1100% gains from backing “disruption theme” stock
We are familiar with the stock picking prowess of Manish Bhandari, the founder of Vallum Capital.
On an earlier occasion, I peeped into the portfolio of Vallum Capital and was pleasantly surprised to find several top-quality stocks in them.
One of the stocks, Indo Count Industries, has given the portfolio a mind-boggling return of 1100% in just 18 months.
The other stocks in the portfolio are equally top-quality stocks. Though Manish has not revealed any of the names, I have been able to decipher most of them.
Second level thinking leads to mega gains
The concept of “second level thinking” has been made popular by Howard Marks, the Billionaire investment-philosopher in his memo titled “It’s Not Easy”.
Howard Marks advises that investors have to learn to see beyond what is obvious. He has given specific examples to illustrate the differences between “first level thinking” and “second level thinking”:
(i) First-level thinking says, “It’s a good company; let’s buy the stock.” Second-level thinking says, “It’s a good company, but everyone thinks it’s a great company, and it’s not. So the stock’s overrated and overpriced; let’s sell.”
(ii) First-level thinking says, “The outlook calls for low growth and rising inflation. Let’s dump our stocks.” Second-level thinking says, “The outlook stinks, but everyone else is selling in panic. Buy!”
(iii) First-level thinking says, “I think the company’s earnings will fall; sell.” Second level thinking says, “I think the company’s earnings will fall far less than people expect, and the pleasant surprise will lift the stock; buy.”
First-level thinking is simplistic and superficial, and just about everyone can do it (a bad sign for anything involving an attempt at superiority). All the first-level thinker needs is an opinion about the future, as in, “The outlook for the company is favorable, meaning the stock will go up.”
India’s poor financial condition created opportunity for second-level thinkers
Durgesh Shah, a leading investment-philosopher, gave an example of “second level thinking” in the macro Indian context.
He explained that there was a time in the 1990s when the Country was in such a dire financial condition that the Gold reserves had to be pledged with foreign countries so as to raise funds. This desperate step had to be taken as otherwise the Country would have defaulted on its sovereign obligations (see Two months that changed India).
Some second-level thinkers correctly figured out that the Country had its back to the Wall and that the only way out was to liberalize and invite foreign capital into the Country. This led to the great boom in the stock markets and created enormous wealth for the entire Country and everyone around it.
Second level thinking led to mega gains from AirBNB’s disruption theme
Manish has explained how his brilliant “second level thinking” helped him home in on Indo Count Industries.
Manish noticed that AirBNB was disrupting the hotel sector by enabling tourists to find top-quality accommodation at rock-bottom prices. He realized that the boom in AirBNB’s business means that there would automatically be a boom in the companies supplying to AirBNB, such as Indo Count which supplies bed and bath linen.
Mohnish Pabrai and Guy Spier use second level thinking to buy CRISIL
In his latest talk on how to find 10-bagger and 100-bagger stocks, Mohnish Pabrai gave an example of how Guy Spier homed in on CRISIL and pocketed multibagger gains from it.
Guy Spier noted that credit rating agencies like Moody’s in Western Countries were making money hand over fist. He rationalized that credit rating agencies in third World countries like India would enjoy the same success as Moody’s and so he bought a truckload of CRISIL, which was and is the premier rating agency in India.
Needless to say, heavy multibagger gains effortlessly flowed into the portfolio of Guy Spier.
Time is ripe to buy “branded fabric” stocks
Now, the most important aspect is that Manish Bhandri has sent out a buy call for stocks in the “branded fabric” sector.
He explained that the market is presently “too obsessed” with the ready-made garments sector and that it has “overlooked” the fabric industry which is the tier II, tier III and tier IV of India.
He explained that a decade back there used to be close to 10 brands. Today, there are hardly two of them sitting in the pole position.
Two stocks in “pole position”
Ramesh Damani prompted, to which Manish Bhandari agreed, that Raymond and Siyaram Silk Mills are the two stocks that are in the “pole position” in the “branded fabric” sector.
Manish emphasized that the pole position in which Raymond and Siyaram Silk Mills are in gives them a very good advantage, whenever the industry revival happens, to gain market share, capture the pricing etc.
Siyaram Silk Mills – Favourite stock of Dolly Khanna and Sunil Singhania
When I peeped into the list of shareholders of Siyaram Silk Mills, I got the shock of my life to see Dolly Khanna, our all-time favourite wizard, sitting pretty in it.
Dolly Khanna holds 51,270 shares of Siyaram Silk Mills as of 31st March 2016. Her present holding is not known.
Dolly is in the distinguished company of Kanchan Sunil Singhania (presumably related to Sunil Singhania of Reliance Mutual Fund).
In addition, DSP Blackrock Micro Cap Fund (which is managed by Vinit Sambre) and Reliance Small Cap Fund (which is managed by Sunil Singhania) are major shareholders of Siyaram Silk Mills.
Raymond – Recommended by Ajay Jaiswal of Stewart & Mackertich
Ajay Jaiswal and his ace team at Stewart & Mackertich have recommended a buy of Raymond as part of their best stocks to buy for 2017. Let’s look at the core logic:
The company is finally coming out of a decade long non-performance across segments like branded textiles, shirting, garmenting, denims & branded apparel businesses, auto components tools
Readymades is the trend
Raymond has aggressively responded to the market and has created strong brands like Park Avenue, Parx, Colorplus, Made To Measure in the readymade segment. The business has grown to 1200 crores and is gaining further scale. On the other hand, its core business of branded textile fabrics is growing steadily and is cash cow with 19% EBIDTA margins.
Tactical buying of cotton to prevent impact in performance
With the rise in cotton price movement due to lower crop production and higher cotton export, there has been 35% hike in branded apparel. The company made strategic relationships with the vendors for cotton. Also, the company is in B2B business and therefore, they got a lot of cotton procurement which is negotiated with the vendors on contract.
Scale up of capacity
The company has 1044 stores as on date, and plans to take it to 1500 by 2020. Store count at the end of FY 2014‐15 was 1003, and did net store addition of around 41 in 2015‐16. After re‐novation / rebranding, same store sales growth has increased 20%.
Leading brands to grow significantly
It is expected that Park Avenue brand may grow significantly in future, as the initiative of the management is to increase market share in the segment. The branded apparel market is likely to grow at more than 18% CAGR over the next 4‐5 years.
Considering restructuring exercise in the company, we assign a P/E of 24x to its FY18E earnings and arrive at a TP of INR814.
Dolly Khanna and other eminent wizards load up on other fabric stocks as well
In earlier pieces, I have expressed surprise as to why all the eminent investors ranging from Dolly Khanna, Billionaire Narayana Murthy, Ashish Kacholia, Renuka Ramnath, Prof Sanjay Bakshi are making a beeline for textile and fabric stocks like Nandan Denim, Nitin Spinners, RSWM, Sutlej Textiles, KPR Mills, Arvind, Ambika Cotton etc.
My uneducated guess is that these eminent wizards are banking on the same theme as Ramesh Damani and Manish Bhandari, namely, the entire textile sector is emerging out of a cyclical slowdown and that mega gains can be harvested from them in due course of time.
Novice investors like you and me cannot ignore the words of wisdom spoken by Ramesh Damani and Manish Bhandari, especially when it has the endorsement of all the other eminent stock wizards. We need to urgently tuck into top-quality fabric and textile stocks and prepare for mega gains to gush into our portfolios!