I haven’t studied it in detail. At first glance, it looks like margins will normalise to the 18-20% range with prices of cotton coming off. Seccondly, the last two years have seen higher than average asset turns.
In the absence of known capex triggers, what do you think the optionalities are?
There are a number of companies in my portfolio that I’ve bought mid-cycle that are not objectively cheap. Fluorochem, KPI Green, Shivalik, arguably even Krsnaa. For all of these, I’d like to be more strict with weights and exits once I think incremental risk reward is unfavourable.
For Shivalik, if they can do 1600 Cr. of revenue in 5 years, it’ll be around 230 Cr. of PAT. From these valuations, my expectation is around 15-20% IRRs if they execute. It’s a phenomenal business and they’ll probably have more triggers with time. From here, if there’s ever an unfavourable turn in the cycle, I’d love to buy back in closer to starting valuations of 20-25 times.
In the family portfolio, companies like TCS and Infy showed a CAGR of 17% (without dividends) during the peak valuations last year, and post the de-rating in IT, it looks closer to 14% after 20 years. My current mindset is that holding for a longer period without churn works if companies are at really cheap starting valuations. RACL was at a PE of 3-4 during 2020, Shivalik was at a PE of below 10 in 2019. If I owned either from those valuations, I wouldn’t sell right now.
My thesis in Ugro is that it’s quite cheap for the business model that they’ve built, and in my view, it is as cheap today as RACL and Shivalik were in the past. If they can execute and prove themselves on asset quality, if RBI continues to have a favourable view towards co-lending, and there isn’t a blackswan event in MSME lending, a business that can generate 5% RoA at scale shouldn’t trade at book value.
In all my other holdings, if valuations run far ahead of earnings, I’ll reconsider my weights in them as things progress.
I could be very wrong. 
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