Parag Parikh’s PPFAS Mutual Fund appears to have undertaken a spring cleaning exercise in November 2014. As many as three stocks were unceremoniously shown the door while an equal number were ushered in.
One surprising casualty of the cleaning exercise is J&K Bank. Given Parag Parikh’s credentials as a value investor, one would have expected him to load up on J&K Bank given the extreme distress that it is facing owing to the NPA scandal and the tragic floods in J&K. I reported earlier that even CRISIL has downgraded the Bank’s rating.
To remind you, Mohnish Pabrai has invested a fortune in J&K Bank because he regards it as a “value pick”.
Two other exits are The Ramco Cements and Navneet Publications. In both stocks, PPFAS has made a tidy profit. Ramco was purchased in March 2014 while Navneet was purchased in May 2014. While Ramco has given a return of 67%, Navneet has given a return of 61% (assuming the purchases were in the middle of the month).
As to the reasons for the sale, Parag Parikh appears to have got jittery about the valuations. While The Ramco Cements is quoting at a P/E of 44.58, Navneet is at a P/E of 17.88.
The three stocks that have been ushered into the portfolio are IPCA Laboratories, HDFC Bank and Persistent Systems.
IPCA Laboratories is a no-brainer. I have written extensively about how IPCA has become the value investors’ favourite stock because it offers the best balance of risk vs. reward. You can read the piece on advice by Sanjoy Bhattacharyya and Saurabh Mukherjea to come to grips with IPCA’s potential.
HDFC Bank replaces the void left by J&K Bank. However, the question is whether Parag Parikh should have chosen a mid-cap bank like Federal Bank or South Indian Bank (as Mohnish Pabrai did) instead of a behemoth like HDFC Bank.
While there is no doubting HDFC Bank’s stature as a blue chip, mid-cap banks (and NBFCs) will probably offer better bang for the buck when the interest cuts happen.
Also, the portfolio already has two bank behemoth stocks in ICICI Bank and Axis Bank (apart from Standard Chartered PLC IDR). What is the point in adding one more behemoth?
Persistent Systems is also an odd choice, especially for a value investor. The brokerages appear to be unanimous that the stock is overvalued. After the mediocre Q2FY15 results, ICICIdirect has recommended a “Hold” on the basis that “Lofty valuations weigh on sound fundamentals”. Dolat Capital recommended a “Reduce” on the basis that the stock is an “underperformer”. Emkay recommended a “Sell” with the caption “Yet another quarter of disappointment”.
Parag Parikh has obviously chosen to be a contrarian and gone against popular opinion in buying Persistent Systems.
One stock that deserves the guillotine but which is the apple of Parag Parikh’s eyes is Mphasis. Ever since HP took over Mphasis, Parag Parikh has been dreaming that Mphasis will be flooded with billion dollar deals from its parent. However, the reverse has happened. HP has clipped Mphasis’ margins and sent the latter’s fortunes into a tailspin.
Can you believe that in this raging bull market, Mphasis has given absolutely no returns in the last one, two, three, four or even five years? Its five year return (since 01.12.2009) is (-40%).
The question is how long can one tolerate this sorry state of affairs and what about the opportunity cost for the funds (Rs. 14.69 Cr) sunk into the stock. If that money had been invested in some other mid-cap stock, it would be have doubled or even quadrupled in this bull market.
Anyway, the top three holdings of the fund are Google (8.88%), Maharashtra Scooters (7.91%) and Axis Bank (7.02%).
The top 10 equity holdings comprise 60.01 % of the core portfolio. The top three sectors – banks, finance companies and internet companies – comprise 34.39 % of the portfolio.
Also, as at the end of the Month, 67.01 % of the portfolio is invested in Indian equities & 25.22 % is invested in foreign equities. The balance is kept in cash Equivalents.