Two major events happened in the month of June, the first, RBI left the interest rates uncut and the second one was Britons exit from European Union. Indian stock market was lucky to not witness any blood-bath like what we had seen in major European stock exchanges. I was reading in one of the blog few statistics that I thought to share with you all, in the last 66 years, since 1950 there have been 57 times market move downwards of 20% or more in the global markets. Think about this statistics like this – it means a crash in major markets every 1.15 years!

As world markets are now very well interconnected the above statistics tells me that crashes like these are going to be more frequent and regular. We did talked about BREXIT as another noise and to ignore it over here on this blog.

Here’s an allegory used by Buffett that I like in relation to market: think about a farmer in Orange, Dubbo or Parkes who has inherited a farm from a generous ancestor, and on which there is no debt. The farmer is under no pressure to sell the farm. Clearly there will be a few bad years, but there will also be a few good years. Buffett suggests you think of the stock market and its distracting and noisy volatility as the emotionally immature farm neighbour who: “[yells] out a price every day to me at which he would either buy my farm or sell me his — and those prices varied widely over short periods of time depending on his mental state … If his daily shout-out was ridiculously low, and I had some spare cash, I would buy his farm. If the number he yelled was absurdly high, I could either sell to him or just go on farming.”

BREXIT represents to me like that noisy neighbour panicking that his farm might fall further in price.

Let us focus on the performance for the last month:

% change in June 2016
NSE 500 3.03%
Portfolio 1 6.13%
Portfolio 2 4.63%
Portfolio 3 1.17%

 

Except Portfolio 3, the other two portfolios outperformed in the month of June. The reason for Portfolio 3 to underperform was, it doesn’t hold JK bank in its portfolio and also Indiabulls Housing finance underperformed in the last month. But the good part about Portfolio 3 is that it is holding a big chunk of cash in its portfolio.

Let us have a look at all the three portfolios in detail:

Portfolio one:

Name Quantity Purchase Price Current Price Total money invested Current position Standing IV – upper band 2017
Axis Bank 511 INR 391.10 INR 533.50 INR 199,852.10 INR 272,618.50 36.41% INR 417.00
JK Bank 2985 INR 67.00 INR 68.90 INR 199,995.00 INR 205,666.50 2.84% INR 92.00
Castrol 533 INR 375.00 INR 379.00 INR 199,875.00 INR 202,007.00 1.07% INR 573.00
TCS 90 INR 2,226.60 INR 2,553.10 INR 200,394.00 INR 229,779.00 14.66% INR 2,386.00
coal India 660 INR 302.85 INR 313.00 INR 199,881.00 INR 206,580.00 3.35% INR 229.00
cash INR 23,179.00
Total INR 999,997.10 INR 1,139,830.00 13.98%
NSE 500 INR 5,833.40 INR 6,980.80 19.67%

 

Portfolio two:

Name Quantity Purchase Price Current Price Total money invested Current position Standing IV- Upper band for 2017
Axis Bank 511 INR 391.10 INR 533.50 INR 199,852.10 INR 272,618.50 36.41% INR 417.00
JK Bank 2985 INR 67.00 INR 68.90 INR 199,995.00 INR 205,666.50 2.84% INR 92.00
Indiabulls housing 398 INR 686.44 INR 671.05 INR 273,203.12 INR 267,077.90 -2.24% INR 765.00
TCS 75 INR 2,226.60 INR 2,553.10 INR 166,995.00 INR 191,482.50 14.66% INR 2,386.00
coal India 660 INR 302.85 INR 313.00 INR 199,881.00 INR 206,580.00 3.35% INR 229.00
cash INR 283.55
Total INR 999,997.10 INR 1,143,708.95 14.37%
NSE 500 INR 5,833.40 INR 6,980.80 19.67%

 

Portfolio three:

Name Quantity Purchase Price Current Price Total money invested Current Position Standing IV- Upper band 2017
Axis Bank 511 INR 391.10 INR 533.50 INR 199,852.10 INR 272,618.50 36.41% INR 417.00
Indiabulls housing Finance 400 INR 686.26 INR 671.05 INR 274,504.00 INR 268,420.00 -2.22% INR 765.00
Coal India 660 INR 302.85 INR 313.00 INR 199,881.00 INR 206,580.00 3.35% INR 229.00
TCS 75 INR 2,226.60 INR 2,553.10 INR 166,995.00 INR 191,482.50 14.66% INR 2,386.00
cash INR 172,113.55
Total INR 999,997.10 INR 1,111,214.55 11.12%
NSE 500 INR 5,833.40 INR 6,980.80 19.67%

 

How many growth stocks do we have in our portfolio?

Recently we posted an article on how to identify growth stocks. Let us find our rationale of investing in the above stocks keeping that article in our mind.

Axis Bank

Axis bank is the second fastest growing private sector bank in the country. After HDFC bank, this is the only private bank that is outperforming and growing its balance sheet in double digit and also maintaining its return on equity. By average Axis bank is reinvesting 85% of its profits back into the business and is allocating that money at a very attractive rate of returns, does improving overall its ROE.

Recently RBI had allowed foreign investment in this bank from 49% to 62%, resulting in surge of its share price. We will be happy to book some profits from this investment if it breaches Rs 560 levels.

JK Bank

Recently we did shared our view in regards to JK bank in detail on our website. We are still holding JK bank in portfolio one and two is because it still holds its quality ratings and is also trading within its 2017 intrinsic value band. For the year 2018 they stand at greater risk of losing their quality grade. Reason, total income (Revenues) are not going anywhere, provisions are still required to maintain big, does resulting in lower profits and lower return on shareholders’ equity.

We will be happy to sell them if the price breaches its upper band of intrinsic values for 2017. Don’t forget this is only our view and we could go wrong. If JK bank turns around positively in its quarterly results than we will be benefited by holding its stock in our portfolio. Our research and findings tells us that there is 83% chance of JK Bank not reporting its earnings close to Rs 12.70 per share for 2017 which many analysts are expecting.

Castrol India

Castrol India is another good quality business trading at much discounted price to its intrinsic value band. The only reason we do not want to stay invested in this stock in Portfolio 2 and 3 is its 2018 intrinsic value band, which is expected between Rs 392 – Rs 440 per share. This band is lower to its 2017’s expected intrinsic value band which means analysts are expecting profits to fall in the 2018.

We did shared our views on when to sell the stocks and you will get a fair idea why we sold that stock in other two portfolios.

TCS

Another great business generating best returns on shareholders equity. But unfortunately at the moment we will say not best growth business. This is one of the reason we booked little profits by selling few stocks from portfolio 2 and 3. The valuations of TCS mostly depends on how much profits it is retaining. If it is expected to retain a lot then they face pressure on growing its earnings at healthy percentile, which they are struggling at this moment.

Coal India

This is a kind of business we were talking about that doesn’t need any extra capital to grow its earnings. At the moment they are not retaining any profits and on top of that they are giving back shareholders equity back to them as dividends. Not a good growth strategy. Currently we won’t consider Coal India as growth business until we see changes to its dividend policy.

Coal India is the best candidate to replace from our portfolio today once we find any extraordinary business at cheap price.

Indiabulls Housing Finance

Indiabulls Housing Finance is another great example of growth business. They are growing their revenues and profits in range of 25% – 30% every year. Because it’s in a mortgage business they need to keep sourcing funds and the key to success is to source them at cheap price. Indiabulls Housing Finance credit rating is A+ and thus puts them in a good position to raise funds at lower interest rates.

Today it is trading at its lower band of expected intrinsic value for 2017, during BREXIT it opened up at Rs 616 per share for a minute, which was really attractive price to buy. We still bought few more shares of it around Rs 650 which is still below its 2017 intrinsic value band.

If you have any questions or concerns to any of the portfolios then please leave comment and I will respond to it.

Happy Weekend!!

Aziz Dodhiya is the chief investment officer for the Valueoperations funds which operates in the Indian market as an FPI (Foreign Portfolio Investor). We do not offer any personal advice to buy or sell any stocks and the views that are shared by Aziz might not incline to your personal investment strategy and this is the reason we advise you to take professional advice before going ahead with our views.