PPFAS AMC: What its latest five stock picks reveal

However, this “pain” is self-inflicted because, as of the latest reporting period, it holds nearly 17% of assets under management (AUM) as cash (money market). The only mutual fund with a higher cash allocation is Quant Mutual Fund, which holds 19% of the total AUM in cash.

For PPFAS, the significant cash holdings signal that value-based opportunities are scarce. In this backdrop, somehow, five stocks have made it into the portfolio in the last 12 months. Can these five stock picks help unravel whether PPFAS continues to stick to its advertised ‘value investing principles’? Let’s find out.

Value investing principles require investing in businesses with a competitive advantage—a “moat”, as they are famously called. Such “moat” businesses must be purchased at attractive valuations with a “margin of safety” built into the price.

With an AUM that has jumped more than 20X in the last four years, can PPFAS continue to invest according to the same principles? Or has their approach changed? What can we learn from these five stock picks?

Here are the latest portfolio entrants:

1. EID-Parry (India) Ltd

2. Accelya Solutions India Ltd

3. Swaraj Engines Ltd

4. Indraprastha Gas

5. Kotak Mahindra Bank Ltd

One way to recognize a common theme between them is to evaluate them from a value investing lens. Value investors typically try to look for the following characteristics.

Competitive advantage or “moat”

According to the value investing school of thought, stable operating margins signal competitive advantage. A stable operating margin (ebit/sales) over a 10-year period means the company has some form of pricing power.

All four businesses shown below (except Kotak Mahindra Bank) have a significantly different margin profile. Some are also more stable than others.

Barring Indraprastha Gas and Accelya Solutions, which has shown relatively higher volatility on account of covid-related factors, the remaining two, EID-Parry and Swaraj Engines, have maintained consistent operating profit margins (OPMs) over the last 10 years.

The fluctuation in OPM (%) of Accelya Solutions, which provides software solutions to airlines, and Indraprastha Gas, which supplies CNG and LPG in the NCR region, was largely on account of covid-related disruptions.

Financials are entirely different animals; therefore, Kotak Mahindra Banks’ more relevant margin—net interest margin (similar to gross margin)—is shown below.

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The chart tells us that not only is the bank’s NIM stable, but it is also the highest among the top five major private banks.

Debt to equity

Value investors like to invest in companies with low debt exposure. The definition of low varies from business to business, but generally, anything under a debt-to-equity ratio of 0.5 is acceptable.

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All four businesses in the ‘non-financial’ bucket seem to be clear of potential debt issues. Investors can derive additional comfort by looking at the interest coverage ratio, i.e. operating profit is the multiple of interest paid in the latest fiscal year. The higher the Interest coverage the better protected the company is against potential bankruptcy.

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EID-Parry, with nearly 8X interest coverage, is well above the comfort zone of 5X. The multiple for the remaining are self-explanatory.

Dividend yields

Compared to the dividend yield of 1.2% of the Nifty 500, three out of the five stocks under discussion have a higher dividend yield.

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EID-Parry’s dividend payout has been very volatile, and whereas Kotak Mahindra Bank has a stable dividend payout at 2%, it’s clear that they’d rather retain most of the profits to support business growth.

Profitability (return on capital employed, or ROCE)

Eventually, what matters is profitability. ROCE tells us what percentage of the capital employed in the business is converted into operating profit every year. It’s like you put ₹100 in a fixed deposit (FD) and earn about 7% pre-tax; therefore, that’s your ROCE on an FD.

As equity (or mutual fund) investors, we are investing in a business. Therefore, we require a higher ROCE than a bank FD. Typically, 15% is considered a good benchmark.

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Of the five recent PPFAS stock picks, three are clearly way ahead of the 15% threshold.

EID-Parry crossed the 15% threshold in 2021-22 and 2022-23 but has since reverted to under 12%, according to screener.in data.

On the flipside, Kotak Mahindra Bank has been a wealth creator over a 10-year period with under 12% ROCE for most of that period. About two years back, an Ambit Capital report titled, Where are the emperor’s clothes, raised questions on the bank’s persistently low ROCE. The bank has been underperforming the index, with the stock going nowhere since 2020-21.

Perhaps that is another common characteristic amongst the five stocks under discussion, i.e. recent underperformance and low valuations.

Reasonable valuation

One of the hallmarks of value investing is buying right. Not overpaying. The principle behind this is that starting valuations matter. If you overpay, the definition of which is nuanced and varies from company to company, your stock results may not be as good despite the business doing well.

The price-to-earnings ratio is one way to look at how cheap or expensive a company’s price is in relation to its earnings. However, please note that the PE ratio may not be appropriate for all businesses, and it may also just be one of the factors that went into the buy decision.

If we track the historical PE ratios of these five companies, we find that:

Kotak Mahindra Bank, the largest allocation of the five stocks, was bought at a PE ratio of 27, well below the 10-year median of 51. However, please bear in mind that the price-to-book (PB) ratio is a more appropriate valuation metric for banks.

Secondly, a PE multiple or a PB multiple below a 10-year median does not automatically mean it is an attractive buy. It’s highly likely many other considerations went into reaching the decision to invest in the bank.

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Indraprastha Gas, the second-largest allocation, was bought at a PE multiple of around 17, well below a 10-year median of 24.

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EID-Parry was bought under its 10-year PE median of 11.

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Swaraj Engines was bought somewhere around 19-20 PE multiple. In this case, the buying valuation was very close to the 10-year median.

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And finally, Accelya Solutions, the smallest allocation of the lot was bought around a PE multiple of 17.

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It’s interesting to note that almost all five stocks were bought at under the 10-year PE multiple. However, the discount to the 10-year median values were not significant except for Kotak Mahindra Bank and Indraprastha Gas, both of which were the highest allocations among these five stocks. So, there seems to be a direct correlation between the discount and the allocation.

It’s also interesting that all the new allocations made it into the portfolio between November 2023 and January 2024. While it’s challenging to preempt why this was the case, the fact remains that PPFAS value investing principles seem to be very much intact judging by the timing, quality and valuations of these five stocks were bought at.

Of course, this is our interpretation, and PPFAS’s reasons for buying these stocks could be entirely different, but so far, it appears that PPFAS continues to eat its own pudding despite negative short-run consequences.

Note: We have relied on data from www.screener.in throughout this article. Only in cases where the data was not available have we used an alternative, but widely used and accepted source of information. 

The purpose of this article is only to share interesting charts, data points and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your advisor. This article is strictly for educative purposes only. 

Rahul Rao has been investing since 2014. He has helped conduct financial literacy programmes for over 150,000 investors. He helped start a family office for a 50-year-old conglomerate and worked at an AIF, focusing on small- and mid-cap opportunities. He evaluates stocks using an evidence-based, first-principles approach, as opposed to comforting narratives.

Disclosure: The writer and his dependents do not hold the stocks/commodities/cryptos/any other asset discussed in this article.