Dec 21, 2023
The performance marathon
• There are several ways to skin the cat in equity markets, and not all of them are right all the time.
• The fundamentals of the Titans portfolio continue to be solid.
• If we break down the recent lag in the portfolio performance, it has primarily been because of non-participation in certain leading themes due to our quality bias.
• We believe that once the euphoria settles on the cyclicals, and PSU side, the quality side of the market will be back in focus, which will help the Titans portfolio.
• We have added a few stocks in the Titans portfolio based on our bullish view on newer themes.
The headline indices witnessed over 5% jump in the month, reversing all the losses from the month before. The mid and small cap indices continued their stupendous run, delivering 10-12% returns in the month. Buoyancy in US markets and the absence of any significant negative news helped the Indian markets do well.
There are several ways to skin the cat in equity markets, and not all of them are right all the time. The nature and character of each rally is different, and markets may favour different styles in different circumstances. For example, it would sometimes favour growth and value the other times. There are bound to be short-term portfolio lags when this happens, which sometimes puts investors on the edge. However, over a long-term horizon, most rational styles end up delivering their stated objectives.
In the Titans portfolio, our objective is to deliver less volatile, benchmark-beating returns to our investors over the long term. In the process, we focus on companies with solid businesses backed by great promoters and managements. By definition, there is a significant quality bias in our portfolio, that helps curb volatility and deliver stable returns. The approach – as any other approach – has several short-term lags when the portfolio performance suffers because of the market favouring a different style.
The current markets are favouring value, and therefore, the stocks that were typically overlooked for poor business quality have outperformed the quality pack. If we break down the recent lag in the portfolio performance, it has primarily been because of non-participation in certain leading themes due to our quality bias. Our nonparticipation in those themes has also been because of cognizance of inherent risks in the themes that are currently in favour.
This isn’t the first time it has happened in the Titans portfolio. We faced a similar situation back in 2021 when there was a similar euphoria in the markets that led to several low-quality names doing well. Here is how the performance looked back then vs. the then benchmark – NSE 200. The underperformance peaked in Jan 2021 and gradually disappeared by the end of the year.
Source: Sanctum Wealth Research
As our stated objective has been to reduce the portfolio volatility and deliver higher risk-adjusted returns, we try not to get consumed by the themes that we believe have limited shelf life. We rather focus on structural bets that put us on a wealth creation path for long-run.
This time, stock selection combined with quality bias worked well for us in the first half of the calendar year as can be seen in the portfolio’s performance till July 2023 (table below).
Source: NSE, Sanctum Wealth Research
This changed when the index continued to rise, with value taking the baton and quality languishing, which has led to a short-term lag in the portfolio performance.
Source: NSE, Sanctum Wealth Research
We believe that once the euphoria settles on the cyclicals and PSU side, the quality side of the market will be back in focus, which will help the Titans portfolio.
Financials underperforming the broader markets
Titans is a financials-heavy portfolio (28% weight), and the sector has been on the backfoot in the current market rally as most of the private banks and NBFCs have not been investor favourites in the past few months. Here is a chart showing performance of major sectors in the past four months.
Source: NSE, Sanctum Wealth Research
As the financial pack consists of the largest and most renowned financial names in the country, it’s not prudent to write off the sector because of its short-term underperformance. Fundamentally, the sector continues to be on a strong footing due to robust credit growth and clean balance sheets of lenders as well as corporates. As the earnings for the pack continue to grow and the estimates continue to be healthy, we believe that the short-term underperformance is not concerning.
Taking stock of portfolio quality
We believe that, rather than being hooked on the scoreboard comparing real-time performance, it’s prudent to have a robust process to achieve the long-term portfolio objectives. This is why we focus on picking quality companies and diversifying the portfolio well to deliver less volatile returns, trusting that, in the long term, the impetus on the process will pay off, as it has always done for patient investors.
Portfolio management is also not only about picking stocks that fit the portfolio philosophy but it’s also about tracking the performance of the underlying companies to assess their worthiness of being part of the portfolio. Essentially, market rewards companies that not only have robust businesses but are also showing decent earnings growth without compromising the quality of earnings.
While measuring earnings growth is straightforward, we measure the quality of earnings by observing how much the company has compromised on return ratios to clock that growth. Here is how the Titans portfolio stacks up against Nifty 50 and BSE500 in the last five years.
Source: ACE Equity, Sanctum Wealth Research
The Titans portfolio has outpaced both Nifty 50 and BSE 500 on the earnings front in the past five years while improving the return metrics. This not only demonstrates the solid business profile of companies in the Titans portfolio but also indicates efficient capital allocation by these companies.
Apart from performance on annual earnings, it’s also essential for the portfolio companies to post decent current earnings performance. Here is how the portfolio stacks up on recent quarter and half-year earnings growth.
Source: ACE Equity, Sanctum Wealth Research
The portfolio has seen a robust sales growth of 16.7% YoY in the quarter gone by and 14.5% YoY growth in the six months of the current year. The 26%+ EBITDA and PAT growth also demonstrates improving margins in the businesses.
It’s not only the past earnings that matter in equity investing but also how the future earnings are looking given the business conditions. The Titans portfolio companies’ earnings are expected to grow at ~23% in FY24E and 19.5% in FY25E. The numbers compare well with the Nifty 50 earnings growth of 20.2% in FY24E and 17.5% in FY25E.
Recent Portfolio Inclusions
We have made a few changes to the portfolio in the last few months to include newer themes that we believe have structural tailwinds.
• Century Textiles, through its subsidiary Birla Estates, is a play on premium housing market in major real estate clusters of the country.
• The company fits well into the housing theme that we have been positive on from the last two years.
• The company has a pipeline of Rs. 45,000 crores of gross development value and is looking to add another Rs 10,000 crore in the current year and Rs 20,000 crore in the next year.
• It will benefit from the significant demand uptick in premium and luxury housing.
• All the projects will come at decent margins of 18%+, which shall help the company post healthy return metrics going forward.
• We expect robust growth in the real estate business and a steady performance of paper and textile business that should help shore up earnings.
Interglobe Aviation Ltd.
Indigo is a play on rising consumption and improved aviation connectivity within the country.
• The company stands to gain from significant consolidation in the industry after grounding of Go Air and financial troubles in SpiceJet.
• The air passenger traffic is at record highs and price hikes are getting absorbed well in the wake of high demand and constrained capacity.
• Capacity constraints due to engine issues are also leading to high load factors.
• Fungibility on domestic and international routes leading to optimum use of existing capacity.
• Yields are also at multi-year highs and are expected to stay there due to high load factor, improved pricing, and stable crude prices.
• Deepak Nitrite (DN) is the largest producer in the phenol-acetone value chain in India with applications in multiple industries.
• India is a net importer of phenol-acetone-based derivatives, and the demand is growing by 10% per annum. DN is doubling its phenol-acetone capacity in the next three years to cater to the demand currently met by imports.
• The company is targeting Rs 750 crores of capex over FY23-27 for its existing and new products across chemistries to boost the share of value-added products in revenue.
• It is also investing in backward integration for improved supplies and margins.
• The company plans to double revenue in 3-4 years through higher sales of existing products and the expansion of the product basket (more value-added derivative products).
• The company has a good track record of executing and commercialising large projects.
Yatharth Hospitals and Trauma Care Services Ltd.
• Yathartha is a leading hospital chain in the Noida region and a top 10 player in Delhi/NCR with bed capacity of 1,400 across four hospitals.
• The company has significant scope of occupancy improvement, as its newer hospitals are less than optimally utilized. Occupancies in Greater Noida, Noida Ext. and Jhansi hospitals are 70%, 41% and 19%, respectively.
• The company is upgrading its clinical capabilities and adding specialty treatments like complex transplants, surgical robots, and oncology that should help improve case mix and margins.
• There is significant scope of improvement in medical tourism revenue, which is currently miniscule, as its Noida hospitals are near the upcoming Jewar International Airport.
• The company already has adjoining lands in its Greater Noida and Noida Ext. hospitals where it can further add 700 beds. It also targets to double its bed capacity in three years through brownfield expansion and strategic acquisitions. • Its affordable care proposition and no-frills facility enables it to have higher number of beds per hospital. Its low dependence on star doctors along with lean business model helps it keep costs under control.
The following passage from the book “Big Mistakes” by Michael Batnick aptly describes the current short-term lag of Titans portfolio.
“Making money in stock markets if difficult. Whether you are running a hedge fund or your own brokerage account, there will be times when you feel really foolish. In the event of a market downturn, this misery will be accompanied by others, but other times, you’ll be all alone on the island. You might buy a particular stock after it double only to see it head south after your purchase, or worse, you will throw in the towel on a loser only to see it double in the next two months. Sometimes it can feel as if the market gods are taunting you.”
In those times, the best thing to do is to focus on the process and not get too carried away by the noise.
On that note, here is the performance of our flagship portfolio strategies over different time periods.
The detailed performance can be viewed and compared with other PMS performances on this webpage. Performance is calculated using Time Weighted Returns, net of fees and expenses. Returns over one year are compounded annually; returns for less than one year are absolute. Please note that SEBI does not verify the performance information provided above. Please note that past performance is not a guarantee of future performance.