From DSP

Thank you, 2021 (#052)

“If someone had to write a biography on your life, 2021 was the year when you went from 0 to 1.”

said a friend who works with one of the biggest fund houses in this country.

“It’s been three weeks since I got something to read from you. If this does not tell you something about the power of your content, nothing will.”

said a senior journalist working with one of the largest business media houses.

I could go on and on but the short point that I wish to make through this newsletter is Thank you! Thank you, 2021!

You see, it has been such a tough year for so many people all around us – physically, emotionally, mentally and financially.

It is often in the toughest times, a ray of light gives us hope, hope to see ahead and hope to look further to what brighter things are forthcoming in our journey to greatness.

Also, a quote that I have lived by in dealing with adversity for almost a decade now is from one of my favourite books, The Hard Things about Hard Things by Ben Horowitz is –

Nobody Cares

You could be in the worst of your times or the best of your times – The truth is simple, Nobody Cares!

This quote has particularly helped me in dealing with adversity with a tremendous amount of strength and never let me lose focus on what the road ahead entails.

So, what are we going to talk about today?

At first I am going to talk about how this year made me have a super hard look on how we take our health for granted, following on to what were some of the biggest misses this year and finally some great picks that may have compensated for returns that can be potentially made in 2-3 years!

So grab a cup of coffee as I take you through a different lens for 2021.

Last year while I put my papers after working for almost 4 years in one of the country’s biggest conglomerates and also the most favourite stock in India, ITC Limited, I was looking forward to my new gig at Phillip Morris International.

It was June 2020 and I was super excited to be back home and be close with my parents to work in this new phase of my life. Little did I know what was coming ahead.

My dad’s Diabetes apparently had spiralled a little out of control failing his kidneys alongside other collateral damage – eye vision weakening, varicose veins, Obstructive Sleep Apnea (OSA). While an erstwhile stroke had made him quit tobacco, diabetes went out of control.

By this time, I had already been writing quite actively on LinkedIn, Twitter & Quora and had also decided to give content a shot as a full-time thing. An inspiration that I drew largely from Ankur Warikoo and Vaibhav Sisinty.

Secondly, PMI wanted me to be in Delhi full time which felt a little uncomfortable given the Covid scenario alongside health concerns around my dad.

The best part – I also had a buy-in from my dad on this to pursue this!

At this point, I received a cold call on my LinkedIn inbox – wherein I could manage a fund, get a carry and also get to continue writing content. This sounded too good to be true and I really didn’t think it was worth a meeting in the first place.

For some reason, my dad seemed quite adamant to make me go and have a conversation with the sender of this message. Next thing I knew – I ended up being at Tusk Investments after putting my papers at PMI.

So ITC → Phillip Morris International → Tusk Investments

All within a span of less than a year.

This is exactly what my friend was trying to refer to in the very first quote of this article.

While at one end I was super happy dealing with the new transformation at work, on the other end I almost ended up being at the hospital every 3-4 months due to some health complication w.r.t. my dad’s newly diagnosed kidney failure.

While it took a massive toll mentally and emotionally the spirit never died down.

In fact, in one of the instances my father was on the ventilator for two days – I almost thought I had lost him. This was right at the peak of the 2nd wave.

After two days of anxiety and uncertainty, I got a call on my mobile phone from an unknown number –

“Beta Nifty kitna band hua aaj?”

“What? Who is this?”

“Arrey, papa bol raha hai – HDFC Bank kya bhao band hua aaj?”

English translation.

“Son, where did Nifty close?”

“It’s me, your dad – at what price did HDFC Bank close?”

And that’s when I knew – he is going to make it.

Over time we learnt to live with things that happened around his health – water intake cannot go beyond 700ml, 3 gms of salt, no dry fruits etc. to name a few.

Having kidney failure entails you need to get dialysis done – a process that filters your entire body’s blood through a machine with needles inserted in your arm almost thrice a week.

While it’s been close to year and a half of my dad undergoing dialysis, I can be content and say that he’s fit and healthy and is doing much better.

Not a day goes by when we don’t talk things all the way from stocks, politics, life and happiness.

The lesson – Do not take anything for granted, especially your health. Always appreciate what you have and be grateful.

Oh, and always listen to your dad at some level.

Time for some stock-specific learnings – The Ugly 💉💊

If 2020 and 2021 taught us something – Pharma Companies make a killing.

Well, there is always a problem with making generic statements like these. Within the pharmaceutical bucket, there were specific pockets that exploded and there were specific pockets that went to 0.

While I was super proud to identify companies like Solara Active Pharma Sciences, Sequent Scientific, Laurus Labs, Strides Pharma, Divis Labs, Natco Pharma quite early, there were specific triggers not keeping a tab on which later proved to be fatal.

While all Pharma investments did not turn sour, investments in Strides Pharma and Sequent require special mention.

Let’s start with Strides.

My initial thesis for investing in Strides was as under –

If you remember, this was earlier called Strides Arcolab then Strides Shashun and now Strides Pharma.

Why now?

Stelis Biopharma is within the company and will be get demerged by the end of this financial year.

What is Stelis?

Biopharma and CDMO operations – due to deliver 400 mn jabs by October 21 of Sputnik V. Secondly, it is important to understand that they have the second highest installed capacity after SII.

Aditya Puri is on board (may get in Carlyle later as Carlyle is the owner of Sequent, the erstwhile demerger that took place earlier alongside Solara)

Stelis has 0 revenues and is already valued at 2600 cr. as per their last funding round.

Typically Biopharma companies are valued at 10x Price to sales. My sense is they do 500/1000 cr. in 3 years and get that valuation.

Third trigger

Strides sold Injectibles business to Mylan for USD 1.6 bn back in 2013.

Their non compete expired in 2019 and incorporated a new company – Strides Steriscience.

Management will invest 250 cr. With 150 cr. Of debt – total 400 cr. And follow an asset light model.

I saw the list of directors – Ankur Thadani is already on board (TPG capital Mumbai partner) – he led rounds in Solara when it was at 234 at 456.

Apart from these two triggers, Strides underlying business has now gained momentum and should fire on all fronts.

Sounds too good, right?

Let’s say I almost ended up putting close to USD 1.5 mn in a levered position.

The result?

Did I lose 43%?

Took a 10% hit and got out since it was levered.

So what did not work?

The underlying US business basically bowed down on all fronts, Sputnik V contract got delayed, no clarity on Stelis demerger (till now).

The Lesson – No matter how good an investment thesis is, always have a mental stop loss in your head. If your investments do not let you sleep at night, it is probably too expensive for your peace.

Now for Sequent, I think Manish Gupta from Solidarity Investment Managers described it best – his entry and his exit.

Now, for me – my exit was broadly because of three reasons (nothing to do with valuations)

  1. Turkey which makes ~20% of the market was going through massive geo-political uncertainty
  2. Q1 and Q2 was not giving a clear picture of how the full year was going to look ahead
  3. While there was some visibility on Q1 for the management in the Q4 earnings con-call (because SEBI allowed companies to publish results with a slight delay in their time frame), the guidance seemed a little mis-guided

My exit was somewhere around 150-155 odd levels. In fact, whenever a stock corrects 50-60% and I still continue to hold it, there is always a fundamental question in my head.

Should I double-up my position?

If the answer is not a resounding yes, it is time to sell.

In fact, this is also broadly inspired by Mr. Manoj Bhargava where he always asks his investee companies – “Is this idea Slam Dunk?”

The Good 🎵🚗

If you go through the webinar series we have covered, you will find multiple stocks that went into the three digit club i.e. returns of over 100%+ both in the short and the longer time frame.

In fact some stocks (which I still continue to hold) also are sitting currently at returns of 200% / 300%+

Many Ideas worked superbly well – Info Edge, Saregama, Tips Industries, Tata Motors DVR, TV Today, Ashok Leyland, Pidilite, Titan to name a few.

So, is any newsletter complete without talking about music?

Let’s discuss that first today.

Investing in Saregama and Tips was actually a culmination of research work for almost 6 months.

The way we were consuming media, it was disproportionately changing – in fact it wouldn’t be an overstatement if I say –

“We now live lives when we are not seeing our phone screens!”

Obviously, the best bet I could make to play this trend was Meta Inc. (which I indirectly do now through the FANG+, sorry the MANG+ ETF) but closer home you needed something in the second or third order if not the first order.

I have been a fan of music since a very young age, played multiple instruments, been in bands and also done everything from recording a song, pirating a song and also streaming a song.

What was increasingly becoming more clear was that Music streaming is here to stay and record labels will continue to mint money provided they keep curating great content.

Another advantage was for folks already sitting on catalogues of IPs – they could just license incrementally without investing much in content.

Did I catch this trend very early? Probably, Probably not.

Am I happy with investing my money? Of course!

The second investment that I am going to be talking about is Tata Motors DVR.

Contrary to what people think, Tata Motors has never been about the domestic business.

78% of their sales comes from JLR. While JLR has had it’s fair share of troubles – most of it felt like bottoming out.

I can’t think of a brand in SUV which can come even remotely close to LR. As far as Jaguar is concerned, they have plans to go all electric sooner than later.

Secondly, the Commercial Vehicle (CV) business of TAMO is ~15% of the topline. The closest competitor in India, Ashok Leyland is 1/5th the size of TAMO.

Finally, the most interesting part of their overall business – the passenger vehicle business or the PV business.

For years everyone had discounted this given their fiascos with Indica, Indigo and Tata Nano.

So what changed?

For starters, we finally saw superb products coming in with impeccable safety ratings and a great driving experience.

While everyone was sitting on the sidelines waiting for someone to move first, TAMO really took on themselves to build the EV ecosystem in India – charging stations, great products and superb affordability.

You open any sell-side analyst report and no one would have given any value to this business.

Mind you, if we are talking 100 rupees of sales for TAMO – 78 was JLR, 15 was CV, 7 was PV of which EV was probably 0.2.

Then came the announcement on 12th October, 2021 – valuing this 0.2 at ~80,000 cr. This almost ended up adding 80% value to the existing market cap of the company in less than a week valuing it at ~1,80,000 cr.

Concluding Thoughts

Through the process of writing and sharing whatever I find insightful, I feel grateful to a carefully curated community of mentors, learners and partners I have been able to meet.

Every year is going to be different and one should always be humbled and strive to Hustle Hard.

As long as we accept there is no end to learning, we will continue to strive for excellence.

Thank you for taking the time to read this! If you have any thoughts or feedback you wish to share with me, you can always reply to this e-mail 🙂

Thank you from the bottom of my heart ❤️

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About the author

Saket Mehrotra

Full-time Fund Manager | Sensex Follower since '09 | Free + Premium insights at Beta to Alpha & Alpha Swing | CA, CS
Senior Associate - Equities at Tusk Investments. Ex - PMI, ITC.

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