio is you can take out an individual/set of stocks which you feel are no more required in the portfolio. And also you will be saving on the expense cost of mutual fund (which in most case is roughly 2%). Over a period of time some might do extra ordinarily well and some might turn out to be not that great. The large winners will offset the small losers. Below is the set of stocks which are part of the portfolio:
The portfolio has a diversified exposure to most of the sectors from manufacturing to consumer segment. One year might be good for some sectors and another year for a different set of sectors. The stocks in the portfolio are majorly large caps and are typically market leaders in their segment.
Now most of these stocks are well researched and well known. We don’t really unearth “new” information here, but invest on the basis that the good news will continue over longer periods of time.
Banks & Financial Services.
Financial services form the backbone of a growing economy. Growth of the economy cannot come without growth in financial institutions. We have picked four stocks in financial segment. Since the portfolio is a equal weighted one, this means 20% weight for the sector.
Kotak and ICICI are the Banking Stocks of our choice. It was a tough choice between Kotak Bank and HDFC Bank, the go-to bank in the private sector. Kotak is more of a bet on the execution ability of Uday Kotak, and the fact that they are more diversified. Kotak has an AMC (mutual fund) and an insurance company other than the bank itself. HDFC Bank doesn’t own the brands that are HDFC’s foray in insurance and AMC (it’s parent, HDFC, does). Kotak bank itself has been stronger and looking to grow at a faster pace, so we’re going with Kotak.
ICICI Bank is the third largest bank and one which has been under the weather for quite sometime. We believe that post the management changes we anticipate, the bank will be in much better hands over the longer term. The franchise is excellent, but it’s been a rough time for a bank because of the corporate exposure. It’s also able to easily raise capital
Outside of Banks, we have selected Edelweiss and Crisil. Edelweiss is turning out to be a financial behemoth with activities ranging from Asset Reconstruction to Wealth Management. With strong management capabilities, we believe that this is a stock to watch out for in the coming decade.
CRSIL is our pick based on the market and mind-share the company enjoys in the field of credit rating. To enthuse the bond markets, SEBI has come out with a proposal that shall require large corporate’s to raise 25% of their borrowings through issuance of bonds. Even bank loans require credit rating now. CRISIL’s major income though flows from its activities pertaining to custom indices. Exchange Traded Funds are picking up, we should see more debt related funds hitting the market which in turn require benchmarks such as one offered by CRISIL.
Below is revenue growth of stocks in portfolio over the years:
Automobiles and Ancillaries
The Indian Automobile Industry is the 4th largest in the world and the fastest growing. But when you compare India to other countries in per-capita vehicle ownership, India is far down with tremendous potential for growth given that ownership of cars for example is seen more in terms of having achieved in life versus being a vehicle for personal transport.
While the road ahead seems pretty clear, the only risk will be if and when fully automated electric vehicles start hitting the road. Once we reach that stage, the growth may get stifled given that cab companies like Uber can run their cars 24 hours, 7 days a week.
Our picks in this sector are Hero Motors, Maruti Suzuki India, Mahindra and Mahindra and Amara Raja Batteries. The three automotive companies are well known leaders in their segments and its very unlikely they shall be easily replaced.
Hero Motors is the king of the 2 Wheeler Market. It has recently invested in Electric Vehicle manufacturer, Ather Energy. While Electric vehicles are a long way from being the vehicle of choice given the lack of infrastructure in India, we believe that having an early lead will Hero overcome any obstacle when electric two wheelers start to become common.
Maruti Suzuki’s story doesn’t need to be told. Suzuki after withdrawing from China will need Maruti to be counted upon as one of the premier automobile manufacturers in the world. While Maruti doesn’t offer any Electric vehicle at the moment, its investing big time into the same. It intends to start testing electric cars starting from this month and hopefully launch its first electric vehicle in 2020. Additionally, it has 50% market share in the Indian car market, dominating most segments it is part of.
Mahindra and Mahindra is a well-known manufacturer of tractors and SUV’s, and commercial vehicles. What is less well known is that the company is a conglomerate with it active in a lot of areas from Defence to Space. (It owns promoter stakes in Tech Mahindra, Mahindra Holidays and Life, and a bunch of other companies) In the tractor segment, Mahindra is a clear winner. Indian farm productivity is low while costs, especially those pertaining to labour are high. M&M is also one of India’s largest CV manufacturers, in the L and MCV segments.
Amara Raja – the manufacturer of Amaron batteries – was for long not as well-known as Exide. Over the years though, Amara Raja batteries has been slowly cutting down on the difference in its market share and that of Exide, and they are quite big in the replacement market. The name is well known, and battery demand is at least once in three years per car – so the growth here is reasonably obvious.
To ensure that its growth isn’t disrupted by coming of Lithium Ion Battery, Amara Raja is investing into a Lithium Ion assembly plant as it get ready to take on the challenges that come with the electric vehicle disruption. A disruption that everyone knows will happen but not everyone seems ready for. (Assembly is better than manufacturing as India has very little access to raw materials)
India missed out on the manufacturing industry which came to be dominated by China, but when it comes to Information Technology, Indian firms are clear market leaders. While companies like Cognizant and Accenture have been able to shake the leadership table, Indian firms should more or less be able to hold onto their gains. Our pick in this sector are TCS, Tech Mahindra, Oracle Financial Services and Honeywell Automation.
The point here is also to benefit from the falling rupee. Many of these players hedge one to two quarters of revenue, but there is a definite benefit over longer periods of time as they will provide more reasons for customers to outsource.
TCS is not just the market leader but also the biggest in terms of market capitalization. If performance is measured through share price move, TCS and Infosys more or less moved step in step till 2010. Since then, TCS has logged in gains of 400%+ versus 100% for Infosys. TCS is more expensive compared to Infosys when measured with standard valuation measures such as Price to Earning, this is more of a result of market willing to pay for better performance.
While TCS is the large-cap infotech stock, Tech Mahindra which is 10% the size of TCS is the pick from the mid-size segment of the infotech industry. Tech Mahindra is part of the Mahindra group and has come a long way since it as incorporated as a joint venture technology outsourcing firm between Mahindra’s and British Telecom.
The risky but successful acquisition of Satyam Computers has added a great deal of muscle to the company. While there is a bit of overlap when it comes to the business of Tech Mahindra with TCS, we believe that given the smaller size of the company and the aggressiveness displayed by the management, this will be a stock to watch out for. It’s more concentrated in revenues on BT, but that’s been reducing over time, and we believe it’s likely to stay in the top players of the IT segment for a while.
Oracle Financial Services is one of the few product companies that have emerged in India. Its Flexcube is used by more than 300+ customers across 100+ countries across the world. Yet, it has a long way to go with just around 3% market share of the Industry. Thanks to the backing of global giant, Oracle, the company can provide total integrated solutions.
Honeywell Automation is not exactly in the same domain as the other companies listed in this sector. It’s a leader in providing integrated automation and software solutions, including process solutions and building solutions. It’s a product player, Thanks to its parent, Honeywell International which also holds 75% stake in this subsidiary, the company is present in a wide range of Industries from Aerospace to Healthcare to Oil & Gas. They make sensors (electric, gas, vehicle), protective equipment, airline cockpit systems, home automation products and a lot more.
Below is the Net profit growth of stocks in portfolio over years:
Oil and Gas
While Electric Vehicle maybe the future, for now, we are dependent on fossil fuels for the near future. Indian Oil Industry is dominated by government owned firms – Indian Oil, Hindustan Petroleum and Bharat Petroleum who are active in the area of refining and marketing while Oil and Natural Gas and Gas Authority of India are dominant in area of Oil Exploration and Gas Distribution.
Our choice for the portfolio is Bharat Petroleum and Gas Authority of India. BPCL, even as a PSU, has good longer term potential and a history of trying to do more; It has retail stores in its fuel pump outlets, has a pure-for-sure program since 2001 for product quality, and has a large franchise all over India.
BPCL has ROEs upwards of 35%, and for fuel, they are able to pass on all input costs. Their LPG business has customer deposits (interest free) of Rs. 10,000 cr. which is a large source of funding.
Trading at 8 times trailing earnings, the stock is pretty cheap and while there is risk of government intervention of fuel prices impacting the bottom line, we believe that there is adequate margin of safety in the lower P/E ratio.
GAIL India is India’s largest natural gas processing and distribution company in India. The company owns and operates India’s largest pipeline network. For long, GAIL has been the leader when it comes to supply of Natural Gas to Industries. Gas for retail consumers have been LPG supplied by the oil behemoth.
Thanks to passing of Petroleum & Natural Gas Regulatory Board Act, 2006, supply of LNG across city has started to pick-up and GAIL being in this area since early 1990’s is more than ready to grab the market share since it already has much of the infrastructure ready.
While LPG will continue to dominate in the coming years, cities will gradually move to CNG which is much cleaner as well as easier to deliver. This is a play on that panning out in the coming decade.
Consumer Goods Sector
In the area of Consumer goods we are adding Bata India, Asian Paints and Pidlilte Industries. While these stocks are not typical consumer stocks like Marico, Dabur or P&G, these are leaders in their respective markets. Paint, adhesives and footwear need solid distribution, technology and scale in the longer term.
Asian Paints is the leader in Paints with the company having a market share exceeding 50% in the organized segment and nearing 40% of the total market. Being a bulk product and one that is not easy to store, Asian Paint key advantage lies in its ability to distribute its product deep in the urban and rural hinterlands. Most paints are sold in smaller shops, where inventory and mixing machines compete for space – and the biggest player wins marketshare.
While Asian Paints is trying to diversify it income by selling related products, Paints will be the key driver of growth for the foreseeable future. The stock is pretty expensive given the lacklustre growth in recent times, but with government focus on affordable housing and general growth in the real estate market alone should drive growth much higher than in the past.
Who doesn’t know Bata – it’s Brand has such a recognition that it’s almost impossible to surpass, especially in the kids’ and school shoes space. It’s had a rough time financially, recently. For too long, Bata has been seen as a non-premium brand and while that provides it larger sales, it came at the cost of margins.
The company is now shifting to position itself as a Premium Brand and increase its brand distribution by adding more than 100 retail stores in the coming years. Bata has in recent times introduced Premium Brands that hopefully shall help it in shedding the image of just being a store for school shoes.
Not many may instantly recognize the name, Pidilite Industries but Fevicol is a brand name that is known by even those who may have not used the product thanks to its catchy slogan and advertisements. Fevicol is India’s largest selling white adhesive brand by a long distance.
Adhesive and Sealants contributes to 55% of the total revenues with Paint Chemicals and Industrial products chipping in much of the rest. Like in case of Asian Paints, we believe that brand awareness and recognition shall continue to play a large role in the future.
India is still at a nascent stage when it comes to consumer spending. China which was not very different a few decades ago provides a useful road map when it comes to consumer behaviour as people become richer.
Below is the set of ratios of stocks in portfolio:
India is a leader when it comes to Generic Pharmaceuticals and has survived the changes as we moved from a Process Patent to Product patents. The last few years though have been tough for the Industry with FDA rules and America’s own domestic compulsions playing a role in the negative growth of the industry.
One of the better managed firms and our pick from the Pharmaceutical sector is Aurobindo Pharma. In addition to growing organically, the company has constantly tried to up the race by acquiring companies. It recently has entered into an agreement to acquire commercial operations and three manufacturing facilities in USA from Sandoz Inc, USA, a Novartis division, for total consideration of $900 million.
While debt fuelled growth is risky, Aurobindo has in the past shown that it’s been able to minimize risks by following a vertically integrated model and lower product concentration. In the minefield of Pharmaceuticals, this is one play that is available at a low valuation.
Piramal Enterprises (PEL) was the leader when it came to acquiring Pharma companies and running them better than the earlier management. But all that changed when Ajay Piramal decided to sell of major part of the company to Abbott. Post the transaction, it’s now a major player in the financial space though it still has a large and growing revenue coming in from the Pharma space.
Ajay Piramal has time and again shown himself to be a great capital allocator and we believe going further, this one strength alone can drive the company for the forthcoming future. Piramal is a play not on India’s need for finance – there is never a dearth for money but a play on the ability of Ajay Piramal to execute in the same way he did decades earlier. He’s made some interesting progress – they made a killing from financing Vodafone in 2014, and has made a strong move in the realty market, both directly as a player and as a financier.
Larsen & Toubro is India’s largest Infrastructure Company and while India has a dearth of Infrastructure, thanks to L&T being in too many areas, it has never been able to rise above the expectations of the market. But that’s changing. It’s now focussed on generating the value from Diversification. It’s moved out the technology service arm (LTTS) and the infotech arm (LTI) as separately listed companies – both now have over Rs. 30,000 cr. market cap each.
Recently it sold its Electrical business to Schneider Electric for Rs.14,000 Crores.
Instead, its doubling up in its core area of expertise – Infrastructure and is looking to invest in the area of Defence where its already a key player. Governments may come and go, but what won’t change is the focus on Infrastructure and we feel there is no better large cap play for the coming decade than L&T.
How To Invest in the Long Term Large Cap Portfolio
We believe that you should choose between investing in riskier long term stories in the existing long term portfolio which we will call “Multi cap”, and the Large cap portfolio. Each one has about 20 stocks, but if you choose you could invest in both too. The number of stocks in a portfolio doesn’t matter – in the end it will be a few stocks that provide most of the return.
The Portfolio is designed for a longer horizon and is more apt for doing a SIP on a periodic basis (may be monthly or quarterly).
The current lot of Large cap portfolio consists of 20 stocks. Assuming an equal weighted portfolio, at this point portfolio as a whole costs 4.22 Lakhs. You don’t have to invest that much, each time.
The idea is to buy into a few stocks each month. So if you have 40K to save per month you’ll just buy a few stocks that add up to 40K, and then the next month, a few others etc, to eventually get to the portfolio that you will need. If you have the whole amount, then you can buy the whole thing in one shot and regularly add stocks with further installments.
There’s another way to do this. Go to our “Kite Cart” at this link. There’s a set of instructions at the bottom: Enter the amount you want to invest, and hit the “Click Here” button. It’ll automatically fill in how much to buy of each stock. Next month, make sure you record the quantities you already own in the “Shares I already own” column, and click on the allocation button again, and you’ll see the new set of allocations. You will buy some shares in one month, some others in another month, but over time you’ll build up to the actual underlying portfolio.
Here’s the portfolio:
We don’t really need to review this portfolio on regular quarterly results, but we will take action if a player is performing badly. There are other stocks that perhaps deserve a place – Reliance is one, Bajaj Finance is another and DMart is a third. We debated eagerly on the positioning of the portfolio, and decided against adding them right now, but they are in line for allocations. As portfolio is in place for a longer horizon, cyclical events, minor setbacks tend to happen. We will be taking out the stocks only in some major event, where in the firm is unable to cop up with challenges or some unhealthy activity is happening with respect to the firm.
The long term is a 10 year horizon, to us. You want stocks that will survive and thrive in that time frame. The near term is, for the most part, a distraction. Valuations remain high, so be a little wary of putting too much into the portfolio right away – the disclipined, regular route is better.
Discuss more in #stocks-fundamentals on Slack please. The online recording of the portfolios and summary will be done soon in the long term portfolio page below.
NOTE: Please do not consider this article as a recommendation, It is purely for informative purpose only. Authors may have positions in the stocks mentioned, so consider our analysis biased. There is no commercial relationship between Capitalmind and the companies mentioned in this analysis.
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