JainMatrix: The Updates Roundup OCT 2015

Dear Reader,

These are exciting times for Indian investors. We saw a period of increasing despondence and negativity in August and September. There was a political logjam affecting key legislation like GST and Land reforms. We also saw a few poor headlines affecting investor sentiment, like the Amtek Auto and the Volkswagen problems.

Just when things were looking bad, the RBI stepped in with a surprise 0.5% lowering of interest rates. This had a strong effect on the market sentiments. Loans will get cheaper. More people should be able to access banks for credit. The lowering of borrowing costs normally has a cascading effect on consumption, investments and growth. With inflation under control, its time to reduce the cost of doing business.

Sensex

  • This view of the last 2 years of Sensex performance shows that we have made good returns so far, close to 30% absolute. And we are still 10% below all time highs.
  • Our sense is that FIIs are fence sitting at the moment, but Retail investors in India have built up the momentum and are steadily entering the stock market.
  • There’s a massive shift happening in investment assets from real estate, gold and commodities to the stock market.
  • India continues to be the fasting growing large economy, and the best performing Emerging Market country today. The fall in oil and commodity prices is very positive for a consumer and importer like India.
  • The INR continues to weaken against the USD, and we expect it to range from 63-66 levels.
  • Our opinion: Continue making steady investments in this market.
  • Major events and risks: Bihar elections, China volatility and policy uncertainty among central govt. legislators.

At JainMatrix Investments the volatility has also affected us but such events offer opportunities too. We are happy to note that our portfolios continue to outperform the benchmark indices. Lets recap our recent reports and articles.

  1. To help investors build their skills, we published Seven Short Steps to Long Term Investing Success.
  2. We did an analysis of our IPO / FPO reports of the past year and discovered that the  JainMatrix Investments IPO Reports have delivered 60.5% returns.
  3. We continued this trend with Syngene IPO: Good Pharma R&D spinoff from Biocon.
  4. This report was also rated highly and published on Investing.com, a popular website.
  5. We go both ways with our analyses, and published this report: Navkar Corp IPO – Location Challenges – Avoid
  6. We reviewed and revisited an ETF that had its NFO in 2014, in  CPSE ETF – UNLOCKING VALUE, SLOWLY
  7. This website www.jainmatrix.com has been created to be a valuable resource for the investor. There are now over 90 reports and articles here which track the equity fundamentals, analyse events, comment on sector performance and educate the Investor. At JainMatrix, we want to make equity investments easier for each and every visitor of this website. To use this resource best, find the Company or Sector of your interest from the Search Boxes, or use the drop down Menus for guidance.

But if Time is Money for you, it will give us pleasure to add you to our group of Subscribers.
I hope you find these reports useful, rewarding and informative.
Regards,
Punit Jain
Bangalore
JainMatrix Investments

DISCLAIMER

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. JM has been publishing equity research reports since Nov 2012. JM has applied for certification under SEBI (Research Analysts) Regulations, 2014. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.

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Manpasand Beverages IPO – Natural but Expensive

  • Date 25th June 2015
  • Price range: Rs. 290-320 and IPO Period:  24-26th June 2015
  • Small Cap with Rs 1600 cr Mkt Cap 
  • Industry – FMCG
  • Advice: High Risk, Expensive, Avoid

Manpasand Beverages is a small fruit drinks manufacturer based in Vadodara. It had FY14 revenues of Rs 294 crores and profits 20.4 cr. The market potential of this segment looks attractive. However, the segment is dominated by well-known Indian and MNC brands. The challenges extend to capacity creation and launch of several new brands and products. IPO pricing is aggressive (PE of 86-95 times) and leaves little on the table for investors in the short to medium term. Investors can avoid this IPO.

Here is a note on the Manpasand Beverages (MAP) IPO.

IPO highlights

  • The IPO is open from 24-26th June 2015 with Issue Price band: Rs. 290-320 per share
  • It’s a fresh Issue of 1.25 cr. shares of Face Value: Rs.10 per share
  • Each lot size is 45 shares and it can be bought in multiples of 45 shares
  • Shares offered as portion of equity post issue: ~25%. Post IPO the mkt cap will be ~1600 cr.
  • The promoter will sell 17% stake, while SAIF Partners and Aditya Birla Equity will sell 7% and 1%.
  • The amount proposed to be raised is Rs.400 cr. The IPO proceeds will be used for:
    • A new mfg. facility in Haryana for Rs 153.3 cr.,
    • Repayment of borrowings of Rs 100.9 cr
    • Modernization of mfg facilities at Vadodra and Varanasi at a cost of Rs.38.8 cr.
    • The rest is for a new corporate office at Vadodara, Gujarat, corporate purposes and exits by investors.

Introduction

  • Manpasand Beverages is a manufacturer and seller of fruit drinks based in Vadodra, Gujarat.
  • FY14 revenues were Rs 294 crores and profits 20.4 cr.
  • The mango based fruit drink ‘Mango Sip’ is the flagship brand and contributes 87% of sales. It caters to customers from semi urban and rural markets.
  • The distribution network of MAP includes 73 consignee agents and 654 distributors spread across 24 states. Also, MAP sells directly to Indian Railways Catering and Tourism Organization (IRCTC).
  • Dhirendra Singh, Chairman of MAP has 15 years experience in this industry. He is the also on the board for group entities like Manpasand Snacks and Beverages Ltd and Xcite Nutrition’s Private Ltd.
  • Recently the company launched two new brands, “Fruits Up” and “Manpasand ORS”. Manpasand ORS was launched with a view to capture the North East market.
JainMatrix Investments, Manpasand Beverages

Fig 1a – Revenue Segments (above) and Fig 1b – Brands

Business and News Updates  

  • Capacity: MAP has three factories that are currently manufacturing its products located in Vadodara and Varanasi including a new facility in Vadodara commencing production this April. The combined capacity for manufacturing is 40,000 Tetra Pak Cases/ day and 65,000 PET Bottle Cases/ day for fruit drinks and 15,000 PET Bottle Cases/ day for carbonated fruit drinks.
  • MAP has acquired and signed an MoU for a manufacturing facility at Dehradun. However it is yet to commence production.
  • MAP would require efficient working capital management as the soft drinks industry requires enough working capital to be able to procure and process payments for raw materials.
  • The MAP IPO has seen a 5% subscription on day 1.

Industry Outlook

  • The overall soft drinks market in India saw aggregate sales worth Rs 65,330 crores in the year 2014. The main segments constituting the soft drinks market in India are carbonates, juices and bottled water, which together accounted for over 99% of the total volumes sold in 2014.
  • About 75% of the total mango drinks market is controlled by Coca-Cola’s Maaza, Pepsico’s Slice and Parle Agro’s Frooti. Other players are Hershey’s India (Jumpin), Dabur (Real), Hector Beverages (Paperboat Aamras), Surya Food and Agro (Priyagold) and Scandic Foods (Sil).
  • Based on the industry data, MAP has a 3% market share of the packaged juices market of India.

Financials of Manpasand beverages

  • Revenues and EBITDA have been growing consistently, see Fig 2.
  • However PAT and EPS have been declining since Mar 2013.
  • Note – Mar-15 results are a simple projection of actual 9 month financials reported by MAP.
  • MAP is a profit making operation as of today but does not have free cash flows since the last few years. See Fig 3.
  • Profits and Free Cash flows appear to be stretched due to high competition, expansion costs and high capital expenditure.
JainMatrix Investments, Manpasand Beverages IPO

Fig 2 – Manpasand Beverages Financials

JainMatrix Investments, Manpasand Beverages

Fig 3 – Manpasand Cash Flows and Debt

Positives for Manpasand Beverages/ IPO offering

  • MAP is focusing on a market which is not well served i.e. semi urban and rural areas. Hence the company could see a good rise in the sales in the upcoming years
  • Rising Income Levels – In the last decade, Indian economy has progressed rapidly. With the progress of the economy, India’s per capita GDP (constant price) has gone up from Rs. 32,037 in 2005-06 to Rs. 46,555 in 2011-12, fuelling a consumption boom in the country. (Source: CARE Report). Thus demand for MAP products should continue to grow.
  • MAP has achieved net profit margins (5% approx) which would help them sustain in the long run in the FMCG sector.
  • MAP is building its own brands and this can be a powerful asset for long term growth.
  • They are growing beyond their flagship ‘Mango Sip’ product and launching a clutch of new products, which may grow their business rapidly in future.

Internal Risks

  • MAP heavily depends on its mango based fruit drink “Mango Sip‟ product which contributed 87% of its net sales for FY2014.
  • MAP had negative free cash flows in the past and this may continue in the next few years. MAP’s operations are cash intensive, and business is worse off due to high working capital needs.
  • A few group entities like Manpasand Snacks and Beverages and Xcite Nutrition’s Pvt have incurred losses in the preceding fiscal years which could be a drain on MAP’s resources.
  • MAP’s business is affected by seasonal variations like reduced demand in winter, and peak sales in summer. These variations could worsen due to a cool summer or a bad monsoon season.
  • MAP sources their tin can packaged products and 500 ml PET packaged “Fruits Up‟ drink from third party facilities and so MAP needs to maintain stringent quality controls with these partner/ vendors.

External Risks

  • A slowdown in economic growth in India could adversely impact MAP’s business.
  • The recent Nestle Maggie events highlight challenges in food packaging and labelling, and govt approvals. Compliance on these matters has to be ensured.
  • There is intense competition in this category with the presence of MNCs and large Indian business houses in the drinks segments. MAP as a small player has to build its niche and not directly compete.

Benchmarking

JainMatrix Investments, Manpasand Beverages

Fig 4 – Manpasand Beverages Benchmarking

  • PE and P/B valuations look stretched even compared to industry leaders like Britannia and Nestle.
  • Sales and profit growth look impressive. Net profit margin for MAP is almost at par with Britannia Industries, which indicates the company’s long term sustainability within the FMCG sector.
  • Overall, for a small company starting off, MAP is doing well, but needs to sustain its momentum.

Overall Opinion

  • The consumption theme in India is very powerful, and will play out over the next few years as income and education levels improve. Within this overall consumption theme, the food segment stands out as both a daily essential as well as an aspirational category.
  • Fruit based drinks is certainly a high potential consumption area with good prospects. Demand is likely to grow faster for fruit drinks than for colas and non-natural drink products.
  • MAP even with its niche rural and semi urban market, today faces intense competition, high costs of brand launches and planned capacity expansion.
  • It may take another 3-4 years to have free positive cash flows from operations.
  • Pricing of the IPO is aggressive, and the high valuations in terms of P/E (86-95 times) and P/B leaves little on the table for investors.
  • Investors should avoid this IPO.

JAINMATRIX KNOWLEDGE BASE:

Disclaimer

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. JM has no known financial interests in Manpasand Beverages Ltd or any related firm. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. JM has been publishing equity research reports since Nov 2012. JM has applied for certification under SEBI (Research Analysts) Regulations, 2014. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com

Seven Short Steps to Long Term Investing Success

Dear Investors,
I got a question on a discussion forum, about Long Term Investing. I found the line of thought very interesting, and my reply is in the form of the Seven Steps to Long Term Investing Success !!
So here goes.  (thanks Srini and Musa).
..

First the question

Dear All,
Need some advise.
I intend to invest some X amount in some select stocks with a holding period of about 8-9 years.
Is it good to leave it untouched till the end of holding period? Or is it advisable to set some yearly target say 20% or so and exit once the target is achieved in a year and wait for some lows to happen to reenter the stock for a target n exit once again and continue this cycle till the end of Holding year.
I don’t know how the above approach of mine sounds, but need you to give me some thoughts on how to go about it.
Regards.
..
Here’s my Answer:
..

the Seven short Steps to Long Term Investing Success

Dear Investor,
This is a pretty good question.
The investing process I feel you should follow is:
  1. Stock Selection: Obviously, choose your Select Stocks well. Since the holding period is 8-9 years, you need to look closely at the fundamentals. Each stock needs to have an investment thesis (eg. capacity expansion of 200%, or a new product launch that can grow profits 150%) and a price target for a specified period of time like say 2-3 years. These need to be high conviction ideas. Plus good Portfolio thinking is that there should not be an overexposure to any one sector, to reduce overall sector risk.
  2. Investment: Buy the Selected Shares. One way to simplify things is to buy shares of roughly equal monetary value.
  3. Monitor the Stocks: Next these shares need to be monitored. Is the investment thesis being played out in reality? Any external events affecting it? A six monthly review for these Select Stocks may be sufficient.
  4. Minimize Transactions: I would disagree about the 20% annual targets and exit /entry cycle. Good well chosen shares may appreciate even 100% in a good year, yet may still be cheap and worth buying, even at this level, if the 2-3 year outlook still looks good. Every delivery based entry and exit can cost you upto 0.6% of your asset, so transactions should be minimized for long term investments.
  5. Use Dips to Buy: Also the reverse may also happen. The investment thesis may be playing out well, but the share price may have fallen 20%. You need to be patient here, and can even buy more of this stock if you have funds.
  6. Exit Non-Performers: My approach would be to (on Review) sell those Stocks that are not performing on fundamentals as per the investment thesis (this may or may not be reflected in the price performance) and perhaps buy more of those that are performing. There is no shame in admitting mistakes. Even investment greats like Anthony Bolton (I’m reading a great book by him called Investing Against the Tide) talk about a success/ hit rate of 55-60%. The secret is to identify mistakes and reduce losses by exiting fast.
  7. Time in Market: Over the 8-9 years period a good internal price target to have is to get a 20% annualized return for your Select Stocks. But notice that big returns come in a few years and things may be flat to negative for the others. So I prefer “Time in Market” with “Good Stocks” where you will get the returns over time.
Thats it !! I guess many years of investing have helped me give a short and sweet answer.
Sorry for generating Option 3 compared to 1 or 2 asked by you, but this is my recommended approach.
Here’s to your investing success.
(needless to say, revert to me if you need help with choosing stocks and monitoring  Emoji )
Regards, Punit Jain
Bangalore, Founder, JainMatrix Investments
 .. 
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DISCLOSURES AND DISCLAIMER

Recipients of this report should be aware that past performance is not necessarily a guide to future performance and all stock investments are subject to market risks. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from a Financial Adviser. This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. JM has been publishing equity research reports since Nov 2012. JM has applied for certification under SEBI (Research Analysts) Regulations, 2014. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com

Thanks for the appreciation

Dear Readers,

I’d like to thank one of my subscribers for his appreciation note.

Punit Jain

On Fri, May 22, 2015 at 6:37 PM, Mohit <mohit…..@gmail.com> wrote:

 

Investment Outlook and Large Cap Portfolio Note

Positive Outlook and The Portfolio Outperforms by 6.2%

Report dated: 20th May 2015

JainMatrix Investments presents its Investment Outlook, and the May 2015 update of its Retirement LC Model Portfolio.

Investment Outlook Note

  • It’s now one year since the new government was elected in at the center. We are fairly pleased with this year in the economy. Without many flashy and headline oriented statements, the government is building stability and solidity in the governance. The achievements include successful auctions in Telecom and Coal mines, improvements in the Power and Coal sectors, efficiency in Parliament and improved foreign policy and exchanges. The LPG cylinder subsidy scheme is a successful pilot for other subsidy programs. Petrol and Diesel seem to be subsidy free.
  • Much more needs to be done, of course. But well begun is half done. Note that stock market investors till some years ago gained most from sectors free of government interference and control. Going forward, my confidence is growing that more sectors will be added that are free. The economy will reap benefits from improvements in ease of doing business, economies of scale and the Make in India – Export to the World initiative.
  • The INR/USD rate is now 63.73, and we now peg this to be in the range of 62-66.
  • The recent spate of volatility in the Indian stock markets is a normal short term correction after a strong rise over the last 20 months.
  • The Indian market continues to be a magnet for global investment funds, as the Indian economy has the best outlook of the BRICS countries. It is also among the few large economies growing fast.
  • Further we have seen over the last one year that the Indian investor too has come back to the markets. This is partly because other asset classes like Real Estate and Gold are not as attractive.

Embed from Getty Images

In terms of outlook we expect the next few triggers to be:

  • Reductions in interest rates by RBI.
  • Improvements in the Gold asset class with the Gold monetization scheme, which may reduce imports and reduce illiquidity and improve returns from this asset.
  • Infrastructure improvements including fast tracking of projects and better PPP structures.

In terms of Risks we would identify

  1. Excessive volatility in INR-USD exchange rates or crude prices
  2. Opacity and slow resolution of foreign ownership and investment taxation issues (Vodaphone, Nokia, MAT, etc.)
  3. Poor or uneven rainfall in coming season

JainMatrix Retirement Large Cap Model Portfolio Theme

  • We renamed the portfolio as the JainMatrix Retirement Large Cap Model Portfolio.
  • The objective of the Retirement LCMP is to outperform the Sensex and Nifty by 5-10%. We have achieved this consistently over the last 29 months.
  • The seven stocks in the portfolio are from seven different sectors, but the overall focus is on Banking, Consumption, Exports and Infrastructure.

Portfolio Performance

  • The portfolio has only 7 BUY shares.
  • The RLCMP continues to perform well. On average the 7 Buy recommendation shares were up by absolute 55.5% and annualized 24.6%.
  • The Sensex and Nifty were up by 18.3% and 18.0% annualized in the same period.
  • The JainMatrix active Retirement LC Model Portfolio thus outperformed by 6.2%.
  • Investors need to continue to invest in these shares in a SIP mode for safe long term returns.

Upgrade to Premium User to receive this Model Portfolio.

Some previous notes for this Portfolio

JainMatrix investments – other useful reports

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DISCLOSURES AND DISCLAIMER

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. JM has been publishing equity research reports since Nov 2012. JM is voluntarily compliant with SEBI (Research Analysts) Regulations, 2014. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com

Britannia Industries – A Premiumization Play in Foods

  • 23rd April 2015
  • CMP: Rs 2151
  • Large Cap – Mkt Cap 26,000 crores
  • Advice: BUY, with a target of Rs 3168, a 47.3% appreciation by Mar’17.

Summary

Britannia rides not just the consumption theme, but within that the large food segment and also commands a premium image. Britannia is a powerful brand in this space. As an organization, BIL has recovered completely from the poor performance in 2010. Under a new leadership it is reinventing itself across marketing as well as operations. After many good initiatives in biscuits, the focus is on the high potential dairy products. The market conditions have been challenging in 2014-15, but even so, BIL has performed excellently so far. We expect the demand to look up in the next few years, and BIL to be a multi-year outperformer for investors. Investors may buy the stock for a Mar’17 target of Rs 3168, a 47.3% appreciation.

This is an update of our Feb 2014 report on Britannia Industries – A Ready to Eat Investment. The share has appreciated 144% in the 14 months since this BUY recommendation. 

Britannia Industries – Description and Profile

  • Britannia Ind. (BIL) is a Bangalore based, bakery and dairy products firm, started in 1892.
  • Revenue in FY14 was Rs 6,912 crores and PAT 396 cr, a growth of 52.3% from FY13.
  • Revenues have grown 17% (CAGR) over the last 6 years. Market Cap is 25,300 cr., ranked 2nd in India in the food processing industry by market cap. It has about 2340 employees.
  • BIL operates in foods segments of (i) Bakery – biscuit, bread, cake & rusk and (ii) Dairy – milk, butter, cheese, ghee, dahi, milk-based ready to drink beverages & dairy whitener.
  • The biscuit market is worth 24,000 cr. and BIL has 27-30% market share in India. The dairy segment is much larger at 75,000 cr. but BIL has a very small share here.
  • The shareholding % is: Promoter 50.8, FII 19.5, Retail/HNI 17.2, DI-5.2, MFs 4 and Corporates 3.3%.
  • Key executives are: Chairman Nusli Wadia, Director Ness Wadia and MD Varun Berry.

The report can be downloaded – JainMatrix Investments_Britannia_Apr 2015.

 JainMatrix Knowledge Base:

See other useful reports

Disclosures and Disclaimer

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. JM has been publishing equity research reports since Nov 2012. Punit Jain has been a long term investor in BIL since March 2014. Other than this JM and its promoters/ employees have no financial interest in BIL or their group companies, and no known material conflict of interest as on date of publication of this report. JM is voluntarily compliant with SEBI (Research Analysts) Regulations, 2014. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com

Equity Portfolio Thoughts – Control, Wealth and your Reflection

——————————————————————————————————-

Date 23rd March 2015  

Summary

  • An Indian investor is free to invest in any of 5000+ stocks listed on the exchanges.
  • He may have a range of needs in his equity portfolio, which we have captured in a hierarchy.
  • He may like to progress on this range and exercise his choices in a calibrated fashion

Introduction

I was speaking to an investor a few weeks ago. A busy executive, he had a medium size equity portfolio by value. But I was astonished to see that he had almost a hundred shares in his Demat account. And he looked at me and asked, “So what should I do with my portfolio?” I was of course on a tight time schedule, and ran through my 4-5 step standard template for portfolio discussions.

A little later, on reflecting on the above question, I realized that the answer to the above question can be very nuanced. And really there can be multiple approaches and answers to this question.

Let’s step back to the very basics of the question, what does a person need from his equity portfolio?

An Equity Portfolio – A Hierarchy of Needs

To answer this question, we need to draw parallels from the Maslow’s hierarchy of needs, and it is summarized below. Expressed simply, every human can have a number of needs, but at different times in his life, and in different situations, the needs change. Generally speaking, the needs follow a hierarchy.

Portfolio hierarchy, JainMatrix Investments

An Equity Portfolio – A Hierarchy of Needs. Source: JainMatrix Investments. Click to enlarge.

In a similar way as Maslow’s needs hierarchy, a person’s equity portfolio reflects different needs in investing and his ability to focus efforts and achieve his personal needs and objectives. Here are the levels that I am able to present:

  1. Gain Control: I have seen many equity portfolios that are nothing more than a legacy of 15 years of sporadic investment enthusiasm. With funds available and a pep talk by anyone, individual investors may make a series of purchases. This may be followed by 6 months of watching the results unravel, followed by 4.5 years of inaction. All of which may be repeated again. As a result the shares may be an uncoordinated mass of choices from the past. Selling is more difficult than buying.
    • It may seem that ‘Do nothing’ is an option here. After all these stocks can sit in your portfolio for another 5 years, and your carrying cost is as less as Rs 1000/year. Wrong. If you are not in the right stocks for a ‘long only’ portfolio, chances are that over time your portfolio will decay in value rather than strengthen.
    • The task of the Investor (along with his portfolio adviser) would be to try and gain control of this portfolio. The basic issues here are –
      • 1. What’s the objective and primary need of this portfolio?
      • 2. How many shares are we comfortable with?
      • 3. Whats the risk appetite and profile of the investor?
      • 4. How do we achieve these 1, 2 & 3, and in what time frame?
    • Also essential to Gain Control, is the need to identify and exit the low potential stocks.
    • In my opinion even stable long term (example – avg. holding of 10 years) investment portfolios should be reviewed once a year to align with macro/ sector events and to evaluate opportunities.
  2. Absolute Returns and Profits: Typically equity trading has a very clear objective, of maximizing returns from any trade. Similarly we obviously invest money with the plan of gaining profits and building wealth. The question here is, over what time span? One hour? One week? One year? A decade? New investors are typically looking for a simple quick absolute return.
    • For an investor, the portfolio strategy here is to simply find the shares that have a high confidence rating of highest upside potential. To find such shares is an ongoing exercise. Many successful finds for example may achieve their potential and may not be investment worthy any longer. Others may continue appreciating for decades. However this exercise is also fraught with risks. Many highly rated shares may fail. Or a sector may be affected by an unexpected event.
    • Its critical here to not just understand a target investment firm for its financials, management and business assets, but also the sector and macro context of this firm.
  3. Safety and Stability: Very soon a trader/ investor may realize that just desire for profits and available funds is not enough. One has to approach investing with a safety plan, and temper high profit expectations with realistic back up plans and a safety net. Am I taking too high a risk, with the possibility of a big loss? What’s my worst case scenario? What risk am I comfortable with? And for how much of my portfolio? With some experience, an investor is able to balance the profit expectation with an understanding of risk, and build his checks and balances.
    • For some thoughts on Risk v/s asset classes see LINK.
    • Every asset class has an associated risk. And a good fundamental researcher can assess and understand this risk well. So for a long term equity investor to have a 100% returns per annum expectation is asking for too much. He may actually get it but only once or twice in a decade. And this may soon be followed by a hurtful loss, equally unexpected.
    • A good equity Portfolio should be able to limit equity holdings within individual firms and within a sector, and also align the market cap focus with risk profile such as Safety – large caps, Higher risk – mid caps and Aggressive – small caps.
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  4. Belonging: Community, Region, Profession, etc: At another level of the investment hierarchy, a wealthy investor may start thinking of his investments not just as a means to grow wealth, but as an expression of his place in society. This means the person is focusing a part of his funds towards the things that are important to him, an extension of his personality.
    • This could perhaps mean that for a Bangalore based person like me, I could invest in firms like Titan, Brittania Industries, BF Utilities, Mindtree, etc. which are local firms. I may get a feeling of pride to see these firms doing well, and even though a small shareholder, would be sharing a part of a big success.
    • Similarly as a former software executive, I may like to invest in a few software small caps that I not just understand well but also hope that my ownership in a small way can contribute to its success. It’s more about encouragement and support than just returns.
    • In terms of an exclusion list, a lot of people may be uncomfortable about investing in sectors such as cigarettes and liquor/alcohol. Its really upto the investor to be comfortable with his investments, right?
  5. Self Actualization: A wealthy investor may actually decide to focus his funds towards doing real good, or addressing problems of society. In the past the only way one could do this was in making donations to NGOs, and Education or Religious Trusts. In today’s economy there are several listed corporates that address the needs of the weaker sections of society, or of the environment, and still have an objective of making profits for shareholders. I see no essential compromise in achieving both these objectives. There is, possibly, “A Fortune at the bottom of the Pyramid”.
    • I believe firms in sectors like education, environment, renewable energy and some NBFC’s in housing finance and micro-finance may be addressing and solving large problems of society.
    • Readers are invited to revert to me with their ideas or suggestions of such firms that they have come across.

In Conclusion

Different investors may have vastly different needs in their equity portfolio, and we have mapped these in the form of a simple hierarchy. Many of us could be frozen in inaction at Stage 1 of this hierarchy. Others may have progressed along the stages and gained control and solid wealth from it. Some may actually have a portfolio that expresses their hopes and dreams for their society. Its essential for an Investor to reflect objectively about his own portfolio and think about improvements.

So where are you in this hierarchy? Drop me an email to see if I can help you with aligning your Equity Portfolio to your own needs. See Portfolio Review for a short description of our services.

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Disclaimer

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. Many firms are mentioned in this report, and it should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Either JM or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com