Friday, 26 October 2012

A Year into Value Investment Blogging: Time to Do Reality Check!

It has been almost a year, since I started this blog on value investing and let me take this opportunity to thank fellow investors who have not only regularly read the blog but also have provided their suggestions, critique, inputs, questions and insights. This involvement and interactions, with number of fellow investors ranging from novice to veterans, have made this journey an enriching experience for me. I sincerely thank all the readers from bottom of my heart  for their wholesome participation and look froward to more and more interaction in coming time.

Over one year, I have posted number of ideas which I thought made sense from value investing framework and I had highest conviction in. I also tried to write about ideas where I myself will be willing to put money so as to make sure I had complete buy in before putting the idea into public domain. Most of the ideas discussed (not all) on this blog are/were part of my portfolio at some time or the other. As I started the blog, one of the objective of writing a blog was to document my investment rationale/hypothesis behind businesses that I buy and to keep tab on how my ideas perform over a period of time. Even though, in value investing, one year is not an appropriate time frame to evaluate the performance of a portfolio, it does serve as milestone indicating whether one is traveling on a right path or not. It is like a mid term exams! 

I take this opportunity to acknowledge that the idea of evaluating performance of my idea is derived from the work done from Vishal (Valueinvest30) who took pain to put together buy price/date of post for all the ideas posted on this blog. Thanks Vishal for that. This prompted me to think that I should assess performance of the ideas posted on this blog for the sake of transparency and getting a sense on direction . It doesn't matter, how the portfolio performs, but it gives me and blog readers some idea about what went right and where it did go wrong.  I also plan to make it yearly ritual  of evaluating performance around same time frame to keep things consistent from evaluation perspective.

While I do not carry all stock in my portfolio in same proportion in terms of capital allocation, for the sake of simplicity and to generalize the results,I have done my performance analysis assuming roughly 10,000 allocated to each idea. I have assume closing price as average buying price on the day I wrote the post about a particular idea. Today's closing price is taken as CMP and returns are calculated on CMP. 

Security
Name
 Date 
Blog Posted
Buy 
Price
Buy          
Quantity
Amount 
Invested
CMP
Current Amt
%Gain
J B Chem
24/11/2011
68.5
  140
  9590      
  69      
  9660          
  0.73%          
Cera Sanitaryware
29/09/2011
178
  55
  9790      
 375      
  20625     
  111%     
Mayur Uniquoter
11/12/2011
167
  60
  10020     
 430      
  25800
  158%     
Sintex Industries
29/12/2011
62
  160
  9920      
  67
  10712      
  8%     
Oriental Carbon
07/01/2012
91
  110
  10010      
 160
  17600      
  78%     
Shriram Transport
18/01/2012
534
  20
  10640      
 605   
  12100      
  14%     
Gujarat Reclaim
29/02/2012
1398
  7
  9786      
1625      
  11375
  16%     
Piramal Enterprise
24/03/2012
455
  22
  10010      
 495      
  10890      
  9%     
Narmada Gelatine
30/03/2012
96
  105
  10080      
 134    
  14070      
  40%     
Mazda Ltd
30/04/2012
93
  110
  10230      
  96      
  10560      
  3%     
Atul Auto
19/05/2012
100
  100
  10000      
 111     
  11100      
  11%     
Amara Raja
Batteries
19/05/2012
138
  75
  10350      
 224      
  16800      
  62%     
Fluidomat
19/05/2012
32
  310
  9920      
  38      
  11780      
  19%     
Swaraj Engines
19/05/2012
402
  25
  10050      
 440 
  11000      
  10%     
Wim Plast
19/05/2012
201
  50
  10050      
 362      
  18100      
  80%     
Hindustan Zinc
29/06/2012
112
  90
  10080      
 132      
  11880      
  18%     
GSFC
16/07/2012
71
  145
  10295   
75.5      
  10947      
  6%     
Total


  170711      
      
235000      
  38%     
Sensex
26/10/2011
17289     
   
18625     
7.72%     

As it is evident from the above table that some of the securities performed extremely well even in over all depressed markets while other did reasonably well. There are few securities which performed worse than benchmark and dampened the overall returns. However, portfolio as a whole did manage to perform well as it generated 38% absolute returns (not annualized as many of the opportunities are less than 6 months old) on amount invested. Now, if one would have invested same amount in nifty/Sensex based index funds, returns will be in the range of 7-8%. Thus, at least for this year additional effort put into finding opportunities seems to be well rewarded.

Even though, these are early days, a pattern emerging from the performance analysis is that combination of undervaluation and great business (Cera, Amara Raja, Mayur, Wim Plast, Oriental Carbon) is likely to fetch far superior returns than finding out business available at deep discount but mediocre/average in nature. However, as I said earlier, these are early days and it is not worth jumping to conclusion. 

Among the under performers, I am very positive on Atul Auto, Piramal Enterprise, GRP and Shriram Transport. 

Mazda and JB chemicals remain value play. However, post JB chemical's announcement about dispute with J&J regarding amount put in escrow account from  sale of Russia-CIS business, margin of safety has reduced. I have partially exited (roughly 50%) at marginal gain, rest 50%,I continue to hold. For Mazda, undervaluation remains. 

Disclosure: Views posted here are personal and shall not be construed as investment advise on buying or selling. One must do his own due diligence before making investment decision. My views can be biased as I hold position in many of the companies discussed here.


16 comments:

  1. Great Track Record Dhwanil.
    Thanks for sharing your ideas as well as guiding beginner investor.

    Kushal

    ReplyDelete
    Replies
    1. Hi Kushal,

      Thanks for being regular reader of the blog. Keep sharing your views/questions/critique.

      Best Regards
      Dhwanil Desai

      Delete
  2. Great Dhwanil and congratulations
    Despite the general positive view on OCCL, I have few doubts which prevented me from taking any exposure (ofcourse I first observed the stock very recently)
    Profits driven by price increase and not volumes: But post 2007, volumes have grown only at CAGR of 9% for 2008-11 and price by 15% and driven by price increase ROIC increased to double digit. With asset turnover around 1, ROIC is entirely driven by leverage (1.5x) and EBITA margins. So what makes us to believe margins will not fall to its historical levels.
    Need to grow much faster from market leader: Solutia has projected that its Technical Specialities division (which sells Insoluble sulphur and some other products) will grow at 5% CAGR between 2011-15. World tire production is expected to grow at a CAGR of 6% (China 12%) between 2011-15 (Source: Solutia pres). So if OCCL has to grow at double digits (20%+), it means either consumption in India has to increase drastically (50% +) or Solutia market share need to decrease. Both looks quite unlikely.
    Risk from slowdown from China: China contributes around 18% to the sales of Solutia technical Specialities division (and even for other division China accounts for around 10%). Now with Solutia commanding more than 70% market share, any slow down in China will impact OCCL quite adversely (may be in terms of pricing pressure because of dumping from Solutia)

    (I posted a longer version of this comment earlier on valuepickr.com)

    ReplyDelete
    Replies
    1. Hi Anil,

      Thanks for sharing your views on OCCL. Let me clarify here that I have done performance analysis just based on what I posted on the blog and how these ideas have performed over 1 year. So performance analysis may not reflect my portfolio positions. I too have exited the position sometime back for a different reason. When OCCL was dragged into acquiring stake in loss making Schrader Duncan which I thought was a bad decision from capital allocation/management integrity point of view. In short acquiring stake in Scharder Duncan did not make business sense, at least to minority shareholders. So I did write a post on the same and exited.

      Coming to your questions on business front, OCCL and solutia have changed their pricing mechanism to quarterly review instead of annual review to better reflect fluctuating RM cost. Till 2008-09, this pricing policy meant that margins were fluctuating depending upon how sulfur prices moved. However post new pricing structure in place, margins have improved and stabilized. If you read last few management Q&A posted on valuepickr, it is evident that management is clear on two things. One, this business has high entry barriers (technology, quality, approval from tyre manufacturers)and secondly it is moderately asset heavy business. Hence producer need to be compensated by higher margins to achieve decent ROIC. Hence they are confident that OCCL should be able to maintain margins in current range i.e.around 30%. Secondly, management clearly mentions that OCCL is a follower and things are dictated by Solutia on price/market share/ quality front. They are the only competitors for solutia in Europe and that is their major market. They do not supply to US market but wanting to do that in future. I am not sure how much of chinese market they serve as there are many players in IS market in china itself apart of Solutia and Shikoku. Even though world tyre market is growing at 6%, Indian market is likely to grow at 12-15%. Moreoever, there is clear trend in radialization of tyres which means higher consumption of IS for tyres. So, in coming years, Indian market will start contributing significantly once new tyre capacity comes online.

      In terms of ROIC, i think in years to come, ROE will be driven by EBIDTA margins and moderate debt and asset turnover around 1-1.2. Currently asset turns is the worst due to currently completed expansion and under utilization of expanded capacity. Once they start another 11,000 MTPA, lots of common cost will spread over much higher capacity and it will improve asset turns from current 0.85 to around 1.1-1.2. Having said this, in near-medium term company is facing headwind in terms of demand in Europe.

      So to summarize, I feel the business quality is pretty strong. OCCL operates in an oligopolistic market dominated by major player cornering 70-75% market. This gives market leader pricing power, which is good for other players in the market as well. Moreover there are number of barriers to entry in business so competitive landscape is not going to change drastically in medium term at least. This will ensure that business has pricing power and will be able to protect its margin. Also they are in a business where demand is going to be steadily increasing in years to come with larger portion coming from Asian market. Hence fundamentally, I think OCCL remains strong business. In terms of valuation, even after 60% appreciation in price, it is available at 5 times earning which is great if one is confident about strong ROCE/ROE and positive free cash flows from operations. What I am not confident is that how effectively management will take advantage of strong business and pass on the benefits to minority shareholders. So to me it is more of a call on jockey than horse!

      Best Regards
      Dhwanil Desai

      Delete
    2. Thanks for your reply. I had no intention to raise any question about your performance analysis. Just wanted to know you view on OCCL. Thanks again.

      Delete
    3. Hi Anil,

      I understand that very well. I just wanted to bring more clarity from my side hence small disclosure in reply. To be very honest, it is this process of questioning/critique is so valuable and precisely the objective for starting this blog as I know all of suffer from psychological biases and hence other point of views which are more neutral/object will help keep things balanced.

      Hope to keep interacting.

      Best Regards
      Dhwanil Desai

      Delete
  3. Dear Dhwanil,
    I think you have missed out on the bonus issues of Atul Auto, Mayur Uniquoters. Please check if these have been included in the quantity or have you adjusted in the cost?

    tony

    ReplyDelete
    Replies
    1. Hi Tony,

      I have adjusted buying price in both the cases. I should have mentioned it separately to avoid confusion. Thanks for pointing out though.

      Best Regards
      Dhwanil Desai

      Delete
  4. This comment has been removed by the author.

    ReplyDelete
  5. Hi Dhwanil,

    Good to see a Value Investor beating the market by a considerable margin.

    Since, I am also in Ahmedabad, I would like to meet you and get some better insight on investing. Let me know how we can meet up.

    My e-mail id is "chaturvedi.abhishek@gmail.com". Looking forward to hear from you !

    ReplyDelete
    Replies
    1. Hi Abhishek,

      Sure we can meet up. I am slightly preoccupied this week. May be we can meet sometime next week.

      Please suggest suitable day/time, ideally late in the evening.

      you can mail me @ desaidhwanil@hotmail.com

      Delete
  6. Hi Dhwanil,

    That's a great performance for the first year itself and I must congratulate you for taking this route and inspiring all of us.

    I would like to know your steps in analyzing a company. Write from the first step to the last one.

    I would request you to write this process in simple and clear language,if possible.

    Thanks in advance :)

    Regards,
    Avadhut

    ReplyDelete
    Replies
    1. Hi Avadhut,

      Sorry for late reply. I will surely do that post Diwali.

      Best Regards
      Dhwanil Desai

      Delete
  7. Hi Dhwanil,

    I have been reading your posts with great interest for a while now.

    I really like your thought process and the temperament. Out of many value investor's work in India, I like yours and Rohit's the best.

    You have got great future and your blog is an excellent piece of work, keep it up. You're bound to become wealthy in this process of learning and sharing.

    Thanks,

    Vikas Rana

    ReplyDelete
    Replies
    1. Hi Vikas,

      Thanks for your appreciation and kind words. It is such feedback that keeps me going.

      Best Regards
      Dhwanil Desai

      Delete