Wednesday, May 07, 2008
Few bets, Infrequent bets, Big bets!
Found an interesting study on portfolios of top value-managers at gurufocus.com..
LINK
Shows how concentrated a portfolio the top value managers run. Its a direct outcome of kelly formula - if you know something, and odds are in your favor and if you have conviction, bet big!
Its specially relevant for small sized funds, where a manager can cherry pick opportunities and make greater allocation towards his best ideas.
One may ask - Does too much concentration involves risk? Mr Buffett says - risk comes with not knowing what you are doing! A value-investor should not be in a business of "accumulating" hundreds of stocks, but cherry-picking just few value opportunities.
KRBL 2.0
This reminds me of Pabrai's Pinnacle 2.0. Oppurtunities in some sectors appear again and again and again..
The recent imbroglio over putting up export cess on basmati exports has resulted in the second oppurtunity arising in these businesses. Govt, seeing bumper windfall for the basmati exportors, decided to levy $200/Tonne of export cess. The companies were holding old inventories - nearly a year old. They had bought up these when the paddy prices in the market were not-supernormal. All of sudden, the spurt in rice prices happened, leading to a windfall for these export oriented companies.
For an exportor, the procurment price in 2006 Oct-Nov-Dec season or thereafter was between Rs 18-24/kg. A kg of paddy gives 0.6 kgs of rice.This makes their rice raw material cost at Rs 35/kg or $ 875/ tonne. This material was held in the inventories of the companies for 12+ months for ageing process, which brings out aroma/taste in the basmati. Market price of this held rice went upto 1600-1800 $/Tonne. So rice produced/procured at $875/Tonne in 2006-2007, is now salable in the market at $ 1500+/ Tonne.
Historically, raw material forms 80-90% of sales cost. Hence leading to normalised OPMs of 10-15%.
Basmati is not consumed within India fully, and more than 50% is exported. For middle-east countries, its a staple crop. So govt doesnt find any utility in stopping exports of the basmati, in order to control inflation or for crop security. Moreover quantum of Basmati as % of total produce is less than 2%. So Govt did a smart thing - seeing super normal profit for traders, decide to share the loot. Hence export tax of $ 200/Tonne or Rs 8/kg on exports.
In best case scenerio, the companies can ask the importors to pay for the cess. Hence they are able to sell rice at x+200 and enjoy the supernormal loot.
In the worst case, the Indian exportors bear the cost of cess - and hence their profits dip by 200$/T. In this case, their net revnue (after paying export cess) is 1300$/T (Rs 52/kg), when their cost of produce is Rs 35/kg ($875/T), they still have $425 / T as margin of safety (which historically had been around 100$/T).
In the worst case scenerio, think of it as a bank, which gets liquidated at the end of the period - sept/oct (before the next crop season begins) - It liquidates its inventory, pays of the creditors, and makes a little money for its equityholders (this time a little bit more than usual - leading to cash of around Rs 100/ share, which makes it a cash bargain!).
Markets, unable to understand simpler things, does exhibit semi-psychotic behaviour. And it creates mouth-watering oppurtunities. The stocks of basmati exportors are hitting lowers since past 3-4 days.... and gives me reason to smile..
.. So far so good.
The recent imbroglio over putting up export cess on basmati exports has resulted in the second oppurtunity arising in these businesses. Govt, seeing bumper windfall for the basmati exportors, decided to levy $200/Tonne of export cess. The companies were holding old inventories - nearly a year old. They had bought up these when the paddy prices in the market were not-supernormal. All of sudden, the spurt in rice prices happened, leading to a windfall for these export oriented companies.
For an exportor, the procurment price in 2006 Oct-Nov-Dec season or thereafter was between Rs 18-24/kg. A kg of paddy gives 0.6 kgs of rice.This makes their rice raw material cost at Rs 35/kg or $ 875/ tonne. This material was held in the inventories of the companies for 12+ months for ageing process, which brings out aroma/taste in the basmati. Market price of this held rice went upto 1600-1800 $/Tonne. So rice produced/procured at $875/Tonne in 2006-2007, is now salable in the market at $ 1500+/ Tonne.
Historically, raw material forms 80-90% of sales cost. Hence leading to normalised OPMs of 10-15%.
Basmati is not consumed within India fully, and more than 50% is exported. For middle-east countries, its a staple crop. So govt doesnt find any utility in stopping exports of the basmati, in order to control inflation or for crop security. Moreover quantum of Basmati as % of total produce is less than 2%. So Govt did a smart thing - seeing super normal profit for traders, decide to share the loot. Hence export tax of $ 200/Tonne or Rs 8/kg on exports.
In best case scenerio, the companies can ask the importors to pay for the cess. Hence they are able to sell rice at x+200 and enjoy the supernormal loot.
In the worst case, the Indian exportors bear the cost of cess - and hence their profits dip by 200$/T. In this case, their net revnue (after paying export cess) is 1300$/T (Rs 52/kg), when their cost of produce is Rs 35/kg ($875/T), they still have $425 / T as margin of safety (which historically had been around 100$/T).
In the worst case scenerio, think of it as a bank, which gets liquidated at the end of the period - sept/oct (before the next crop season begins) - It liquidates its inventory, pays of the creditors, and makes a little money for its equityholders (this time a little bit more than usual - leading to cash of around Rs 100/ share, which makes it a cash bargain!).
Markets, unable to understand simpler things, does exhibit semi-psychotic behaviour. And it creates mouth-watering oppurtunities. The stocks of basmati exportors are hitting lowers since past 3-4 days.... and gives me reason to smile..
.. So far so good.
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