Portfolio Status

After lot of thought, I've decided on the following:

1. Wait to put stake in Amara Raja, it's quite expensive and run up very fast in last 2 months. Sold off at break even

2. Up my stake in Piramal Enterprises. I'm fairly confident that Mr. Piramal can do better justice than I can...and now I can go and spend time studying more.

3. Freeze further addition to my portfolio. No more fresh purchases. Having said that, yes, I'll sell stocks if they reach my targets, like PNB and INFY, the stalwarts...and rotate the money into other depressed stalwarts. For example, I'm eyeing HEROMOTOCORP, but later on that...

So, here's my new portfolio:

In the next post onwards, I'll focus on new learning and topics I want to focus...the new session of classroom begins :-)

Exit Plan

Now that I've decided to freeze further purchases in my portfolio for next 6-12 months, I should also be ready with an exit plan given markets run away too fast and I should take some profits to deploy in better opportunities that I'll find in this study period.

Essentially, over last few weeks, I've found that my portfolio contains some decent stocks, but I can find better stories. The following are the reasons:

1. My portfolio primarily contains quantitatively undervalued stocks, not necessarily qualitatively great stocks at right price. I'm shifting towards finding businesses with strong moat and buying them undervalued when all hell is loose...times that come rarely, like in Dec 2011, June 2012 (for a subset of businesses), Oct-2009 to Mar 2010 and alike.

2. I risk holding some value traps, like SRF, MAZDA, not because they're bad businesses, but market may never re-rate their valuations. Hence, I'll freeze any further addition to these positions, and rather exit them for some profit (I've a strong conviction that markets will move towards all time high in next one year, more chances of this happening than a crash back to sub 5000 levels)

3. I'm already finding better opportunities, though they're expensive now, like Amara Raja Batteries, Shriram Transport Finance, etc, and will need funds for these when markets revert back again later, after hitting a peak.

Ok, so here's the exit plan - in order in which I'll sell them

SRF - Based on the concerns of this being a value trap, I plan to

- sell 30% of my holding when SRF crosses Rs 240 or so. Looking at the trend, I may sell just before dividend, since it always falls post dividend payments (ex-date)

- offload another 20-30% when it reaches towards Rs 300

PNB

As mentioned, if it goes above 950 - 1000, I'll exit this stock. Good bank, but risk of asset quality is not justified at Rs 1000, at least until FY14.

INFY

Again, its a stalwart dumped by market, and I'll exit (at least 30%) this when it again starts trading above a P/E of 20.

Other than these, I might exit some stake in other stocks, in general if they run up too fast, but only if I have great confidence to be able to re-allocate them to better opportunities.

Ok, final word - no more purchases until study progresses a good deal, exceptions being

- PEL falls below Rs 450

- Amara Raja falls below Rs 200

- IGL falls below Rs 210

- MAZDA falls below Rs 82

Otherwise, I'm happy to stick to 90% invested status and focus on studies... :-)

What all can go wrong with SRF

While I posted all good about SRF recently, considering some new learning in recent past, and the fact that I'm finding new, supposedly better opportunities, and the fact that SRF represents 11%+ of my portfolio currently (and when I get 100% invested, it'll still be 10% of my portfolio), a reality check is needed.

Let's see what all can go wrong with this business and the stock.

Business Moat

1. Strong Brand: SRF is a leader in its industry - man-made fibres. However, since this industry has a small barrier to entry, there's no strong brand, but yes, SRF does enjoy a leadership position.

2. Distribution network: Searching for 'SRF distributors' does bring up many links on Google, and considering they're growing sales at a decent pace of 20%+ in last 3-5 years, SRF does have a moderately strong distribution network.

3. Intellectual Property: Yes, SRF has a strong team of chemical scientists and does have some strength of IP rights. As mentioned, all business verticals are engaged in development of newer molecules, and this will help SRF bring newer products with better quality that competition can't bring, and hence some moat here as well.

4. Lowest Cost: Not really, but yes, operating margins are improving.

5. Barrier to switching: Somewhat. Since the consumers are into industrial businesses, it is not safe to change the suppliers without risk of quality issues, and hence SRF does enjoy a protection against losing existing customers, provided they maintain quality and competetive pricing.

Ok, so business moat is decent to moderately good, and given cheap valuations, risk of a significant downgrade in Intrinsic value of the business is limited, if not zero.

One risk is that of increasing debt, due to expansion and which could eat into profits and hence dividend yield. Let's consider a bear case. If profits were to decline by 40%, with current dividend payout rate of 20% of profits, there's a good deal of risk to lower dividends, given the outflows in increasing interest and debt payments.

Second is that due to an economic slowdown. If industrial output falls further, there'll be a hit on topline growth, or even a decline in topline for SRF.

Market re-rating is another risk. Historically, the P/E ratio for SRF has on an average been around 3-5 range, and hence scope for a large increase in P/E is unlikely.

However, the good part is that SRF stock has seen a steep fall in prices due to recent quarter poor performance. Current P/E of 3.88 is against an annual PAT of Rs 326 cr. However, assuming best case, the profit can jump back to 400+ levels, and then at a P/E of 4, the stock price can come back to 300 or so levels.

Having said that, it is unlikely that SRF will ever trade above the Intrinsic Value, which is significantly higher at Rs 450+.

All in all, it makes sense to hold this to milk the nice 3.5% half-yearly dividend due in November and then the rest 3.5% in March (this is the annual track record of dividend payment by SRF), and sell it when it starts tading at PE 4.5 or higher, simple reason being that chances of this stock generating low returns is larger than anything. It may not crash further, but it is a kind of stock which trades mostly undervalued, at a discount to the IV, and hence, the only gain possible is through dividends & increase in IV, with market price discount remaining constant.

So, the final action is to wait and watch - no reduction in stake given dividend income and improving market sentiments, and the very attractive purchase price of Rs. 207, but the change is that I won't hold it for very long term...

Amara Raja Batteries

This is an exciting story which I've come across, both on forums, and found it in my stock screens too.

Here's a nice analysis of this business. I'm fairly confident that this business has a growing moat that can keep the profits growing for next 5-10 years.

Here I perform my own analysis of fair value:

1. The business has a 3y average EBIT of Rs 15.5 / share. Based on debt capacity bargain criteria of 1.75X debt capacity, or EV/EBIDTA of 7 or lesser, certainly the stock is expensive. This way, the fair value using 3y average is Rs 108, and using current EBIT (since the company is growing fast), it is Rs 152.

Note that I've ignored cash and investment and dividend to offset debt on the books.

2. The PEG for the company is certainly less than 1. In fact, at P/E of 16, it is still trading less than 20%+ growth rate in profits, and a significant re-rating is possible given the valuation multiples of Exide are much higher.

3. The current price of Rs 230 / share is all right - its fairly valued, and given strengths of business, and growing moat, it can sustain revised valuations of about 15X P/E or even higher.

However, the following are the risks:

1. If EXIDE falters and its downward rating happens, Amara Raja may not be able to sustain higher valuations and can come down (I really wish that happens)

2. If economy weakens further, demand may dampen and this poses risk to topline growth.

3. The management addresses the risks in AR, but seems a little too optimistic about being able to handle them. Specifically, they say the following:

a. They've reached a large base and it is difficult to continue growing fast
b. Even then, they want to double their topline in next 3-4 years!

Certainly, this is a little too optimistic, and will have to be funded through debt. So, there's a risk to reduced EBIT and hence PEG may go more than 1 very soon. This could pose risk to downside in stock price if macro economics remains bad for months and years to come.

In essence, I see a risk that stock price has run up quite fast, and chances are that price may not go much higher, if bad things happen. Hence, best case scenario is that it'll continue to grow and rerating continues and stock can easily move up to 300+ very soon from today's level of 240

But the bear case tells us that stock is fully pricing all positives at current price, and there's little to zero margin of safety right now.

Hence, I'll not take major position until it comes down to Rs 200 or below. In fact, I'll only take large positions if it drops below Rs 175

However, to make sure I don't miss out best case scenario and then repent for not having bought a spectacular business, I'll do the following:

1. Keep accumulating on dips up to a maximum of 4% of my portfolio.
2. When it crashes below Rs 175, slowly catch it to accumulate up to 10% of my portfolio.

Patience is going to be the key here. However, certainly it looks a great business, at fair price, and hence I'll start putting my bets, slowly and carefully, and wish markets start falling :-)

Portfolio status and expectation

In the last few days, I've made many incremental purchases, and I'm getting closer to going 100% invested in my target portfolio (~45% of net-worth in equity). If I ignore illiquid investments, this composes about 70% equity and 30% debt + cash.

Ok, I've increased stake in Piramal Enterprises, Mazda and IGL, while completing full investment in many others. Here's the composition.

Note that I've taken a small tracking position in Amara Raja Batteries. At this point, I'm about to freeze my portfolio for next 6-12 months, with the following decisions:

1. No increase in number of stocks any further.
2. No increase in investments in top 7 stocks (BHEL, SRF, BHARTIARTL, CROMPGREAV, INFY, MOIL, OPTOCIRCUITS)
3. Need to analyze SRF again, and see if it would be prudent to reduce it, purely due to the concern of a little higher debt level, slower growth outlook and risk that it is a small company, relatively. Needs more analysis.
4. PEL is about 6.7% of my portfolio, but before I take it to full 10% level, need to stock and do some some critical analysis...primarily on the fact that can I buy it lower in next few months, and the fact that whether there're some serious concerns about the pharma business and infusion into real estate and financial divisions.
5. No further increase in IGL, as I wrote in the post. It is good business, but to balance the risk of pricing regulations, I decide to limit the exposure.
6. Choose if it makes sense to further increase stake in MAZDA, or if Amara Raja Batteries turns out to be a better bet.

In all, I've about 10% surplus funds, and need to choose which makes the best investment out of PEL, MAZDA and AMARA RAJA batteries. As far as PNB is concerned, I won't liquidate it - it can give decent returns + dividends when market bull phase comes back in full swing.

I performed an expectation analysis also, here's the summary:

Stock Holding	Purchase Price / CMP	Fair Value Estimate	1.5X fair value reversion	Potential upside due to 1.5X fair value reversion	3y average dividend yield
BHEL	Rs.        220.50	Rs.        322.00	Rs.        483.00	119.05%	2.61%
BHARTIARTL	Rs.        263.90	Rs.        300.00	Rs.        450.00	70.52%	0.38%
SRF	Rs.        206.73	Rs.        480.00	Rs.        720.00	248.28%	6.77%
CROMPGREAV	Rs.        129.28	Rs.        100.00	Rs.        150.00	16.03%	1.49%
MOIL	Rs.        251.11	Rs.        314.00	Rs.        471.00	87.57%	2.26%
Opto circuits	Rs.        128.96	Rs.        180.00	Rs.        270.00	109.37%	2.97%
INFY	Rs.    2,249.88	Rs.    2,318.00	Rs.    3,477.00	54.54%	1.96%
PEL	Rs.        472.86	Rs.        680.00	Rs.    1,020.00	115.71%	2.46%
PNB	Rs.        709.07	Rs.    1,143.00	Rs.    1,714.50	141.80%	3.10%
IGL	Rs.        261.49	Rs.        221.00	Rs.        331.50	26.77%	1.85%
MAZDA	Rs.          98.63	Rs.        134.00	Rs.        201.00	103.79%	3.55%
AMARA RAJA BATTERIES	Rs.        227.13	Rs.        150.00	Rs.        225.00	-0.94%	1.66%
				102.15%	2.64%

As you can see, I've listed my average purchase price, my calculated Intrinsic Value / fair price and the 3 year average dividend payout, and accordingly, my portfolio dividend yield is a decent, if not great, 2.64%. Also, assuming markets will revert to mean in next 3 years, my portfolio can earn about 102% profits, which amount to a handsome 26% CAGR!!! Not to account for 2.64% annual dividends, yielding to a total expected return or about 30% from this portfolio.

While this might be a little overstretched, but then, we know a very bullish market can become highly irrational, and that's the time to take some profits and channelize into better opportunities.

I'll now soon freeze my portfolio (except selling if something flies away too fast, potential candidates being PNB, INFY and smaller stocks...) and focus back on continuing reading. Need to structure the reading, so much to read, but need to prioritize...just need to spend couple more weeks on completing this choice of 10% incremental investment in MAZDA, PEL or AMARA RAJA, and think if need to reduce stake in SRF

Let's see how things unfold...

Will come back again, IL&FS

I found this interesting business in my stock screen, but looking at annual report, I'm not very confident if I can analyze it today, so just keeping it in my watchlist and will come back soon...

I really like Amara Raja Batteries, and have taken a small tracking position also, and this will be the stock I'll analyze before freezing...and accordingly re-adjust capital based on my conviction.

I've kept two more stocks in my watchlist (SWARAJ ENGINES & ECLERX SERVICES), but will not analyze them right now as I'm deciding to freeze my portfolio for next 6-12 months. Will spend time on studying books and reading good articles on value investing...

A re-look at IGL

Since last one week, I've been analyzing new opportunities (MAZDA, PEL) and find that maybe, they're safer bets compared to IGL. No doubt IGL is a good business, but given the risk / reward ratio, I'd be more comfortable to put my bet on MAZDA due to a simple business with decent moat, able management, small enough to keep growing and a good deal of undervalued stock, and PEL due to skills of Mr. Piramal and the fact that this company has a lot of cash to look out for good opportunities, and I'm getting an entry into drug discovery + pharma + healthcare analytics as a debt capacity bargain.

Hence, I bought some more yesterday at rs 256 and finalize the infusion in IGL. I'll stop for now, and only think again about IGL if

1. It drops below Rs 200 with no further degradation in fundamentals
2. I have surplus cash and no other better opportunity (after exhausting the limit of 7% on MAZDA and 10% on PEL)

I still have some position and can benefit the rise in IGL due to PNG growth in NCR, which is my primary reason to like the stock. And due to small concerntration in portfolio, the risk of further pricing regulation is contained.

Next post, to resolve confusion on SRF and take a call for reducing or maintaining the position...

Clearing Confusion - MAZDA

In the last post, I analyzed my stock portfolio holdings and said that I'm confused about SRF, MAZDA and IGL.

I took some time to analyze these further, starting with MAZDA, and here's what I find:

- Another independent research on this business:

http://valueinvestinginpractice.blogspot.in/2012/04/mazda-limited-engineering-value-play.html

Good analysis, pros and cons and I more or less agree and would do the same...

- Management compensation. While it is high in percentage terms (15% of net profit), looking at the history, for last 5 years, the three executive directors' salaries have been around Rs 30 lacs each, and occasional bonus / commission. This is still high in percentage terms, but reasonable in absolute terms considering the performance they've generated - consistent OPM and NPM of 15% and 10% roughly, and an ROE of 18%+ (except this year) with nearly zero debt

- Custom engineering business means lesser competition and hence lower risk of profit margin erosion.

- Crolles technical collaboration is a plus, with equal risk of losing competetive advantage if terms go bad with crolles.

All in all, this looks a decent business, undervalued substantially and low risk of things going wrong. Hence, even though it is small, I've decided to increase and build up to 5% stake in my portfolio. I've started buying more below Rs 100 (my initial IV calculation was Rs 87, but considering management has bough shares from market at that price, its unlikely prices will come down to Rs 87 soon, and I'm only buying it about 10% higher than my target.

Next is on IGL and SRF in another post :-)

Health Check

Over the last 24 hours, quite a few emotional tides, and finally today's post on SN helps me settle down.

I was getting excited about finding these small caps trading so cheap, and added to watchlist, and was even thinking of adding small positions in the following counters:

HALDYN GLASS
NAVIN FLOURINE
PUNEET RESINS

Most likely, all three of above are out of the list already, a big relief :-)

Also thinking about reshuffling betweek SRF and MAZDA.

But before I do anything, I'll step back and analyze my existing positions. Let's start:

Healthy Ones:
BHEL, MOIL, INFY, CROMPGREAV

These are debt free companies, very good ROE of 30%+ over past 5 years, consistent and stable growth and decent valuations, adjusting for market reputation. My purchase prices too are all right, maybe a little expensive, but still quite good compared to historical levels. I'll be very comfortable to hold them and not be worried due to transient down quarters and slowdown in growth.

Cautious One:
BHARTIARTL, OPTOCIRCUIT

Good, promising businesses, but concerns of declining margins for Bharti, while cash flow concerns for Opto Circuits. Since I believe in long term prospects of the businesses, and the fact that they're available at deep discounts, I'll still hold them, but yes, I understand the risk is higher in these investments, but then rewards are equally good.

Comfortable, but exit on rise:
PNB is one stock where I believe its decent, but not a stock I'll hold for long term. Its more of a positional stock - buy when it crashes below Rs 680, and sell when it goes above Rs. 900. But never increase beyond 7% of portfolio.

Confused:
SRF, MAZDA and IGL.

For IGL, I believe in story, but then, concerns that its a little more expensive, and risk of further margin contraction due to PNGRB decisions. Right now, have invested 3% of portfolio in IGL, but given the discovery of new potentially better opportunities, will need to re-think before making further purchase.

For SRF, the new concern about "small caps being value trap" is on my mind, and if I do conservative analysis, I find cyclical profit margin contraction (is it really cyclical?), increasing debt, and some other concerns I've posted today. I'll analyze more and see if I should take some profits off, if not a complete exit.

MAZDA, looks good, but need to do a critical analysis and make sure chances of this turning as a value trap are minimal, and only then I'll add more positions. In any case, I'm not comfortable having more than 15% of my portfolio in small caps, so i I have to add positions, it'll only be when I'm convinced it is better than SRF.

Excited!!!
Piramal Enterprises. Every time I look at it, I'm more convinced its a great opportunity. Yes, it might not rebound fast, but given Mr. Piramal's skills, I consider this as a stock to hold for long term. I've added about 1.4% of my portfolio in PEL stock, and will add below Rs 470.

Finally, there're few more stocks in my watchlist which I need to analyze. I'll probably wait for while, let excitement stabilize and then take a decision - whether to freeze my portfolio (except only exiting stocks on rise where I'm not very comfortable or want to exit at a certain price) and spend time studying and reading long pending list of items, or to continue this churn. Certainly, considering short term financial obligations coming my way, the former choice looks better. Not that I'm underinvested, even if I clean up and freeze, I'll still have 50%+ of my investments in equity, so not a bad figure and not a risk of missing the next boom, if it has started :-)

Let's sleep and relax, its a great way to control irrational exuberance.

Re-allocation

I purchased some more Infosys when it crashed 8% yesterday after results, at Rs 2345. Rs 15 will be returned back in a month as dividend, so if I assume I reinvested dividend on my total stake in INFY, my incremental cost is Rs 2267, and my new average cost being Rs 2250.

I also completed my purchase in OPTO CIRCUITS, for a total average cost of Rs 129 and ~10% stake in portfolio.

I also decide that Piramal Enterprises is a far better opportunity than MAZDA, and I'm still not comfortable to put my stake in a small cap company compared to an excellent sidecar opportunity. Hence, I'll exit the small tracking position I took in MAZDA and start putting more money in PEL, the cash generated from sale of ALBK and PNB...

Here'e the new portfolio composition:

The balancing is happening now...only IGL and PEL need to get more stake, while others are fixed now. PNB, well, if it drops back to Rs 660, I'll consider buying, and will exit above Rs 1000 or so...

Piramal Enterprises

As I wrote 2 days back, today I perform the detailed analysis of Piramal Industries, earlier known as Piramal Healthcare.

Let me first write my reasons to research this stock, they'll help remove some biases:

1. Its been discussed few times in value investing forums.
2. Prof. Sanjay Bakshi analyzed it an year back and found it attractive, the price has not moved yet and there're more reasons for the business to be more attractive than an year back.
3. Mr. Ajay Piramal is known for his superb capital allocation skills, and I think he can make better use of my money than I can do.
4. PEL now owns 11% stake in Vodafone India. Below I analyze if this stake is undervalued in PEL stock.

Ok, so, first step in valuation of PEL is to find a value for Vodafone India. Vodafone India has about 16.4% market share of Indian telecom (cellular, GSM) market, which currently stands at about 911 million subscribers, according to a report by TRAI. Since Bharti Airtel, the largest subscriber owns 19.62% market share, a reasonable estimate of Vodafone's revenue is 16.4/19.6 * 416038 million = ~Rs 350000 million for year 2011-12. Taking an average Net Profit Margin of 20% for the industry, we can arrive at Earning for Vodafone as Rs 70000 million for year 2011-12. Now, under current distressed industry situation, Bharti trades at 17P/E, and it won't be unreasonable to assume that if Vodafone India were public it'll trade at least at 15 times its earnings. This gives a total market cap of Rs 105000 crores to Vodafone India, of which, PEL owns 11%.

Thus, the market value estimate for the stake in Vodafone India alone is Rs 10500 crores. Taking a margin of safety of 40% on this calculation, we can at least assume Rs 6000, which is what is roughly PEL paid to acquire the stake. So, this gives a good confident that book value of vodafone stake in PEL is at least slightly undervalued, and Mr. Piramal has struck a good deal.

So, net of Vodafone Investments + Cash - Long term Debt is Rs 300 per share (6000 cr + 57 cr - 892 cr = 5150 cr = 46% of book value) = Rs 300 roughly, and there's a lot of margin due to Vodafone valuation with 40% discount.

The question now is, at current price of Rs 470, what else within the business makes it still undervalued compared to rest of Rs 170 per share price. Let's try to analyze:

DRG Acquisition
Referring to Analysts presentation, DRG is a healthy business, with high barrier to entry, negative working capital, consistent 20%+ revenue growth and even high profit growth, debt free, diversified client portfolio, and PEL has acquired it for $635M, when DRG is expected to have a revenue of $160M in FY2012. This is 4X revenue valuation, in line with market valuations for such businesses in US.

Assuming current profit of 20%+, earnings for FY2012 are expected to be about $35M. Assuming 2 stage DCF, with 18% growth in FCFF for next 8 years and 2% thereafter, we arrive at a fair value of $650M, very close to what PEL paid. Thus the value of DRG in each share of PEL is about Rs 180.

Due to bridged acquisition over 18 months, starting May 2012, with 1:1 payment through equity and debt, and debt being at 5.5% cost. They plan to raise debt against DRG asset itself in US. Can we count the value of DRG today? There'll be increase in debt upto an amount of $320M on books of DRG, which can be easily serviced (interest cost will be $17.5M per year). Even if debt is carried on books of PEL, it can be easily serviced from available cash (or potential cash inflow from dividends that might be generated from DRG profits). The equity part will be paid out of cash inflow to come from Abbott over next 3 years ($1.2B) and from sale of Vodafone stake, which they say is a short term investment. Hence, we should NOT add Rs 180 into value for PEL, maybe something between Rs 90 and 180.

Before we move forward, let's stop and revise and tally. Sale to Abbott would generate a total cash inflow of $2.2B as one time, received in 2010, and then, $400M annually from 2011 to 2014. Till now, $2.2B + $400M is received and is on books ending FY2011-12. ll this total amount is sufficient to cover purchase of Vodafone and DRG and still leave surplus cash, so debt arising from DRG should not worry us, but as a conservatism, let's account for only 70% of Rs 180 from DRG, and hence total value accounted is now rs 300 due to Vodafone and Rs 125 due to DRG. This leaves Rs 45 more to be accounted, NOT counting any surplus cash inflow remaining from Abbott by 2014.

Pls note that we've been very conservative in valuing Vodafone and DRG so far, and yet only left behind with Rs 45 to be accounted for remaining businesses that PEL holds.

Financial Subsidaries
Let's start with the INDIAREIT Fund advisors and Investment Management compaty, along with PHL finance pvt ltd. These were acquired for a total consideration of Rs 225 cr, summing to Rs 11.63, net's knock off Rs 10 as the value from remaining Rs 45. Sime reason being a belief in Mr. Piramal's value investing skills, he won't pay more that value, and then we can say Rs 10 per share of PEL is a good value for these INDIAREIT companies.

Let us also not count any further value for other financial subsidaries.

Now remains Rs 35. Sales from all the Pharma and Healthcare related businesses (accounting for over 80% of total consolidated sales) was Rs 1988 cr in FY2011-12. Average profit margin is 16%+, and this means a  total Operating Profit - Depreciation (EBIT) of over Rs 318 - Rs 140 cr or equivalently, Rs 180 cr = Rs 10.5 per share.

This gives a debt capacity of Rs 10.5 / 3 / 0.09 = Rs 39 per share for healthcare related business. This means, that if we leave aside Vodafone and DRG and financial acquisitions at cost (and believe in Mr Piramal's skills to equate purchase price as fair value), the remaining business, in current state is available at Debt Capacity!

Can you buy a pharma business today at debt capacity? Not really, all pharma businesses enjoy high valuations, owing to stability of their business fundamentals. Hence, I believe Piramal Enterprises is still quite undervalued and I can enter below Rs 470 a share quite comfortably. Of course, it'd make sense to stagger the buying, so I'll now start increasing my stake in PEL gradually, buying on dips below Rs 470, upto 10% of my portfolio.

The belief is in excellent skills of capital allocation of Mr. Piramal, and the fact that he's driving the enterprise to be in the right businesses in pharma world, and building a portfolio of right verticals. I still need to read in details the analysis Prof. Bakshi did 17 months back, but now I won't be biased - I have performed my analysis and can make it more pruned by reading what the revered professor has to say.

Another sidecar investment. Its good to analyze sidecar opportunities and invest while you're still learning to do independent research :-)

Here I come Piramal Enterprises...and next post will tell the new action plan.

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Here's a structured calculation of IV to find at what margin of safety is the stock trading right now.

1. Valuation of Vodafone stake is Rs 10500 cr.
2. Valuation of DRG stake is NOT counted, since it is yet to come on books. instead, we count the cash inflow of 3 x $400M = $1.2B = Rs 6000 cr (@ 50$ - INR = 50). Let's be double conservative and consider only upto 70% will go to good use (this also discounts future cash flows), and hence, effective value comes at Rs 4000 cr.

3. We found that debt capacity for all pharma related business is about Rs 667 cr. Taking Graham's minimum value of common stock as 1.75X of debt capacity, we can assume a value for Rs 1160 cr. for pharma business.

4. Finally, we reduce total liabilities of Rs 2600 cr.

Ignoring other businesses, we find the value for Piramal Industries as Rs 10500 + 4000 + 1160 - 2600 = Rs 13000+ cr. This translates to Rs. 680 per share. Since a good part of this is cash, which will be paid to buy DRG, we should still take some decent margin of safety.

At CMP, we're getting this company at 30% margin of safty. I think it's a decent margin of safety for such a well managed enterprise, in hands of an excellent investor. I'll be doubly confident to buy this stock now :-)

A new opportunity

Well, this is one stock I've heard quite a few times, and I'm analyzing it these days. Piramal Industries (earlier Healthcare)...yes, interesting company, but still need some time for detailed analysis, so took a tracking position in it.

Since this will now become 11th stock, and I have two small caps, SRF and MAZDA now, I'm thinking about balancing capital betweek SRF and MAZDA, such that the risk of getting into two 'value traps' reduces. The rationale is that while both SRF and MAZDA are healthy businesses, the risk of not getting a higher valuation by market is prevalent due to small company profile, boring business and not so strong moat. So, from current ~14% level of SRF, I plan to bring down level to ~6% and fill MAZDA will the flows. Of course, the key is to way for the right moment to reduce SRF and increase MAZDA. I'll buy more of MAZDA below Rs 87, while reduce SRF when it returns to 230+ levels.

Now that this is a new thought, I should also wait for it to sink it before taking action, so, let's wait for the result reason to begin and see how overall market behaves.

Of course, till then, I'll also analyze Piramal Industries and maybe something changes on this thought...let's wait and watch :-)

Goodbye Allahabad Bank

Well, I was not feeling comfortable holding more than 17% of my portfolio in BFSI stocks, especially after they ran up 25% in last 45 days. Finally, I decided to reduce BFSI to below 10%, and exited ALBK completely, while reduce 33% of PNB holding. Due to bad investments in ALBK in the past, I stand at an all time loss of 3.5% in this stock, but yes, since the last purchase, I've had over 12% profit. Goodbye, when you again get dumped to drain, I'll pick you again...

In PNB also, since I was invested upto my limit of 11% per stocks in portfolio (BHEL is an exception...), and I sense it has also run up beyond my calculated IV, too fast in last 45 days, its prudent to reduce some exposure. Now my total BFSI exposure is 8.2% and only stock being PNB, which I still believe, my current average cost is around 710 (after a net loss to date of about 15% of my current holding.

Since I reduced about 14% invested amount by these actions, I also reallocated some money, and completed purchase in BHARTIARTL to 11%. Yes, I bought it a little expensive, but given the fact that it's making a very strong base around 260 levels, and my conservative IV calculation only gives a 10% lower price, I'm comfortable in buying a good business with healthy prospects at a slightly higher price than my IV. This is a classic example where my conviction in business future prospect is stronger than my confidence in correctness of IV calculation.

Additionally, now that I've 9 stocks, I also have room to add a new stock, and out of my watchlist, MAZDA is one business which I like. There has been some good discussion on SN forum, and its been few weeks that we've waited to assimilate the discussion, and my gut feel says - go ahead. Strong business fundamental, undervalued by a conservative IV calculation method, healthy record of cash flow generation, decent dividend yield, and no debt. Just the right kind of company you'd want to buy in. Yes, Ideally I'd like to buy below Rs 87, but again, giving benefit of doubt in IV calculation, since its only about 12% higher, and started buying in small amounts. As it falls, I've surplus cash from sale of banking stocks to gradually build up exposure in MAZDA. Thanks Sanjeev Ji for analyzing this good stock.

Finally, here's my new portfolio allocation, by stocks:

And this is by sector. Yes, my exposure in Capital goods sector is above 30%, primarily due to good run up in BHEL and the fact that BHEL alone stands at 17% in my portfolio. But I strongly believe in the business prospects, and in long term, both BHEL and CROMPGREAV will deliver - they're healthy businesses, run by able management, and there's a huge potential for both these companies to grow further given the large power infrastructure need in India. Yes, there's competition, but these are good brands which enjoy reputation of quality products, and eventually, quality wins in such mammoth investment spaces.

Readjustments

I took the first step of what I mentioned in planned investments. The new allocation looks as below

Here's the detail:

1. ALBK has run up from a low of Rs 117 odd to Rs 150 in last 40 days. This is quite fast. I did some bottom fishing around Rs 125 and below, and considering that I only took it as a beaten down stock, and not really a great long term investment, I should reduce some exposure and take profits. I did so, and reduce about 14% holding yesterday at Rs 150. As the stock will increase further, I'll offload further, and bring down portfolio contribution of ALBK to less than 7%, and possibly exit completely if I stop a much better opportunity.

2. CROMPGREAV has also run up from a low of Rs 103 to Rs 130 pretty fast. Again, prudent to reduce some exposure considering quite high a cost in comparison to IV as mentioned in my post earlier. It'll come down when people get sense out of this liquidity driven rally, and then I'll buy back again when it comes below the IV. Yes, it may not happen, but then I'll only offload upto 20% of my holdings. I reduced about 12.5% yesterday, and will take another offloading to reduce cost and risk (considering I really have a negative margin of safety on this stock)

3. I took some more exposure in IGL & BHARTIARTL. As I mentioned in my post on these company, I strongly believe in future prospects, and although current price is about 10% higher than my IV calculations, I'm taking some risk in buying a bit higher since I believe that long term growth prospects offset the risk adequately. This is a classic case of buying slightly higher than calculated fair price if you believe that IV will grow in the future, and opportunity cost of investment is justified (more on this topic soon...)

Let's wait more for this rally to unfold, will take some more prudent calls to reduce exposure in opportunities where I don't believe quite strongly and which are more of Graham like opportunities (ALBK, PNB, and CROMPGREAV to reduce risk due to negative MoS), and wait for downhill movement to pick more of BHARTIARTL, IGL and INFY.

On OPTOCIRCUITS, I'll hold further purchase till I get time to analyze it deeper, especially the incremental return on capital and success of acquisitions and goodwill writeoff.