Two batch-mates from Narsee Monjee College of Commerce and Economics, Arpit Shah and Amit Doshi launched Care Care Portfolio Management Services (PMS) in 2011. The PMS has a unique set of stocks in its portfolio, including stationery, paper and packaging companies.
Care PMS has two funds, Growth Plus Value fund and Large and mid-cap fund. The PMS has an AUM of 700 crores.
Growth Plus Value fund, the first fund, was launched in 2011, at Care PMS’ inception. It has given an annualized return of 22.6 percent since then, compared to the 13.7 percent return of the BSE 500 TRI index, against which the fund measures its performance.
In a freewheeling conversation with Moneycontrol, Shah and Doshi, the co-fund mangers of Care PMS discussed their investment approach, top bets, mistakes, and advice to aspiring investors.
Edited excerpts:
Investment style
Doshi: We invest in small-caps and mid-caps. We follow a growth plus value approach. We find undervalued companies that have a solid growth trigger and then do our due diligence. We pay attention to the guy who’s calling the shots. If we’re not comfortable with the management, we don’t invest. We have missed out on a lot of return generators because of this.
Filters for stock selection
Shah: We look at cash flows. The company should have zero debt or high interest coverage. We see if the company has delivered what the management has said in the last five-to-six years. We also look at working capital, turnover ratios, historical ROE trends, and dividend payout ratios.
Also read: West Coast Paper arm doubles optical fibre cable capacity, shares hit 5% upper circuit
Top bets
JK Paper
Doshi: We have had JK Paper in our portfolio since 2017. The company is significantly backward integrated, which means it fulfils its needs for raw materials rather than depending on imports. JK Paper has plantations within 200-300 km range of its plant or souring wood pulp. The company has control over input prices and therefore can make excellent and consistent margins. During COVID 19, a lot of small paper players had shut their business because wood pulp imports were not available. JK Papers was the only one which was not in the red due to its backward integration, operational efficiency, and export markets.
JK Paper has transformed from a pure paper company to a packaging one, where 60 percent of its topline is coming from the packaging business. The packaging business for the company is growing faster as compared to its paper business and so it deserves a re-rating. The company is now setting up a plant in Ludhiana, after which it will have a presence in all the four corners of the country. It already has plants in Odisha, Andhra Pradesh, and Gujarat, which other major paper players like Seshasayee Paper, Tamil Nadu Newsprint and Paper Limited, and West Coast Paper Mills don’t have.
JK Paper has paper cup and paper straw products which are also gaining traction as preference of paper over plastic is taking place, any further hard push from government will increase the demand significantly.
LT Foods
Shah: We have been holding onto LT Foods since 2016. LT Foods owns the Daawat Basmati rice brand in India. It is not like a typical FMCG company, where volumes are currently affected. Basmati being a premium rice itself is not affected by the slowdown in mass categories. Also, Basmati rice is an entry-barrier business, where production happens only in India and Pakistan, so it leaves more room for basmati rice companies to grow.
Doshi: LT Foods gets more than 70 percent of its revenue from exports—they have a 50 percent market share in the United States and a 30 percent market share in India. The company also makes ready-to-eat products. However the segment is very small currently and is not contributing to revenue.
Arvind Limited
Shah: Arvind Limited’s entry in advanced material seven years back has started contributing significantly to the topline and bottomline. Advanced material is not a typical fabric used in clothes; it is used in firefighter uniforms, building and construction sectors, and others. The advanced material segment is growing at a 20 percent CAGR. Arvind Limited has also set aside Rs 300 crore for capex, especially on the advanced material division.
They’re checking all the right boxes. They demerged the real estate business, the engineering business, and demerged the branded business to Arvind Fashions. And now, they’re a hard-core textile business. Plus, the company has reduced its long-term debt significantly from Rs 2,700 crore to Rs 1,500 crore in the last 4 years, which has strengthened the balance sheet. The valuation of Arvind Limited is cheap and we don’t have anything to lose even if the advanced material business does not take off.
Thirumalai Chemicals
Shah: Thirumalai Chemicals manufactures Phthalic Anhydride, which is used in making plasticisers. The Phthalic Anhydride market is a duopoly in India and only Thirumalai Chemicals and IG Petrochemicals make the substance.
Thirumalai Chemicals has a balance sheet of Rs 10 crore of equity and Rs 2,000 core of turnover, so even half percent growth in margins can have a significant impact on earnings per share. The company is also adding capacity—it had doubled its capacity from 1.2 lakh tonnes to 2.4 lakh tonnes in the last three years. The additional capacity is helping them focus on its high-margin business, like fine chemicals. Because of the additional capacity, the company can start exporting fine chemicals to Europe and America, which will start contributing to the margins.
Also read: PSUs will disappoint, packaging could be a contra bet, says this leading AIF manager
Saregama
Doshi: A lot of things changed after Vikram Mehra, managing director of Saregama took over the company. He introduced Carvaan and monetised the music business. They have the biggest music library, with over 1,60,000 songs. The company’s events and concerts business is also doing well.
Misses
Asian Oilfield
Shah: We lost almost 50 percent of our investment in Asian Oilfields. A large part of Asian Oilfields’ revenue was coming from an oilfield in Nigeria. The company’s revenues suffered when the Nigerian government withdrew their contract with the company.
Shiva Texyarn
Shah: We invested in Shiva Textiles thinking there would be higher order flows from the government for NBC (Nuclear, Biohazard, and Chemical) suits. However, those orders didn’t flow in for Shiva Textiles. Also their core textile business had a bad time.
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