It has been a good market for smallcaps for the past 15 months so my portfolio has soared. Even the passive defensive portfolio I run has not done that badly(beat the mkt by 50%!). So I guess it’s time to relook at my stocks and figure out if some of them discount too much of the future. This is particularly important as the slowdown in India seems structural and will likely match if not exceed the one we witnessed in the late 1990’s. Only when faced with dire circumstances will our political machinery awake from it’s self induced slumber !

I’m still keenly looking into small companies in niche sectors that can grow in a slow growing economy. That policy worked for me in 2012 – Kajaria Ceramics, Kaveri Seeds, Mayur Uniquoters, Indag Rubber, Ajanta Pharma, Supreme Industries & Heritage Foods were the key portfolio drivers. Smaller financials like ING Vysya and SCUFL were on song too as the stock market sensed that rates were going to be cut. While many of these names are still likely to do well it’s important to not be complacent & keep looking at alternates. Over the past yr I did book out of some stocks like Sadbhav Engineering(slow execution), Supreme Infra(slowdown in new orders), Thangamayil Jewelery(rapid increase in debt), Dewan Housing(probable corporate governance issues in group companies), Carborundum/Tube Investments/ Setco Auto(end of cycle) and Indag Rubber(end of operating leverage ?).

I missed the cement boom over the last 12 months. Stocks that were on my watchlist did very well(Shree Cement, JK Lakshmi) but I couldn’t participate in the rally. Still trying to figure out if that sector has more steam left. My top cement picks at this point would be Madras Cement, JK Cement & JK Lakshmi Cement. Also would love to buy Shree Cement at 10-15% lower prices. Still no sign of any revival in commercial real estate/infrastructure spend so Greaves Cotton, Blue Star, Sanghvi Movers & Ratnamani which are now significant players in their niches continue to be subdued. Maybe the bounce will be in FY15 and not FY 14 as expected earlier. I might look to re-enter these stocks along with the likes of Sadbhav, Supreme Infra and MBL Infra over the next 15-18 months on suitable declines. Other interesting smallcap stocks that I’m currently accumulating are Cera Sanitaryware, Fluidomat, Rapicut Carbides, Kovai Medical and Manjushree Technopak. Depending on how they cope with the slowdown I’ll increase their portfolio weights gradually.

On the whole my investment process continues to be the same. I’m trying to allocate higher weights to my top ideas and be more selective. Maybe not increase no. of stocks beyond 25 unless we see a big revival in the economy(like 2004-05) that results in a lot of sectors booming. My active portfolio now has 14 stocks while the passive one has 23(to likely increase to 25). One of my oft repeated mistakes has been to book out of growth stocks after a rapid rise/one bad quarter(e.g Ajanta Pharma, Cera & V-Guard) Maybe it’s an indication that I need to be more clear at the outset about my investment rationale & have more conviction in the business. At times you do get the chance to get back at lower levels but I need to be more decisive. Most times I don’t change my stance while the initial assumptions made while exiting might turn out false in hindsight.

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