I have received a lot of emails and comments asking me about the composition of my portfolio. I have discussed most of the stocks, which form my holdings on the blog. It would be strange if I said a stock was attractive and went and bought something else. However there still seems to be quite a bit of curiosity.

I have decided to disclose my portfolio after multiple requests for the sake of transparency. I am uncomfortable discussing my portfolio and its performance on the blog as the key purpose of this blog is to share my learnings and not to provide tips or boast about my performance.
So here goes –

Some disclaimers
1. I am not recomending any stocks in this list. Please read the disclaimer at the end of my blog ..blah blah blah. You get the point
2. My portfolio is usually stable. But considering the way the market is dropping, it has become volatile not only in terms of value but in terms of holdings too. The problem now is not of finding undervalued stocks, but of picking the best among the undervalued ones. On top of that, with every crash, new ideas keep popping up. So this list will definitely change in the next few months
3. I am not obliged to disclose any stocks I add or drop in the future. I may or may not disclose what I buy or sell. So please do not buy based on this list below.
4. I am fine with a 70% success rate, i.e 7 out of 10 of my ideas working out. I typically don’t lose much as I keep a margin of safety in my purchases. So although some of the picks may not work out as planned, I have been able to do quite well on a complete portfolio basis.

Core portfolio (all stocks are planned to be equal wieghted even if they are not now)

Balmer lawrie
Gujarat gas
Novartis
Lakshmi machine works
Bharat electronics
Ashok leyland
Asian paints
Merck
NIIT tech + Patni (in combination will be a single position)
Honda siel
Concor
Grindwell norton
GSK consumer (on watch list)

Graham style portfolio (smaller positions, cheap stocks)
VST
Ultramarine pigments
India nippon
Manugraph (on watch list)
Cheviot company
HTMT global
Denso india

I may be building positions in some of these ideas in the subsequent months. I may also decide to drop some if I find more attractive ideas.

Added point: I am very particular about valuation (after everything else checks out) . I will rarely create a meaningful position unless the price is right. So please keep in mind that the analysis date is not the date on which i created a full position. It is only the date when I finished analysis. The average price in each case varies depending on when I started building the position.

I will not be disclosing anything more on my portfolio beyond what I have done already and I hope all of you would understand that.

About
Lakshmi machine works is the biggest textile machinery supplier with a market share of around 60% of the indian market. In addition the company also has a machine tool and foundry division which together contribute to less than 10% of the total revenue.
The company’s main market is india and is one of the lowest cost suppliers in the country. In addition the company is also planning to setup a unit in china for textile machinery and is also focussing on the other divisions

Financials
The company’s performance has improved in the last 5 years. This improvement has been on the backdrop of an upcycle in the textile business and the removal of the Textile quotas in the international markets.
The company’s ROE has improved from around 8% to around 30%. The sales increased 4 times during this period. In addition the net profit has gone up by 10 times due to the increase in the net margins from 4.7% to around 10%+ during the same period.
A more commendable improvement has been the improvement in the Wcap turns. The company has become working capital negative and now has almost 600+ crs on the balance. As a result of this improvement the company has a very lean balance sheet where out of the total 800 Crs, only 200 Crs is the invested capital. Due to this the Asset turns is very high at 11.5.

Positives
The company is a one of lowest cost producers in the industry. In addition the company has improved its capital efficiency dramatically during this upcycle. This improvement has come as a result of the improvement in inventory turns and recievable turns.
In addition the company has seen an improvement in net margins due to elimination of interest expenses and other overheads. This has come about inspite of increase in RM prices.
The company is also spending almost 1% of revenue on R&D which is a good, but a higher spend could be better. The company has a decent order book too.
In addition the company expects a replacement demand of around 28 Mn and new demand of around 29 Mn due to growth of the textile industry (page 24 of Annual report)

Risks
The risks are painfully obvious. The textile industry was hit initially due to rupee appreciation and then due to the credit crisis. During such times, CAPEX expenditure is usually put on hold or delayed. As a result the company expects the demand to drop by 10 to 20% in the current year.
Due to demand drop in the international market, other foreign manufacturers could become more aggressive in the India impacting the profitability of the company.

Competitive analysis
The Industry has decent entry barriers. LMW has fairly depreciated investments which would require quite a bit of investment by any new player. In addition LMW also has the benefit of economies of scale due to which it has lower cost in the industry
There is a certain amount of Lock-in too as once a textile producer buys the machinery from one supplier, it would tend to continue with it as there are cost benefits in terms of maintenance, training and CAPEX.
There are also learning curve barriers and contractual commitment barriers in the industry. In all, LMW enjoys a certain amount of competitive advantage in the industry which also shows up as high market share and high ROE.

Valuation
The company has almost 600Crs+ cash on the book. Net of the cash, the valuation is around 200-300 Crs. The net profit for last year was around 240 Crs out of which the other income was around 60 crs. As a result the core income was around 160 crs. Even under a sceanrio where the net profit drops by 50%, the current valuation is around 2-3 times the depressed profit.
A DCF (discounted cash flow) analysis assuming a growth of 7-8% and net margins of 8-10% gives an intrinsic value of around 4500. The current price is around 20% of this value

Scenario analysis
The above DCF analysis can be done with varying assumptions of growth and net margins.
If the company grows at 8% and has 8% margins during the next 7-8 years, the value is around 3900. This looks like a fairly conservative scenario for the next few years. Even with an extremely low margin of 5% for the next 7-8 years the value comes to 2000.
The above scenarios assume that 2009 and part of 2010 would be bad with net profit dropping by 50%.

conclusion
The company has been priced as if it will be out of business soon. The company is being valued at 250-300 Crs net of cash for all the fixed assets, intellectual property, customer relationships etc. In effect the market is saying that company will shut down in the next 1-2 years.
The credit crisis and subsequent recession in the textile industry is bound to impact companies like LMW. However this is part of a normal business cycle. Capital good are the first to bear the brunt of a recession. However that does not mean that the industry is heading for extinction. The pricing however seems to be pointing to that scenario

Some Q&A
I am putting some possible questions and answers which could be on your mind

Q1: The textile industry is in recession and the outlook is cloudy. Should we not wait till it becomes clear ?
The future is never completely clear. If it was clear in 2007 that the textile industry would be in recession in 2009, the stock price would not have gone up to 3000+. In 2007 the market was pricing the stock for a glorious future and now is pricing for complete disaster. The reality is always in between

Q2: The price could drop further. Should I wait for a better price?
The stock is selling at around 30-40% of intrinsic value. No one can predict how much lower it can go. I personally think bottom fishing is a waste of time. Time and energy should be spent on understanding the company, its industry and the future economics of the company than trying to get the last 10% in terms of price

Q3: All the stock analyst and gurus have sell recommendation on the stock. What makes you think you are right and all the others are wrong?
I don’t know if I am right or not. What I like are the odds. There is a high probability that the company and its stock could do well in the future. How well, I don’t know. I could be wrong too. However this is not the only stock in my portfolio. The reason for having a diversified portfolio is that I may be wrong 30-40% of the time and still do well on an overall basis. In addition the downside on the stock is protected as the company is now selling at very low valuations and is priced for disaster.

Q4: The volumes are low and stock is exhibiting weakness
Lets give the stock some horlicks 🙂 ..how does it matter if you plan to hold the stock for the long term. If the volumes are low and there is weakness, it is a good time to buy. When everything clear up, and optimisim and strenght returns it would a good time to sell.

Q5: The technicals for the stock are weak
Huh !! sorry we are from a different planet !!