A Peak Into My Investment Diary

In 2020, Warren Buffett gave a tip:

Before you buy a stock, take a piece of paper, and write down your reasons.

In fact, Daniel Kahneman, goes further. He recommends an investment diary.1CNBC article on Warren Buffett, 2020 | Farnam Street post on Michael Mauboussin, 2012.

So, I’ve been trying it.

Take a look:

Before we begin, please note:

  • The idea is to honestly share, whatever I’ve written down.

Not to brag.

Or, to influence your decisions.

  • I make a lot of investing mistakes. And, obviously, my views on the stocks in my portfolio, will be biased.

So, please beware.

With that, lets start…

1. Tata Steel PP

A. Why I Bought

On 23rd Dec, 2019, I bought Tata Steel PP at ₹60.24.

This is what I wrote:

PROS

  • Important to Tata Sons.2Most of the pros and cons of Tata Steel are from ICRA Rating, 2019, Aug.
  • Captive raw material: In India, Iron ore: 100% Coking coal: 30%. Hence, cost efficiency and hedge against input price volatility.
  • Liquidity: Cash + Liquid investments + Undrawn bank lines = ₹15 K crores.
  • Acquisitions: Bhushan Steel and Steel portion of Usha Martin. Capacity will go up from 13 MT to almost 20 MT.

CONS

  • Brownfield: 5 MT expansion in Kalinganagar. Pressure on FCF, leverage, interest coverage, execution risks.
  • Europe: Slowdown and brexit. Exit from this market is key. Thyssenkrup JV would’ve been great.
  • Net debt: ₹110 K crores (30 Sep, 2019).3Tata Steel Results Presentation, FY20Q2, P23. Almost 60% is in foreign currency. While, 80% of operating profits come from India. Hence, currency mismatch.
  • Complex capital structure: Preference shares, partly paid shares, hybrid securities. All find a mention (31 March, 2019).

ValuE

  • Fully paid shares: If we look across cycles, Tata Steel would clear at least its cost of capital. Hence, it should be worth at least its book value of ₹76 K crores (FY20Q2).

With 120 crore shares, the book value per share is ₹633.

  • Partly paid shares:4Proposed rights issue document, 2018, Jan, 23.
ParticularsFVPremTotal
Application2.5151154
1st & Final call7.5454461
10.0605615

Hence, if fully-paid share price goes beyond 615, then the value of partly paid share should be X-461.5A Business Standard article later confirmed the “step function”/ “minus function” / “call option like feature”, comes alive only after we set the price at ₹615.

THESIS

  • Fully paid: I’m very skeptical about my ability to gauge the future of the steel industry. So, very unwilling to take a call on the prospects of the main (fully-paid) shares.

Having said that, it doesn’t mean they’re worth nothing. They’re worth at least ₹500 to ₹600 per share.

  • Partly Paid: They are 25% equivalent of the main shares. Hence, they’re worth at least ₹125 per share. But, they’re available at ₹60 per share.
  • Biggest Worry: Tata Steel will unilaterally forfeit the PPs without calling the 1st and final call. But that is unlikely, because it will be terribly unfair to the shareholders and will tarnish the company’s stellar image.

And more importantly, Tata Sons (promoters) have a 50% stake in the rights/partly paid issue. They won’t harm themselves.

B. Updates

Still holding.

2. Wonderla

A. Why I Bought

On 29th Apr, 2020, I bought Wonderla Holidays at ₹127.

This is what I wrote:

Pros

  • Debt-free.
  • Quality: When running, the business has high OPM and decent ROCE. May not be a great business like Castrol, VST or MGL, but isn’t a donkey business either.
  • Scuttlebutt: Spoke to a relative. His 9 year son loves Wonderla.

Spoke to an acquaintance in Bangalore. His feedback was great. His kids keep asking to go. Although, he feels ticket prices are high.

Also, saw videos of Wonderla on YouTube.

  • Management: The founder Kochouseph Chittilappilly’s other business is V-Guard. Spoke to a friend (CA) from Kerala. The founder has a great reputation. Donated his kidney to promote organ donation.
  • Runway: The business has a long runway/scalability in front of it. Chennai. Bhubaneswar.

Cons

  • External shocks: Exposed to shocks like Nipah virus, excessive rains, Covid-19.
  • Footfalls: Not rising. Perhaps due to pricey tickets. ₹800 to ₹1,000.
  • Seasonality: Seasonal business with bulk of the visitors coming in summer (Q1). Next best is festive season(Q3). It’s 50% of Q1. Q2 and Q4 are wash outs.

Value

  • Wonderla share is at a life-time low.
  • It is trading at 0.85X book value.
  • Market cap is ₹730 crores. Land at Bangalore, Hyderabad and Kochi is carried on the balance sheet at ₹500 crores (revalued, as per Ind AS). Went to an elder relative, who has knowledge about industrial lands. He also arrived at a rough value of ₹500 crores. Plus, there is some investment and cash.

Thesis

  • Probabilities: 50% loss could happen. But 10X gain could also happen over 2 decades. Mispriced bet. Doesn’t deserve to sell at less than book value.
  • Long-term thinking: Sooner or later, people will emerge out of Covid.
  • Contrarian bet: Instead of buying hotels, or airlines (which have debt), why not buy this?

B. Updates

Still holding.

References

1CNBC article on Warren Buffett, 2020 | Farnam Street post on Michael Mauboussin, 2012.
2Most of the pros and cons of Tata Steel are from ICRA Rating, 2019, Aug.
3Tata Steel Results Presentation, FY20Q2, P23.
4Proposed rights issue document, 2018, Jan, 23.
5A Business Standard article later confirmed the “step function”/ “minus function” / “call option like feature”, comes alive only after we set the price at ₹615.
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