Friday, January 30, 2015

Dolly Khanna's ridiculous 89% return in FY2015 so far

Yes - the Rajiv / Dolly Khanna portfolio is up 89% this year. I have tried to break this down in as many positions as I could find. All the December 2014 shareholding patterns are not out yet so some changes might happen to this portfolio as well. Wherever numbers for Dec 2014 were not available I used Sep 2014 numbers. I arbitrarily assumed around 10% (10 Cr to be exact) of cash at 31 Mar 2014.

  • 17 open positions - concentration level is a bit lower than most value investing portfolios
  • High concentration in the top 4 - Over 50%
  • Only 2 loss making positions - Selan Exploration (due to wild swing on the oil prices) & Nucleus software
  • Returns so far from the reconstructed portfolio via public filings seems to be better than RJ as well - but yes this is a much smaller portfolio and to be fair RJ at this scale might have been generating similar returns
  • 25% portfolio turnover so far in FY2015 is fairly low
  • Several multi-baggers in a single year

Thursday, January 29, 2015

Pricing Equity Securities

Pricing is a topic of much debate and causes much heartburn. I am going to attempt to demystify the pricing aspect of securities and put into perspective the pricing of Indian security markets.

For the readers new to finance, I would suggest you read the following articles before reading this one: IRR, Dividend Yield, ROIC, Retained earnings

The Basics

100 rupees in the bank today are worth 100 rupees to you today as you can go to an ATM withdraw it and spend it right away. What are 100 rupees expected 1 year from now?

This depends on 2 factors:
  • Probability of receiving the 100 rupees
  • Interest rate
The lower the probability of receiving the 100 rupees the higher the interest rate. The interest rate at 100% probability is called the risk free rate. There is nothing that is actually risk free but government bond yield over the same period is called the risk free rate.

Wednesday, January 28, 2015

The Rakesh Jhunjhunwala Portfolio estimate

I have made an earnest attempt to find out all the positions of fabled investor Rakesh Jhunjhunwala (RJ). Unfortunately I don't know of a good shareholding screener that will give you the history. The best one out there is from but it is not able to give you the exact data - maybe because it runs with the exact investor name and does not group across investor vehicles. All the data for this article has been taken from the BSE and NSE websites.

These are purely estimates and I have no clue about several other stocks that RJ might own. I have arbitrarily assumed 10% cash on 1 Apt 2015. He of course owns the right stuff given that he has outperformed the index by a large number.

Learning from the portfolio:

  • For a portfolio that is worth 0.1% of the market the number of positions is relatively few - at around 30
  • High concentration in top few positions - Top 2 positions account for 50% or so and 66% in top 4
  • Net trading is very low - less than 20% of original portfolio value over 3 quarters. Maybe there is more trading in and out but this is the net change in position.
  • There are 5 names that are listed only on the BSE

Monday, January 26, 2015

Institutional (short term) performance derby

I got this phrase from the Seth Klarman book on value investing - "Margin of safety". My attempt here is to put this into context of the Indian markets.

Market participants

Overall a large percentage of the Indian markets are owned by FIIs. The number has been steadily rising since 1992 making the markets more and more linked with the global financial system. The percentage of volume on the exchanges is now over 22%. So the gyrations of the market are similar to the global system.

Mutual fund penetration in India seems low at 9% of urban households versus 46% in the US. But that is probably because of much lower investment money available to most households and lower banking penetration.

The FII volume in India as of Jan 2015 is about 3 times the DII (Domestic Institutional investor) volume which basically means that the institutional activity is driven by FIIs. Overall FII + DII constitute about 80% of the total volume

This 80% of market activity drives the institutional performance derby.

Saturday, January 24, 2015

Greenply Industries: Good quality but overvalued

21 Jan 2015
I have to start this one by saying that Greenply Industries definitely makes beautiful looking annual reports. I know this brand from furniture shopping trips and ads for the last 2 decades but little did I know that it is the largest interior company in india, Largest laminate manufacturer in Asia and the 3rd largest laminate manufacturer globally. The laminates business is in the process of being de-merged and the stock is trading ex-record date.

1. How good is the moat?

Grade: B
  • Brand: Replication cost and timeline are both massive. This is a household name in India and chances are if you are telling your furniture store to use something it will be greenply or greenlam. Plywood manufacturing licenses are also hard to come by.
  • Technology: nothing great. MDF has some edge. Its pretax margins are high.
  • Performance during recessions - this is the opposite of recession proof. The good news is that construction and housing is likely to grow rapidly over the next few years owing to the positive outlook on infrastructure by the government.
  • Pricing power - The industry has low pricing power but when it comes to commercial establishments and housing - most professionals would like a brand. Here branding will play a similar role to branding in the cement industry.
  • Very high market share - 32% in plywood, 28% in laminates and 30% in MDF. In MDF Greenply is 40% of the installed capacity so overcapacity maybe a problem. Overall India's consumption of MDF is low at 0.5 mil m3 versus China at 30 mil m3.
  • The Laminates business has been demerged and today you cannot buy stock of the laminates business as it has not been listed yet - but the stock is trading ex-record date of 27 Nov 2014.
  • Overall being the market leader and good prospects I would say the moat is good.

Wednesday, January 21, 2015

Nucleus Software Exports

This is my review of Nucleus software exports from earlier in Jan. 


Nucleus software is a financial software provider to the banks with a geographically diversified customer base. Currently cash on the balance sheet is worth about 50% of market cap and the stock seems quite cheap. The question really is whether the earnings can be grown.

1. How big is the moat?

Grade: B-

  • Brand replication cost: Brand is decent and the chances of banks hiring a new firm to do their financial software are very low. Customers in this case are likely to be sticky just because of the fear of switching
  • Brand replication timeline: For a new company it will take very long to establish the kind of trust and track record that this company has
  • Ease of product/technology replication: A large software company may be able to replicate this fairly easily but not necessarily make it bug free and something that lots of financial institutions will jump it
  • Sales and distribution replication: This will be highly challenging.
  • Vendor relationships: Nothing really special. Creditor % of sales is fairly large at 19%+.
  • Employee relationships: This is a good area. Average compensation is ~12L/year which is higher than even some of the larger companies. 24L sales per employee which is excellent as well. Not as good as RS software but somewhat better than TCS. Even top management remuneration is only 0.5% of sales which is an excellent sign.
  • Performance during recessions - Will not be great but banks will have to use software as the regulatory environment is forcing them to be highly compliant with esoteric laws - the kind of compliance only a computer can do.
  • Pricing power - Once a long standing customer is established pricing power should be good. Entry level pricing power will be weak.

Tuesday, January 20, 2015

Why does value investing work?

We know empirically that value investing is one of the rare strategies that works over the long run and generates decent returns. But often I am asked the question why does it work?

I will attempt to answer this question with a graph.

As you can see 

  • The 1 year Index return (pink) is the most wildly fluctuating line
  • The 1 year earnings growth is also moving around a lot but not as much as the index return
  • If you notice the 5 year earnings growth and index return relative to the 1 year track each other relatively closely
The short term fluctuations in the index returns being much larger than the earnings growth fluctuations and fluctuations in the EPS growth & Index return in long run show that when the negative fluctuations occur it creates opportunities.

This same phenomenon happens to individual stock prices as well and to a larger degree as individual stock prices are not as large in market capitalization as the index itself.
This begs the question: Why does the 1 year index return fluctuate much more than the 5 year return?

The answer to this is complex and maybe I don't understand it well myself but:
  • Investment horizon of the market participants spans from milliseconds to decades. Shorter term market participants are larger in number as all open ended schemes, FIIs, retail investors and others are in a constant state of churning the portfolio. This is demonstrated by the daily volume numbers. About a third of the index market cap is traded every year and if we assume the public float to be 50% then 60% changes hands every year. So the average investment horizon can be estimated to be 1.67 Years or so.
  • Tendency of fleeting marginal capital to be highly mobile - If the market rules dictated that you had to hold a stock for at least a year maybe this difference would not be so high. There is fleeting capital moving from exchange to exchange, company to company and country to country. This capital can make exaggerating difference as well.
  • Derivative markets - Yes do I do believe the NIFTY options market drives up the volatility of the NIFTY and there the entire market. When the expected volatility (VIX) starts to rise it becomes a self fulfilling prophecy exaggerating a massive run up or down over a few months.
  • Cheaper transaction costs - make people think that the cost of trading in and out is low so lots of punts get taken.
Hopefully I have done a bit of justice to answering this question. Your comments or feedback are always appreciated.

Sunday, January 18, 2015

NIFTY Price to Earnings (PE) - Overheated yet?

This question really does not belong in the value investing folklore but is a proxy for me to judge whether the markets are overheated and how dangerous mistakes can be. In high index P/E environments anyone is likely to be swayed by exuberant growth statistics.  I typically like to use NIFTY as the index of choice for my research as it is the leading index on Dalal Street. Yes, some can argue that the Sensex is the leading index on Dalal Street but I think the NIFTY is more practical and covers a larger and more apt section of the market.

  • The 12.5 percentile has not been hit since March 2009 - which shows an extended period of exuberance - which maybe not that irrational considering the new vigor towards development.
  • The current level is hovering around the 75 percentile mark. Over which only in highly maniacal markets has the index stayed above it:
    • 2000 Dot com boom (before the bust)
    • 2007-08 global financial exuberance before the bust
    • 2009-11 when the GDP numbers in India did not fall as fast as the global numbers so everyone though India was "immune" to the global financial system
  • The 87.5 Percentile has only been breached for short periods (max 5 months) at the culmination of the aforementioned booms before the busts. Will this rally hit the 87.5 percentile limit? India's most fabled investor and trader Rakesh Jhunjhunwala definitely thought so back in May 2014 when he said this will be the "mother of all bull markets"
Value investing theory (aka Buffet) will tell you to be greedy when others are fearful and be fearful when others are greedy.

The moral of the story is that times to be fearful are either already here or are almost here unless the earnings start to jump and rein in the index P/E. 

Finding low risk & high uncertainty in the markets

There have been several mentions of the difference between uncertainty and risk in the value investing community especially by Mohnish Pabrai. He says that the best investments will carry high uncertainty but low risk of permanent capital loss. Which in other words means that in the likely worst case scenario the investment price should be low enough that it should not fall further. If some uncertain but plausible and possible events occur it makes some good money.



Opposite of likelihood. Unpredictable.
The chance that an investment's actual return will be different than expected.

Efficient market theorists view

Probability modeled on normal or other distributions
Risk is proportional to return as per the efficient market theorists.

Value investor’s view

Uncertainty is a certain opportunity to pick up cheap companies as it leads to low valuations.
Risk is largely in the price. The lower the price the lower the risk.


One needs to analyze it and sometimes learn to live with it.
Risk mitigation technique is to buy at high margin of safety.

Overall it has been very difficult for me to separate the two. Before reading about value investing I always thought that the two were correlated. The rationale was that the lower my ability to analyse and predict the future the higher the risk. The truth is that risk is drive by the price. If the price is low enough the uncertainty only drives the upside and not the downside. 

This is a concept that helps analyse and take a decision on investments. I have not yet found a way to build a screen-er that can filter out high uncertainty companies. One can however pick them up via reading, horizontal industry analysis, news stories, events, moves in raw material prices, etc.

Some interesting articles on the difference between uncertainty and risk

Tuesday, January 13, 2015

Past follies: Voltamp transformers

This is a classical case of missing the basics. This was another 2010 disaster for me.

Here is the learning:

  • A highly competitive industry with no pricing power is a bad idea - the numbers in 2010 looked good as the investment cycle was up and India was not seeing the slowdown.
  • If a company has net after tax margins below 10% then even a high ROCE is dangerous as it is capturing a very small fraction of the value it generates. Chances are pricing power is low.
  • Recession proof - Nothing is 100% recession proof but some companies fare better than others. In this case this is a highly cyclical industry.
  • Market share and brand - I did not pay enough attention to this.
  • NO Checklist means the latest piece of information that you have seen is what gets higher weightage - checklist is a must
  • Being cheap on P/E does not mean the stock is cheap as the earnings maybe a flash in the pan.

Overall over a 5 year period the stock has lost 15% or so.

Thursday, January 8, 2015

Who is Dolly Khanna? (& her Q2 Portfolio)

Portfolio: Q2 FY15 Filings:

Finally I found an article (Mr & Mrs Khanna: The latest blockbuster on D-street tracked by market watchers) that describes the investor and who she really is!

She is a homemaker and her husband Rajiv Khanna is managing the family money. They used to own the Kwality Milk Foods company which was sold to Hindustan Unilever in 1995.

Have fun reading it here.

Wednesday, January 7, 2015

What price does one pay for margins?

Consider that you have a choice between 2 companies:

Company A Company B
Revenue 50.0 100.0
Profit after tax 10.0 10.0
Equity 40.0 40.0
ROE 25% 25%
Net Margin 20% 10%

Assuming ZERO debt and exactly the same growth rate should the valuation of the two be the same or should Company A carry a premium? Surely company A takes home a greater percentage of revenue thereby showing that it has a greater hold on the market. But the fact that the ROE is the same is also interesting because that means no real premium on invested capital is being charged.
  • Are the margins sustainable? If they are Company A should be valued higher. Threat of competition to Company A is higher and thus if its moat is not strong enough sooner rather than later it will be attacked. Pricing power and brand is most important in this case.
  • Can the Revenue/Assets be made more efficient? If yes then company A should be valued higher.
As usual the answer to me seems that it depends on a few factors - three of which have been covered above. Sustainability of margins holds the key. If you can somehow determine that the margins will hold then by all means Company A will be valued higher.

Then comes the question: How much higher?

Typically this will have to be covered by an earnings estimate of the future. The sustainability of margins should be considered within the estimation of the future earnings.

Tuesday, January 6, 2015

Past follies: Indian Bank

Indian bank was another pick from back in early 2010. This bank had ridiculously low NPAs and the market valuation did not reflect the quality of the financials - classical value trap!


  • Bank asset quality is something that very difficult to judge as the loans seem great until they stop paying!
  • Public sector banks are consistently valued below "private" banks as they have a propensity to drive up their NPAs - I have made a note of staying far away from something that is owned 81% by the government.
  • In the Dec 2009 filings only 2.24% of the company was owned by larger than 1% holders by 2 funds. Which basically means that no professional investors were large in the company to protest if something bad happens - Should always look our for larger holders
  • ROE at the time was wonderful - and nothing seemed to be the issue with the quality of the management. Testament to this is the fact that lending per employee has gone from 2.59 Cr to 6.29 Cr. Branches have increased 37% since Mar 2009 with no increase in employees. Overall management I think the management is doing somethings right as well.

Bottom line on this one is that PSUs should be looked at very carefully and the shareholder list is very important as well.

Saturday, January 3, 2015

Past follies: JetKing InfoTrain

In Q4 FY 2010 my research led me to believe this was a value stock - but it turned out to be a value trap. 

Key learning is: 
  • NUMBERS are dangerous if not coupled with business analysis and reality.
    • Return on invested capital is important but cannot form the ONLY basis for an investment
    • Growth of a company's revenues is not just Return on capital multiplied by reinvested % of earnings. The company's business plan and ability to grow is a bigger factor. ROIC x reinvestment% can be used just as a max on the growth.
  • COMPETITION: Always look at what the competition is doing. 
    • Jetking got undone by universities rather than training institutes like itself. People prefer a degree because the employ-ability of a degree is far higher than some course.
    • The starting salary of a JetKing Graduate was pretty low and continued to be low which would mean that sustaining margins would have been challenging.
  • NO CHECKLIST: Led to missing crucial details:
    • Top management salary in FY2009 was 1.8Cr+ on a revenue of 48Cr. This is always a bad sign
    • TTM earnings in Dec 2009 were already below the last 7 quarter's earnings and should have been read as a warning sign. 
After the fact early detection could have been done:
  • By Dec 2010 the TTM revenue was also below the previous 11 quarters. It should be been read clearly as a writing on the wall. 

Friday, January 2, 2015

Accelya Kale: Review from May 29 2014

My review of Accelya Kale Solutions on May 29,2014. The stock has run up over 45% since then. It was on the edge of the margin of safety - now of course is overpriced for a decent return. 


Accelya Kale: Decent moat and excellent business

The airlines industry famously has destroyed a lot of capital over the years due to the high leverage and primarily being a commodity where players find it hard to differentiate their product offerings. Airline IT however seems to be a different ball game. Here is a company with no debt, cash flow from operations greater than net income, very high dividend payouts, low debtor to sales % and very high returns on capital. Seems too good to be true? Yes, it trades around 10.9 times earnings too! Now it definitely sounds too good to be true - so lets study whats up with this one.

Thursday, January 1, 2015

Notes from the Mohnish Pabrai Lecture @ MDI on 26 Dec 2014

I was fortunate enough to have the opportunity to attend a lecture at MDI Gurgaon by seasoned value investor Mohnish Pabrai. 
  • Waiting 5 years for a good moat and then getting 20% a year for 5 years leads to a net return over the 10 years of 11.9% (assuming risk free FD rates after tax of 5.6%). This means that getting a 12% return today is the equivalent of waiting 5 years for a 20% return. This does not mean one becomes reckless - just means that sitting around on cash for too long is a bad thing too.
  • Looking at random stocks one can see that the variation across a year is almost always north of 50%. The value of all companies cannot change by 50% in 1 year which means that over a period of a year you should have some opportunity to buy a few stocks.
  • When to sell is always more complex than when to buy. Mohnish says he needs the value of the company to be at least 90% of what he thinks its worth before he sells.
  • Hold stocks for at least 2 years before you declare you are wrong. That way you can avoid any emotional outbreaks on your part.
  • Of course - Mr. Pabrai's fabled cloning topic was covered. I have already covered a lot of that in my post about Cloning as an investment strategy.
  • Importance of the ONE person investment team - Having analysts report into an investment manager dilutes the quality of the stock pick. No team is large enough to look at all companies so some sort of Cloning is required for good picks for everyone.
  • Dhando Holdings - Is a new SPAC setup by MP to acquire an insurance company. He intends to add value to insurer by just improve the quality of investment management of the float. He also says that given the success of the Berkshire insurance model there are not many examples of people who have copied them yet.
Lots of what was said was captured by Ashish Kila in his post - Notes from meeting with Mohnish Pabrai back in 2012.

Last but not the least - There was an excellent section on how the Dakshina foundation run by Mr. Pabrai and his wife is having an impact on the economic mobility in India - Kudos to the Pabrais for taking this wonderful initiative. There was a touching anecdote of a boy who made it to IIT by being a Dakshina scholar which changed the family's income from $80 per month to $8000 per month. MP says that even Dakshina follows the principle of value investing where the investment made in the scholar is far lesser than the impact it has on the scholar's life. MP is a truly legendary investor and philanthropist!