"Forever is a good holding period."
– Warren Buffett
Over the years, we have developed various portfolio constructions for investors based on their outlook. We have summarised these below:
‘Good and Clean’ (G&C): We began this portfolio in 2011. The G&C portfolios are constructed each quarter using: (i) a battery of financial tests based on the previous fiscal year’s data; and (ii) our forensic accounting model. Each G&C portfolio typically runs for a quarter before we revise it. Thus, we believe this portfolio is ideal for investors aiming to beat benchmarks over the short term. The methodology is:
Within each sector, we first identify firms that do well on our ‘greatness’ and
‘accounting’ frameworks;
We then overlay our macro outlook and valuation filters to identify sectors which are placed favourably; and
The sector-level champions from step 1 (for the sectors identified in step 2) constitute our G&C portfolio.
Please click here for the latest G&C portfolio published on September 02, 2015.
Ten-bagger: We first unveiled this portfolio - built using our ‘greatness’ framework - in January 2012. (See our 19
thJanuary 2012 note - ‘Tomorrow’s ten baggers’ - for the framework behind this construct note; click here for the note.) This framework studies a firm’s structural strengths by focusing not on absolutes but rather on improvements over a period of time and the consistency of those improvements.
A basic sketch of the underlying process behind the making of a great firm has been recaptured in Exhibit below.
Exhibit 33: The ‘greatness’ framework
Source: Ambit Capital Research
We rank the BSE500 universe of firms (excluding financial services firms and excluding firms with insufficient data) on our ’greatness‘ score, which consists of six equally weighted headings – investments, conversion to sales, pricing discipline, balance sheet discipline, cash generation and EPS improvement, and return ratio improvement. Under each of these six headings, we further look at two kinds of improvements:
Our G&C portfolio is ideal for investors aiming to beat
benchmarks over the short term
The ten-bagger framework studies a firm's structural strength and focuses on improvements over a period of time and the consistency of those improvements
b. Conversion of investment to sales (asset
turnover, sales)
c. Pricing discipline (PBIT margin)
d. Balance sheet discipline (D/E, cash ratio) a. Investment (gross
block)
e. Cash generation (CFO)
Percentage improvements in performance over FY14-16 vs FY11-13; and
Consistency in performance over FY11-16 i.e. improvements adjusted for underlying volatility in financial data
A complete list of factors that are considered whilst quantifying greatness has been mentioned in Exhibit below.
Exhibit 34: Factors used for quantifying greatness
Head Criteria
1 Investments a. Above-median gross block increase (FY14-16 over FY11-13)*
b. Above-median gross block increase to standard deviation 2 Conversion to sales a. Improvement in asset turnover (FY14-16 over FY11-13)*
b. Positive improvement in asset turnover adjusted for standard deviation
c. Above-median sales increase (FY14-16 over FY11-13)*
d. Above-median sales increase to standard deviation
3 Pricing discipline a. Above-median PBIT margin increase FY14-16 over FY11-13)*
b. Above-median PBIT margin increase to standard deviation 4 Balance sheet discipline a. Below-median debt-equity decline (FY14-16 over FY11-13)*
b. Below-median debt-equity decline to standard deviation c. Above-median cash ratio increase (FY14-16 over FY11-13)*
d. Above-median cash ratio increase to standard deviation 5 Cash generation and
PAT improvement a. Above-median CFO increase (FY14-16 over FY11-13)*
b. Above-median CFO increase to standard deviation c. Above-median adj. PAT increase (FY14-16 over FY11-13)*
d. Above-median adj. PAT increase to standard deviation 6 Return ratio improvement a. Improvement in RoE (FY14-16 over FY11-13)*
b. Positive improvement in RoE adjusted for standard deviation c. Improvement in RoCE (FY14-16 over FY11-13)*
d. Positive improvement in RoCE adjusted for standard deviation Source: Ambit Capital research; Note: * Rather than comparing one annual endpoint to another annual endpoint (say, FY11 to FY16), we prefer to average the data out over FY11-13 and compare that to the averaged data over FY14-16. This gives a more consistent picture of performance (as opposed to simply comparing FY11 to FY16).
The ten-bagger portfolio focuses on structural plays that are financially strong firms (with credible management teams) and remain consistent performers on a cross-cyclical basis. Companies are identified based on their relentless improvement in financial performance over long periods of time (usually, six years). This portfolio is ideal for conventional buy-and-hold investors with a 1-3 year horizon.
Adding the Coffee Can for long-term investors with a ten-year outlook
To this suite of portfolios, we now add the Coffee Can which is ideal for long-term investors with a ten-year outlook. In the table below, we summarise our portfolio recommendations for investors.
Exhibit 35: Our suite of Portfolios for investors looking to invest in India
Type of Investor Recommended Ambit
Portfolio
Returns over recommended time period
Short-term investor with quarterly
performance focus Good and Clean Portfolio
The 19 instalments of our ‘Good &
Clean’ portfolios over the last six years have delivered a staggering 3.1% alpha on a CAGR basis
Conventional buy-and-hold
investor with 1-3 year horizon Ten-Bagger Portfolio
The six iterations of our ten-baggers portfolios have generated over 10.7%
alpha over the past six years Long-term investor with ten-year
outlook Coffee Can Portfolio Average alpha of 8.6% over eight- to ten-year iterations
Source: Ambit Capital Research
The Coffee Can Portfolio is ideal for long-term investors with a ten-year outlook
Appendix 2: Performance of last 14 back tested Coffee Can portfolios
Period 1: 2000-2010 (6.6% alpha relative to the Sensex; 22.6% per annum absolute returns)
All-cap portfolio stocks: NIIT, Cipla, Hero MotoCorp, Swaraj Engines, HDFC Large-cap portfolio stocks: NIIT, Cipla, Hero MotoCorp, HDFC
In the first iteration, both versions of the CCP outperformed the benchmark. Whilst the all-cap CCP delivered a 22.6% return (6.6% alpha to the Sensex), the large-cap portfolio delivered a 20.6% return (7.6% alpha to the Sensex). The maximum drawdown for both the portfolios in this period was also less than the maximum drawdown for the Sensex.
Exhibit 36: First iteration summary
2000-2010* All-cap CCP Large-cap CCP Sensex
CAGR returns 22.6% 23.6% 16.0%
Maximum drawdown** -35% -30% -56%
Excess returns 0.42 0.53 0.14 Source: Bloomberg, Ambit Capital research. Note: * Portfolio kicks off on 30 June 2000. Excess returns have been calculated as returns in excess of risk-free rate (assumed to be 8%) divided by absolute maximum drawdown.
Maximum drawdown is defined as the maximum drop in cumulative returns from the highest peak to the lowest subsequent trough. ** Maximum drawdown took place from December 2007 to December 2008 for the all-cap CCP, large-cap CCP and for the Sensex.
The five stocks that constituted the first iteration of the Coffee Can Portfolio consisted of one IT company, one pharma company, one BFSI company and two companies from the automobile/auto-ancillary sector. These were NIIT, Cipla, Hero MotoCorp HDFC Ltd and Swaraj Engines. The star performers during this period were Hero MotoCorp and HDFC which proved to be a ten-bagger whilst NIIT collapsed ~74% in this period.
Exhibit 37: Portfolio performance during the first iteration
Company Value at start
(Rs)
Value at end
(Rs) Total return CAGR
Date from/to 30-Jun-00 30-Jun-10
NIIT 100 26 -13%
Cipla 100 531 18%
Hero Motocorp 100 1,499 31%
Swaraj Engines 100 493 17%
H D F C 100 1,283 29%
Portfolio 500 3,831 23%
Sensex 100 441 16%
Outperformance 6.6%
Source: Bloomberg, Ambit Capital research. Note: *Portfolio price at the start of Rs500 denotes an equal allocation of Rs100 in each stock at the start of the period. Portfolio price at the end is the value of the portfolio at the end of the period. Thus, for this period, the value of the portfolio rose from Rs500 at the start to Rs3,831 at the end.
Hero Motocorp and HDFC were
the star performers, whilst NIIT was
the laggard in Period 1
Exhibit 38: Hero and HDFC rose exponentially whilst NIIT collapsed in 2000-2010
Source: Bloomberg, Ambit Capital research. Note: Value at the start denotes an equal allocation of Rs100 in each stock at the start of the period. Value at the end is the value of each stock at the end of the period. Thus, for this period, the value of the portfolio rose from Rs500 at the start to Rs3,831 at the end.
Period 2: 2001-2011 (11.7% alpha relative to the Sensex; 32.2% per annum absolute returns)
All-cap portfolio stocks: Cipla, Hero MotoCorp, Apollo Hospitals, Roofit Industries, HDFC Ltd and LIC Housing Finance
Large-cap portfolio stocks: Cipla, Hero MotoCorp and HDFC Ltd
Both versions of the CCP performed well during the second iteration as well, beating the Sensex. The all-cap and large-cap CCP gave an impressive alpha of 11.7% and 7.8% respectively for this iteration. The portfolio was remarkably steady as compared to the maximum drawdown, delivering an excess return of 0.66-0.72x.
Exhibit 39: Second iteration summary
2001-2011* All-cap CCP Large-cap CCP Sensex
CAGR returns 32.2% 28.3% 20.5%
Maximum drawdown** -34% -31% -56%
Excess returns 0.72 0.66 0.23 Source: Bloomberg, Ambit Capital research. Note: * Portfolio kicks off on 29 June 2001. Excess returns have been calculated as returns in excess of risk-free rate (assumed to be 8%) divided by absolute maximum drawdown.
Maximum drawdown is defined as the maximum drop in cumulative returns from the highest peak to the lowest subsequent trough. ** Maximum drawdown took place from December 2007 to November 2008 for the all-cap CCP and the large-cap CCP and December 2007 to February 2009 for the Sensex.
During the second iteration, the Coffee Can Portfolio consisted of six stocks with three repeats (Cipla, Hero MotoCorp and HDFC from Period 1) and three new entries (Apollo Hospitals, Roofit Industries and LIC Housing Finance). During this period, note that one of the stocks in the portfolio, Roofit Industries, was delisted during 2001-2011. Despite this, the portfolio performed admirably. The star performer was LIC Housing Finance that delivered 46.7x returns whilst Cipla was a laggard at 3.0x.
Exhibit 40: Portfolio performance during the second iteration
Company Value at start
(Rs)
Value at end
(Rs) Total return CAGR
Date from/to 30-Jun-01 30-Jun-11
Cipla 100 396 15%
Source: Bloomberg, Ambit Capital research. Note: Value at start denotes an equal allocation of Rs100 in each stock at the start of the period. Value at end is the value of each stock at the end of the period. Thus, for this period, the value of the portfolio rose from Rs600 at the start to Rs9,802 at the end.
Value at start Vaue at end Value of stock in portfolio (in Rs)
LIC Housing Finance was the star performer delivering ~47x total returns in Period 2
Exhibit 41: LIC Housing Finance’s performance during 2001-2011 was stellar
Source: Bloomberg, Ambit Capital research. Note: Value at the start denotes an equal allocation of Rs100 in each stock at the start of the period. Value at the end is the value of each stock at the end of the period. Thus, for this period, the value of the portfolio rose from Rs600 at the start to Rs9,802 at the end.
Period 3: 2002-2012 (5.1% alpha to the Sensex; 25.4%
per annum absolute returns)
All-cap portfolio stocks: Infosys, Hero MotoCorp, Cipla, Container Corporation of India, Gujarat Gas, Aurobindo Pharma, HDFC Ltd and LIC Housing Finance Large-cap portfolio stocks: Infosys, Hero MotoCorp, Cipla, Container Corporation of India, HDFC Ltd
During the third iteration, the Coffee Can delivered an alpha of 5.1% whilst the large-cap Coffee Can delivered an alpha of 3.3%. Both versions of the Coffee Can performed well during maximum drawdown as well, delivering excess returns of 0.43x-0.49x.
Exhibit 42: Third iteration summary
2002-2012* All-cap CCP Large-cap CCP Sensex
CAGR returns 25.4% 23.7% 20.3%
Maximum drawdown** -41% -32% -56%
Excess returns 0.43 0.49 0.22 Source: Bloomberg, Ambit Capital research. Note: * Portfolio kicks off on 28 June 2002. Excess returns have been calculated as returns in excess of risk-free rate (assumed to be 8%) divided by absolute maximum drawdown.
Maximum drawdown is defined as the maximum drop in cumulative returns from the highest peak to the lowest subsequent trough. ** Maximum drawdown took place from December 2007 to November 2008 for the all-cap CCP, December 2007 to December 2008 for the large-cap CCP and December 2007 to February 2009 for the Sensex.
The number of stocks making it to the 2002 edition of the Coffee Can Portfolio was much higher than the previous two iterations. A total of eight stocks qualified to be part of the Coffee Can Portfolio in the third iteration. Cipla, Hero MotoCorp, HDFC Ltd and LIC Housing were repeated yet again whilst the other four stocks were Infosys, Container Corporation, Gujarat Gas and Aurobindo Pharma.
2,000 4,000 6,000 8,000 10,000 12,000
Value at start Vaue at end Value of stock in portfolio (in Rs)
LIC Housing Fin.
H D F C Roofit Inds.
Apollo Hospitals Hero Motocorp Cipla
Exhibit 43: Portfolio performance during the third iteration
Company Value at start
(Rs)
Value at end
(Rs) Total return CAGR
Date from/to 30-Jun-02 30-Jun-12
Infosys 100 706 22% allocation of Rs100 in each stock at the start of the period. Portfolio price at the end is the value of the portfolio at the end of the period. Thus, for this period, the value of the portfolio rose from Rs800 at the start to Rs7,709 at the end.
Exhibit 44: Portfolio’s outperformance was led by LIC Housing Finance once again
Source: Bloomberg, Ambit Capital research. Note: Value at the start denotes an equal allocation of Rs100 in each stock at the start of the period. Value at the end is the value of each stock at the end of the period. Thus, for this period, the value of the portfolio rose from Rs800 at the start to Rs7,709 at the end.
Period 4: 2003-2013 (7.2% alpha to the Sensex; 27.4%
per annum absolute returns)
All-cap portfolio stocks: Infosys, Hero MotoCorp, Cipla, Sun Pharma, Container Corporation of India, Gujarat Gas, Aurobindo Pharma, HDFC Ltd, LIC Housing Finance
Large-cap portfolio stocks: Infosys, Hero MotoCorp, Cipla, Container Corporation of India, Sun Pharma and HDFC Ltd
Whilst the all-cap version of the Portfolio delivered a 7.2% alpha, the large-cap version gave a higher 9% alpha in the fourth iteration. In a maximum drawdown situation, both versions remained steady and beat the Sensex, thereby delivering excess returns of 0.62-.0.77x.
Exhibit 45: Fourth iteration summary
2003-2013* All-cap CCP Large-cap CCP Sensex
CAGR returns 27.4% 29.2% 20.2%
Maximum drawdown** -31% -28% -56%
Excess returns 0.62 0.77 0.22 Source: Bloomberg, Ambit Capital research. Note: * Portfolio kicks off on 30 June 2003. Excess returns have been calculated as returns in excess of risk-free rate (assumed to be 8%) divided by absolute maximum drawdown.
Maximum drawdown is defined as the maximum drop in cumulative returns from the highest peak to the lowest subsequent trough. ** Maximum drawdown took place from December 2007 to November 2008 for the all-cap CCP, December 2007 to December 2008 for the large-cap CCP and December 2007 to February 2009 for the Sensex.
Value at start Vaue at end Value of stock in portfolio (in Rs)
Sun Pharma powered through to be the best-performing stock in Period 4
Barring one addition (Sun Pharma), the Coffee Can Portfolio in its fourth iteration was the same as that in the third iteration. Performance was driven by Sun Pharma’s stellar performance. However, the performance of the large-cap version was better than the all-cap version of the Coffee Can Portfolio.
Exhibit 46: Portfolio performance during the fourth iteration
Company Value at start
(Rs)
Value at end
(Rs) Total return CAGR
Date from/to 30-Jun-03 30-Jun-13
Infosys 100 713 22%
Cipla 100 710 22%
Hero Motocorp 100 958 25%
Sun Pharma.Inds. 100 3,381 42%
Container Corpn. 100 736 22%
Aurobindo Pharma 100 528 18%
Guj Gas Company 100 518 18%
H D F C 100 1,292 29%
LIC Housing Fin. 100 1,338 30%
Portfolio 900 10,175 27%
Sensex 100 631 20%
Outperformance 7.2%
Source: Bloomberg, Ambit Capital research. Note: *Portfolio price at the start of Rs900 denotes an equal allocation of Rs100 in each stock at the start of the period. Portfolio price at the end is the value of the portfolio at the end of the period. Thus, for this period, the value of the portfolio rose from Rs900 at the start to Rs10,175 at the end.
Exhibit 47: Sun Pharma delivered a stellar performance in Period 4
Source: Bloomberg, Ambit Capital research. Note: Value at the start denotes an equal allocation of Rs100 in each stock at the start of the period. Value at the end is the value of each stock at the end of the period. Thus, for this period, the value of the portfolio rose from Rs900 at the start to Rs10,175 at the end.
Period 5: 2004-2014 (12.7% alpha to the Sensex;
32.6% per annum absolute returns)
All-cap portfolio stocks: Infosys, Hero MotoCorp, Cipla, Container Corporation of India, Gujarat Gas, Alok Industries, Munjal Showa and Havells India, HDFC Ltd and LIC Housing Finance
Large-cap portfolio stocks: Infosys, Hero MotoCorp, Cipla, Container Corporation of India and HDFC Ltd
The fifth iteration of our Coffee Can Portfolio yielded a whopping 12.7% alpha over the Sensex. The portfolio was equally divided between large-caps and mid-caps/small-caps. The higher share of the mid-caps/small-caps vs earlier iterations was instrumental in delivering higher alpha during this period.
2,000 4,000 6,000 8,000 10,000 12,000
Value at start Vaue at end Value of stock in portfolio (in Rs)
LIC Housing Fin.
H D F C
Guj Gas Company Aurobindo Pharma Container Corpn.
Sun Pharma.Inds.
Hero Motocorp Cipla
Infosys
The CCP delivered a whopping
12.7% to the Sensex, in Period 5
Exhibit 48: Fifth iteration summary
2004-2014* All-cap CCP Large-cap CCP Sensex
CAGR returns 32.6% 22.1% 19.9%
Maximum drawdown** -62% -31% -56%
Excess returns 0.40 0.45 0.21 Source: Bloomberg, Ambit Capital research. Note: * Portfolio kicks off on 30 June 2004. Excess returns have been calculated as returns in excess of risk-free rate (assumed to be 8%) divided by absolute maximum drawdown.
Maximum drawdown is defined as the maximum drop in cumulative returns from the highest peak to the lowest subsequent trough. ** Maximum drawdown took place from December 2007 to November 2008 for the all-cap CCP, December 2007 to December 2008 for the large-cap CCP and December 2007 to February 2009 for the Sensex.
The performance amongst the mid-cap/small-cap stocks was extreme: Whilst Havells delivered ~96.7x returns, Alok Industries delivered -60% by the end of the iteration.
Given the phenomenal performance by Havells during the period, the performance of the large-cap portfolio (22.1% CAGR) lagged that of the all-cap portfolio (32.6%
CAGR).
Exhibit 49: Portfolio performance during the fifth iteration
Company Value at start
(Rs)
Value at end
(Rs) Total return
CAGR
Date from/to 30-Jun-04 30-Jun-14
Infosys 100 547 19% allocation of Rs100 in each stock at the start of the period. Portfolio price at the end is the value of the portfolio at the end of the period. Thus, for this period, the value of the portfolio rose from Rs1,000 at the start to Rs16,849 at the end.
Exhibit 50: Havells India was the star performer in Period 5
Source: Bloomberg, Ambit Capital research. Note: Value at the start denotes an equal allocation of Rs100 in each stock at the start of the period. Value at the end is the value of each stock at the end of the period. Thus, for this period, the value of the portfolio rose from Rs1,000 at the start to Rs16,849 at the end.
Value at start Vaue at end Value of stock in portfolio (in Rs)